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 September 30, 1999
[ ] 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. 1-13760
THE NETWORK CONNECTION, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
GEORGIA 58-1712432
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification Number)
222 NORTH 44TH STREET
PHOENIX, ARIZONA 85034
----------------------------------------
(Address of Principal Executive Offices)
(602) 629-6200
------------------------------------------------
(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 November 10, 1999
----- --------------------------------
Common stock, $.001 par value 6,405,746 shares
Transitional Small Business Disclosure Format
Yes [ ] No [X]
<PAGE>
THE NETWORK CONNECTION, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 1999
(unaudited) and June 30, 1999 (audited)........................... 3
Condensed Statements of Operations for the Three Months
Ended September 30, 1999 and 1998 (unaudited)..................... 4
Condensed Statements of Cash Flows for the Three Months
Ended September 30, 1999 and 1998 (unaudited)..................... 5
Notes to Condensed Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 17
Item 2. Changes in Securities......................................... 18
Item 4. Submission of Matters to a Vote of Security Holders........... 18
Item 6. Exhibits and Reports on Form 8-K.............................. 18
SIGNATURES................................................................. 19
2
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THE NETWORK CONNECTION, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 700,620 $ 2,751,506
Restricted cash 451,719 446,679
Short-term investments 302,660 302,589
Accounts receivable 5,078,469 75,792
Notes receivable from related parties 97,932 98,932
Inventories, net of allowance of $7,837,595 2,984,708 1,400,000
Prepaid expenses 167,458 169,429
Assets held for sale 400,000 800,000
Due from affiliate 477,416 --
Other current assets 104,830 173,999
------------ ------------
Total current assets 10,765,812 6,218,926
Note receivable from related party 75,000 75,000
Property and equipment, net of accumulated
depreciation of $815,185 and $683,029, respectively 1,319,142 1,338,580
Intangibles, net of accumulated amortization of
$259,122 and $74,981, respectively 6,976,986 7,119,806
Other assets 150 150
------------ ------------
Total assets $ 19,137,090 $ 14,752,462
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,851,700 $ 1,663,411
Accrued liabilities 2,131,347 2,209,682
Deferred revenue 1,155,428 365,851
Accrued product warranties 144,750 --
Dividends payable 76,667 --
Current portion of long-term debt 23,473 42,751
Notes payable to related parties 68,836 68,836
------------ ------------
Total current liabilities 8,452,201 4,350,531
Notes payable 605,650 3,467,045
Due to affiliate 4,322,757 1,647,692
------------ ------------
Total liabilities 13,380,608 9,465,268
------------ ------------
Commitments and contingencies
Stockholders' equity :
Series B preferred stock par value $0.01 per
share, 1,500 shares authorized issued and outstanding 15 15
Series C preferred stock par value $0.01 per
share, 1,600 shares authorized; 800 shares issued
and outstanding 8 8
Series D preferred stock par value $0.01 per share,
2,495,400 authorized, issued and outstanding 24,954 24,954
Common stock par value $0.001 per share, 10,000,000
shares authorized; 6,405,746 and 6,339,076 issued
and outstanding respectively 6,406 6,339
Additional paid-in capital 88,325,209 88,316,945
Accumulated other comprehensive income:
Net unrealized gain (loss) on investment securities 87 (526)
Accumulated deficit (82,600,197) (83,060,541)
------------ ------------
Total stockholders' equity 5,756,482 5,287,194
------------ ------------
Total liabilities and stockholders' equity $ 19,137,090 $ 14,752,462
============ ============
</TABLE>
See accompanying notes to financial statements.
3
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THE NETWORK CONNECTION, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1999 1998
----------- -----------
Revenue:
Equipment sales $ 5,550,560 $ 89,028
Service income 59,827 245,297
----------- -----------
5,610,387 334,325
----------- -----------
Costs and expenses:
Cost of equipment sales 3,420,381 283,714
Cost of service income 8,580 256
General and administrative expenses 1,347,496 4,607,948
Special charges -- (190,000)
Depreciation and amortization expense 316,295 321,379
----------- -----------
5,092,752 5,023,297
----------- -----------
Operating income (loss) 517,635 (4,688,972)
Other:
Interest expense (135,649) (2,390)
Interest income 40,420 30,714
Other income (expense) 7,270 (2,628)
----------- -----------
Net income (loss) 429,676 (4,663,276)
Cumulative dividend on preferred stock (46,000) --
----------- -----------
Net income (loss) attributable to common
stockholders $ 383,676 $(4,663,276)
=========== ===========
Basic net income (loss) per common share $ 0.06 $ (4.42)
=========== ===========
Weighted average number of shares outstanding 6,350,670 1,055,745
=========== ===========
Diluted net income (loss) per common share $ 0.01 $ (4.42)
=========== ===========
Weighted average number of common and dilutive
shares outstanding 27,470,817 1,055,745
=========== ===========
See accompanying notes to financial statements.
4
<PAGE>
THE NETWORK CONNECTION, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE THREE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 429,676 $(4,663,276)
Adjustments to reconcile net income (loss)
to net cash:
Depreciation and amortization 316,295 321,379
Special charges -- (190,000)
Loss on sale of assets held for sale 4,506
Loss on disposal of equipment -- 2,629
Non cash compensation expense 85,000 --
Changes in net assets and liabilities, net of
effect of acquisition:
(Increase) decrease in accounts receivable (5,002,677) 578,295
Increase in inventories (1,584,708) (52,820)
Decrease in prepaid expenses 1,971 231,169
Decrease in other current assets 69,169 395,172
Increase in other assets -- 25,649
Increase (decrease) in accounts payable 3,146,969 (472,787)
Decrease in accrued liabilities (47,668) (724,978)
Increase in deferred revenue 789,577 36,263
Increase in accrued product warranties 144,750 82,749
----------- -----------
Net cash used in operating activities $(1,647,140) $(4,430,556)
Cash flows from investing activities:
Purchases of investment securities 542 --
Purchases of property and equipment (112,718) (10,676)
Proceeds from sale of equipment -- 3,388
Proceeds from sale of assets held for sale 395,494 --
Increase in restricted cash (5,040) (426,357)
----------- -----------
Net cash provided by (used in) investing
activities $ 278,278 $ (433,645)
Cash flows from financing activities:
Payments on notes payable (494,625) (20,775)
Payments received on notes receivable 1,000 --
Payments to affilate (188,399) --
Contributed capital -- 4,885,680
----------- -----------
Net cash provided by (used in) financing
activities $ (682,024) $ 4,864,905
Net increase (decrease) in cash and cash
equivalents (2,050,886) 704
Cash and cash equivalents at beginning of period 2,751,506 111,418
Cash and cash equivalents at end of period $ 700,620 $ 112,122
=========== ===========
See accompanying notes to financial statements.
5
<PAGE>
THE NETWORK CONNECTION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
PART I. FINANCIAL INFORMATION
(1) BASIS OF PRESENTATION
The accompanying condensed 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 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 financial statements
have been condensed or omitted pursuant to such rules and regulations. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and notes thereto for the transition period ended June
30, 1999, included in The Network Connection, Inc.'s (the "Company" or "TNCi")
Annual Report on Form 10-KSB.
On May 18, 1999, Global Technologies, Ltd. ("Global") received from the
Company 1,055,745 shares of its common stock and 2,495,400 shares of its Series
D Convertible Preferred Stock in exchange for $4,250,000 in cash and
substantially all the assets and certain liabilities of Global's Interactive
Entertainment Division ("IED"), as defined in the Asset Purchase and Sale
Agreement, dated April 30, 1999, as amended (the "Transaction"). The Transaction
has been accounted for as a reverse merger whereby, for accounting purposes,
Global is considered the accounting acquiror, and although the legal capital
structure carries forward, the Company is treated as the successor to the
historical operations of IED. Accordingly, the historical financial statements
of the Company, which previously have been reported to the Securities and
Exchange Commission ("SEC") on Forms 10-KSB, 10-QSB, among others, as of and for
all periods through March 31, 1999, have been replaced with those of IED.
The financial statements as of and for the three months ended September
30, 1998 reflect the historical results of Global's IED as previously included
in Global's consolidated financial statements. The Transaction date for
accounting purposes was May 1, 1999. As of September 30, 1999, the Company is a
majority owned subsidiary of Global whose ownership, through a combination of
the Transaction described above and Global's purchase of Series B 8% convertible
preferred stock of the Company, 110,000 shares of the Company's common stock
from third party investors, and the purchase of the Series A, D and E
convertible notes of the Company approximates 81% of the Company on an
if-converted common stock basis. The historical financial statements of the
Company up to the date of the Transaction as previously reported will no longer
be included in future filings of the Company.
(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.
6
<PAGE>
(3) NOTES PAYABLE
Prior to the Transaction, the Company entered into a Secured Promissory
Note with 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 its assets (the "Promissory Note"). The Promissory Note is
convertible into shares of the Company's Series C 8% convertible preferred stock
("Series C Stock") at the discretion of Global. The Note had an original
maturity of May 14, 1999, but has 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 of the Company, respectively, from the holders of
such notes (collectively, the "Series Notes"). Concurrent with such purchase by
Global, the Company executed the fifth and sixth 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
had also advanced working capital to the Company in the form of intercompany
advances. In August 1999, the Company executed the seventh allonge to the
Promissory Note which rolled the intercompany advances into the principal
balance of the Promissory Note. As of September 30, 1999, the Promissory Note
had a principal balance of $4.3 million and has been classified as due to
affiliate in the balance sheet.
On August 24, 1999, the Board of Directors of Global approved the
conversion of the Promissory Note into approximately five million shares of the
Company's common stock at a price per share equal to 66.6% of the average of the
five lowest last sale prices of a share of Common Stock as reported by the
NASDAQ National Market out of the twenty trading days immediately preceding
August 24, 1999. Such conversion was contingent upon receiving shareholder
approval to increase the authorized share capital of the Company. This increase
in authorized share capital was subsequently approved at the September 17, 1999
Special Meeting of TNCi shareholders. The Company's articles of incorporation
were amended on October 25, 1999, to increase the number of authorized shares of
common stock to 40 million. Accordingly, the Company is in the process of
issuing to Global approximately five million shares of its common stock, based
on a conversion date of August 24, 1999. Had the conversion occurred on
September 30, 1999, pro forma stockholders' equity and tangible net worth would
have been $10,079,000 and $3,102,000, respectively.
On August 24, 1999, the Global Board of Directors approved a $5 million
secured revolving credit facility for the Company (the "Facility"). The Facility
provides that the Company 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. The Company 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 the Company and is convertible, at Global's
option, into shares of the Company's Series C Stock. The Company executed the
Facility on October 12, 1999 and as of November 15, 1999, no amounts were
outstanding.
In September 1999, the Company 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 were used by the Company to repay a note
payable due April 19, 2001 in the principal amount of $470,000. The sale of the
second building occurred in November 1999. The net proceeds of approximately
$390,000 from the sale were used to retire a note payable due 2009 in the
principal amount of $217,000.
In October 1999, a note payable in the principal amount of $400,000 due
September 5, 1999 was converted into 200,000 shares of the Company's common
stock.
(4) INCOME (LOSS) PER SHARE
Basic and diluted weighted average number of shares outstanding for the
three months ended September 30, 1998, included 1,055,745 shares of the
Company's common stock, representing 100% of the Company's capital stock which
was all owned by Global. No effect was given to common stock equivalents in the
computation of diluted loss per share as their effect would have been
anti-dilutive.
7
<PAGE>
For the three months ended September 30, 1999, diluted weighted average
number of shares outstanding include 6,350,670 common shares plus 21,120,147
common stock equivalents related to the Promissory Note, Series B 8% Convertible
Preferred Stock, Series C 8% Convertible Preferred Stock and Series D
Convertible Preferred Stock.
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
------------ ------------
Net income (loss) $ 429,676 $ (4,663,276)
Less: preferred stock dividends (46,000) --
------------ ------------
Income (loss) available to common
stockholders $ 383,676 $ (4,663,276)
============ ============
Basic EPS - weighted average shares
outstanding 6,350,670 1,055,745
============ ============
Basic income (loss) per share $ .06 $ (4.42)
============ ============
Basic EPS - weighted average shares
outstanding 6,350,670 1,055,745
Effect of dilutive securities:
Convertible preferred stock 17,030,500 --
Convertible debt 4,089,647 --
------------ ------------
Dilutive EPS - weighted average shares
outstanding 27,470,817 1,055,745
============ ============
Net income (loss) $ 383,676 $ (4,663,276)
============ ============
Diluted income (loss) per share $ 0.01 $ (4.42)
============ ============
(5) SEGMENT INFORMATION
The Company operates principally in one industry segment: development,
manufacturing and marketing of computer-based entertainment and data networks.
Historically, the Company's principal revenues have been derived from European
customers.
For the three months ended September 30, 1999 and 1998, respectively,
one customer accounted for approximately 96% and a separate customer accounted
for approximately 100% of the Company's sales. Outstanding receivables from
these two customers were $4,923,843 and $974,812, respectively, at September 30,
1999 and September 30, 1998.
(6) COMMITMENTS AND CONTINGENCIES
(a) LAWSUITS
Swissair/MDL-1269, IN RE AIR CRASH NEAR PEGGY'S COVE, NOVA SCOTIA. This
multi-district litigation relates to the crash of Swissair Flight No. 111 on
September 2, 1998 in waters near Peggy's Cove, Nova Scotia resulting in the
death of all 229 people on board. The Swissair MD-11 aircraft involved in the
crash was equipped with an Entertainment Network System that had been sold to
Swissair by Global Technologies, Ltd. ("Global" formerly known as Interactive
Flight Technologies, Inc.). Following the crash, investigations were conducted
and continue to be conducted by Canadian and United States agencies concerning
the cause of the crash. Estates of the victims of the crash have filed lawsuits
throughout the United States against Swissair, Boeing, Dupont and various other
parties, including Global. TNCi was not a party to the contract for the
Entertainment Network System, but has been named in some of the lawsuits filed
by families of victims on a claim successor liability. TNCi denies all liability
for the crash. TNCi is being defended by the aviation insurer for Global.
8
<PAGE>
FEDERAL EXPRESS CORPORATION V. THE NETWORK CONNECTION, INC., State
Court of Forsyth County, State of Georgia, Civil Action File No. 99-V51560685.
This lawsuit was served on the Company on or about July 22, 1999 by Federal
Express Corporation. The suit alleges the Company owes Federal Express
approximately $110,000 for past services rendered.
ERIC SCHINDLER V. INTERACTIVE FLIGHT TECHNOLOGIES, INC. et al., State
Court for Fulton County, Georgia Case No. 99-V51560685. On August 18, 1999, Eric
Schindler commenced a lawsuit, naming GTL and the Company as defendants. The
Complaint alleges that the Company and GTL failed to pay severance pay pursuant
to a written employment contract following Schindler's resignation as an
employee and vice president of the Company in May 1999. Specifically, the
Complaint alleges (1) breach of contract (against the Company), (2) conspiracy
and interference with contract rights (against the Company and GTL), and (3)
interference with contract rights (against GTL). The Complaint seeks $85,000 in
severance pay on the contract claims, unspecified damages for loss of stock
options, punitive damages of at least $450,000, attorneys' fees and costs. The
Company and GTL deny any liability, intend to defend themselves vigorously and
are considering counterclaims. No responsive pleading has yet been filed. The
Company entered into a settlement agreement in October 1999 with Mr. Schindler
whereby the Company paid $50,000 to Mr. Schindler and all claims have been
dropped. Such amount had been accrued for at September 30, 1999.
The Company is subject to other lawsuits and claims arising in the
ordinary course of its business. In the Company's opinion, as of September 30,
1999, 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") 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 a limited number of
additional ships for the installation of CruiseView by the Company. The cost per
cabin for CruiseView purchase and installation on each ship is provided for in
the Carnival Agreement. In December 1998, Carnival ordered the installation of
CruiseView on one Carnival Cruise Lines "Fantasy" class ship, which has been in
operational use, on a test basis, since August 1999. In August 1999, Carnival
ordered the installation of CruiseView on one Carnival Cruise Lines "Destiny"
class ship, which has been in operational use, on a test basis, since October
1999.
The terms of the Carnival Agreement provide that Carnival may return
the CruiseView system within the Acceptance Period, as defined in the Carnival
Agreement. The Acceptance Periods for the "Fantasy" and "Destiny" class ships
are 12 months and three months, respectively. As of September 30, 1999, the
Company recorded deferred revenue of $1,155,000, reflecting amounts paid by
Carnival towards the purchase price of CruiseView aboard these ships. As of
September 30, 1999, the Company had not recognized any revenue in association
with the Carnival Agreement. The Company would be required to repay such funds
to Carnival in the event Carnival does not accept the system. Under the Carnival
Agreement, the Company is required to provide a performance bond or standby
letter of credit in favor of Carnival ensuring the Company's ability to repay
such amounts.
The Company has not provided a bond or letter of credit. Should
Carnival require the Company to obtain a bond or letter of credit, the Company
may be required to provide cash collateral to a financial institution to secure
such obligation.
9
<PAGE>
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 Financial Statements and the Notes
thereto appearing elsewhere herein. Historical results are not necessarily
indicative of trends in operating results for any future period.
DESCRIPTION OF BUSINESS
The Company is engaged in the development, manufacturing and marketing
of computer-based entertainment and data networks that provide users access to
information, entertainment and a wide array of service options, such as shopping
for goods and services, computer games, access to the World Wide Web, and
gambling operations where permitted by applicable law. The Company primarily
markets its products to academic institutions, passenger rail carriers, cruise
ship lines, business jet manufacturers, finishing centers and operators, hotels
and corporations for training purposes.
BASIS OF PRESENTATION
On May 18, 1999, Global Technologies, Ltd. ("Global") received from the
Company 1,055,745 shares of its common stock and 2,495,400 shares of its Series
D Convertible Preferred Stock in exchange for $4,250,000 in cash and
substantially all the assets and certain liabilities of Global's Interactive
Entertainment Division ("IED"), as defined in the Asset Purchase and Sale
Agreement, dated April 30, 1999, as amended (the "Transaction"). The Transaction
has been accounted for as a reverse merger whereby, for accounting purposes, IED
is considered the accounting acquiror, and although the legal capital structure
carries forward, the Company is treated as the successor to the historical
operations of IED. Accordingly, the historical financial statements of the
Company, which previously have been reported to the Securities and Exchange
Commission ("SEC") on Forms 10-KSB, 10-QSB, among others, as of and for all
periods through March 31, 1999, have been replaced with those of IED.
The financial statements as of and for the three months ended September
30, 1998 reflect the historical results of Global's IED as previously included
in Global's consolidated financial statements. The Transaction date for
accounting purposes was May 1, 1999. As of September 30, 1999, the Company is a
majority owned subsidiary of Global whose ownership, through a combination of
the Transaction described above and Global's purchase of Series B 8% convertible
preferred stock of the Company, 110,000 shares of the Company's common stock
from third party investors, and the purchase of the Series A, D and E
convertible notes of the Company approximates 81% of the Company on an
if-converted common stock basis. The historical financial statements of the
Company up to the date of the Transaction as previously reported will no longer
be included in future filings of the Company.
EDUCATION
The Company has drawn upon its years of experience in providing
multimedia servers for education and training. Through the Company's servers and
networks, students and faculty are able to access hundreds of hours of
multimedia content, search the internet, and build interactive courses.
In August 1999, the Company received an order of $5.3 million, for 195
of its CHEETAH(TM) multimedia servers to begin the first phase of the Georgia
Metropolitan Regional Education Services Agency ("MRESA") net 2000 project. The
order is part of the first phase of a three year state-wide program, whereby
MRESA hopes to bring advanced multimedia learning tools and technology to all
700 Georgia schools grades K-12, in the MRESA area. The Company completed this
part of the first phase.
10
<PAGE>
TRAINVIEW
In February 1999, the Company received an engineering design order from
Alstom Transport Limited ("Alstom"), a unit of ALSTOM SA, a worldwide leader in
the manufacture of high speed passenger trains, to incorporate the design of
TrainView, the Company's advanced Infoactive Business and Entertainment System,
into Alstom's concept high speed train design. The TrainView all-digital system
proposed is an adaptation of the Company's existing system currently installed
for cruise customers. The system is expected to deliver personal interactive
entertainment, video/audio on demand, e-commerce for shopping, event booking,
Internet and business services to the seat through the Company's TransPORTAL
applications. The Company has completed its work under this engineering design
order and has been paid for its services.
CRUISEVIEW
In September 1998, the Company entered into a Turnkey Agreement (the
"Carnival Agreement") with Carnival Corporation ("Carnival") for the purchase,
installation and maintenance of CruiseView 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 a limited number of additional
ships for the installation of CruiseView by the Company. The cost per cabin for
CruiseView purchase and installation on each ship is provided for in the
Carnival Agreement. Carnival exercised its right and ordered the installation of
CruiseView on one Carnival Cruise Lines "Fantasy" class ship. Delivery and
installation of CruiseView for the "Fantasy" class ship began in December 1998
and has been in operational use, on a test basis, since August 1999. It is
expected to begin commercial operation in the quarter ending December 31, 1999.
In August 1999, Carnival ordered the installation of CruiseView on one Carnival
Cruise Lines "Destiny" class ship, which has been in operational use, on a test
basis, since October 1999. There can be no assurance, however, that Carnival
will exercise its right under the Carnival Agreement to order CruiseView for
installation on any additional ships.
The terms of the Carnival Agreement provide that Carnival may return
the CruiseView system within the Acceptance Period, as defined in the Carnival
Agreement. The Acceptance Period for the "Fantasy" and "Destiny" class ships are
12 months and three months, respectively. As of September 30, 1999, the Company
recorded deferred revenue of $1,555,428, reflecting amounts paid by Carnival
towards the purchase price of CruiseView aboard these ships. As of September 30,
1999, the Company had not recognized any revenue in association with the
Carnival Agreement. The Company would be required to repay such funds to
Carnival in the event Carnival does not accept the system. Under the Carnival
Agreement, the Company is required to provide a performance bond or standby
letter of credit in favor of Carnival ensuring the Company's ability to repay
such amounts.
The Company has not provided a bond or letter of credit. Should
Carnival require the Company to obtain a bond or letter of credit, the Company
may be required to provide cash collateral to a financial institution to secure
such obligation.
The Company has concluded that the cost of building and installing
CruiseView systems in Carnival ships pursuant to the Carnival Agreement may
exceed the revenue earned in connection with such installations. Carnival's
continuing to exercise its option for building and installation of CruiseView on
additional ships under the Carnival 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 on the Carnival Agreement.
Should additional orders result in a loss contract, such losses will be accrued
for at the time that the loss has been determined.
AIRVIEW
In April 1998, the Boeing Company specified the Company's AirView data
server as part of the airplane manufacturer's completion Request For Proposal
(RFP) for the new B737-73Q Business Jet. In November 1998, the Company received
an order from Raytheon Systems Company, a unit of Raytheon Company, which was
contracted by Boeing Company, to equip the Boeing Business Jet (BBJ) B737-73Q
"Demonstrator" aircraft with the Company's AirView for an Integrated Business
and Entertainment System (IBES). Installation began in late 1998. There can be
no assurance, however, that any additional orders for the Company's AirView
system other than the Demonstrator will be received.
11
<PAGE>
SWISSAIR
In October, 1997, Global entered into a revised agreement with Swissair
which required Global to install and maintain the Entertainment Network in the
first, business and economy class sections of three aircraft at no cost to
Swissair and in the first and business classes of another sixteen aircraft at an
average price of $1.7 million per aircraft. As of October 31, 1998, Global had
completed all installations under the initial Swissair program. Global was
responsible for maintenance costs through September 1998, for all nineteen
aircraft and specific software and hardware upgrades to the Entertainment
Network that are not yet completed. The Swissair agreement also provided for a
one-year warranty on the Entertainment Network. Global entered into a contract
dated April 1, 1998, with Swissair for $3,975,000 to extend the warranty on the
installed system for a second and third year. Through May 18, 1999, Global has
been paid $707,500 under this contract. No subsequent payments have been
received from Swissair.
In April 1998 and October 1998, Global entered into additional
contracts with Swissair for a $4.7 million order for first and business class
installations on four Swissair MD-11 aircraft that are being added to the
Swissair fleet. Swissair had made payments of $1,450,000 on the $4.7 million
order for the four installations.
On October 29, 1998, Global was notified by Swissair of the airline's
decision to deactivate the Entertainment Network on all Swissair aircraft. Until
April 1999, Global and its system integrator/installation contractor had been
working closely with Swissair to take the necessary steps that will allow
Swissair to reactivate the systems as quickly as possible. However, by April
1999, discussions between Global and Swissair regarding outstanding financial
matters related to current accounts receivable, inventory, purchase commitments
and extended warranty obligations, as well as planning discussions for an
October 1999 reactivation ceased to be productive.
On May 6, 1999, Global filed a lawsuit against Swissair in the United
States District Court for the District of Arizona seeking damages for Swissair's
failure to honor its obligations for payment and reactivation of Global's
Entertainment Network. Swissair has failed to make payments to Global under
installation and warranty contracts and has harmed Global's business and
reputation by failing to honor its commitments to reactivate the Entertainment
Network on Swissair aircraft. Even though there has been no evidence that the
Entertainment Network contributed in any way to the crash of Swissair Flight No.
111 on September 2, 1998, Swissair has continued to use the unfortunate
circumstances of the crash as an excuse to avoid its obligations.
The Swissair agreements are not assignable to third parties under the
terms of such agreements. However, in connection with the Transaction, Global
has agreed to pay to the Company any net proceeds received from Swissair as a
result of the above litigation or otherwise. Further, the Company, as a
subcontractor to Global, will assume any operational responsibilities of the
Swissair agreement in the event that such requirement arises. The Company has
not assumed any liabilities or obligations arising out of the crash of Swissair
Flight No. 111.
As a result of the above events, management concluded that its only
source of future payment, if any, will be through the litigation process. In
addition, with the deactivation of the entertainment system and Swissair's
breach of its agreements with Global, the Company believes it will not be called
upon by Swissair to perform any ongoing warranty, maintenance or development
services. Swissair's actions have rendered the Company's accounts receivable,
inventory and deposits worthless. These items were written-off or reserved for
as of June 30, 1999.
12
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenue for the quarter ended September 30, 1999 was $5,610,387, an
increase of $5,276,062 (or 1,578%) compared to revenue of $334,325 for the
corresponding period of the previous fiscal year. Revenue for the quarter ended
September 30, 1999 consisted of equipment sales of $5,550,560 and service income
of $59,827. The equipment sales were principally generated from the installation
of its Cheetah(TM) video servers in 195 schools in the State of Georgia. The
service income was generated from system design services provided to Alstom.
Revenue for the corresponding period ended September 30, 1998 consisted of
equipment sales of $89,028 and service income of $245,297. The equipment sales
were generated from the sale of spare parts needed for the Entertainment
Networks on three Swissair aircraft. The service income was principally
generated from programming services provided to Swissair, the Company's share of
gaming profits generated by the Swissair systems and revenue earned under the
Swissair extended warranty contract.
Cost of equipment sales and service income for the quarter ended
September 30, 1999 was $3,428,961, an increase of $3,144,991 or (1,108%) over
cost of equipment sales and service income of $283,970 for the corresponding
period ended September 30, 1998. Cost of equipment sales for the quarter ended
September 30, 1999 was comprised principally of material costs and estimated
warranty costs for the 195 video servers for the Georgia schools project. Cost
of equipment sales for the corresponding period ended September 30, 1998 was
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.
General and administrative expenses for the quarter ended September 30,
1999 were $1,347,496, a decrease of $3,260,452 (or 71%) compared to expenses of
$4,607,948 for the corresponding period ended September 30, 1998. Significant
components of general and administrative expenses include payroll costs and
legal and professional fees. The decrease in expenses is attributed to a $3.1
million severance payment recorded September 1998 for three former executives of
the Company.
Depreciation and amortization expense for the quarter ended September
30, 1999 was $316,295, a decrease of $5,084 (or 2%) compared to depreciation and
amortization expense of $321,379 for the corresponding period ended September
30, 1998. Depreciation and amortization expense for the 1999 quarter is
comprised of property, plant and equipment depreciation of $132,155 and
intangible amortization of $184,140. Depreciation and amortization expense for
the corresponding period ended September 30, 1998 was comprised of property,
plant and equipment depreciation of $321,379. There was no intangible
amortization expense for such period. The decrease in property, plant and
equipment depreciation in the current period is a result of equipment write-offs
of $1,006,532 during October 1998.
Special charges for the quarter ended September 30, 1999 were zero
compared to a credit of $190,000 during the corresponding period ended September
30, 1998. A recovery of $190,000 was recognized during September 1998 as a
result of a reduction in the number of Entertainment Networks requiring
maintenance.
Interest expense was $135,649 for the quarter ended September 30, 1999
compared to $2,390 for the corresponding period ended September 30, 1998.
Interest expense for the period ended September 30, 1999 can be attributed
principally to long-term debt obligations of the Company, whereas interest
expense for the corresponding period of the previous fiscal year is attributable
to the Company's capital leases for furniture which expired in September 1999.
Interest income was $40,420 for the quarter ended September 30, 1999
compared to $30,714 for the corresponding period ended September 30, 1998.
Interest income for the period ended September 30, 1999 was principally
generated from short-term investments of working capital, whereas interest
income for the corresponding period ended September 30, 1998 was attributed to
Swissair extended warranty billings.
13
<PAGE>
Other income for the quarter ended September 30, 1999 was $7,270 and is
comprised primarily of a $4,992 gain resulting from the sale of office furniture
and a $6,784 gain on the sale of a note receivable. Other expense for the
corresponding period ended September 30, 1998 was $2,628 resulting from a loss
on the sale of equipment during the period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents and
short-term investments of approximately $1 million, and working capital of
approximately $2.3 million. Prior to June 30, 1999, the Company's primary source
of funding has been through contributed capital from Global. In August 1999, the
Company obtained an order for $5.3 million for the manufacture, delivery and
installation of 195 Cheetah(TM) Multimedia Video Servers for certain Georgia
schools, and a service order under the Carnival Agreement for installation of a
second CruiseView system. All servers have been delivered and accepted by the
customer and the Company has received the full payment of $5.3 million. The
Company received an installment payment from Carnival in August 1999 which has
been recorded as deferred revenue (the aggregate amount of which was $1.1
million at September 30, 1999). Excluding revenues and profits from the Georgia
program, working capital may continue to decrease as the Company continues to
invest in inventory for the Carnival service order and invest in business
development, and complete transactions which are longer term by nature.
During the three months ended September 30, 1999, the Company used $1.6
million of cash for operating activities, a decrease of $2,783,000 from the $4.4
million of cash used by operating activities for the corresponding period of the
previous fiscal year. The cash utilized in operations during the three months
ended September 30, 1999, resulted primarily from increases in accounts
receivable and inventories, offset by increases in accounts payable and accrued
product warranties. Cash used in operations during the quarter ended September
30, 1998 resulted primarily from general and administrative expenses.
Cash flows provided by investing activities were $278,000 during the
three months ended September 30, 1999. The increase in cash resulted primarily
from proceeds from the sale of a building held for sale, offset by purchases of
property and equipment.
Cash used in financing activities during the three months ended
September 30, 1999 of $682,000 resulted primarily from payments made on notes
payable, as well as payments made to an affiliate.
In October 1999, a note payable in the principal amount of $400,000 due
September 5, 1999 was converted into 200,000 shares of the Company's common
stock.
Prior to the Transaction, the Company entered into a Secured Promissory
Note with 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 its assets (the "Promissory Note"). The Promissory Note is
convertible into shares of the Company's Series C 8% convertible preferred stock
("Series C Stock") at the discretion of Global. The Note had an original
maturity of May 14, 1999, but has 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, respectively, from the holders of such notes (the
"Series Notes"). Concurrent with such purchase by Global, the Company executed
the fifth and sixth 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 had also advanced
working capital to the Company in the form of intercompany advances. In August
1999, the Company executed the seventh allonge to the Promissory Note which
rolled the intercompany advances into the principal balance of the Promissory
Note. As of September 30, 1999, the Promissory Note had a principal balance of
$4.3 million and has been classified as due to affiliate in the balance sheet.
On August 24, 1999, the Board of Directors of Global approved the
conversion of the Promissory Note into approximately five million shares of the
Company's common stock at a price per share equal to 66.6% of the average of the
five lowest last sale prices of a share of Common Stock as reported by the
NASDAQ National Market out of the twenty trading days immediately preceding
14
<PAGE>
August 24, 1999. Such conversion was contingent upon receiving shareholder
approval to increase the authorized share capital of the Company. This increase
in authorized share capital was subsequently approved at the September 17, 1999
Special Meeting of TNCi shareholders. The Company's articles of incorporation
were amended on October 25, 1999, to increase the number of authorized shares of
common stock to 40 million. Accordingly, the Company is in the process of
issuing to Global approximately five million shares of its common stock, based
on a conversion date of August 24, 1999. Had the conversion occurred on
September 30, 1999, pro forma stockholders' equity and tangible net worth would
have been $10,079,000 and $3,102,000, respectively.
In order to meet anticipated working capital needs, the Company sought
a credit facility from Global. On August 24, 1999, the Global Board of Directors
approved the establishment of a $5 million secured revolving credit facility for
the Company (the "Facility"). The Facility provides that the Company 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. The Company
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 the Company and
is convertible, at Global's option, into shares of the Company's Series C stock.
The Company executed the Facility on October 12, 1999.
In September 1999, the Company 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 19, 2001 in the principal amount of $470,000. The sale of the
second building occurred in November 1999. The net proceeds of approximately
$390,000 from sale were used to retire a Note payable due 2009 in the principal
amount of $217,000.
The terms of the Carnival Agreement provide that Carnival may return
the CruiseView system within the Acceptance Period, as defined in the Carnival
Agreement. The Acceptance Periods for the "Fantasy" and "Destiny" class ships
are 12 months and three months, respectively. As of September 30, 1999, the
Company recorded deferred revenue of $1,155,000, reflecting amounts paid by
Carnival towards the purchase price of CruiseView aboard these ships. As of
September 30, 1999, the Company had not recognized any revenue in association
with the Carnival Agreement. The Company would be required to repay such funds
to Carnival in the event Carnival does not accept the system. Under the Carnival
Agreement, the Company is required to provide a performance bond or standby
letter of credit in favor of Carnival ensuring the Company's ability to repay
such amounts.
The Company is required to provide a performance bond or standby letter
of credit in favor of Carnival ensuring Carnival's ability to be repaid amounts
previously paid to the Company in the event Carnival determines not to accept
the system as permitted under the Carnival Agreement. As of September 30, 1999,
the Company had not provided a bond or letter of credit. If Carnival requires
the Company to do so, the Company may be required to provide cash collateral to
a financial institution to secure such a financial instrument. Moreover, if
Carnival does not accept the system, the Company will be obliged to return the
purchase price, which would have a material adverse effect on liquidity.
The Company has concluded that the cost of building and installing
CruiseView systems in Carnival ships pursuant to the Carnival Agreement may
exceed the revenue earned in connection with such installations. Carnival's
continuing to exercise its option for building and installation of CruiseView on
additional ships under the Carnival 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 on the Carnival Agreement.
Should additional orders result in a loss contract, such losses will be accrued
for at the time that the loss has been determined.
The Company is currently using its working capital to finance inventory
purchases and other expenses associated with the delivery and installation of
Company products, and general and administrative costs. The Company believes
that its current cash balances plus interest received on such balances, and the
$5 million revolving credit facility with Global are sufficient to meet the
Company's currently anticipated cash requirements for at least the next twelve
months though if the Company were to receive substantial orders it may be
required to obtain additional inventory financing.
INFLATION AND SEASONALITY
The Company does not believe that it is significantly impacted by
inflation. Our operations are not seasonal in nature, except to extent
fluctuations in quarterly operating results occur due to the cyclical nature of
government funding to be obtained in connection with education programs.
15
<PAGE>
RISKS ASSOCIATED WITH YEAR 2000
The commonly referred to Year 2000 ("Y2K") problem results from the
fact that many existing computer programs and systems use only two digits to
identify the year in the date field. These programs were designed and developed
without considering the impact of a change in the century designation. If not
corrected, computer applications that use a two-digit format could fail or
create erroneous results in any computer calculation or other processing
involving the Year 2000 or a later date. The Company has identified two main
areas of Y2K risk:
1. Internal computer systems or embedded chips could be disrupted or
fail, causing an interruption or decrease in productivity in the Company's
operations, and
2. Computer systems or embedded chips of third parties including
financial institutions, suppliers, vendors, landlords, customers and service
providers and others could be disrupted or fail, causing an interruption or
decrease in the Company's ability to continue operations.
The Company has performed a comprehensive review of the Y2K issues and
has completed its review of internal systems and has received assurances from
third parties on which it relies with respect to the compliance of their
systems. All of the Company's application software programs are Y2K compliant.
The Company presently believes that the Y2K problem will not pose significant
operational problems for the Company's internal systems or that the systems of
third parties on which it relies will be materially adversely affected. The
Company also believes that incremental remediation costs, if any, to become Y2K
compliant, are not material.
While the Company believes that it is adequately addressing the Y2K
issue, there can be no assurance that the cost and liabilities associated with
the Y2K issue will not materially adversely impact its business, prospects,
revenues or financial position. The Company is uncertain as to its most
reasonably likely worst case Y2K scenario, and it has not developed a
contingency plan to handle a worst case scenario.
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 the
following: the Company's success in obtaining new contracts; 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; competition and competitive pressures on pricing; and economic
conditions in the United States and in other regions served by the Company.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
FEDERAL EXPRESS CORPORATION V. THE NETWORK CONNECTION, INC., State
Court of Forsyth County, State of Georgia, Civil Action File No. 99-V51560685.
This lawsuit was served on the Company on or about July 22, 1999 by Federal
Express Corporation. The suit alleges the Company owes Federal Express
approximately $110,000 for past services rendered.
HOLLINGSEAD INTERNATIONAL, INC. V. THE NETWORK CONNECTION, INC., State
Court of Forsyth County, State of Georgia, Civil Action File No. 99S0053.
Hollingsead International, Inc. ("Hollingsead") filed suit against the Company
on January 28, 1999, alleging that the Company failed to pay invoices submitted
for installation and service of audio-visual systems in its aircraft.
Hollingsead sought damages in the amount of $357,850, in addition to interest at
the rate of 18% per annum from March 2, 1998, attorneys' fees and punitive
damages. The parties entered into a settlement agreement on or about August 5,
1999 that provided for the payment of $427,870 by the Company, to be paid in
installments, including interest accruing at 8.0% per annum from July 28, 1999
until the balance is paid. The agreement also provides for Hollingsead to pay
$5,399 as reimbursement for attorneys' fees. The last installment is due on or
before December 20, 1999. Under the settlement agreement, the Company will
dismiss its counterclaims with prejudice and Hollingsead will dismiss its
Complaint with prejudice upon completion of all payments by the Company.
SIGMA DESIGNS, INC. ("SIGMA") V. THE NETWORK CONNECTION, INC., United
States District Court, Northern District of California, San Jose Division, Civil
Action File No. 98-21149J(EAI). Sigma filed a Complaint against the Company on
December 1, 1998, alleging breach of contract and action on account. Sigma
claims that the Company failed to pay for goods that it shipped to the Company.
The matter was settled by written agreement dated January 22, 1999, contingent
upon registration of the Company stock and warrants issued to Sigma as a part of
such settlement and payment by the Company of $50,000. The Company did not
complete its obligations under the terms of the original settlement agreement.
In or about May 1999, the shares of the Company issued to Sigma as a part of the
settlement of the above-referenced lawsuit were sold by Sigma to GTL, the parent
company of the Company. The lawsuit was dismissed with prejudice on July 12,
1999 as a condition of GTL's purchase.
ERIC SCHINDLER V. INTERACTIVE FLIGHT TECHNOLOGIES, INC. et al., State
Court for Fulton County, Georgia Case No. 99-V51560685. On August 18, 1999, Eric
Schindler commenced a lawsuit, naming GTL and the Company as defendants. The
Complaint alleges that the Company and GTL failed to pay severance pay pursuant
to a written employment contract following Schindler's resignation as an
employee and vice president of the Company in May 1999. Specifically, the
Complaint alleges (1) breach of contract (against the Company), (2) conspiracy
and interference with contract rights (against the Company and GTL), and (3)
interference with contract rights (against GTL). The Complaint seeks $85,000 in
severance pay on the contract claims, unspecified damages for loss of stock
options, punitive damages of at least $450,000, attorneys' fees and costs. The
Company and GTL deny any liability, intend to defend themselves vigorously and
are considering counterclaims. No responsive pleading has yet been filed. The
Company entered into a settlement agreement in October 1999 with Mr. Schindler
whereby the Company paid $50,000 to Mr. Schindler and all claims have been
dropped. Such amount had been accrued for at September 30, 1999.
17
<PAGE>
The Company is subject to other lawsuits and claims arising in the
ordinary course of its business. In the Company's opinion, as of September 30,
1999, the effect of such matters will not have a material adverse effect on the
Company's results of operations and financial position.
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 14, 1999 the Company issued 66,667 shares of the Common
Stock of the Company to Barbara Riner in consideration of the execution and
delivery of a separation and release agreement. The issuance was exempt under
Section 4(2) of the Securities Act.
In October, 1999, the Company issued 200,000 shares of the Common Stock
of the Company upon conversion of a note payable in the principle amount of
$400,000 in a transaction exempt under Section 4(2) of the Securities Act.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders was held on September 17, 1999 to act
upon the following matters:
1. A proposal to ratify and approve the acquisition of IED, and the
related issuance of 1,055,745 shares of the Company's Common Stock and 2,495,400
shares of the Company's Series D Convertible Preferred Stock, pursuant to an
Asset Purchase and Sale Agreement, dated April 30, 1999, by and between the
Company and GTL, as amended by the First Amendment to Asset Purchase and Sale
Agreement, dated as of May 14, 1999.
2. A proposal to amend the Company's Amended and Restated Articles of
Incorporation to increase the authorized number of shares of capital stock of
the Company to 42,500,000 of which 40,000,000 shares is Common Stock and
2,500,000 shares is Preferred Stock.
With respect to the first proposal, 13,506,816 votes were cast for,
63,555 votes were cast against or withheld, and there were 17,150 abstentions.
With respect to the second proposal 3,472,176 votes were cast for, 102,395 votes
were cast against or withheld, and there were 12,950 abstentions.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 -- Articles of Amendment to the Second Amended and Restated Articles
of Incorporation dated October 6, 1999
3.2 -- Articles of Amendment to the Second Amended and Restated Articles
of Incorporation dated October 6, 1999
27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter
ended September 30,1999.
Financial Date of
Statements Event
Items Reported Filed Reported
-------------- ----- --------
Change in Certifying Accountants No August 2,
1999
18
<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: November 15, 1999 THE NETWORK CONNECTION, INC.
By: /s/ Irwin L. Gross
------------------------------
Irwin L. Gross
Chief Executive Officer
By:/s/ Morris C. Aaron
------------------------------
Morris C. Aaron
Executive Vice President &
Chief Financial Officer
19
ARTICLES OF AMENDMENT TO THE
SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
THE NETWORK CONNECTION, INC.
Pursuant to the provisions of Section 14-2-1006 of the Georgia Business
Corporation Code, the undersigned Corporation hereby adopts the following
Articles of Amendment to the Second Amended and Restated Articles of
Incorporation: NOW, THEREFORE, the undersigned hereby certifies as follows:
FIRST: The name of the Corporation is: THE NETWORK CONNECTION, INC.
SECOND: The following amendments were duly adopted by the Directors of
the Corporation as of July 23, 1999, and were duly adopted by the Shareholders
of the Corporation on September 17, 1999, all in accordance with the provisions
of Section 14-2-1003 of the Georgia Business Corporation Code:
RESOLVED, that the first paragraph of Article V. of the Corporation's
Second Amended and Restated Articles of Incorporation be, and hereby is,
amended in its entirety to read as follows:
ARTICLE V.
The aggregate number of shares of capital stock which the Corporation
shall have authority to issue is FORTY TWO MILLION FIVE HUNDRED THOUSAND
(42,500,000) shares consisting of:
(a) 40,000,000 shares of Common Stock, $.001 par value per share
(the "Common Stock"); and
(b) 2,500,000 shares of Preferred Stock, $.01 par value per share
(the "Preferred Stock").
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to the Second Amended and Restated Articles of Incorporation to be
signed by its duly authorized officer this 6th day of October, 1999.
THE NETWORK CONNECTION, INC., a
Georgia corporation
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
ARTICLES OF AMENDMENT TO THE
SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
THE NETWORK CONNECTION, INC.
--------------------
This Articles of Amendment to the Second Amended and Restated Articles
of Incorporation (the "Amendment") is being executed as of October 6, 1999, for
the purpose of amending the Second Amended and Restated Articles of
Incorporation of The Network Connection, Inc. (the "Company"), pursuant to
Section 14-2-602 of the Georgia Business Corporation Code.
NOW, THEREFORE, the undersigned hereby certifies as follows:
FIRST: The name of the Corporation is THE NETWORK CONNECTION, INC.
SECOND: That on May 5, 1999 the Corporation filed Articles of Amendment
to the Second Amended and Restated Articles of Incorporation authorizing the
creation of sixteen hundred (1,600) shares of Series C 8% Convertible Preferred
Stock.
THIRD: That, pursuant to authority conferred upon the Board of
Directors by the Articles of Incorporation, said Board of Directors, at a
meeting of the Board of Directors, approved and adopted a resolution providing
for the amendment of the terms of the Company's Series C 8% Convertible
Preferred Stock, which resolution is as follows:
RESOLVED, that pursuant to Article V of the Second Amended and Restated
Articles of Incorporation of the Company, there be and hereby is authorized an
amendment to the terms of the Company's Series C 8% Convertible Preferred Stock
(the "Series C Preferred Stock"), which amendment shall be as follows:
1. The first paragraph of Article V of the Second Amended and Restated
Articles of Amendment to the Articles of Incorporation of the Company creating
the terms and conditions of the Series C 8% Preferred Stock be, and it hereby
is, amended in its entirety to read as follows:
RESOLVED, that pursuant to Article V of the Second Amended and Restated
Articles of Incorporation of the Company, there be and hereby is authorized and
created one series of Preferred Stock, hereby designated as Series C 8%
Convertible Preferred Stock to consist of Three Thousand (3,000) shares with a
par value of $.01 per share and a Stated Value of $1,000.00 per share (the
"Stated Value"), and that the designations, preferences and relative,
participating, optional or other rights of the Series C 8% Convertible Preferred
Stock (the "Series C Preferred Stock") and qualifications, limitations or
restrictions thereof, shall be as follows:
<PAGE>
FOURTH: This Amendment was approved and duly adopted by the Board of
Directors as of July 23, 1999, in the manner required by Section 14-2-602 of the
Georgia Business Corporation Code, and Shareholder approval was not required.
IN WITNESS WHEREOF, the Corporation has caused this Amendment to be
signed by a duly authorized officer on this 6th day of October, 1999.
THE NETWORK CONNECTION, INC., a
Georgia corporation
By:
----------------------------
Name:
----------------------------
Title:
----------------------------
<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> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 700,620
<SECURITIES> 302,660
<RECEIVABLES> 5,078,469
<ALLOWANCES> 0
<INVENTORY> 2,984,708
<CURRENT-ASSETS> 10,765,812
<PP&E> 2,134,327
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0
24,977
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</TABLE>
