<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
Date of Report (For the quarterly period ended MAY 2, 1998)
[ ] 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.)
3500 GATEWAY DRIVE, SUITE 101, POMPANO BEACH, FL 33069
- ------------------------------------------------ ---------
(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 No X
------ ------
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 June
15, 1998.
<PAGE> 2
2CONNECT EXPRESS, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed balance sheets--
May 2, 1998 and January 31, 1998 1
Condensed statements of operations--
three months ended May 2, 1998 and April 30, 1997 2
Condensed statements of cash flows--
three months ended May 2, 1998 and April 30, 1997 3
Notes to condensed financial statements 4 - 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 8
PART II OTHER INFORMATION
Item 6, Exhibits and Reports on Form 8-K 9
Signatures 9
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
2Connect Express, Inc.
Condensed Balance Sheets
May 2, and January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
May 2, January 31,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 740,028 $ 218,068
Accounts Receivable, net of reserves 56,499 350,296
Inventory, net of reserves -- 1,277,913
Prepaid Expenses & Other Current Assets 275,371 118,086
----------- -----------
Total Current Assets 1,071,898 1,964,363
Property & Equipment, Net 8,500 394,000
Other Assets 6,259 86,806
----------- -----------
Total Assets $ 1,086,657 $ 2,445,169
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable - Prepetition $ 1,039,968 $ 1,001,158
Accounts Payable - Postpetition (See Note Below) 8,908 44,557
Notes Payable -- 275,000
Accrued Expenses & Other Current Liabilities 83,600 134,300
Accrued Landlord Claims 689,102 781,826
Accrued Employee Contract Claims 540,815 540,815
Accrued Other Bankruptcy Claims 217,032 149,546
Current Maturities of long-term Debt 2,967 22,209
----------- -----------
Total Current Liabilities 2,582,392 2,949,411
Other Liabilities
Long-term Debt & Capital Leases 8,080 8,803
----------- -----------
Total Liabilities 2,590,472 2,958,214
----------- -----------
Shareholders' Equity
Common Stock ($.01 par value. Authorized 25,000,000 Shares; 37,525 37,525
Issued & Outstanding 3,752,500 shares)
Paid-In-Capital 8,667,451 8,667,451
Retained Deficit - Prior Year (9,218,021) (9,218,021)
Net Loss - Current Year (990,770) --
----------- -----------
Total Shareholders' Equity (1,503,815) (513,045)
----------- -----------
Total Liabilities & Shareholders' Equity $ 1,086,657 $ 2,445,169
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
1
<PAGE> 4
2Connect Express, Inc.
Condensed Statements of Operations
For the Three Months Ended May 2, 1998 and April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
------------------------------
May 2, 1998 April 30, 1997
----------- --------------
<S> <C> <C>
Net sales $ 760,154 $ 403,373
Cost of sales 766,016 292,954
Gross profit (5,862) 110,419
----------- -----------
General and administrative expenses:
Selling, general and administrative
expenses (excluding depreciation) 733,265 516,734
Depreciation and amortization 56,444 --
Preopening cost amortization 38,932 22,097
----------- -----------
Operating loss (834,503) (428,412)
Other income (expense):
Interest income 4,240 23,904
Interest expense (6,748) (378)
Restructuring charges and reserves (154,232) --
Other, net 473 --
----------- -----------
Net loss $ (990,770) $ (404,886)
=========== ===========
Net loss per share $ (0.26) $ (0.15)
=========== ===========
Number of shares used in calculating
loss per share 3,752,500 2,712,500
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE> 5
2Connect Express, Inc.
Condensed Statement of Cash Flows
For the Three Months Ended May 2, 1998 and April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
-------------------------------
May 2, 1998 April 30, 1997
----------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (990,770) $ (404,886)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 56,444 22,097
Preopening cost amortization 38,932 --
Changes in assets & liabilities:
Accounts receivable 293,797 (88,848)
Inventory 1,277,913 (378,324)
Prepaid expenses & other assets (115,670) (94,712)
Accounts payable - prepetition 38,810 357,703
Accounts payable - postpetition (35,649) --
Accrued expenses (50,700) 42,129
Accrued landlord claims (92,724) --
Accrued employee contract claims -- --
Accrued other bankruptcy claims 67,486 --
----------- -----------
Net cash provided by (used in) operating activities 487,869 (544,841)
----------- -----------
Cash flows from investing activities:
Capital expenditures -- (344,041)
Loss on closed store assets and reserve for asset liquidations 329,056 --
----------- -----------
Net cash provided by investing activities 329,056 (344,041)
----------- -----------
Cash flows from financing activities:
Decrease in notes payable (275,000) --
Net proceeds from issuance of common stock -- (5,838)
Increase (decrease) in long-term debt (19,965) 6,376
----------- -----------
Net cash provided by (used in) financing activities (294,965) 538
----------- -----------
Net increase (decrease) in cash and cash equivalents 521,960 (888,344)
Cash and cash equivalents, beginning of period 218,068 1,449,167
----------- -----------
Cash and cash equivalents, end of period $ 740,028 $ 560,823
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 6
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, reserves and restructuring reserves) necessary for
fair presentation. The results of operations for the three months ended May 2,
1998 are not necessarily indicative of the operating results expected for the
fiscal year ending January 30, 1999. These financial statements should be read
in conjunction with the consolidated financial statements and notes thereto for
the fiscal year ended January 31, 1998. Such financial statements for fiscal
year ended January 31, 1998 have not yet been issued, as the audit of such
financial statements has not been completed due to the Company's bankruptcy
filing.
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. All such previously accrued "pre-opening" costs
have been written off to restructuring expense as part of the Company's
reorganization.
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 $.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 $530,000 and $611,000, respectively.
4
<PAGE> 7
5) LEASE OBLIGATIONS
-----------------
(a) Operating Leases:
The Company had entered into eleven (11) non-cancelable operating
leases for store locations, corporate office and security equipment as of
January 31, 1998. The Company filed a voluntary petition for protection under
Chapter 11 of the U.S. Bankruptcy Code on January 12, 1998, and subsequent to
the filing, has closed all but one of its' retail stores, relocated its
corporate office to smaller space on a month to month basis, terminated all
leases for security equipment except for the one store which continues to
operate, and has rejected all such leases. Only the retail store at Coral Square
Mall, Coral Springs, Florida remains open.
Minimum future rental payments for all non-cancelable operating leases consist
of the following:
Year ending
the Saturday closest
to January 31
- --------------------
1998....................................................... $ 81,370
1999....................................................... 108,493
2000....................................................... 112,001
2001....................................................... 87,927
2002....................................................... 57,882
Thereafter................................................. 242,052
---------
$ 689,725
=========
6) RESTRUCTURING AND BANKRUPTCY FILING
-----------------------------------
On January 12, 1998, the Company filed a voluntary petition for relief
("the Filing") under chapter 11 ("Chapter 11") of title II of the United States
Code ("the Bankruptcy Code") in the United States Bankruptcy Court for the
Southern District of Florida ("the Bankruptcy Court"). In Chapter 11, the
Company will and has continued to manage its affairs and operate its business as
a debtor-in-possession while it develops a reorganization plan that will
restructure the Company and allow its emergence from Chapter 11. As a
debtor-in-possession in Chapter 11, the Company may not engage in transactions
outside of the ordinary course of business without approval, after notice and
hearing, of the Bankruptcy Court.
In accordance with the Bankruptcy Code, the Company can seek court
approval for the rejection of executory contracts, including real property
leases. In connection with the Company's Chapter 11 proceedings, a review is
being undertaken of all the Company's obligations under its executory contracts,
including real property leases.
5
<PAGE> 8
Subsequent to the Filing, the Company reached an agreement with Bay
Tech Investments, Inc., to provide secured debtor-in-possession financing in the
form of a credit facility. The credit facility provides for borrowings dependent
upon the Company's level of inventory and accounts receivable with maximum
borrowings of $500,000. The agreement grants a security interest in
substantially all of the Company's assets. Advances under the facility bear
interest at 11%. The debtor-in-possession facility replaced a Revolving Credit
Facility provided by Bay Tech Investments, Inc. which had been in existence
pre-petition. At the time of the Chapter 11 petition, $275,000 was borrowed on
this facility, which balance rolled over to the debtor-in-possession facility.
The debtor-in-possession agreement was originally scheduled to terminate on
February 29, 1998. The Company requested and received a thirty day extension of
the facility until March 28, 1998 unless further extended upon request of the
borrower and such extension to be at the option of the lender. The interest rate
on advances under the facility was changed to 12% for the extension period only.
On March 28, 1998 the Company voluntarily paid off the balance owed on the
debtor-in-possession facility plus accrued interest and did not seek extension
of the facility. The Company believed that cash raised through liquidation of
excess assets would provide sufficient liquidity through the anticipated date
that the Company expects to emerge from the proceeding.
Subsequent to the Filing, the Company announced on March 3, 1998 that
it had executed a Letter of Intent whereby Bobby Allison Cellular Systems of
Florida, Inc. ("Bobby Allison"), would merge with and into the Company. The
transaction was contingent upon completion of a Merger Agreement which would be
incorporated into a Plan of Reorganization to be filed with the Bankruptcy Court
and subsequent confirmation of that Plan by the court. The merger contemplated
will be financed principally by Sterne Agee & Leach, Inc., an investment banking
firm that was the managing underwriter of the Company's initial public offering
in May 1997. The merger and related financing is anticipated to take place
following the Company's emergence from the bankruptcy proceeding.
The Company has subsequently executed the Merger Agreement with Bobby
Allison, and has filed a Plan of Reorganization on April 14, 1998 and an
accompanying Disclosure Statement. The Court has scheduled a hearing on June 16,
1998 on the Plan of Reorganization and Disclosure Statement. The Company has
also executed a Management Agreement with Bobby Allison, whereby Bobby Allison
would assume the operation of the Company's Coral Square Mall store and be
responsible for all expenses related thereto. The Court has scheduled a hearing
on the Management Agreement on June 16, 1998.
The accompanying condensed financial statements have been prepared on a
going concern basis of accounting, after adjustments to inventory valuation and
asset values that are not anticipated to be included in the merger described
above, and also after adjustments to the assets to be included in the merger.
The assets included in the proposed merger, which is subject to confirmation of
the Plan of Reorganization by the Court, consist of one store lease, inventory
for one store and its store fixtures, certain fixtures from nine closed stores,
and a payment to be made by Bobby Allison for the business. Remaining minimal
office assets, required during the period until the merger, have been written
down to current estimated market value. The condensed financial statements do
not reflect any adjustments that might result should the Company's Plan of
Reorganization not be confirmed by the Court, the merger not be consummated and
should the Company be unable to continue as a going concern and liquidate. The
Company's losses from operations, which resulted in its bankruptcy filing and
partial liquidation, raise substantial doubt about its ability to continue as a
going concern. The appropriateness of using the limited going concern basis is
dependent upon, among other things, (i) confirmation of a Plan of Reorganization
under the Bankruptcy Code, (ii) the ability to achieve profitable operations
after such confirmation and under the proposed merger, and (iii) the ability to
generate sufficient cash from operations to meet its obligations.
6
<PAGE> 9
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 characterized
by aggressive pricing strategies and participation by service providers in the
retail distribution channels, in an attempt to gain market share. Due to rapid
changes in technology and in market conditions, the Company's past and future
operating results could be adversely affected should the Company be unable to
anticipate product cycles and consumer demand accurately, and be unable to
respond due to contractual arrangements. 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 May 2, 1998
The Company's net sales for the first quarter ended May 2, 1998 were
$760,155 versus $403,373 during the comparable first quarter ended April 30,
1997. The Company operated approximately 1.2 stores during the first quarter
last year, two such stores which operated during their grand opening period. The
Company commenced operation of its first store on December 6, 1996 and
subsequently opened two stores in April 1997, three stores in August 1997, two
stores in September 1997 and two stores in November 1997. The Company closed its
five worst performing stores immediately upon its bankruptcy filing and operated
five stores at January 31, 1998. During the quarter ended May 2, 1998 the
Company operated approximately 4 stores for the full quarter including the sole
on-going store in Coral Springs, Florida. In the other stores, which are now all
closed, the Company conducted inventory clearance and liquidation sales at steep
discounts and then sold remaining inventory and defective merchandise which had
been returned by customers in two public auctions conducted by Stampler
Auctions. The first such auction consisted of first quality merchandise and
generated proceeds of $300,000 while the second auction consisting of customer
returns generated proceeds of $34,500.
Gross loss for the first quarter ended May 2, 1998 was ($5,862) versus
gross profit in the prior year comparable quarter ended April 30, 1997 of
$110,419. The negative gross profit in first quarter 1998 was due to the
aforementioned retail store clearance sales and public auctions. The auction
sales returned approximately 30% of the merchandise inventory cost value, but,
they enabled to Company to immediately eliminate expenses of operating the
stores where the inventory was housed and allowed the Company to reject those
store leases. The gross margin of 27.4% for the first quarter ended April 30,
1997 was adversely affected by grand opening promotions in connection with
opening the Dadeland and Westchester stores during April 1997. In order to
create store awareness and garner market share, the Company priced its products
at or below competition and used customer incentives to increase sales, which
lowered average selling price per unit and gross margin.
Selling, general and administrative expenses ("SG&A"), excluding
depreciation and amortization, for the first quarter ended May 2, 1998 was
$733,265 (96.5% to sales) versus $516,734 (128.1% to sales) during the
comparable quarter last year ended April 30, 1997. The increase in SG&A expenses
was due to the increased number of stores operated during the quarter, store
closing expenses and expenses related to the movement of merchandise from closed
stores to operating stores and movement of store fixtures and equipment to a
warehouse awaiting subsequent sale to Bobby Allison. Subsequent to conduct of
the aforementioned auctions, the Company has reduced personnel headcount to five
persons, including management, in its Coral Springs store and four in the
corporate office.
7
<PAGE> 10
Depreciation, amortization and amortization of pre-opening costs for
the first quarter ended May 2, 1998 was $95,376 versus $22,097 for the prior
year comparable quarter ended April 30, 1997. The increase was due to the
increased number of stores operated during the first quarter of 1998 and
acceleration of those expenses due to store closings.
Net interest expense for the first quarter ended May 2, 1998 was $6,748
versus $378 in the comparable prior year quarter ended April 30, 1997. The
increase was due to interest on borrowings under the debtor-in-possession credit
facility.
Net interest income for the first quarter ended May 2, 1998 was $4,240
versus $23,904 during the last year comparable quarter ended April 30, 1997. The
decline in interest income was due to lower cash and short term investments in
first quarter 1998 versus first quarter 1997.
Restructuring charges and reserves in the first quarter ended May 2,
1998 was $154,232 versus $0 in the last year comparable quarter ended April 30,
1997. The restructuring charges included write-down to expected realized
proceeds of assets anticipated to be sold to Bobby Allison under the
aforementioned merger agreement and legal fees related to the Company's
bankruptcy proceeding in excess of retainers previously paid to the Company's
securities counsel, general and bankruptcy counsel.
Net loss for the first quarter ended May 2, 1998 was ($990,770) versus
($404,886) for the last year comparable quarter ended April 30, 1997. The net
loss is primarily due to lower gross profit related to liquidation of
merchandise inventory that was excess, related to stores being closed and
customer returns of defective merchandise where vendor returns for credit were
no longer possible due to the bankruptcy filing. Although the Company has now
closed all but one store and reduced corporate headcount to skeleton levels, the
Company anticipates that it will continue to incur costs, expenses and losses
until, at the earliest, the Company emerges from bankruptcy, merges with Bobby
Allison and establishes a number of stores generating sufficient revenue to
offset its operating costs and costs of any continuing expansion.
FINANCIAL CONDITION
- -------------------
The Company increased its cash position by $521,960 during first
quarter ended May 2, 1998, to $740,028 from $218,068 at fiscal year ended
January 31, 1998. During that period the Company repaid its $275,000 borrowings
under its debtor-in-possession credit facility. The cash increase was primarily
due to the liquidation of excess merchandise inventory and inventory from stores
which were closed or anticipated to be closed during the bankruptcy proceeding
and the sale of excess corporate office furniture and fixtures no longer
required due to downsizing.
The Company expects to receive additional funds from the collection of
receivables and the sale of assets to Bobby Allison under the aforementioned
merger agreement. The Company's cash is anticipated to be paid to creditors
after confirmation of the Company's Plan of Reorganization by the Court. At such
time the Company will have extremely limited cash resources and will require
additional financing to sustain current operations until the aforementioned
merger is consummated. It is anticipated that upon consummation of the merger,
the combined entity will require additional financing to implement a growth
strategy.
8
<PAGE> 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(b) Reports on Form 8-K. Reports on Form 8-K have been filed
during the quarter ended May 2, 1998, on a monthly basis
pursuant to the filing of U.S. Bankruptcy Court Trustee
Reports.
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 June 10, 1998 /s/ Thomas H. Hicks
- ----------------------- ----------------------------------
Thomas H. Hicks, President and
Chief Executive Officer (interim)
Date June 10, 1998 /s/ Christopher D. Chalfant
- ----------------------- ----------------------------------
Christopher D. Chalfant, Controller
and Chief Accounting Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> MAY-02-1998
<CASH> 740,028
<SECURITIES> 0
<RECEIVABLES> 56,499
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,071,898
<PP&E> 8,500
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,086,657
<CURRENT-LIABILITIES> 2,582,392
<BONDS> 0
0
0
<COMMON> 37,525
<OTHER-SE> (1,541,340)
<TOTAL-LIABILITY-AND-EQUITY> 1,086,657
<SALES> 760,154
<TOTAL-REVENUES> 760,154
<CGS> 766,016
<TOTAL-COSTS> 828,641
<OTHER-EXPENSES> 149,519
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,748
<INCOME-PRETAX> (990,770)
<INCOME-TAX> 0
<INCOME-CONTINUING> (990,770)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (990,770)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> 0
</TABLE>
