U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended ________________
OR
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Transition Period from November 1, 1998 to June 30, 1999.
Commission File No. 1-13760
THE NETWORK CONNECTION, INC.
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(Name of Small Business Issuer in Its Charter)
GEORGIA 58-1712432
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
222 NORTH 44TH STREET
PHOENIX, ARIZONA 85034
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(Address of principal executive offices) (Zip Code)
(602) 629-6200
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
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COMMON STOCK, $.001 PAR VALUE PER SHARE THE NASDAQ STOCK MARKET
Securities registered under Section 12(g) of the Exchange Act:
NONE
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 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. [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $958,607
As of October 8, 1999, the number of shares of Common Stock outstanding was
6,405,743 and the aggregate market value of such Common Stock (based on the
closing price on that date) held by non-affiliates of the registrant was
approximately $10,829,925.
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THE NETWORK CONNECTION, INC.
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
Page
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PART I...................................................................... 1
ITEM 1 -- DESCRIPTION OF BUSINESS........................................ 1
ITEM 2 -- DESCRIPTION OF PROPERTY........................................ 11
ITEM 3 -- LEGAL PROCEEDINGS.............................................. 11
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 13
PART II..................................................................... 14
ITEM 5 -- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....... 14
ITEM 6 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 15
ITEM 7 -- FINANCIAL STATEMENTS........................................... 24
ITEM 8 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................ 24
PART III.................................................................... 25
ITEM 9 -- DIRECTORS AND EXECUTIVE OFFICERS............................... 25
ITEM 10 -- EXECUTIVE COMPENSATION......................................... 27
ITEM 11 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 31
ITEM 12 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 33
PART IV..................................................................... 34
ITEM 13 -- EXHIBITS AND REPORTS ON FORM 8-K............................... 34
SIGNATURES.................................................................. 37
FINANCIAL STATEMENTS....................................................... F-1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Network Connection, Inc. (the "Company" or "TNCi") is engaged in the
development, manufacturing and marketing of computer-based entertainment and
data networks, which 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 gambling where permitted by
applicable law. The Company's primary markets for its products are cruise ships,
passenger trains, schools and corporate training. Secondary markets include
business jets and hotel operators, among others.
These systems can support live-feed, closed-circuit and satellite based
digital television programs in addition to personal interactive entertainment
and video/audio on demand, shopping, multi-player games, gambling, shore
excursion/event booking, karaoke and internet access, all simultaneously,
independently and with full user control through a keyboard, wireless television
remote control or touch screen display. In addition, attendant or crew
interactive training can be provided at the same time.
As part of the turnkey solution sought by the transportation industry, the
Company may also provide and manage content for use with these systems on a
fee-for-service basis or on a revenue sharing basis.
The Company's products are sold under the names TRIUMPH, Cheetah(TM), and
related sub product names. These systems are based upon non-proprietary or open
system PC hardware standards and utilize major commercial components and
subsystems in order to provide flexibility and reliability. The Company's
products are designed to be compatible with industry standard network operating
systems and new network operating systems as they become available. Product
design allows compatibility with most applications running in such network
environments, and enables the Company's systems to operate efficiently as
servers and work stations for groups of interconnected PCs arranged in LANs,
WANs, intranets and the Internet. The Company has distributed its products
worldwide principally through its own internal sales force and strategic
resellers.
On May 18, 1999, Global Technologies, Ltd. (formerly known as Interactive
Flight Technologies, Inc.) ("GTL") 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 GTL'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, GTL is considered the accounting
acquiror and 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, will be replaced with those of IED.
The Company will continue to file as a SEC registrant and continue to
report under the name The Network Connection, Inc. The financial statements as
of and for the years ended October 31, 1998 and 1997 reflect the historical
results of GTL's IED as previously included in GTL's consolidated financial
statements. Included in the results of operations for the eight months ended
June 30, 1999 are the historical results of GTL's IED through April 30, 1999,
and the results of the combined company for the two months ended June 30, 1999.
The Transaction date for accounting purposes is May 1, 1999. Contributed capital
reflects the cash consideration paid by GTL to the Company in the Transaction in
addition to funding of IED historical operations. GTL will continue to report as
a separate SEC registrant, owning the shares of the Company as described above.
As of June 30, 1999, the Company is a majority owned subsidiary of GTL whose
ownership, through a combination of the Transaction described above and GTL's
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purchase of Series B 8% preferred stock of the Company and 110,000 shares of the
Company's common stock from third party investors, approximates 78% 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.
The Company's principal offices are located at 222 North 44th Street,
Phoenix, Arizona 85034 and the main telephone number is (602) 629-6200.
Unless the context requires otherwise, all references to "we," "our" or
"us" refer to The Network Connection, Inc., a corporation originally
incorporated in the state of Georgia in 1986.
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES EXCHANGE ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT") WHICH INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING STATEMENTS REGARDING THE COMPANY'S STRATEGY, FINANCIAL
PERFORMANCE, AND REVENUE SOURCES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS INCLUDING THOSE SET FORTH UNDER "ITEM 6 - MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
ELSEWHERE IN THIS REPORT.
OUR BUSINESS STRATEGY
The Company's strategy is to position itself as a leading provider of
comprehensive interactive information system solutions which are scalable to
accommodate small or large user groups and, are based on a high-speed and secure
network. The Company can also offer customized video content options and
interfaces with a customer's existing applications and network. Additionally,
the Company will continue to position itself as an integrated browser-based
software developer and a content programming, procurement, integration and
management service provider. Content programming and procurement can include
educational and training products, video entertainment, gaming, e-mail and
internet access, and E-Commerce capabilities.
SALES, MARKETING AND DISTRIBUTION
The Company currently distributes its products principally through the
efforts of its internal direct sales force. The Company also attends trade shows
and hosts end user seminars or meetings to promote and market its products.
Additionally, the Company may advertise in trade publications. The Company plans
to continue and accelerate these efforts.
Also, the Company is developing relationships with strategic "partners"
capable of providing customer solutions through the Company's products, or
encouraging their customers to purchase the Company's systems in conjunction
with their own products on the basis that overall system or product performance
will be enhanced. The Company will assist these partner-vendors by determining
the configuration of the Company's products that will deliver optimal
performance along with the partner-vendor's products.
The purchase price for the Company's "turn-key" packaged systems depends
upon various factors, such as the size and type of train or ship, and the
requested system features. There can be a relatively long sales cycle for some
products, because of the need to evaluate the Company's technology, to conduct a
test installation of each customized system, and to negotiate agreements with
other providers. The sales cycle is also dependent upon a number of factors
beyond the Company's control, such as the financial condition of the customer,
safety and maintenance concerns, regulatory issues and purchasing patterns of
particular operators, and the industry generally. This can result in long and
unpredictable buying patterns for the Company's transportation-related products.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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OVERVIEW OF THE MARKETS AND INDUSTRIES WE SERVE
The Company is focused on four primary markets at this time: (1) multimedia
servers for education and corporate training; (2) interactive entertainment and
information systems for cruise ships; (3) interactive entertainment and
information systems for trains; and (4) interactive information systems for
business aviation. Corporate training programs and interactive education for
high schools and universities constitute large markets in excess of several
billion dollars per year. Indeed, high schools and universities are beginning to
seek innovative ways of bringing the internet and interactive courseware to the
classroom. Interactive entertainment and information systems for cruise ships
and trains represent large, relatively untapped markets. For example, there
currently are more than 70 cruise ships in revenue service with 500 or more
guest cabins, and the build schedule for ships of this size shows more than 30
new ships entering revenue service between now and the end of 2001. Only nine
ships to date have had interactive entertainment and information systems
installed. In the case of commuter trains, no interactive entertainment and
information systems have been installed. Finally, original equipment
manufacturers (OEMs) and operators of business jets are just beginning to see
the benefits of installing interactive and multimedia servers connected to a
high-speed LAN to provide business travelers with an "office-in-the-sky." While
the Company believes these markets are large, relatively untapped, and
potentially profitable, no assurances can be given that the Company will be
successful in any of them.
OUR PRODUCTS AND SERVICES
INTERACTIVE INFORMATION SYSTEMS FOR BUSINESS AVIATION (AIRVIEW)
In April 1998, the Boeing Company identified the Company's AirView
interactive and video server as a key element of an "office-in-the-sky" for the
new B737-73Q Business Jet. In November 1998, the Company received an order from
the Raytheon Company, which was contracted by Boeing Company, to equip the
Boeing Business Jet (BBJ) B737-73Q "Demonstrator" aircraft with the Company's
AirView interactive and video server and switches. Installation is due to be
completed on the Demonstrator aircraft in the quarter ending December 1999.
There can be no assurance, however, that any additional business jet orders for
the Company's AirView system will be received. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
INTERACTIVE ENTERTAINMENT AND INFORMATION SYSTEMS FOR CRUISE SHIPS
(CRUISEVIEW)
CruiseView is an advanced cabin entertainment and information management
system for the Cruise industry. The CruiseView system is a high bandwidth,
high-speed video-enabled intranet, tailored to meet the environmental demands of
cruise conditions. With video and data servers connected to cabin set top PCs,
via a Gigabit digital network backbone for voice, video and data, CruiseView
delivers to each cabin, on demand, a unique entertainment and information
experience, independent of all other passengers.
CruiseView offers passengers:
* video and music libraries.
* e-commerce capabilities.
* casino-style and action games.
* previews of and the ability to book shore tours.
* integration with ship operations, including billing, room service,
surveys and customer requests.
In September 1998, the Company entered into a Turnkey Agreement (the
"Carnival Agreement") with Carnival Corporation ("Carnival"), a Panamanian
registered corporation, 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 an unspecified number of additional ships for the installation of
CruiseView by the Company. The cost per cabin for the CruiseView purchase and
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installation on each ship is provided for in the Carnival Agreement, as is the
minimum software license and installation cost per ship, with additional per
ship costs charged based upon the number of actual cabins installed and
operational. The cost of training up to ten Carnival personnel per ship for
system operation is included in the contract cost for licensing and installation
of CruiseView, with the cost of additional training and maintenance billed
separately by the Company. In December 1998, Carnival ordered the installation
of CruiseView on the Carnival Cruise Lines "M/S Sensation". CruiseView has been
in operational use on Sensation, in a test mode, since August 1999. It is
expected to begin general commercial operation in the quarter ending December
31, 1999. In August 1999, Carnival ordered the installation of CruiseView on the
Carnival Cruise Lines "M/S Triumph" which is expected to be completed in the
quarter ending December 31, 1999. There can be no assurance that Carnival will
exercise its right under the Carnival Agreement to order CruiseView for
installation on any additional ships. See "Cautionary Factors That May Affect
Future Results -- Rights to Terminate Contracts with the Company" regarding
risks related to the Company's relationship with Carnival.
INTERACTIVE ENTERTAINMENT AND INFORMATION SYSTEMS FOR TRAINS (TRAINVIEW)
Like CruiseView, TrainView is a browser-based information portal, which
provides advertising, shopping, route and city information, video features,
games and music to the captive train commuter audience.
In February 1999, the Company received an engineering design order from
Alstom Transport Limited ("Alstom"), a unit of ALSTOM SA, to incorporate the
design of TrainView into Alstom's high-speed train design concept. 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, shopping, event
booking, internet access, and business services to the seat through the
Company's TransPORTAL applications.
In September 1999, the Company announced the formation of a Passenger Rail
Division and the hiring of a Division President, based in the U.K. The focus of
the new Division will be to pursue new business opportunities in the world-wide
passenger rail market.
There can be no assurance that Alstom or any of its customers will purchase
a TrainView system for installation on any train.
CORPORATE TRAINING AND ACADEMIC SOLUTIONS
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 initial award, in excess of $1
million, for its CHEETAH(TM) multimedia server to begin the first phase of the
Georgia Metropolitan Regional Education Services Agency ("MRESA") net 2000
project. The award 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 K-12, under the guidance of the Georgia
MRESA. The Company completed this part of the first phase, and recently received
a second order for the first phase in excess of $4 million.
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PRODUCT FEATURES AND TECHNOLOGY
The interactive system's open architecture and compatibility features
permit ease of support for new and emerging content options. The system is a
proven, all digital, in-room or in-seat interactive system. Dual, fault-tolerant
video and file servers serve as the heart of the system. A gigabit LAN backbone
provides 100 Megabit connectivity to each client. The scaleable architecture is
based on Intel processors and Microsoft operating systems. In addition, the core
software design allows simple customization of the user interface and
integration of third-party software. The system interfaces with both color flat
panel and TV displays.
OPERATIONS AND MANUFACTURING
The Company currently manufactures all of its products in the United
States, either at its Phoenix, Arizona facility or at its supplier locations.
Final assembly, integration, burn-in, and functional testing are conducted at
its facilities in Phoenix, Arizona and Atlanta, Georgia.
The Company obtains electronic components and finished sub-assemblies for
its products "off-the-shelf" from a number of qualified suppliers. The Company
has established a comprehensive testing protocol to ensure that components and
sub-assemblies meet the Company's specifications and standards before final
assembly and integration. The Company has elected to procure off-the-shelf
component parts and sub-assemblies from suppliers to ensure better quality
control and pricing. To date, the Company has not experienced interruptions in
the supply of such component parts and sub-assemblies, and believes that
numerous qualified suppliers are available. The inability of most of the
Company's current suppliers to provide component parts to the Company would not
adversely affect the Company's operations on a long-term basis.
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret and other intellectual
property law, nondisclosure agreements with all of its employees and other
protective measures to establish and protect its proprietary rights in its
products. The Company believes that because of the rapid pace of technological
change in the open systems networking industry, legal protection of its
proprietary information is less significant to the Company's competitive
position than factors such as the Company's strategy, the knowledge, ability and
experience of the Company's personnel, new product development, market
recognition and ongoing product maintenance and support. Without legal
protection, however, it may be possible for third parties to copy aspects of the
Company's products or technology or to obtain and use information that the
Company regards as proprietary. In addition, the laws of some foreign countries
do not protect proprietary rights in products and technology to the same extent
as do the laws of the United States. Although the Company continues to implement
protective measures and intends to defend its proprietary rights vigorously,
there can be no assurance that these efforts will be successful. The failure or
inability of the Company to effectively protect its proprietary information
could have an adverse affect on the Company's business.
RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapid
technological change and evolving industry standards, and it is highly
competitive with respect to timely product innovation. The introduction of
products embodying new technology and the emergence of new industry standards
can render existing products obsolete and unmarketable. The Company believes
that its future success will depend upon its ability to develop, manufacture and
market new products and enhancements to existing products on a cost-effective
and timely basis. The system architecture for the Company's interactive
entertainment and information products was designed to permit hardware and
software upgrades over time. Moreover, the current architecture presents no
known limits on a customer's ability to offer compelling content to the user in
a rapid and highly reliable manner. Therefore, a major focus of the Company's
research and development efforts is to reduce the cost of network and client
hardware and to enhance the core software of the system to permit even easier
integration of new content.
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If the Company is unable, for technological or other reasons, to develop
new products in a timely manner in response to changes in the industry, or if
products or product enhancements that the Company develops do not achieve market
acceptance, the Company's business will be materially and adversely affected.
There can be no assurance that technical or other difficulties in the future
will not delay the introduction of new products or enhancements.
OUR CUSTOMERS
The Company's products are sold to end users in a wide range of industries.
Customers that have purchased the Company's products are financial institutions,
health care companies, academic institutions, communications/broadcasting
companies, governmental agencies, entertainment providers, transportation
operators and end-users operating in various other industries.
The Company's high-end, high performance, multimedia video capable products
currently are targeted to and sold to education and corporate skills training
providers, hotel, train and ship operators and retail facility information kiosk
businesses. Most sales efforts in 1998 and 1999 were focused on larger system
sales into niche markets of the Company's "turn-key" packaged solutions,
AirView, CruiseView and TrainView. There can be no assurance, however, that the
Company will successfully negotiate definitive agreements for the purchase of
these systems. The markets for these types of products are new and their actual
aggregate size is impossible to measure accurately. Although management expects
the video server market to experience growth, with the growth to come
principally from the high-performance superserver segment of the market, no
assurances can be made that the Company's products will be accepted within the
market.
COMPETITION
The market for the products and services that the Company offers is very
competitive. Factors for the Company's success include product quality,
technical capability, system reliability, price, promptness of program
performance, and warranty protection. There are numerous international and U.S.
firms that currently compete, or are capable of competing, with the Company.
Many competitors have greater financial and human resources than the Company.
The Company faces substantial competition from the manufacturers of several
different types of products used as network servers. The Company expects
competition to intensify as more firms enter the market and compete for market
share. In addition, companies currently in the server market will continue to
change product offerings in order to capture further market share.
With respect to base configuration, the Company competes with manufacturers
of high-end PCs used as network servers. Competitors offering products in this
market include International Business Machines Corporation ("IBM"), Compaq
Computer, Inc., Gateway Corporation, and Dell Corporation. One of the principal
competitive factors in the market for simple LANs is price, and the economies of
scale available to high-end PC manufacturers may permit them to offer their
products at a lower price. The Company expects its competitors to continue to
improve the performance, availability, scalability and upgradability features of
their products. The Company expects all of its competitors in the simple LAN
market to improve the distribution channels for their products used as servers.
With respect to more fully configured high-end video servers for larger and
more complex LANs and more sophisticated or business-critical applications, the
Company competes indirectly with manufacturers of mainframes and minicomputers.
Manufacturers that promote their products in this market include IBM, Digital
Equipment Corporation, Hewlett-Packard Corporation and UNYSIS, Inc. The
Company's operating results could, however, be adversely affected if one or more
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of these competitors elects to compete more aggressively with respect to price
or product features of their mainframes or minicomputers. The Company competes
in the market for complex LANs with other manufacturers of superservers,
including Sun, Silicon Graphics and Ncube. The Company competes in the market
for "turn-key" systems for travel-related entertainment with other manufacturers
of complete systems, including Rockwell Collins Passenger Systems, BE Aerospace,
Sony Transcom, Matsushita, Allin Interactive, and Trans Digital.
There can be no assurance that alternative technologies will not be
developed in the future that will be capable of providing certain services now
performed by network servers. The development of such technologies could reduce
the need for network servers and adversely affect the Company's operating
results.
As many of the Company's competitors are more established, benefit from
greater market recognition and have greater financial, technological, production
and marketing resources than the Company, establishing and maintaining the
Company's competitive position will require continued investment by the Company
in research and development and sales and marketing. There can be no assurance
that the Company will have sufficient resources to make such investments or
survive the sales cycle and support the receivables collection cycle, or that
the Company will be able to make the technological advances necessary for it to
be competitive. In addition, if more manufacturers of PCs, mainframes or
minicomputers were to develop and market their own superserver class of
products, the Company's operating results could be adversely affected.
REGULATION
The installation and use of the Company's AirView system on any particular
aircraft may require prior certification and approvals from the Federal Aviation
Administration ("FAA") and certification and approvals from aeronautical
agencies of foreign governments. Other regulatory requirements may apply in the
passenger rail, cruise or other markets in which the Company operates that may
affect the Company's ability to deliver it products or install on a timely
basis. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
United States law, with certain exceptions, currently prohibits the knowing
transportation of gaming devices operated on modes of interstate transportation.
In addition, states may prohibit the transportation and use of gaming devices.
Federal law also prohibits the installation, transportation or operation of
gaming devices by any U.S. or foreign air carrier or for such carriers to permit
their use on aircraft operated to or from the United States in foreign air
transportation. The laws regarding the transmission of gaming data into, out of,
or within United States territory, even where such data was lawfully obtained in
another jurisdiction, are unclear. As a result, there can be no assurance that
the transmission of such data will not be restricted or prohibited. Because
gaming may generate greater revenues and profitability than other entertainment
options available on the Company's products, the inability to offer gaming in
certain markets may have a material adverse impact on the Company's business and
on the market acceptance of the Company's products. The Company may also be
subject to the laws of foreign jurisdictions which may similarly restrict or
prohibit the gaming or other activities offered on the Company's products.
INSURANCE AND BONDS
The Company maintains liability insurance for claims arising from its
business. These policies have limits of up to $10 million in the aggregate and
insures against both property damage and personal injury. The policies are
written on an "occurrence" basis, which provides coverage for insured risks that
occur during the policy period, irrespective of when a claim is made. Higher
policy limits are sometimes purchased for individual projects when contractually
required.
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BACKLOG ORDERS AND WORK-IN-PROGRESS
As of June 30, 1999, the Company had no backlog. Work-in-progress consisted
of programs with Carnival Cruise Lines ("Carnival") under the Company's 1998
contract with Carnival. In August 1999, the Company received an order to
manufacture and install its Cheetah(TM) Video Servers in approximately 193
schools in the State of Georgia. The total sales price of this order was
approximately $5.3 million. All product was successfully produced and installed
by September 30, 1999, and the Company has received progress payments of $1.2
million through October 8, 1999.
SUPPLIERS
The Company does not depend upon any single supplier. Because we have
multiple sources of supply, we have not experienced difficulties in obtaining
adequate sources of supply and adequate alternatives to satisfy our
manufacturing needs. We do not have formal purchase contracts for our supplies,
but instead we generally purchase such items under individual purchase orders.
EMPLOYEES
As of June 30, 1999 the Company had approximately 22 full-time employees,
including four executive officers. None of the employees are covered by a
collective bargaining agreement. The Company's success depends to a significant
extent upon the performance of its executive officers and other key personnel.
The Company considers its relations with its employees to be good.
WARRANTIES
The Company provides a warranty regarding its products for periods ranging
from one to three years, depending on the requirements of customers. To date,
the Company has not experienced significant claims under warranties, and its
ability to meet the full demands of having a significant number of units sold to
customers who require such service has not been tested. The Company also passes
through to end users the warranties that it receives from vendors on any
separate hardware, software or component parts that it sells independently of
full systems.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS INHERENT IN DEVELOPMENT OF NEW PRODUCTS AND MARKETS. The Company's
strategy includes developing new applications for its interactive entertainment
and information technologies and entering new markets, such as the train
industry. This strategy presents risks inherent in assessing the value of
development opportunities, in committing capital in unproven markets and in
integrating and managing new technologies and applications. Within these new
markets, the Company will encounter competition from a variety of sources. It is
also possible that the Company will experience unexpected delays or setbacks in
developing new applications of its technology. There can be no assurance that
the Company's new products and applications will generate additional revenue for
the Company or that the Company will successfully penetrate these additional
markets.
RISK OF TECHNOLOGICAL OBSOLESCENCE. The ability of the Company to maintain
a standard of technological competitiveness is a significant factor in the
Company's strategy to maintain and expand its customer base, enter new markets
and generate revenue. While the Company believes that its systems are currently
technologically competitive, the Company's continued success will depend in part
upon its ability to identify promising emerging technologies and to develop,
refine and introduce high quality services in a timely manner and on competitive
terms. There can be no assurance that future technological advances by direct
competitors or other providers will not result in improved systems that could
adversely affect the Company's business, financial condition and results of
operations. Additionally, the Company may fail to identify emerging
technologies.
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MANAGEMENT OF GROWTH. The Company's growth strategy will require its
management to conduct operations and respond to changes in technology and the
market, while substantially expanding operations and personnel. If the Company's
management is unable to manage growth effectively, its business, financial
condition and results of operations will be materially adversely affected.
RISK OF SYSTEM FAILURE OR INADEQUACY. The failure of one of the Company's
systems at any particular time could occur as a result of component malfunction,
operator error or some other reason. Although system interruptions historically
have been inconsequential, any system failure could harm the Company's
reputation, cause a loss or delay in market acceptance of the Company's systems,
and have a material adverse effect on the Company's business, financial
condition and results of operations. To reduce the risk of system failure, the
Company performs extensive testing of its systems and engages in ongoing quality
assurance efforts involving the use of redundant systems and sophisticated
diagnostic tools to aid in system maintenance and trouble-shooting. Despite
these measures, there can be no assurance that system failures or interruptions
will not occur.
DEPENDENCE ON KEY PERSONNEL. The Company's success is dependent on a number
of key management, research and operational personnel for the management of
operations, development of new products and timely installation of its systems.
The loss of one or more of these individuals could have an adverse effect on the
Company's business and results of operations. The Company depends on its
continued ability to attract and retain highly skilled and qualified personnel.
There can be no assurance that the Company will be successful in attracting and
retaining such personnel.
DEPENDENCE ON TRANSPORTATION INDUSTRY AND CONTINUED OPERATION OF
TRANSPORTATION INDUSTRY CUSTOMERS. A substantial portion of the Company's
revenue is expected to be generated in the near term from its transportation
industry operations, thereby making the Company's business dependent upon the
transportation industry in general and the continued operations of the Company's
transportation industry customers. A significant reduction in the operations of
any of these customers could, depending on the extent of the reduction, have a
material adverse effect on the Company. Additionally, the transportation
industry is dependent on customers having disposable income. Therefore, a
general economic downturn or a recession could negatively impact the
transportation industry before affecting other segments of the economy, even
though transportation providers typically offer promotional pricing and
incentives during recessionary periods to ensure a steady occupancy rate.
RIGHTS TO TERMINATE CONTRACTS WITH THE COMPANY. The Company's contract with
the cruise line is subject to renewal by mutual consent of the parties at the
expiration of the initial term. A decision by the cruise line to discontinue its
agreement with the Company at the contractual expiration date could have a
material adverse effect on the Company. The Company entered into the Turnkey
Agreement (the "Carnival Agreement") with Carnival Corporation, a Panamanian
registered corporation, for the purchase, installation and maintenance of
CruiseView on a minimum of one Carnival Cruise Lines Ship. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" for a
summary of the Carnival Agreement. The Carnival Agreement that was entered into
by the Company contains certain terms which the Company is attempting to
renegotiate with Carnival. If Carnival is unwilling to renegotiate the terms of
the Carnival Agreement, or if these negotiations do not result in an agreement
containing terms more favorable to the Company, the financial condition of the
Company could be materially and adversely effected.
FLUCTUATIONS IN OPERATING RESULTS. The Company expects to experience
significant fluctuations in its future quarterly operating results that may be
caused by many factors, including the cyclical nature of government funding to
be obtained in connection with education programs. Accordingly, quarterly
revenues and operating results will be difficult to forecast, and the Company
believes that period-to-period comparisons of its operating results will not
necessarily be meaningful and should not be relied upon as an indication of
future performance. See "Management's Discussions and Analysis of Financial
Condition and Results of Operations."
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COMPETITION. The market for entertainment networks is rapidly evolving and
highly competitive. Many of the Company's current and potential competitors have
longer operating histories and significantly greater financial, technical,
marketing and other resources than the Company and therefore may be able to
respond more quickly to new or changing opportunities, technologies and customer
requirements. Although the Company's business strategy targets certain markets
which it believes offer a competitive advantage, there can be no assurance that
the Company will be able to compete effectively with current or future
competitors or that the competitive pressures faced by the Company will not have
a material adverse effect on the Company's business, financial condition and
results of operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company is subject, both
directly or indirectly, to various laws and governmental regulations relating to
its business. The Company believes that it is currently in compliance with such
laws and that they do not have a material impact on its operations. However, as
a result of rapid technology growth and other related factors, laws and
regulations may be adopted which significantly impact the Company's business.
LONG SALES CYCLES; LACK OF EXISTING BACKLOG. The sales cycle for the
Company's systems is relatively long because it involves the evaluation of the
Company's technology for each project, a test installation of each customized
system, and negotiation of related agreements from other providers such as movie
and internet access providers and computer gaming operators. All of these items
requires a large investment on the part of the Company and occurs before a
contract is signed with an end-user. The long sales cycles for the Company's
products, combined with the fact that the Company had no backlog orders as of
June 30, 1999, could place a significant strain on the Company's financial and
other resources. The failure by the Company to build a backlog of orders in the
future would have a material adverse effect on the Company's financial
condition.
UNPROVEN BUSINESS STRATEGY. In connection with the acquisition of IED, the
Company has retained a new management team. The Company's new management has
shifted the Company's business strategy to position itself as a provider of
comprehensive systems solutions and as an integrated browser-based software
developer and content programming, procurement, integration and management
service provider. Moreover, the Company focuses its efforts on the airline,
train and cruise transportation industries and on the training and academic
solution provider industry. Since this new strategy has been implemented
recently, the Company has no operating history to reflect the results of this
strategy. Therefore, there can be no assurance that the Company will succeed in
implementing its strategy or that it will obtain financial returns sufficient to
justify its investment in the markets in which it plans to participate.
POSSIBLE DELISTING BY NASDAQ. Under the rules of the National Association
of Securities Dealers (the "NASD"), issuers whose securities are included on The
NASDAQ SmallCap Market, where the Common Stock is listed, are required to obtain
stockholder approval prior to the issuance of listed securities or in connection
with an acquisition (other than a public offering for cash) where the issuance
of common stock (or securities convertible into common stock) is or will equal
or will be in excess of 20% or more of the common stock or voting power prior to
issuance or where the issuance will cause a change in control (the "Rules"). In
connection with the GTL Transaction, the Company made an application to NASDAQ
for an exception to the Rules based on the Company's determination that the
delay in securing stockholder approval would seriously jeopardize the financial
viability of the enterprise. However, NASDAQ notified the Company that it would
not grant the exception to the Rules. The Company determined that it had no
choice but to complete the GTL Transaction. The Company structured and closed
the GTL Transaction with the objective of complying with the Rules. The Company
advised NASDAQ that it received stockholder ratification of the GTL Transaction
at a special stockholders' meeting and that GTL voluntarily voted its Preferred
Stock in the same proportion as the Common Stock voted by the other stockholders
at the meeting. The Company hopes that NASDAQ will deem its actions to be in
compliance with the Rules, or if NASDAQ deems the Company violated the Rules by
closing the GTL Transaction, that it will view such actions as mitigating
factors. NASDAQ has not made a final determination regarding this matter. If
NASDAQ ultimately determines that the Company violated the Rules, the Company
could be subject to delisting from The NASDAQ SmallCap Market. If the Company's
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Common Stock is delisted, the Common Stock will become subject to Rule 15g-9 of
the Exchange Act, which imposes additional sales practice requirements on
broker-dealers that sell low-priced securities to persons other than established
customers and institutional accredited investors. For transactions covered by
this rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, the rule may affect the ability of broker-dealers
to sell the Company's Common Stock and may affect the ability of holders to sell
the Company's Common Stock in the secondary market. The SEC 's regulations
define a "penny stock" to be any equity security that has a market price of less
than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. The penny stock restrictions will apply to the
Company's Common Stock if it is delisted from The NASDAQ SmallCap Market. If the
Company's Common Stock becomes subject to the penny stock rules, the market
liquidity for the Common Stock could be adversely affected.
DEPENDENCE UPON MAJOR CUSTOMER AND LARGE CONTRACTS. Swissair accounted for
approximately 91% of the Company's revenues during the last year. The Company
does not expect future business from Swissair. The failure to timely or
adequately replace this contract with one or more new contracts may materially
adversely affect the Company's business and operations.
INSURANCE AND POTENTIAL EXCESS LIABILITY. The Company maintains liability
insurance to protect against damages to persons or property. If the Company has
to incur liability in excess of the Company's policy coverage, the Company's
financial condition could be adversely affected.
ECONOMIC AND GENERAL RISKS OF BUSINESS. Our success will depend upon
factors that are beyond our control and that cannot clearly be predicted at this
time. Such factors include general economic conditions, both nationally and
internationally, changes in tax laws, fluctuating operating expenses, changes in
governmental regulations, changes in technology, and trade laws.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 17,000 square feet of office and
production space located at 222 North 44th Street, Phoenix, Arizona. As of June
30, 1999, the Company also owned two buildings comprising approximately 10,000
square feet each, located on one acre in Alpharetta, Georgia. The Company is
indebted to two institutional lenders as of June 30, 1999, in the aggregate
amount of $220,000 and $470,000, respectively, from the purchase of this
facility. These loans are secured by the purchased real estate and bear annual
interest at the rate of such lender's prime rate plus 2%, and 16%, respectively.
As of September 20, 1999, the Company sold one of the buildings for
$412,500, and used the net proceeds to repay approximately $390,000 of the
$470,000 loan. The sale of the second building has been contracted for and is
expected to close in November 1999. Net proceeds of this sale will be used to
retire the balance of the $470,000 loan plus all of the $220,000 loan.
Concurrent with the sale of the second building, the Company will sign a
six-month lease for use of this facility. It is anticipated that monthly rental
charges will approximate $4,100 per month.
Management believes that the properties owned and leased by the Company are
adequate and suitable for current operations.
ITEM 3. LEGAL PROCEEDINGS
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
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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.
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. The suit alleges the Company owes Federal Express approximately
$110,000 for past services rendered. The Company intends to defend itself
vigorously.
ERIC SCHINDLER ("SCHINDLER") V. INTERACTIVE FLIGHT TECHNOLOGIES, INC. ET
AL., State Court for Fulton County, Georgia Case No. 99-V51560685. On August 18,
1999, Eric Schindler served a lawsuit on GTL, 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.
On March 29, 1999, the Company filed for arbitration under the rules of the
United Nations Commission on International Trade Law and the Rules of
Arbitration of the Kuala Lumpur Regional Centre for Arbitration, to enforce its
rights under the terms of the Star Agreement with CNA and Star for the delivery,
installation and maintenance of a CruiseView system on the Star cruise ship the
SuperStar Leo. In May 1999, the Company determined not to pursue this
arbitration action.
SWISSAIR/MDL-1269, IN RE AIR CRASH NEAR PEGGY'S COVE, NOVA SCOTIA. This
multi-district litigation relates to the crash of Swissair Flight 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 GTL. Following the crash, investigations were conducted and continue
to be conducted by Canadian and United States agencies concerning the cause of
the crash. No investigative agency has linked the Entertainment Network System
to 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 GTL. The Company 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 of successor liability. TNCi denies all liability for the
crash. The Company is being defended by the aviation insurer for GTL.
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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 as of 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 proposal 1, 3,506,816 votes were cast for, 63,555 votes
were cast against or withheld, and there were 17,150 abstentions. With respect
to proposal 2, 3,472,176 votes were cast for, 102,395 votes were cast against or
withheld, and there were 12,950 abstentions.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on The NASDAQ SmallCap Market. See
"Cautionary Factors That May Affect Future Results - Possible Delisting by
NASDAQ." The following table shows the high and low bid prices in dollars per
share for the last two years as reported by NASDAQ.
YEAR ENDED DECEMBER 31, 1997 LOW HIGH
- ---------------------------- ------- ------
First Quarter $12.375 $5.750
Second Quarter $12.000 $6.000
Third Quarter $10.500 $7.000
Fourth Quarter $10.375 $5.750
YEAR ENDED DECEMBER 31, 1998 LOW HIGH
- ---------------------------- ------- ------
First Quarter $ 3.625 $7.125
Second Quarter $ 3.188 $5.688
Third Quarter $ 1.813 $4.938
Fourth Quarter $ 2.00 $4.125
TRANSITION PERIOD ENDED JUNE 30, 1999 LOW HIGH
- ------------------------------------- ------- ------
First Quarter $ 2.125 $3.938
Second Quarter $ 1.375 $3.375
As of September 30, 1999, there were approximately 100 record holders of
the Company's Common Stock, but the Company believes that there are
approximately 2,200 beneficial shareholders, based upon broker requests for
distribution.
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to receive dividends
only when declared by the Company's Board of Directors. Other than prior to
September 22, 1994 when the Company made distributions to shareholders as an S
corporation, dividends have never been declared or paid and the Company does not
plan to make any dividend payments in the foreseeable future. Instead the
Company will reinvest in the expansion and development of our business. If the
Board of Directors decides to declare a dividend in the future, the decision
will be based on our earnings, financial condition, cash requirements, and any
other factors they deem relevant.
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ITEM 6. 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 Company Financial Statements and the Notes
thereto appearing elsewhere herein. Historical results are not necessarily
indicative of trends in operating results for any future period.
HISTORICAL OVERVIEW
DESCRIPTION OF BUSINESS
The Company is engaged in the development, manufacturing and marketing of
computer-based entertainment and data networks, which provides 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's primary
markets for its products are cruise ships, passenger trains, schools and
corporate training. Secondary markets include business jets and hotels, among
others.
BASIS OF PRESENTATION
On May 18, 1999, Global Technologies, Ltd. (formerly known as Interactive
Flight Technologies, Inc.) ("GTL") 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 GTL'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, GTL is considered the accounting
acquiror and 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, will be replaced with those of IED.
The Company will continue to file as a SEC registrant and continue to
report under the name The Network Connection, Inc. The financial statements as
of and for the years ended October 31, 1998 and 1997 reflect the historical
results of GTL's IED as previously included in GTL's consolidated financial
statements. Included in the results of operations for the eight months ended
June 30, 1999 are the historical results of GTL's IED through April 30, 1999,
and the results of the post Transaction company for the two months ended June
30, 1999. The Transaction date for accounting purposes is May 1, 1999. GTL will
continue to report as a separate SEC registrant, owning the shares of the
Company as described above. As of August 1999, the Company is a majority owned
subsidiary of GTL whose ownership, through a combination of the Transaction
described above and GTL's purchase of Series B 8% preferred stock of the Company
and 110,000 shares of the Company's common stock from third party investors,
approximates 78% 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.
CHANGE IN FISCAL YEAR-END
The Company has changed its fiscal year-end from December 31 to June 30.
The Transition Period resulting from the change in fiscal year-end is measured
from IED's former fiscal year-end of October 31. Accordingly, the eight-month
period resulting from this change, November 1, 1998 through June 30, 1999, is
referred to as the "Transition Period."
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AIRVIEW
In an Agreement dated as of June 19, 1997, the Company entered into an
AirView Purchase Agreement (the "AirView Agreement") with Fairlines, a French
corporation engaged in the start-up operation of a commercial airline, for the
purchase of up to ten AirView systems for installation on ten Fairlines
aircraft. Fairlines filed for bankruptcy under French law in the first quarter
of calendar year 1998. While the Company does not expect to recover its
investment in this program, the Company is pursuing its remedies, contractual
and otherwise, in respect to collection of amounts due and damages incurred
under the AirView Agreement.
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.
In October, 1997, GTL entered into a revised agreement with Swissair which
required GTL 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, GTL had completed
all installations under the initial Swissair program. GTL 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. GTL 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, GTL has been paid $707,500 under
this contract. No subsequent payments have been received from Swissair.
In April 1998 and October 1998, GTL 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. As of
February 26, 1999, Swissair has made payments of $1,450,000 on the $4.7 million
order for the four installations.
On October 29, 1998, GTL was notified by Swissair of the airline's decision
to deactivate the Entertainment Network on all Swissair aircraft. Until April
1999, GTL 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 GTL 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, GTL 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 GTL's
Entertainment Network. Swissair has failed to make payments to GTL under
installation and warranty contracts and has harmed GTL'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, GTL 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 GTL,
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. (See Part I
- -- Item 3 -- Legal Proceedings.)
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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 GTL, 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 as of June 30, 1999. Accordingly, the Company has recognized deferred
revenue on equipment sales to the extent of cash received of $876,000; charged
off inventory to cost of equipment sales in the amount of $1,517,000; wrote off
deposits of $655,000 to special charges; and reversed all warranty and
maintenance accruals totaling $5,164,000.
CRUISEVIEW
The Company entered into a CruiseView Purchase Agreement, dated as of
February 13, 1998 (the "Star Agreement"), with Continuous Network Advisors
("CNA") on behalf of Star Cruises Management Limited ("Star"), an Isle of Man
corporation engaged in the operation of a commercial cruise line, for the
purchase of CruiseView systems for installation on up to two Star cruise
vessels. Certain issues arose during the contract installation period which lead
to a settlement agreement between Star and CNA dated June 1999 whereby Star
would return the Company's equipment back by December 31, 1999. No cash payments
to the Company were identified in the settlement agreement. The Company is
objecting to the settlement agreement though the Company believes modifying such
settlement and receiving payment at this time is unlikely. (see "PART I - ITEM 3
- - Legal Proceedings".)
In September 1998, the Company entered into a Turnkey Agreement (the
"Carnival Agreement") with Carnival Corporation ("Carnival"), a Panamanian
registered corporation, 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 an unspecified 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 exercised its right and ordered the installation of CruiseView on
the Carnival Cruise Lines "M/S Sensation". Delivery and installation of
CruiseView for the Sensation began in December 1998 and has been in operational
use, on a test, since August 1999. It is expected to begin commercial operation
in the quarter ending December 31, 1999. In August 1999, Carnival exercised its
right and ordered the installation of CruiseView on the Carnival Cruise Lines
"M/S Triumph" which is expected to be completed in the quarter ending December
31, 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. For the M/S Sensation, the acceptance period is 12 months. As of June
30, 1999, the Company recorded deferred revenue of $365,851, reflecting amounts
paid by Carnival. The Company would be required to return 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
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.
The Company has not provided a bond or letter of credit as of June 30,
1999. 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 securing such obligation.
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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 manufacturing of high speed passenger trains, to incorporate the design of
TrainView, the Company's advance Infoactive Business and Entertainment System,
into Alstom's concept high speed train design. The TrainView all-digital system
proposed is an adaption of the Company's existing system currently installed for
in-flight and 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. There can be no assurance however, that Alstom or any
of its customers will purchase a TrainView system for installation on any train.
RESULTS OF OPERATIONS
Revenue for the Transition Period ended June 30, 1999 was $958,607, a
decrease of $17,424,753 (or 95%) compared to revenue of $18,383,360 (unaudited)
for the corresponding period ended June 30, 1998. Revenue for the Transition
Period ended June 30, 1999 consisted of equipment sales of $875,957 and service
income of $82,650. The decline is the result of a lack of new customer orders.
The equipment sales were generated from payments received from Swissair for one
of four entertainment networks billed per the April 1998 contract. The service
income was principally generated from programming services provided to Swissair,
services relating to the initial entertainment system design for Alstom and
system upgrades provided to an educational customer. Revenue for the eight-month
period ended June 30, 1998 consisted of equipment sales of $17,949,591
(unaudited) and service income of $433,769 (unaudited). The equipment sales were
principally generated from the installation of the entertainment networks on ten
Swissair aircraft. The service income was generated from services provided to
Swissair pursuant to the media programming services agreement, the Company's
share of gains, profits generated by the Swissair systems and revenue earned
under the Swissair contract to extend the warranty.
Revenue for the year ended October 31, 1998 was $18,816,962, an increase of
$7,716,253 (or 70%) over revenue of $11,100,709 for the year ended October 31,
1997. Revenues in each year consist of equipment sales (principally from the
installation of the Entertainment Networks on Swissair aircraft) and service
income. During the year ended October 31, 1998, the Company completed
installations under the initial Swissair program in ten business classes and
eighteen first classes whereas installations completed in fiscal 1997 were in
nine business classes and one first class. Revenues from equipment sales rose
71% from $10,524,828 in fiscal 1997 to $18,038,619 in fiscal 1998 due to the
increased installations in fiscal 1998. Service income of $778,343 for the year
ended October 31, 1998 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 Letter
of Intent. Service income of $575,881 for the year ended October 31, 1997 was
primarily derived from a Product Identification/Product Development Agreement
with an airline and entertainment programming services provided to customers.
Cost of equipment sales for the Transition Period ended June 30, 1999 was
$1,517,323, a decrease of $13,722,245 (or 90%) compared to cost of equipment
sales of $15,239,568 (unaudited) for the corresponding period ended June 30,
1998. Cost of equipment sales includes materials, installation and maintenance
costs, as well as estimated warranty costs and costs of upgrades to the Swissair
Entertainment Network that the Company is contractually committed to providing
to Swissair. Fiscal 1998 cost of sales is attributed to the installation of
equipment on ten Swissair aircraft whereas the decreased cost of sales in fiscal
1999 is attributed to material costs for only four Swissair aircraft. Cost of
service income for the Transition Period ended June 30, 1999 was $480, a
decrease of $13,053 (or 97%) compared to cost of service income of $13,533
(unaudited) for the eight months ended June 30, 1998. Cost of service income for
fiscal 1999 and fiscal 1998 is related to programming services provided to
Swissair.
18
<PAGE>
Cost of equipment sales and service income for the year ended October 31,
1998 was $15,537,071, a decrease of $9,341,389 (or 38%) over the comparable
figure of $24,878,460 for the fiscal year ended October 31, 1997. Cost of
equipment sales includes materials, installation and maintenance costs, as well
as estimated one-year warranty costs and costs of upgrades to the Swissair
Entertainment Networks that the Company is contractually committed to providing
to Swissair. The decrease in cost of equipment sales is primarily a result of
the inclusion of provisions for inventory obsolescence, unusable inventory and
rework adjustments of $11,496,748 in cost of equipment sales for fiscal 1997.
The 1997 provision for inventory obsolescence was a result of the Company
purchasing inventory for installation in the economy sections of Swissair
aircraft and actually completing only three economy installations. The unusable
inventory and rework adjustments primarily resulted from the Company's redesign
of the tray table utilized in the Entertainment Networks for the economy section
of an aircraft. The decrease in cost of equipment sales for fiscal 1998 is also
attributable to reductions in maintenance costs and estimated one-year warranty
costs as the reliability of the Entertainment Networks has improved.
Additionally, the Company recognized a reduction in installation costs from its
subcontractor during fiscal 1998.
Provisions for doubtful accounts for the Transition Period ended June 30,
1999 were $28,648, compared to zero (unaudited) for the corresponding period
ended June 30, 1998. Fiscal 1999 provisions resulted from entertainment
programming services provided to Swissair.
Provisions for doubtful accounts for the year ended October 31, 1998 were
zero compared to $216,820 for the year ended October 31, 1997. Fiscal 1997
provisions resulted from entertainment programming services provided to a
previous customer.
Bad debt recoveries of $1,064,284 during the year ended October 31, 1997
resulted from the recovery of accounts receivable under a customer agreement
which were reserved for during the Company's fourth quarter of its fiscal year
ended October 31, 1996.
There were no research and development expenses for the Transition Period
ended June 30, 1999, compared to $1,092,316 (unaudited) for the corresponding
period ended June 30, 1998. The decrease in expenses reflects the Company's
decision not to develop the next generation of the Entertainment Network and the
resulting reduction in staff and professional fees.
Research and development expenses for the year ended October 31, 1998 were
$1,092,316, a decrease of $6,729,324 (or 86%) over expenses of $7,821,640 for
the year ended October 31, 1997. The decrease in expenses reflects the Company's
decision not to develop the next generation of the Entertainment Network and the
resulting reduction in staff and professional fees. The Company does not plan to
continue its research and development in the in-flight entertainment business
beyond those efforts that are required contractually by the Swissair agreement.
The Swissair agreement requires the Company to provide specific upgrades to the
Entertainment Network. The Company has ceased development of these upgrades as a
result of Swissair's breach of its agreement and does not plan to develop any
further upgrades to the Entertainment Network.
General and administrative expenses for the Transition Period ended June
30, 1999 were $3,703,633, a decrease of $264,127 (or 7%) compared to expenses of
$3,967,760 (unaudited) for the corresponding period ended June 30, 1998.
Significant components of general and administrative expenses include costs of
consulting agreements, legal and professional fees, corporate insurance costs
and legal fees related to the merger of GTL and the Company. Significant
components accounting for the decrease in general and administrative expenses
from 1998 to 1999 include personnel costs and related severance for employees
terminated in 1998, and higher operating expenses, offset by a 1999 accrual of
approximately $1.6 million to write-off certain consulting agreements
determined, in the current period, to have no future value.
General and administrative expenses for the year ended October 31, 1998
were $9,019,872, a decrease of $3,554,351 (28%) over expenses of $12,574,223 for
the year ended October 31, 1997. The decrease in expenses reflects the Company's
19
<PAGE>
reduction in staff in administrative areas, including production, marketing and
program management departments. As of May 29, 1998, the Company terminated
almost all sales and marketing efforts related to IED. The decrease in expenses
during fiscal 1998 was partly offset by the payment of $3,053,642 in severance
to three former executives of GTL.
For the Transition Period ended June 30, 1999 the Company recorded
warranty, maintenance, commission and support cost accrual adjustments of
$5,117,704, $504,409, $303,321 and $1,225,959, respectively. Such adjustments to
prior period estimates, which totaled $7,151,393, resulted from an evaluation of
specific contractual obligations and discussions between the new management of
the Company and other parties related to such contracts. Based on the results of
the Company's findings during fiscal 1999, such accruals were no longer
considered necessary.
Special charges for the Transition Period ended June 30, 1999 were $521,590
compared to zero (unaudited) for the corresponding period of the previous fiscal
year.
Special charges for the year ended October 31, 1998 were $400,024 compared
to $19,649,765 for the year ended October 31, 1997. Special charges in fiscal
1998 primarily resulted from equipment write-offs of $1,006,532. The write-offs
were for excess computers, furniture and other equipment that the Company is not
utilizing in its operations and is in the process of disposing. The equipment
write-offs were partly offset by a recovery of special charges expensed in
fiscal 1997. During fiscal 1998, a recovery of $190,000 was recognized as a
special charge credit as a result of a reduction in the number of Entertainment
Networks requiring maintenance. The Company also recognized a recovery of
$416,508 related to Swissair's decision to not develop the system for the front
row in the economy sections of its aircraft. Special charges in fiscal 1997
primarily resulted from the installment of the Entertainment Networks on three
Swissair aircraft and installations required by the Debonair agreement. The
Company was responsible for the costs of installing the system on three Swissair
aircraft, including materials, installation, upgrades, a one-year warranty and
maintenance through September of 1998. The costs for these three systems of
$14,292,404 were recorded as a special charge during fiscal 1997. Due to the
termination of the Debonair agreement, the costs of the installed system
($956,447) and all inventory on-hand under the Debonair agreement ($2,881,962)
were written off as a special charge in fiscal 1997. Additionally, the Company
recorded a special charge of $1,518,952 for the write-off of a system
integration lab utilized in software development and testing. The lab equipment
will not be utilized in the Company's future operations.
Interest expense was $83,029 for the Transition Period ended June 30, 1999
compared to $8,873 (unaudited) for the corresponding period ended June 30, 1998.
The fiscal 1999 expense can be attributed principally to long-term debt
obligations, whereas the fiscal 1998 expense is attributable to the Company's
capital leases for furniture that expire in September 1999.
Interest expense was $11,954 for the year ended October 31, 1998 compared
to $13,423 for the year ended October 31, 1997. The expense is attributable to
the Company's capital leases for furniture that expire in September of 1999.
Interest income for the Transition Period ended June 30, 1999 was $77,682
compared to $15,750 (unaudited) for the corresponding period ended June 30,
1998. Fiscal 1999 and fiscal 1998 interest income is principally attributed to
Swissair extended warranty billings.
20
<PAGE>
Interest income for the year ended October 31, 1998 was $53,465, an
increase of 100% compared to zero interest income for the year ended October 31,
1997. Interest income in fiscal 1998 is principally attributed to Swissair
extended warranty billings.
Other income for the Transition Period ended June 30, 1999 was $11,226
compared to $10,679 (unaudited) for the corresponding period ended June 30,
1998. Other income in fiscal 1999 represents proceeds from the sale of office
furniture and equipment. Other income in fiscal 1998 represents proceeds from
the sale of equipment and scrapped inventory.
Other income of $10,179 for the year ended October 31, 1998 represents
proceeds from the sale of scrapped inventory. Other expense of $203,649 for the
year ended October 31, 1997 represents the loss on disposals of property and
equipment.
The unaudited results of operations for the eight months ended June 30,
1998 are presented for comparative purposes only.
EIGHT MONTHS ENDED
JUNE 30, 1998
(UNAUDITED)
------------------
Revenues $18,383,360
Cost of equipment sales $15,239,568
Research and development $ 1,092,316
General and administrative expenses $ 3,967,760
Interest expense $ 8,873
Interest income $ 15,750
Other income $ 10,679
Net loss to common shareholders $ 1,912,261
Cost of service income $ 13,533
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had working capital of approximately $1.9
million. The Company's primary source of funding has been through contributed
capital from GTL. Subsequent to June 30, 1999, the Company obtained orders
consisting of a $5.3 million purchase order for the manufacture, delivery and
installation of 193 Cheetah(TM) Multimedia Video Servers to certain Georgia
schools; and a service order under the Carnival Agreement for installation of a
second CruiseView system. As of October 8, 1999, all 193 servers have been
delivered and accepted by the customer and the Company has received payment of
approximately $1.2 million towards the total amount due of approximately $5.3
million. The balance is expected to be received by November 1999. The Company
received an installment payment from Carnival in August 1999. Excluding the
benefit of 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 Transition Period, the Company used $3.1 million of cash for
operating activities, a decrease of $829,000 from the $3.9 million of cash used
by operating activities for the corresponding period of the previous fiscal
year. The cash utilized in operations during the Transition Period resulted
primarily from general and administrative expenses. The cash used in operations
during the year ended October 31, 1998 is primarily a result of increases in
accounts receivable and increases in inventories and an increase in accrued
product warranties, offset by decreases in accounts payable and deferred
revenue.
Purchases of investment securities for the Transition Period were $302,589
compared to none for the eight months ended June 30, 1998. At June 30, 1999, the
Company had no material capital commitments.
The note payable due September 5, 1999 was in default at June 30, 1999.
Subsequent to year-end, the note was converted into 200,000 shares of the
Company's common stock. Therefore, the note payable has been classified as
long-term at June 30, 1999.
21
<PAGE>
Prior to the Transaction, the Company entered into a Secured Promissory
Note with GTL in the principal amount of $750,000, bearing interest at a rate of
9.5% per annum, and a related security agreement granting GTL a security
interest in its assets (the "Promissory Note"). The Promissory Note is
convertible into shares of the Company's Series C 8% preferred stock at the
discretion of GTL.
GTL has also advanced approximately $898,000 to the Company in the form of
intercompany advances. Both the Promissory Note and the advances have been
classified as due to affiliate in the balance sheet as of June 30, 1999.
On October 12, 1999, the Company entered into $5 million secured revolving
credit facility (the "Facility") with GTL. 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 GTL 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 GTL's option into shares of the
Company's Series C 8% Preferred Stock.
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, profits
from the Georgia school program, and the $5 million revolving credit facility
with GTL are sufficient to meet the Company's currently anticipated cash
requirements for at least the next twelve months.
INFLATION AND SEASONALITY
We do not believe that we are 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.
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 (without
limitation) financial institutions, suppliers, vendors, landlords, customers and
service providers and others ("Material Third Parties") could be disrupted or
fail, causing an interruption or decrease in the Company's ability to continue
operations.
The Company has developed, or is in the process of developing, plans for
implementation and testing of any necessary modifications to its key computer
systems and equipment with embedded chips to ensure that it is Y2K compliant.
The Company believes that its internal systems are Y2K compliant. The Company
believes that the Y2K issue will not pose significant operational problems for
it. However, if the modifications and conversions made are not sufficient, the
Y2K could have a material impact on its operations. The Company has performed an
assessment of its Triumph products for Y2K issues. The Triumph products use a
four-digit identifier and therefore, the Company believes the Triumph products
are Y2K compliant.
22
<PAGE>
The Company's cost of addressing Y2K has been insignificant to date. The
financial impact of making any additional systems changes, or other remediation
efforts, if any, cannot be known precisely at this time, but it is not expected
to be material to the Company's financial position, results of operations, or
cash flows.
In addition, the Company has identified and prioritized and is
communicating with material third parties to determine their Y2K status and any
probable impact on them. The Company will continue to track and evaluate its
long-term relationships with material third parties based on the responses it
receives from such persons and on information learned from other sources. If any
of the Company's material third parties are not Y2K ready and such
non-compliance causes a material disruption to any of their respective
businesses, the Company's business could be materially adversely affected.
Disruptions could include, among other things: the failure of a material third
party's business; a financial institution's inability to take and transfer
funds; an interruption in delivery of supplies from vendors; a loss of voice and
data connections; a loss of power to the Company's facilities; and other
interruptions in the normal course of the Company's operations, the nature and
extent of which the Company cannot foresee. The Company will continue to
evaluate the nature of these risks, but at this time the Company is unable to
determine the probability that any such risk will occur, or if it does occur,
what the nature, length or other effects, if any, that it may have on the
Company. If a significant number of material third parties experience failures
in their computer systems or operations due to Y2K non-compliance, it could
affect the Company's ability to process transactions or otherwise engage in
similar normal business activities. For example, while the Company expects its
internal systems to be Y2K ready, the Company and its customers will be
dependant upon the Y2K readiness of many providers of communications services
and in turn, those providers' vendors and suppliers. If, for example, such
providers and others are not Y2K ready, the Company and its customers may not be
able to send and receive data and electronic transmissions, which would have a
material adverse effect on the business and revenues of the Company and its
customers. While many of these risks are outside the Company's control, the
Company has instituted a process to identify material third parties and to
address any non-compliance issues.
While the Company believes that it is adequately addressing the Y2K issue,
there can be no assurance that its Y2K analysis will be completed on a timely
basis, or 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 yet 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.
23
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NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and unrealized
gains and losses on investment securities net of taxes and is presented in the
consolidated statements of stockholders' equity (deficiency) and comprehensive
income; it does not affect the Company's financial position or results of
operations.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise" replacing
the "industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosure about
products and services, geographical areas, and major customers. The adoption of
SFAS No. 131 does not affect results of operations or financial position but
does affect the disclosure of segment information.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes standards for
the accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
statement generally requires recognition of gains and losses on hedging
instruments, based on changes in fair value or the earnings effect of forecasted
transactions. As issued, SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--An
Amendment of FASB Statement No. 133," which deferred the effective date of SFAS
No. 133 until June 15, 2000. We are currently evaluating the impact of SFAS No.
133.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and schedules are included herewith commencing on
page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no items or circumstances to be disclosed under this Item 8.
24
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
This section provides biographical information about each of the Company's
directors and executive officers.
IRWIN L. GROSS Irwin L. Gross has been the Chairman of the Board of
(Age 55) Directors and Chief Executive Officer of the Company since
May 18, 1999 and Chairman of the Board of Directors and
Chief Executive Officer of GTL since September 1998. He is a
founder of ICC Technologies, Inc., a publicly held company
listed on the NASDAQ National Market, which is currently
engaged in Internet related technology, and Chairman and
Director of ICC from May 1984 to July 1998. In addition, Mr.
Gross served as the Chief Executive Officer of
Engelhard/ICC, a joint venture between ICC and Engelhard. Mr
Gross became a director of ORBIT/FR in December of 1998,
which is a publicly held company specializing in the design
and manufacture of sophisticated automated microwave test
measurement systems for the wireless communication,
satellite and aerospace industries. Mr. Gross was also a
founder of Interdigital Company (AMEX) and served as a
Director and Executive Vice President until April 1984. Mr.
Gross has served as a consultant to, investor in and
director of, numerous publicly held and private companies.
Mr. Gross also serves on the board of directors of several
charitable organizations. Mr. Gross has a Bachelor of
Science degree in Accounting from Temple University and a
Juris Doctor degree from Villanova University.
STEPHEN SCHACHMAN Stephen Schachman became a Director of the Company on May
(Age 55) 18, 1999 and presently is a private consultant to the
Company. Since 1995, Mr. Schachman has been the owner of his
own consulting firm, Public Affairs Management, which is
located in the suburban Philadelphia area. From 1992 to
1995, Mr. Schachman was an executive officer and consultant
to Penn Fuel Gas Company, a supplier of natural gas
products. Prior thereto, he was an attorney with the
Philadelphia law firm Dilworth, Paxson, Kalish & Kaufman.
Mr. Schachman was also an Executive Vice President of Bell
Atlantic Mobile System and prior thereto President of the
Philadelphia Gas Works, the largest municipally owned gas
company in the United States. Mr. Schachman has a Bachelor
of Arts degree from the University of Pennsylvania and Juris
Doctor degree from the Georgetown University Law School. Mr.
Schachman has been a Director of GTL since September 1998.
MOSHE M. PORAT M. Moshe Porat became a Director of the Company on May 18,
(Age 52) 1999 and since September 1996 has served as the Dean of the
School of Business and Management at Temple University. He
is the Chairholder of the Joseph E. Boettner Professorship
in Risk Management and Insurance. From 1988 to 1996 he was
Chairman of the Risk Management, Insurance and Actuarial
Science Department at Temple University. He received his
undergraduate degree in economics and statistics (with
distinction) from Tel Aviv University. His MBA (Magna Cum
Laude) is from the Recanati Graduate School of Management at
Tel Aviv University. He completed his doctoral work at
Temple University. Prior to his academic work, Dr. Porat
served as deputy general manager of a large international
insurance brokerage firm and insurance company as an
economic and financial consultant. Dr. Porat has authored
several monographs on captive insurance companies and their
use in risk management, has published numerous articles on
captive insurance companies, self insurance and other
financial and risk topics, has served as an expert witness
and has won several awards. Dr. Porat holds the CPCU
professional designation and is a member of ARIA (American
25
<PAGE>
Risk and Insurance Association), IIS (International
Insurance Society), RIMS (Risk and Insurance Management
Society) and Society of CPCU. Dr. Porat has been a Director
of GTL since September 1998.
MORRIS C. AARON Morris C. Aaron has served as the Executive Vice President
(Age 35) and Chief Financial Officer of the Company and as a Director
of the Company since May 18, 1999. Since September 25, 1998,
he has served as the Chief Financial Officer of GTL. Prior
to his involvement in GTL, from January 1996 to September
1998, Mr. Aaron was the Chief Financial Officer and
Treasurer of Employee Solutions, Inc., a publicly-held
company listed on the NASDAQ National Market. From 1986 to
1996, Mr. Aaron was with the firm of Arthur Andersen, LLC in
the corporate finance and corporate restructuring group. Mr.
Aaron holds a Bachelors Degree in Accounting from
Pennsylvania State University, a MBA from Columbia
University and is a Certified Public Accountant in the State
of New York.
FRANK E. GOMER Dr. Frank Gomer has served as the President and Chief
(Age 51) Operating Officer of the Company and as a Director of the
Company since May 18, 1999. From October 1, 1998 to May 18,
1999, Dr. Gomer served as President of IED and from February
10, 1997 to October 1, 1998 he served as Vice President of
Engineering and Operations of GTL. Prior to joining GTL in
1997, Dr. Gomer was responsible for all electronic display
systems developed and manufactured by Honeywell Air
Transport Systems Division. From 1986 to 1997, he held a
series of senior engineering and program management
positions with Honeywell. Dr. Gomer has a Bachelor of
Science degree from Colgate University and a Doctor of
Philosophy degree from Washington University in St. Louis.
WILBUR RINER, SR. Mr. Riner has served as an Executive Vice President of the
(Age 72) Company since May 18, 1999. Mr. Riner co-founded the Company
with his son, James Riner, in 1986. From 1986 to 1999, he
served as Chief Executive Officer and Chairman of the Board
of Directors of the Company, and from 1997 to 1999, he
served as President of the Company. Prior to forming the
Company, from 1984 to 1986, Mr. Riner was the Chief
Executive Officer of Asher Technologies, a manufacturer of
telecommunications products. Prior to 1984, Mr. Riner served
as Executive Vice President for OKI Telecom's operations in
the United States and Vice President/United States Sales and
Marketing for Mitel Corp. and General Manager of ITT North
Microsystems for ITT Telecommunication.
The Company's directors hold office until the next annual meeting of
stockholders following their election or appointment and until their successors
are elected and qualified or until their prior resignation. The Company's
executive officers hold office subject only to the authority of the Board of
Directors.
Each non-employee director of the Company is paid $1,000 for attendance at
each meeting of the Board of Directors and $500 for participating in each
telephonic Board meeting. In addition, the Company reimburses directors for
their out-of-pocket expenses incurred in connection with their service on the
Board of Directors. On June 11, 1999, Mr. Schachman and Dr. Porat were each
granted a non-qualified option under the 1995 Stock Option for Non-Employee
Directors Plan to acquire 30,000 shares of the Company's Common Stock at an
exercise price of $2.25 per share. All options granted to non-employee directors
vest in equal annual installments beginning June 11, 2000 and ending June 11,
2002.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During the eight-month Transition Period, all reports on Forms 3, 4 and 5
were filed in a timely fashion, except for Mr. Wilbur Riner's Annual Statement
of Beneficial Ownership of Securities on Form 5 for the Transition Period, which
will be filed late.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information for the Transition
Period ended June 30, 1999 and the Company's last two fiscal years ended
December 31, 1998 and 1997, with respect to compensation paid or accrued by the
Company to the Company's Chief Executive Officer and to each of the most highly
compensated other executive officers whose combined salary and bonus
compensation for 1999 exceeded $100,000.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
AWARDS
OTHER ------
ANNUAL SECURITIES
COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) OPTIONS (#)
--------------------------- ---- --------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Irwin L. Gross, Chairman of the Board (1) 1999 -- -- -- --
Frank E. Gomer, President and 1999 21,348 -- -- 50,000
Chief Operating Officer (1)
Morris C. Aaron, Executive Vice 1999 14,884 -- -- 50,000
President and Chief Financial Officer (1)
Wilbur L. Riner, Sr., Executive Vice 1999 104,000 -- 3,600(5) 25,000
President, Business Development (2) 1998 156,000 -- 22,900(5) 100,000
1997 104,322 -- 23,400(5) 100,000
James E. Riner, Vice President, 1999 94,031(3) -- 2,400(5) 10,000
Engineering 1998 91,790 -- 3,600(5) 25,000
1997 86,790 -- 3,600(5) 25,000
Bryan Carr, Vice President, 1999 70,000 -- 2,800(5) --
Finance and Chief Financial Officer (4) 1998 120,000 -- 15,301(5) 50,000
1997 101,667 -- 30,171(5) 80,000
</TABLE>
(1) Pursuant to the GTL Transaction, on May 18, 1999 Mr. Gross became the
Chairman of the Board of Directors, Mr. Aaron was appointed Executive Vice
President and Chief Financial Officer and Dr. Gomer was appointed President
and Chief Operating Officer of the Company. Mr. Aaron is also employed by
GTL, the parent company of TNCi, and devotes approximately 40% of his time
to GTL and receives a comparable portion of his compensation from GTL.
(2) Served as Chairman, President and Chief Executive Officer of the Company
until May 18, 1999.
(3) Includes approximately $14,000 for moving expenses.
(4) Bryan Carr's employment was terminated on May 31, 1999.
(5) Consists of the following:
27
<PAGE>
AUTOMOBILE COMMISSIONS
NAME YEAR ALLOWANCE($) ($) TOTAL($)
---- ---- ------------ ----------- --------
Wilbur L. Riner, Sr. 1999 3,600 -- 3,600
1998 5,400 17,500 22,900
1997 5,400 18,000 23,400
James E. Riner 1999 2,400 -- 2,400
1998 3,600 -- 3,600
1997 3,600 -- 3,600
Bryan Carr 1999 2,800 -- 2,800
1998 4,800 10,501 15,301
1997 5,000 25,171 30,171
Mr. Wilbur Riner and Mr. Carr, from time to time, have provided significant
assistance to the Company's sales and marketing staff in effecting sales of the
Company's products, for which sales they received commission compensation.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table sets forth certain information with respect to the
exercise of stock options by each of the named executive officers during the
Transition Period, and the fiscal year-end value of unexercised options for the
same period.
NO. OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT TRANSITION PERIOD AT TRANSITION PERIOD
ENDED JUNE 30, 1999 ENDED JUNE 30, 1999
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---- ---------------------- --------------------
Frank E. Gomer 10,000/40,000 -- (1)
Morris C. Aaron 10,000/40,000 -- (1)
Wilbur L. Riner, Sr. --/40,000 -- (1)
James E. Riner 12,500/54,348 $3,125/-- (1)
(1) If no value is indicated, these options did not have an exercise price less
than the closing bid price per share of the Common Stock on the NASDAQ
SmallCap Market at June 30, 1999.
28
<PAGE>
OPTION GRANTS IN 1999
The following table sets forth certain information with respect to
individual grants of stock options made to the named executive officers during
the Transition Period.
NO. OF SHARES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE EXPIRATION
NAME OPTIONS GRANTED TO EMPLOYEES (1) PRICE DATE
---- --------------- ---------------- -------- ----------
Frank E. Gomer (2) 50,000 14.50% $2.25 6/11/09
Morris C. Aaron (2) 50,000 14.50% 2.25 6/11/09
Wilbur L. Riner, Sr. (3) 25,000 7.25% 2.25 6/11/09
James E. Riner (4) 10,000 2.90% 2.25 6/11/09
(1) Represents the closing bid price of the Common Stock on the grant date of
June 11, 1999.
(2) The qualified options vest as follows 10,000 on the grant date of June 11,
1999 and thereafter 10,000 vest on June 11, 2000, June 11, 2001, June 11,
2002, and June 11, 2003.
(3) The qualified options vest 12,500 on June 11, 2000 and 12,500 on June 11,
2001.
(4) The qualified options vest 2,500 on June 11, 2000, June 11, 2001, June 11,
2002 and June 11, 2003.
EMPLOYMENT ARRANGEMENTS
Wilbur L. Riner serves as Executive Vice President Business Development
pursuant to the terms of an employment agreement that terminates on May 18,
2001. Mr. Riner receives a minimum annual base salary of $156,000 per year. The
employment agreement provides for a severance payment in the event Mr. Riner's
employment is terminated by the Company other than for "cause" as defined in the
agreement. The severance payment amount would be equal to the lesser of his base
annual salary or Mr. Riner's base salary for the remaining term of the
Agreement. The employment agreement also provides that the Company may pay other
incentive compensation as may be set by the Board of Directors from time to time
and for such other fringe benefits as are paid to other executive officers of
the Company.
James E. Riner serves as Vice President Engineering and Programs pursuant
to the terms of an employment agreement that terminates on October 31, 2001. Mr.
Riner receives a minimum annual base salary of $140,000 per year. The employment
agreement provides for a severance payment in the event that the Company
terminates Mr. Riner's employment other than for "cause" as defined in the
agreement. The severance payment amount would be equal to the lesser of his base
annual salary or his base salary for the remaining term of the Agreement. The
employment agreement also provides that the Company may pay other incentive
compensation as may be set by the Board of Directors from time to time and for
such other fringe benefits as are paid to other executive officers of the
Company.
Bryan Carr served as Vice President Finance, Treasurer, Chief Financial
Officer and Chief Operating Officer of the Company until May, 1999 pursuant to
the terms of an employment agreement providing for a minimum annual base salary
of $120,000 per year and for commissions of .5% for net sales that exceed
$500,000 in any calendar month. The employment agreement also provides for a
severance payment in the event of termination due to certain events; including a
change-in-control or the disposition of substantially all of the business and/or
assets of the Company and any event which has the effect of significantly
reducing the duties or authority of Mr. Carr. The severance payment amount would
equal the greater of, the present value of his base annual salary for one year
or the remainder of his term. The employment agreement also provides that the
Company may pay other incentive compensation as may be set by the Board of
Directors from time to time and for such other fringe benefits as are paid to
other executive officers of the Company. The Company does not believe any
additional amounts are due to Mr. Carr under the agreement.
29
<PAGE>
Dr. Frank Gomer serves as President and Chief Operating Officer of the
Company pursuant to the terms of an employment agreement that terminates on June
10, 2001. Dr. Gomer receives a minimum annual base salary of $215,000. Beginning
June 11, 1999 and ending June 11, 2003, Dr. Gomer also receives 50,000 10-year
options under the Company's Stock Option Plan, which vest in increments of
10,000 options per year pursuant to the terms and conditions of the employment
agreement. The employment agreement also provides for a severance payment in the
event that the Company terminates Dr. Gomer other than for "cause" as defined in
the employment agreement. The severance payment would be equal to two times the
remaining balance of his base salary for the remainder of the then current term.
The employment agreement also provides a payment in the event the Company
terminates Dr. Gomer due to a termination of the Company's business as defined
in the employment agreement or upon termination without cause following a change
in control. In either such event, Dr. Gomer would receive an amount equal to two
times his remaining base salary for the then current term, but not less than his
annual base salary for one year. The employment agreement also provides that the
company may pay other incentive compensation as may be set by the Board of
Directors from time to time, and for such other fringe benefits as are paid to
other executive officers of the Company. Such fringe benefits take the form of
medical and dental coverage and an automobile allowance of $500 per month.
Morris C. Aaron serves as Executive Vice President and Chief Financial
Officer pursuant to the terms of an employment agreement that terminates on June
10, 2001. Mr. Aaron receives a minimum annual base salary of $215,000. Beginning
June 11, 1999 and ending June 11, 2003, Mr. Aaron also receives 50,000 10-year
options under the Company's Stock Option Plan, which vest in increments of
10,000 options per year pursuant to the terms of the employment agreement. The
employment agreement provides for a severance payment in the event that the
Company terminates Mr. Aaron other than for "cause" as defined in the employment
agreement. The severance payment would be equal to two times the remaining
balance of his base salary for the remainder of the then current term. The
employment agreement also provides a payment in the event the Company terminates
Mr. Aaron due to a termination of the Company's business as defined in the
employment agreement. In the event of the termination of the Company's business,
Mr. Aaron would receive an amount equal to two times his remaining base salary
for the then current term, but not less than his annual base salary for one
year. The employment agreement also provides that the company may pay other
incentive compensation as may be set by the Board of Directors from time to
time, and for such other fringe benefits as are paid to other executive officers
of the Company. Such fringe benefits take the form of medical and dental
coverage and an automobile allowance of $500 per month.
REPORT ON REPRICING OF OPTIONS
On June 11, 1999, the Company cancelled existing options to purchase 20,000
shares of Common Stock previously granted to Wilbur Riner, Sr. at an exercise
price of $8.75 per share. The Company repriced these options and granted Mr.
Riner incentive stock options to purchase 20,000 shares of the Company's Common
Stock at an exercise price of $2.50 per share, half of which vest on the first
anniversary of the date of grant and half of which vest on the second
anniversary of the date of grant. The Company repriced these options in
connection with the GTL Transaction to provide additional incentive to Mr.
Riner.
30
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of October 8, 1999, with
respect to the number of shares of the Company's Common Stock and Preferred
Stock beneficially owned by individual directors, by all of the Company's
directors and officers as a group, and by persons known by the Company to own
more than 5% of the Company's Common Stock and Preferred Stock. The Company has
no other class of voting stock outstanding.
All information with respect to beneficial ownership has been furnished by
the respective director, executive officer or five percent beneficial owner, as
the case may be. Beneficial ownership of the Common Stock and Preferred Stock
has been determined for this purpose in accordance with the applicable rules and
regulations promulgated under the Exchange Act. Except as otherwise described
below, all shares of Common Stock and Preferred Stock are owned directly and the
indicated person has sole voting and investment power.
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON PREFERRED
STOCK PERCENT OF STOCK PERCENT OF
NAME AND ADDRESS OF BENEFICIALLY COMMON BENEFICIALLY PREFERRED
BENEFICIAL OWNER OWNED (1) STOCK OWNED (1) STOCK
---------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Irwin L. Gross 66,667 1% -0- -0-
1811 Chestnut Street, Suite 120
Philadelphia, Pennsylvania 19103
Chairman of the Board of Directors
Morris C. Aaron (1) 10,000 * -0- -0-
222 North 44th Street
Phoenix, Arizona 85034
Director, Executive Vice President
and Chief Financial Officer
Frank E. Gomer (2) 10,000 * -0- -0-
222 North 44th Street
Phoenix, Arizona 85034
Director, President
and Chief Operating Officer
Wilbur Riner, Sr. (3) 11,100 * -0- -0-
1324 Union Hill Road
Alpharetta, Georgia 30201
Director, Executive Vice President
Business Development
Dr. Moshe M. Porat -0- -0- -0- -0-
1811 Chestnut Street, Suite 120
Philadelphia, Pennsylvania 19103
Director
Stephen Schachman -0- -0- -0- -0-
1811 Chestnut Street, Suite 120
Philadelphia, Pennsylvania 19103
Director
Global Technologies, Ltd.(4) 3,011,764 47.0 2,497,700 100(5)
222 North 44th Street
Phoenix, Arizona 85034
Barbara Riner (6) 514,543 8.0 -0- -0-
1324 Union Hill Road
Alpharetta, Georgia 30201
All directors and executive officers
as a group (6 persons) 31,100 * -0- -0-
</TABLE>
31
<PAGE>
- ----------
* Less than 1%
(1) Includes options currently exercisable to acquire 10,000 shares of the
Company's Common Stock.
(2) Includes options currently exercisable to acquire 10,000 shares of the
Company's Common Stock.
(3) Does not include 490,120 shares held by Barbara Riner, the wife of Wilbur
Riner. Also does not include options exercisable to purchase an aggregate
of 24,423 shares held by Barbara Riner. Mr. Riner has disclaimed all
beneficial interest in the shares held by his wife. Includes options
currently exercisable to acquire 11,100 shares of the Company's Common
Stock.
(4) Includes 1,155,899 shares of Common Stock issuable upon conversion of
certain shares of Series B Stock held by GTL and 310,000 shares of Common
Stock issuable upon exercise of warrants. Does not include 18,317,571
shares of Common Stock issuable as of July 23, 1999 upon conversion of (i)
the balance of the Series B Stock, (ii) the Series C Stock, (iii) the
Series D Stock and (iv) certain secured debt for which there is not a
sufficient number of authorized Common Stock available. On September 17,
1999, the stockholders of the Company approved an increase in the amount of
authorized shares contained in the Company's Articles of Incorporation. The
Company is in the process of amending its Articles of Incorporation to
permit it to issue the shares of Common Stock issuable upon conversion of
the Series B Stock, the Series C Stock, the Series D Stock and for certain
secured debt. Includes 490,120 shares held by Barbara Riner which are
subject to a proxy in favor of two officers of GTL.
(5) Does not include the shares of Series C Preferred Stock issuable upon
conversion of certain convertible debt.
(6) Includes options currently exercisable to acquire 24,423 shares of the
Company's Common Stock. Barbara Riner is the wife of Wilbur Riner. Does not
include options to acquire 11,100 shares of the Company's Common Stock held
by Wilbur Riner. Ms. Riner has disclaimed beneficial interest in the shares
held by her husband.
32
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's Chief Executive Officer is a principal of Ocean Castle
Investments, LLC ("Ocean Castle") which maintains administrative offices for the
Company's Chief Executive Officer and certain other employees of GTL. During the
year ended October 31, 1998, Ocean Castle executed consulting agreements with
two principal stockholders of GTL. The rights and obligations of Ocean Castle
under the agreements were assumed by the Company in connection with the
Transaction. The consulting agreements require payments aggregating $1,000,000
to each of the consultants through December 2003 in exchange for advisory
services. Each of the consultants also received stock options to purchase 33,333
shares of Class A common stock of GTL at an exercise price of $4.50. As of June
30, 1999, the Company determined that the consulting agreements had no future
value due to the Company's shift away from in-flight entertainment into
alternative markets such as leisure cruise and passenger rail transport. Only
limited services were provided in 1999 and no future services will be utilized.
Accordingly, the Company recorded a charge to general and administrative
expenses in the Transition Period of $1.6 million representing the balance due
under such contracts.
In August 1999, the Company executed a separation and release agreement
with a shareholder and former officer of the Company, pursuant to which the
Company paid approximately $85,000 in the form of unregistered shares of the
Company's common stock.
In June 1999, the Company loaned to a vice president, $75,000 for the
purpose of assisting in a corporate relocation to the Company's headquarters in
Phoenix, Arizona. Such loan is secured by assets of the employee. The note
matures in August 2009 and bears an interest rate of approximately 5%.
GTL had an Intellectual Property License and Support Services Agreement
(the "License Agreement") for certain technology with FortuNet, Inc.
("FortuNet"). FortuNet is owned by a principal stockholder and previous director
of GTL. The License Agreement provides for an annual license fee of $100,000
commencing in October 1994 and continuing through November 2002. GTL was
required to pay FortuNet $100,000 commencing in October 1994 and continuing
through November 2002. The Company paid FortuNet $100,000 during each of the
years ended October 31, 1998 and 1997. As of October 31, 1998, the remaining
commitment of $400,000 is included in accrued liabilities on the balance sheet.
The Company assumed this liability in connection with the Transaction.
Subsequent to June 30, 1999, the Company agreed to a termination of this
agreement and paid FortuNet $100,000 plus legal fees. During the Transition
Period ended June 30, 1999, the Company had revised its estimated accrual to
$200,000 which is included in accrued liabilities at June 30, 1999.
During the year ended October 31, 1998, GTL extended by one year a
consulting agreement with a former officer of GTL pursuant to which GTL will pay
$55,000 for services received during the period November 1999 through October
2000. The Company has assumed the liability for the consulting agreement in
connection with the Transaction in the amount of $73,000 which is included in
accrued liabilities at June 30, 1999.
During the year ended October 31, 1998, GTL executed severance and
consulting agreements with three former officers, pursuant to which GTL paid the
former officers and set aside restricted funds in the amounts of $3,053,642 and
$735,000, respectively. The consulting agreements all expire by September 1999.
Payments totaling $735,000 have been and continue to be made from restricted
cash of GTL through September 1999. Expenses associated with these agreements
were charged to general and administrative expenses in the year ended October
31, 1998.
During the year ended October 31, 1996, GTL executed severance agreements
with three former officers pursuant to which the Company will pay severance of
$752,500 over a three-year period. As of June 30, 1999 and October 31, 1998,
$18,000 and $55,000 remained to be paid under these agreements. Such liabilities
were assumed by the Company in connection with the Transaction.
33
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B.
EXHIBIT
NUMBER DESCRIPTION REFERENCE
- ------- ----------- ---------
2.1 Asset Purchase and Sale Agreement with Interactive Flight
Technologies, Inc., dated April 29, 1999 (1)
2.2 First Amendment to Asset Purchase and Sale Agreement,
dated as of May 14, 1999 (1)
3.1 Articles of Amendment to the Articles of Incorporation
regarding Series D Preferred Stock May 17, 1999 *
3.2 Amended and Restated Bylaws of Registrant (2)
10.1 Employment Agreement, dated October 31, 1998, by and
between the Registrant and Wilbur L. Riner (3)
10.2 Addendum and Modification to Employment Agreement, dated
May 14, 1999, by and between Registrant and Wilbur L. Riner *
10.3 Employment Agreement, dated October 31, 1998, by and
between the Registrant and James E. Riner (3)
10.4 Addendum and Modification to Employment Agreement, dated
May 14, 1999, by and between Registrant and James E. Riner *
10.5 Employment Agreement, dated October 31, 1998, by and
between the Registrant and Bryan R. Carr (3)
10.6 Employment Agreement, effective June 11, 1999, by and
between Registrant and Frank Gomer *
10.7 Employment Agreement, effective June 11, 1999, by and
between Registrant and Morris C. Aaron *
10.8 Promissory Note, dated September 1, 1994, make by the
Company to the order of Wilbur Riner. (4)
10.9 Promissory Note, dated September 1, 1994, made by the
Company to the order of James Riner (4)
10.10 1994 Employee Stock Option Plan, including form of Stock
Option Agreement (4)
10.11 1995 Stock Option Plan for Non-Employee Directors (5)
34
<PAGE>
10.12 Securities Purchase Agreement dated as of October 23,
1998, between the Shaar Fund Ltd. (the "Shaar") and the
Registrant (6)
10.13 Registration Rights Agreement dated as of October 23,
1998, between the Shaar and the Registrant (6)
10.14 Warrant Agreement dated October 23, 1998, between Shaar
and the Registrant (6)
10.15 Securities Purchase Agreement dated as of December 28,
1998, between Cache Capital and the Registrant (3)
10.16 Registration Rights Agreement dated as of December 28,
1998, between Cache Capital and the Registrant (3)
10.17 Letter of Intent, dated as of February 4, 1999, among
The Network Connection, Inc. and Interactive Flight
Technologies, Inc. (3)
10.18 Securities Purchase Agreement, dated as of May 10, 1999,
between the Company and IFT (7)
10.19 Secured Promissory Note, dated January 25, 19999, made
in favor of IFT (7)
10.20 First Allonge to Secured Promissory Note, dated May 10,
1999, made in favor of IFT (7)
10.21 Second Allonge to Secured Promissory Note, dated May 10,
1999, made in favor of IFT (7)
10.22 Third Allonge to Secured Promissory Note, dated May 10,
1999, made in favor of IFT (7)
10.23 Fourth Allonge to Secured Promissory Note, dated May 10,
1999, made in favor of IFT (7)
10.24 Amendment No. 1 to Registration Rights Agreement, dated
May 10, 1999, between the Company and IFT (7)
10.25 Fifth Allonge to Secured Promissory Note, dated July 16,
1999, made in favor of IFT *
10.26 Sixth Allonge to Secured Promissory Note, dated August
9, 1999, made in favor of IFT *
10.27 Seventh Allonge to Secured Promissory Note, dated August
24, 1999, made in favor of IFT *
10.28 Revolving Credit Note in the aggregate amount of Five
Million Dollars ($5,000,000) in favor of IFT *
16. Letter on Change in Certifying Accountant (8)
23. Consent of KPMG LLP *
27. Financial Data Schedule *
35
<PAGE>
- ----------
* Filed herewith
(1) Incorporated by reference, filed with the Company's Current Report on Form
8-K dated May 18, 1999.
(2) Incorporated by reference, filed as an exhibit with the Company's Current
Report on Form 8-K on June 21, 1996.
(3) Incorporated by reference, filed as an exhibit with the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998.
(4) Incorporated by reference, filed as an exhibit with the Company's
Registration Statement on Form SB-2 on October 26, 1994. SEC File No.
33-85654.
(5) Incorporated by reference, filed as an exhibit with the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995.
(6) Incorporated by reference, filed as an exhibit with the Company's Quarterly
Report on Form 10-QSB for the fiscal quarter ended September 30, 1998 on
November 16, 1998.
(7) Incorporated by reference, filed as an exhibit with the company's Quarterly
Report on Form 10-QSB for the fiscal quarter ended March 31, 1999.
(8) Incorporated by reference, filed as an exhibit with the Company's Current
Report on Form 8-K dated July 30, 1999.
(b) CURRENT REPORTS ON FORM 8-K
We filed two reports on Form 8-K during the last quarter of the fiscal year
ended June 30, 1999. The following table contains information with respect to
that filing:
FINANCIAL
STATEMENTS DATE OF
ITEM(S) REPORTED FILED EVENT REPORTED
---------------- ---------- --------------
Acquisition of Assets of Interactive
Flight Technologies, Inc. Yes* May 18, 1999
Change in Fiscal Year No June 11, 1999
Change in Certifying Accountants No August 2, 1999
- ----------
* Required financial statements were filed with an amendment to the Form 8-K
on July 30, 1999.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE NETWORK CONNECTION, INC.
Dated: October 13, 1999 By /s/ Irwin L. Gross
---------------------------
Irwin L. Gross
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Irwin L. Gross Chairman of the Board October 13, 1999
- ---------------------------
Irwin L. Gross
/s/ Morris C. Aaron Executive Vice President, October 13, 1999
- --------------------------- Chief Financial Officer and
Morris C. Aaron Director
/s/ Frank E. Gomer President, Chief Operating October 13, 1999
- --------------------------- Officer and Director
Frank E. Gomer
/s/ Wilbur L. Riner, Sr. Executive Vice President October 13, 1999
- --------------------------- and Director
Wilbur L. Riner, Sr.
/s/ Stephen M. Schachman Director October 13, 1999
- ---------------------------
Stephen M. Schachman
/s/ M. Moshe Porat Director October 13, 1999
- ---------------------------
M. Moshe Porat
37
<PAGE>
THE NETWORK CONNECTION, INC.
Index to Financial Statements
Page
----
Independent Auditors' Report ............................................. F-2
Balance Sheets as of June 30, 1999 and October 31, 1998 .................. F-3
Statements of Operations for the Transition Period Ended June 30, 1999
and the Years Ended October 31, 1998 and 1997 .......................... F-4
Statements of Cash Flows for the Transition Period Ended June 30, 1999
and the Years Ended October 31, 1998 and 1997 .......................... F-5
Statements of Stockholders' Equity (Deficiency) and Comprehensive Income
for the Transition Period Ended June 30, 1999 and the Years Ended
October 31, 1998 and 1997 ............................................. F-6
Notes to Financial Statements ............................................ F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
The Network Connection, Inc.:
We have audited the accompanying balance sheets of The Network Connection, Inc.
as of June 30, 1999 and October 31, 1998 and the related statements of
operations, changes in stockholders' equity (deficiency) and comprehensive
income and cash flows for the Transition Period ended June 30, 1999 and each of
the years in the two year period ended October 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of The Network Connection, Inc. at
June 30, 1999 and October 31, 1998 and 1997 and the results of its operations
and its cash flows for the Transition Period ended June 30, 1999 and each of the
years in the two year period ended October 31, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Phoenix, Arizona
October 12, 1999
F-2
<PAGE>
THE NETWORK CONNECTION, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, OCTOBER 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,751,506 $ 14,348
Restricted cash 446,679 437,502
Investment securities 302,589 --
Accounts receivable, net 75,792 1,130,648
Notes receivable from related parties 98,932 --
Inventories, net 1,400,000 1,005,427
Prepaid expenses 169,429 44,695
Assets held for sale 800,000 --
Other current assets 173,999 270,225
------------ ------------
Total current assets 6,218,926 2,902,845
Note receivable from related party 75,000 --
Property and equipment, net 1,338,580 780,035
Intangibles, net 7,119,806 --
Other assets 150 555,150
------------ ------------
Total assets $ 14,752,462 $ 4,238,030
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 1,681,771 $ 891,242
Accrued liabilities 2,209,682 3,280,378
Deferred revenue 365,851 453,022
Accrued product warranties -- 5,369,008
Current maturities of long-term debt 24,391 --
Notes payable to related parties 68,836 --
------------ ------------
Total current liabilities 4,350,531 9,993,650
Notes payable 3,467,045 --
Due to affiliate 1,647,692 --
------------ ------------
Total liabilities 9,465,268 9,993,650
------------ ------------
Commitments and contingencies
Stockholders' equity (deficiency):
Series B preferred stock par value $0.01 per share,
1,500 shares authorized, issued and outstanding 15 --
Series C preferred stock par value $0.01 per share,
1,600 shares authorized; 800 shares issued and outstanding 8 --
Series D preferred stock par value $0.01 per share,
2,495,400 authorized, issued and outstanding 24,954 --
Common stock par value $0.001 per share, 10,000,000 shares
authorized; 6,339,076 issued and outstanding 6,339 --
Additional paid-in capital 88,316,945 --
Contributed capital in excess of par value -- 79,618,459
Accumulated other comprehensive income:
Net unrealized loss on investment securities (526) --
Accumulated deficit (83,060,541) (85,374,079)
------------ ------------
Total stockholders' equity (deficiency) 5,287,194 (5,755,620)
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 14,752,462 $ 4,238,030
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
THE NETWORK CONNECTION, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED
JUNE 30, YEAR ENDED OCTOBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Equipment sales $ 875,957 $ 18,038,619 $ 10,524,828
Service income 82,650 778,343 575,881
------------ ------------ ------------
958,607 18,816,962 11,100,709
------------ ------------ ------------
Costs and expenses:
Cost of equipment sales 1,517,323 15,523,282 24,646,334
Cost of service income 480 13,789 232,126
Provision for doubtful accounts 28,648 -- 216,820
Research and development expenses -- 1,092,316 7,821,640
General and administrative expenses 3,703,633 9,019,872 12,574,223
Special charges 521,590 400,024 19,649,765
Reversal of warranty, maintenance and
commission accruals (7,151,393) -- --
Bad debt recoveries -- -- (1,064,284)
------------ ------------ ------------
(1,379,719) 26,049,283 64,076,624
------------ ------------ ------------
Operating income (loss) 2,338,326 (7,232,321) (52,975,915)
Other:
Interest expense (83,029) (11,954) (13,423)
Interest income 77,682 53,465 --
Other income (expense) 11,226 10,179 (203,649)
------------ ------------ ------------
Net income (loss) 2,344,205 (7,180,631) (53,192,987)
Cumulative dividend on preferred stock (30,667) -- --
------------ ------------ ------------
Net income (loss) attributable to common stockholders $ 2,313,538 $ (7,180,631) $(53,192,987)
============ ============ ============
Basic net income (loss) per common share $ 0.97 $ (6.80) $ (50.38)
============ ============ ============
Weighted average number of shares outstanding 2,387,223 1,055,745 1,055,745
============ ============ ============
Diluted net income (loss) per common share $ 0.13 $ (6.80) $ (50.38)
============ ============ ============
Weighted average number of common and
dilutive shares outstanding 18,543,707 1,055,745 1,055,745
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
THE NETWORK CONNECTION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED
JUNE 30, YEAR ENDED OCTOBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,313,538 $ (7,180,631) $(53,192,987)
Adjustments to reconcile net income (loss) to net cash:
Depreciation and amortization 342,544 1,205,361 1,815,779
Change in inventory valuation allowance (892,010) -- 8,297,933
Special charges 521,590 400,024 19,649,765
Reversal of warranty, maintenance and commission accurals (7,151,393) -- --
Loss on disposal of equipment -- -- 203,649
Non cash compensation expense -- -- 480,749
Changes in net assets and liabilities, net of effect
of Transaction:
Decrease (increase) in accounts receivable (482,344) 4,523,470 (5,754,771)
Decrease (increase) in inventories 1,897,437 5,105,334 (12,563,721)
Decrease (increase) in prepaid expenses (116,717) 47,428 183,394
Decrease in other current assets 78,134 247,549 --
Increase in other assets -- (411,042) --
(Decrease) increase in accounts payable (1,449,333) (4,933,431) 1,673,893
(Decrease) increase in accrued liabilities 702,559 (1,758,210) (584,655)
(Decrease) increase in deferred revenue 1,138,048 (1,930,882) 2,383,904
Increase in accrued product warranties -- 758,321 836,667
------------ ------------ ------------
Net cash used in operating activities $ (3,097,947) $ (3,926,709) $(36,570,401)
Cash flows from investing activities:
Purchases of investment securities (302,589) -- --
Purchases of property and equipment (18,243) (36,008) (10,341,561)
Proceeds from sale of equipment -- 3,620 --
Cash acquired in Transaction 23,997 -- --
Increase in restricted cash (9,177) (437,502) --
------------ ------------ ------------
Net cash used in investing activities $ (306,012) $ (469,890) $(10,341,561)
Cash flows from financing activities:
Payments on notes payable (58,450) (80,753) (53,085)
Advances from parent 805,616 -- --
Contributed capital 5,391,951 4,427,544 47,029,203
Proceeds from issuance of stock 2,000 -- --
------------ ------------ ------------
Net cash provided by financing activities $ 6,141,117 $ 4,346,791 $ 46,976,118
Net increase (decrease) in cash and cash equivalents 2,737,158 (49,808) 64,156
Cash and cash equivalents at beginning of year 14,348 64,156 --
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,751,506 $ 14,348 $ 64,156
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
THE NETWORK CONNECTION, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) AND COMPREHENSIVE INCOME
TRANSITION PERIOD ENDED JUNE 30, 1999 YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL
SERIES B SERIES C SERIES D COMMON PAID-IN
PREFERRED PREFERRED PREFERRED STOCK CAPITAL
--------- --------- ---------- ------ ------------
<S> <C> <C> <C> <C> <C>
Balance as of October 31, 1996 $ -- $ -- $ -- $ -- $ --
Contributed capital -- -- -- -- --
Net loss -- -- -- -- --
------ ------ ---------- ------ ------------
Balance as of October 31, 1997 $ -- $ -- $ -- $ -- $ --
Contributed capital -- -- -- -- --
Net loss -- -- -- -- --
------ ------ ---------- ------ ------------
Balance as of October 31, 1998 $ -- $ -- $ -- $ -- $ --
Contributed capital -- -- -- -- --
Contribution of advances to capital -- -- -- -- 85,010,410
Issuance of stock 15 8 24,954 6,338 3,304,536
Exercise of stock options -- -- -- 1 1,999
Comprehensive income (loss):
Unrealized loss on available for
sale securities -- -- -- -- --
Net income -- -- -- -- --
Total comprehensive income -- -- -- -- --
------ ------ ---------- ------ ------------
Balance as of June 30, 1999 $ 15 $ 8 $ 24,954 $6,339 $ 88,316,945
====== ====== ========== ====== ============
<CAPTION>
ACCUMULATED
OTHER ACCUMULATED TOTAL
CONTRIBUTED COMPREHENSIVE (DEFICIT) STOCKHOLDERS'
CAPITAL INCOME EARNINGS EQUITY
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Balance as of October 31, 1996 $ 28,161,712 $ -- $(25,000,461) $ 3,161,251
Contributed capital 47,029,203 -- -- 47,029,203
Net loss -- -- (53,192,987) (53,192,987)
----------- ------------ ------------ -----------
Balance as of October 31, 1997 $ 75,190,915 $ -- $(78,193,448) $(3,002,533)
Contributed capital 4,427,544 -- -- 4,427,544
Net loss -- -- (7,180,631) (7,180,631)
----------- ------------ ------------ -----------
Balance as of October 31, 1998 $ 79,618,459 $ -- $(85,374,079) $(5,755,620)
Contributed capital 5,391,951 -- -- 5,391,951
Contribution of advances to capital (85,010,410) -- -- --
Issuance of stock -- -- -- 3,335,851
Exercise of stock options -- -- -- 2,000
Comprehensive income (loss):
Unrealized loss on available for
sale securities -- (526) -- --
Net income -- -- 2,313,538 --
Total comprehensive income -- -- -- 2,313,012
----------- ------------ ------------ -----------
Balance as of June 30, 1999 $ -- $ (526) $(83,060,541) $ 5,287,194
=========== ============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
THE NETWORK CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) DESCRIPTION OF BUSINESS
The Network Connection, Inc. (the "Company" or "TNCi") is engaged in
the development, manufacturing and marketing of computer-based
entertainment and data networks, which provides users access to
information, entertainment and a wide array of service options, such
as movies, shopping for goods and services, computer games, access the
World Wide Web and gambling, where permitted by applicable law. The
Company's primary markets for its products are cruise ships, passenger
trains, schools and corporate training. Secondary markets include
business jets and hotel operators, among others.
(b) BASIS OF PRESENTATION
On May 18, 1999, Global Technologies, Ltd. (formerly known as
Interactive Flight Technologies, Inc.) ("GTL") 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 GTL'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, GTL is considered the
accounting acquiror, and although the legal capital structure carries
forward, and 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, will be replaced with
those of IED.
The Company will continue to file as a SEC registrant and continue to
report under the name The Network Connection, Inc. The financial
statements as of and for the years ended October 31, 1998 and 1997
reflect the historical results of GTL's IED as previously included in
GTL's consolidated financial statements. Included in the results of
operations for the eight months ended June 30, 1999 are the historical
results of GTL's IED through April 30, 1999, and the results of the
post Transaction company for the two months ended June 30, 1999. The
Transaction date for accounting purposes is May 1, 1999. Contributed
capital reflects the cash consideration paid by GTL to the Company in
the Transaction in addition to funding of IED historical operations.
GTL will continue to report as a separate SEC registrant, owning the
shares of the Company as described above. As of June 30, 1999, the
Company is a majority owned subsidiary of GTL whose ownership, through
a combination of the Transaction described above and GTL's purchase of
Series B 8 % preferred stock of the Company and 110,000 shares of the
Company's common stock from third party investors, approximates 78% of
the Company on an if-converted common stock basis (See note 15.) 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.
(c) CHANGE IN FISCAL YEAR-END
The Company has changed its fiscal year-end from December 31 to June
30. The Transition Period resulting from the change in fiscal year-end
is measured from IED's former fiscal year-end of October 31.
Accordingly, the eight-month period resulting from this change,
November 1, 1998 through June 30, 1999, is referred to as the
"Transition Period."
F-7
<PAGE>
(d) 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.
(e) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities at the date of purchase of three months or less to be cash
and cash equivalents.
(f) RESTRICTED CASH
At June 30, 1999 and October 31, 1998, the Company held restricted
cash of $446,679 and $437,502, respectively, in a trust fund for
payments which may be required under severance agreements with one
former executive of GTL. (See note 15.)
(g) INVESTMENT SECURITIES
Investment securities consist of debt securities with a maturity
greater than three months at the time of purchase. In accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS No. 115")
the debt securities are classified as available-for-sale and carried
at fair value, based on quoted market prices. The net unrealized gains
or losses on these investments are reported in stockholders' equity,
net of tax. The specific identification method is used to compute the
realized gains and losses on the debt securities.
(h) INVENTORIES
Inventories consisting principally of entertainment network components
are stated at the lower of cost (first-in, first-out method) or
market.
(i) GOODWILL
The Company classifies as goodwill the excess of the purchase price
over the fair value of the net assets acquired and is amortized over
ten years using the straight line method.
(j) PROPERTY AND EQUIPMENT
Property and equipment are stated at the lower of cost or net
realizable value. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the assets
ranging from three to seven years. Leasehold improvements are
depreciated using the straight-line method over the shorter of the
underlying lease term or asset life.
(k) REVENUE RECOGNITION
The Company's revenue derived from sales and installation of equipment
is recognized upon installation and acceptance by the customer. Fees
derived from servicing installed systems is recognized when earned,
according to the terms of the service contract. Revenue pursuant to
contracts that provide for revenue sharing with customers and/or
F-8
<PAGE>
others is recognized as cash is received in the amount of the
Company's retained portion of the cash pursuant to the revenue sharing
agreement. Revenue earned pursuant to extended warranty agreements is
recognized ratably over the warranty period.
(l) DEFERRED REVENUE
Deferred revenue represents cash received on advance billings of
equipment sales as allowed under installation and extended warranty
contracts.
(m) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred except for
development costs required by a customer contract. Development costs
incurred pursuant to contractual obligations are allocated to
deliverable units. These development costs are expensed as cost of
goods sold upon installation of the complete product and acceptance by
the customer.
(n) WARRANTY COSTS
The Company provides, by a current charge to income, an amount it
estimates will be needed to cover future warranty obligations for
products sold with an initial warranty period. Revenue and expenses
under extended warranty agreements are recognized ratably over the
term of the extended warranty.
(o) IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount.
(p) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(q) INCOME (LOSS) PER SHARE
During fiscal 1998, the Company adopted Financial Accounting Standards
Board (FASB) SFAS No. 128, "Earnings per Share" (SFAS No. 128). Income
(loss) per share for all prior periods have been restated to conform
to the provisions of SFAS 128. Basic income (loss) per share is
computed by dividing income (loss) attributable to common
stockholders, by the weighted average number of common shares
outstanding for the period. Diluted income (loss) per share reflects
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then
shared in the income (loss) of the Company. In calculating net loss
per common share for 1998 and 1997, $15.1 million and $15.1 million,
respectively, common stock equivalent shares consisting of convertible
F-9
<PAGE>
preferred stock issued to GTL in connection with the Transaction have
been excluded because their inclusion would have been anti-dilutive.
(r) STOCK-BASED COMPENSATION
In accordance with the provisions of Accounting Principals Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
the Company measures stock-based compensation expense as the excess of
the market price at the grant date over the amount the employee must
pay for the stock. The Company's policy is to generally grant stock
options at fair market value at the date of grant; accordingly, no
compensation expense is recognized. As permitted, the Company has
elected to adopt the pro forma disclosure provisions only of SFAS No.
123, "Accounting for Stock-Based Compensation". (See note 11.)
(s) In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes standards for the accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. This statement generally
requires recognition of gains and losses on hedging instruments, based
on changes in fair value or the earnings effect of forecasted
transactions. As issued, SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133--An Amendment of FASB Statement No. 133," which
deferred the effective date of SFAS No. 133 until June 15, 2000. We
are currently evaluating the impact of SFAS No. 133.
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components
in a full set of financial statements. Comprehensive income consists
of net income and unrealized gains and losses on investment securities
net of taxes and is presented in the consolidated statements of
stockholders' equity (deficiency) and comprehensive income; it does
not affect the Company's financial position or results of operations.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise" replacing the "industry segment" approach with
the "management" approach. The management approach designates the
internal organization that is used by management for making operating
decisions and assessing performance as the source of the Company's
reportable segments. SFAS No. 131 also requires disclosure about
products and services, geographical areas, and major customers. The
adoption of SFAS No. 131 does not affect results of operations or
financial position but does affect the disclosure of segment
information.
F-10
<PAGE>
(2) ACQUISITION
The Transaction has been accounted for by the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based upon estimated fair values at
the date of acquisition as follows:
Purchase price:
Cash $ 4,250,000
Net liabilities of IED contributed (4,012,430)
-----------
Total $ 237,570
===========
Assets acquired and liabilities assumed:
Historical book value of net liabilities $(2,457,723)
Fair value adjustments:
Inventory (1,280,847)
Property and equipment (806,873)
Other assets (368,255)
Liabilities (681,390)
-----------
Total fair value of liabilities assumed $(5,597,086)
Excess of fair value of TNCi Series B Preferred Stock
and Series C Preferred Stock over its recorded value $(1,501,000)
Purchase of Common Stock of TNCi (254,658)
===========
Excess of purchase price over fair value of net
liabilities assumed (goodwill) $ 7,115,174
===========
The excess of fair value of TNC Series B Preferred Stock and Series C
Preferred Stock is the result of GTL's acquisition of such shares based on
the fair value of the GTL Series A Preferred Stock amounting to $4,080,000,
less $1,030,000 cash received and the historical value of $1,549,000 of the
Series B Preferred Stock.
Purchase of 110,000 shares of Common Stock of TNCi from a third party was
valued based on the cash consideration paid by GTL for the shares.
(3) INVESTMENT SECURITIES
A summary of investment securities by major security type at June 30, 1999
is as follows:
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
JUNE 30, 1999
Available-for-sale:
Corporate debt securities $303,115 $167 $(693) $302,589
======== ==== ===== ========
As of June 30, 1999 all maturities are less than one year.
(4) INVENTORIES
Inventories consist of the following:
JUNE 30, OCTOBER 31,
1999 1998
----------- -----------
Raw materials $ 2,398,973 $ 2,192,442
Work in process 1,405,372 3,439,888
Finished goods 5,433,250 4,102,702
----------- -----------
9,237,595 9,735,032
Less: inventory valuation allowance (7,837,595) (8,729,605)
----------- -----------
$ 1,400,000 $ 1,005,427
=========== ===========
F-11
<PAGE>
(5) ASSETS HELD FOR SALE
In connection with the Transaction, the Company relocated its corporate
offices and production capabilities to its Phoenix, Arizona offices.
Accordingly, as of June 30, 1999 the decision to sell the Georgia property
was made and the assets were recorded at their net realizable value and
classified as assets held for sale.
(6) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30, OCTOBER 31,
1999 1998
----------- -----------
Leasehold improvements $ 24,117 $ 237,551
Purchased software 149,703 149,703
Furniture 163,609 138,609
Equipment 1,684,180 903,873
----------- -----------
2,021,609 1,429,736
Less: accumulated depreciation (683,029) (649,701)
----------- -----------
$ 1,338,580 $ 780,035
=========== ===========
During the year ended October 31, 1998, the Company recorded equipment
write-offs of $1,006,531 which are included in special charges on the
statement of operations. The write-offs are principally related to excess
computers, furniture and other equipment that the Company is not utilizing.
(7) INTANGIBLES
Intangibles consist of the following:
JUNE 30,
1999
-----------
Goodwill $ 7,115,174
Other intangibles 79,613
-----------
7,194,787
Accumulated amortization (74,981)
-----------
$ 7,119,806
===========
(8) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
JUNE 30, OCTOBER 31,
1999 1998
---------- ----------
Accrued development and support costs $ -- $1,845,915
Accrued maintenance costs -- 402,418
Due to related parties (see note 15) 1,891,123 455,000
Other accrued expenses 318,559 577,045
---------- ----------
Accrued liabilities $2,209,682 $3,280,378
========== ==========
F-12
<PAGE>
(9) NOTES PAYABLE AND DUE TO AFFILATE
Notes Payable consists of the following:
JUNE 30,
1999
----------
Series A, D and E Notes (see below) $2,386,048
Note payable due September 5, 1999, interest at 7%,
convertible to preferred stock at the option of the
Company 400,000
Note payable due in varying installments through 2009,
interest at prime (8.25% at June 30, 1999) plus 2%,
collateralized by certain commercial property and
personally guaranteed by two shareholders 220,508
Note payable due in varying installments through 2000,
interest at 6.9%, collateralized by a vehicle 10,308
Note payable due and payable April 19, 2001, interest at
16% payable monthly, collateralized by certain
commercial property 470,000
Note payable due in varying installments through 2000,
interest at 11%, collateralized by a vehicle 4,572
----------
3,491,436
Less current portion 24,391
----------
$3,467,045
==========
Aggregate maturities of notes payable as of June 30, 1999 are as follows:
2000 $ 24,391
2001 890,491
2002 2,403,402
2003 19,126
2004 21,078
Thereafter 132,948
----------
$3,491,436
==========
The Series A, D and E Notes ("Series Notes") were issued by the Company in
1998 prior to the Transaction. The Series Notes all had original maturities
of approximately 135 days with interest at approximately 7% to 8% per
annum. The Company could choose to repay such Notes in cash subject to a
payment charge equal to approximately 7% of the face amount of the Note or
the Company could elect to convert the Series Notes into preferred stock of
the Company which is convertible into common stock at various discounts to
market ranging from 15% to 25%. The Company was in default on the Series
Notes on June 30, 1999. (See note 20.)
F-13
<PAGE>
The note payable due September 5, 1999 was in default at June 30, 1999.
Subsequent to year-end, the note was converted into 200,000 shares of the
Company's common stock. Therefore, the note payable has been classified as
long-term at June 30, 1999.
Prior to the Transaction, the Company entered into a Secured Promissory
Note with GTL in the principal amount of $750,000, bearing interest at a
rate of 9.5% per annum, and a related security agreement granting GTL a
security interest in its assets (the "Promissory Note"). The Promissory
Note is convertible into shares of the Company's Series C 8% preferred
stock at the discretion of GTL.
GTL has also advanced approximately $898,000 to the Company in the form of
intercompany advances. Both the Promissory Note and the advances have been
classified as due to affiliate in the balance sheet as of June 30, 1999.
(See note 20.)
Notes payable in the amount of $68,836 to related parties with interest
payable at approximately 5% per annum become due and payable upon
achievement of certain operational goals.
(10) INCOME (LOSS) PER SHARE
Basic and diluted weighted average number of shares outstanding for the two
years ended October 31, 1998 and 1997, included 1,055,745 shares of the
Company's common stock, representing 100% of the Company's capital stock
which was all owned by GTL. No effect was given to common stock equivalents
in the computation of diluted loss per share as their effect would have
been anti-dilutive.
For the Transition Period, basic weighted average number of shares
outstanding includes 1,055,745 common shares held by GTL for the full
period and approximately 5.3 million shares (the shares issued and
outstanding prior to the Transaction) for two months. Diluted weighted
average number of shares outstanding for the Transition Period include
1,055,745 common shares and 15,097,170 potential dilutive securities
resulting from the Series D Convertible Preferred Stock for the entire
Transition Period (both issued to GTL in connection with the Transaction);
plus 5,278,737 common shares outstanding prior to the merger, and 1,133,120
common stock equivalents related to the Convertible Promissory Note, Series
A, D and E Convertible Notes, Series B 8% Convertible Preferred Stock,
Series C 8% Convertible Preferred Stock and options each weighted for the
two months ended June 30, 1999.
F-14
<PAGE>
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED
JUNE 30, YEAR ENDED OCTOBER 31,
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Net income (loss) $ 2,344,205 $(7,180,631) $(53,192,987)
Less: preferred stock dividends (30,667) -- --
------------ ----------- ------------
Income (loss) available to common
stockholders $ 2,313,538 $(7,180,631) $(53,192,987)
============ =========== ============
Basic EPS - weighted average shares
outstanding 2,387,223 1,055,745 1,055,745
============ =========== ============
Basic income (loss) per share $ 0.97 $ (6.80) $ (50.38)
============ =========== ============
Basic EPS - weighted average shares
outstanding 2,387,223 1,055,745 1,055,745
Effect of dilutive securities:
Stock Purchase Options - common stock 82,033 -- --
Convertible preferred stock 15,570,814 -- --
Convertible debt 503,638 -- --
------------ ----------- ------------
Dilutive EPS - weighted average shares
outstanding 18,543,708 1,055,745 1,055,745
Net income (loss) $ 2,344,205 $(7,180,631) $(53,192,987)
------------ ----------- ------------
Diluted income (loss) per share $ 0.13 $ (6.80) $ (50.38)
============ =========== ============
</TABLE>
(11) STOCK OPTION PLANS
Under the Company's 1994 Employee Stock Option Plan (the "Plan"), as
amended, the Company has reserved an aggregate of 1,200,000 shares of
Common Stock for issuance under the Plan. Options granted under the Plan
are for periods not to exceed ten years. Under the Plan, incentive and
non-qualified stock options may be granted. All option grants under the
Plan are subject to the terms and conditions established by the Plan and
the Stock Option Committee of the Board of Directors. Options must be
granted at not less than 100% of fair value for incentive options and not
less than 85% of fair value of non-qualified options of the stock as of the
date of grant and generally are exerciseable in increments of 25% each year
subject to continued employment with the Company. Options generally expire
five to ten years from the date of grant. Options canceled represent the
unexercised options of former employees, returned to the option pool in
accordance with the terms of the Plan upon departure from the Company. The
Board of Directors may terminate the Plan at any time at their discretion.
During fiscal 1999, 285,348 stock options with up to a four-year vesting
period were granted at exercise prices ranging from $2.25 to $3.125.
On August 16, 1995, the Company adopted the 1995 Stock Option Plan For
Non-Employee Directors (the "Directors Plan") and reserved 100,000 shares
of unissued common stock for issuance to all non-employee directors of the
Company. The Directors Plan is administered by a committee appointed by the
Board of Directors consisting of directors who are not eligible to
F-15
<PAGE>
participate in the Directors Plan. Pursuant to the Directors Plan,
directors who are not employees of the Company receive for their services,
on the date first elected as a member of the Board and on each anniversary
thereafter, if they continue to serve on the Board of Directors, an
automatically granted option to acquire 5,000 shares of the Company's
common stock at its fair market value on the date of grant; such options
become exercisable in two equal annual installments if the individual
continues at that time to serve as a director, and once exercisable remain
so until the fifth anniversary of the date of grant. During fiscal 1999,
60,000 options were granted.
In accordance with the provisions of APB 25, the Company measures
stock-based compensation expense as the excess of the market price at the
grant date over the amount the employee must pay for the stock. The
Company's policy is to generally grant stock options at fair market value
at the date of grant, so no compensation expense is recognized. As
permitted, the Company has elected to adopt the disclosure provisions only
of SFAS No. 123.
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net earnings and net
earnings per share on a pro forma basis would be as indicated below:
TRANSITION PERIOD
ENDED
JUNE 30, 1999
-----------------
Net earnings:
As reported $2,313,538
==========
Pro forma $2,018,009
==========
Basic net earnings per share:
As reported $ 0.97
==========
Pro forma $ 0.85
==========
Diluted net earnings per share:
As reported $ 0.13
==========
Pro forma $ 0.11
==========
Pro forma net earnings reflect only options granted during the Transition
Period and in each of the fiscal years ended 1998, 1997 and 1996. There
were no options granted related to IED for the years ended October 31, 1998
and 1997. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
earnings amount presented above because compensation cost is reflected over
the options' vesting period and compensation cost for options granted prior
to November 1995 are not considered under SFAS No. 123.
F-16
<PAGE>
For purposes of the SFAS No. 123 pro forma net earnings and net earnings
per share calculations, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in fiscal 1999:
TRANSITION PERIOD
ENDED
JUNE 30, 1999
-----------------
Dividend yield 0%
Expected volatility 58.76%
Risk free interest rate 5.67%
Expected lives (years) 10.0
Activity related to the stock option plans is summarized below:
TRANSITION PERIOD ENDED
JUNE 30, 1999
--------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Balance at the beginning of year 676,478 $5.00
Granted 345,348 2.25
Exercised (20,000) 3.84
Forfeited (281,848) 4.75
--------
Balance at the end of year 719,978 3.09
========
Exercisable at the end of year 331,731 4.29
========
Weighted-average fair value of options
granted during the year $ 1.66
========
The following table summarizes the status of outstanding stock options as
of June 30, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ------------ -------- ----------- --------
$2.00 - $2.25 528,096 7.68 $2.16 159,848 $2.04
$2.50 - $4.17 51,383 7.04 3.41 31,383 3.60
$6.48 - $7.25 85,750 4.02 6.59 85,750 6.59
$7.50 - $9.82 54,750 8.07 7.63 54,750 7.63
======= =======
719,978 331,731
======= =======
F-17
<PAGE>
(12) BENEFIT PLAN
On June 1, 1999 a formal termination of the Company's 401(k) plan was
initiated. The 401(K) plan of parent company GTL was amended June 1, 1999
to include employees of the Company.
GTL has adopted a defined contribution benefit plan that complies with
section 401(k) of the Internal Revenue Code and provides for discretionary
company contribution. Employees who complete three months of service are
eligible to participate in the Plan.
(13) STOCKHOLDERS' EQUITY
PREFERRED STOCK
Series B 8% Convertible Preferred Stock ("Series B Stock"); stated value
$1,000 per share and liquidation value of 120% of stated value. The Holder
of Series B Stock is entitled to an annual cumulative dividend of $80 per
share payable quarterly in cash or Common Stock. Cumulative unpaid
dividends at June 30, 1999 total $20,000. Each share of Series B Stock is
convertible into Common Stock at a price equal to the lowest of: a) 75% of
the Average Price of Common Stock, as defined, or b) 75% of the Average
Price of Common Stock, as defined calculated as if April 29, 1999 were the
conversion date. The Series B Stock has no voting rights. GTL owns 100% of
the issued and outstanding Series B Stock.
Series C 8% Convertible Preferred Stock ("Series C Stock"); stated value
$1,000 per share and liquidation value of 120% of stated value. The Holder
of Series C Stock is entitled to an annual cumulative dividend of $80 per
share payable quarterly in cash or Common Stock. Cumulative unpaid
dividends at June 30, 1999 total $10,667. Each share of Series C Stock is
convertible into Common Stock at a price equal to the lowest of: a) $2.6875
per share, or b) 66.67% of the Average Price, as defined, or c) at the
lowest rate the Company issues equity securities, as defined. The Series C
Stock generally has no voting rights. On August 24, 1999, GTL notified the
Company of its intent to convert such shares into Common Stock. (See note
20.) GTL owns 100% of the issued and outstanding and accumulated unpaid
dividends Series C Stock.
Series D Convertible Preferred Stock ("Series D Stock"); stated value $10
per share and liquidation value of 120% of stated value. The Holder of
Series D Stock is entitled to an annual dividend as and when declared by
the Board of Directors of the Company. Each share of Series D Stock is
convertible into 6.05 shares of the Company's Common Stock. The Series D
Stock generally has no voting rights.
COMMON STOCK
Each share of Common Stock is entitled to one vote per share.
WARRANTS
During the Transition Period, the Company issued 489,429 warrants,
resulting in 1,206,025 warrants outstanding at June 30, 1999. Each warrant
represents the right to purchase one share of the Company's Common Stock at
exercise prices ranging from $2.34 to $4.13 per share, until such warrants
expire beginning November 1, 2001 through April 1, 2004. All outstanding
warrants are exercisable as of June 30, 1999.
F-18
<PAGE>
(14) INCOME TAXES
Income tax (benefit) differed from the amounts computed by applying the
U.S. Federal corporate income tax rate of 34% to net income (loss) as a
result of the following:
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED YEAR ENDED OCTOBER 31,
JUNE 30, 1999 1998 1997
------------- ---- ----
<S> <C> <C> <C>
Computed expected tax (benefit) $ 786,603 $(2,441,415) $(18,085,616)
Change in valuation allowance (983,188) 2,100,322 18,066,284
Nondeductible expense 16,320 416,498 --
Other 180,265 (75,405) 19,332
--------- ----------- ------------
$ -- $ -- $ --
========= =========== ============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are presented below:
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED
JUNE 30, 1999
-------------
<S> <C>
Deferred tax assets:
Net operating loss carryforward $ 5,443,825
Property and equipment 972,785
Allowance for bad debts 1,517,277
Provision for inventory valuation 3,142,092
Accrued liabilities 770,859
Deferred revenue 146,699
Other 262,589
------------
$ 12,256,126
Less valuation allowance (12,256,126)
------------
Net deferred tax asset $ --
============
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
has provided a valuation allowance for 100% of the deferred tax assets as
the likelihood of realization cannot be determined. As of June 30, 1999,
the Company has a net operating loss (NOL) carryforward for federal income
tax purposes of approximately $13,977,000, which begins to expire in 2009.
The Company likely underwent a change in ownership in accordance with
Internal Revenue Code Section 382, the effect of which has not yet been
F-19
<PAGE>
determined by the Company. This change would effect the timing of the
utilization of the NOL, as well as the amount of the NOL which may
ultimately be utilized, though it is not expected to materially effect the
amount of the NOL carryforward.
(15) RELATED PARTY TRANSACTIONS
The Company's Chief Executive Officer is a principal of Ocean Castle
Investments, LLC (Ocean Castle) which maintains administrative offices for
the Company's Chief Executive Officer and certain other employees of GTL.
During the year ended October 31, 1998, Ocean Castle executed consulting
agreements with two principal stockholders of GTL. The rights and
obligations of Ocean Castle under the agreements were assumed by the
Company in connection with the Transaction. The consulting agreements
require payments aggregating $1,000,000 to each of the consultants through
December 2003 in exchange for advisory services. Each of the consultants
also received stock options to purchase 33,333 shares of Class A common
stock of GTL at an exercise price of $4.50. As of June 30, 1999, the
Company determined that the consulting agreements had no future value due
to the Company's shift away from in-flight entertainment into alternative
markets such as leisure cruise and passenger rail transport. Only limited
services were provided in 1999 and no future services will be utilized.
Accordingly, the Company recorded a charge to general and administrative
expenses in the Transition Period of $1.6 million representing the balance
due under such contracts.
In August 1999, the Company executed a separation and release agreement
with a shareholder and former officer of the Company, pursuant to which the
Company paid approximately $85,000 in the form of unregistered shares of
the Company's common stock.
In June 1999, the Company loaned to a vice president, $75,000 for the
purpose of assisting in a corporate relocation to the Company's
headquarters in Phoenix, Arizona. Such loan is secured by assets of the
employee. The note matures in August 2009 and bears an interest rate of
approximately 5%.
GTL had an Intellectual Property License and Support Services Agreement
(the "License Agreement") for certain technology with FortuNet, Inc.
("FortuNet"). FortuNet is owned by a principal stockholder and previous
director of GTL. The License Agreement provides for an annual license fee
of $100,000 commencing in October 1994 and continuing through November
2002. GTL was required to pay FortuNet $100,000 commencing in October 1994
and continuing through November 2002. The Company paid FortuNet $100,000
during each of the years ended October 31, 1998 and 1997. As of October 31,
1998, the remaining commitment of $400,000 is included in accrued
liabilities on the balance sheet. The Company assumed this liability in
connection with the Transaction. Subsequent to June 30, 1999, the Company
agreed to a termination of this agreement and paid FortuNet $100,000 plus
legal fees. During the Transition Period ended June 30, 1999, the Company
had revised its estimated accrual to $200,000 which is included in accrued
liabilities at June 30, 1999.
During the year ended October 31, 1998, GTL extended by one year a
consulting agreement with a former officer of GTL pursuant to which GTL
will pay $55,000 for services received during the period November 1999
through October 2000. The Company has assumed the liability for the
consulting agreement in connection with the Transaction in the amount of
$73,000 which is included in accrued liabilities at June 30, 1999.
During the year ended October 31, 1998, GTL executed severance and
consulting agreements with three former officers, pursuant to which GTL
paid the former officers and set aside restricted funds in the amounts of
$3,053,642 and $735,000, respectively. The consulting agreements all expire
by September 1999. Payments totaling $735,000 have been and continue to be
made from restricted cash of GTL through September 1999. Expenses
associated with these agreements were charged to general and administrative
expenses in the year ended October 31, 1998.
F-20
<PAGE>
During the year ended October 31, 1996, GTL executed severance agreements
with three former officers pursuant to which the Company will pay severance
of $752,500 over a three-year period. As of June 30, 1999 and October 31,
1998, $18,000 and $55,000 remained to be paid under these agreements. Such
liabilities were assumed by the Company in connection with the Transaction.
(16) COMMITMENTS AND CONTINGENCIES
(a) LAWSUIT
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. On March 29, 1999, the Company filed
a timely answer and asserted counterclaims against Hollingsead. 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 Company has provided for such amount as
of May 1, 1999. 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 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. On 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.
Swissair/MDL-1269, In re Air Crash near Peggy's Cove, Nova Scotia. This
multi-district litigation relates to the crash of Swissair Flight 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 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 Interactive Flight Technologies, Inc. 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 sucessor liability.
TNCi denies all liability for the crash. TNCi is being defended by the
aviation insurer for Interactive Flight Technologies, Inc.
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. The Company intends to
defend itself vigorously.
The Company is subject to other lawsuits and claims arising in the ordinary
course of its business. In the Company's opinion, as of June 30, 1999, the
effect of such matters will not have a material adverse effect on the
Company's results of operations and financial position.
F-21
<PAGE>
(b) LEASE OBLIGATIONS
The Company leases office space and equipment under operating leases which
expire at various dates through June 2002. The future minimum lease
commitments under these leases are as follows:
YEAR ENDING JUNE 30, 1999 OPERATING LEASES
------------------------- ----------------
2000 $120,000
2001 120,000
2002 120,000
--------
Total minimum lease payments $360,000
========
Rental expense under operating leases totaled $292,042, $944,932 and
$920,412 for the Transition Period ended June 30, 1999 and fiscal years
ended October 31, 1998 and October 31, 1997, respectively.
(c) 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
an unspecified 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 the
Carnival Cruise Lines "M/S Sensation," which has been in operational use,
on a test basis, since August 1999. In August 1999, Carnival ordered the
installation of CruiseView on the Carnival Cruise Lines "M/S Triumph."
The terms of the Carnival Agreement provide that Carnival may return the
CruiseView system within the Acceptance Period, as defined in the Carnival
Agreement. For the M/S Sensation, the acceptance period is 12 months. As of
June 30, 1999, the Company recorded deferred revenue of $365,851,
reflecting amounts paid by Carnival. As of June 30, 1999, the Company has
not recognized any revenue in association with the Carnival Agreement. The
Company would be required to return 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 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.
The Company has not provided a bond or letter of credit as of June 30,
1999. 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 securing such obligation.
(17) SPECIAL CHARGES AND REVERSAL OF WARRANTY, MAINTENANCE AND COMMISSION
ACCRUALS
GTL had previously entered into sales contracts with three airlines,
Schweizerische Luftverkehr AG (Swissair), Debonair Airways, Ltd. (Debonair)
and Alitalia Airlines, S.p.A. (Alitalia) for the manufacture and
installation of its in-flight entertainment network, and to provide
hardware and software upgrades, as defined in the agreements. In connection
with the Transaction, the Company assumed all rights and obligations of the
above contracts.
F-22
<PAGE>
Pursuant to the October 1997 agreement with Swissair, Swissair purchased
shipsets for the first and business class sections of sixteen aircraft for
an average of $1.7 million per aircraft. Included in the purchase price was
material, installation, maintenance through September 1998, one-year
warranty and upgrade costs for the sixteen aircraft. As of October 31,
1998, the Company had completed installations of the entertainment network
on all of these aircraft. The agreement also required the Company to
install the entertainment network in the first, business and economy class
sections of three additional aircraft, at no charge to Swissair. The
Company was responsible for all costs including entertainment network
components, installation and maintenance through September 1998 for the
three aircraft. As of October 31, 1998, the Company had completed
installations of the entertainment network on all of these aircraft and
title to each of these three shipsets had been transferred to Swissair. The
estimated material, installation, maintenance and one-year warranty and
upgrade costs for these three shipsets of $14,292,404 is included in the
accompanying statement of operations as a special charge for the year ended
October 31, 1997. During the fiscal year ended October 31, 1998, the
Company recognized a recovery of special charges of $606,508. The recovery
of special charges resulted from a reduction in the number of entertainment
networks requiring maintenance in the economy class sections of the
Swissair aircraft and a reduction in development expenses.
In April 1998 and October 1998, the Company entered into additional
contracts with Swissair. The first letter of intent relates to 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 through February
1999. No payments have been received since February. The second contract
was to extend the warranty on all installed systems for a second and third
year at a price of $3,975,000. Through February 1999, the Company had been
paid $707,500 under this contract. No subsequent payments have been
received from Swissair.
On October 29, 1998, the Company was notified by Swissair of its decision
to deactivate the entertainment networks on all Swissair aircraft. However,
by April 1999, discussions between the Company 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, GTL 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 the Company's Entertainment Network.
The Swissair agreements are not assignable to third parties under the terms
of such agreements. However, in connection with the Transaction, GTL has
agreed to pay to the Company any net proceeds, if any, received from
Swissair as a result of the above litigation or otherwise. Further, the
Company, as a subcontractor to GTL, 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 GTL, 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 as of June 30, 1999.
Accordingly, the Company has recognized deferred revenue on equipment sales
to the extent of cash received of $876,000; charged off inventory to cost
of equipment sales in the amount of $1,517,000; wrote off deposits of
$655,000 to special charges; and reversed all warranty and maintenance
accruals totaling $5,164,000.
F-23
<PAGE>
Pursuant to an agreement with Debonair, the Company was to manufacture,
install, operate, and maintain the entertainment network on six Debonair
aircraft for a period of eight years from installation. In February 1998,
the Company and Debonair signed a Termination Agreement. Pursuant to the
Termination Agreement, Debonair removed the entertainment network from its
aircraft and the Company paid Debonair $134,235 as full and final
settlement of all of its obligations with Debonair. Included in the
accompanying statement of operations for the year ended October 31, 1997
are special charges of $956,447 for the cost of the first completed shipset
and $2,881,962 to write-down all inventory related to the Debonair program.
In connection with these agreements with Swissair and Debonair and the
absence of any new entertainment network orders for the Company, property
and equipment write-downs of $1,006,532 and $1,518,952 were recorded as
special charges during fiscal 1998 and 1997, respectively.
Pursuant to an agreement with Alitalia, the Company delivered five first
generation shipsets for installation on Alitalia aircraft during fiscal
1996. Alitalia has notified the Company that it does not intend to continue
operation of the shipsets, and the Company has indicated that it will not
support the shipsets.
For the Transition Period ended June 30, 1999, the Company recorded
warranty, maintenance and commission accrual adjustments of $5,117,704,
$1,730,368 and $303,321, respectively, related to the Swissair and Alitalia
matters. Such adjustments to prior period estimates, which totaled
$7,151,393 resulted from an evaluation of specific contractual obligations
and discussions between the new management of the Company and other parties
related to such contracts. Based on the results of the Company's findings
during this period, such accruals were no longer considered necessary.
(18) 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 Transition Period and fiscal years ended October 31, 1998 and 1997,
one customer accounted for approximately 91%, 98% and 95% of the Company's
sales. Outstanding receivables from this customer were zero and $1.1
million respectively at June 30, 1999 and October 31, 1998. (See note 15.)
(19) SUPPLEMENTAL FINANCIAL INFORMATION
Supplemental disclosure of cash flow information is as follows:
TRANSITION
PERIOD ENDED YEAR ENDED OCTOBER 31,
JUNE 30, 1999 1998 1997
------------- ------- --------
Cash paid for interest $ -- $11,954 $ 13,423
========= ======= ========
Noncash investing and financing
activities:
Capital lease obligations incurred $ -- $ -- $210,678
========= ======= ========
F-24
<PAGE>
(20) SUBSEQUENT EVENTS
In July and August 1999, GTL purchased all of the Series A and E notes and
the Series D notes, respectively, from the holders of such notes.
Concurrent with such purchase by GTL, 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.
On August 24, 1999, the Board of Directors of GTL approved the conversion
of the Promissory Note and outstanding advances to the Company into Series
C Stock of the Company and, the simultaneous conversion of the Series C
Stock into the Company's common stock in accordance with the designation of
the Series C Stock. Such conversion, to the extent it exceeded
approximately one million shares of the Company's common stock on August
24, 1999, was contingent upon receiving shareholder approval to increase
the authorized share capital of the Company which was subsequently approved
on September 17, 1999. Accordingly, the Company will issue to GTL
approximately 5.6 million shares of its common stock in October 1999, based
on an anticipated conversion date of August 24, 1999. Had this transaction
occurred on June 30, 1999, pro forma stockholders' equity and tangible net
worth would have been $9,320,934 (unaudited) and $2,201,128 (unaudited),
respectively.
In September 1999, the Company sold one of its two buildings in Alpharetta,
Georgia. The net proceeds from the sale, plus cash of approximately $80,000
was used by the Company to repay the Note payable due April 19, 2001. The
sale of the second building is expected to occur in November 1999 and net
proceeds are expected to be used to retire the Note payable due 2009.
On August 24, 1999, the GTL Board of Directors approved a $5 million
secured revolving credit facility by and among GTL and 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 GTL 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 GTL's option, into shares of the
Company's Series C stock. The Company executed the Facility on October 12,
1999.
F-25
ARTICLES OF AMENDMENT TO THE ARTICLES
OF INCORPORATION OF
THE NETWORK CONNECTION, INC.
---------------
These Articles of Amendment (the "Amendment") are being executed as of
May 5, 1999, for the purpose of amending the 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: Pursuant to authority conferred upon the Board of Directors by
the Articles of Incorporation, the Board of Directors, adopted the following
resolution providing for the creation of Two Million Four Hundred Ninety-Five
Thousand Four Hundred (2,495,400) shares of Series D Convertible Preferred
Stock:
RESOLVED, that pursuant to Article V of the Articles of Incorporation
of the Company, there be and hereby is authorized and created a series of
Preferred Stock, hereby designated as Series D Convertible Preferred Stock to
consist of Two Million Four Hundred Ninety-Five Thousand Four Hundred
(2,495,400) shares with a par value of $.01 per share and a Stated Value of
$10.00 per share (the "Stated Value"), and that the designations, preferences
and relative, participating, optional or other rights of the Series D
Convertible Preferred Stock (the "Series D Preferred Stock") and qualifications,
limitations or restrictions thereof, shall be as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1 DEFINITIONS. The terms defined in this Article whenever
used in this Amendment have the following respective meanings:
(a) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in
Section 6.1(c).
(b) "AFFILIATE" has the meaning ascribed to such term in Rule
12b-2 under the Securities Exchange Act of 1934, as amended.
(c) "AGREEMENT" means that certain Asset Purchase and Sale
Agreement dated April 29, 1999 between the Corporation and IFT.
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(d) "BUSINESS DAY" means a day other than Saturday, Sunday or any
day on which banks located in the State of New York are authorized or obligated
to close.
(e) "CAPITAL SHARES" means the Common Shares and any other shares
of any other class or series of common stock, whether now or hereafter
authorized and however designated, which have the right to participate in the
distribution of earnings and assets (upon dissolution, liquidation or
winding-up) of the Corporation.
(f) "CLOSING DATE" means the date of closing under the Agreement.
(g) "COMMON SHARES" or "COMMON STOCK" means shares of common
stock, $.001 par value, of the Corporation.
(h) "COMMON STOCK ISSUED AT CONVERSION" when used with reference
to the securities issuable upon conversion of the Series D Preferred Stock,
means all Common Shares now or hereafter Outstanding and securities of any other
class or series into which the Series D Preferred Stock hereafter shall have
been changed or substituted, whether now or hereafter created and however
designated.
(i) "CONVERSION DATE" means any day on which all or any portion of
shares of the Series D Preferred Stock is converted in accordance with the
provisions hereof.
(j) "CONVERSION NOTICE" has the meaning set forth in Section 6.2.
(k) "CONVERSION PRICE" means on any date of determination the
applicable price for the conversion of shares of Series D Preferred Stock into
Common Shares on such day as set forth in Section 6.1.
(l) "CORPORATION" means The Network Connection, Inc., a Georgia
corporation, and any successor or resulting corporation by way of merger,
consolidation, sale or exchange of all or substantially all of the Corporation's
assets, or otherwise.
(m) "CURRENT MARKET PRICE" on any date of determination means the
closing bid price of a Common Share on such day as reported on the NASDAQ or
such other exchange or quotation system where such Common Stock is traded.
(n) "HOLDER" means IFT, any successor thereto, or any Person to
whom the Series D Preferred Stock is subsequently transferred in accordance with
the provisions hereof.
(o) "IFT" means Interactive Flight Technologies, Inc., a Delaware
corporation.
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(p) "OUTSTANDING" when used with reference to Common Shares or
Capital Shares (collectively, "Shares"), means, on any date of determination,
all issued and outstanding Shares, and includes all such Shares issuable in
respect of outstanding scrip or any certificates representing fractional
interests in such Shares; PROVIDED, HOWEVER, that any such Shares directly or
indirectly owned or held by or for the account of the Corporation or any
Subsidiary of the Corporation shall not be deemed "Outstanding" for purposes
hereof.
(q) "PERSON" means an individual, a corporation, a partnership, an
association, a limited liability company, a unincorporated business
organization, a trust or other entity or organization, and any government or
political subdivision or any agency or instrumentality thereof.
(r) "SUBSIDIARY" means any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Corporation.
(s) "VALUATION EVENT" has the meaning set forth in Section 6.1.
All references to "cash" or "$" herein means currency of the
United States of America.
ARTICLE 2
RESERVED
ARTICLE 3
RANK
The Series D Preferred Stock shall rank (i) prior to the Common Stock;
(ii) prior to any class or series of capital stock of the Corporation hereafter
created other than "Pari Passu Securities" (collectively, with the Common Stock,
"Junior Securities"); (iii) pari passu with Corporation's Series B 8%
Convertible Preferred Stock and with Corporation's Series C 8% Convertible
Preferred Stock, and (iv) pari passu with any class or series of capital stock
of the Corporation hereafter created specifically ranking on parity with the
Series D Preferred Stock ("Pari Passu Securities").
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ARTICLE 4
DIVIDENDS
The Holder shall be entitled to receive dividends and distributions on
or with respect to the Series D Preferred Stock if, as, when, and in the amounts
declared by Corporation's Board of Directors.
ARTICLE 5
LIQUIDATION PREFERENCE
(a) If the Corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or state bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up (each such event being considered a
"Liquidation Event"), no distribution shall be made to the holders of any shares
of capital stock of the Corporation upon liquidation, dissolution or winding up
unless prior thereto, the holders of shares of Series D Preferred Stock shall
have received the Liquidation Preference (as defined below) with respect to each
share. If upon the occurrence of a Liquidation Event, the assets and funds
available for distribution among the holders of the Series D Preferred Stock and
holders of Pari Passu Securities shall be insufficient to permit the payment to
such holders of the preferential amounts payable thereon, then the entire assets
and funds of the Corporation legally available for distribution to the Series D
Preferred Stock and the Pari Passu Securities shall be distributed ratably among
such shares in proportion to the ratio that the Liquidation Preference payable
on each such share bears to the aggregate Liquidation Preferences payable on all
such shares.
(b) At the option of each Holder, the sale, conveyance of disposition
of all or substantially all of the assets of the Corporation, the effectuation
by the Corporation of a transaction or series of related transactions in which
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more than 50% of the voting power of the Corporation is disposed of, or the
consolidation, merger or other business combination of the Corporation with or
into any other Person (as defined below) or Persons when the Corporation is not
the survivor shall be deemed to be a liquidation, dissolution or winding up of
the Corporation pursuant to which the Corporation shall be required to
distribute, upon consummation of and as a condition to, such transaction an
amount equal to 120% of the Liquidation Preference with respect to each
outstanding share of Series D Preferred Stock in accordance with and subject to
the terms of this Article 5; PROVIDED, that all holders of Series D Preferred
Stock shall be deemed to elect the option set forth above if at least a majority
in interest of such holders elect such option. "Person" shall mean any
individual, corporation, limited liability company, partnership, association,
trust or other entity or organization.
(c) For purposes hereof, the "Liquidation Preference" with respect to a
share of the Series D Preferred Stock shall mean an amount equal to the Stated
Value thereof.
ARTICLE 6
CONVERSION OF SERIES D PREFERRED STOCK
SECTION 6.1 CONVERSION; CONVERSION PRICE. Each share of Series D
Preferred Stock shall be convertible into the number of shares of Common Stock
(rounded to the nearest 1/100 of a share) equal to a fraction, the numerator of
which is (a) the product of One Hundred Fifty Percent (150%) multiplied by the
number of outstanding shares of Common Stock on the Closing Date (excluding the
shares of Common Stock and Preferred Stock issued to IFT on the Closing Date
pursuant to the Agreement), treating all convertible securities (other than the
Series D Preferred Stock), options, warrants, and other rights to acquire
securities of Corporation outstanding on the Closing Date as if they had been
converted or exercised (whether or not actually converted or exercised), as the
case may be, minus (b) the number of shares of Common Stock issued to IFT on the
Closing Date pursuant to the Agreement, and the denominator of which is
2,495,400.
Notwithstanding anything to the contrary contained herein, if a
Valuation Event occurs after the date hereof as a result of which the number of
Common Shares Outstanding (assuming for purposes of such determination, the
issuance of all such shares pursuant to an exercise or conversion (as the case
may be) of options, warrants, and other securities issued as part of such
Valuation Event) shall be increased or decreased, then the Conversion Price
shall automatically be proportionately decreased or increased, respectively, and
the number of Common Shares reserved for issuance pursuant to the conversion of
the then Outstanding Series D Preferred Stock shall be automatically
proportionately increased or decreased respectively, so as appropriately to
reflect the effects of such Valuation Event, effective immediately upon the
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effectiveness of such Valuation Event. The adjustment required by the foregoing
sentence shall be effectuated each time a separate Valuation Event shall occur,
and such adjustments shall therefore be cumulative.
For purposes of this Section 6.1, a "VALUATION EVENT" shall mean an event in
which the Corporation at any time takes any of the following actions:
(a) subdivides or combines its Capital Shares;
(b) makes any distribution or dividend of its Capital Shares in respect
of Outstanding Capital Shares;
(c) issues any additional Capital Shares (the "Additional Capital
Shares"), otherwise than as provided in the foregoing Sections 6.1(a) and 6.1(b)
above, at a price per share less, or for other consideration lower, than the
Current Market Price in effect immediately prior to such issuances, or without
consideration, except for issuances under employee benefit plans consistent with
those presently in effect and issuances under presently outstanding warrants,
options or convertible securities, to officers, directors or employees of the
Corporation, or otherwise under the Corporation's 1994 Employee Stock Option
Plan or non-employee Director Stock Option Plan;
(d) issues any warrants, options or other rights to subscribe for or
purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Current Market
Price in effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable or
exercisable for Capital Shares and the consideration per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to the
terms of such convertible, exchangeable or exercisable securities shall be less
than the Current Market Price in effect immediately prior to such issuance;
(f) makes a distribution of its assets or evidences of indebtedness to
the holders of its Capital Shares as a dividend in liquidation or by way of
return of capital or other than as a dividend payable out of earnings or surplus
legally available for the payment of dividends under applicable law or any
distribution to such holders made in respect of the sale of all or substantially
all of the Corporation's assets (other than under the circumstances provided for
in the foregoing Sections 6.1(a) through 6.1(e)); or
(g) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing Sections 6.1(a)
through 6.1(f), inclusive, which in the opinion of the Corporation's Board of
Directors, determined in good faith, would have a material adverse effect upon
the rights of the Holder at the time of a conversion of the Series D Preferred
Stock.
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SECTION 6.2 EXERCISE OF CONVERSION PRIVILEGE. (a) Conversion of the
Series D Preferred Stock may be exercised, in whole or in part, by the Holder by
telecopying an executed and completed notice of conversion in the form annexed
hereto as Annex I (the "Conversion Notice") to the Corporation. Each date on
which a Conversion Notice is telecopied to and received by the Corporation in
accordance with the provisions of this Section 6.2 shall constitute a Conversion
Date. The Corporation shall convert the Series D Preferred Stock and issue the
Common Stock Issued at Conversion effective as of the Conversion Date. The
Conversion Notice also shall state the name or names (with addresses) of the
persons who are to become the holders of the Common Stock Issued at Conversion
in connection with such conversion. The Holder shall deliver the shares of
Series D Preferred Stock to the Corporation by express courier within 30 days
following the date on which the telecopied Conversion Notice has been
transmitted to the Corporation. Upon surrender for conversion, the Series D
Preferred Stock shall be accompanied by a proper assignment hereof to the
Corporation or be endorsed in blank. As promptly as practicable after the
receipt of the Conversion Notice as aforesaid, but in any event not more than
five Business Days after the Corporation's receipt of such Conversion Notice, or
such Series D Preferred Stock, whichever is later, the Corporation shall (i)
issue the Common Stock issued at Conversion in accordance with the provisions of
this Article 6, and (ii) cause to be mailed for delivery by overnight courier to
the Holder (X) a certificate or certificate(s) representing the number of Common
Shares to which the Holder is entitled by virtue of such conversion and (Y)
cash, as provided in Section 6.3, in respect of any fraction of a Share issuable
upon such conversion. Holder shall indemnify the Corporation for any damages to
third parties as a result of a claim by such third party to ownership of the
Series D Preferred Stock converted prior to the receipt of the Series D
Preferred Stock by the Corporation. Such conversion shall be deemed to have been
effected at the time at which the Conversion Notice indicates as long as the
Series D Preferred Stock shall have been surrendered as aforesaid at such time,
and at such time the rights of the Holder of the Series D Preferred Stock, as
such, shall cease and the Person and Persons in whose name or names the Common
Stock Issued at Conversion shall be issuable shall be deemed to have become the
holder or holders of record of the Common Shares represented thereby. The
Conversion Notice shall constitute a contract between the Holder and the
Corporation, whereby the Holder shall be deemed to subscribe for the number of
Common Shares which it will be entitled to receive upon such conversion and, in
payment and satisfaction of such subscription (and for any cash adjustment to
which it is entitled pursuant to Section 6.4), to surrender the Series D
Preferred Stock and to release the Corporation from all liability thereon. No
cash payment aggregating less than $1.50 shall be required to be given unless
specifically requested by the Holder.
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(b) If, at any time (i) the Corporation challenges, disputes or denies
the right of the Holder hereof to effect the conversion of the Series D
Preferred Stock into Common Shares or otherwise dishonors or rejects any
Conversion Notice delivered in accordance with this Section 6.2 or (ii) any
third party who is not and has never been an Affiliate of the Holder commences
any lawsuit or proceeding or otherwise asserts any claim before any court or
public or governmental authority which seeks to challenge, deny, enjoin, limit,
modify, delay or dispute the right of the Holder hereof to effect the conversion
of the Series D Preferred Stock into Common Shares, then the Holder shall have
the right but not the obligation, by written notice to the Corporation, to
require the Corporation promptly to redeem the Series D Preferred Stock for cash
at a redemption price equal to, in the case of (i), one hundred and twenty-five
percent (125%) of the Stated Value thereof and, in the case of (ii), one hundred
and fifteen percent (115%) of the Stated Value thereof (each, the "Mandatory
Purchase Amount"). Under any of the circumstances set forth above, the
Corporation shall be responsible for the payment of all costs and expenses of
the Holder, including reasonable legal fees and expenses, as and when incurred
in disputing any such action or pursuing its rights hereunder (in addition to
any other rights of the Holder).
SECTION 6.3 FRACTIONAL SHARES. No fractional Common Shares or scrip
representing fractional Common Shares shall be issued upon conversion of the
Series D Preferred Stock. Instead of any fractional Common Shares which
otherwise would be issuable upon conversion of the Series D Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction. No cash payment of less than $1.50 shall be required
to be given unless specifically requested by the Holder.
SECTION 6.4 RECLASSIFICATION, CONSOLIDATION, MERGER OR MANDATORY SHARE
EXCHANGE. At any time while the Series D Preferred Stock remains outstanding and
any shares thereof have not been converted, in case of any reclassification or
change of Outstanding Common Shares issuable upon conversion of the Series D
Preferred Stock (other than a change in par value, or from par value to no par
value per share, or from no par value per share to par value or as a result of a
subdivision or combination of outstanding securities issuable upon conversion of
the Series D Preferred Stock) or in case of any consolidation, merger or
mandatory share exchange of the Corporation with or into another corporation
(other than a merger or mandatory share exchange with another corporation in
which the Corporation is a continuing corporation and which does not result in
any reclassification or change, other than a change in par value, or from par
value to no par value per share, or from no par value per share to par value, or
as a result of a subdivision or combination of Outstanding Common Shares upon
conversion of the Series D Preferred Stock), or in the case of any sale or
transfer to another corporation of the property of the Corporation as an
entirety or substantially as an entirety, the Corporation, or such successor,
resulting or purchasing corporation, as the case may be, shall, without payment
of any additional consideration therefor, execute a new Series D Preferred Stock
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providing that the Holder shall have the right to convert such new Series D
Preferred Stock (upon terms and conditions not less favorable to the Holder than
those in effect pursuant to the Series D Preferred Stock) and to receive upon
such exercise, in lieu of each Common Share theretofore issuable upon conversion
of the Series D Preferred Stock, the kind and amount of shares of stock, other
securities, money or property receivable upon such reclassification, change,
consolidation, merger, mandatory share exchange, sale or transfer by the holder
of one Common Share issuable upon conversion of the Series D Preferred Stock had
the Series D Preferred Stock been converted immediately prior to such
reclassification, change, consolidation, merger, mandatory share exchange or
sale or transfer. The provisions of this Section 6.4 shall similarly apply to
successive reclassifications, changes, consolidations, mergers, mandatory share
exchanges and sales and transfers.
SECTION 6.5 COMPLIANCE WITH SECTION 13(D). Notwithstanding anything
herein to the contrary, until the Holder shall have filed a Schedule 13D or
Schedule 13G under the Securities Exchange Act of 1934 (the "Exchange Act") and
otherwise complied with the requirements of Section 13 of the Exchange Act with
respect to its beneficial ownership of the Common Stock, the Holder shall not
have the right, and the Corporation shall not have the obligation, to convert
all or any portion of the Series D Preferred Stock if and to the extent that the
issuance to the Holder of shares of Common Stock upon such conversion would
result in the Holder's being deemed the "beneficial owner" of more than 5% of
the then outstanding shares of Common Stock within the meaning of Section 13(d)
of the Exchange Act, and the rules promulgated thereunder. If any court of
competent jurisdiction shall determine that the foregoing limitation is
ineffective to prevent a Holder from being deemed the beneficial owner of more
than 5% of the then outstanding shares of Common Stock, then the Corporation
shall redeem so many of such Holder's shares (the "Redemption Shares") of Series
D Preferred Stock as are necessary to cause such Holder to be deemed the
beneficial owner of not more than 5% of the then outstanding shares of Common
Stock. Upon such determination by a court of competent jurisdiction, the
Redemption Shares shall immediately and without further action be deemed
returned to the status of authorized but unissued shares of Series D Preferred
Stock and the Holder shall have no interest in or rights under such Redemption
Shares. Any and all dividends paid on or prior to the date of such determination
shall be deemed dividends paid on the remaining shares of Series D Preferred
Stock held by the Holder. Such redemption shall be for cash at a redemption
price equal to the sum of (i) the Stated Value of the Redemption Shares and (ii)
any accrued and unpaid dividends to the date of such redemption.
SECTION 6.6 SHAREHOLDER APPROVAL. Unless the Corporation shall have
obtained approval by its voting stockholders in accordance with the rules of the
NASDAQ or such other stock market or quotation system as the Corporation shall
be required to comply with, of the issuance of Common Shares to the Holder
pursuant to a conversion of Series D Preferred Stock, then the Corporation shall
not issue shares of Common Stock upon any such conversion if such issuance of
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Common Stock, when added to the number of shares of Common Stock previously
issued by the Corporation upon conversion of shares of the Series D Preferred
Stock, would equal or exceed twenty percent (20%) of the number of shares of the
Corporation's Common Stock which were issued and outstanding on the Closing
Date. The limitation on the Holder's right of conversion contained in the
preceding sentence shall terminate on July 15, 1999.
ARTICLE 7
VOTING RIGHTS
Except as otherwise provided by the Georgia Business Corporation Code
("GCL"), in this Article 7, or in Article 8 below, the Holders of the Series D
Preferred Stock shall have no voting power.
In the event that on or before July 15, 1999, the Corporation's
Articles of Incorporation have not been amended to increase the number of
authorized shares of Common Stock sufficiently to permit the Corporation to
issue to IFT, upon the exercise of all options and warrants and the conversion
of all convertible securities held by IFT, that number of shares of Common Stock
necessary to satisfy the Corporation's obligations under all such securities,
then each share of Series D Preferred Stock shall be entitled to cast six (6)
votes at any duly called meeting of the stockholders of the Corporation on any
matter presented for consideration of such stockholders.
During the period in which the Series D Preferred Stock shall be
non-voting, the Corporation shall nonetheless provide each Holder of Series D
Preferred Stock with prior notification of any meeting of the stockholders (and
copies of proxy materials and other information sent to stockholders). In the
event of any taking by the Corporation of a record of its stockholders for the
purpose of determining stockholders who are entitled to receive payment of any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining stockholders who
are entitled to vote in connection with any proposed liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
Holder, at least thirty (30) days prior to the consummation of the transaction
or event, whichever is earlier), of the date on which any such action is to be
taken for the purpose of such dividend, distribution, right or other event, and
a brief statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time.
To the extent that under the GCL the vote of the holders of the Series
D Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the holders of at least a majority of the shares of the Series D
Preferred Stock represented at a duly held meeting at which a quorum is present
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or by written consent of a majority of the shares of Series D Preferred Stock
(except as otherwise may be required under the GCL) shall constitute the
approval of such action by the class. To the extent that under the GCL holders
of the Series D Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of Series D Preferred
Stock shall be entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible using the record date for the
taking of such vote of shareholders as the date as of which the Conversion Price
is calculated. Holders of the Series D Preferred Stock shall be entitled to
notice of all shareholder meetings or written consents (and copies of proxy
materials and other information sent to shareholders) with respect to which they
would be entitled to vote, which notice would be provided pursuant to the
Corporation's bylaws and the GCL.
ARTICLE 8
PROTECTIVE PROVISIONS
As long as shares of Series D Preferred Stock are Outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the GCL) of the holders of at least a majority of the
then outstanding shares of Series D Preferred Stock:
(a) alter or change the rights, preferences or privileges of the Series
D Preferred Stock;
(b) create any new class or series of capital stock having a preference
over the Series D Preferred Stock as to distribution of assets upon liquidation,
dissolution or winding up of the Corporation ("Senior Securities") or alter or
change the rights, preferences or privileges of any Senior Securities so as to
affect adversely the Series D Preferred Stock;
(c) increase the authorized number of shares of Series D Preferred
Stock; or
(d) do any act or thing not authorized or contemplated by this
Amendment which would result in taxation of the holders of shares of the Series
D Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as
amended (or any comparable provision of the Internal Revenue Code as hereafter
from time to time amended).
In the event holders of at least a majority of the then outstanding
shares of Series D Preferred Stock agree to allow the Corporation to alter or
change the rights, preferences or privileges of the shares of Series D Preferred
Stock, pursuant to subsection (a) above, so as to affect the Series D Preferred
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Stock, then the Corporation will deliver notice of such approved change to the
holders of the Series D Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and Dissenting Holders shall have the right
for a period of thirty (30) days to convert pursuant to the terms of this
Amendment as they exist prior to such alteration or change or continue to hold
their shares of Series D Preferred Stock.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 LOSS, THEFT, DESTRUCTION OF SERIES D PREFERRED STOCK. Upon
receipt of evidence satisfactory to the Corporation of the loss, theft,
destruction or mutilation of shares of Series D Preferred Stock and, in the case
of any such loss, theft or destruction, upon receipt of indemnity or security
reasonably satisfactory to the Corporation, or, in the case of any such
mutilation, upon surrender and cancellation of the Series D Preferred Stock, the
Corporation shall make, issue and deliver, in lieu of such lost, stolen,
destroyed or mutilated shares of Series D Preferred Stock, new shares of Series
D Preferred Stock of like tenor. The Series D Preferred Stock shall be held and
owned upon the express condition that the provisions of this Section 10.1 are
exclusive with respect to the replacement of mutilated, destroyed, lost or
stolen shares of Series D Preferred Stock and shall preclude any and all other
rights and remedies notwithstanding any law or statute existing or hereafter
enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without the surrender thereof.
SECTION 9.2 WHO DEEMED ABSOLUTE OWNER. The Corporation may deem the
Person in whose name the Series D Preferred Stock shall be registered upon the
registry books of the Corporation to be, and may treat it as, the absolute owner
of the Series D Preferred Stock for the purpose of receiving payment of
dividends on the Series D Preferred Stock, for the conversion of the Series D
Preferred Stock and for all other purposes, and the Corporation shall not be
affected by any notice to the contrary. All such payments and such conversion
shall be valid and effectual to satisfy and discharge the liability upon the
Series D Preferred Stock to the extent of the sum or sums so paid or the
conversion so made.
SECTION 9.3 NOTICE OF CERTAIN EVENTS. In the case of the occurrence of
any event described in Section 6.1 of this Amendment, the Corporation shall
cause to be mailed to the Holder of the Series D Preferred Stock at its last
address as it appears in the Corporation's security registry, at least twenty
(20) days prior to the applicable record, effective or expiration date
hereinafter specified (or, if such twenty (20) days notice is not practicable,
at the earliest practicable date prior to any such record, effective or
expiration date), a notice stating (x) the date on which a record is to be taken
for the purpose of such dividend, distribution, issuance or granting of rights,
options or warrants, or if a record is not to be taken, the date as of which the
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holders of record of Series D Preferred Stock to be entitled to such dividend,
distribution, issuance or granting of rights, options or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of record
of Series D Preferred Stock will be entitled to exchange their shares for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale transfer, dissolution, liquidation or winding-up.
SECTION 9.4 REGISTER. The Corporation shall keep at its principal
office a register in which the Corporation shall provide for the registration of
the Series D Preferred Stock. Upon any transfer of the Series D Preferred Stock
in accordance with the provisions hereof, the Corporation shall register such
transfer on the Series D Preferred Stock register.
The Corporation may deem the person in whose name the Series D
Preferred Stock shall be registered upon the registry books of the Corporation
to be, and may treat it as, the absolute owner of the Series D Preferred Stock
for the purpose of receiving payment of dividends on the Series D Preferred
Stock, for the conversion of the Series D Preferred Stock and for all other
purposes, and the Corporation shall not be affected by any notice to the
contrary. All such payments and such conversions shall be valid and effective to
satisfy and discharge the liability upon the Series D Preferred Stock to the
extent of the sum or sums so paid or the conversion or conversions so made.
SECTION 9.5 WITHHOLDING. To the extent required by applicable law, the
Corporation may withhold amounts for or on account of any taxes imposed or
levied by or on behalf of any taxing authority in the United States having
jurisdiction over the Corporation from any payments made pursuant to the Series
D Preferred Stock.
SECTION 9.6 HEADINGS. The headings of the Articles and Sections of this
Amendment are inserted for convenience only and do not constitute a part of this
Amendment.
13
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amendment to the
Certificate of Incorporation to be signed by its duly authorized officers as of
the day first above written.
THE NETWORK CONNECTION, INC.
By: /s/ Wilbur S. Riner
------------------------------------
Name:
Title:
By: /s/ James E. Riner
------------------------------------
Name: James E. Riner
Title: V.P. Engineering
INITIAL HOLDER
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
By: /s/ Morris C. Aaron
------------------------------------
Name:
Title:
14
<PAGE>
ANNEX I
[FORM OF CONVERSION NOTICE]
TO:
The undersigned owner of this Series D Preferred Stock (the "Series C
Preferred Stock") issued by The Network Connection, Inc. (the "Corporation")
hereby irrevocably exercises its option to convert __________ shares of the
Series D Preferred Stock into shares of the common stock, $.001 par value, of
the Corporation ("Common Stock"), in accordance with the terms of the Amendment.
The undersigned hereby instructs the Corporation to convert the number of shares
of the Series D Preferred Stock specified above into Shares of Common Stock
Issued at Conversion in accordance with the provisions of Article 6 of the
Amendment. The undersigned directs that the Common Stock issuable and
certificates therefor deliverable upon conversion, the Series D Preferred Stock
recertificated, if any, not being surrendered for conversion hereby, together
with any check in payment for fractional Common Stock, be issued in the name of
and delivered to the undersigned unless a different name has been indicated
below. All capitalized terms used and not defined herein have the respective
meanings assigned to them in the Amendment.
Dated:
---------------------------
- ---------------------------------
Signature
Fill in for registration of Series D Preferred Stock:
Please print name and address
(including zip code number) :
- --------------------------------------------------------------------------------
ADDENDUM AND MODIFICATION TO EMPLOYMENT AGREEMENT
This ADDENDUM AND MODIFICATION TO EMPLOYMENT AGREEMENT ("Agreement") is
made and entered into this ___ day of May, 1999, by and between The Network
Connection, Inc. ("TNCI") and Wilbur L. Riner, Sr. ("Employee").
WHEREAS, the parties entered into an Employment Agreement or related
agreements on or about October 31, 1998 (the "Employment Agreement"); and
WHEREAS, TNCI and Interactive Flight Technologies, Inc. ("IFT") entered
into an Asset Purchase and Sale Agreement, dated April 29, 1999 (the "Asset
Purchase Agreement"), and contemplate that IFT shall sell certain assets and
business interests to TNCI in exchange for shares of TNCI's capital stock (the
"Transaction"); and
WHEREAS, the Transaction is anticipated to benefit TNCI and its employees,
including Employee; and
WHEREAS, TNCI and Employee desire to modify their respective rights and
obligations under the Employment Contract to allow the Transaction to occur for
their mutual benefit;
NOW THEREFORE in consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, and
intending to be legally bound, the parties to this Agreement hereby agree as
follows:
1. Provided that the Transaction closes on or before June 14, 1999, this
Agreement supersedes any inconsistent terms of the Employment Agreement,
specifically including all of paragraphs 6 and 7, but all other terms of the
Employment Agreement shall remain in full force and effect. In the event the
Transaction fails to close on or before June 14, 1999, this Agreement shall be
without effect.
2. Employee waives and relinquishes any and all rights pursuant to Section
7 of the Employment Agreement ("Severance"). Employee further waives and
relinquishes any and all rights under the original Employment Agreement or
otherwise relating to relocation; Employee understands that relocation may be
required and does not provide any right to terminate this Agreement or receive
any benefits or payments (other than reimbursement of reasonable expenses as
approved by TNCI in advance).
3. TNCI shall employee Employee, and Employee agrees to be employed with
TNCI, according to the terms set forth herein. Employee shall be employed as
Executive Vice President Business Development, with assignments to be determined
from time to time by the TNCI board of directors. The term of such employment
shall be two (2) years from the date the Transaction actually closes. During
this term, Employee may be terminated for "cause" or for "no cause." For
purposes of this Agreement, "cause" shall be deemed to mean TNCI's reasonable
belief that any of the following has occurred:
<PAGE>
i. the recurring or continued failure of Employee to perform material
duties assigned to Employee after a written demand by TNCI identifying
the manner in which it believes Employee has not performed his duties
and Employee's subsequent failure to cure the identified problem
within a reasonable time; or
ii. the Employee's commission of fraud or dishonesty, or willful conduct
that (actually or potentially) significantly impairs the reputation
of, or harms, TNCI, its subsidiaries or affiliates; or
iii. Wilful or reckless violation of TNCI's work rules, policies or
regulations.
4. After the initial two (2) year term of this Agreement, Employee's
employment shall terminate unless the parties otherwise agree in writing.
5. In the event Employee is terminated during the term of this Agreement by
TNCI for "no cause," Employee shall be entitled to receive a gross severance
benefit equal to the lesser of (a) one (1) year's base salary, or (b) Employee's
base salary for the remaining term of this Agreement. Any severance benefit paid
pursuant to this paragraph shall be payable (subject to payroll deductions) 50%
at the time of termination and the remaining 50% in six monthly installments. In
addition, as part of the severance, in the event Employee elects health care
benefits continuation under COBRA, TNCI shall pay or reimburse the cost of
Employee's premiums until Employee obtains alternative health care coverage, up
to a maximum of twelve (12) months. No severance pay shall be due in the event
Employee is terminated "for cause" at any time, or resigns or otherwise
initiates termination for any reason.
6. In view of the move of corporate headquarters to Arizona and the parties
interests in uniform interpretation of its rights and obligations, this
Agreement and the Employment Agreement shall be interpreted according to the
laws of the State of Arizona as governs transactions occurring wholly within the
State of Arizona between Arizona residents. Any dispute related to this
Agreement or the Employment Agreement, including any arbitration initiated
pursuant to paragraph 12 of the Employment Agreement shall be venued in Maricopa
County, Arizona.
<PAGE>
7. This writing constitutes the entire agreement among the parties hereto
with respect to the subject matter hereof and shall not be altered or amended
except in a writing signed by the parties whose rights or obligations are
affected by such amendment or alteration.
IN WITNESS WHEREOF, the Parties have executed this Agreement effective as
of the day and year first written above.
THE NETWORK CONNECTION, INC.
May 14, 1999 By: /s/ Wilbur S. Riner, Sr.
- ------------------------------- -------------------------------------
Dated Wilbur S. Riner, Sr.
- ------------------------------- By: /s/ Wilbur S. Riner
Dated -------------------------------------
The Network Connection, Inc.
ADDENDUM AND MODIFICATION TO EMPLOYMENT AGREEMENT
This ADDENDUM AND MODIFICATION TO EMPLOYMENT AGREEMENT ("Agreement") is
made and entered into this ____ day of May, 1999, by and between The Network
Connection, Inc. ("TNCI") and James E. Riner ("Employee").
WHEREAS, the parties entered into an Employment Agreement on or about
October 31, 1998 (the "Employment Agreement"); and
WHEREAS, TNCI and Interactive Flight Technologies, Inc. ("IFT") entered
into an Asset Purchase and Sale Agreement, dated April 29, 1999 (the "Asset
Purchase Agreement"), and contemplate that IFT shall sell certain assets and
business interests to TNCI in exchange for
shares of TNCI's common stock (the "Transaction"); and
WHEREAS, the Transaction is anticipated to benefit TNCI and its
employees, including Employee; and
WHEREAS, TNCI and Employee desire to modify their respective rights and
obligations under the Employment Contract to allow the Transaction to occur for
their mutual benefit;
NOW THEREFORE in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and intending to be legally bound, the parties to this Agreement
hereby agree as follows:
1. Provided that the Transaction closes on or before May 28, 1999, this
Agreement supersedes any inconsistent terms of the Employment Agreement, but all
other terms of the Employment Agreement shall remain in full force and effect.
In the event the Transaction fails to close on or before May 28, 1999, this
Agreement shall be without effect.
2. Employee waives and relinquishes any and all rights pursuant to
Section 7 of the Employment Agreement ("Severance").
3. TNCI shall employ Employee, and Employee agrees to remain employed
with TNCI, according to the terms set forth herein. Employee shall be employed
as Vice President of Engineering and Programs, with assignments to be determined
from time to time by the TNCI board of directors and officers. The terms of such
employment shall be from the date the Transaction actually closes until October
31, 2001. During this term, Employee may be terminated for "cause" or for no
"cause." For purposes of this Agreement, "cause" shall be deemed to mean TNCI's
reasonable belief that any of the following has occurred:
i. the recurring or continued failure of Employee to perform
material duties assigned to Employee after a written demand by
TNCI identifying the manner in which it believes Employee has not
performed his duties and Employee's subsequent failure to cure
the identified problem within a reasonable time; or
<PAGE>
ii. the Employee's commission of fraud or dishonesty, or willful
conduct that (actually or potentially) significantly impairs the
reputation of, or harms, TNCI, its subsidiaries or affiliates; or
iii. Willful or reckless violation of TNCI's work rules, policies or
regulations.
4. After the initial two (2) year term of this Agreement, Employee's
employment shall terminate unless the parties otherwise agree in writing.
5. In the event Employee is terminated during the term of this Agreement by
TNCI for "no cause," Employee shall be entitled to receive a gross severance
benefit equal to the lesser of (a) one (1) year's base salary, or (b) Employee's
base salary for the remaining term of this Agreement. Any severance benefit paid
pursuant to this paragraph shall be payable (subject to payroll deductions) 50%
at the time of termination and the remaining 50% in six monthly installments. In
addition, as part of the severance, in the event Employee elects health care
benefits continuation under COBRA, TNCI shall pay or reimburse the cost of
Employee's premiums until Employee obtains alternative health care coverage, up
to a maximum of twelve (12) months. No severance pay shall be due in the event
Employee is terminated "for cause" at any time, or resigns or otherwise
initiates termination for any reason.
6. In view of the move of corporate headquarters to Arizona and the parties
interests in uniform interpretation of its rights and obligations, this
Agreement and the Employment Agreement shall be interpreted according to the
laws of the State of Arizona as governs transactions occurring wholly within the
State of Arizona between Arizona residents. Any dispute related to this
Agreement or the Employment Agreement, including any arbitration initiated
pursuant to paragraph 12 of the Employment Agreement shall be venued in Maricopa
County, Arizona.
7. This writing constitutes the entire agreement among the parties hereto
with respect to the subject matter hereof and shall not be altered or amended
except in a writing signed by the parties whose rights or obligations are
affected by such amendment or alteration.
IN WITNESS WHEREOF, the Parties have executed this Agreement effective as
of the day and year first written above.
THE NETWORK CONNECTION, INC.
May 14, 1999 By: /s/ James E. Riner
- ------------------------------- -------------------------------------
Dated James E. Riner
- ------------------------------- By: /s/ Wilbur S. Riner
Dated -------------------------------------
The Network Connection, Inc.
EMPLOYMENT AGREEMENT
THIS AGREEMENT IS EFFECTIVE JUNE 11, 1999, BETWEEN THE NETWORK
CONNECTION, INC. ("COMPANY") AND FRANK GOMER ("EXECUTIVE").
W I T N E S S E T H:
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
agrees to perform the duties and services incident to that position, and such
other duties and services as may reasonably be requested of him by the Chief
Executive Officer or the Chairman of the Board of Company. The Executive will
report directly to the Chief Executive Officer and shall report to the Board of
Directors of Company on a regular basis.
(b) Throughout the term of this Agreement, Executive shall devote his
entire 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 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 5% of any class of the outstanding equity securities of
such business.
3. TERM. This Agreement shall be for a term of 24 months, commencing on
June 11, 1999, and ending on June 10, 2001, 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, to use their best efforts to determine
whether the Agreement will be renewed or negotiated.
<PAGE>
4. COMPENSATION.
(a) For all services to be rendered by Executive to Company, Executive
shall receive an annual base salary of Two Hundred and Fifteen Thousand Dollars
($215,000), payable in accordance with Company's regular payroll practices in
effect from time to time.
(b) In addition to Executive's base salary, Company shall pay to
Executive, on July 31 and January 31 for the preceding six-month periods ending
on June 30 and December 31 of each year during the term of this Agreement, such
bonuses or other additional compensation as the Board of Directors may determine
based upon the achievement of the goals assigned to Executive as set forth in a
Board-approved Business Plan or as may otherwise be determined or agreed to by
the Board. Subject to the achievement of the assigned goals, the total and
aggregate bonuses to be paid to Executive in any year during the term of this
Agreement should not be less than twenty percent (20%) of Executive's annual
salary. To the extent Executive is entitled to a bonus for the time period from
January 1, 2001 to June 10, 2001, Executive shall be paid such bonus, as
determined pursuant to the terms of this Section 4, on July 31, 2001.
(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. Company shall pay Executive for any unused vacation at
December 31st of each year.
(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 car phone, cellular 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) Company shall grant to Executive, effective as of June 11, 1999,
fifty thousand (50,000) options under the Company's Stock Option Plan. Such
options shall vest as follows: ten thousand (10,000) on June 11, 1999; ten
thousand (10,000) on June 11, 2000; ten thousand (10,000) on June 11, 2001; ten
thousand (10,000) on June 11, 2002; and ten thousand (10,000) on June 11, 2003.
The options shall be for a term of ten (10) years from the date of the grant of
such options. If Company does not renew this Agreement or terminates this
Agreement without Cause, fifty percent (50%) of all options granted hereunder
will vest and become exercisable (to the extent not already vested and
exercisable). If Executive leaves Company or is terminated for Cause, Executive
shall be entitled to exercise such options that have vested as of the date of
such event, but no additional options shall vest or be exercisable. Upon a
Change of Control, or if Executive leaves the Company for Good Reason, as
hereinafter defined, all options granted hereunder shall vest as of immediately
prior to such Change of Control. In the event of Executive's disability or
death, Executive's estate shall be entitled to exercise such options that have
vested as of the date of disability or death.
2
<PAGE>
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, 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.
7. TERMINATION OF COMPANY'S BUSINESS. If (i) Company shall discontinue the
business operation in which Executive is employed, Company may immediately
terminate Executive's employment upon written notice, or (ii) there is a change
of control ("Change in Control", as defined herein), and as a result of such
Change in Control, the Executive is terminated without Cause (as defined in
Paragraph 8 below), then, on the occurrence of either event, Company shall have
no further obligations or liabilities hereunder to Executive, except Company
shall (i) pay Executive an amount equal to two times the remaining base salary
due the Executive for the then current term, but in no event shall Executive
receive less than his base salary for one year, to be paid in accordance with
the regular payroll practices of Company; and (ii) continue to provide Executive
with family medical and dental coverage for a period of 12 months.
(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) 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 30% 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.
3
<PAGE>
(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, in
his reasonable judgment, 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;
(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;
(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 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
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;
(g) the Executive's material breach of this Agreement in any other
respect.
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. TERMINATION WITHOUT CAUSE. In the event Company terminates this
Agreement without Cause at any time, the Company's sole liability for
compensation to Executive shall be to pay the Executive two times the remaining
4
<PAGE>
balance of the base salary due the Executive for the remainder of the then
current term to be paid in accordance with the regular payroll practices of
Company and provide Executive with family medical and dental coverage for the
same period.
10. 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.
11. NONCOMPETITION, TRADE SECRETS, ETC.
(a) During the term of this Agreement and for a period of one (1) 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 definitely
planned by Company, at the time of the termination of Executive's employment.
However, nothing contained in this Paragraph 13 shall prevent Executive from
holding for investment no more than five percent (5%) of any class of equity
securities of a company whose securities are traded on a national securities
exchange or on the NASDAQ National Market.
(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 10 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.
(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
5
<PAGE>
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
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 number of months 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.
12. 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.
13. INDEMNIFICATION. Company shall maintain a Directors and Officers Errors
and Omission Policy with a minimum coverage of 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.
6
<PAGE>
14. 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,
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 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:
Irwin L. Gross, Chairman and CEO
Interactive Flight Technologies, Inc.
811 Chestnut Street
uite 120
hiladelphia, PA 19103
with a copy, given in the manner prescribed above, to:
Richard P. Jaffe, Esquire
Mesirov Gelman Jaffe Cramer & Jamieson, LLP
1735 Market Street - 38th Floor
Philadelphia, PA 19103-7598
(ii) If to Executive:
Frank Gomer
7
<PAGE>
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 parties 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.
(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
<PAGE>
(l) EXPENSES OF THE PARTIES. Company shall be responsible for up to
$4,000 in legal expenses incurred in the negotiation and preparation of this
Agreement.
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 CEO
EXECUTIVE:
/s/ FRANK GOMER
-----------------------------------------
FRANK GOMER
9
<PAGE>
EXHIBIT "A"
Under Paragraph 11, NONCOMPETITION, TRADE SECRETS, ETC., the geographic area
shall be as follows:
Continental United States
10
EMPLOYMENT AGREEMENT
THIS AGREEMENT IS EFFECTIVE JUNE 11, 1999, BETWEEN THE NETWORK CONNECTION,
INC. ("COMPANY") AND MORRIS C. AARON ("EXECUTIVE").
W I T N E S S E T H:
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 Chief
Financial Officer and agrees to perform the duties and services incident to that
position, and such other duties and services as may reasonably be requested of
him by the Chief Executive Officer or the Chairman of the Board of Company. The
Executive will report directly to the Chief Executive Officer and shall report
to the Board of Directors of Company on a regular basis.
(b) Throughout the term of this Agreement, Executive shall devote his
entire 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 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 5% of any class of the outstanding equity securities of
such business.
3. TERM. This Agreement shall be for a term of 24 months, commencing on
June 11, 1999, and ending on June 10, 2001, 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, to use their best efforts to determine
whether the Agreement will be renewed or negotiated.
<PAGE>
4. COMPENSATION.
(a) For all services to be rendered by Executive to Company, Executive
shall receive an annual base salary of Two Hundred and Fifteen Thousand Dollars
($215,000), payable in accordance with Company's regular payroll practices in
effect from time to time.
(b) In addition to Executive's base salary, Company shall pay to
Executive, on July 31 and January 31 for the preceding six-month periods ending
on June 30 and December 31 of each year during the term of this Agreement, such
bonuses or other additional compensation as the Board of Directors may determine
based upon the achievement of the goals assigned to Executive as set forth in a
Board-approved Business Plan or as may otherwise be determined or agreed to by
the Board. Subject to the achievement of the assigned goals, the total and
aggregate bonuses to be paid to Executive in any year during the term of this
Agreement should not be less than twenty percent (20%) of Executive's annual
salary. To the extent Executive is entitled to a bonus for the time period from
January 1, 2001 to June 10, 2001, Executive shall be paid such bonus, as
determined pursuant to the terms of this Section 4, on July 31, 2001.
(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. Company shall pay Executive for any unused vacation at
December 31st of each year. In addition, Company shall provide Executive with a
monthly supplemental insurance reimbursement of $417.00.
(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 car phone, cellular 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) Company shall grant to Executive, effective as of June 11, 1999,
fifty thousand (50,000) options under the Company's Stock Option Plan. Such
options shall vest as follows: ten thousand (10,000) on June 11, 1999; ten
thousand (10,000) on June 11, 2000; ten thousand (10,000) on June 11, 2001; ten
thousand (10,000) on June 11, 2002; and ten thousand (10,000) on June 11, 2003.
The options shall be for a term of ten (10) years from the date of the grant of
such options. If Company does not renew this Agreement or terminates this
Agreement without Cause, fifty percent (50%) of all options granted hereunder
will vest and become exercisable (to the extent not already vested and
exercisable). If Executive leaves Company or is terminated for Cause, Executive
shall be entitled to exercise such options that have vested as of the date of
such event, but no additional options shall vest or be exercisable. Upon a
Change of Control, or if Executive leaves the Company for Good Reason, as
hereinafter defined, all options granted hereunder shall vest as of immediately
prior to such Change of Control. In the event of Executive's disability or
death, Executive's estate shall be entitled to exercise such options that have
vested as of the date of disability or death.
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, Company will continue the payment
2
<PAGE>
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.
7. TERMINATION OF COMPANY'S BUSINESS. If (i) Company shall discontinue the
business operation in which Executive is employed, Company may immediately
terminate Executive's employment upon written notice, or (ii) there is a change
of control ("Change in Control", as defined herein), and as a result of such
Change in Control, the Executive is terminated without Cause (as defined in
Paragraph 8 below), then, on the occurrence of either event, Company shall have
no further obligations or liabilities hereunder to Executive, except Company
shall (i) pay Executive an amount equal to two times the remaining base salary
due the Executive for the then current term, but in no event shall Executive
receive less than his base salary for one year, to be paid in accordance with
the regular payroll practices of Company; and (ii) continue to provide Executive
with family medical and dental coverage for a period of 12 months.
(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) 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 30% 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:
3
<PAGE>
(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, in
his reasonable judgment, 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;
(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;
(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 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
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;
(g) the Executive's material breach of this Agreement in any other
respect.
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. TERMINATION WITHOUT CAUSE. In the event Company terminates this
Agreement without Cause at any time, the Company's sole liability for
compensation to Executive shall be to pay the Executive two times the remaining
balance of the base salary due the Executive for the remainder of the then
current term to be paid in accordance with the regular payroll practices of
Company and provide Executive with family medical and dental coverage for the
same period.
4
<PAGE>
10. 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.
11. NONCOMPETITION, TRADE SECRETS, ETC.
(a) During the term of this Agreement and for a period of one (1) 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 definitely
planned by Company, at the time of the termination of Executive's employment.
However, nothing contained in this Paragraph 13 shall prevent Executive from
holding for investment no more than five percent (5%) of any class of equity
securities of a company whose securities are traded on a national securities
exchange or on the NASDAQ National Market.
(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 10 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.
(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,
5
<PAGE>
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
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 number of months 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.
12. 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.
13. INDEMNIFICATION. Company shall maintain a Directors and Officers Errors
and Omission Policy with a minimum coverage of 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.
14. 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
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.
(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,
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 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:
Irwin L. Gross, Chairman and CEO
Interactive Flight Technologies, Inc.
1811 Chestnut Street
Suite 120
Philadelphia, PA 19103
7
<PAGE>
with a copy, given in the manner prescribed above, to:
Richard P. Jaffe, Esquire
Mesirov Gelman Jaffe Cramer & Jamieson, LLP
1735 Market Street - 38th Floor
Philadelphia, PA 19103-7598
(ii) If to Executive:
Morris C. Aaron
4715 East Calle Del Norte
Phoenix, AZ 85018
with a copy, given in the manner prescribed above, to:
Stephen Marcovich, Esquire
Cummings & Lockwood
Four Stamford Plaza
P.O. Box 120
Stamford, CT 06904-0120
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 parties 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.
8
<PAGE>
(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.
(l) EXPENSES OF THE PARTIES. Company shall be responsible for up to
$4,000 in legal expenses incurred in the negotiation and preparation of this
Agreement.
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 CEO
EXECUTIVE:
/s/ MORRIS C. AARON
-----------------------------------------
MORRIS C. AARON
9
<PAGE>
EXHIBIT "A"
Under Paragraph 11, NONCOMPETITION, TRADE SECRETS, ETC., the
geographic area shall be as follows:
Continental United States
10
FIFTH ALLONGE TO
SECURED PROMISSORY NOTE
ALLONGE, dated July 16, 1999, attached to and forming a part of the Secured
Promissory Note, dated January 26, 1999, as amended by the Allonge to Secured
Promissory Note dated January 29, 1999, the Second Allonge to Secured Promissory
Note dated March 19, 1999, the Third Allonge to Secured Promissory Note dated
March 24, 1999, and the Fourth Allonge to Secured Promissory Note dated May 10,
1999 (collectively, the "NOTE"), made by THE NETWORK CONNECTION, INC., a Georgia
corporation ("MAKER"), payable to the order of Interactive Flight Technologies,
Inc., a Delaware corporation ("PAYEE") in the original principal amount of
$500,000 and in the current principal amount of $750,000.
1. In consideration of the cancellation of the notes referred to on Annex I
attached to this Allonge which were issued by Maker, have been acquired by
Payee, and are in the aggregate principal amount of One Million Two Hundred
Fifty Four Thousand and Eighty Two Dollars ($1,254,082), with interest,
redemption premiums, and other charges incurred but unpaid thereon to the date
hereof totaling Six Hundred Forty Thousand Nine Hundred Twenty Five Dollars
($640,925) (the "Series Notes"), the principal amount of the Note is hereby
increased to Two Million Six Hundred Forty-Five Thousand Seven Dollars
($2,645,007). Accordingly, the first paragraph of the Note is hereby amended as
follows:
FOR VALUE RECEIVED, the undersigned, The Network Connection, Inc., a
Georgia corporation (the "MAKER"), hereby promises to pay to the order
of Interactive Flight Technologies, Inc., a Delaware corporation, its
successors and assigns (the "PAYEE"), the principal sum of Two Million
Six Hundred Forty-Five Thousand Seven Dollars ($2,645,007), together
with interest on the outstanding principal balance thereof accrued
from the date hereof: (a) at the fixed rate of 9.5% per annum in
respect of all periods during which no Event of Default (as such term
is hereinafter defined) is continuing; and (b) at the fixed rate of
12.5% in respect of all periods during which any Event of Default is
continuing. All payments of principal and/or interest shall be paid in
lawful money of the United States of America in immediately available
funds to an account designated by Payee.
2. Any agreement to subordinate, or any subordination, of the indebtedness
represented by the Note to bank or finance company indebtedness, which may
heretofore have been given by Payee, is null and void and of no force or effect.
Maker represents and warrants to Payee that since execution of the Note, Payee
retains a first priority security interest in the Collateral granted by Maker to
Payee pursuant to that certain Security Agreement dated January 25, 1999 as
amended ("SECURITY AGREEMENT"). The Maker's obligations under the Note, as
amended here-by, shall be and be deemed to be secured by the Collateral and
subject to the terms of the Secur-ity Agreement, all of which are confirmed and
ratified as of the date hereof, including, but not limited to, all of the
representations, warranties and covenants therein, subject to the waivers
provided by Payee contained in the Fourth Allonge.
<PAGE>
3. In all other respects, the Note is confirmed, ratified, and approved
and, as amended by this Allonge, shall continue in full force and effect.
IN WITNESS WHEREOF, Maker and Payee have caused this Allonge to be executed
and delivered by their respective duly authorized officers as of the day and
year first above written.
THE NETWORK CONNECTION INC.
By: /s/ Wilber Riner, Sr.
------------------------------------
Accepted and agreed to:
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
By: /s/ Morris C. Aaron
------------------------------------
<PAGE>
ANNEX I
DATE OF NOTE PAYEE PRINCIPAL AMOUNT
- ------------ ----- ----------------
October 11, 1998 Sui Wan Chan $ 108,333
October 11, 1998 Peter Che Nan Chen $ 108,333
October 12, 1998 Correllus International, Ltd. $ 108,333
October 12, 1998 Galapaco Holdings, Ltd. $ 270,750
October 12, 1998 Keyway Holdings, Co. $ 108,333
November 17, 1998 Correllus International, Ltd. $ 100,000
November 19, 1998 Peter Che Nan Chen $ 100,000
November 24, 1998 Lufeng Investments, Ltd. $ 50,000
November 27, 1998 Keyway Holdings, Co. $ 100,000
December 11, 1998 Matterhorn, Ltd. $ 200,000
----------
TOTAL $1,254,082
==========
SIXTH ALLONGE TO
SECURED PROMISSORY NOTE
ALLONGE, dated August 9, 1999, attached to and forming a part of the
Secured Promissory Note, dated January 26, 1999, as amended by the Allonge to
Secured Promissory Note dated January 29, 1999, the Second Allonge to Secured
Promissory Note dated March 19, 1999, the Third Allonge to Secured Promissory
Note dated March 24, 1999, the Fourth Allonge to Secured Promissory Note dated
May 10, 1999, and the Fifth Allonge to Secured Promissory Note dated July 16,
1999 (collectively, the "NOTE"), made by THE NETWORK CONNECTION, INC., a Georgia
corporation ("MAKER"), payable to the order of Interactive Flight Technologies,
Inc., a Delaware corporation ("PAYEE") in the original principal amount of
$500,000 and in the current principal amount of $2,645,007.
1. In consideration of the cancellation of the notes referred to on Annex I
attached to this Allonge which were issued by Maker, have been acquired by
Payee, and are in the aggregate principal amount of Three Hundred Fifty Thousand
Dollars ($350,000), with interest, redemption premiums, and other charges
incurred but unpaid thereon to the date hereof totaling One Hundred Twenty Seven
Thousand Seven Hundred Fifty Dollars ($127,750) (the "Series D Notes"), the
principal amount of the Note is hereby increased to Three Million One Hundred
and Twenty Two Thousand and Seven Hundred Fifty Seven Dollars ($3,122,757).
Accordingly, the first paragraph of the Note is hereby amended as follows:
FOR VALUE RECEIVED, the undersigned, The Network Connection, Inc., a
Georgia corporation (the "MAKER"), hereby promises to pay to the order
of Interactive Flight Technologies, Inc., a Delaware corporation, its
successors and assigns (the "PAYEE"), the principal sum of Three
Million One Hundred Twenty-Two Thousand Seven Hundred Fifty-Seven
Dollars ($3,122,757), together with interest on the outstanding
principal balance thereof accrued from the date hereof: (a) at the
fixed rate of 9.5% per annum in respect of all periods during which no
Event of Default (as such term is hereinafter defined) is continuing;
and (b) at the fixed rate of 12.5% in respect of all periods during
which any Event of Default is continuing. All payments of principal
and/or interest shall be paid in lawful money of the United States of
America in immediately available funds to an account designated by
Payee.
2. Any agreement to subordinate, or any subordination, of the indebtedness
represented by the Note to bank or finance company indebtedness, which may
heretofore have been given by Payee, is null and void and of no force or effect.
Maker represents and warrants to Payee that since execution of the Note, Payee
retains a first priority security interest in the Collateral granted by Maker to
Payee pursuant to that certain Security Agreement dated January 25, 1999 as
amended, ("SECURITY AGREEMENT"). The Maker's obligations under the Note, as
amended hereby, shall be and be deemed to be secured by the Collateral and
subject to the terms of the Security Agreement, all of which are confirmed and
ratified as of the date hereof, including, but not limited to, all of the
representations, warranties and covenants therein.
<PAGE>
3. In all other respects, the Note is confirmed, ratified, and approved
and, as amended by this Fifth Allonge, shall continue in full force and effect,
subject to the waivers provided by Payee contained in the Fourth Allonge.
IN WITNESS WHEREOF, Maker and Payee have caused this Sixth Allonge to be
executed and delivered by their respective duly authorized officers as of the
day and year first above written.
THE NETWORK CONNECTION INC.
By: /s/ Wilber Riner, Sr.
------------------------------------
Accepted and agreed to:
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
By: /s/ Morris C. Aaron
------------------------------------
<PAGE>
ANNEX I
SERIES D NOTES OF THE NETWORK CONNECTION, INC.
DATE OF NOTE ORIGINAL PAYEE PRINCIPAL AMOUNT TRANSFERRED TO
- ------------ -------------- ---------------- --------------
October 20, 1998 Robert E. Benninger, $100,000 XCEL Capital LLC
Jr. and Sara Anne on April 13, 1999
Benninger
XCEL Capital LLC
October 20, 1998 Will D. Brantley $150,000 on April 23, 1999
October __, 1998 Elaine Martin $100,000 Not Transferred
--------
TOTAL $350,000
========
SEVENTH ALLONGE TO
SECURED PROMISSORY NOTE
ALLONGE, dated August 24, 1999, attached to and forming a part of the
Secured Promissory Note, dated January 26, 1999, as amended by the Allonge to
Secured Promissory Note dated January 29, 1999, the Second Allonge to Secured
Promissory Note dated March 19, 1999, the Third Allonge to Secured Promissory
Note dated March 24, 1999, the Fourth Allonge to Secured Promissory Note dated
May 10, 1999, the Fifth Allonge to Secured Promissory Note dated July 16, 1999,
and the Sixth Allonge to Secured Promissory Note dated August 9, 1999
(collectively, the "NOTE"), made by THE NETWORK CONNECTION, INC., a Georgia
corporation ("MAKER"), payable to the order of Interactive Flight Technologies,
Inc., a Delaware corporation ("PAYEE") in the original principal amount of
$500,000 and in the current principal amount of $3,122,757.
1. In consideration of the payment by Payee of certain obligations of
Maker, the principal amount of the Note is hereby increased by One Million Two
Hundred Thousand Dollars ($1,200,000) to Four Million Three Hundred Twenty-Two
Thousand Seven Hundred Fifty Seven Dollars ($4,322,757). Accordingly, the first
paragraph of the Note is hereby amended as follows:
FOR VALUE RECEIVED, the undersigned, The Network Connection, Inc., a
Georgia corporation (the "MAKER"), hereby promises to pay to the order
of Interactive Flight Technologies, Inc., a Delaware corporation, its
successors and assigns (the "PAYEE"), the principal sum of Four
Million Three Hundred Twenty-Two Thousand Seven Hundred Fifty-Seven
Dollars ($4,322,757), together with interest on the outstanding
principal balance thereof accrued from the date hereof: (a) at the
fixed rate of 9.5% per annum in respect of all periods during which no
Event of Default (as such term is hereinafter defined) is continuing;
and (b) at the fixed rate of 12.5% in respect of all periods during
which any Event of Default is continuing. All payments of principal
and/or interest shall be paid in lawful money of the United States of
America in immediately available funds to an account designated by
Payee.
2. Paragraph 16 is hereby amended and restated in full to read as follows:
16. CONVERSION RIGHTS. Payee shall be entitled, at any time and
from time to time and in its sole discretion, to convert all or a
portion of the principal amount and accrued interest due under this
Note into shares of the Maker's Series C 8% Convertible Preferred
Stock, $.01 par value, Stated Value $1,000 per share (the "PREFERRED
STOCK") or, at the option of Payee, into the Maker's Common Stock (the
"COMMON STOCK"). Any such conversion into Preferred Stock shall be
effected at the rate of one share of Preferred Stock for each $1,000
due hereunder which Payee has elected to convert (the "CONVERSION
RATE"). If Payee elects to convert all or a portion of the principal
amount and accrued interest due under this Note directly into the
Common Stock, the number of shares to be issued shall be calculated as
<PAGE>
if such amount had first been converted to Preferred Stock hereunder
(calculated without regard to any insufficiency of authorized shares
of Preferred Stock) and such resulting shares of Preferred Stock had,
in turn, immediately been converted to Common Stock at a conversion
price per share equal to the lowest of (a) $1.50, (b) 66.67% of the
Current Market Price (as hereafter defined), (c) the price per share
at which the Maker, after the date of this Allonge, issues and sells
any Common Stock, or (d) where coupled with the right of the
purchaser(s) thereof to demand that the Corporation register under the
Securities Act of 1933 any Common Shares (not theretofore registered)
for which any warrants or options may be exercised or any convertible,
exchangeable or exercisable securities may be converted, exercised or
exchanged, (i) the exercise price of any such warrants or options
issued by the Maker after the date of this Allonge, or (ii) the
conversion rate, exchange rate or exercise price, respectively, of any
such convertible, exchangeable or exercisable security issued by the
Maker after the date of this Allonge, except for stock option
agreements or stock incentive agreements issued pursuant to employee
benefit plans. For purposes of this Paragraph 16, the term "Current
Market Price" means the closing bid price as reported on the Nasdaq
Stock Market (or if not then traded on such market, on such exchange
or quotation system where such shares are then traded) for the trading
day immediately preceding the Conversion Date.
Payee may elect to convert by delivering to Maker, by facsimile,
telecopier or other expedient means of transmission, a notice of
conversion stating (i) the principal amount and/or accrued interest to
be converted, (ii) the number of shares of Preferred Stock or Common
Stock to be issued as a result of such conversion; and (iii) the
person(s) in whose name the Preferred Stock or Common Stock is to be
issued. The conversion of any portion of this Note and the resulting
issuance of Preferred Stock or Common Stock shall be effective upon
the date that Maker receives the corresponding notice of conversion,
and Maker shall deliver to Payee one or more certificates evidencing
such shares no later than five days following such effective date.
Upon a conversion of all amounts due hereunder, Payee shall deliver
the original Note (including all Allonges), marked "PAID," to Maker no
later than five days following the delivery to Maker of the conversion
notice. In the event of a conversion of less than all amounts due
hereunder, (A) no principal amount under the Note shall be deemed
converted unless and until all accrued interest under the Note shall
be first converted; and (B) the portion of the amounts due hereunder
that are so converted shall be deemed repaid. The parties shall mark
on the grid attached to the Fourth Allonge to Secured Promissory Note
dated May 10, 1999 the facts related to such partial conversion and
shall confirm the accuracy of the entry by signing next to each such
entry.
<PAGE>
3. Any agreement to subordinate, or any subordination, of the indebtedness
represented by the Note to bank or finance company indebtedness, which may
heretofore have been given by Payee, is null and void and of no force or effect.
Maker represents and warrants to Payee that since execution of the Note, Payee
retains a first priority security interest in the Collateral granted by Maker to
Payee pursuant to that certain Security Agreement dated January 25, 1999 as
amended, ("SECURITY AGREEMENT"). The Maker's obligations under the Note, as
amended hereby, shall be and are deemed to be secured by the Collateral and
subject to the terms of the Security Agreement, all of which are confirmed and
ratified as of the date hereof, including, but not limited to, all of the
representations, warranties and covenants therein.
4. In all other respects, the Note is confirmed, ratified, and approved
and, as amended by this Seventh Allonge, shall continue in full force and
effect.
IN WITNESS WHEREOF, Maker and Payee have caused this Seventh Allonge to be
executed and delivered by their respective duly authorized officers as of the
day and year first above written.
THE NETWORK CONNECTION INC.
By: /s/ Morris C. Aaron
------------------------------------
Accepted and agreed to:
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
By: /s/ David Cheurin
------------------------------------
REVOLVING CREDIT NOTE
$5,000,000 August 24, 1999
FOR VALUE RECEIVED, the undersigned, The Network Connection, Inc., a
Georgia corporation (the "MAKER"), hereby promises to pay to the order of
Interactive Flight Technologies, Inc., a Delaware corporation, its successors
and assigns (the "PAYEE"), the lesser of (x) Five Million Dollars ($5,000,000),
or (y) the unpaid principal amount of all advances made by Payee to Maker under
this Revolving Credit Note, in either such case together with interest on the
outstanding principal balance thereof accrued from the date hereof calculated at
the sum of the prime lending rate (as published and changed from time to time in
the "Money Rates" section of THE WALL STREET JOURNAL, or if not so published for
any reason, then as published in any other financial newspaper of national
circulation) plus three percent (3%) per annum. All payments of principal and/or
interest shall be paid in lawful money of the United States of America in
immediately available funds to an account designated by Payee.
1. FUNDING.
Provided that no Event of Default (as such term is defined below) has
occurred and is continuing, and subject to the terms and conditions set forth
herein, commencing on the date hereof, and expiring on the day immediately prior
to the Maturity Date (as defined below), Maker may request from Payee, and Payee
shall extend to Maker advances under this Revolving Credit Note in amounts
requested by Maker, provided that the amount requested, together with all then
outstanding advances shall not exceed, in the aggregate, Five Million Dollars
($5,000,000) outstanding at any one time (the "Maximum Loan Amount"). Subject to
the terms and conditions hereof, Maker may, from time to time, borrow, repay,
and reborrow advances. All borrowings, repayments and reborrowings shall be
reflected on the attached Partial Conversion Grid.
2. PAYMENTS OF PRINCIPAL AND INTEREST.
(a) Interest on the outstanding principal balance of this Revolving
Credit Note shall be payable on the 5th day of each month. Interest shall be
calculated on the basis of a 360 day year but shall be payable only for the
number of days actually elapsed.
(b) The outstanding principal balance of this Revolving Credit Note,
together with all accrued and unpaid interest and fees thereon, shall be due and
payable on September 30, 2001 (the "Maturity Date").
(c) In the event that any scheduled payment date hereunder is a day on
which banks in the State of Arizona are required or authorized to be closed,
then the payment that would be due on such day shall instead be due and payable
on the next day which is not such a non-banking day, with additional interest
for such delay at the rate then in effect hereunder.
<PAGE>
3. CONVERSION RIGHTS.
Payee shall be entitled, at any time and from time to time and in its
sole discretion, to convert all or a portion of the principal amount and accrued
interest due under this Note into shares of the Maker's Series C 8% Convertible
Preferred Stock, $.01 par value, Stated Value $1,000 per share (the "PREFERRED
STOCK") or, at the option of Payee, into the Maker's Common Stock (the "COMMON
STOCK"). Any such conversion into Preferred Stock shall be effected at the rate
of one share of Preferred Stock for each $1,000 due hereunder which Payee has
elected to convert (the "CONVERSION RATE"). If Payee elects to convert all or a
portion of the principal amount and accrued interest due under this Note
directly into Common Stock, the number of shares to be issued shall be
calculated as if such amount had first been converted to Preferred Stock
hereunder (calculated without regard to any insufficiency of authorized shares
of Preferred Stock) and such resulting shares of Preferred Stock had, in turn,
immediately been converted to Common Stock at a conversion price per share equal
to the lowest of (a) $1.50, (b) 66.67% of the Current Market Price (as hereafter
defined), (c) the price per share at which the Maker, after the date of this
Revolving Credit Note, issues and sells any Common Stock, or (d) where coupled
with the right of the purchaser(s) thereof to demand that the Corporation
register under the Securities Act of 1933 any Common Shares (not theretofore
registered) for which any warrants or options may be exercised or any
convertible, exchangeable or exercisable securities may be converted, exercised
or exchanged, (i) the exercise price of any such warrants or options issued by
the Maker after the date of this Revolving Credit Note, or (ii) the conversion
rate, exchange rate or exercise price, respectively, of any such convertible,
exchangeable or exercisable security issued by the Maker after the date of this
Revolving Credit Note, except for stock option agreements or stock incentive
agreements issued pursuant to employee benefit plans. For purposes of this
Paragraph 3, the term "Current Market Price" means the closing bid price as
reported on the Nasdaq Stock Market (or if not then traded on such market, on
such exchange or quotation system where such shares are then traded) for the
trading day immediately preceding the Conversion Date.
Payee may elect to convert by delivering to Maker, by facsimile,
telecopier or other expedient means of transmission, a notice of conversion
stating (i) the principal amount and/or accrued interest to be converted, (ii)
the number of shares of Preferred Stock or Common Stock to be issued as a result
of such conversion; and (iii) the person(s) in whose name the Preferred Stock or
Common Stock is to be issued. The conversion of any portion of this Note and the
resulting issuance of Preferred Stock or Common Stock shall be effective upon
the date that Maker receives the corresponding notice of conversion, and Maker
shall deliver to Payee one or more certificates evidencing such shares no later
than five days following such effective date. Upon a conversion of all amounts
due hereunder, Payee shall deliver the original Note (including all Allonges),
marked "PAID," to Maker no later than five days following the delivery to Maker
of the conversion notice. In the event of a conversion of less than all amounts
due hereunder, (A) no principal amount under the Note shall be deemed converted
unless and until all accrued interest under the Note shall be first converted;
and (B) the portion of the amounts due hereunder that are so converted shall be
deemed repaid. The parties shall mark on the grid attached to the Fourth Allonge
to Secured Promissory Note dated May 10, 1999 the facts related to such partial
conversion and shall confirm the accuracy of the entry by signing next to each
such entry.
-2-
<PAGE>
4. COLLATERAL SECURITY.
The grant by Maker to Payee of a first priority lien on and security
interest in all of Maker's Accounts, Equipment, Inventory, chattel paper,
documents and instruments, general intangibles, and all other goods and property
of the Maker pursuant to the Security Agreement between Maker and Payee dated as
of January 26, 1999, as amended, (the "SECURITY AGREEMENT"), shall also serve as
collateral for the indebtedness, fees, costs and other amounts evidenced by this
Revolving Credit Note.
5. FEES.
(a) Maker shall pay to Payee a one time loan commitment and
administrative fee of $50,000 upon the execution of this Revolving Credit Note.
(b) Maker shall pay to Payee an unused commitment fee of one half of
one percent (0.5%) of the unborrowed balance of the Maximum Loan Amount per
annum, payable on the 5th day of each month. Such unused commitment fee shall be
calculated on the basis of a 360 day year but shall be payable only for the
number of days actually elapsed.
6. EVENTS OF DEFAULT.
The occurrence of any of the following events or circumstances shall
be an "EVENT OF DEFAULT" hereunder:
(a) Any failure by the Maker to pay when due (or within three days of
grace thereafter) all or any principal or interest or other payment hereunder;
or
(b) Maker's use of any of the proceeds hereof to repay interest
bearing debt for borrowed money existing on the date hereof; or
(c) Maker's (i) admission in writing of its inability to pay generally
its debts as they mature, or (ii) making of a general assignment for the benefit
of creditors, or (iii) adjudication as a bankrupt or insolvent, or (iv) filing
of a voluntary petition in bankruptcy, or (v) taking advantage, as against its
creditors, of any bankruptcy law or statute of the United States of America or
any state or subdivision thereof now or hereafter in effect, or (vi) having a
petition or proceeding filed against it under any provision of any bankruptcy or
insolvency law or statute of the United States of America or any state or
subdivision thereof, which petition or proceeding is not dismissed within sixty
(60) days after the date of the commencement thereof, (vii) having a receiver,
liquidator, trustee, custodian, conservator, sequestrator or other such person
appointed to take charge of Maker's affairs or assets or business and such
appointment is not vacated or discharged within sixty (60) days thereafter, or
(viii) taking of any action in furtherance of any of the foregoing; or
(d) Any failure by the Maker to perform or observe any other
agreement, covenant, term or condition contained in this Revolving Credit Note,
the Security Agreement, or in any other agreement between the Maker and the
Payee, and the continuance of such failure or non-performance for ten (10) days;
or
-3-
<PAGE>
(e) The entry of a final judgment in an amount in excess of $150,000
against Maker which is not, within sixty (60) days after the entry thereof,
discharged or the execution thereof stayed pending appeal, or within sixty (60)
days after the expiration of any such stay, such judgment is not discharged; or
(f) Any default with respect to any indebtedness or liabilities of the
Maker in an amount in excess of $150,000 if the effect of such default is to
permit the holder to accelerate the maturity of any such indebtedness or
liabilities or to cause such indebtedness or liabilities to become due prior to
the stated maturity thereof; or
(g) The occurrence of any levy upon or seizure or attachment of any
property of the Maker having an aggregate fair value in excess of $150,000,
which levy, seizure or attachment shall not be set aside, bonded or discharged
within sixty (60) days after the date thereof; or
(h) (i) the payment of any dividends or distributions by the Maker in
respect of its Common Stock, (ii) the redemption by the Maker of any capital
stock or other equity interests in the Maker, other than in accordance with the
terms of any series of preferred stock of Maker which is authorized and of which
shares are outstanding on the date of this Revolving Credit Note, or in
connection with any other transaction which is not on terms at least as
favorable as those which could be obtained at that time in an arms'-length
transaction with an unaffiliated third person, (iii) any sale of all or
substantially all of the assets of the Maker in a single transaction or series
of related transactions, (iv) any merger or consolidation to which the Maker is
a party, other than with a wholly-owned subsidiary of the Maker, (v) any
transfer of or change in ownership interest in the Maker, approved by the Board
of Directors of Maker, which represents more than 50% of the securities of Maker
which entitle the holders thereof generally to vote for the election of
directors of Maker, or (vi) any change in the senior management of the Maker; or
(i) Any failure by the Maker to maintain insurance on its assets and
properties of types and in amounts which are customary for businesses or
individuals similarly situated;
(j) Any liquidation, dissolution or winding up of the Maker or its
business; or
(k) Any change in the control of the Maker.
-4-
<PAGE>
7. REMEDIES ON DEFAULT.
If any Event of Default shall occur and be continuing, Payee, or any
other holder hereof shall, in addition to any and all other available rights and
remedies, have the right, at its option (except for an Event of Default under
paragraph 6(c) above, the occurrence of which shall automatically effect
acceleration hereunder), (a) to declare the entire unpaid principal balance of
this Revolving Credit Note, together with all accrued interest hereunder, to be
immediately due and payable, and (b) to pursue any and all available remedies at
law or in equity for the collection of such principal and interest, including
but not limited to the exercise of all rights and remedies against the Maker and
the remedies provided in the Security Agreement.
8. CERTAIN WAIVERS.
Except as otherwise expressly provided in this Revolving Credit Note,
the Maker hereby waives diligence, demand, presentment for payment, protest,
dishonor, nonpayment, default, and notice of any and all of the foregoing. All
amounts payable under this Revolving Credit Note shall be payable without relief
under any applicable valuation and appraisement laws. The Maker hereby expressly
agrees that this Revolving Credit Note, or any payment hereunder, may be
extended, modified or subordinated (by forbearance or otherwise) from time to
time, without in any way affecting the liability of the Maker.
9. WAIVERS AND AMENDMENTS.
Neither any provision of this Revolving Credit Note nor any
performance hereunder may be amended or waived orally, but only by an agreement
in writing and signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
10. CUMULATIVE REMEDIES.
No right or remedy conferred upon the Payee under this Revolving
Credit Note is intended to be exclusive of any other right or remedy contained
herein or in any instrument or document delivered in connection herewith, and
every such right or remedy shall be cumulative and shall be in addition to every
other such right or remedy contained herein and/or now or hereafter existing at
law or in equity or otherwise.
11. WAIVERS; COURSE OF DEALING.
No course of dealing between the Maker and the Payee, or any failure
or delay on the part of the Payee in exercising any rights or remedies, or any
single or partial exercise of any rights or remedies, shall operate as a waiver
or preclude the exercise of any other rights or remedies available to the Payee.
12. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL.
This Revolving Credit Note shall be deemed to be a contract made under
the laws of the State of Arizona and shall be governed by, and construed in
accordance with, the laws of the State of Arizona. The Maker hereby irrevocably
consents to the jurisdiction of all courts (state and federal) sitting in the
-5-
<PAGE>
State of Delaware in connection with any claim, action or proceeding relating to
or for the collection or enforcement of this Revolving Credit Note, and hereby
waives any defense of FORUM NON CONVENIENS or other such claim or defense in
respect of the lodging of any such claim, action or proceeding in any such
court. THE MAKER HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
CLAIM, ACTION OR PROCEEDING RELATING TO OR FOR THE COLLECTION OR ENFORCEMENT OF
THIS Revolving Credit NOTE.
13. COLLECTION COSTS.
In the event that the Payee shall, after the occurrence of an Event of
Default, turn this Revolving Credit Note over to an attorney for collection, the
Maker shall further be liable for and shall pay to the Payee all collection
costs and expenses incurred by the Payee, including reasonable attorneys' fees
and expenses; and the Payee may take judgment for all such amounts in addition
to all other sums due hereunder.
14. NOTICES.
(a) NOTICES OF BORROWING. Subject to the terms and conditions herein,
whenever Maker desires to borrow under this Revolving Credit Agreement, Maker
shall deliver by telecopy to Payee (at the name and address described at
Paragraph 13(b) herein) no later than 12:00 p.m. at least three business days
prior to the proposed business day on which a cash advance is to be made (the
"FUNDING DATE") a notice specifying (i) the proposed Funding Date; (ii) the
amount of the proposed cash advance; and (iii) certifying that no Event of
Default has occurred and is then continuing.
(b) GENERAL. All notices, requests or instructions hereunder other
than those described in Paragraph 13(a) herein, shall be in writing and
delivered personally, sent by telecopy with confirmation back of delivery, sent
by nationally recognized, overnight courier service, or sent by registered or
certified mail, postage prepaid, as follows:
If to Payee:
Interactive Flight Technologies, Inc.
1811 Chestnut Street, Suite 120
Philadelphia, PA 19103
Telecopy No.: (215) 972-8183
Telephone No.: (215) 972-8191
Attention: President
-6-
<PAGE>
with a copy to:
Mesirov Gelman Jaffe Cramer & Jamieson, LLP
1735 Market Street
Philadelphia, PA 19103
Attention: Steven B. King, Esquire
Telecopy No.: (215) 994-1111
Telephone No.: (215) 994-1037
If to Maker:
The Network Connection, Inc.
222 N. 44th Street
Phoenix, AZ 85034
Telecopy No.: (602) 629-6294
Telephone No.: (602) 629-6200
Attention: Chief Financial Officer
with a copy to:
Streich Lang, P.A.
Two North Central Avenue
Phoenix, AZ 85004
Attn: Christian Hoffman, Esquire
Telephone No.: (602) 229-5336
Telecopy No.: (602) 420-5008
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be effective on the earlier of (i) the date
of delivery to the addressee, (ii) the date of delivery by facsimile (if
delivered before 4:45 p.m. Eastern Standard Time, or if later, then effective on
the next business day), (iii) five business days after it has been mailed, or
(iv) one business day after delivery to such nationally recognized courier
service.
15. MISCELLANEOUS.
Notwithstanding any provision contained in this Revolving Credit Note
to the contrary, the Maker's liability for payment of interest shall not exceed
the limits imposed by applicable usury law. If any provision hereof requires
interest payments in excess of the then legally permitted maximum rate, such
provision shall automatically be deemed to require such payment at the then
legally-permitted maximum rate. This Revolving Credit Note shall be binding on
the Maker, its successors and assigns, and shall inure to the benefit of Payee
and Payee's successors and assigns.
-7-
<PAGE>
IN WITNESS WHEREOF, Maker, intending to be legally bound hereby, has
caused this Revolving Credit Note to be signed in its name by its duly
authorized officer on the date first above written.
THE NETWORK CONNECTION, INC.
By: /s/ Morris C. Aaron
------------------------------------
(Title)
-8-
<PAGE>
BORROWING, REBORROWING, AND CONVERSION GRID
Principal Accrued
Accrued Balance Interest
Amount Amount Interest Principal After After Authorized
Date Borrowed Repaid Converted Converted Conversion Conversion Signature
- ---- -------- ------ --------- --------- ---------- ---------- ----------
INDEPENDENT AUDITORS' CONSENT
The Stockholders and Board of Directors
The Network Connection, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-38313 and 333-38315) on Form S-8 of The Network Connection, Inc. of our
report dated October 12, 1999, relating to the balance sheets of The Network
Connection, Inc. as of June 30, 1999 and October 31, 1998, and the related
statements of operations, changes in stockholders' equity (deficiency) and
comprehensive income and cash flows for the Transition Period ended June 30,
1999 and each of the years in the two year period ended October 31, 1998, which
report appears in the June 30, 1999, annual report on Form 10-KSB of The Network
Connection, Inc.
/s/ KPMG LLP
Phoenix, Arizona
October 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JULY 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,751,506
<SECURITIES> 302,589
<RECEIVABLES> 3,860,471
<ALLOWANCES> 3,784,679
<INVENTORY> 1,400,000
<CURRENT-ASSETS> 6,218,926
<PP&E> 2,021,609
<DEPRECIATION> 683,029
<TOTAL-ASSETS> 14,752,462
<CURRENT-LIABILITIES> 4,350,531
<BONDS> 0
0
24,977
<COMMON> 6,339
<OTHER-SE> 5,255,878
<TOTAL-LIABILITY-AND-EQUITY> 14,752,462
<SALES> 958,607
<TOTAL-REVENUES> 958,607
<CGS> 0
<TOTAL-COSTS> (1,379,719)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,029
<INCOME-PRETAX> 2,344,205
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,344,205
<EPS-BASIC> .97
<EPS-DILUTED> .13
</TABLE>
