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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
--------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 0-25668
GLOBAL TECHNOLOGIES, LTD.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 86-0970492
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification Number)
1811 Chestnut Street, Suite 120
Philadelphia, Pennsylvania 19103
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(Address of Principal Executive Offices)
(215) 972-8191
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding at May 8, 2000
----- --------------------------
Class A Common Stock, $.01 par value 10,533,654 shares
Class B Common Stock, $.01 par value -0- shares
Transitional Small Business Disclosure Format Yes [ ] No [X]
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<PAGE>
GLOBAL TECHNOLOGIES, LTD.
AND SUBSIDIARIES
INDEX
PART I . FINANCIAL INFORMATION PAGE
----
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31 , 2000
(unaudited) and June 30, 1999....................................... 3
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended March 31, 2000 and 1999 (unaudited).... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2000 and 1999 (unaudited).................... 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 23
Item 2. Changes in Securities............................................... 24
Item 6. Exhibits and Reports on Form 8-K.................................... 25
SIGNATURES................................................................... 27
2
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
ASSETS 2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,030,549 $ 15,521,275
Restricted cash 463,405 1,412,736
Investments 93,024,088 4,594,751
Accounts receivable 21,087 128,489
Notes receivable from related parties 53,551 98,932
Inventories, net of allowance of $7,837,595 5,424,359 1,400,000
Prepaid expenses 708,518 607,900
Assets held for sale -- 800,000
Deferred tax asset 28,797,214 --
Other current assets 2,818,950 470,273
------------- -------------
Total current assets 132,341,721 25,034,356
Investments 1,818,812 5,752,599
Note receivable from related party 78,000 75,000
Property and equipment, net of accumulated depreciation
of $1,388,678 and $915,901, respectively 16,206,156 1,369,392
Intangibles, net accumulated amortization of $631,293
and $74,981, respectively 6,784,844 7,119,806
Other assets 1,137,865 61,468
------------- -------------
Total assets $ 158,367,398 $ 39,412,621
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,468,809 $ 2,530,675
Accrued liabilities 6,044,928 1,072,269
Deferred revenue 2,108,152 365,851
Accrued product warranties 291,796 --
Notes payable 6,190 24,391
Notes payable to related parties -- 68,836
------------- -------------
Total current liabilities 11,919,875 4,062,022
Notes payable -- 3,467,045
Other liabilities 945,765 1,220,340
Accrued litigation settlement 1,000,000 1,843,750
------------- -------------
Total liabilities 13,865,640 10,593,157
------------- -------------
Minority interest 456,908 1,165,098
Stockholders' equity:
Series A 8% Convertible preferred stock, 3,000 shares
designated, zero and 3,000 shares issued and outstanding,
respectively (liquidation preference of $1,200 per share) -- 30
Series C 5% Convertible preferred stock, 1,006 and zero
shares issued and outstanding, respectively 10 --
Class A common stock, one vote per share, par value
$0.01 per share, 40,000,000 shares authorized; 10,472,054
and 8,190,954 shares issued and outstanding, respectively 104,722 81,910
Additional paid-in capital 126,815,873 113,435,090
Accumulated other comprehensive income:
Loss on foreign currency translation (196,695) --
Net unrealized gain (loss) on investments 89,962,703 (10,107)
Unrealized tax benefit of NOL carryforward 28,797,214 --
Accumulated deficit (101,438,977) (85,658,567)
Treasury stock, at cost -- (193,990)
------------- -------------
Total stockholders' equity 144,044,850 27,654,366
------------- -------------
Total liabilities and stockholders' equity $ 158,367,398 $ 39,412,621
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Equipment sales $ 590 $ -- $ 5,597,909 $ 89,028
Service income -- 290,773 59,827 1,194,248
------------ ------------ ------------ ------------
590 290,773 5,657,736 1,283,276
------------ ------------ ------------ ------------
Costs and expenses:
Cost of equipment sales 225,669 -- 3,680,584 283,714
Cost of service income 21,189 183,441 36,292 529,574
General and administrative expenses 8,541,879 1,908,075 14,346,353 9,776,285
Non-cash compensation expense 292,562 -- 916,612 --
Provision for doubtful accounts -- -- -- 28,647
Expenses associated with investments -- 300,000 1,656,587 300,000
Special charges -- -- -- (190,000)
Depreciation and amortization expense 370,607 104,456 1,023,172 657,359
------------ ------------ ------------ ------------
9,451,906 2,495,972 21,659,600 11,385,579
------------ ------------ ------------ ------------
Operating loss (9,451,316) (2,205,199) (16,001,864) (10,102,303)
Other:
Interest expense (5,845) (1,358) (54,120) (5,614)
Interest income 48,732 406,799 573,639 1,476,229
Equity in loss of nonconsolidated affiliates (405,325) -- (1,120,776) --
Other income (expense) (15,913) 19,545 (19,697) (547,772)
------------ ------------ ------------ ------------
Net loss before minority interest (9,829,667) (1,780,213) (16,622,818) (9,179,460)
------------ ------------ ------------ ------------
Minority interest 557,576 -- 811,739 --
------------ ------------ ------------ ------------
Net loss $ (9,272,091) $ (1,780,213) $(15,811,079) $ (9,179,460)
------------ ------------ ------------ ------------
Cumulative dividend on preferred stock (61,644) -- (61,644) --
------------ ------------ ------------ ------------
Net loss attributable to common shareholders $ (9,333,735) $ (1,780,213) $(15,872,723) $ (9,179,460)
============ ============ ============ ============
Basic and diluted net loss per share
of common stock $ (0.88) $ (0.22) $ (1.66) $ (1.20)
============ ============ ============ ============
Weighted average shares outstanding:
basic and diluted 10,614,910 8,013,134 9,550,955 7,657,652
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(15,811,079) $ (9,179,460)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,023,172 657,359
Equity in loss of nonconsolidated affiliate 1,120,776 --
Non-cash expenses associated with investments 1,656,587 --
Loss applicable to minority interest (811,739) --
Special charges -- (190,000)
Loss on sale of assets held for sale 37,893 --
Non-cash compensation expense 916,612 --
Loss on disposals of property and equipment -- 1,006,532
Changes in assets and liabilities, net of acquisition:
Decrease (increase) in accounts receivable 107,402 (684,054)
(Increase) decrease in inventories (4,024,359) 86,643
Increase in prepaid expenses (100,618) (85,108)
Increase in other current assets and other assets (2,352,213) (2,880,295)
Increase (decrease) in accounts payable 776,815 (575,086)
Increase (decrease) in accrued liabilities 4,806,649 (881,405)
Increase in deferred revenue 1,742,300 1,900,518
Increase (decrease) in accrued product warranties 291,796 (1,426,013)
------------ ------------
Net cash used in operating activities $(10,620,006) $(12,250,369)
------------ ------------
Cash flows (for) from investing activities:
Maturities of investment securities 1,450,079 2,558,015
Purchases of investment securities (1,839,643) (6,048,182)
Sales of investment securities 4,969,019 1,502,253
Investments in affiliates (2,108,373) --
Payments received on related party note receivable 42,381 --
Deposits on property and equipment (795,320) --
Purchases of property and equipment (15,303,425) (69,125)
Proceeds from sale of equipment 3,590 14,368
Proceeds from sale of assets held for sale 762,107 --
Decrease (Increase) in restricted cash 667,181 (2,006,423)
Purchase of Johnny Valet, Inc. -- (688,736)
Payments to purchase Series A, D and E notes (555,000) --
------------ ------------
Net cash used in investing activities $(12,707,404) $ (4,737,830)
------------ ------------
Cash flows from (for) financing activities:
Issuance of Series C Preferred Stock 9,660,000 --
Redemption of Series A Preferred Stock (3,519,970) --
Exercise of unit purchase options 2,111,118 --
Purchase of treasury stock (1,394,960) (1,544,466)
Payments on notes payable (767,525) (151,123)
Issuance of stock to directors and officers 2,684,938 --
Re-purchase of outstanding warrants (296,036) --
Exercise of employee stock options 555,813 4,245
------------ ------------
Net cash provided by (used in)
financing activities $ 9,033,378 $ (1,691,344)
------------ ------------
Effect of exchange rate on cash and cash equivalents (196,694) --
------------ ------------
Net decrease in cash and cash equivalents (14,490,726) (18,679,543)
Cash and cash equivalents at beginning of period 15,521,275 38,961,896
------------ ------------
Cash and cash equivalents at end of period $ 1,030,549 $ 20,282,353
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GLOBAL TECHNOLOGIES, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION
BASIS OF PRESENTATION
(1) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
Global Technologies, Ltd. ("Global") and its wholly-owned subsidiaries:
GlobalTech Holdings Limited, GTL Management Limited, Interactive Flight
Technologies (Gibraltar) Limited, GTL Lottoco, Inc., GTL Subco, Inc., GTL
Investments, GTL Leasing Limited, Lottery Sales Company Limited, and MTJ Corp;
and the majority-owned and controlled subsidiary, The Network Connection, Inc.
and its wholly-owned subsidiary TNCi UK Limited ("TNCi") (collectively, the
"Company"). The ownership interest of minority shareholders in TNCi are recorded
as "minority interest" on the accompanying condensed consolidated financial
statements. TNCi was acquired by Global effective May 1, 1999 for accounting
purposes (the "Transaction"). All significant intercompany accounts and
transactions have been eliminated.
The equity method of accounting is used for the Company's 50% or less
owned affiliates (Inter Lotto (UK) Limited and Donativos S.A. de C.V.) over
which the Company has the ability to exercise significant influence. The amount
by which the Company's carrying value in each such affiliate exceeds its share
of the underlying net assets of such equity affiliate is amortized over five
years on a straight-line basis from the date of acquisition which adjusts the
Company's share of such affiliate's earnings or losses. The Company's investment
in Shop4Cash.com, Inc. is accounted for at cost. The Company's investment in
U.S. Wireless Corporation ("U.S. Wireless") is accounted for at fair market
value as securities available for sale under FAS 115. (See Note 3.)
The Company continually evaluates investments for indications of
impairment based on the market value of each investment relative to cost,
financial condition, near-term prospects of the investment, and other relative
factors. If impairment is determined the carrying value is adjusted to fair
value.
The equity method of accounting requires that when it is determined
that only one party in an investment has any tangible assets at risk, 100% of
the equity loss should be recorded by that party without regard to the percent
ownership in the investment. The Company determined during the quarter ended
December 31,1999 that it retains the majority of the financial risk related to
Inter Lotto and, accordingly, has recorded against their investment 100% of the
loss incurred by Inter Lotto during this period before operations begin, and
continues to record 100% of the loss until such time as the investment begins to
return a profit.
In the quarter ended December 31, 1999, the Company determined that the
value of its investment in Donativos S.A. de C.V. ("Donativos") had been
permanently impaired. Since the opening of its entertainment center, Donativos
has not generated sufficient profits to meet its obligations to the Company
under the loan and equipment financing agreements and, therefore, its ability to
continue as a "going concern" was in doubt. The equity investment has been
written off and a reserve for the full amount of the loans and subsequent
advances to Donativos has been recorded, resulting in a charge to income of $1.7
million. On April 14, 2000 the Company entered into an agreement pursuant to
which on May 10, 2000 the Company received $2.0 million from Donativos in return
for cancellation of the debt owed by Donativos to Global and transfer of the
equity that Global and Regal Gaming & Entertainment, Inc. ("Regal") held in
Donativos to the majority shareholder of Donativos. The transaction also
involved an exchange of general releases and transfer of title to the equipment
in the gaming center in Monterey, Mexico from a Global subsidiary to Donativos.
6
<PAGE>
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles, pursuant
to the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the accompanying condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals)
which are necessary for a fair presentation of the results for the interim
periods presented. Certain information and footnote disclosures normally
included in consolidated financial statements have been condensed or omitted
pursuant to such rules and regulations. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto for the transition period ended June 30,
1999, included in the Company's Transition Report on Form 10-KSB.
The results of operations for the three months and nine months ended
March 31, 2000 are not necessarily indicative of the results to be expected for
the entire fiscal year.
(2) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Additionally, such estimates and assumptions affect the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
(3) INVESTMENTS
Investments are classified according to the applicable accounting
method at March 31, 2000 and June 30, 1999. Market value reflects the price of
publicly traded securities at the close of business at the respective date.
Unrealized gain (loss) reflects the excess (deficit) of market value over
carrying value of publicly traded securities classified as available for sale.
In March and April 2000, the Company converted its Series B Preferred
Stock of U.S. Wireless Corporation ("U.S. Wireless") into 3,000,000 shares of
U.S. Wireless common stock (subject to the limitations of Rule 144). As such,
the Company changed its method of accounting for this investment from the cost
method to classifying the investment as available for sale carried at fair
market value as of March 31, 2000. Unrealized gains on this investment are
reflected as a separate component of stockholders' equity. At March 31, 2000 the
market price of U.S. Wireless common stock was $31 per share, resulting in a
total fair market value of $93,000,000. Changes in the market price of U.S.
Wireless stock will result in future adjustments to unrealized gains or losses
on this investment. As of May 10, 2000, the price per share common share of U.S.
Wireless common stock was $15.00, resulting in a fair market value of $45
million.
The following summarizes the Company's current portion of investments
by type at:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
MARCH 31, 2000
Available-for-sale:
Corporate equity securities $3,037,325 $89,962,675 $ -- $93,000,000
Corporate debt securities 24,060 28 -- 24,088
---------- ----------- -------- -----------
Total $3,061,385 $89,962,703 $ -- $93,024,088
========== =========== ======== ===========
JUNE 30, 1999
Available-for-sale:
Corporate debt securities $4,604,858 $ -- $(10,107) $ 4,594,751
========== =========== ======== ===========
</TABLE>
Corporate equity securities consist of available for sale securities.
Corporate debt securities consist of corporate bonds with a maturity greater
than three months at the time of purchase.
The following summarizes the Company's non-current investments at March
31, 2000:
CARRYING VALUE
--------------
Equity Affiliates
(Approx. voting %)
Inter Lotto (UK) Ltd. (27.5%) $ 818,812
Donativos S.A. de C.V. (24.5%) --
Shop-4-Cash.com, Inc. (4%) 1,000,000
----------
Total Non-Current Investments $1,818,812
==========
(4) STOCK DIVIDEND
On January 5, 2000, the Board of Directors approved a three-for-two
stock split to be effected by way of a stock dividend of one share for each two
shares of Common Stock held by stockholders of record as of the close of
business February 15, 2000. The dividend was paid on February 29, 2000;
fractional shares have been paid out in cash. All references to the number of
common shares, per share amounts and stock option data elsewhere in the
consolidated financial statements and related footnotes have been restated as
appropriate to reflect the effect of the stock dividend for all periods
presented prior to the stock dividend.
(5) DEFERRED TAX ASSET
As a result of the Company's change from the cost method of valuation
of its investment in U.S. Wireless (See Note 3), during the quarter ended March
31, 2000, the Company determined that its deferred tax assets resulting from net
operating loss carryforwards for Federal income tax purposes are more likely
than not to be realized. As such, the Company has reduced its valuation
allowance previously recorded for 100% of the deferred tax assets. As of June
30, 1999 the Company had a net operating loss carryforward for federal income
tax purposes of approximately $73.9 million. A deferred tax asset of
approximately $28.8 million has been recognized based upon an effective tax rate
of 39%.
(6) NOTES RECEIVABLE
Prior to the reverse merger with TNCi (the "Transaction"), TNCi issued
a secured promissory note to Global in the principal amount of $750,000, bearing
interest at a rate of 9.5% per annum, and a related security agreement granting
Global a security interest in TNCi's assets (the "Promissory Note"). The
Promissory Note was convertible into shares of TNCi's Series C 8% Convertible
Preferred Stock ("TNCi Series C Stock") at the discretion of Global. The Note
had an original maturity of May 14, 1999, but had been extended until September
2001.
In July and August 1999, Global purchased all of the Series A and E
notes and the Series D notes issued by TNCi (collectively, the "Series Notes"),
respectively, from the holders of such notes. Concurrent with such purchase by
Global, TNCi executed several allonges to the Promissory Note which cancelled
such Series Notes and rolled the principal balance, plus accrued but unpaid
interest, penalties and redemption premiums on the Series Notes, into the
principal balance of the Promissory Note. Subsequent to May 18, 1999, Global has
also advanced working capital to TNCi in the form of intercompany advances. In
7
<PAGE>
August 1999, TNCi executed an allonge to the Promissory Note which rolled the
intercompany advances into the principal balance of the Promissory Note and
granted Global the ability to convert the Promissory Note directly into shares
of TNCi's Common Stock, without first converting to Series C Stock, as an
administrative convenience.
On August 24, 1999, the Board of Directors of Global approved the
conversion of the Promissory Note into approximately 4.8 million shares of
TNCi's Common Stock. Such conversion was contingent upon receiving shareholder
approval to increase the authorized share capital of TNCi. This increase in
authorized share capital was subsequently approved at the September 17, 1999
Special Meeting of TNCi shareholders. Accordingly, TNCi has issued to Global
approximately 4.8 million shares of its Common Stock based on the conversion
date of August 24, 1999. Separately from the Promissory Note, in December 1999
TNCi issued 886,140 shares of its Common Stock to Global upon conversion of the
TNCi Series C Stock held by Global.
Also, on August 24, 1999, the Company's Board of Directors approved a
$5 million secured revolving credit facility by and between TNCi and Global (the
"Facility"). The Facility provides that TNCi may borrow up to $5 million for
working capital and general corporate purposes at the prime rate of interest
plus 3%. The Facility matures in September 2001. TNCi paid an origination fee of
$50,000 to Global and will pay an unused line fee of 0.5% per annum. The
Facility is secured by all of the assets of TNCi and is convertible, at Global's
option, into shares of TNCi's Common Stock at a price equal to the lesser of
66.7% of the trailing five-day average share price of the preceding 20 days, or
$1.50 per share, or any lesser amount at which shares of TNCi's Common Stock
have been issued to third parties.
Pursuant to Nasdaq rules, Global may not convert borrowings under the
Facility into shares of TNCi Common Stock in excess of 19.99% of the number of
shares of TNCi Common Stock outstanding as of August 24, 1999, without
stockholder approval. As of March 31, 2000, $1,080,000 was outstanding under the
Facility. As of March 31, 2000, the Company did not have sufficient cash for
TNCi to borrow the full $5 million under the Facility. Should TNCi draw on the
Facility, the Company would have to obtain financing or sell assets to meet its
obligations under the Facility. Should TNCi be unable to borrow funds under the
Facility, it could result in a material adverse effect on the operating results
and financial condition of TNCi.
(7) NOTES PAYABLE
In September 1999, TNCi sold one of its two buildings in Alpharetta,
Georgia. The net proceeds of approximately $390,000 from the sale, plus cash of
approximately $80,000, was used by the Company to repay a note payable due April
2001, in the principal amount of $470,000. The sale of the second building
occurred in November 1999. The net proceeds of approximately $367,000 from the
sale were used to retire a note payable due 2009 in the principal amount of
$217,000.
In October 1999, a convertible note payable of TNCi in the principal
amount of $400,000 due September 5, 1999 was converted into 200,000 shares of
TNCi's Common Stock.
(8) PREFERRED STOCK
On November 10, 1999, the Board of Directors of the Company approved
the redemption of the Series A 8% Convertible Preferred Stock ("Series A Stock")
as of November 6, 1999 for approximately $3.57 million, consisting of its stated
value of $3 million, plus accrued and unpaid dividends of approximately $120,000
and a redemption premium of approximately $450,000. Such amounts were paid on
November 16, 1999 to the holder of the Series A Stock.
On February 16, 2000, Global entered into an agreement for the issue of
preferred stock and callable warrants in return for $10 million. The preferred
stock carries a 5% cumulative dividend payable quarterly in cash or in kind.
Cumulative undeclared and unpaid dividends as of March 31, 2000 total $61,644 or
$6.16 per share. The preferred stock converts into Class A Common Stock at a
conversion price of $17.748 per share, representing 120% of the average closing
bid prices thereof over the five trading days beginning March 1, 2000 (the
"Fixed Conversion Price") as adjusted for certain dilutive events. Nine months
after funding, and
8
<PAGE>
every three months thereafter, the conversion price resets to the lesser of the
Fixed Conversion Price or 100% of the average of the four low trading prices
over the course of the preceding 20 trading days. On April 14, 2000 the Company
registered the Class A Common Stock into which the preferred stock and warrants
are convertible or exercisable, as the case may be. Additionally, the Company
may redeem the preferred stock for a premium under certain circumstances. As of
May 10, 2000 the Series C 5% Convertible Preferred Stock ("Series C Stock")
represented approximately 14% of the common stock of the Company on a fully
converted basis. If the Company were required to redeem the Series C Stock, it
could have a material adverse effect on the Company's financial position.
(9) WARRANTS
In December 1999, TNCi issued warrants to purchase 25,000 shares of
TNCi Common Stock at $6.50 per share and Global issued warrants to purchase
37,500 shares of Global Class A Common Stock at $5.25 per share to Emden
Consulting Corp. in exchange for certain financial advisory services. The
warrants expire in December 2004. Non-cash compensation expense of $269,525 was
recorded in the quarter ended December 1999.
In December 1999, TNCi issued warrants to purchase 25,000 shares of
TNCi Common Stock at $6.50 per share and Global issued warrants to purchase
37,500 shares of Global Class A Common Stock at $5.25 per share to Waterton
Group LLC in exchange for certain financial advisory services. The warrants
expire in December 2004. Non-cash compensation expense of $269,525 was recorded
in the quarter ended December 1999.
In December 1999, TNCi issued common stock purchase warrants to
purchase 100,000 shares of TNCi Common Stock at prices ranging from $6 to $10
per share to Continental Capital & Equity Corp. in exchange for public relations
and financial advisory services. The warrants vest over a period of 270 days and
expire in February 2002. Non-cash compensation expense of $151,286 was
recognized in the three months ended March 31, 2000 and additional non-cash
compensation expense may be recognized, under variable plan accounting, over the
remaining nine months of the agreement.
In connection with the February 16, 2000 preferred stock offering noted
above, the Company issued warrants to purchase 100,925 shares of Global's Class
A Common Stock to the holders of the preferred stock. These warrants are
exercisable at a price of $17.748 and expire in February 16, 2005.
In connection with the February 16, 2000 preferred stock issuance,
designees of Reedland Capital Partners, a division of Financial West Group,
received warrants to purchase an aggregate of 50,000 shares of the Company's
common stock at $17.835 per share for Reedland Capital Partners' role as sales
agent.
On March 13, 2000, TNCi issued 236,080 shares of its common stock in
connection with the cashless exercise of common stock purchase warrants held by
the former holders of TNCi's Series A and E notes. The warrants exercised
represented warrants to purchase 311,525 shares of TNCi Common Stock.
(10) SHARE REPURCHASES
In July and August 1999, Global acquired from third parties the Series
Notes (as described in Note 4) issued by TNCi in November of 1998 for
consideration consisting of cash and 581,415 shares of Class A Common Stock. In
connection with this transaction, Global entered into put/call agreements with
the various note holders which provided them with the right to require Global to
purchase any or all of their shares for an average price of $2.38 per share.
Further, Global retained the right to purchase all or any of these shares held
by the holder at an average price of $3.03 per share. These put and call rights
could be exercised for the period from January 1, 2000 to January 10, 2000.
In December, 1999, the Company determined to exercise its call rights
effective January 1, 2000 and provided proper notice to the parties that it had
done so. Accordingly, on February 28, 2000, the Company repurchased 464,630 of
these shares at a cost of approximately $1.4 million. The repurchase of the
remainder of these shares is currently the subject of litigation. See "Note
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11(a) - Global Technologies, Ltd. v. XCEL Capital, LLC." These repurchased
shares and all other shares held in Treasury Stock were retired by the Board of
Directors of the Company on March 16, 2000.
(11) UNIT PURCHASE OPTIONS
In connection with the Company's March 6, 1995 public offering, the
Company issued 140,000 Unit Purchase Options to designees of D. H. Blair
Investment Banking Corporation for their role as underwriters of the offering.
Each Unit Purchase Option was exercisable into one share of Class A Common
Stock, One Class A Warrant and One Class B Warrant at an exercise price of
$12.00 per share. Each Class A Warrant was exercisable into one share of Class A
Common Stock and one additional Class B Warrant at an exercise price of $13.71
per share (as adjusted for certain dilutive events). Each Class B Warrant was
exercisable into one share of Class A Common Stock at an exercise price of
$19.10 per share (as adjusted for certain dilutive events). The options and
underlying warrants were set to expire March 6, 2000.
As of March 6, 2000, 104,458 shares of Class A Common Stock were issued
as a result of the exercise of the Unit Purchase Options and 64,439 shares of
Class A Common Stock were issued as a result of the exercise of Class A
Warrants. No Class B Warrants were exercised and any remaining options and
warrants have expired. The Company received proceeds of $2,111,118 as certain
option holders executed cashless exercise.
(12) OPTION GRANTS
On October 8, 1999, the Compensation Committee of the Board of
Directors of the Company recommended, and the Board approved, an option grant to
purchase up to 1,500,000 shares of Global's Class A Common Stock to Mr. Irwin L.
Gross, Chairman and Chief Executive Officer of the Company. One quarter of these
options vested immediately and one quarter vest over three years. The remainder
vest on the sixth anniversary of the date of grant, subject to acceleration to a
three-year schedule in the event of the achievement of certain performance
goals. The exercise price of the options is equal to the closing market price of
the Company's Common Stock on the day prior to grant. The options expire in
October 2009.
Additionally, on November 10, 1999, the Compensation Committee of the
Board of Directors of TNCi recommended, and the Board approved an option grant
to purchase up to 500,000 shares of TNCi's Common Stock to Mr. Irwin L. Gross,
Chairman and Chief Executive Officer of TNCi. One quarter of these options
vested immediately and one quarter vest over three years. The remainder vest on
the sixth anniversary of the date of grant, subject to acceleration to a
three-year schedule in the event of the achievement of certain performance
goals. The exercise price of the options is equal to the closing market price of
TNCi's Common Stock on the day of grant. The options expire in October 2009.
On March 6, 2000, TNCi granted options to purchase up to 800,000 shares
of TNCi's Common Stock to Mr. Robert Pringle, President and Chief Operating
Officer of TNCi. One fifth of these options vest on June 6, 2000, with the
remainder vesting in four equal annual installments beginning March 6, 2001.
Exercise price of the options is equal to the closing market price of TNCi's
Common Stock on the day prior to grant, and the options expire on March 6, 2010.
On March 6, 2000, TNCi granted options to purchase up to 800,000 shares
of TNCi's Common Stock to Dr. Jay Rosan, an Executive Vice President of TNCi.
One fifth of these options vest on June 6, 2000, with the remainder vesting in
four equal annual installments beginning March 6, 2001. Exercise price of the
options is equal to the closing market price of TNCi's Common Stock on the day
prior to grant, and the options expire on March 6, 2010.
On March 6, 2000, TNCi granted options to purchase up to 250,000 shares
of TNCi's Common Stock to Mr. Richard Genzer, Chief Technology Officer of TNCi.
One fifth of these options vest on June 6, 2000, with the remainder vesting in
four equal annual installments beginning March 6, 2001. Exercise price of the
options is equal to the closing market price of TNCi's Common Stock on the day
prior to grant, and the options expire on March 6, 2010.
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<PAGE>
(13) PRO FORMA INFORMATION
Pro forma unaudited operations data assuming the TNCi acquisition had
taken place on July 1, 1998 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1999
-------------- --------------
Revenue $ 121,764 $ 1,722,368
Net loss $(2,246,133) $(16,617,373)
Net loss per share $ (0.29) $ (2.17)
(14) COMMITMENTS AND CONTINGENCIES
(a) LAWSUITS
FIDELITY AND GUARANTY INSURANCE COMPANY V. INTERACTIVE FLIGHT
TECHNOLOGIES, INC., United States District Court for the District of Minnesota,
CV No. 99-410. This is a declaratory judgment action where the Company and its
insurers are seeking a declaration of the applicability of an excess liability
policy to claims made by the estates of victims of the crash of Swissair Flight
No. 111 on September 2, 1998.
Swissair/MDL-1269, IN REGARDS TO AN AIR CRASH NEAR PEGGY'S COVE, NOVA
SCOTIA. This multi-district litigation, which is being overseen by the United
States District Court for the Eastern Division of Pennsylvania, relates to the
crash of Swissair Flight No. 111 on September 2, 1998. The Swissair MD-11
aircraft involved in the crash was equipped with an entertainment network system
that had been sold to Swissair by the Company. Estates of the victims of the
crash have filed lawsuits throughout the United States against Swissair, Boeing,
Dupont and various other parties, including the Company. TNCi has been named in
some of the lawsuits filed on a successor liability theory. The Company and TNCi
deny all liability for the crash. The Company and TNCi are being defended by the
aviation insurer for the Company.
FEDERAL EXPRESS CORPORATION V. THE NETWORK CONNECTION, INC., State
Court of Forsyth County, State of Georgia, Civil Action File No. 99-SC-0053.
This lawsuit was served on the Company on or about July 22, 1999 by Federal
Express Corporation and relates to charges incurred by prior management. The
suit alleged the Company owes Federal Express approximately $110,000 for past
services rendered. The Company has settled this matter for $75,000, with $25,000
having been paid on execution of the settlement agreement on March 3, 2000,
$10,000 having been paid on each of April 1, 2000 and May 1, 2000 and three
additional payments of $10,000 to be paid on each of June 1, 2000, July 1, 2000
and August 1, 2000.
BRYAN R. CARR V. THE NETWORK CONNECTION, INC. AND GLOBAL TECHNOLOGIES,
LTD., Superior Court of Georgia, Civil Action No. 99-CV-1307. Bryan R. Carr, the
Company's former Chief Operating and Financial Officer and a former Director,
filed a claim on November 24, 1999 alleging a breach of his employment
agreement. Mr. Carr claims that he is entitled to the present value of his base
salary through October 31, 2001, a share of any "bonus pool," the value of his
stock options and accrued vacation time. The Company is currently defending the
claim.
In September of 1999, Global filed a lawsuit against Barington Capital
Group, L. P. ("Barington") in Maricopa County Superior Court, Arizona, seeking a
declaratory judgment that no sums were owed to Barington pursuant to a Financial
Advisory Service Agreement dated in October of 1998. In October of 1999,
Barington filed a lawsuit on the same contract in the Supreme Court of the State
of New York, County of New York, Index No. 99-6041606, captioned BARINGTON
CAPITAL GROUP , L.P. V. INTERACTIVE FLIGHT TECHNOLOGIES, INC., alleging that
Barington is owed $1,750,471 in connection with services alleged to have been
performed pursuant to the Financial Advisory Service Agreement. Barington's New
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York suit has been stayed pending resolution of the Arizona action. Global
denies all liability and denies that any sums are owed to Barington.
GLOBAL TECHNOLOGIES, LTD. V. XCEL CAPITAL, LLC, United States district
Court for the Eastern District of Pennsylvania, Case No. 00-CV-505. On January
27, 2000 Global filed an action against XCEL Capital, LLC ("XCEL") for specific
performance and breach of contract. In the action, Global is seeking to compel
XCEL and another party to tender 116,785 shares of Global Class A Common Stock
to Global at $3.17 per share in accordance with XCEL `s obligations pursuant to
a put/call agreement entered into between the parties on August 12, 1999.
On October 25, 1999, Global filed a lawsuit against Regal (and its
principals and their spouses) in the United States District Court for the
Southern District of Florida seeking judgment in favor of Global on the $500,000
promissory note made by Regal (and guaranteed by its principals and their
spouses) to Global. The promissory note was made to secure Regal's obligations
to fund cost overruns in connection with the entertainment center project
undertaken by Donativos. In May 2000, this lawsuit was settled in connection
with a transaction that Global engaged in with Donativos S.A. de C.V.
("Donativos") whereby Global received $2.0 million from Donativos in return for
cancellation of the debt owed by Donativos to Global and transfer of the equity
that Global and Regal held in Donativos to its majority shareholder (the debt
and equity portions of this investment had been previously written off). In the
settlement, Regal delivered to Global its shares of Donativos in return for
$80,000, dismissal of this lawsuit, cancellation of the debt owed by Regal to
Global and a mutual general release.
A suit captioned LODGENET ENTERTAINMENT CORPORATION V. THE NETWORK
CONNECTION, INC. was filed April 5, 2000 in the Circuit Court for the Second
Judicial Circuit of the State of South Dakota. The action arises out of TNCi's
hiring of Theodore P. Racz, a former LodgeNet Entertainment Corporation
("LodgeNet") employee, as its Senior Vice President of the Hotels & Hospitality
division. LodgeNet is alleging tortious interference with contract and tortious
interference with business relationships. LodgeNet is seeking to prohibit Mr.
Racz from being employed by TNCi, as well as seeking damages, and fees and
costs.
A case captioned INTERACTIVE FLIGHT TECHNOLOGIES, INC. V. MICHAIL ITKIS
was initiated on February 3, 1999 in the Superior Court of State of Arizona, in
and for Maricopa County. The Company brought claims for breach of contract,
unjust enrichment, breach of fiduciary duty and fraud against Mr. Itkis relating
to certain items of compensation that he received in connection with his
separation from the Company. The Company sought the return of the items of
compensation. Mr. Itkis brought counterclaims against the Company and certain of
its affiliates for breach of contract and declaratory judgment, seeking to
retain the items of compensation. The parties settled this matter in May 2000
with Global paying Mr. Itkis $6,295 for certain legal expenses he incurred in
defending the action and for which Global was required to provide indemnity.
The Company may be subject to other lawsuits and claims arising in the
ordinary course of its business. In the Company's opinion, as of March 31, 2000,
the effect of such matters will not have a material adverse effect on the
Company's results of operations and financial position.
(b) CARNIVAL AGREEMENT
In September 1998, the Company entered into a Turnkey Agreement (the
"Carnival Agreement") with Carnival Corporation ("Carnival") for the purchase,
installation and maintenance of its advanced cabin entertainment and management
system for the cruise industry ("CruiseView(TM)") on a minimum of one Carnival
Cruise Lines ship. During the four-year period commencing on the date of the
Carnival Agreement, Carnival has the right to designate an unspecified number of
additional ships for the installation of CruiseView(TM). The cost per cabin for
CruiseView(TM) purchase and installation on each ship is provided for in the
Carnival Agreement. In December 1998, Carnival ordered the installation of
CruiseView(TM) on one Carnival Cruise Lines "Fantasy" class ship which has been
in operational use since August 1999. In August 1999, Carnival ordered the
installation of CruiseView(TM) on one Carnival Cruise Lines "Destiny" class ship
which has been in operational use since October 1999. Under the terms of the
agreement, the Company receives payment for 50% of the sales price of the system
in installments through commencement of operation of the system. Recovery of the
remaining sales price of the system is to be achieved through the receipt of the
Company's 50% share of net profits as defined in the Carnival Agreement,
generated by the system over future periods.
The terms of the Carnival Agreement provide that Carnival may return
the CruiseView(TM) system within the acceptance period, as defined in the
Carnival Agreement, or for breach of warranty. The acceptance period for the
Fantasy and Destiny class ships are twelve months and three months,
respectively, from completion of installation and testing, which occurred in
February 1999 and October 1999, respectively. The initial warranty period for
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<PAGE>
these systems is three years. As of March 31, 2000, the Company had recorded
deferred revenue of approximately $2.1 million related to the two Carnival
ships.
In the quarter ended March 31, 2000, the Company concluded that the cost of
building and installing CruiseView(TM) systems on the existing two Carnival
ships pursuant to the Carnival Agreement has exceeded the revenue that can be
earned in connection therewith. Accordingly, the Company has recorded an expense
of $208,146 in the period ended March 31, 2000 reflecting the excess of cost
over expected revenue. Carnival's continuing to exercise its option for building
and installing CruiseView(TM) on additional ships under the agreement may prove
unprofitable and therefore have a negative effect on the Company's working
capital. The Company is currently endeavoring to renegotiate the terms of the
agreement with Carnival. (See "Note 17 (b) - Subsequent Event").
(c) PURCHASE COMMITMENT
In September 1999, GTL Leasing Limited entered into an agreement with
International Lottery & Totalizator Systems, Inc., a California corporation
("ILTS"), to purchase an on-line lottery system for the operation of the Inter
Lotto lotteries. The base value of the lottery system being purchased from ILTS
is $12.3 million of which approximately $5.5 million has yet to be paid as of
March 31, 2000. In addition, on the same date, GTL Management Limited entered
into an eight-year facilities management agreement with ILTS to provide
operational and technology support for the system. Under this agreement, GTL
Management is required, beginning April 1, 2000, to make weekly payments of
$72,000, plus additional amounts based on the number of installed terminals and
sales volumes, upon the commencement of ticket sales through the system. Global
has guaranteed the obligations of GTL Leasing Limited and GTL Management Limited
under these agreements.
(15) COMPREHENSIVE INCOME
Comprehensive income encompasses net income and "other comprehensive
income", which includes all other non-owner transactions and events which change
stockholders' equity. The Company recognized comprehensive income (loss) for the
three months and nine months ended March 31, 2000 and 1999 as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net Loss $ (9,272,091) $(1,780,213) $ (15,811,079) $(9,179,460)
Net unrealized gain on
investment securities 89,962,969 -- 89,972,810 --
Tax benefit of NOL carryforward 28,797,214 -- 28,797,214 --
Unrealized loss on foreign
currency translation (196,695) -- (196,695) --
------------- ----------- ------------- -----------
Comprehensive gain (loss) $ 109,291,397 $(1,780,213) $ 102,762,250 $(9,179,460)
============= =========== ============= ===========
</TABLE>
(16) OPERATING SEGMENTS
In 1998, the Company adopted SFAS 131, which requires the reporting of
operating segments using the "management approach" versus the "industry
approach" previously required. The Company's reportable segments consist of TNCi
and general corporate operations. TNCi's operations include the design,
manufacture, installation and maintenance of advanced, high-end,
high-performance computer servers and interactive, broad-band information and
entertainment systems, and procuring and providing the content available through
these systems. These all-digital systems deliver an on-demand, multi-media
experience via high-speed, high-performance Internet protocol networks. The
systems are designed to provide users access to information, entertainment and a
wide array of service options such as movies, shopping for goods and services,
computer games, access to the World Wide Web and on-line gambling, where
permitted by applicable law. General corporate operations consist of investing
in, developing and operating or assisting in the management of affiliate
companies, most of which are engaged in telecommunications, e-commerce,
networking solutions and gaming.
The following summarizes information related to the Company's segments.
All significant inter-segment activity has been eliminated. Assets are the owned
or allocated assets used by each operating segment.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue
TNCi $ 590 $ -- $ 5,657,736 $ 478,065
Other -- 290,773 -- 805,211
------------- ------------- ------------- -------------
$ 590 $ 290,773 $ 5,657,736 $ 1,283,276
Gross profit(a)
TNCi $ (246,268) $ -- $ 1,940,860 $ 193,615
Other -- 107,332 -- 276,373
------------- ------------- ------------- -------------
$ (246,268) $ 107,332 $ 1,940,860 $ 469,988
Operating income (loss)
TNCi $ (2,920,725) $ (989,121) $ (4,255,304) $ (7,036,470)
Other (6,530,591) (1,216,078) (11,746,560) (3,065,833)
------------- ------------- ------------- -------------
$ (9,451,316) $ (2,205,199) $ (16,001,864) $ (10,102,303)
General corporate operations
Equity in loss of non-consolidated
affiliate $ (405,325) $ -- $ (1,120,776) $ --
Net interest 42,887 405,441 519,519 1,470,615
Other income (expenses) (15,913) 19,545 (19,697) (547,772)
Minority interest 557,576 -- 811,739 --
------------- ------------- ------------- -------------
179,225 424,986 190,785 922,843
Net loss $ (9,272,091) $ (1,780,213) $ (15,811,079) $ (9,179,460)
Total assets
TNCi $ 14,434,965 $ 7,019,282 $ 14,434,965 $ 7,019,282
General corporate 143,932,433 28,762,658 143,932,433 28,762,658
------------- ------------- ------------- -------------
Total Assets $ 158,367,398 $ 35,781,940 $ 158,367,398 $ 35,781,940
============= ============= ============= =============
</TABLE>
- ----------
(a) Gross profit is the difference between Revenue and Cost of Revenue in the
consolidated statement of operations.
(17) SUBSEQUENT EVENTS
(a) CREDIT FACILITY
On April 5, 2000, the Company entered into a line of credit facility
with Merrill Lynch in which Merrill Lynch agreed to advance up to $10 million
based upon a percentage of the value of securities pledged as collateral to
secure amounts drawn under the line of credit. Principal amounts borrowed under
the line, together with accrued interest at an annual rate equal to the London
Inter-bank Offer Rate (LIBOR) plus 1.25%, are payable upon demand by Merrill
Lynch. As of May 11, 2000, approximately $5.1 million is outstanding under the
line of credit facility. To secure such borrowing, the Company has pledged to
Merrill Lynch 1,000,000 shares of common stock of U.S. Wireless Corporation
("U.S. Wireless") held by the Company.
If the amount owed under the Merrill Lynch credit facility at any time
exceeds 35% of the market value of the shares of U.S. Wireless pledged to
Merrill Lynch, the Company will be subject to a maintenance call which would
require the Company to pledge additional securities which are acceptable to
Merrill Lynch as collateral or require the Company to reduce the outstanding
balance owed under the Merrill Lynch credit facility through payment in cash.
The Company provides no assurance that the Company would have sufficient
additional collateral or funds necessary to pay outstanding amounts owed under
the Merrill Lynch credit facility in the event of a maintenance call or upon
demand for payment by Merrill Lynch, the failure of either of which would result
in the liquidation of the Company's shares of U.S. Wireless pledged to Merrill
14
<PAGE>
Lynch to satisfy outstanding obligations under the Merrill Lynch credit
facility, adverse tax consequences resulting from such liquidation, and a
material adverse effect on the Company's financial condition.
(b) CARNIVAL LETTER
Since the installation of the CruiseView(TM) system on two Carnival
cruise ships, and beginning in the quarter ended March 31, 2000, the Company has
experienced costs in excess of those recoverable under the Carnival Agreement.
Given these costs, and ongoing technical issues, the Company notified Carnival
of its desire to renegotiate the Carnival Agreement. During these discussions,
Carnival notified the Company in a letter dated April 24, 2000 that it sought to
terminate the Carnival Agreement and sought to assert certain remedies
thereunder. The Company and Carnival are in discussions seeking to resolve
issues under the Carnival Agreement regarding recovery of amounts paid to the
Company (recorded as deferred revenue), the Company's recovery of its inventory
costs, potential warranty/de-installation obligations and other matters.
Concurrently, the Company and Carnival are in discussions with respect to a
new agreement which would cover the installation of the Company's latest
CruiseView(TM) technology on the "Fantasy" class ship discussed above, and
contractual terms more favorable to the Company than the Carnival Agreement,
including a longer-term and multiple ship arrangement. The Company believes its
new technology improves the Company's ability to create multiple new content and
commerce-based revenue streams, and to establish a business relationship
providing appropriate returns to each partner. However, while the Company is
optimistic about the discussions, there is no assurance that the Company will be
successful in reaching a mutually satisfactory resolution of the Carnival
Agreement and in securing a new, more favorable long term contract with
Carnival.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Condensed Consolidated Financial Statements
and the Notes thereto appearing elsewhere herein. Historical results are not
necessarily indicative of trends in operating results for any future period.
Global Technologies, Ltd. ("Global" and, collectively with its
affiliate companies, the "Company") is a technology incubator that invests in,
develops and assists in the management of or operates emerging growth companies
in the e-commerce, networking solutions, telecommunications and gaming
industries.
Global currently holds approximately 80% of the outstanding common
stock of The Network Connection, Inc. ("TNCi") on a fully converted basis. TNCi
is publicly traded on the Nasdaq SmallCap Market under the ticker symbol "TNCX."
TNCi is engaged in the business of designing, manufacturing, marketing,
installing and maintaining advanced, high-end, high-performance computer servers
and interactive, broad-band information and entertainment systems and providing
the content available thereon. Global also holds approximately 15.25% of the
outstanding common stock of U.S. Wireless Corporation ("US Wireless). US
Wireless is publicly traded on the Nasdaq SmallCap Market under the ticker
symbol "USWC." US Wireless has developed a proprietary, network-based wireless
location technology and plans to build out a nationwide network to support its
technology. Global also holds 27.5% of Inter Lotto (UK) Limited ("InterLotto") a
company that is licensed to operate lotteries on behalf of charities in the
United Kingdom ("UK"). Global owns 100% of GTL Management Limited ("GTL
Management"), which has an exclusive contract with InterLotto to provide it
management services in connection with operation of lotteries. Global holds
approximately 4% of Shop4Cash.com, Inc. ("Shop4Cash"), a privately held
cash-incentive Internet shopping portal with a growing base of about 250
affiliated merchants. Lastly, Global owns 24.5% of Donativos S.A. de C. V.
("Donativos"), a company that has developed and is operating a gaming center in
15
<PAGE>
Monterrey, Mexico. On April 14, 2000 the Company entered into an agreement
pursuant to which on May 10, 2000 the Company received $2.0 million from
Donativos in return for cancellation of the debt owed by Donativos to Global and
transfer of the equity that Global and Regal Gaming & Entertainment, Inc.
("Regal") held in Donativos to the majority shareholder of Donativos. The
transaction also involved an exchange of general releases and transfer of title
to the equipment in the gaming center in Monterey, Mexico from a Global
subsidiary to Donativos.
RESULTS OF OPERATIONS
REVENUE
Revenue for the quarter ended March 31, 2000 was $590, a decrease of
$290,183 (or 99%) compared to revenue of $290,773 for the corresponding period
of the previous fiscal year. Revenue for the nine months ended March 31, 2000
was $5,657,736, an increase of $4,374,460 (or 341%) compared to revenue of
$1,283,276 for the corresponding period of the previous fiscal year. The Company
elected to defer revenue of approximately $2.1 million in connection with the
Carnival Agreement pending the outcome of current contract negotiations.
Equipment sales generated during the three months and nine months ended March
31, 2000 were principally from the sale of 195 of TNCi's Cheetah(R) video
servers in connection with the Georgia Metropolitan Regional Education Services
Agency ("MRESA") Net 2000 project. Equipment sales of $89,028 during the nine
months ended March 31, 1999 were generated from the sale of spare parts needed
for the entertainment networks previously installed on three Swissair aircraft.
Service income of $59,827 generated during the nine months ended March 31, 2000
was from system design services provided by TNCi to ALSTOM Transport LTD
("Alstom"). The Company provided these services to Alstom, but expects no
further business from Alstom as they plan to create a subsidiary that would
compete with the Company in the passenger rail market. Service income of
$290,773 and $1,194,248 was generated during the three months and nine months
ended March 31, 1999, respectively. During the nine months ended March 31, 1999,
service income of $389,037 was generated from programming services provided to
Swissair, the Company's share of gaming profits generated by the Swissair
systems, revenue earned under the Swissair extended warranty contract, and
service income of $805,211 generated by the Company's dry cleaning operations.
The dry cleaning operations were acquired by prior management of the Company and
disposed of by current management on May 13, 1999. There will be no further
revenue under the Swissair agreements.
COST OF SALES
Cost of equipment sales and service income for the quarter ended March
31, 2000 were $246,858, an increase of $63,417 (or 35%) compared to cost of
sales of $183,441 for the corresponding quarter of the previous fiscal year.
Cost of equipment sales and service income for the nine months ended March 31,
2000 were $3,716,876, an increase of $2,903,588 (or 357%) over cost of sales of
$813,288 for the corresponding period of the previous fiscal year. Cost of
equipment sales for the three months and nine months ended March 31, 2000 is
comprised principally of material costs and estimated warranty costs associated
with the 195 TNCi Cheetah(R) video servers for the Georgia schools project. Cost
of sales for the corresponding period ended March 31, 1999 includes cost of
equipment sales comprised of material, installation and maintenance costs, as
well as estimated warranty costs and costs of upgrades to the entertainment
networks installed in Swissair aircraft; and cost of service income for
production costs related to the dry cleaning operations previously owned by the
Company.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter ended March 31,
2000 were $8,541,879, an increase of $6,633,804 (or 348%) compared to expenses
of $1,908,075 for the corresponding period ended March 31, 1999. General and
administrative expenses for the nine months ended March 31, 2000 were
$14,346,353, an increase of $4,570,068 (or 47%) compared to expenses of
$9,776,285 for the corresponding period of the previous fiscal year. The
increase in expenses in the current nine-month period is principally attributed
to the costs of starting up GTL Management's operations in connection with the
launch of the UK lottery, as well as an increase in expenses of TNCi related to
personnel increases in the current quarter, offset partially by a $3.1 million
severance expense recorded September 1998 for three former executives of TNCi.
16
<PAGE>
NON-CASH COMPENSATION
Non-cash compensation expense of $292,562 in the three-month period
ended March 31, 2000 is related to the issuance of warrants and stock in
exchange for services. Non-cash compensation of $916,612 for the nine-month
period ended March 31, 2000 is comprised of an $85,000 expense for a former
employee as part of a severance package as well as $ 831,612 of expense related
to the issuance of warrants and stock in exchange for services.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the quarter ended March 31,
2000 was $370,607, an increase of $266,151 (or 255%) compared to depreciation
and amortization expense of $104,456 for the corresponding period in the
previous fiscal year. Depreciation and amortization expense for the quarter
ended March 31, 2000 are comprised of property, plant and equipment depreciation
of $188,150 and intangible amortization of $182,457. Depreciation and
amortization expense for the corresponding period ended March 31, 1999 was
comprised of property, plant and equipment depreciation of $93,626 and
intangible amortization of $10,830. The increase in depreciation and
amortization expense in the current quarter can be attributed to fixed assets
acquired during May 1999 as the result of the merger with TNCi, an increase in
fixed asset purchases by TNCi in the current period and the depreciation of
gaming equipment owned by the Company related to the Company's investment in
Donativos. Depreciation and amortization expense for the nine months ended March
31, 2000 was $1,023,172, an increase of $365,813 (or 56%) compared to
depreciation and amortization expense of $657,359 for the corresponding period
ended March 31, 1999. Depreciation and amortization expense for the nine months
ended March 31, 2000 is comprised of property, plant and equipment depreciation
of $463,071 and intangible amortization of $560,101. Depreciation and
amortization expense for the corresponding period ended March 31, 1999 is
comprised of property, plant and equipment depreciation of $518,563 and
intangible amortization of $138,796. The decrease in property, plant and
equipment depreciation in the current nine-month period is a result of
$1,006,532 of equipment written off during October 1998, partially offset by the
depreciation of assets acquired May 1999 as a result of the TNCi merger. The
increase in amortization expense in the current three-month period is due to the
fact that amortization for the three-month period ended March 31, 2000 is
attributed to goodwill related to the merger with TNCi, whereas amortization for
the three-month period ended March 31, 1999 is attributable to the dry cleaning
operations. Intangible amortization for the current nine-month period is
principally attributed to goodwill related to the merger with TNCi, whereas
intangible amortization for the nine-month period ended March 31, 1999 is
attributed to the dry cleaning operation.
SPECIAL CHARGES
There were no special charges for the quarter ended March 31, 2000 or
for the corresponding period ended March 31, 1999. Special charges for the nine
months ended March 31, 2000 were zero compared to a credit of $190,000 during
the corresponding period ended March 31, 1999. A recovery of $190,000 was
recognized during September 1998 as a result of a reduction in the number of
entertainment networks installed on Swissair aircraft requiring maintenance.
PROVISION FOR DOUBTFUL ACCOUNTS
There were no provisions for doubtful accounts for the three and nine
months ended March 31, 2000 compared to $28,647 for the corresponding periods of
the previous fiscal year. The provisions in the previous fiscal year resulted
from entertainment programming services provided to Swissair for which the
Company has not been paid.
INTEREST EXPENSE
Interest expense was $5,845 and $54,120 for the three months and nine
months ended March 31, 2000 compared to $1,358 and $5,614 for the three months
and nine months ended March 31, 1999, respectively. Interest expense for the
nine-month period of the current fiscal year is principally attributable to
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prior long-term debt obligations and fees related to establishing a certificate
of deposit, whereas interest expense for the corresponding period of the
previous fiscal year is attributable to the Company's capital leases for
furniture.
INTEREST INCOME
Interest income was $48,732 and $573,639 for the three and nine months
ended March 31, 2000 compared to $406,799 and $1,476,229 for the three and nine
months ended March 31, 1999, respectively. Interest income for the three and
nine month period ended March 31, 2000 is attributed to short-term investments
of working capital as well as amortization on gains related to Global's purchase
of the TNCi Series A, D and E notes from the holders of such notes. Interest
income for the corresponding period of the previous fiscal year is attributed
principally to short-term investments of working capital. The decrease in income
during the current nine-month period is due to the lower average cash balance
during the nine-month period ended March 31, 2000 compared to the corresponding
period ended March 31, 1999, offset partially by the amortization on the gains
from the purchase of the TNCi Series A, D and E notes from their holders.
EQUITY INTERESTS
For the quarter ended March 31, 2000 the Company recorded its share of
its equity interest in losses of Inter Lotto in the amount of $405,325. For the
nine-month period ended March 31, 2000 the Company's share of equity interest in
losses of Inter Lotto and Donativos was $1,036,125 and $84,651, respectively.
The equity method of accounting requires that when it is determined that only
one party in an investment has any tangible assets at risk, 100% of the equity
loss should be recorded by that party without regard to the percent ownership in
the investment. The Company has determined during the quarter ended December 31,
1999 that it retains the majority of the financial risk related to Inter Lotto
and, accordingly, has recorded against their investment 100% of the loss
incurred by Inter Lotto during this period before operations begin, and will
continue to record 100% of the loss until such time as the investment returns a
profit.
INVESTMENT EXPENSE
Expenses associated with investments of $1,656,587 for the nine months
ended March 31, 2000 represent a reserve for the investment in Donativos.
Expenses associated with investments of $300,000 for the three and nine months
ended March 31, 1999 represent a $150,000 investment write-off deemed to have no
value and a $150,000 standstill fee related to the Inter Lotto acquisition.
OTHER EXPENSE
Other expense of $15,913 and $19,697 for the three and nine months
ended March 31, 2000, respectively, consist principally of losses incurred on
the buyout of a capital lease for furniture, losses incurred on the sale of two
buildings located in Alpharetta, Georgia on a loss incurred on the buyout of a
vehicle lease. Other expense of $547,772 for the nine-month period ended March
31, 1999 resulted from furniture and equipment write-offs of $1,006,532 during
October 1998, partially offset by the recovery of furniture and equipment
written off in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had cash and cash equivalents, and
short-term investments of approximately $94.1 million of which approximately
$93.0 million represents the Company's investment in U.S. Wireless, which was
classified as an investment available for sale and carried at fair market value
as of March 31, 2000. The carrying value of this investment is subject to future
fluctuations in the market price of U.S. Wireless common stock. As of May 11,
2000, the price per share of U.S. Wireless common stock was $15.00, resulting in
a fair market value of $45 million.
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On April 5, 2000, the Company entered into a line of credit facility
with Merrill Lynch in which Merrill Lynch agreed to advance up to $10 million
based upon a percentage of the value of securities pledged as collateral to
secure amounts drawn under the line of credit. Principal amounts borrowed under
the line, together with accrued interest at an annual rate equal to the London
Inter-bank Offer Rate (LIBOR) plus 1.25%, are payable upon demand by Merrill
Lynch. As of May 11, 2000, approximately $5.1 million is outstanding under the
line of credit facility. To secure such borrowing, the Company has pledged to
Merrill Lynch 1,000,000 shares of common stock of U.S. Wireless Corporation
("U.S. Wireless") held by the Company.
If the amount owed under the Merrill Lynch credit facility at any time
exceeds 35% of the market value of the shares of U.S. Wireless pledged to
Merrill Lynch, the Company will be subject to a maintenance call which would
require the Company to pledge additional securities which are acceptable to
Merrill Lynch as collateral or require the Company to reduce the outstanding
balance owed under the Merrill Lynch credit facility through payment in cash.
The Company provides no assurance that the Company would have sufficient
additional collateral or funds necessary to pay outstanding amounts owed under
the Merrill Lynch credit facility in the event of a maintenance call or upon
demand for payment by Merrill Lynch, the failure of either of which would result
in the liquidation of the Company's shares of U.S. Wireless pledged to Merrill
Lynch to satisfy outstanding obligations under the Merrill Lynch credit
facility, adverse tax consequences resulting from such liquidation, and a
material adverse effect on the Company's financial condition. On May 10, 2000,
the Company repaid $1.9 million of the line of credit facility to satisfy a
maintenance call from Merrill Lynch. The payment was made from the proceeds
received in conjunction with the Donativos agreement.
In February 2000, Global entered into an agreement to issue preferred
stock and callable warrants in return for $10 million. The preferred stock
carries a 5% cumulative dividend payable quarterly in cash or in kind. The
preferred stock converts into Class A Common Stock at a conversion price equal
to 120% of the average closing bid prices thereof over the five trading days
beginning March 1, 2000 (the "Fixed Conversion Price"). Nine months after
funding, and every three months thereafter, the conversion price resets to the
lesser of the Fixed Conversion Price or 100% of the average of the four low
trading prices over the course of the preceding 20 trading days. The Company has
granted the purchaser of the preferred stock registration rights relating to the
Class A Common Stock into which the preferred stock and warrants are convertible
or exercisable, as the case may be. Additionally, the Company may redeem the
preferred stock for a premium under certain circumstances.
As described below, the Company has purchase commitments related to
Inter Lotto in the amount of $5.5 million ($12.3 million commitment less
payments of $6.8 million to date). In addition, as described below, the Company
has a commitment to fund the revolving credit facility between TNCi and Global.
The Company is seeking additional financing for the Inter Lotto obligations.
Alternatively, the Company could seek to sell, or to further borrow against a
pledge of, the unregistered shares of US Wireless or its subsidiary, TNCi, owned
by the Company.
Prior to the last fiscal year, the Company's primary source of funding
had historically been through equity offerings. Subsequent to June 30, 1999, the
Company received orders consisting of a $5.3 million purchase order for the
manufacture, delivery and installation of 195 of the Company's Cheetah(R)
multimedia video servers in connection with the Georgia MRESA Net 2000 project,
and a service order for installation of a second CruiseView(TM) system. In
addition, in the three months-ended March 31, 2000, the Company received three
orders for installation of InnView(TM) systems in hotels in California and
Arizona. The Company has received the full payment of $5.3 million in connection
with the Net 2000 project. The Company received installment payments from
Carnival for the two ships currently under contract which has been recorded as
deferred revenue (the aggregate amount of which was $2.1 million at March 31,
2000). Excluding the benefit of the Georgia schools program, cash and cash
equivalents, and short-term investments will continue to decrease as the Company
continues to invest in inventory for orders under the agreement with Carnival
and its three hotel orders, invest in business development and cover overhead
expenses, contribute capital into affiliate companies and complete new
transactions which may not generate cash flow in the next twelve months. In
addition, as described below, the Company's purchase commitments with respect to
Inter Lotto will greatly accelerate this decrease to the extent that the Company
will have depleted its cash and cash equivalents, in the quarter ending June 30,
2000, and in the absence of alternative financing, be required to sell or borrow
against a pledge of its short term investment securities.
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During the nine months ended March 31, 2000, the Company used $10.6
million of cash for operating activities, a decrease of $1.7 million from the
$12.3 million of cash used by operating activities for the nine months ended
March 31, 1999. Cash utilized in operations during the nine months ended March
31, 2000 resulted primarily from the net loss, increases in other current
assets, other assets, inventories related to installations of InnView(TM) and
prepaid expenses, partially offset by increases in accounts payable resulting
from inventory purchases, accrued liabilities, deferred revenue related to the
Carnival Agreement, and accrued product warranties related to the Carnival
Agreement. The cash used in operations during the nine months ended March 31,
1999 resulted primarily from general and administrative expenses.
Restricted cash decreased by $667,181 during the nine months ended
March 31, 2000 primarily as the result of severance payments to former employees
and the release of a letter of credit securing the purchase of equipment related
to Donativos.
Cash flows used in investing activities were $12.7 million during the
nine months ended March 31, 2000. Deposits on equipment purchases for Inter
Lotto accounted for the majority of the use of cash. Purchases of investment
securities, offset by maturities of investment securities and proceeds from the
sale of assets held for sale, along with proceeds from the sale of investment
securities, and investments in affiliates accounted for the balance of the
change.
For the nine months ended March 31, 2000, cash provided from financing
activities of $9 million resulted primarily from proceeds from the issuance of
Series C Preferred Stock, sale of stock to Directors and Officers of the company
and exercise of unit price options, partially offset by purchases of treasury
stock as well as payments made to repurchase Series A, D and E notes and
payments made on notes payable.
On November 10, 1999, the Board of Directors of the Company approved
the redemption of the Series A Stock as of November 6, 1999 for approximately
$3.57 million, consisting of its stated value of $3 million, plus accrued and
unpaid dividends of approximately $120,000 and a redemption premium of
approximately $400,000.
At the November 10, 1999 meeting of the Board of Directors of the
Company, the Board approved the sale of approximately 1,552,500 shares of its
Class A Common Stock to certain of the Company's directors and officers at $1.75
per share, the last sale price of a share of Class A Common Stock on November
10, 1999 as reported by the Nasdaq National Market. The Board determined the
transaction to be in the best interest of the Company in order to alleviate the
liquidity strain experienced in connection with redemption of its Series A 8%
Convertible Preferred Stock and to provide capital for the Company to pursue its
investment in Shop4Cash.com, Inc., a privately held e-commerce company. The
issuance was made in a private offering pursuant to Section 4(2) of the
Securities Act.
Global will be required to commit additional funds to its affiliate
companies, TNCi, and Inter Lotto, which would come from either existing working
capital of the Company, or proceeds from external financing by Global or one of
its subsidiaries or sale of short-term investments. Global may also identify new
business opportunities that it would like to participate in, which may require
financing. Should additional funding, if required, exceed existing working
capital, or should the Company not be able to raise external financing to meet
its capital requirements, the Company's ability to financially support certain
affiliate companies or acquire new operating companies or make new investments
would be materially adversely affected.
As of September 8, 1999, GTL Leasing Limited entered into an agreement
to purchase $12.3 million of lottery systems in connection with its investment
in Inter Lotto. As of March 31, 2000, the Company had paid $6.8 million towards
the purchase price and expects to finance the balance of this commitment. No
assurances can be made that such financing will be available to the Company. If
the Company is unable to obtain such financing, such inability would have a
material adverse effect on the Company's liquidity. The Company also entered
into a facilities management agreement for servicing of the lottery systems.
Under this agreement, GTL Management Limited is required, beginning April 1,
2000, to make weekly payments to the provider of the lottery systems of $72,000,
plus additional amounts based on the number of installed terminals in excess of
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3,500 and a percentage of the average daily sales beginning in March 2000.
Global has guaranteed the obligations of GTL Leasing Limited and GTL Management
Limited under these agreements.
On August 13, 1999, the Company and two of its officers entered into a
Release and Settlement Agreement with First Lawrence Capital Corp. ("First
Lawrence") whereby the Company issued 375,000 shares of its Class A Common Stock
and agreed that its wholly-owned subsidiary, GlobalTech Holdings Limited, a UK
corporation ("GTL Holdings"), will pay First Lawrence 24 consecutive monthly
payments of $41,667 each, beginning April 1, 2000. In exchange, First Lawrence
will be available to perform management consulting services to GTL Holdings.
On August 24, 1999, Global's Board of Directors approved a $5 million
secured revolving credit facility between TNCi and Global (the "Facility"). The
Facility provides that TNCi may borrow up to $5 million for working capital and
general corporate purposes at the prime rate of interest plus 3%. The Facility
matures in September 2001. TNCi paid an origination fee of $50,000 to Global and
will pay an unused line fee of 0.5% per annum. The Facility is secured by all of
the assets of TNCi and is convertible, at Global's option, into shares of TNCi's
Common Stock at a price equal to the lesser of 66.7% of the five day low average
share price of the preceding 20 days, or $1.50 per share, or any lesser amount
at which shares of TNCi's Common Stock have been issued to third parties.
Pursuant to Nasdaq rules, Global may not convert borrowings under the Facility
into shares of TNCi Common Stock in excess of 19.99% of the number of shares of
TNCi Common Stock outstanding as of August 24, 1999, without stockholder
approval. As of March 31, 2000, $1,080,000 was outstanding under the Facility.
As of March 31, 2000, the Company did not have sufficient cash for TNCi to
borrow the full $5 million under the Facility. Should TNCi draw on the Facility,
the Company would have to obtain financing or sell assets to meet its
obligations under the Facility. Should TNCi be unable to borrow funds under the
Facility, it could result in a material adverse effect on the operating results
and financial condition of TNCi.
A note payable of TNCi due September 5, 1999 was converted into 200,000
shares of TNCi's Common Stock.
On November 23, 1999, Global acquired 500,000 shares, or approximately
4% of Shop4Cash at a price of $2.00 per share. Shop4Cash is a privately held,
cash-incentive, Internet shopping portal. Global has registration rights in
connection with these shares.
The terms of the Carnival Agreement provide that Carnival may return
the CruiseView(TM) system within the acceptance period, as defined in the
Carnival Agreement, or for breach of warranty. The acceptance period for the
Fantasy and Destiny class ships are twelve months and three months,
respectively, from completion of installation and testing, which occurred in
February 1999 and October 1999, respectively. The initial warranty period for
these systems is three years. As of March 31, 2000, the Company had recorded
deferred revenue of approximately $2.1 million related to the two Carnival
ships.
In the quarter ended March 31, 2000, the Company concluded that the
cost of building and installing CruiseView(TM) systems on the existing two
Carnival ships pursuant to the Carnival Agreement has exceeded the revenue that
can be earned in connection therewith. Accordingly, the Company has recorded an
expense of $208,146 in the period ended March 31, 2000 reflecting the excess of
cost over expected revenue. Carnival's continuing to exercise its option for
building and installing CruiseView(TM) on additional ships under the agreement
may prove unprofitable and therefore have a negative effect on the Company's
working capital. The Company is currently endeavoring to renegotiate the terms
of the agreement with Carnival.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation (an interpretation of APB Opinion No. 25). This interpretation
provides guidance regarding the application of APB Opinion 25 to Stock
Compensation involving employees. This interpretation is effective July 1, 2000
and is not expected to have a material effect on the Company's consolidated
financial statements.
INFLATION AND SEASONALITY
The Company does not believe that it is significantly impacted by
inflation. The Company's operations are not seasonal in nature, except to the
extent fluctuations in quarterly operating results occur due to the cyclical
nature of government funding to be obtained in connection with education
programs with which the Company may be involved in the future, if any.
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YEAR 2000
Many currently installed computer systems and software products were
coded to accept only two digit year entries in the date code field.
Consequently, subsequent to December 31, 1999, many of these systems became
subject to failure or malfunction. Although the Company is not aware of any
material Year 2000 issues at this time, Year 2000 problems may occur or be made
known to the company in the future. Year 2000 issues may possibly affect
software solutions developed by the Company or third-party software incorporated
into the Company's solutions. The Company generally does not guarantee that the
software licensed from third-parties by the Company's clients is Year 2000
compliant, but the company sometimes does warrant that solutions developed by
the Company are Year 2000 compliant.
FORWARD-LOOKING INFORMATION
This Report contains certain forward-looking statements and information
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The cautionary statements made in this
Report should be read as being applicable to all related forward-looking
statements wherever they appear in this Report. Forward-looking statements, by
their very nature, include risks and uncertainties. Accordingly, the Company's
actual results could differ materially from those discussed herein. A wide
variety of factors could cause or contribute to such differences and could
adversely impact revenues, profitability, cash flows and capital needs. Such
factors, many of which are beyond the control of the Company, include, without
limitation, the following: the Company's ability to successfully resolve
contract issues with Carnival Corporation; resolution of the Swissair-related
litigation; obtaining financing for general corporate purposes and for the Inter
Lotto gaming equipment; the inability to fund draws on the credit facility
between Global and TNCi; the inability to cover the obligations to the provider
of the Inter Lotto lottery systems from the operations of a start-up venture in
an untried game in the UK market; the ability of the Company to procure and
provide compelling content for use through its systems; the Company's success in
obtaining new contracts for the sale of its Cheetah(R) Servers and/or
interactive information and entertainment systems; the volume and type of work
orders that are received under such contracts; the accuracy of the cost
estimates for the projects; the Company's ability to complete its projects on
time and within budget; levels of, and ability to collect accounts receivable;
availability of trained personnel and utilization of the Company's capacity to
complete work; reliability of technical proficiency of systems developed by the
Company; the inability of TNCi to finance development of installation of system
purchases; competition and competitive pressures on pricing; and economic
conditions in the United States and in other regions served by the Company.
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PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
FIDELITY AND GUARANTY INSURANCE COMPANY V. INTERACTIVE FLIGHT
TECHNOLOGIES, INC., United States District Court for the District of Minnesota,
CV No. 99-410. This is a declaratory judgment action where the Company and its
insurers are seeking a declaration of the applicability of an excess liability
policy to claims made by the estates of victims of the crash of Swissair Flight
No. 111 on September 2, 1998.
Swissair/MDL-1269, IN REGARDS TO AN AIR CRASH NEAR PEGGY'S COVE, NOVA
SCOTIA. This multi-district litigation, which is being overseen by the United
States District Court for the Eastern Division of Pennsylvania, relates to the
crash of Swissair Flight No. 111 on September 2, 1998. The Swissair MD-11
aircraft involved in the crash was equipped with an entertainment network system
that had been sold to Swissair by the Company. Estates of the victims of the
crash have filed lawsuits throughout the United States against Swissair, Boeing,
Dupont and various other parties, including the Company. TNCi has been named in
some of the lawsuits filed on a successor liability theory. The Company and TNCi
deny all liability for the crash. The Company and TNCi are being defended by the
aviation insurer for the Company.
A suit captioned LODGENET ENTERTAINMENT CORPORATION V. THE NETWORK
CONNECTION, INC. was filed April 5, 2000 in the Circuit Court for the Second
Judicial Circuit of the State of South Dakota. The action arises out of TNCi's
hiring of Theodore P. Racz, a former LodgeNet Entertainment Corporation
("LodgeNet") employee, as its Senior Vice President of the Hotels & Hospitality
division. LodgeNet is alleging tortious interference with contract and tortious
interference with business relationships. LodgeNet is seeking to prohibit Mr.
Racz from being employed by TNCi, as well as seeking damages, and fees and
costs.
FEDERAL EXPRESS CORPORATION V. THE NETWORK CONNECTION, INC., State
Court of Forsyth County, State of Georgia, Civil Action File No. 99-SC-0053.
This lawsuit was served on the Company on or about July 22, 1999 by Federal
Express Corporation and relates to charges incurred by prior management. The
suit alleged the Company owes Federal Express approximately $110,000 for past
services rendered. The Company has settled this matter for $75,000, with $25,000
having been paid on execution of the settlement agreement on March 3, 2000,
$10,000 having been paid on each of April 1, 2000 and May 1, 2000 and three
additional payments of $10,000 to be paid on each of June 1, 2000, July 1, 2000
and August 1, 2000.
BRYAN R. CARR V. THE NETWORK CONNECTION, INC. AND GLOBAL TECHNOLOGIES,
LTD., Superior Court of Georgia, Civil Action No. 99-CV-1307. Bryan R. Carr, the
Company's former Chief Operating and Financial Officer and a former Director,
filed a claim on November 24, 1999 alleging a breach of his employment
agreement. Mr. Carr claims that he is entitled to the present value of his base
salary through October 31, 2001, a share of any "bonus pool," the value of his
stock options and accrued vacation time. The Company is currently defending the
claim.
GLOBAL TECHNOLOGIES, LTD. V. XCEL CAPITAL, LLC, United States District
Court for the Eastern District of Pennsylvania, Case No. 00-CV-505. On January
27, 2000 Global filed an action against XCEL Capital, LLC ("XCEL") for specific
performance and breach of contract. In the action, Global is seeking to compel
XCEL to tender 116,785 shares of Global Class A Common Stock to Global at $3.17
per share in accordance with XCEL's obligations pursuant to a put/call agreement
entered into between the parties on August 12, 1999.
In September of 1999, Global filed a lawsuit against Barington Capital
Group, L. P. ("Barington") in Maricopa County Superior Court, Arizona, seeking a
declaratory judgment that no sums were owed to Barington pursuant to a Financial
Advisory Service Agreement dated in October of 1998. In October of 1999,
Barington filed a lawsuit on the same contract in the Supreme Court of the State
of New York, County of New York, Index No. 99-6041606, captioned BARINGTON
CAPITAL GROUP , L.P. V. INTERACTIVE FLIGHT TECHNOLOGIES, INC., alleging that
Barington is owed $1,750,471 in connection with services alleged to have been
performed pursuant to the Financial Advisory Service Agreement. Barington's New
York suit has been stayed pending resolution of the Arizona action. Global
denies all liability and denies that any sums are owed to Barington.
October 25, 1999, Global filed a lawsuit against Regal Gaming &
Entertainment, Inc. ("Regal") (and its principals and their spouses) in the
United States District Court for the Southern District of Florida seeking
judgment in favor of Global on the $500,000 promissory note made by Regal (and
guaranteed by its principals and their spouses) to Global. The promissory note
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was made to secure Regal's obligations to fund cost overruns in connection with
the entertainment center project undertaken by Donativos. In May 2000, this
lawsuit was settled in connection with a transaction that Global engaged in with
Donativos S.A. de C.V. ("Donativos") whereby Global received $2.0 million from
Donativos in return for cancellation of the debt owed by Donativos to Global and
transfer of the equity that Global and Regal held in Donativos to its majority
shareholder (the debt and equity portions of this investment had been previously
written off). In the settlement, Regal delivered to Global its shares of
Donativos in return for $80,000, dismissal of this lawsuit, cancellation of the
debt owed by Regal to Global and a mutual general release.
A case captioned INTERACTIVE FLIGHT TECHNOLOGIES, INC. V. MICHAIL ITKIS
was initiated on February 3, 1999 in the Superior Court of State of Arizona, in
and for Maricopa County. The Company brought claims for breach of contract,
unjust enrichment, breach of fiduciary duty and fraud against Mr. Itkis relating
to certain items of compensation that he received in connection with his
separation from the Company. The Company sought the return of the items of
compensation. Mr. Itkis brought counterclaims against the Company and certain of
its affiliates for breach of contract and declaratory judgment, seeking to
retain the items of compensation. The parties settled this matter in May 2000
with Global paying Mr. Itkis $6,295 for certain legal expenses he incurred in
defending the action and for which Global was required to provide indemnity.
The Company may be subject to other lawsuits and claims arising in the
ordinary course of its business. In the Company's opinion, as of March 31, 2000,
the effect of such matters will not have a material adverse effect on the
Company's results of operations or financial condition.
ITEM 2 -- CHANGES IN SECURITIES
UNREGISTERED ISSUANCES
In connection with the Company's February 2000 financing, designees of
Reedland Capital Partners, a division of Financial West Group, received warrants
to purchase an aggregate of 50,000 shares of the Company's common stock at
$17.835 per share for Reedland Capital Partners' role as sales agent. These
warrants were issued in a transaction exempt from the registration provisions of
the Securities Act of 1933 as amended (the "Act"), pursuant to Section 4(2)
thereof.
On March 13, 2000, TNCi issued 236,080 shares of its common stock in
connection with the cashless exercise of common stock purchase warrants held by
the former holders of Series A and E notes. The warrants exercised represented
warrants to purchase 311,525 shares of TNCi Common Stock. These shares were
issued in a transaction exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof.
On February 16, 2000, Global sold 10,000 shares of its Series C Stock
and callable warrants to two institutional investors for $9.7 million (net of
$300,000 paid to the intermediary for the transaction, which also received
warrants to purchase 50,000 shares of Class A Common Stock). The transaction is
exempt from the registration provisions of the Securities Act pursuant to
Section 4(2) thereof. The Series C Stock converts into shares of Class A Common
Stock the Fixed Conversion Price. Nine months after funding, and every three
months thereafter, the conversion price resets to the lesser of the Fixed
Conversion Price or 100% of the average of the four low trading prices over the
course of the preceding 20 trading days. Any outstanding shares of Series C
Stock automatically convert to Class A Common Stock at the then applicable
conversion price on the third anniversary of funding. The warrants are
exercisable for 100,925 shares of Class A Common Stock at an exercise price of
$17.748 and expire on February 16, 2005. The purchasers of the Series C Stock
and warrants were granted registration rights in connection with the
transaction. The shares of Class A Common Stock underlying the Series C Stock
and warrants were registered on a Registration Statement on Form S-3 that was
declared effective by the Commission on April 17, 2000 at 10:30 a.m. Eastern
Standard Time. Issuance of the Unit Purchase Options and Warrants was in a
transaction exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof.
In connection with the Company's March 6, 1995 public offering, the
Company issued 140,000 Unit Purchase Options to designees of D. H. Blair
Investment Banking Corporation for their role as underwriters of the offering.
Each Unit Purchase Option was exercisable into one share of Class A Common
Stock, One Class A Warrant and One Class B Warrant at an exercise price of
$12.00 per share. Each Class A Warrant was exercisable into one share of Class A
Common Stock and one additional Class B Warrant at an exercise price of $13.71
per share (as adjusted for certain dilutive events). Each Class B Warrant was
exercisable into one share of Class A Common Stock at an exercise price of
$19.10 per share (as adjusted for certain dilutive events). The options and
underlying warrants were set to expire in March 6, 2000.
24
<PAGE>
As of March 6, 2000, 104,458 shares of Class A Common Stock were issued
as a result of the exercise of the Unit Purchase Options and 64,439 shares of
Class A Common Stock were issued as a result of the exercise of Class A
Warrants. No Class B Warrants were exercised and any remaining options and
warrants have expired. The Company received proceeds of $2,111,019 as certain
option holders executed cashless exercise.
On March 6, 2000 the Company issued 169,897 shares of its Class A
Common Stock as a result of the exercise of the Unit Purchase Options and
Warrants described above. Pursuant to stock registration rights granted to the
option holders, the shares of Class A Common Stock were registered on a
Registration Statement on Form S-3 that was declared effective by the Commission
on April 17, 2000 at 10:30 a.m. Eastern Standard Time.
On March 6, 2000, TNCi granted options to purchase up to 800,000 shares
of TNCi's Common Stock to Mr. Robert Pringle, President and Chief Operating
Officer of TNCi. One fifth of these options vest on June 6, 2000, with the
remainder vesting in four equal annual installments beginning March 6, 2001.
Exercise price of the options is equal to the closing market price of TNCi's
Common Stock on the day prior to grant, and the options expire on March 6, 2010.
These options were granted in a transaction exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) thereof.
On March 6, 2000, TNCi granted options to purchase up to 800,000 shares
of TNCi's Common Stock to Dr. Jay Rosan, an Executive Vice President of TNCi.
One fifth of these options vest on June 6, 2000, with the remainder vesting in
four equal annual installments beginning March 6, 2001. Exercise price of the
options is equal to the closing market price of TNCi's Common Stock on the day
prior to grant, and the options expire on March 6, 2010. These options were
granted in a transaction exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof.
On March 6, 2000, TNCi granted options to purchase up to 250,000 shares of
TNCi's Common Stock to Mr. Richard Genzer, Chief Technology Officer of TNCi. One
fifth of these options vest on June 6, 2000, with the remainder vesting in four
equal annual installments beginning Manrch 6, 2001. Exercise price of the
options is equal to the closing market price of TNCi's Common Stock on the day
prior to grant, and the options expire on March 6, 2010. These options were
granted in a transaction exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof.
25
<PAGE>
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
The following Index to Exhibits lists the Exhibits filed as part of
this Quarterly Report on Form 10-QSB. Where so indicated, Exhibits which were
previously filed are incorporated by reference. Documents filed herewith are
denoted with an asterisk.
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Ownership and Merger. (1)
3.2 Amended and Restated certificate of Incorporation of the
Registrant. (1)
3.3 Certificate of Amended and Restated Certificate of
Incorporation af Registrant dated November 2, 1998. (4)
3.4 Certificate of Designations, Preferences, and Rights of Series
A Convertible Preferred Stock of the Registrant. (4)
3.5 Certificate of Designations, Preferences, and Rights of Series
B Convertible Preferred Stock of the Registrant. (4)
3.6 By-Laws of the Registrant. (1)
4.1 Warrant Agreement, dated as of March 7, 1995 among the
Registrant, D. H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company. (1)
4.2 Amendment to March 7. 1995 Warrant Agreement, among the
Registrant, D. H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company. (2)
4.3 Warrant Agreement, dated as of October 24, 1996 among the
Registrant, D. H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company. (2)
4.4 Amendment to October 24, 1996 Warrant Agreement, amoung the
Registrant, D. H. Blair Investment Banking Corp., and American
Stock Transfer & Trust Company. (2)
4.5 Form of Underwriter's Unit Purchase Option. (1)
4.6 Stock Purchase Warrant dated as of November 7, 1996 issued to
FortuNet, Inc. (2)
4.7 Stock Purchase Warrant dated as of November 12, 1996 issued to
Houlihan Lokey Howard & Zukin.. (2)
4.8 Form of Warrant issued to The Shaar Fund Ltd. Dated May 10,
1999. (3)
4.9 Registration Rights Agreement dated May 6, 1999 between the
Registrant and The Shaar Fund Ltd. (3)
4.10 Convertible Preferred Stock Purchase Agreement among Registrant
and the Investors signatory thereto, dated as of February 16,
2000 (5)
4.11 Certificate of Designations, Rights, Preferences and
Limitations of Series C Convertible Preferred Stock of Global
Technologies, Ltd. (5)
4.12 Callable Warrant issued to holders of Series C Convertible
Preferred Stock of Global Technologies, Ltd. (5)
4.13 Registration Rights Agreement dated February 16, 2000 between
the Registrant and the Investors Signatory thereto, dated as of
February 16, 2000 (5)
4.14 Warrant Agreement, dated as of March 7, 1995 among the
Registrant, D.H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company (5)
26
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.15 Amendment to March 7, 1995 Warrant Agreement entered into among
the Registrant, D.H. Blair Investment Banking Corp., and
American Stock Transfer & Trust Company (5)
4.16 Warrant Agreement, dated as of October 24, 1996 among the
Registrant, D.H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company (5)
4.17 Amendment to October 24, 1996 Warrant Agreement among the
Registrant, D.H. Blair Investment Banking Corp., and American
Stock Transfer & Trust Company (5)
4.18 Form of Underwriter's Unit Purchase Option (5)
4.19 Stock Purchase Warrant Issued to The Shaar Fund Ltd. dated May
10, 1999 (5)
4.20 Registration Rights Agreement dated May 6, 1999 between the
Registrant and The Shaar Fund Ltd. (5)
10.41 Employment Agreement between Robert Pringle and The Network
Connection, Inc., dated March 6, 2000. *
10.42 Option Agreement between Robert Pringle and The Network
Connection, Inc., dated March 6, 2000. *
10.43 Registration Rights Agreement between The Network Connection,
Inc. and Robert Pringle, Jay Rosan, and Richard Genzer, dated
March 6, 2000. *
27 Financial Data Schedule. *
- ------------
* Filed herewith.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form SB-2, Registration No. 33-86928.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-3, Registration No. 333-14013.
(3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended January 31, 1997, filed with the
Securities and Exchange Commission on March 17, 1997, File No. 0-25668.
(4) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended April 30, 1999, filed with the
Securities and Exchange Commission on June 14, 1999, File No. 0-25668.
(5) Incorporated by reference from the Registrant's Registration Statement on
Form S-3/A, Registration No. 333-32772.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on February 28, 2000, relating
to the $10 million equity financing through the issuance of Series C 5%
Preferred Stock.
27
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 2000 GLOBAL TECHNOLOGIES, LTD.
By: /s/ Irwin L. Gross
---------------------------
Irwin L. Gross
Chief Executive Officer
By: /s/ Patrick J. Fodale
---------------------------
Patrick J. Fodale
Chief Financial Officer
28
<PAGE>
INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Ownership and Merger. (1)
3.2 Amended and Restated certificate of Incorporation of the
Registrant. (1)
3.3 Certificate of Amended and Restated Certificate of
Incorporation af Registrant dated November 2, 1998. (4)
3.4 Certificate of Designations, Preferences, and Rights of Series
A Convertible Preferred Stock of the Registrant. (4)
3.5 Certificate of Designations, Preferences, and Rights of Series
B Convertible Preferred Stock of the Registrant. (4)
3.6 By-Laws of the Registrant. (1)
4.1 Warrant Agreement, dated as of March 7, 1995 among the
Registrant, D. H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company. (1)
4.2 Amendment to March 7. 1995 Warrant Agreement, among the
Registrant, D. H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company. (2)
4.3 Warrant Agreement, dated as of October 24, 1996 among the
Registrant, D. H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company. (2)
4.4 Amendment to October 24, 1996 Warrant Agreement, amoung the
Registrant, D. H. Blair Investment Banking Corp., and American
Stock Transfer & Trust Company. (2)
4.5 Form of Underwriter's Unit Purchase Option. (1)
4.6 Stock Purchase Warrant dated as of November 7, 1996 issued to
FortuNet, Inc. (2)
4.7 Stock Purchase Warrant dated as of November 12, 1996 issued to
Houlihan Lokey Howard & Zukin.. (2)
4.8 Form of Warrant issued to The Shaar Fund Ltd. Dated May 10,
1999. (3)
4.9 Registration Rights Agreement dated May 6, 1999 between the
Registrant and The Shaar Fund Ltd. (3)
4.10 Convertible Preferred Stock Purchase Agreement among Registrant
and the Investors signatory thereto, dated as of February 16,
2000 (5)
4.11 Certificate of Designations, Rights, Preferences and
Limitations of Series C Convertible Preferred Stock of Global
Technologies, Ltd. (5)
4.12 Callable Warrant issued to holders of Series C Convertible
Preferred Stock of Global Technologies, Ltd. (5)
4.13 Registration Rights Agreement dated February 16, 2000 between
the Registrant and the Investors Signatory thereto, dated as of
February 16, 2000 (5)
4.14 Warrant Agreement, dated as of March 7, 1995 among the
Registrant, D.H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company (5)
4.15 Amendment to March 7, 1995 Warrant Agreement entered into among
the Registrant, D.H. Blair Investment Banking Corp., and
American Stock Transfer & Trust Company (5)
4.16 Warrant Agreement, dated as of October 24, 1996 among the
Registrant, D.H. Blair Investment Banking Corp. and American
Stock Transfer & Trust Company (5)
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.17 Amendment to October 24, 1996 Warrant Agreement among the
Registrant, D.H. Blair Investment Banking Corp., and American
Stock Transfer & Trust Company (5)
4.18 Form of Underwriter's Unit Purchase Option (5)
4.19 Stock Purchase Warrant Issued to The Shaar Fund Ltd. dated May
10, 1999 (5)
4.20 Registration Rights Agreement dated May 6, 1999 between the
Registrant and The Shaar Fund Ltd. (5)
10.41 Employment Agreement between Robert Pringle and The Network
Connection, Inc., dated March 6, 2000. *
10.42 Option Agreement between Robert Pringle and The Network
Connection, Inc., dated March 6, 2000. *
10.43 Registration Rights Agreement between The Network Connection,
Inc. and Robert Pringle, Jay Rosan, and Richard Genzer, dated
March 6, 2000. *
27 Financial Data Schedule. *
- ------------
* Filed herewith.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form SB-2, Registration No. 33-86928.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-3, Registration No. 333-14013.
(3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended January 31, 1997, filed with the
Securities and Exchange Commission on March 17, 1997, File No. 0-25668.
(4) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the fiscal quarter ended April 30, 1999, filed with the
Securities and Exchange Commission on June 14, 1999, File No. 0-25668.
(5) Incorporated by reference from the Registrant's Registration Statement on
Form S-3/A, Registration No. 333-32772.
EMPLOYMENT AGREEMENT
THIS AGREEMENT IS EFFECTIVE AS OF MARCH 6, 2000, BETWEEN THE NETWORK
CONNECTION, INC. ("COMPANY") AND ROBERT PRINGLE ("EXECUTIVE").
WITNESSETH:
Company wishes to employ Executive and Executive wishes to enter into the
employ of Company on the terms and conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the facts, mutual promises and
covenants contained herein and intending to be legally bound hereby, Company and
Executive agree as follows:
1. EMPLOYMENT. Company hereby employs Executive and Executive hereby
accepts employment by Company for the period and upon the terms and conditions
contained in this Agreement.
2. OFFICE AND DUTIES.
(a) The Executive is engaged hereunder as the Company's President and
Chief Operating Officer and agrees to perform the duties and services incident
to that position. The Executive will report to the Board of Directors of Company
on a regular basis. Within 30 days after six months of employment under this
Agreement have elapsed, the Board of Directors of Company shall convene a
meeting in order to consider promotion of Executive to the position of Chief
Executive Officer, based upon his performance to date.
(b) Throughout the term of this Agreement, Executive shall devote
substantially all of his working time, energy, skill and best efforts to the
performance of his duties hereunder in a manner which will faithfully and
diligently further the business and interests of Company. The foregoing shall
not be construed, however, as preventing the Executive from investing his assets
in such form or manner as will not require services on the part of the Executive
in the operations of the business in which such investment is made that would
interfere with his obligations hereunder, and provided such business is not in
competition with the company or, if in competition, such business has a class of
securities registered under the Securities Exchange Act of 1934 and the interest
of Executive therein is solely that of an investor owning not more than 3% of
any class of the outstanding equity securities of such business.
3. TERM. This Agreement shall be for a term of thirty-six (36) months,
commencing as of March 6, 2000, and ending on March 5, 2003, unless sooner
terminated as hereinafter provided. This Agreement shall terminate at the end of
the original term, provided, however, that the parties hereto shall, at least
sixty (60) days prior to the end of the term hereof, use their best efforts to
determine whether the Agreement will be renewed or renegotiated.
4. COMPENSATION.
(a) For all services to be rendered by Executive to Company pursuant
to this Agreement, Executive shall receive an annual base salary of Two Hundred
and Fifty Thousand Dollars ($250,000), payable in accordance with Company's
regular payroll practices in effect from time to time.
<PAGE>
(b) In addition to Executive's base salary, Company shall pay to
Executive a cash bonus for each year that Executive's employment continues under
this Agreement. The amount of this bonus shall be dependent and based upon the
achievement of certain corporate objectives that shall be determined mutually by
Executive and Company, and shall be in an amount of up to 50% of Executive's
annual base salary. It is anticipated that these corporate objectives will be
tied at least in part to fiscal year performance. The bonus shall be payable
within 60 days of the end of the fiscal year to which it relates. The first
bonus pursuant to this section would therefore be payable by August 31, 2000
(Company's fiscal year end is June 30), and shall be prorated to take into
account the period of time during fiscal year 2000 that Executive actually
worked with Company. Likewise, in the event that this Agreement is not renewed
at the end of its term and Executive is entitled to bonus under this section for
fiscal year 2003, such bonus shall be prorated in the same manner.
(c) Throughout the term of this Agreement and as long as they are kept
in force by Company, Executive shall be entitled to participate in and receive
the benefits of any profit sharing or retirement plans and any health, life,
accident or disability insurance plans or programs made available to other
similarly situated executives of Company. Specifically, Executive shall be
provided family medical and dental coverage at Company's expense. Executive
shall be entitled to four (4) weeks paid vacation during each year of the term
of this Agreement.
(d) Company will provide Executive with an automobile allowance of
$500 per month and Company will reimburse Executive for all reasonable expenses
incurred by Executive in connection with the performance of Executive's duties
hereunder, including mobile phone and club memberships, upon receipt of vouchers
therefor and in accordance with Company's regular reimbursement procedures and
practices in effect from time to time.
(e) The Company shall grant to Executive options to purchase up to an
aggregate of Eight Hundred Thousand (800,000) shares of the Company's common
stock, par value $0.001 per share, at an exercise price per share equal to the
last sale price of a share of such common stock as of the close of business on
the day prior to the execution and delivery of this Agreement, as reported by
Nasdaq, pursuant to a separate Stock Option Grant Agreement (the "Plan").
5. DISABILITY. If Executive becomes unable to perform his duties hereunder
due to partial or total disability or incapacity resulting from a mental or
physical illness, injury or any other cause ("Disability"), Company will
continue the payment of Executive's base salary at its then current rate for a
period of twelve (12) weeks following the date Executive is first unable to
perform his duties due to such disability or incapacity. Thereafter, Company
shall have no obligation for base salary or other compensation payments to
Executive during the continuance of such disability or incapacity, except as
provided in the Company's disability policy, if any.
6. DEATH. If Executive dies, all payments hereunder shall cease at the end
of the month in which Executive's death shall occur and Company shall have no
further obligations or liabilities hereunder to Executive's estate or legal
representative or otherwise.
2
<PAGE>
7. TERMINATION WITHOUT CAUSE, UPON TERMINATION OF COMPANY'S BUSINESS, AND
AFTER CHANGE IN CONTROL. If (i) Company shall terminate Executive without Cause
(as defined in Paragraph 8 below), (ii) Company shall discontinue the business
operation in which Executive is employed, or (iii) there is a Change in Control
(as hereinafter defined) and as a result of such Change in Control, the
Executive leaves the employ of Company for Good Reason (as hereinafter defined),
then, on the occurrence of any of such events, Company shall have no further
obligations or liabilities hereunder to Executive, except Company shall (A) pay
Executive an amount equal to one-half his annual base salary, to be paid in
accordance with the regular payroll practices of Company; (B) notwithstanding
anything to the contrary contained in the Plan, the vesting of the installment
of options that except for the termination of employment would have been the
next to vest, shall be accelerated to the date of termination and shall
thereafter be exercisable in accordance with the Plan; and (C) continue to
provide Executive with family medical and dental coverage for a period of six
months. In addition, in the event of termination of Executive pursuant to this
Paragraph, the restrictions of subparagraph 10(a) shall terminate.
(a) Change in Control. The term "Change in Control" shall mean a
change in control of a nature that would be required to be reported in response
to Item 6(e) of Schedule 14A of Regulation 14A issued under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as in effect as of the
date hereof, or if Item 6(e) is no longer in effect, any subsequent regulation
issued under the Exchange Act for a similar purpose, whether or not the Company
is subject to such reporting requirements; provided that, without limitation,
such a change in control shall be deemed to have occurred if:
(i) other than Irwin L. Gross or Global Technologies, Ltd., any
"person" is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the Company's then
outstanding securities;
(ii) during any period of two consecutive years (not including
any period prior to the date of the Agreement), individuals who at the beginning
of such period constitute the Board of Directors, and any new director, whose
election by the Board or nomination or election by the Company's stockholders
was approved by a vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for elections was previously approved, cease for any
reason to constitute a majority of the Board; or
(iii) the business of the Company is disposed of by the Company
pursuant to a liquidation, sale of assets of the Company, or otherwise.
(b) Good Reason. "Good Reason" shall mean the occurrence after a
Change in Control of any of the following events without the Executive's express
written consent:
(i) any change in the Executive's title, authorities,
responsibilities (including reporting responsibilities), which represent a
demotion from his status, title, position or responsibilities (including
reporting responsibilities) as in effect immediately prior to the Change in
Control; the assignment to him of any duty or work responsibilities which are
inconsistent with such status, title, position or work responsibilities; or any
removal of the Executive from or failure to appoint or reelect him to any of
such positions, except in connection with the termination of his employment for
Disability, retirement or Cause, as a result of the Executive's death or by him
other than for Good Reason;
3
<PAGE>
(ii) a reduction by the Company in the Executive's annual base
salary as in effect on the date hereof or as the same may be increased from time
to time; or
(iii) the failure of the Company to obtain a satisfactory
agreement from any successor or assign of the Company to assume and agree to
perform this Agreement.
8. TERMINATION FOR CAUSE. Company may discharge the Executive and thereby
terminate his employment hereunder for the following reasons (for "Cause"):
(a) habitual intoxication;
(b) habitual illegal drug use or drug addition;
(c) conviction of a felony, materially adversely affecting Company or
where such conviction significantly impairs the Executive's ability to perform
his duties hereunder;
(d) while acting in his capacity as Executive of Company, knowingly
engaging in any unlawful activity which could materially adversely affect the
Company;
(e) gross insubordination, gross negligence, or willful and knowing
violation of any expressed direction or regulation established by Company which
is materially injurious to the business or reputation of Company;
(f) misappropriation of corporate funds or other acts of dishonesty;
and
(g) the Executive's material breach of this Agreement in any other
respect, provided that the Company notifies the Executive in writing indicating
with reasonable detail the nature of the breach and the Executive fails to cure
the breach or render it non-material within 15 days after receipt of notice.
In the event that Company discharges the executive for Cause, Company shall
pay to Executive the portion, if any, of the Executive's base salary for the
period up to the date of termination which remains unpaid. The Company shall
have no further obligation or liability under this Agreement.
9. COMPANY PROPERTY. All advertising, sales, manufacturers' and other
materials or articles or information, including without limitation data
processing reports, customer sales analyses, invoices, price lists or
information, samples, budgets, business plans, strategic plans, financing
applications, reports, memoranda, correspondence, financial statements, and any
other materials or data of any kind furnished to Executive by Company or
developed by Executive on behalf of Company or at Company's direction or for
Company's use or otherwise in connection with Executive's employment hereunder,
are and shall remain the sole and confidential property of Company; if Company
requests the return of any such materials at any time during or at or after the
termination of Executive's employment, Executive shall immediately deliver the
same to Company.
4
<PAGE>
10. NONCOMPETITION, TRADE SECRETS, ETC.
(a) During the term of this Agreement and for a period of one year
after the termination of his employment with Company for any reason whatsoever,
Executive shall not directly or indirectly induce or attempt to influence any
executive of Company to terminate his or her employment with Company and shall
not engage in (as a principal, partner, director, officer, agent, executive,
consultant or otherwise) or be financially interested in any business operating
within the geographical area described in Exhibit "A", attached hereto, which is
involved in business activities which are the same as, similar to, or in
competition with business activities carried on by Company, or being
definitively planned by Company, at the time of the termination of Executive's
employment. However, nothing contained in this Paragraph 10 shall prevent
Executive from holding for investment no more than three percent of any class of
equity securities of a company whose securities are traded on a national
securities exchange or the Nasdaq System.
(b) During the term of this Agreement and at all times thereafter,
Executive shall not use for his personal benefit, or disclose, communicate or
divulge to, or use for the direct or indirect benefit of any person, firm,
association or company other than the Company, any material referred to in
Paragraph 9 above or any information regarding the business methods, business
policies, procedures, techniques, research or development projects or results,
trade secrets, or other knowledge or processes of or developed by the Company or
any names and addresses of customers or clients, any data on or relating to
past, present or prospective customers or clients, or any other confidential
information relating to or dealing with the business operations or activities of
Company, made known to Executive or learned or acquired by Executive while in
the employ of Company. The limitations of this paragraph shall not apply to any
information that has become previously disclosed to the public by the Company or
has become public knowledge other than by a breach of this Agreement.
(c) Any and all reports, plans, budgets, writings, inventions,
improvements, processes, procedures and/or techniques which Executive may make,
conceive, discover or develop, either solely or jointly with any other person or
persons, at any time during the term of this Agreement, whether during working
hours or at any other time and whether at the request or upon the suggestion of
the Company or otherwise, which relate to or are useful in connection with any
business now or hereafter carried on or contemplated by the Company, including
developments or expansions of its present fields of operations, shall be the
sole and exclusive property of Company. Executive shall make full disclosure to
Company of all such reports, plans, budgets, writings, inventions, improvements,
processes, procedures and techniques, and shall do everything reasonably
necessary or desirable to vest the absolute title thereto in Company. Executive
shall write and prepare all specifications and procedures regarding such
inventions, improvements, processes, procedures and techniques and otherwise aid
and assist Company so that Company can prepare and present applications for
copyright or Letters Patent therefor and can secure such copyright or Letters
Patent wherever possible, as well as reissues, renewals, and extensions thereof,
and can obtain the record title to such copyright or patents so that Company
shall be the sole and absolute owner thereof in all countries in which it may
desire to have copyright or patent protection. Executive shall not be entitled
to any additional or special compensation or reimbursement regarding any and all
such writings, inventions, improvements, processes, procedures and techniques.
(d) Executive acknowledges that the restrictions contained in the
foregoing subparagraphs (a), (b) and (c), in view of the nature of the business
in which Company is engaged, are reasonable and necessary in order to protect
the legitimate interests of Company, and that any violation thereof would result
5
<PAGE>
in irreparable injuries to Company, and Executive therefore acknowledges that,
in the event of his violation of any of these restrictions, Company shall be
entitled to obtain from any court of competent jurisdiction preliminary and
permanent injunctive relief as well as damages and an equitable accounting of
all earnings, profits and other benefits arising from such violation, which
rights shall be cumulative and in addition to any other rights or remedies to
which Company may be entitled.
(e) If the period of time or the area specified in subparagraph (a)
above should be adjudged unreasonable in any proceeding, then the period of time
shall be reduced by such amount of time or the area shall be reduced by the
elimination of such portion thereof or both so that such restrictions may be
enforced in such area and for such time as is adjudged to be reasonable. If
Executive violates any of the restrictions contained in such subparagraph (a),
the restrictive period shall not run in favor of Executive from the time of the
commencement of any such violation until such time as such violation shall be
cured by Executive to the satisfaction of Company.
11. PRIOR AGREEMENTS. Executive represents to Company (a) that there are no
restrictions, agreements or understandings whatsoever to which Executive is a
party which would prevent or make unlawful his execution of this Agreement or
his employment hereunder, (b) that his execution of this Agreement and his
employment hereunder shall not constitute a breach of any contract, agreement or
understanding, oral or written, to which he is a party or by which he is bound
and (c) that he is free and able to execute this Agreement and to enter into
employment by Company. In the event, however, that Executive is named a
defendant in any legal action or proceeding alleging a breach of the
non-compete, non-solicitation or confidentiality provisions of his employment
contract with Aetna US Healthcare in connection with his employment hereunder,
Company agrees to indemnify and hold Executive harmless against any claims,
damages, losses, judgments, expenses, costs or other liabilities (including,
without limitation, reasonable attorneys' fees) arising therefrom.
12. INDEMNIFICATION. Company maintains and shall continue to maintain
Directors and Officers Errors and Omission coverage with a minimum coverage of
at least Fifteen Million Dollars ($15,000,000). Any deductible and all other
costs and expenses which may be incurred by Executive as a result of his acting
in his capacity as an Officer of the Company shall be paid by Company.
13. MISCELLANEOUS.
(a) Indulgences, Etc. Neither the failure nor any delay on the part of
either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
(b) Controlling Law. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement (including, without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the State of Delaware,
6
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notwithstanding any conflict-of-laws doctrines of any jurisdiction to the
contrary, and without the aid of any canon, custom or rule of law requiring
construction against the draftsman.
(c) Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received only when delivered
(personally, by courier service such as FedEx or by other messenger) against
receipt or upon actual receipt of registered or certified mail, postage prepaid,
return receipt requested, addressed as set forth below:
(i) If to Company:
The Network Connection, Inc.
1811 Chestnut Street
Suite 120
Philadelphia, PA 19103
Attention: Chief Executive Officer
(ii) If to Executive:
Robert Pringle
--------------------------------------
--------------------------------------
--------------------------------------
In addition, notice by mail shall be by air mail if posted outside of the
continental United States. Either party may alter the address to which
communications or copies are to be sent by giving notice of such change of
address in conformity with the provisions of this subparagraph for the giving of
notice.
(d) Exhibits. All Exhibits attached hereto are hereby incorporated by
reference into, and made a part of, this Agreement.
(e) Binding Nature of Agreement; No Assignment. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns, except that
no party may assign or transfer its rights nor delegate its obligations under
this Agreement without the prior written consent of the other party hereto.
(f) Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
(g) Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
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(h) Entire Agreement. This Agreement contains the entire understanding
between the parties hereto with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms hereof.
This Agreement may not be modified or amended other than by an agreement in
writing.
(i) Paragraph Headings. The Paragraph and subparagraph headings in
this Agreement have been inserted for convenience of reference only; they form
no part of this Agreement and shall not affect its interpretation.
(j) Gender, Etc. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context indicates is appropriate.
(k) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
Holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or Holiday, then the final day shall be deemed to be the next
day which is not a Saturday, Sunday or Holiday. For purposes of this Agreement,
the term "Holiday" shall mean a day, other than a Saturday or Sunday, on which
national banks with branches in the Commonwealth of Pennsylvania are or may
elect to be closed.
8
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IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed and delivered in Philadelphia, Pennsylvania, as of the date first
above written.
THE NETWORK CONNECTION, INC.
By: /s/ Irwin L. Gross
------------------------------------
Irwin L. Gross,
Chairman and Chief Executive Officer
EXECUTIVE:
/s/ Robert Pringle
----------------------------------------
Robert Pringle
9
<PAGE>
EXHIBIT "A"
Under Paragraph 11, Noncompetition, Trade Secrets, Etc., the
geographic area shall be as follows:
Worldwide
STOCK OPTION GRANT AGREEMENT
The stock option represented by this STOCK OPTION GRANT AGREEMENT is
granted as of the 6th day of March 2000, by The Network Connection, Inc., a
Georgia corporation (the "Company"), to Robert Pringle ("Grantee").
BACKGROUND
A. Grantee is President and Chief Operating Officer of Company.
B. Pursuant to the terms of an employment agreement entered into between
the Company and Grantee of even date herewith (the "Employment Agreement"), and
in order to induce Grantee to enter into the Employment Agreement, incentivize
Grantee with respect to the future success of the Company and to encourage him
to perform at increasing levels of effectiveness and use his best efforts to
promote the growth and profitability of the Company, and in consideration of
services to be performed, Company desires to afford Grantee an opportunity to
purchase shares of its common stock, par value $0.001 per share ("Common
Stock"), as hereinafter provided.
C. Any capitalized terms used but not defined herein shall have the
meanings attributed thereto in the Employment Agreement.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration the receipt and adequacy of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. Grant of Option. In order to incentivize Grantee with respect to the
future success of the Company and to encourage him to perform at increasing
levels of effectiveness and use his best efforts to promote the growth and
profitability of the Company, the Company hereby irrevocably grants to Grantee
the right and option to purchase (the "Option") all or any part of an aggregate
of Eight Hundred Thousand (800,000) shares of Common Stock (the "Option Shares")
at a price per share equal to $9.00, which is the last sale price for shares of
Common Stock on the day prior to the day hereof as reported by Nasdaq (the
"Option Price"), during the Option Period (as defined below) and subject to the
conditions hereinafter set forth.
2. Option Period. The Option may be exercised in accordance with the
provisions of Paragraphs 4 and 5 hereof during the Option Period, which shall
begin on the date hereof and shall end on the Option Expiration Date defined in
Paragraph 3 hereof. All rights to exercise the Option shall terminate on the
Option Expiration Date.
3. Option Expiration Date. The Option Expiration Date shall be March 6,
2010.
4. Exercise of Option.
(a) The Option shall vest, and shall be exercisable as set forth in
the following table, provided that any portion of this Option which becomes
exercisable in any year, but is not exercised in such year, may be carried
<PAGE>
forward and exercised in any future year until the Option Expiration Date,
subject to earlier termination as provided in Paragraph 6 hereof:
From and after: Number of Shares Exercisable
--------------- ----------------------------
June 6, 2000 160,000
March 6, 2001 160,000
March 6, 2002 160,000
March 6, 2003 160,000
March 6, 2004 160,000
(b) Notwithstanding anything to the contrary contained herein, Grantee
may purchase all or any portion of the unexercised balance of this Option
immediately prior to, or upon, the effective date of a Change of Control (as
defined in the following sentence). A "Change of Control" of the Company shall
mean any transaction or series of related transactions that results in a change
in the control of the Company, including, without limitation:
(i) a merger or consolidation of the Company into or with any
other entity when the Company is not the surviving entity of such merger or
consolidation;
(ii) the acquisition, directly or indirectly, by any individual,
entity or "group" (as defined in Section 13(d) of the Securities and Exchange
Act of 1934, as amended) (other than the Company, any subsidiary thereof, any
employee benefit plan of the Company, or any entity holding shares or other
securities of the Company for or pursuant to the terms of such a plan) (an
"Acquirer"), of stock or options, or any combination thereof, entitling the
Acquirer to cast 50% or more of all votes (without consideration of the rights
of any class of stock to elect directors by a separate class vote) entitled to
be cast by all stockholders of the Company in an election of the Board of
Directors of the Company;
(iii) the acquisition, directly or indirectly, by an Acquirer of
a majority of the total equity interest of the Company;
(iv) the sale or other disposition of assets of the Company equal
to 33.33% or more of the value of the Company's assets at the time of such sale
or disposition, unless the stockholders of the Company, immediately prior to
such sale or disposition, hold at least a majority of the voting power of each
surviving, resulting or acquiring corporation which, immediately following the
transaction, holds any of such sold or disposed assets;
(v) the election to the Board of Directors of the Company of
individuals who would constitute a majority of the members of the Board elected
at any meeting of stockholders or by written consent (without consideration of
the rights of any class of stock to elect directors by a separate class vote),
where the election or the nomination for election by the Company's stockholders
of such directors was not approved by a vote of at least a majority of the
directors in office immediately prior to such election or nomination; or
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<PAGE>
(vi) the formation of a joint venture or partnership with the
Company for the purpose of effecting a transfer of control of, or a material
interest in, the Company (such merger, consolidation, sale or other transaction
listed in subparagraphs (i) through (vi) being hereinafter referred to as a
"Transaction").
There shall be excluded from the foregoing any Transaction as a result of
which (A) the holders of Common Stock prior to the Transaction retain or acquire
securities constituting a majority of the outstanding voting common stock of the
acquiring or surviving corporation or other entity in substantially the same
proportions that they owned Common Stock in the Company prior to the
Transaction, and (B) no single person or entity owns more than half of the
outstanding voting common stock of the acquiring or surviving corporation or
other entity. For purposes of this Paragraph 4, voting common stock of the
acquiring or surviving corporation or other entity that is issuable upon
conversion of convertible securities or upon exercise of warrants or options
shall be considered outstanding, and all securities that vote in the election of
directors (other than solely as the result of a default in the making of any
dividend or other payment) shall be deemed to constitute that number of shares
of voting common stock which is equivalent to the number of such votes that may
be cast by the holders of such securities.
5. Manner of Exercise. Exercise of the Option, or any portion thereof,
shall be by written notice to the Company pursuant to Paragraph 12 hereof. The
notice shall be accompanied by payment in full in cash, stock of the Company, or
other property (including notes or other contractual obligations of Grantee to
make payment on a deferred basis, and/or through "cashless exercise
arrangements," to the extent permitted by applicable law), or a combination
thereof, in an amount equal to the product obtained by multiplying the number of
Option Shares with respect to which the Option is then being exercised by the
Option Price. Upon receipt of such notice and payment, the Company shall, as
soon as practicable thereafter, deliver a certificate or certificates
representing the Option Shares purchased. The certificate or certificates shall
be delivered to or upon the written order of the Grantee. Upon such exercise and
regardless of the fact that a certificate or certificates representing the
Option Shares purchased shall not yet have been issued, Grantee or his legal
representative, legatees or distributees, as the case may be, shall be deemed to
be a holder of any shares subject to this Option, provided that the written
notice and payment required by this Paragraph 5 have been delivered to Company.
The Option Shares that shall be purchased upon the exercise of the Option as
provided herein shall be fully paid and non-assessable.
6. Rights in Event of Death, Disability or Termination of Employment.
(a) DEATH. If Grantee's employment is terminated because of death
while employed by the Company, then the installment of Options that would have
been the next to vest at the time of such termination shall automatically vest
as of the date immediately prior to such termination (without any action on the
part of the Company or the Grantee). After such a termination, Grantee's estate
or legal representatives shall have through the Option Expiration Date to
exercise any vested but unexercised Options. Subject to the first sentence of
this paragraph (a), any Options that remain unvested at the time of termination
shall automatically terminate and be cancelled (without any action on the part
of the Company).
(b) DISABILITY. If Grantee is terminated from his employment with the
Company by reason of disability in accordance with the Employment Agreement,
then the installment of Options that would have been the next to vest at the
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<PAGE>
time of such termination shall automatically vest as of the date immediately
prior to such termination (without any action on the part of the Company or the
Grantee). After such a termination, Grantee shall have through the Option
Expiration Date to exercise any vested but unexercised Options. Subject to the
first sentence of this paragraph (b), any Options that remain unvested at the
time of termination shall automatically terminate and be cancelled (without any
action on the part of the Company).
(c) CAUSE OR RESIGNATION. If Grantee is terminated from his employment
with the Company for Cause (as defined in the Employment Agreement) in
accordance with the Employment Agreement or voluntarily leaves the employ of the
Company other than for Good Reason (as defined in the Employment Agreement)
prior to expiration of the Employment Agreement, then all unvested Options shall
automatically terminate and be cancelled (without any action on the part of the
Company) on the effective date of termination. In addition, Grantee shall have
the opportunity on the date of such termination for Cause or Grantee's
voluntarily leaving the employ of the Company to exercise all vested but
unexercised Options. All vested Options not exercised on such date shall
thereafter automatically expire (without any action on the part of the Company).
(d) WITHOUT CAUSE. If Grantee is terminated from his employment
without Cause or terminates his employment with Company for Good Reason (as
defined in the Employment Agreement) in accordance with the Employment
Agreement, then the installment of Options that would have been the next to vest
at the time of such termination shall automatically vest as of the date
immediately prior to such termination (without any action on the part of the
Company or the Grantee). After such a termination, Grantee shall have through
the Option Expiration Date to exercise any vested but unexercised Options.
Subject to the first sentence of this subparagraph (d), any Options that remain
unvested at the time of termination shall automatically terminate and be
cancelled (without any action on the part of the Company).
7. Option Shares to be Purchased for Investment. Unless Company has
notified Grantee pursuant to Paragraph 12 hereof that a registration statement
covering the Option Shares has become effective under the Securities Act of
1933, as amended (the "Act"), it shall be a condition to the exercise of the
Option that the Option Shares acquired upon such exercise be acquired for
investment and not with a view to distribution. If requested by the Company upon
advice of its counsel that the same is necessary or desirable, the Grantee
shall, at the time of purchase of the Option Shares, deliver to the Company
Grantee's written representation that Grantee (a) is purchasing the Option
Shares for his own account for investment, and not with a view to public
distribution or with any present intention of reselling any of the Option Shares
(other than a distribution or resale which, in the opinion of counsel
satisfactory to the Company, may be made without violating the registration
provisions of the Act); (b) has been advised and understands that (i) the Option
Shares have not been registered under the Act and are subject to restrictions on
transfer and (ii) the Company is under no obligation to register the Option
Shares under the Act or to take any action which would make available to the
Grantee any exemption from such registration except as may be provided in the
Registration Rights Agreement of even date herewith between the Company and
certain shareholders, including the Grantee; and (c) has been advised and
understands that such Option Shares may not be transferred without compliance
with all applicable federal and state securities laws.
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<PAGE>
8. Changes in Capital Structure. The number of Option Shares covered by this
Option and the Option Price shall automatically (without any action on the part
of the Company) be equitably adjusted in the event (the "Event") of (i) the
payment of any dividend payable in, or the making of any distribution of, Common
Stock to holders of record of Common Stock, which increases the outstanding
Common Stock; (ii) any stock split, combination of shares, recapitalization or
other similar change; (iii) the merger or consolidation of the Company into or
with any other entity; or (iv) the reorganization, dissolution, liquidation or
winding up of the Company. Grantee shall be entitled, upon the exercise of the
Option, to receive such new, additional or other shares of stock of any class,
or other property (including, without limitation, cash and/or securities of any
successor entity), as Grantee would have been entitled to receive as a matter of
law in connection with such Event had Grantee held the Option Shares on the
record date set for such Event. The Company shall have the authority to
reasonably determine the adjustments to be made under this Paragraph 8 and any
such reasonable determination shall be final, binding and conclusive.
9. Legal Requirements. If the listing, registration or qualification of the
Option Shares upon any securities exchange or under any federal or state law, or
the consent or approval of any governmental regulatory body is necessary as a
condition of or in connection with the purchase of the Option Shares, the
Company shall not be obligated to issue or deliver the certificates representing
the Option Shares as to which the Option has been exercised unless and until
such listing, registration, qualification, consent or approval shall have been
effected or obtained. This Option does not hereby impose on the Company a duty
to so list, register, qualify, or effect or obtain consent or approval. If
registration is considered unnecessary by the Company or its counsel, the
Company may cause a legend to be placed on the certificates for the Option
Shares being issued calling attention to the fact that they have been acquired
for investment and have not been registered, such legend to read as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED FOR SALE,
SOLD OR OTHERWISE TRANSFERRED UNLESS THERE IS A REGISTRATION
STATEMENT IN EFFECT COVERING SUCH SECURITIES OR THERE IS
AVAILABLE AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS."
10. No Obligation to Exercise Option. The Grantee shall be under no
obligation to exercise the Option.
11. Transfer. The Option is not transferable by Grantee other than by will
or by the laws of descent and distribution in the event of the Grantee's death,
in which event the Option may be exercised by the heirs or legal representatives
of the Grantee as provided herein. The Option may be exercised during the
lifetime of the Grantee only by the Grantee. Any attempt at assignment,
transfer, pledge or disposition of the Option contrary to the provisions hereof
5
<PAGE>
or the levy of any execution, attachment or similar process upon the Option
shall be null and void and without effect. Any exercise of the Option by a
person other than the Grantee shall be accompanied by appropriate proofs of the
right of such person to exercise the Option.
12. Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed to be properly given when personally delivered to
the party entitled to receive the notice or when sent by certified or registered
mail, postage prepaid, properly addressed to the party entitled to receive such
notice at the address stated below; or when sent via facsimile transmission with
confirmation of transmission or via electronic mail, provided that in both of
the foregoing situations a copy of the notice so transmitted is sent to the
party entitled to receive such notice via first-class mail, postage prepaid at
the address stated below:
If to Company: The Network Connection, Inc.
1811 Chestnut Street, Suite 120
Philadelphia, PA 19103
Attention: Chairman and Chief Executive Officer
Facsimile: (215) 972-8183
E-mail: [email protected]
If to Grantee: Robert Pringle
--------------------------------------
--------------------------------------
--------------------------------------
Either party hereto may change such party's address, facsimile number or
e-mail address by sending notice thereof to the other party by any of the
methods set out above, provided that such change shall not be deemed effective
as against the party to whom it is sent until the notice containing such change
is actually received by such party.
13. Administration. This Option has been granted pursuant to the Employment
Agreement and is subject to the terms and provisions thereof. All questions of
interpretation and application of this Option shall be determined by the
Company, and such determination shall be final, binding and conclusive.
14. Not an Employment or Service Contract. Nothing in this Option shall be
construed as an agreement by the Company, express or implied, to employ Grantee
or contract for Grantee's services, to restrict the right of the Company to
discharge Grantee or cease contracting for Grantee's services or to modify,
extend or otherwise affect in any manner whatsoever, the terms of any employment
agreement or contract for services which may exist between the Grantee and the
Company.
15. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns.
16. Governing Law. This Agreement shall be governed by and construed under
the laws of the State of Delaware without regard to conflicts of laws
principles.
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17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
18. Amendment. This Agreement may not be amended except by an instrument in
writing signed by the parties.
7
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the
date first above written.
THE NETWORK CONNECTION, INC.
By: /s/ Irwin L. Gross
------------------------------------
Irwin L. Gross
Chairman and Chief Executive Officer
/s/ Robert Pringle
------------------------------------
Robert Pringle
8
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of March 6, 2000 among The Network
Connection, Inc., a Georgia corporation (referred to as "Company"), and Robert
Pringle, Jay Rosan and Richard Genzer (each referred to as a "Shareholder," and
collectively, as "Shareholders").
BACKGROUND
Shareholders have purchased shares of Company's Common Stock, $0.001 par
value per share ("Shares"), pursuant to exercise of options granted pursuant to
Employment Agreements with each of the Shareholders dated as of March 6, 2000
and Stock Option Grant Agreements with each of the Shareholders of even date
with the Employment Agreements, and Company's obligations in this Agreement are
a part of the consideration to Shareholders under the Employment Agreements.
NOW, THEREFORE, in consideration of the premises and intending to be
legally bound, the parties hereto agree as follows:
Section 1. Definitions.
The following terms shall have the following meanings:
"ACT" means the Securities Act of 1933, as amended, and any successor
statute, and the rules and regulations promulgated thereunder.
"BUSINESS DAY" means a day on which the New York Stock Exchange is open for
business.
"INDEMNIFIED PERSONS" shall have the meaning given in Section 8 hereof.
"MAXIMUM AMOUNT" shall have the meaning given in Section 5 hereof.
"MINIMUM AMOUNT" means at least 375,000 Registerable Shares, such number to
be equitably adjusted in the event of a stock split, stock dividend, combination
or reclassification of Shares.
"NASDAQ" means the Nasdaq SmallCap Market of The Nasdaq Stock Market, Inc.
"PIGGYBACK REGISTRATION" shall mean registration under the Act pursuant to
Section 2 hereof.
"PIGGYBACK REQUEST" means a written request to Company pursuant to Section
2 hereof for the registration of Registerable Shares pursuant to the Act.
"PRIORITY" shall have the meaning given in Section 5 hereof.
"REGISTRATION EXPENSES" shall have the meaning given in Section 4 hereof.
"REGISTERABLE SHARES" means the 1,850,000 Shares of the Shareholders
covered by this Agreement, such number to be equitably adjusted in the event of
a stock split, stock dividend, combination or reclassification of Shares.
"SELLING EXPENSES" shall have the meaning given in Section 4 hereof.
"SHAREHOLDER" and "SHAREHOLDERS" shall have the meaning given in the
heading of this Agreement.
"SHARES" means Common Stock, $0.001 par value, of Company.
"SEC" means the Securities and Exchange Commission.
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Section 2. Piggyback Registration. If at any time after the date hereof,
Company proposes to register Shares under the Act for sale to the public by
Company or any other person (except as provided in Section 6 hereof), Company
shall, not less than twenty (20) days prior to the proposed date of filing of a
registration statement under the Act, give written notice to Shareholders of its
intention to do so. A Piggyback Request from any Shareholder shall state the
number of Registerable Shares to be registered and the intended plan of
distribution thereof. If the Company receives a Piggyback Request from a
Shareholder within ten (10) days after Company's notice under this Subsection 2,
Company, subject to the conditions and limitations of Section 3 hereof, will use
commercially reasonable efforts to cause the Registerable Shares covered by the
Piggyback Request to be so registered under the Act in the proposed registration
statement if the proposed registration statement becomes effective, but Company
shall have no obligation to cause, or use any efforts to cause, any such
registration statement to become effective. Registerable Shares covered by a
Piggyback Request shall be sold pursuant to the same plan of distribution that
applies to the majority of the other Shares covered by such registration
statement, except to the extent that Company otherwise agrees in writing. The
rights to Piggyback Registration granted by this Section 2 may be exercised on
no more than three occasions.
Section 3. Registration Procedures.
(a) If Company is effecting piggyback registration under the
provisions of Section 2 of any Registerable Shares, Company will as promptly as
practicable:
(i) Comply with Rule 424 under the Act relating to filing of
prospectuses and furnish to each seller and to each underwriter such number of
conformed copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale of the Registerable Shares
covered by such registration statement.
(ii) If the offering is to be underwritten, Company and each
seller of Registerable Shares shall enter into a written agreement with any
managing underwriter selected in the manner herein provided in such form and
containing such provisions as are satisfactory to Company and such seller of
Registerable Shares (such satisfaction not to be withheld unreasonably), and as
are customary in the securities business for such an arrangement between such
underwriter, such seller and corporations of Company's size and investment
stature.
(iii) Give Shareholders two days' advance notice of its
anticipated filing date of the registration statement and amendments thereto.
(b) Notwithstanding the foregoing, Company may delay filing a
registration statement otherwise required to be filed pursuant to this
Agreement, and may withhold efforts to cause a registration statement covering
Registerable Shares to become effective for a period of up to ninety (90) days,
if Company determines in good faith that such registration statement might (1)
interfere with or affect the negotiation or completion of any transaction that
is being contemplated by Company (whether or not a final decision has been made
to undertake such transaction) at the time the right to delay is exercised, or
(2) involve initial or continuing disclosure obligations that might not be in
the best interest of Company's shareholders. If, after a registration statement
becomes effective, Company notifies Shareholders that Company considers it
appropriate for the registration statement to be amended or supplemented,
Shareholders shall suspend any further sales of Registerable Shares until
Company advises them that the registration statement has been amended or
supplemented. Company may give such advice if there exists at any time material
non-public information relating to Company that, in the reasonable opinion of
Company's Board of Directors, would be prejudicial to Company or its
shareholders if disclosed at that time. Company agrees with Shareholders that it
will use commercially reasonable efforts to amend or supplement the registration
statement, as required to permit sales of the Registerable Shares covered
thereby to resume within ninety (90) days after it has given the notice referred
to in the preceding sentence.
(c) In connection with each registration hereunder, each Shareholder
will (i) furnish promptly to Company in writing such information with respect to
himself and the proposed distribution by him as reasonably shall be requested by
Company in order to assure compliance with federal and applicable state
securities laws, and (ii) comply with all applicable rules promulgated by the
SEC or any securities exchange (including the Nasdaq SmallCap Market).
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Section 4. Expenses. All expenses incurred by Company in complying with
Sections 2 hereof, including without limitation all registration and filing
fees, printing expense, fees and disbursements of counsel and independent public
accountants for Company, fees and expenses (including counsel fees) incurred in
connection with complying with state securities or "blue sky" laws (other than
those which by law must be paid by the selling security holders), fees of
securities exchanges or the National Association of Securities Dealers, Inc.,
fees of transfer agents and registrars, but excluding any Selling Expenses, are
called "Registration Expenses." All underwriting discounts, selling commissions
and transfer taxes applicable to the sale of outstanding shares and any legal
fees and expenses of counsel or other advisers and agents of Shareholder are
called "Selling Expenses." Company will pay all Registration Expenses. All
Selling Expenses shall be borne by Shareholder.
Section 5. Marketing Arrangements
(a) If (i) a Shareholder requests registration of Registerable Shares,
(ii) the offering proposed to be made is to be an underwritten public offering,
and (iii) the managing underwriter of such public offering furnishes a written
opinion that the total amount of securities to be included in such offering
would exceed the maximum amount of securities (the "Maximum Amount") (as
specified in such opinion) which can be marketed at a price reasonably related
to the then current market value of such securities (or the anticipated market
price, if no trading market then exists) and without materially and adversely
affecting such offering or the trading market for Shares, then Company,
Shareholders and other holders of Shares desiring to register their Shares by
such registration shall have a right to participate in such offering in the
following order of priority (a "Priority") until the number of Shares included
in the offering reaches the Maximum Amount, and no additional Shares will be
included in the registration statement.
First Priority shall be to Company for Shares to be sold for the
account of Company.
Second Priority shall be to holders of Company securities who have a
contractual right granted to such holders prior to the date hereof to have
Shares registered pursuant to a registration statement initiated on their
request or demand (regardless of whether or not such holder or holders have
initiated the registration statement with respect to which Shareholders seek to
exercise their piggyback rights hereunder).
Third Priority shall be to holders of Shares who have a contractual
right granted to such holders on or prior to the date hereof to have their
Shares registered pursuant to piggyback or incidental rights on terms comparable
to Section 2 hereof (in a registration statement that such holders do not have a
right to initiate), including Shareholders who have Piggyback Rights under this
Agreement.
Fourth Priority shall be to all other holders of Shares in any
sequence that may be agreed upon among the holders of such Shares and/or
Company.
To the extent that some but not all of the Shares owned by persons
within any of the Priorities listed above are not included within the Maximum
Amount, the Shares to be included in the registration statement shall be
allocated pro rata to holders in such Priority in proportion to the respective
numbers of Shares each such person in such Priority wishes to include in the
registration statement.
(b) Company represents and warrants that it has not granted any
registration rights or entered into any agreements obligating it to register any
of its securities under the Act that are inconsistent with the foregoing
priorities.
(c) In connection with any underwritten public offering of Company's
equity securities, Shareholders agree that they will agree in writing to any
restrictions on the sale of Registerable Shares owned by them that are requested
by the managing underwriter, for a period not to exceed one hundred and thirty
(130) days commencing ten (10) days prior to the anticipated commencing date of
the underwritten public offering; provided, however, that such restrictions
shall not relate to Registerable Shares being registered, nor shall such
restrictions be imposed unless restrictions at least as burdensome are imposed
on each executive officer (as defined under the Securities Exchange Act of 1934)
or director of Company.
Section 6. Exceptions to Company's Obligations. The right to Piggyback
Registration shall not apply, unless Company otherwise agrees in writing, to any
registration statement:
3
<PAGE>
(a) To be filed on a registration form which is unavailable for the
registration of Registerable Shares;
(b) Relating primarily to Shares to be offered pursuant to (i) an
employee benefit plan, or (ii) a dividend or interest reinvestment plan
(including such a plan that has an open enrollment or cash investment feature);
(c) Relating to Shares to be issued in the acquisition of another
business, through a merger, consolidation, exchange of securities or otherwise;
(d) Relating to Company securities to be issued for a consideration
other than solely cash;
(e) Relating to Company securities to be offered primarily to existing
security holders of Company, through a "rights offering" or otherwise;
(f) Relating primarily to Company securities to be issued on the
exercise of options, warrants and similar rights, or on the conversion or
exchange of other securities, issued by the Company or any other person;
provided, however that this exception to a Shareholder's Piggyback Registration
rights will apply only in the case of a third-party financing transaction and
then only to the extent that the exception or restriction is imposed by the
third-party;
(g) Relating primarily to debt securities of Company, including debt
securities that are convertible or exchangeable for equity securities of
Company; or
(h) That may become effective automatically upon filing with the SEC
pursuant to Rule 462 under the Act or otherwise.
Section 7. Termination of Registration Rights. Notwithstanding the
foregoing provisions, Company's obligation to register Registerable Shares under
this Agreement shall terminate as to any particular Registerable Shares (a) on
March 6, 2005, (b) when such Registerable Shares have been sold in an offering
registered under the Act or in a sale exempt from registration under the Act,
(c) when such Registerable Shares shall have been effectively registered under
the Act for a period of at least ninety (90) days, or (d) when a written
opinion, to the effect that such Registerable Shares may be sold without
registration under the Act and without restriction as to the quantity and manner
of such sales, shall have been received from counsel for Company which counsel
is reasonably acceptable to the owner of such Registerable Shares (which
satisfaction shall not be withheld unreasonably).
Section 8. Indemnification.
(a) In the event of any registration of Registerable Shares under the
Act pursuant to this Agreement, Company will, and hereby does, indemnify and
hold harmless, to the fullest extent permitted by law, Shareholders, each person
or entity that participates as an underwriter or qualified independent
underwriter/pricer ("independent underwriter"), if any, in the offering or sale
of such securities, each officer, director or partner of such underwriter or
independent underwriter, and each other person, if any, who controls any
Shareholder or any such underwriter within the meaning of the Act (collectively,
the "Indemnified Persons"), against any and all losses, claims, damages or
liabilities, joint or several, and expenses (including reasonable fees of
counsel and any amounts paid in any settlement effected with Company's consent,
which consent shall not be unreasonably withheld) to which such Indemnified
Persons may become subject under the Act, common law or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof), or expenses arise out of or are
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in any registration statement under which Registerable Shares
were registered under the Act or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, (ii) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary, final or summary prospectus,
together with the documents incorporated by reference therein (as amended or
supplemented if Company shall have filed with the SEC any amendment thereof or
supplement thereto), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or (iii) any violation by Company of any federal or state
4
<PAGE>
rule or regulation applicable to Company and relating to action required of or
inaction by Company in connection with any such registration. Company will
reimburse Indemnified Persons for any reasonable legal or any other expenses
reasonably incurred by any of them in connection with investigating or defending
any such loss, claim, damage, liability, action or proceeding. Notwithstanding
the foregoing, Company shall not be liable to any Indemnified Person to the
extent that any such loss, claim, damage, liability (or action or proceeding,
whether commenced or threatened, in respect thereof) or expense arises out of or
is based upon (i) any untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with written
information furnished to Company by or on behalf of any such Indemnified Person,
for use in the preparation of the registration statement or (ii) the failure of
any such Indemnified Person to comply with any legal requirement applicable to
any such Indemnified Person to deliver a copy of a prospectus or any supplements
or amendments thereto after Company has made such documents available to such
persons, and it is established that delivery of such prospectus, supplement or
amendment would have cured the defect giving rise to such loss, claim, damage,
liability or expense. Such indemnity and reimbursement of expenses shall remain
in full force and effect following the transfer of Registerable Shares by any
Shareholder.
(b) Company, as a condition to including any Registerable Shares in
any registration statement filed in accordance with this Agreement, shall have
received an undertaking reasonably satisfactory to it from the prospective
seller of such Registerable Shares and any underwriter or independent
underwriter, to indemnify and hold harmless (in the same manner and to the same
extent as set forth in Subsection 8(a)) Company and its directors and officers
and each person controlling Company within the meaning of the Act and all other
prospective sellers and their respective directors, officers, general and
limited partners and controlling persons with respect to any statement or
alleged statement in or omission from such registration statement, any
preliminary, final or summary prospectus contained therein, or any amendment or
supplement thereto, if such statement or alleged statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to Company or its representatives by or on behalf of such
seller or underwriter for use in the preparation of such registration statement;
provided, however, that the aggregate amount which any Shareholder shall be
required to pay pursuant to such undertaking shall be limited to the amount of
the net proceeds received by such person upon the sale of the Registerable
Shares pursuant to the registration statement giving rise to such claim.
(c) Promptly after receipt by an indemnified party hereunder of
written notice of the commencement of any action or proceeding with respect to
which a claim for indemnification may be made pursuant to this Section 8, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action; provided, however, that the failure of any indemnified party to
give notice as provided herein shall not relieve the indemnifying party of its
obligations under this Section 8, except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. If any such claim
or action shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein, and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party; and provided further
that the indemnifying party shall not be entitled to so participate or so assume
the defense if, in the indemnified party's reasonable judgment, a conflict of
interest between the indemnified party and the indemnifying party exists in
respect of such claim. After notice from the indemnifying party to such
indemnified party of its election to assume the defense of such claim or action,
the indemnifying party shall not be liable to the indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof unless the indemnifying
party has failed to assume the defense of such claim or to employ counsel
reasonably satisfactory to such indemnified party; and provided further, that
the indemnified party shall have the right to employ counsel to represent such
indemnified party if, in such indemnified party's reasonable judgment, a
conflict of interest between the indemnified party and the indemnifying party
exists in respect of such claim, and in that event the fees and expenses of such
separate counsel shall be paid by the indemnifying party; and provided further,
that if, in the reasonable judgment of the indemnified party, a conflict of
interest between such indemnified party and any other indemnified party exists
in respect of such claims, such indemnified parties shall be entitled to
additional counsel or counsels and the indemnifying party shall be obligated to
pay the fees and expenses of such additional counsel or counsels. No indemnified
party will consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the claimants or
plaintiffs to such indemnified party of a release from all liability in respect
to such claim or litigation. No indemnifying party will be liable for any
settlement effected without its prior written consent.
5
<PAGE>
(d) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
Subsections 8(a) and (b), then each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in Subsections 8(a) and (b) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and the indemnified party on the other hand in connection
with statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
indemnifying party or the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The parties hereto agree that it would not be just
and equitable if contributions pursuant to this Section 8 were to be determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the first sentence of
this Section 8. The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities referred to in the first sentence of this
Section 8 shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any action or claim (which shall be limited as provided in Subsection 8(c) if
the indemnifying party has assumed the defense of any such action in accordance
with the provisions thereof which is the subject of this Section 8). No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. Notwithstanding anything in this Section 8 to
the contrary, no indemnifying party (other than Company) shall be required
pursuant to this Section 8 to contribute any amount in excess of the proceeds
received by such indemnifying party from the sale of Registerable Shares in the
offering to which the losses, claims, damages or liabilities of the indemnified
parties relate.
(e) The provisions of this Section 8 shall be in addition to any other
rights to indemnification or contribution which any indemnified party may have
pursuant to law or contract and shall remain in full force and effect following
the transfer of the Registerable Shares by any such party.
(f) Indemnification similar to that specified in the preceding
provisions of this Section 8 (with appropriate modifications) shall be given by
Company and Shareholders with respect to any required registration or other
qualification of securities under any state securities and blue sky laws.
Section 9. Compliance with Rule 144. At the request of any Shareholder, if
he proposes to sell Registerable Shares in compliance with Rule 144 under the
Act, or any similar Rule, Company shall (a) forthwith furnish to such holder a
written statement as to its compliance with the filing requirements of the SEC
as set forth in such Rule and (b) make such additional filings with the SEC as
will enable Shareholder to make sales of Registerable Shares pursuant to such
Rule.
Section 10. Miscellaneous.
(a) Binding and Benefit. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns, except that no party may assign or
transfer its rights or obligations under this Agreement without the prior
written consent of the other parties hereto; provided, however, that the
obligation to register Registerable Shares shall be enforceable by direct or
remote transferees of Registerable Shares now owned by a Shareholder only if the
transfer results from the death of any person, a gift made without consideration
or the transfer of all or substantially all of the assets of an entity, by
merger, consolidation, asset sale or otherwise.
(b) Communications from Shareholders. If Shares are owned of record
jointly by two or more persons, Company may rely on any communication signed by
one such person. Company may ignore communications given by persons who purport
to own Registerable Shares beneficially unless such communications are confirmed
by a record owner, and it may ignore any communications from a record owner that
conflict with previously received communications from another person who is at
the relevant time also a record owner of the same Registerable Shares.
(c) Indulgences, Etc. Neither the failure nor any delay on the part of
either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
6
<PAGE>
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
(d) Controlling Law. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement (including, without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the State of Delaware,
notwithstanding any conflict-of-laws doctrines of any jurisdiction to the
contrary, and without the aid of any canon, custom or rule of law requiring
construction against the draftsman.
(e) Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received only when delivered
(personally, by courier service such as FedEx or by other messenger) against
receipt or upon actual receipt of registered or certified mail, postage prepaid,
return receipt requested, addressed as set forth below:
(i) If to Company:
The Network Connection, Inc.
1811 Chestnut Street
Suite 120
Philadelphia, PA 19103
Attention: Chairman and Chief Executive Officer
(ii) If to any Shareholder:
To the address of such Shareholder contained in the records of
the Company.
In addition, notice by mail shall be by air mail if posted outside of the
continental United States. Either party may alter the address to which
communications or copies are to be sent by giving notice of such change of
address in conformity with the provisions of this subparagraph for the giving of
notice.
(f) Execution in Counterparts This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
(g) Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(h) Entire Agreement. This Agreement contains the entire understanding
between the parties hereto with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms hereof.
This Agreement may not be modified or amended other than by an agreement in
writing.
(i) Paragraph Headings. The Paragraph and subparagraph headings in
this Agreement have been inserted for convenience of reference only; they form
no part of this Agreement and shall not affect its interpretation.
(j) Gender, Etc. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context indicates is appropriate.
(k) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
Holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or Holiday, then the final day shall be deemed to be the next
day which is not a Saturday, Sunday or Holiday. For purposes of this Agreement,
the term "Holiday" shall mean a day, other than a Saturday or Sunday, on which
national banks with branches in the Commonwealth of Pennsylvania are or may
elect to be closed. "Business Days" shall be all days that are not Saturdays,
Sundays or Holidays.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
THE NETWORK CONNECTION, INC.
By: /s/ Irwin L. Gross
-------------------------------------
Irwin L. Gross
Chairman and Chief Executive Officer
/s/ Robert Pringle
-------------------------------------
Robert Pringle
/s/ Jay Rosan
-------------------------------------
Jay Rosan
/s/ Richard Genzer
-------------------------------------
Richard Genzer
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS FOUND IN THE COMPANY'S 10-QSB FOR THE
YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 1,030,549
<SECURITIES> 93,024,088
<RECEIVABLES> 21,087
<ALLOWANCES> 0
<INVENTORY> 5,424,359
<CURRENT-ASSETS> 132,341,721
<PP&E> 17,594,834
<DEPRECIATION> 1,388,678
<TOTAL-ASSETS> 158,367,398
<CURRENT-LIABILITIES> 11,919,875
<BONDS> 0
0
10
<COMMON> 104,722
<OTHER-SE> 144,940,118
<TOTAL-LIABILITY-AND-EQUITY> 158,367,398
<SALES> 5,597,909
<TOTAL-REVENUES> 5,657,736
<CGS> 3,680,584
<TOTAL-COSTS> 3,716,876
<OTHER-EXPENSES> 17,942,724
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,120
<INCOME-PRETAX> (15,811,079)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,811,079)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,811,079)
<EPS-BASIC> (1.66)
<EPS-DILUTED> (1.66)
</TABLE>
