SECURITIES AND EXCHANGE COMMISSION
27
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number: 1-13760
THE NETWORK CONNECTION, INC.
1324 Union Hill Road
Alpharetta, Georgia 30201
(770-751-0889)
A Georgia Corporation IRS Employer ID No. 58-1712432
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 par value per share Registered on The
Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(b) of
the Securities Exchange Act of 1934 during the preceding 12
months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not 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 of this Form 10-KSB. [ ]
The aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant,
based on the closing sale price of the Common Stock on March
31, 1999, in the over-the-counter market as reported by The
Nasdaq SmallCap Market tier of The Nasdaq Stock Market, was
approximately $10.0 million. Shares of Common Stock held by
each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 31, 1999, the registrant had outstanding
5,179,646 shares of its Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business
General
The Company designs, manufactures and distributes
computer networking products and systems, including complete
video and data entertainment systems, high stream count
videoservers and workstations, which provide users with
video on demand applications and support and full motion
digital video, imaging and other multimedia processes. The
Company's networking products are used in connection with
employee training, academic, telecommunications,
entertainment and other industry applications. Video on
demand permits new ways to employ video as an instructional,
entertaining and communications medium over existing
computer networks. Each user is given the ability to call-up
video content as needed, without affecting any other network
participant's requirements on the system, and without
requiring any other system participant simultaneously to
view the same content.
The Company was originally incorporated in 1986 to
distribute computer network products as a value added
distributor ("VAD") of such products. Although its principal
business continued as a VAD, in 1987 the Company made a
strategic shift in its business operations by moving away
from the distribution of products manufactured by others and
to seek to become principally a manufacturer of its own
superserver and workstation products. This shift resulted
from changing trends in the computer industry, which
included increased profit margin pressures on VADs due to
the perception that VADs were offering simple commodities
rather than value added products for sale to their
customers.
The Company's products are sold under the names
TRIUMPH, Cheetah, and related sub product names. These
systems are based upon non-proprietary PC hardware standards
and utilize standard major 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 currently distributes its products
worldwide principally through its own internal sales force
and strategic resellers.
The Network Connection Solution
In 1987, the Company first introduced the initial entry
of its TRIUMPH family of multimedia information and
entertainment systems, which are designed to provide the
compatibility, performance, availability and scalability
necessary for sophisticated interactive capable systems. The
Company believes that its systems contain the following
features.
* Compatibility
The TRIUMPH family is based upon hardware standards and
is designed to be compatible with industry standard network
operating systems, such as Windows NT, Novell NetWare,
Microsoft LAN Manager, SCO UNIX, Banyan VINES and Linux, and
with new network operating systems as they become available.
In addition, the Company's products are designed to be
compatible with applications designed to run in such network
environments. TRIUMPH familty systems use of common
"interfaces" (e.g., products utilized to increase system
functionality in terms of system power and/or special or
additional features availability), such as the Small
Computer System Interface ("SCSI"), and its employment of
Peripheral Component Interconnect ("PCI"), FCAL
(FiberChannel Arbitrated Loop), Gigabit ethernet and Fast
ethernet, also enables the Company's products to connect
with hardware produced by third-party vendors. The TRIUMPH
systems also provide for ease of support of a wide range of
network connectivity standards.
* Performance
The TRIUMPH architecture consists of independent
subsystems interfaced by a high-speed symmetric/asymmetric
multiprocessor connected system. This architecture is
designed to reduce the I/O bottlenecks and performance
degradation typically associated with PC- based servers
attempting to perform multiple tasks concurrently with a
single microprocessor. The TRIUMPH open systems architecture
and critical data flow design technology incorporates the
fault tolerance and high throughput necessary to provide
simultaneous services, such as video-on-demand, LAN-based
video training, and database/file imaging and printing. In
addition, as the TRIUMPH systems provide video/multimedia
systems encompassing voice or sound, pictorial and graphic,
live or recorded, and touch technologies, the Company
believes that easy access to information in a "user
friendly" environment is made available. In this respect,
the TRIUMPH architecture is designed to provide abilities
and features not found in mainframes and minicomputers at a
significantly lower cost.
* Availability
The TRIUMPH architecture is designed to permit systems
to be configured to provide the high level of availability
required for business-critical applications through
reliability, data integrity and recoverability features.
Reliability features available for certain TRIUMPH models
include power supply and other key module redundancy to
promote continued system operation, cooling system
redundancy to protect against premature component failure
and disk redundancy by providing an ability to replace hard
disks during system operation without interruption. The
TRIUMPH data integrity features minimize the potential for
data loss during system operation and, in addition to the
disk backup features described above, include data parity
checking to enhance data integrity. Recoverability features
facilitate recovery when a stoppage does occur and include
subsystems which permit remote diagnostics subsystems for
TRIUMPH systems.
* Scalability
The TRIUMPH systems can scale from just a few
interactive users to hundreds or thousands of interactive
users providing an array of interactive services, which
include internet, intranet, audio, audio/video, commerce and
transactional information systems.
* Upgradability
The TRIUMPH systems allow for upgrading without
obsolescence of existing Triumph products. Upgrades may
include architecture to allow increase in the number of
interactive users, concurrent video streams, or other
interactive applications.
Product Strategy
Technology and Product Strategy
* Support Popular Network Operating Systems
. The Company intends to support additional network
operating systems if they augment the capabilities of the
Triumph interactive systems. The TRIUMPH systems open
architecture and compatibility features permit ease of
support for new and emerging software technologies to
leverage the time critical interactive data nature of the
systems. As any new operating system or software technology
is introduced, the Triumph architecture is readily capable
to incorporate such as it may relate to the benefit of the
Triumph family of interactive systems.
* Develop Higher Performance Systems While
Maintaining Compatibility
The Company's principal technological challenge with
respect to the development of its TRIUMPH family of
interactive systems is to simultaneously deliver high
performance and compatibility with existing PC hardware and
software standards. The Company intends to continue
improving the performance of its systems while maintaining
compatibility with popular network operating systems and
hardware interfaces.
* Offer Broad Product Line
The scalability of TRIUMPH systems is key to providing
a diverse range of services for the educational, and
transportation related markets. The product line, while
broad within a given market segment, is specifically
targeted to provide an easily deliverable custom system to
meet the needs of the given customer. The flexibility of
the Triumph interactive systems allows for quick and easy
customization for any given customer within a target market.
* Packaging
Sales of the Company's TRIUMPH systems are made as
complete integrated, yet customizable, systems. The Company
sells its products as a complete solution to a customer's
needs, rather than as only a "finger in the dike" or a niche
filler. In 1995, the Company introduced, hardware, software
and services packaged as complete value added system
solutions for the travel and transportation commercial
markets: (i) "AirView," an in-flight interactive
entertainment and cabin management system mounted in
individual airline seats, (ii) "TrainView." an in-transit
interactive entertainment and railcar management system
mounted in individual railcar seats, (iii) "InnView," an in-
room interactive entertainment system for the hotel
hospitality market and (iv) "CruiseView," an in-room
interactive entertainment system for the cruise ship market.
Technology
The Company believes that the TRIUMPH architecture
allows its products to provide the performance and
availability advantages of a mainframe without sacrificing
compatibility with PC hardware and software standards. This
architecture consists of independent subsystems interfaced
by a high-speed system bus. These subsystems include: the
Company's TRIUMPH RAID Accelerated Controller ("TRAC"), an
intelligent Input/Output Processor subsystem; the primary
CPU subsystem; the systembus subsystem; and the main memory
subsystem. These subsystems operate independently and thus
reduce the I/O bottlenecks and performance degradation
typically associated with other approaches.
Network Operating System Compatibility Features. Network
operating systems are designed to work with architectures
that incorporate industry standard connection features. When
a server design features an architecture that does not
incorporate such industry standards, the server manufacturer
must modify the network operating systems utilized in order
for it to work with its nonstandard architecture. Generally,
the time, expense and knowledge necessary to complete these
modifications limit the number of network operating systems
supported by these proprietary servers and restrict their
ability to respond quickly to new NOS releases. The TRIUMPH
system open architecture is compatible with the basic I/O
system that allows computer hardware to connect to a network
operating system. This enables the TRIUMPH system to support
any network operating systems with the relatively simple
addition of drivers specific to that network operating
system. The TRIUMPH system's are, therefore, compatible with
leading network operating systems such as Linux, Windows NT,
Novell NetWare, Microsoft LAN Manager, SCO UNIX and Banyan
VINES. The Company's products are also designed to be
compatible with new network operating systems as they become
available.
Application Compatibility Features. The TRIUMPH system's
open architecture permits applications written for use with
the network operating systems supported by the Company to
run unmodified. The TRIUMPH systems, therefore, support
applications that require both network operating systems and
basic I/O system compatibility.
Hardware Interface Protocols. Each TRIUMPH subsystem
provides hardware compatibility by supporting industry
standard interfaces with simple software drivers. The TRAC
subsystem offers SCSI, FCAL, IDE, and SAN compatibility, the
CPU subsystem offers CISC/RISC compatibility and the bus
subsystem offers PCI compatibility. SCSI peripherals,
network interface cards or other subsystems designed by
third parties that incorporate technological advances in any
of these standards-based product areas may be added easily
to TRIUMPH systems.
Intelligent I/0 Processor Subsystem. The TRAC subsystem
utilizes an asymmetric approach to managing mass storage
and consequently relieves the main CPU of that task and
improves overall system performance. With the TRAC, data is
accessed from the disk drives and is more easily and
economically (in terms of bandwidth usage) available to the
CPU and main memory. Multiple TRACs can be configured in a
TRIUMPH server system, allowing an almost unlimited number
of peripherals per system.
The TRAC may also incorporate RAID technology based on
the need of the system design to help protect the system
from data loss. This technology, which is commonly referred
to as data striping and disk mirroring, also improves system
performance by reducing data transfer and access times from
disk drives.
Central Processing Unit Subsystem. The CPU subsystem runs
the NOS and applications in client-server environments. The
CPU offers CISC/RISC compatibility. Each subsystem may be
upgraded with a CPU that incorporates a microprocessor
operating at a higher clock speed.
Availability Features. The TRIUMPH system architecture is
designed to permit systems to be configured to provide the
high level of availability required for critical
applications through reliability, data integrity and
recoverability features. Reliability features available for
certain TRIUMPH models offer key module redundancy to
promote continued system operation. The TRIUMPH systems data
integrity features minimize the potential for data loss
during system operation.
Products
The current TRIUMPHr product line consists of: the
Cheetah Enterprise Video File Server, the M2r Enterprise
File Server, the TNXr Large Workgroup File Server, the T4000
Small Workgroup File Server, the T300 and T5000 high end
network work stations, and the TNX/C Video File Encoder.
The following lists the basic features of each model in
the Company's current generation of TRIUMPH products:
VIDEO SERVERS
CheetahO Enterprise Video File Server. The CheetahO or M2V
has the same capabilities as the M2r Enterprise File Server
(see below), except that it contains certain configuration
enhancements that allow for the support of video
applications across entire networks. It is designed to serve
up to 300 simultaneous video users per single system and can
be rack mounted to achieve up to 336 gigabytes of disk
storage.
CheetahO Large Workgroup Video File Server. The video
capable version of the TNX is very similar to CheetahO
described above, but with reduced work station service
capacity and reduced disk storage capabilities.
FILE SERVERS
M2r Enterprise File Server. The Company's top-level
non-video file server, it is designed to serve over 1000
work stations. The M2 may contain up to six CPUs and has a
disk storage capacity of up to 100 gigabytes. This system
contains an enhanced cooling system and RAID 5 and multiple
power supplies for support of its large disk hard drive
capacity.
TNXr Large Workgroup File Server. The Company's mid-level
file server, it is designed to serve between 40-100 work
stations. The TNX may contain up to 6 processors and has a
disk capacity of between 12-16 gigabytes. This system may or
may not contain disk redundancy features depending upon the
needs of the particular customer.
WORK STATIONS
T3000. An entry level network work station, includes the
capability of providing normal office automation, graphics
and word processing.
T5000. A high end, engineering work station, with single
or multiple processor configurations, designed for a range
of desktop applications; including - computer aided design,
graphics, mathematical applications and computer modeling.
OTHER PRODUCTS
TNX-C Encoder. The TNX-C is a real-time, networked Motion
Pictures Export Group (MPEG) encoder impression station. It
converts analog video data to digital files when conjoined
with either of the Company's video file servers. All encoded
files are compressed and able to run throughout an
associated network at 30 frames per second and near
broadcast quality.
"TURN-KEY" PACKAGED SOLUTIONS
AirView. An in-flight interactive entertainment and cabin
management system mounted in individual airline seats.
TrainView. An in-transit interactive entertainment and
railcar management system mounted in individual railcar
seats.
InnView. An in-room interactive entertainment system for
the hotel hospitality market.
CruiseView An in-room interactive entertainment system for
the cruise ship market.
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 via
a wireless television remote control in each room or touch
screen display at each seat. In addition, attendant
interactive training can be provided at the same time.
Sales and Distribution
The Company currently distributes its products
principally through the efforts of its internal direct sales
force and to a much lesser extent through independent sales
representatives. In the future the Company intends to offer
its products through an augmented internal sales force. The
Company also distributes its superserver products through a
select group of network-oriented resellers, including VADs
and system integrators, OEMs and international distributors.
Currently, the Company's principal means of conducting its
sales effort internationally is through trade show
attendance, holding end-user seminars to demonstrate Company
products, internal and a limited amount of customer on site
demonstrations of product use (solely for superserver
products), print advertising in trade publications and
telemarketing. The Company plans to continue and to
accelerate these marketing efforts.
The Company is also attempting to develop relationships
with software and other product vendor "partners" capable of
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 would 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. An example is the Company's
relationship with Tandberg Educational for the sale of the
Company's superserver products in conjunction with Tandberg
products for use in educational digital multimedia
instruction applications.
The Company's marketing efforts focus on holding
end-user seminars and attending trade shows (including
international trade shows) as the primary method to create
market awareness of the Company and its products.
The purchase price for the Company's "turn-key"
packaged systems for the travel related entertainment market
is relatively high depending upon various factors such as
the size and type of airplane, train, hotel or ship, and the
requested system features. The high system purchase price is
anticipated to result in a relatively extensive sales cycle,
which will include the evaluation of the Company's
technology, a test installation of the system and
negotiation of related agreements. The sales cycle is also
dependent upon a number of factors beyond the Company's
control, such as the financial condition, safety and
maintenance concerns, regulatory issues and purchasing
patterns of particular operators, and the respective
industry generally. As a result, this can result in
extremely cyclical buying patterns for the Company's travel
related entertainment products. (see "Management's
Discussion and Analysis of Financial Condition and Operating
Results")
Competition
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. Many of these companies have
substantially greater financial resources, research and
development staffs, manufacturing, marketing and
distribution facilities than the Company. The Company also
expects its competitors to continue to improve their
network-oriented distribution channels.
With respect to base configuration TRIUMPH superservers
for simple LANs, 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. 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 TRIUMPH
superservers for larger and more complex LANs and more
sophisticated or business-critical applications, the Company
competes indirectly with manufacturers of mainframes and
minicomputers. In addition, certain manufacturers promote
their mainframes and minicomputers as being appropriate for
use as network servers. Competitors offering products in
this market include IBM, Digital Equipment Corporation,
Hewlett-Packard Corporation and UNYSIS, Inc. The Company
believes that the positive competitive factors in this
market include the Company's ability to provide server
products with performance and availability characteristic of
mainframes and minicomputers, at a significantly reduced
cost, as well as with the compatibility to support current
and future networking solutions built around industry
standard hardware and software. The Company's operating
results could, however, be adversely affected if one or more
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 Aeorspace, Sony Transcom, Matsushita, Allin
Interactive, Interactive Flight Technologies and Trans
Digital. The Company believes that it competes favorably
with other manufacturers of superservers and "turn-key"
systems with respect to the compatibility, performance,
availability, scalability, upgradability and technical
support required for sophisticated network computing
available with the Company's products. In addition,
components of the company's products are smaller, weigh
considerably less and consume much less power than those of
several competitors. Because these factors affect operating
costs for the operator, they may be critical factors for
customers.
The Company does not believe that its server products
will compete in the near future with those manufactured by
IBM, Compaq Computers, Inc. or the other "major players" in
the industry. The Company believes that the major computer
manufacturers will generally seek to produce and service
higher production-lower margin commodity products, and will
refrain from producing lower production-higher margin
products (like the Company's video servers) until the market
for each related product and product series is perceived to
be large enough to support the sizable investments in
production capability and advertising that the "major
players" must make prior to launching new products.
Nevertheless, based upon the perceived size of the market
for video capable network equipment, the Company's
management recognizes that it will only be a matter of time
before the "major players" will start to produce higher
margin network equipment products which will compete
directly with those produced by the Company.
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 necessary technological advances. 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.
End Users
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
and other bureaucracies, entertainment providers,
transportation operators and end-users operating in various
other industries.
The market niches for the Company's high-end, high
performance, video capable products currently encompass, but
are not limited to, applications for education and corporate
skills training, product training, hotel, train, ship and
airplane video-on-demand and retail facility information
kiosks. Most sales efforts in 1998 were focused on larger
system sales into niche markets of the Company's "turn-key"
packaged solutions, AirView, CruiseView and TrainView, which
have longer sales cycles. Sales of such products will
contribute to sales backlog for revenues derived from
multiple roll-out deliveries over 12 to 36 months. The
Company currently has agreements (see "AirView",
"CrusieView", "TrainView" below) for and has responded to
major requests for proposal for CruiseView, AirView and
TrainView systems with some of the world's largest travel
and transportation-related companies. There can be no
assurance, however, that the Company will successfully
negotiate definitive agreements for the purchase of these
systems. Due to the fact that all of the markets for this
type of product are in their infancy, and their actual
aggregate size is impossible to measure accurately, the
Company is unable to determine the shares of these markets
held by its own products. Nevertheless, Management of the
Company expects the video server market to experience
significant growth, with the growth to come principally from
the high-performance superserver segment of the market.
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. The costs of purchase from the
Company include the cost of training Fairlines employees for
system use, and the cost of system installation, which
installation is provided by Hollingsead International and
its subsidiaries ("Hollingsead") on behalf of the Company
under a separate agreement with the Company (see "PART I -
Manufacturing"). Delivery of all AirView systems under the
terms of the agreement was originally expected to be
completed by December 31, 1998. Due to Fairlines repeated
delays in securing additional aircraft, it is unclear as to
when, if ever, any additional systems will be sold to and
installed by Fairlines. In March 1999, the Company filed to
revoke the Supplemental Type Certificate (STC) (see "PART I
- - Government Regulation") issued in connection with the two
Fairlines aircraft on which AirView systems are installed
and in operation due to Fairlines default in payment under
terms of the AirView Agreement. Revocation of the STC would
result in the inability for Fairlines to operate the
aircraft commercially with the AirView system installed on
the aircraft. The Company is pursuing its remedies,
contractual and otherwise, in respect to collection of
amounts due and damages incurred under the AirView
Agreement. (see "PART I - ITEM 3 - Legal Proceedings")
In April 1998, the Boeing Company specified the Company's
AirView Video/Audio on Demand 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.
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. The costs of
purchase from the Company include the cost of training Star
employees for system use and the cost of system
installation. Delivery and installation of the CruiseView
systems under the terms of the agreement for the first ship
was completed and began commercial operation in October
1998, with the second ship originally expected to be
completed by September 30, 1999. In March 1999, the Company
filed for arbitration to enforce its rights under the terms
of the Star Agreement. The Company claims that Star and CNA
are in default under the payment obligations of the Star
Agreement and intends to aggressively pursue its rights
under the terms of the Star Agreement through arbitration
and all remedies available, including repossession of
inventory, contractual and otherwise. (see "PART I - ITEM 3
- - Legal Proceedings") The Company increased its provision
for doubtful accounts by approximately $2.6 million in the
fourth fiscal quarter of 1998 due to the uncertainty of
recovery of certain amounts due the Company under the Star
Agreement.
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 Cruse Lines ship,
and an unspecified maximum number of Carnival Cruse Line
ships. 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, 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.
The Carnival Agreement initially called for delivery of the
CruiseView system for use aboard one ship, the Carnival
Cruise Lines "M/S Triumph" currently under construction,
which system is expected to be installed in mid 1999. In
December 1998, Carnival exercised its right and ordered the
installation of a CruiseView system on the Carnival Cruise
Lines "M/S Sensation". Delivery and installation of
CruiseView for the Sensation began in December 1998 and is
expected to begin commercial operation in April 1999. The
Company anticipates gross revenues of over $4.0 million from
the purchase, installation and maintenance of CruiseView on
these two Carnival cruise ships. 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.
TrainView
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, the
Company's advanced Infoactive Business and Entertainment
System, into Alstom's concept high speed train design. The
TrainView all-digital system proposed is an adaptation of
the Company's existing system currently installed for
various 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 will purchase a TrainView
system for installation on any train.
Customer Concentration
In 1998, two customers accounted for an aggregate of 96%
(76% and 20%, respectively) of the Company's revenues. In
1997, three customers accounted for an aggregate of 79%
(38%, 30% and 11%, respectively) of the Company's revenues.
Management believes that the concentration of credit risk
with respect to trade accounts receivable is high due to the
limited number of customers requiring large shipments.
Customer Support
The Company believes that customer service and support
is a significant competitive factor in the network server
market which will become increasingly important as LANs
become more complex and as more enterprises implement
business-critical applications on their networks. The
Company supports its customers by providing rapid problem
resolution both during and after the installation process.
The Company maintains a small, in-house technical support
organization that assists customers in troubleshooting
problems and providing replacement parts. The Company
provides a toll-free hotline to help diagnose and correct
system interruptions as they occur at customer sites and its
support staff is available seven days a week.
The Company warrants all of its TRIUMPH superservers
against defects in materials and workmanship for one year
(three years for disk drives). During the warranty period
the Company will repair or replace, within four days, any
TRIUMPH server component(s) which the Company identifies as
containing defects which do not prevent the continued use of
the server. For defects that do prevent the continued use of
the server, the Company will attempt to repair or replace
the identified defective component within 24-hours. The
Company's product warranties do not materially differ from
those generally available in the industry.
To date, the Company has not experienced significant
claims under such 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.
Manufacturing
The Company currently manufactures all of its TRIUMPH
products in the United States at its Atlanta, Georgia
metropolitan area facility.
The Company obtains electronic components for its
TRIUMPH products "off-the-shelf" from a number of
wholesalers and performs at its own facility the assembly
and test of the printed circuit boards and mechanical
components incorporated into its products. The only
significant subcontracted manufacturing work performed for
the Company is the manufacture of cabinets for its file
servers. The Company has established a comprehensive testing
and qualification program with the goal of ensuring that all
subassemblies meet the Company's specifications and
standards before final assembly and testing.
Diagnostic tests, assembly, burn-in, final
configuration and final quality assurance tests currently
are completed at the Company's manufacturing facility. The
Company employs statistical process controls at its
manufacturing facility. The Company has also implemented
quality control policies that are reviewed and accepted by
the Company's major customers. The Company believes that
this procedure helps ensure a high-quality product.
The Company has elected to assemble into its products
principally off the shelf component parts available from
multiple sources. The Company believes that this practice
helps to ensure better quality control and pricing, by
allowing the Company to select the best manufactured and
best performing components available on the market (rather
than a proprietary product that may fall behind the "curve"
in terms of either such characteristic) and to purchase such
components from marketplace sources that offer the best
prices at the time that the particular components are needed
for production (rather than to have prices dictated by the
limited sources able to provide a proprietary component).
The Company obtains component parts on a purchase order
basis and does not have long-term contracts with any of its
suppliers. To date, the Company has not experienced
interruptions in the supply of such component parts, and
believes that numerous qualified suppliers are available.
The inability of any of its current suppliers, except as
identified below, to provide component parts to the Company
would not adversely affect the Company's operations.
Alternate sources could be readily established.
Intellectual Property
The Company currently holds no patents, but has a
patent application pending with respect to its AirView
products and technology. The Company currently holds federal
trademarks, for the marks "TNX", "TRIUMPH", "THE NETWORK
CONNECTION", "M2", "M2V" and "T.R.A.C.", "CHEETAH", "QUAD-
CHEETAH", "CHEETAH WORKGROUP", "EDUVIEW", "AIRVIEW",
"TRAINVIEW", "CRUISEVIEW" and "BATTLEVIEW" and has trademark
applications pending for the mark "INNVIEW". The Company
also 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 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
effect on the Company's business.
There can be no assurance that third parties will not
assert intellectual property infringement claims against the
Company. Although no claims or litigation related to any
such matter are currently pending against the Company, there
can be no assurance that none will be initiated, that the
Company would prevail in any such litigation seeking damages
or an injunction against the sale of the Company's products,
or that the Company would be able to obtain any necessary
licenses on reasonable terms if at all.
Government Regulation
The installation and use of AirView on any
particular aircraft requires prior certification and
approvals from the FAA and certification and approvals from
aeronautical agencies of foreign governments. Because the
installation of the AirView is considered a major
modification to an aircraft, the Company must apply for and
be granted an STC from the FAA. This is a multi-step process
involving required interim approvals. A separate STC will be
required with respect to each aircraft type on which AirView
will be installed. Once an STC is issued with respect to an
aircraft type, the unit may be installed on other aircraft
of the same type with the same configuration provided each
installation is performed in a manner as specified by the
aircraft specific STC. To date, the Company has obtained an
STC for Fairlines MD-81 aircraft.
Because the process of obtaining an STC is highly
technical, the Company has entered into agreements with
Hollingsead and its subsidiary Elsinore Aerospace Services
(collectively, "Hollingsead") to assist the Company in the
application and approval process (see ITEM 1 --
"Manufacturing"). Hollingsead is an FAA designated
engineering representative experienced in in-flight
entertainment systems and has the authority to approve,
subject to final FAA review, certain aspects of the
Company's STC applications.
Potential Change of Control Transaction
On February 4, 1999, the Company, entered into a non-binding
Letter of Intent with Interactive Flight Technologies, Inc.,
a Delaware corporation ("IFT") regarding the acquisition by
the Company of all or substantially all of the assets and
specified liabilities of IFT (the "Net Assets") relating to
IFT's interactive entertainment business (the "Business") in
consideration for the Company's issuance to IFT of that
number of shares of its Common Stock as would constitute 60%
of the Company's fully-diluted equity (the "Acquisition").
The Net Assets will include: $5 million in cash; accounts
receivable owing to IFT from Swissair; the proceeds and
other recoveries generated by certain litigation brought by
IFT; the Swissair warranty contract; the Swissair customer
relationship; all IFT interactive entertainment intellectual
property, and other tangible assets related to the Business
(including but not limited to customer lists and files,
trade secrets, trademarks, service marks, assignable
government permits and other rights under leases and rights
under specified contracts); inventory, furniture, fixtures,
computers and equipment related to the Business; other
infrastructure (including FAA certified repair station)
relating to the Business; IFT's engineering and technical
staff; and the benefit of all IFT research and development
efforts. The Acquisition will be effected in accordance with
a definitive agreement (the "Agreement") to be subsequently
negotiated and signed following the completion of due
diligence investigations by the Company and IFT. In
addition to the usual and customary representations,
covenants and conditions contained in agreements of the type
used to consummate transactions like the Acquisition, the
definitive agreement will provide that closing of the
Acquisition is subject (i) to approval by the shareholders
of the Company, if required under the rules of The Nasdaq
Stock Market, and (ii) the receipt of a "fairness opinion"
with respect to the terms of the Acquisition to the effect
that the Acquisition is fair from a financial point of view,
to the Company shareholders. Although the Letter of Intent
is otherwise not binding, the Company has agreed to refrain
from entering into negotiations with any other party for the
sale of all or substantially all of its assets, or for the
sale of control of the Company, until May 15, 1999. IFT
similarly agreed not to enter into negotiations for the
acquisition of control of any other company engaged in the
interactive entertainment business until May 15, 1999.
There is no guarantee that the Acquisition will be
consummated on the terms set forth in the Letter of Intent.
IFT developed interactive entertainment products for use in
the airline and travel industry, and it has ceased all
research and development activities with respect to such
products except as required under contract. It currently
maintains only one ongoing contract for its interactive
entertainment products, and is currently engaged in the
redirection of its business activities into new markets. IFT
is a Nasdaq: NMS registrant and trades under the ticker
symbol FLYT.
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.
If the Company is unable, for technological or other
reasons, to develop 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. The Company has in the past experienced
delays in introducing certain of its products and
enhancements, and there can be no assurance that it will not
encounter technical or other difficulties that could in the
future delay the introduction of new products or
enhancements. Such delays in the past have generally
resulted from the Company's need to obtain a requisite
component from a third-party vendor whose own development
process has been delayed (e.g., 9 month delay in Microsoft's
development in 1992 of Microsoft Windows NT, the primary
operating software system used in the Company's superserver
products).
The Company performs all of its research and
development activities at its headquarters in Alpharetta,
Georgia. During 1998 and 1997, research and development
expenses totaled $397,196 and $277,527, respectively. The
Company intends to continue to invest in research and
development.
Employees
As of April 15, 1999, the Company had 22 full-time
employees and 2 part-time employees. 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.
Item 2. Property
The Company's primary operations are performed in its
20,000 square foot, owned facilities located on two acres in
Alpharetta, Georgia. The Company is indebted to two
institutional lenders as of December 31, 1998, in the
aggregate amount of $227,102 and $470,000, respectively,
for the purchase of this primary operating 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.
The Company believes that its current facilities
described above are adequate for its immediate and near-term
needs and does not anticipate the need for significant
expansion in the near future.
Item 3. Legal Proceedings
On December 1, 1998, Sigma Designs, Inc. ("Sigma"), filed a
complaint against the Company in the United States District
Court, Northern District of California, San Jose Division,
Civil Action File No. 98-21149J(EAI) alleging breach of
contract and action on account. Sigma claims that the
Company failed to pay for goods shipped to the Company by
Sigma. The matter was settled by written agreement dated
January 22, 1999, contingent upon registration of Company
stock issued to Sigma as a part of such settlement, and
payment by the Company of $50,000, in two installments, the
latter which was due on February 5, 1999. The Company made
the $50,000 settlement payments and is in the process of
filing for registration of the stock issued to Sigma,
subject to penalty payments for late filing. Management of
the Company expects to fully comply with the terms of the
settlement agreement and expects that the claim will be
dismissed with prejudice.
Hollingsead filed a complaint against the Company on January
28, 1999, in the State Court of Forsyth County, State Court
of Georgia, Civil Action File No. 99sc0053, alleging the
Company failed to pay invoices submitted for installation
and service of audio-visual systems in certain aircraft. In
its complaint Hollingsead requests $357, 850 in damages plus
interest, costs, attorneys fees, and punitive damages of no
less than $250,000. The Company filed an answer and a
counterclaim on March 29, 1999 with the court alleging that
any amounts allegedly owed Hollingsead should be set-off
and/or recouped against damages incurred by the Company as a
result of Hollingsead's negligence and/or breach of
contract. The Company is seeking settlement of such claims
with Hollingsead.
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. The
CruiseView system on the SuperStar Leo was installed and has
been in commercial operation since October 1998. The Company
claims that Star and CNA are in default under the payment
obligations of the Star Agreement and intends to
aggressively pursue its remedies, including repossession of
inventory, contractual and otherwise, to enforce its rights
under the terms of the Star Agreement.
On March 29, 1999, the Company filed to revoke the Supplemental Type Certi
ficate (STC) issued by the FAA and DGAC in connection with
the two Fairlines aircraft on which AirView systems are
installed and in operation due to Fairlines default in
payment under terms of the AirView Agreement. Revocation of
the STC would result in the inability for Fairlines to
operate the aircraft commercially with the AirView system
installed on the aircraft. The Company is pursuing its
remedies, contractual and otherwise, in respect to
collection of amounts due and damages incurred under the
AirView Agreement.
Item 4. Submission of Matters to a Vote of Security
Holders
None
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market for Common Stock
The Company's common stock trades on The Nasdaq SmallCap
Market tier of The Nasdaq Stock Market under the symbol
"TNCX." The following table sets forth the high and low
sale prices for the Company's common stock for each quarter
of fiscal 1997 and fiscal 1998 as reported by The Nasdaq
Stock Market:
High Low
Fiscal 1997:
First Quarter $12.375 $5.750
Second Quarter 12.000 6.000
Third Quarter 10.500 7.000
Fourth Quarter 10.375 5.750
Fiscal 1998:
First Quarter $ 7.125 $3.625
Second Quarter 5.688 3.188
Third Quarter 4.938 1.813
Fourth Quarter 4.125 2.000
Holders of Record
At March 12, 1999, there were approximately 59
shareholders of record of the Company's common stock, but
the Company believes that there are over 1,000 beneficial
shareholders, based upon broker requests for distribution of
annual meeting materials.
Dividends
Other than prior to September 22, 1994 when the Company
made distributions to shareholders as an S Corporation, the
Company has not declared or paid any cash dividends on its
Common Stock and does not intend to do so in the foreseeable
future.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in
conjunction with the information set forth in the Financial
Statements and notes thereto included elsewhere in this
report.
Overview
The Company has incurred net losses from operations for
several years, has an accumulated deficit at December 31,
1998, and has used substantial cash in its operations which
raises substantial doubt about the Company's ability to
continue as a going concern. The company has entered into
negotiation with IFT in a change of control transaction that
is expected to close by May 15, 1999. The Company believes
the IFT transaction will generate sufficient cash to fund
currently anticipated future cash requirements during the
next twelve months. If the proposed change of control
should not be completed, the Company will require additional
cash from alternative external sources in order to fund
currently anticipated cash requirements, including
performance under existing contracts, repayment of
indebtedness and ongoing payroll expense. If future
financing is not available when needed, the Company will be
forced to curtail or discontinue operations. In such event,
the stockholders may lose, or experience a substantial
reduction in, the value of their investment in the Company.
(see "Liquidity and Capital Resources; Certain
Transactions")
In 1998, two customers accounted for an aggregate of 96%
(76% and 20%, respectively) of the Company's revenues.
During 1997, three customers accounted for an aggregate of
79% (38%, 30% and 11%, respectively) of the Company's
revenues. The Company's products are often used with other
products in large complex projects with long delivery
cycles. The Company expects to experience significant
fluctuations in its future quarterly operating results that
may be caused by many factors, including the Company's
current dependence on and timing issues, not within the
Company's control, for large shipments to a limited number
of customers in the travel related entertainment market and
also, customer payment of invoices and customer product
satisfaction which determines when, after shipment and
installation, the product is accepted by the customer for
payment. 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.
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. The costs of purchase from the
Company include the cost of training Fairlines employees for
system use, and the cost of system installation, which
installation is provided by Hollingsead International and
its subsidiaries ("Hollingsead") on behalf of the Company
under a separate agreement with the Company (see "PART I -
Manufacturing"). Delivery of all AirView systems under the
terms of the agreement was originally expected to be
completed by December 31, 1998. Due to Fairlines repeated
delays in securing additional aircraft, it is unclear as to
when, if ever, any additional systems will be sold to and
installed by Fairlines. In March 1999, the Company filed to
revoke the Supplemental Type Certificate (STC) (see "PART I
- - Government Regulation") issued in connection with the two
Fairlines aircraft on which AirView systems are installed
and in operation due to Fairlines default in payment under
terms of the AirView Agreement. Revocation of the STC would
result in the inability for Fairlines to operate the
aircraft commercially with the AirView system installed on
the aircraft. The Company is pursuing its remedies,
contractual and otherwise, in respect to collection of
amounts due and damages incurred under the AirView
Agreement. (see "PART I - ITEM 3 - Legal Proceedings")
In April 1998, the Boeing Company specified the Company's
AirView Video/Audio on Demand 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 for the Demonstrator will be received.
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. The costs of
purchase from the Company include the cost of training Star
employees for system use and the cost of system
installation. Delivery and installation of the CruiseView
systems under the terms of the agreement for the first ship
was completed and began commercial operation in October
1998, with the second ship originally expected to be
completed by September 30, 1999. In March 1999, the Company
filed for arbitration to enforce its rights under the terms
of the Star Agreement. The Company claims that Star and CNA
are in default under the payment obligations of the Star
Agreement and intends to aggressively pursue its rights
under the terms of the Star Agreement through arbitration
and all remedies available, including repossession of
inventory, contractual and otherwise. (see "PART I - ITEM 3
- - Legal Proceedings") The Company increased its provision
for doubtful accounts by approximately $2.6 million in the
fourth fiscal quarter of 1998 due to the uncertainty of
recovery of certain amounts due the Company under the Star
Agreement.
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 Cruse Lines ship,
and an unspecified maximum number of Carnival Cruse Line
ships. 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, 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.
The Carnival Agreement initially called for delivery of the
CruiseView system for use aboard one ship, the Carnival
Cruise Lines "M/S Triumph" currently under construction,
which system is expected to be installed in mid 1999. In
December 1998, Carnival exercised its right and ordered the
installation of a CruiseView system on the Carnival Cruise
Lines "M/S Sensation". Delivery and installation of
CruiseView for the Sensation began in December 1998 and is
expected to begin commercial operation in April 1999. The
Company anticipates gross revenues of over $4.0 million from
the purchase, installation and maintenance of CruiseView on
these two Carnival cruise ships. 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.
TrainView
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, the
Company's advanced Infoactive Business and Entertainment
System, into Alstom's concept high speed train design. The
TrainView all-digital system proposed is an adaptation of
the Company's existing system currently installed for
various 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 will purchase a TrainView
system for installation on any train.
Results of Operations
Revenues decreased 36% to $5.0 million for the fiscal year
ended December 31, 1998 from $7.8 million for the fiscal
year ended December 31, 1997. This decrease primarily
resulted from deliveries in 1997 of the Company's larger
AirView systems to Fairlines and shipments on the South
Korean Government High School Program, which did not occur
in the 1998 period.
Gross profit as a percentage of revenues increased by 4% to
40% for the fiscal year ended December 31, 1998 as compared
to 36% for the 1997 year. This increase was primarily due
to revenues generated during the 1998 period from larger
system sales with higher margins and technology licensing
fees that were not realized in the same 1997 periods. Gross
margins for any particular period are not necessarily
indicative of the results that may occur in any future
period due to factors including, but not limited to, changes
in product mix, fluctuating component cost, critical
component availability and industry competition.
Selling, general and administrative expenses decreased
$638,710 (14%) for the fiscal year ended December 31, 1998,
as compared to the same 1997 period. This decrease related
to expenses which were incurred in the respective periods in
1997 and not in 1998, primarily for additional (i) marketing
expenses (including advertising, trade show, public
relations, bidding and proposal and demonstration expenses)
associated with the introduction of new products for
Courseware on Demand, and (ii) employment of sales and
marketing personnel and related payroll and non-recurring
legal and administrative expenses related to establishing a
sales office in Singapore (which office was eliminated in
December 1998). The Company anticipates that it will
continue to invest in its marketing and sales generation
strategy (increasing advertising, trade show, demonstration
and proposal expenses and sales and marketing personnel,
with related payroll costs) to increase revenues and
increase net income from operations in the future; such
investment may adversely affect short-term operating
performance.
Provision for doubtful accounts and inventory reflect an
increase from fiscal 1997 of $6.5 million for the fiscal
year ended December 31, 1998; $2.4 million resulted from a
writedown of inventories and a reserve for the uncertainty
and possible uncollectibility of outstanding receivables due
to (i) repeated program schedule delays by Fairlines and
(ii) the length of time that accounts receivable for
extended programs with Fairlines and the South Korean
Government High School Program have been past due; $1.0
million resulted from a reserve taken for a fixed fee
arrangement with a major aeronautical electronics company
negotiated in June 1998 with respect to the licensing of the
Company's technology, the value of which licensing cannot
now be considered fixed and determinable due to a change in
facts and circumstances; and $2.6 million for uncertainty in
collectibility of accounts receivable from the delivery and
installation of a system under the Star Agreement.
Special charges in the fourth fiscal quarter resulted from
$595,263 for the impairment of other assets capitalized in
1997 related to costs for obtaining Federal Aviation
Administration (FAA) certification for the Company's AirView
system which were being amortized over 10 years. These
assets were written off due to the uncertainty of
recoverability resulting from the termination of the
Fairlines Agreement and the absence of any additional orders
received for the AirView system for use in commercial
aircraft requiring FAA certification.
Changes in interest are attributable to changes in average
outstanding borrowings during the periods presented and
interest income on restricted cash and short-term
securities.
Liquidity and Capital Resources; Certain Transactions
The Company has entered into negotiation with IFT in a
change of control transaction that is expected to close by
May 15, 1999. The Company believes the IFT transaction will
generate sufficient cash to fund currently anticipated
future cash requirements during the next twelve months. If
the proposed change of control should not be completed, the
Company will require additional cash from alternative
external sources in order to fund currently anticipated cash
requirements, including performance under existing
contracts, repayment of indebtedness and ongoing payroll
expense. It is uncertain as to the Company's ability to
obtain additional capital.
At December 31, 1998, the Company had working capital of
approximately $1.4 million compared to $5.5 million as of
December 31, 1997. The Company's primary source of funding
was principally due to the net proceeds from the issuance of
convertible preferred stock of $3.3 million, proceeds from
the issuance of $2.2 million of debt and the sale of short
term investments of $557,725. Cash used in operating
activities was $5.6 million and the purchase of property
and equipment was $534,084. The negative change in cash
from operating activities primarily resulted from a net loss
of $9.6 million, a decrease in accounts payable and accrued
expenses of $1.2 million, and an increase of $3.1 million in
accounts receivable, offset by a decrease in inventory of
$424,827 and an increase in deferred revenue of $521,232.
The reduction in cash from operating activities was offset
by depreciation and amortization of $1.0 million and an
increase in provision for doubtful accounts and inventory of
$6.5 million.
The Company's primary source of funds at December 31, 1998
consisted of $1.1 million in cash and short term investments
and funds available under a $1.0 million revolving line of
credit. $1.0 million of cash represents two certificates of
deposit which are restricted from use by the fact that they
are pledged as collateral for the availability of the line
of credit. The line of credit was to expire in May 1999, and
bore interest at an annual rate of 7.05%. At December 31,
1998, the Company had $669,000 borrowings outstanding under
the line of credit. On January 27, 1999, the line of credit
was terminated and the restricted cash was used to payoff
the borrowings of $1.0 million outstanding under the line of
credit.
Capital expenditures for the purchase of property and
equipment for the fiscal year ended December 31, 1998 were
$534,084, primarily for the purchase of additional equipment
and software in order to expand product demonstration and
development capabilities for CruiseView and TrainView.
During 1999, capital expenditures, if any, are anticipated
to be funded through existing working capital or other
financing.
Real Estate Indebtedness
The Company is indebted to an institutional lender, as of
December 31, 1998, in the aggregate amount of $227,102, for
the purchase of its primary operating facility. This loan
is secured by the purchased real estate and the personal
guarantees of Wilbur and Barbara Riner, and bears annual
interest at the rate of such lender's prime rate plus 2%. A
default by the Company in payment of this mortgage loan
could result in foreclosure against the property.
On May 19, 1998, the Company entered into a promissory note
with an institutional lender in the amount of $470,000. This
note is secured by the real estate of the Company. The note
is due and payable on April 19, 2001 and bears interest,
payable monthly, at an annual rate of 16%.
Redeemable Convertible Preferred Stock
On March 11, 1998, the Company raised gross proceeds of $2.2
million in a private placement to a single institutional
investor, KA Investments LDC (the "KA"), of five-year
convertible debt securities (the "Debentures") pursuant to
the terms of a Convertible Debenture Purchase Agreement,
dated March 11, 1998, by and between the Company and the KA
(the "Debenture Purchase Agreement"). Each Debenture was
sold for $50,000.00, accrued interest at a rate of 4% per
annum, and was convertible at the option of the holder into
shares of the Company's Common Stock at a price per share
equal to the lesser of (i) $8.02 or (ii) 80% of the average
closing market price of the Company's Common Stock during
the 21 trading days prior to conversion, but in no event
less than $3.00 per share (as adjusted for stock splits).
On June 9, 1998, the KA and the Company entered into a
Convertible Preferred Stock Purchase Agreement (the
"Purchase Agreement A"), pursuant to which the KA agreed to
exchange all of its Debentures for 220,000 shares of the
Company's 4% Series A Convertible Preferred Stock (the
"Series A Preferred Stock"). The financial terms of the
Series A Preferred Stock were identical to the financial
terms of the Debentures for which they were exchanged. The
Company was obligated to file and have declared effective by
the Securities and Exchange Commission (the "Commission"),
on or prior to June 24, 1998, a registration statement with
respect to the resale of the Common Stock issuable upon
conversion of the Series A Preferred Stock. The Company
originally filed such Registration Statement on May 1, 1998,
and such Registration Statement was declared effective by
the Commission on June 8, 1998. As of December 31, 1998,
holders of the Company's Series A Preferred Stock had
exercised their right and converted all 220,000 shares of
the Series A Preferred Stock into 746,653 shares of the
Company's Common Stock.
On June 29, 1998, the Company entered into a promissory note
(the "Investor Note") with an institutional investor in the
amount of $1,250,000. This note was unsecured and was due
and payable with accrued interest at an annual rate of 8% on
August 28, 1998. The Company, in its sole discretion, could
elect to pay this note on August 28, 1998, subject to a
payment charge of $87,500, or exchange this note for a
series of convertible preferred stock or convertible
debentures of the Company. Repayment of the Investor Note
was orally extended and made payable on demand.
On October 23, 1998, the Company elected to exchange the
Investor Note for 1,500 shares of the Company's Series B 8%
Convertible Preferred Stock (the " Series B Preferred
Stock") and warrants to acquire 100,000 shares of Common
Stock issued to the holder of the Series B Preferred Stock
(the "Warrants"). The $1,000 stated value per share of
Series B Preferred Stock is convertible at the option of the
holder into shares of Common Stock, at a price per share
equal to the lesser of $ 3.66 per share of Common Stock
(the "Closing Price") or 75% of the average of the closing
bid prices as reported on the Nasdaq SmallCap Market
("Nasdaq") for the lowest five of the 20 trading days
immediately preceding the date of Series B Preferred Stock
conversion (the "Average Price"). The Warrants are
exercisable to acquire shares of Common Stock at a price per
share equal to $4.125.
The shares of Series B Preferred Stock were issued pursuant
to a Securities Purchase Agreement, dated as of October 23,
1998 (the "Purchase Agreement B"), entered into between the
Company and a single institutional investor upon the
exchange of outstanding loan principal and accrued interest
pursuant to the Investor Note, plus certain premiums, owed
by the Company to that investor. In connection with such
exchange of indebtedness, the Company also issued the
Warrant to the same institutional investor. The Company is
obligated to file and have declared effective by the
Commission, a registration statement with respect to the
resale of the Common Stock issuable upon conversion of the
Series B Preferred Stock pursuant to the terms of a
Registration Rights Agreement entered into between the
Company and the holder of the Series B Preferred Stock and
the Warrants (the "Registration Agreement"). Pursuant to the
Registration Agreement, the Company is required to use its
best efforts to maintain a continuously effective
Registration Statement, with respect to the Common Stock
underlying the Series B Preferred Stock and the Warrants
until the earlier of three years after the Registration
Statement is declared effective or until such earlier date
on which such Common Stock may be sold pursuant to Rule
144(k) under the Securities Act of 1933, as amended (the
"Securities Act"). The Company will not receive any proceeds
from the resale by the holders of any of the Common Stock
issuable to the holders upon conversion of the Series B
Preferred Stock. Pursuant to the terms of the Registration
Agreement, the Registration Statement will cover up to 20%
of the number of shares of Common Stock outstanding on the
issue date of the Series B Preferred Stock under the
Purchase Agreement B. The terms of the Purchase Agreement B
require that the Company maintain a reserve of up to 20% of
the number of shares of Common Stock outstanding on the
issue date of the Series B Preferred Stock under the
Purchase Agreement B for issuance upon conversion.
Through October 23, 2001, the Company may redeem all
outstanding shares of the Series B Preferred Stock at 135%
of the aggregate stated value ($1,000 per share) thereof,
plus accrued and unpaid dividends on such shares (the
"Redemption Price"), as long as the then Current Market
Price (as defined) of the Common Stock at the time of
optional redemption is less than $3.66 per share.
Furthermore, all shares of Series B Preferred Stock that
have not been converted to Common Stock prior to October 23,
2001 shall be converted to Common Stock on that date on the
assumption that the Common Stock is listed on Nasdaq.
Notwithstanding such mandatory conversion, however, absent
approval of the Purchase Agreement B by Company Stockholders
in satisfaction of applicable Nasdaq rules, rather than
conversion of all then outstanding Series B Preferred Stock
the Company shall be required to make cash redemption
payments equal to the Redemption Price of such shares to the
extent that any common shares issuable upon conversion, when
aggregated with (i) all common shares previously issued on
Series B Preferred Stock conversion, (ii) all common shares
issued as stock dividends on the Preferred Stock, and (iii)
all common shares issuable on exercise of the Warrants,
would equal 20% or more of the number of outstanding shares
of Common Stock on October 23, 1998.
Indebtedness
On August 12, 1998, the Company entered into promissory
notes (collectively "Series Notes") with five individual
investors in the aggregate amount of $650,000. The Series
Notes were unsecured and were due and payable with accrued
interest at an annual rate of 8% on October 14, 1998. The
Company, in its sole discretion, could elect to pay these
Series Notes on October 12, 1998, subject to a payment
charge equal to 7% of the principal amount, or exchange the
Series Notes for a series of convertible preferred stock or
convertible debentures of the Company. On October 12, 1998,
the Company entered into new promissory notes (collectively
"Series A Notes") in the aggregate amount of $704,082 with
the holders of the Series Notes to replace and rollover the
Series Notes. The Series A Notes are unsecured and are due
and payable with accrued interest at an annual rate of 8% on
December 11, 1998. The Company, in its sole discretion, may
elect to pay these Series A Notes on December 11, 1998,
subject to a payment charge equal to 7% of the principal
amount, or exchange the Series A Notes for a series of
convertible preferred stock or convertible debentures of the
Company. On December 11, 1998, the Company and the holders
of the Series A Notes agreed to extend the due date for
repayment of the Series A Notes until February 25, 1999. On
February 25, 1999 the Series A Notes were orally extended
and made payable on demand. The Company is currently in
negotiation with the holders for the exchange of the Series
E Notes into equity of the Company.
On October 20, 1998, the Company entered into promissory
notes (collectively "Series D Notes") with three individual
investors in the aggregate amount of $350,000. The Series D
Notes were unsecured and were due and payable with accrued
interest at an annual rate of 8% on January 18, 1999. The
Company, in its sole discretion, could elect to pay these
Series D Notes on January 18, 1999, subject to a payment
charge equal to 5% of the principal amount, or exchange the
Series D Notes for a series of convertible preferred stock
or convertible debentures of the Company. On January 18,
1999, the Company and the holders of the Series D Notes
agreed to extend the due date for repayment of the Series D
Notes until April 15, 1999, subject to a payment charge
equal to 5% of the principal amount plus an additional 2.5%
of the principal amount for each 30 day period after January
18, 1999 the Series D Notes are outstanding. The Company is
currently in negotiation with the holders for the exchange
of the Series E Notes into equity of the Company.
From November 17 to December 17, 1998, the Company entered
into promissory notes (collectively "Series E Notes") with
five individual investors in the aggregate amount of
$550,000. The Series E Notes were unsecured and were due and
payable with accrued interest at an annual rate of 8% from
January 18 to February 8, 1999. The Company, in its sole
discretion, could elect to pay these Series E Notes on the
due date, subject to a payment charge equal to 7% of the
principal amount, or exchange the Series E Notes for a
series of convertible preferred stock or convertible
debentures of the Company. On February 12, 1999, the Company
and the holders of the Series E Notes agreed to extend the
due date for repayment of the Series E Notes until March 15,
1999. On March 15, 1999 the Series E Notes were orally
extended and made payable on demand. The Company is
currently in negotiation with the holders for the exchange
of the Series E Notes into equity of the Company.
On January 25, 1999, the Company entered into a loan
transaction with IFT, pursuant to (i) a promissory note in
the principal amount of $750,000, bearing a rate of interest
of 9.5% per annum, for a term ending on the earlier of May
15, 1999, or the closing date of a change of control
transaction between the Company and IFT and (ii) a security
agreement granting IFT a security interest in all accounts
receivable of the Company.
Equity Sale
On December 29, 1998, in consideration for $280,000 in cash
the Company sold in a private placement to a single
institutional investor, 80,000 shares of its Common Stock
(the "Initial Shares") in association with the right to
acquire up to 80,000 additional Repricing Shares of Common
Stock without the payment of additional consideration
(collectively, the "Shares"), pursuant to the terms of a
Common Stock Purchase Agreement, dated as of December 28,
1998, by and between the Company and the Investor (the
"Purchase Agreement C"). Under the terms of the Purchase
Agreement C, Repricing Shares are issuable to the investor
in the event that on the 45th day (with respect to 25% of
the Initial Shares), the 90th day (with respect to 25% of
the Initial Shares) and the 135th day (with respect to 50%
of the Initial Shares) subsequent to the closing date for
sale of the Initial Shares (with each such date being
referred to as a "Repricing Date"), the average of the
lowest twenty closing sale prices during each such 45-day
period, respectively (each a "Discounted Share Price"), does
not exceed $4.22 per share (the "Multiple Share Price").
The number of Repricing Shares to be issued on each
Repricing date, subject to the maximum of 80,000 Repricing
Shares, equals the product of (i) the difference between the
Multiple Share Price and the relevant Discounted Share
Price, and (ii) a fraction equal to the number of Initial
Shares subject to repricing (e.g., 25% of 80,000 shares, or
20,000) divided by the relevant Discounted Share Price. The
Company intends to limit the number of Repricing Shares
which will be issued by, from time to time, exercising its
right to repurchase Repricing Shares at the Call Price
established in the Purchase Agreement C, which is a minimum
of $4.49 per share. The Company is obligated to file with
the Securities and Exchange Commission, a registration
statement with respect to the shares issuable under the
Purchase Agreement C and to use its best efforts to keep the
registration statement effective for a period of five (5)
years after the registration statement is declared
effective, or until such earlier date when the Offered
Shares may be sold pursuant to Rule 144(k) under the
Securities Act. At any time prior to sale by the Investor,
the Company may redeem the Shares at the Call Price
established in the Purchase Agreement C, which price is the
greater of $4.49 per share, or 100% of the closing bid price
per share on the date of redemption minus $3.50.
Outlook: Issues and Risks
Potential Change of Control Transaction
On February 4, 1999, the Company, entered into a non-binding
Letter of Intent with Interactive Flight Technologies, Inc.,
a Delaware corporation ("IFT") regarding the acquisition by
the Company of all or substantially all of the assets and
specified liabilities of IFT (the "Net Assets") relating to
IFT's interactive entertainment business (the "Business") in
consideration for the Company's issuance to IFT of that
number of shares of its Common Stock as would constitute 60%
of the Company's fully-diluted equity (the "Acquisition").
The Net Assets will include: $5 million in cash; accounts
receivable owing to IFT from Swissair; the proceeds and
other recoveries generated by certain litigation brought by
IFT; the Swissair warranty contract; the Swissair customer
relationship; all IFT interactive entertainment intellectual
property, and other tangible assets related to the Business
(including but not limited to customer lists and files,
trade secrets, trademarks, service marks, assignable
government permits and other rights under leases and rights
under specified contracts); inventory, furniture, fixtures,
computers and equipment related to the Business; other
infrastructure (including FAA certified repair station)
relating to the Business; IFT's engineering and technical
staff; and the benefit of all IFT research and development
efforts. The Acquisition will be effected in accordance with
a definitive agreement (the "Agreement") to be subsequently
negotiated and signed following the completion of due
diligence investigations by the Company and IFT. In
addition to the usual and customary representations,
covenants and conditions contained in agreements of the type
used to consummate transactions like the Acquisition, the
definitive agreement will provide that closing of the
Acquisition is subject (i) to approval by the shareholders
of the Company, if required under the rules of The Nasdaq
Stock Market, and (ii) the receipt of a "fairness opinion"
with respect to the terms of the Acquisition to the effect
that the Acquisition is fair from a financial point of view,
to the Company shareholders. Although the Letter of Intent
is otherwise not binding, the Company has agreed to refrain
from entering into negotiations with any other party for the
sale of all or substantially all of its assets, or for the
sale of control of the Company, until May 15, 1999. IFT
similarly agreed not to enter into negotiations for the
acquisition of control of any other company engaged in the
interactive entertainment business until May 15, 1999.
There is no guarantee that the Acquisition will be
consummated on the terms set forth in the Letter of Intent.
IFT developed interactive entertainment products for use in
the airline and travel industry, and it has ceased all
research and development activities with respect to such
products except as required under contract. It currently
maintains only one ongoing contract for its interactive
entertainment products, and is currently engaged in the
redirection of its business activities into new markets. IFT
is a Nasdaq: NMS registrant and trades under the ticker
symbol FLYT.
The Company is currently using its working capital to
finance its current expenses, including installations,
equipment purchases, product development, inventory and
other expenses associated with the delivery and installation
of systems for Carnival. Cash liquidity from external
sources will be required to finance existing and anticipated
growth in the Company's accounts receivable and inventories
resulting from performance under outstanding orders,
including ongoing payroll expenses. The Company believes
that its working capital requirements will increase
throughout 1999 and beyond, particularly as its focus
continues on large, long-term projects. The Company is in
discussions with commercial and private lenders to obtain
the availability of borrowings secured by assets of the
Company and with investors for equity financing to prepare
for future operating needs in the event that the IFT
transaction is not completed. (see "Potential Change of
Control Transaction" above) Even if the IFT transaction is
completed, maintaining an adequate level of working capital
through the end of 1999, and thereafter, will depend in part
on collection of accounts receivable on a timely basis,
successful litigation with non-paying customers already
delinquent, satisfactory settlements with vendor-creditors
(including those already suing the Company) (see "PART I -
Item 3 - Legal Proceedings"), the success of the Company's
products in the marketplace, the relative profitability of
those products, continued availability of memory and storage
components at favorable pricing and the Company's ability to
control operating expenses. Following completion of the IFT
transaction, the Company may still seek or require
additional financing for growth opportunities, including any
expansion that the Company may undertake internally, for
strategic acquisitions or partnerships, or for expansion of
additional sites or major long-term projects. There can be
no assurance that the IFT transaction will be completed and
that if not any financing will be available on terms
acceptable to the Company, if at all. If future financing is
not available when needed, the Company will be forced to
curtail or discontinue operations. In such event, the
stockholders may lose, or experience a substantial reduction
in, the value of their investment in the Company.
Forward Looking Statements
Except for historical information contained herein, the
matters discussed in this ITEM 6 and elsewhere in this
annual Report on Form 10KSB are forward-looking statements
(within the meaning of Section 27 of the Securities Act of
1933, as amended (the "Securities Act") and Section 21 of
the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) that are subject to certain risks and
uncertainties that could cause actual results to differ
materially from those set forth in such forward-looking
statements. Such risks and uncertainties include, but are
not limited to, the failure to execute definitive agreements
with additional customers on favorable terms or at all, the
failure of the Company to receive sufficient financing to
perform under any new contracts or to perform sufficient
research and development, the impact of competition and
downward pricing pressures, the effect of changing economic
conditions and conditions in the specific industries the
Company has targeted, the impact of any changes in domestic
and foreign regulatory environments or the Company's
inability to obtain requisite government approvals, risks in
technology development, the risks involved in currency
fluctuations, the risks of not being able to obtain
additional future financing by sale of securities due to the
inability to maintain Nasdaq listing for Company Common
Stock, and the other risks and uncertainties detailed
herein.
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, detailed 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 estimates that its internal systems
will be Y2K ready by September 30, 1999. The Company
believes that with these detailed plans and completed
modifications, the Y2K issue will not pose significant
operational problems for it. However, if the modifications
and conversions are not made, or completed in a timely
fashion, 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 is, therefore, Y2K compliant.
The Company's cost of addressing Y2K has been insignificant
to date. The financial impact of making any required systems
changes or other remediation efforts 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 in
September 1999, 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 program 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. The Company expects to have a
contingency plan to handle this situation by September 30,
1999.
Item 7. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants
27
Balance Sheet as of December 31, 1998
28
Statements of Operations for the years ended December 31,
1998 and 1997 30
Statements of Changes in Shareholders' Equity for the years
ended
December 31, 1998 and 1997
31
Statements of Cash Flows for the years ended December 31,
1998 and 1997 32
Notes to Financial Statements
33
Report of Independent Accountants
To the Board of Directors and Shareholders of
The Network Connection, Inc.
In our opinion, the accompanying balance sheet and the
related statements of operations, of changes in
shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of The Network
Connection, Inc. at December 31, 1998, and the results of
its operations and its cash flows for each of the two years
in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
As discussed in Note 1 to the financial statements, the
Company has incurred net losses from operations and has an
accumulated deficit that raises substantial doubt about its
ability to continue as a going concern. The financial
statements do not include any adjustments that might result
from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
April 15, 1999
Atlanta, Georgia
THE NETWORK CONNECTION, INC.
BALANCE SHEET
December
31,
1998
ASSETS
Current assets:
Restricted cash $1,015,00
0
Short term investments 80,834
Accounts receivable, less 1,874,779
allowance of $2,792,000
Inventories:
Raw materials, less 1,357,674
allowance of $262,000
Work in process 1,400,494
Prepaid expenses 245,360
---------
---------
Total current assets 5,974,141
Property and equipment:
Land 150,000
Building and improvements 763,055
Furniture, fixtures and 2,602,303
equipment
Software 60,192
Vehicles 162,773
---------
---------
3,738,323
Less accumulated (1,383,63
depreciation 5)
---------
---------
2,354,688
Other assets, net 86,972
---------
---------
Total assets $8,415,80
1
=========
=
THE NETWORK
CONNECTION, INC.
BALANCE SHEET
December
31,
1998
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Current
liabilities:
Accounts payable $2,924,132
and accrued
expenses
Payable to 74,429
shareholders
Borrowings under 669,000
bank line of
credit
Notes payable 1,604,082
Deferred revenues 521,332
Current portion 36,974
of long-term debt
and capital lease
obligations
----------
----------
Total current 5,829,949
liabilities
Long-term debt, 699,998
less current
portion
----------
----------
Total liabilities 6,529,947
Commitments and
contingencies (Note 2)
Redeemable convertible
preferred stock, $.01 par
value, $1,000 stated value:
Authorized, 1,500 shares;
Issued and outstanding, 1,522,667
1,500
Shareholders'
equity:
Preferred stock,
$.01 par value:
Authorized,
2,500,000 shares;
Issued and
outstanding, none
Common stock,
$.001 par value:
Authorized,
10,000,000
shares;
Issued and 5,070
outstanding,
5,069,646 shares
Additional paid- 16,443,552
in capital
Accumulated (16,085,43
deficit 5)
----------
----------
Total 363,187
shareholders'
equity
----------
----------
Total liabilities $8,415,801
and shareholders'
equity
==========
==
THE NETWORK
CONNECTION, INC.
STATEMENTS OF
OPERATIONS
For the years ended
December 31,
1998 1997
Revenues $5,003,290 $7,848,444
Cost of revenues 3,005,151 5,044,258
---------- ----------
---------- ---------
Gross profit 1,998,139 2,804,186
Selling, general and 3,965,878 4,346,318
administrative
Provision for doubtful 6,464,064 258,270
accounts and inventory
reserve
Special charges 595,263 0
Research and 397,196 277,527
development
---------- ----------
---------- ---------
Operating loss (9,424,262 (2,077,929
) )
Interest, net (209,036) 52,301
---------- ----------
---------- ---------
Net loss (9,633,298 (2,025,628
) )
Preferred stock 574,951 0
dividends
---------- ----------
--------- ---------
Net loss to common ($10,208,2 ($2,025,62
shareholders 49) 8)
========== ==========
== =
Basic and Diluted Net ($2.31) ($0.53)
loss per share
========== ========
= ==
Weighted average 4,426,535 3,845,097
shares outstanding
========== ==========
== =
THE NETWORK
CONNECTION, INC.
STATEMENTS OF
CHANGES IN
SHAREHOLDERS
EQUITY
Common Additional
Accumulate Total
S d
t
o
c
k
Shares Amount PIC Deficit
Equity
Balance at January 3,036,7 $3,037 $(4,426,50 $4,756,353
1, 1997 10 $9,179,8 9)
25
Exercise of 1,065,392 1,065 5,276,76 5,277,828
warrants to 3
acquire common
stock
Stock option 50,291 50 165,801 165,851
plan
Net Loss (2,025,628 (2,025,628
)
_______ ________ ________ __________ ______
___ __ __ __ __
Balance at 4,152,3 4,152 14,622,3 (6,452,137 8,174,404
December 31, 1997 93 89 )
Common stock 80,000 80 213,350 213,430
sold
Conversion of 746,653 747 1,984,57 1,985,322
preferred stock to 5
common stock
Stock option 90,600 91 198,189 198,280
plan
Preferred stock (574,951 (574,951)
dividends )
Net Loss (9,633,298 (9,633,298
) )
_______ ________ ________ __________ __________
___ __ __ __ __
Balance at 5,069,6 $5,070 $16,443, ($16,085,4 $363,187
December 31, 1998 46 552 35)
THE NETWORK
CONNECTION, INC.
STATEMENTS OF
CASH FLOWS
For the years
ended December
31,
1998 1997
Operating
activities
Net loss ($9,633,2 ($2,025,62
98) 8)
Adjustments to
reconcile net
loss to net cash
used
in operating
activities:
Depreciation 1,030,265 334,029
and amortization
Provision for 6,202,064 0
doubtful accounts
Provision for 262,000 0
inventory
Changes in
operating assets
and liabilities:
Accounts (3,140,34 (3,131,223
receivable 1) )
Inventories 424,827 (2,336,585
)
Prepaids and 11,328 (728,070)
other assets
Accounts (1,243,98 2,990,205
payable and 5)
accrued expenses
Payable to 3,500 2,078
shareholders
Deferred 521,332 0
revenues
--------- ----------
--------- ---------
-
Net cash used in (5,562,30 (4,895,194
operating 8) )
activities
Investing
activities:
Purchase of (534,084) (417,291)
property and
equipment
Purchase of short- 557,725 (142,846)
term investments
--------- ----------
--------- ---------
-
Net cash (used 23,641 (560,137)
in) provided by
investing
activities
Financing
activities:
Proceeds from 143,000 30,000
bank line of
credit
Proceeds from 1,601,600 0
issuance of
promissory notes
Proceeds from 470,000 18,077
issuance of long-
term debt
Net proceeds from 3,344,749 5,443,679
issuance of stock
Payment of long- (30,330) (11,777)
term debt and
capital lease
obligations
--------- ----------
--------- ---------
-
Net cash provided 5,529,019 5,479,979
by financing
activities
--------- ----------
--------- ---------
-
Net change in (9,648) 24,648
cash
Cash at 1,024,648 1,000,000
beginning of year
--------- ----------
--------- ---------
-
Cash at end of $1,015,00 $1,024,648
year 0
========= ==========
== =
Supplemental
Information:
Conversion of 3,450,000 0
debt to
convertible
preferred stock
Preferred stock 574,951 0
dividends
1. Significant Accounting Policies
Description of Business
The Network Connection, Inc. (the "Company") was
incorporated on December 30, 1986. The Company designs,
manufactures and distributes computer networking products
for use in employee training, academic, telecommunications,
entertainment and other industry applications. The
Company's products are based upon a proprietary engineered
process utilizing non-proprietary personal computer hardware
standards with standard major components and subsystems.
The Company's products are designed to be compatible with
industry-standard network operating systems.
Basis of Presentation - Going Concern
The Company's financial statements are prepared using
generally accepted accounting principles applicable to a
going concern which contemplate the realization of assets
and liquidation of liabilities in the normal course of
business. The Company has incurred net losses from
operations for several years, has an accumulated deficit at
December 31, 1998, and has used substantial cash in its
operations which raises substantial doubt about the
Company's ability to continue as a going concern. Management
believes that the completion of the change of control
transaction with Interactive Flight Technologies, Inc.
("IFT") described in Note 9, future debt and equity
offerings and successful commercialization of its products
and services will generate the required capital necessary to
continue as a going concern.
Concentration of Credit Risk
The Company's principal financial instruments subject to
potential credit risk are cash and equivalents and trade
accounts receivable. The Company invests its cash and
credit instruments with highly rated financial institutions
and performs periodic evaluations of the relative standing
of these financial institutions. Trade accounts receivable
are generally unsecured; therefore, the Company is at risk
to the extent such amounts become uncollectible.
In 1998, two customers accounted for an aggregate of 96%
(76% and 20%, respectively) of the Company's revenues. In
1997, three customers accounted for an aggregate of 79%
(38%, 30% and 11%, respectively) of the Company's revenues.
Management believes that the concentration of credit risk
with respect to trade accounts receivable is high due to the
limited number of customers requiring large shipments.
Inventories
Inventories consist primarily of components purchased for
assembly into products and are stated at the lower of cost
or market using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation
and amortization are calculated using the straight-line
method over the estimated useful lives of the assets,
principally five years, except for buildings for which the
life is forty years.
Income Taxes
Under the Statement of Financial Accounting Standards No.
109 (SFAS 109), "Accounting for Income Taxes", the liability
method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
The Company provides a valuation allowance for deferred tax
assets which are determined by management to be below the
threshold for realization established by SFAS 109.
Revenue Recognition
Revenues are recognized when the products are shipped or
installed based upon the terms of the contract, expiration
of rights of acceptance or return and determination that the
related receivables are collectible. Revenues pursuant to
contracts that provide for revenue sharing with customers or
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.
The Company's products are often used with other products in
large complex projects. As a result, the Company may grant
extended payment terms for certain sales of up to 180 days
based on the nature of the project.
Deferred Revenue
Deferred revenue represents the advance billings of
equipment sales as allowed under purchase and installation
contracts.
Other Assets
Costs incurred to establish and defend trademarks and
patents are capitalized. Such costs are amortized using the
straight-line method over 20 years.
Basic and Diluted Net Loss Per Common Share
Basic and Diluted net loss per common share have been
computed by dividing net loss by the weighted average number
of common shares outstanding during each period.
Management's 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 dates of the
financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results
could differ from those estimates.
Advertising Costs
Costs of advertising are expensed when incurred. The
Company recognized advertising expenses of approximately
$234,000 and $656,000 in 1998 and 1997, respectively.
2. Commitments and Contingencies
The Company leases certain equipment and office space.
Property and equipment includes $15,230 of equipment under
capital lease agreements at December 31, 1998. Accumulated
amortization was $13,707 at December 31, 1998. Amortization
of leased assets is included in depreciation and
amortization expense. The Company also leases certain
equipment under noncancelable operating leases that expire
in various years through 2001.
Future minimum lease payments required under capital lease
obligations and noncancelable operating leases with initial
or remaining terms of one year or more are summarized as
follows at December 31, 1998:
Year ending December 31, Capital
Operating
1999 970
15,288
2000 0
15,288
2001 0
7,644
Total minimum lease payments $970
$38,220
Less amounts representing interest
90
Present value of minimum capital lease payments
880
Less current portion 880
Long-term obligations under capital leases
$ 0
During 1998 and 1997, total rental expense for all operating
leases was approximately $33,574 and $36,000, respectively.
To date, the Company has not experienced significant claims
under product warranties due to the pass through to end
users of the warranties that the Company receives from
vendors.
On December 1, 1998, Sigma Designs, Inc. ("Sigma"), filed a
complaint against the Company in the United States District
Court, Northern District of California, San Jose Division,
Civil Action File No. 98-21149J(EAI) alleging breach of
contract and action on account. Sigma claims that the
Company failed to pay for goods shipped to the Company by
Sigma. The matter was settled by written agreement dated
January 22, 1999, contingent upon registration of Company
stock issued to Sigma as a part of such settlement, and
payment by the Company of $50,000, in two installments, the
latter which was due on February 5, 1999. The Company has
made the $50,000 settlement payments and is in the process
of filing for registration of the stock issued to Sigma.
Management of the Company expects to fully comply with the
terms of the settlement agreement and the claim will be
dismissed with prejudice.
Hollingsead International, Inc. ("Hollingsead") filed a
complaint against the Company on January 28, 1999, in the
State Court of Forsyth County, State Court of Georgia, Civil
Action File No. 99sc0053, alleging the Company failed to pay
invoices submitted for installation and service of audio-
visual systems in certain aircraft. In its complaint
Hollingsead requests $357, 850 in damages plus interest,
costs, attorneys fees, and punitive damages of no less than
$250,000. The Company filed an answer and a counterclaim
with the court on March 29, 1999 alleging that any amounts
allegedly owed Hollingsead should be set-off and/or recouped
against damages incurred by the Company as a result of
Hollingsead's negligence and/or breach of contract. The
Company is seeking settlement of such claims with
Hollingsead.
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. The
CruiseView system on the SuperStar Leo was installed and has
been in commercial operation since October 1998. The Company
claims that Star and CNA are in default under the payment
obligations of the Star Agreement and intend to aggressively
pursue its remedies, including repossession of inventory,
contractual and otherwise, to enforce its rights under the
terms of the Star Agreement.
On March 29, 1999, the Company filed to revoke the Supplemental Type Certi
ficate (STC) issued by the FAA and DGAC in connection with
the two Fairlines aircraft on which AirView systems are
installed and in operation due to Fairlines default in
payment under terms of the AirView Agreement. Revocation of
the STC would result in the inability for Fairlines to
operate the aircraft commercially with the AirView system
installed on the aircraft. The Company is pursuing its
remedies, contractual and otherwise, in respect to
collection of amounts due and damages incurred under the
AirView Agreement.
3. Debt Obligations
Debt obligations consist of the following:
1998
1997
Note payable due in varying installments through 2009,
interest at
prime (7.5% at December 31, 1998) plus 2%, collateralized
by
certain commercial property and personally guaranteed by
two
shareholders $227,102
$238,767
Note payable due in varying installments through 2000,
interest
at 6.9%, collateralized by a vehicle.
31,456 40,845
Note payable due and payable April 19, 2001, interest at 16%
payable monthly, collateralized by certain commercial
property 470,000 0
Note payable due in varying installments through 2000,
interest at
11.0%, collateralized by a vehicle.
7,444 12,458
736,002 292,070
Less current portion 36,004
32,964
$699,998 $259,106
Aggregate maturities of long-term debt as of December 31,
1998 are as follows:
1999 36,004
2000 31,072
2001 486,457
2002 18,848
2003 22,050
Thereafter 141,571
$736,002
On May 28, 1998, the Company entered into a $1.0 million
line of credit agreement with a bank. Outstanding advances
bear interest at 7.05% per annum through the maturity date
of May 28, 1999. Interest is payable monthly in arrears,
commencing January 1, 1998. As of December 31, 1998, there
was $669,000 advanced under this line of credit. This line
of credit is collateralized by two certificates of deposit
in the total amount of $1.0 million and are presented in the
balance sheet as restricted cash.
On August 12, 1998, the Company entered into promissory
notes (collectively "Series Notes") with five individual
investors in the aggregate amount of $650,000. The Series
Notes were unsecured and were due and payable with accrued
interest at an annual rate of 8% on October 14, 1998. The
Company, in its sole discretion, could elect to pay these
Series Notes on October 12, 1998, subject to a payment
charge equal to 7% of the principal amount, or exchange the
Series Notes for a series of convertible preferred stock or
convertible debentures of the Company. On October 12, 1998,
the Company entered into new promissory notes (collectively
"Series A Notes") in the aggregate amount of $704,082 with
the holders of the Series Notes to replace and rollover the
Series Notes. The Series A Notes are unsecured and are due
and payable with accrued interest at an annual rate of 8% on
December 11, 1998. The Company, in its sole discretion, may
elect to pay these Series A Notes on December 11, 1998,
subject to a payment charge equal to 7% of the principal
amount, or exchange the Series A Notes for a series of
convertible preferred stock or convertible debentures of the
Company. On December 11, 1998, the Company and the holders
of the Series A Notes agreed to extend the due date for
repayment of the Series A Notes until February 25, 1999. On
February 25, 1999 the Series A Notes were orally extended
and made payable on demand.
On October 20, 1998, the Company entered into promissory
notes (collectively "Series D Notes") with three individual
investors in the aggregate amount of $350,000. The Series D
Notes were unsecured and were due and payable with accrued
interest at an annual rate of 8% on January 18, 1999. The
Company, in its sole discretion, could elect to pay these
Series D Notes on January 18, 1999, subject to a payment
charge equal to 5% of the principal amount, or exchange the
Series D Notes for a series of convertible preferred stock
or convertible debentures of the Company. On January 18,
1999, the Company and the holders of the Series D Notes
agreed to extend the due date for repayment of the Series D
Notes until April 15, 1999, subject to a payment charge
equal to 5% of the principal amount plus an additional 2.5%
of the principal amount for each 30 day period after January
18, 1999 the Series D Notes are outstanding.
From November 17 to December 17, 1998, the Company entered
into promissory notes (collectively "Series E Notes") with
five individual investors in the aggregate amount of
$550,000. The Series E Notes were unsecured and were due and
payable with accrued interest at an annual rate of 8% from
January 18 to February 8, 1999. The Company, in its sole
discretion, could elect to pay these Series E Notes on the
due date, subject to a payment charge equal to 7% of the
principal amount, or exchange the Series E Notes for a
series of convertible preferred stock or convertible
debentures of the Company. On February 12, 1999, the Company
and the holders of the Series E Notes agreed to extend the
due date for repayment of the Series E Notes until March 15,
1999. On March 15, 1999 the Series E Notes were orally
extended and made payable on demand.
The Company paid interest of approximately $311,000 and
$62,000 during fiscal years 1998 and 1997, respectively.
4. Common Stock, Preferred Stock and Warrants
On March 11, 1998, the Company raised gross proceeds of $2.2
million in a private placement to a single institutional
investor, KA Investments LDC (the "KA"), of five-year
convertible debt securities (the "Debentures") pursuant to
the terms of a Convertible Debenture Purchase Agreement,
dated March 11, 1998, by and between the Company and KA (the
"Debenture Purchase Agreement"). Each Debenture was sold
for $50,000.00, accrued interest at a rate of 4% per annum,
and was convertible at the option of the holder into shares
of the Company's Common Stock at a price per share equal to
the lesser of (i) $8.02 or (ii) 80% of the average closing
market price of the Company's Common Stock during the 21
trading days prior to conversion, but in no event less than
$3.00 per share (as adjusted for stock splits). On June 9,
1998, KA and the Company entered into a Convertible
Preferred Stock Purchase Agreement (the "Purchase Agreement
A"), pursuant to which KA agreed to exchange all of its
Debentures for 220,000 shares of the Company's 4% Series A
Convertible Preferred Stock (the "Series A Preferred
Stock"). The financial terms of the Series A Preferred Stock
were identical to the financial terms of the Debentures for
which they were exchanged. The Company was obligated to file
and have declared effective by the Securities and Exchange
Commission (the "Commission"), on or prior to June 24, 1998,
a registration statement with respect to the resale of the
Common Stock issuable upon conversion of the Series A
Preferred Stock. The Company originally filed such
Registration Statement on May 1, 1998, and such Registration
Statement was declared effective by the Commission on June
8, 1998. As of December 31, 1998, holders of the Company's
Series A Preferred Stock had exercised their right and
converted all 220,000 shares of the Series A Preferred Stock
into 746,653 shares of the Company's Common Stock.
On June 29, 1998, the Company entered into a promissory note
(the "Investor Note") with an institutional investor in the
amount of $1,250,000. This note was unsecured and was due
and payable with accrued interest at an annual rate of 8% on
August 28, 1998. The Company, in its sole discretion, could
elect to pay this note on August 28, 1998, subject to a
payment charge of $87,500, or exchange this note for a
series of convertible preferred stock or convertible
debentures of the Company. Repayment of the Investor Note
was orally extended and made payable on demand. On October
23, 1998, the Company elected to exchange the Investor Note
for 1,500 shares of the Company's non-voting Series B 8%
Convertible Preferred Stock (the " Series B Preferred
Stock") and warrants to acquire 100,000 shares of Common
Stock issued to the holder of the Series B Preferred Stock
(the "Warrants") pursuant to a Securities Purchase Agreement
of even date ("Purchase Agreement B"). The $1,000 stated
value per share of Series B Preferred Stock is convertible
at the option of the holder into shares of Common Stock, at
a price per share equal to the lesser of $ 3.66 per share
of Common Stock (the "Closing Price") or 75% of the average
of the closing bid prices as reported on the Nasdaq SmallCap
Market ("Nasdaq") for the lowest five of the 20 trading days
immediately preceding the date of Series B Preferred Stock
conversion (the "Average Price"). The Warrants are
exercisable to acquire shares of Common Stock at a price per
share equal to $4.125.
On December 29, 1998, in consideration for $280,000 in cash
the Company sold in a private placement to a single
institutional investor, (the "Investor"), 80,000 shares of
its Common Stock (the "Initial Shares") in association with
the right to acquire up to 80,000 additional Repricing
Shares of Common Stock without the payment of additional
consideration (collectively, the "Shares"), pursuant to the
terms of a Common Stock Purchase Agreement, dated as of
December 28, 1998, by and between the Company and the
Investor (the "Purchase Agreement C"). Under the terms of
the Purchase Agreement C, Repricing Shares are issuable to
the Investor in the event that on the 45th day (with respect
to 25% of the Initial Shares), the 90th day (with respect to
25% of the Initial Shares) and the 135th day (with respect
to 50% of the Initial Shares) subsequent to the closing date
for sale of the Initial Shares (with each such date being
referred to as a "Repricing Date"), the average of the
lowest twenty closing sale prices during each such 45-day
period, respectively (each a "Discounted Share Price"), does
not exceed $4.22 per shares (the "Multiple Share Price").
The number of Repricing Shares to be issued on each
Repricing date, subject to the maximum of 80,000 Repricing
Shares, equals the product of (i) the difference between the
Multiple Share Price and the relevant Discounted Share
Price, and (ii) a fraction equal to the number of Initial
Shares subject to repricing (e.g., 25% of 80,000 shares, or
20,000) divided by the relevant Discounted Share Price. The
Company intends to limit the number of Repricing Shares
which will be issued by, from time to time, exercising its
right to repurchase Repricing Shares at the Call Price
established in the Purchase Agreement C, which is a minimum
of $4.49 per share. At any time prior to sale by the
Investor, the Company may redeem the Shares at the Call
Price established in the Purchase Agreement C, which price
is the greater of $4.49 per share, or 100% of the closing
bid price per share on the date of redemption minus $3.50.
See also Note 2 and Note 9.
5. Income Taxes
The Company accounted for income taxes under the liability
method required by SFAS 109. Deferred income taxes reflect
the net effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At
December 31, 1998, the Company had a net deferred tax asset
of approximately $6,491,000 which was totally offset by a
valuation allowance because the assets do not meet the
criteria for recognition in SFAS 109. Significant components
of the Company's deferred tax liabilities and assets as of
December 31, 1998 and 1997 are as follows:
1998 1997
Deferred tax liabilities:
Tax over book depreciation ($188,000)
($122,000)
Tax over book amortization 0
0
Total deferred tax liabilities ($188,000)
($122,000)
Deferred tax assets:
Bad debt reserve $1,061,000
$ 57,000
Uniform capitalization 81,000
10,000
Book over tax amortization 195,000
9,000
Charitable contributions
4,000 3,000
Net operating loss 5,338,000
3,013,000
Total deferred tax assets $6,679,000
$3,092,000
Net deferred tax assets 6,491,000
2,970,000
Valuation allowance (6,491,000)
(2,970,000)
Net deferred taxes $ 0
$ 0
The valuation allowance for deferred tax assets as of
January 1, 1998 was approximately $2,970,000. The net change
in the total valuation allowance for 1998 was approximately
$3,521,000. This change resulted primarily from increases
in the above described temporary differences on which a
valuation allowance was provided.
The Company did not record any income tax expense or benefit
from operations for the years ended December 31, 1998 and
1997, respectively. The following table provides a
reconciliation between the Federal income tax rate and the
Company's effective income tax rate:
1998 1997
Statutory Federal income tax rate 34% 34%
Disallowed meals and entertainment (0) (1)
Increase in valuation allowance (36) (51)
Other, net 2 18
Effective tax rate 0% 0%
At December 31, 1998, the Company has net operating loss
(NOL) carryforwards of approximately $14,049,000. The NOL's
expire, if not utilized, as follows:
December 31, 2009 $ 168,000
December 31, 2010 $1,027,000
December 31, 2011 $4,071,000
December 31, 2012 $2,438,000
December 31, 2018 $6,345,000
6. Related Party Transactions
The Company was owed approximately $68,000 from two
shareholders/officers as of December 31, 1998.
On September 1, 1994, the Company entered into four
promissory notes in the aggregate amount of $69, 290
payable to certain shareholders/officers for accrued and
unpaid salaries owed through August 31, 1994. Under the
terms of the notes, outstanding amounts bear interest at 5%
per annum, with payments of principal and accrued interest
being payable to the extent certain operating cash flow
requirements are met. As of December 31, 1998, $74,429 of
principal and accrued interest remained outstanding under
these notes.
7. 401(k) Plan
During 1996, the Company established a defined contribution
plan (the 401(k) Plan) pursuant to Section 401(k) of the
Internal Revenue Code, whereby substantially all employees
are eligible to contribute up to 15% of their pre-tax
earnings, not to exceed amounts allowed under the Internal
Revenue Code. The Company may make contributions to the
401(k) Plan at the discretion of the Board of Directors. No
employer contributions have been made to the 401(k) Plan by
the Company.
8. Stock Options
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 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
1998, options to purchase 355,000 shares were granted at per
share price of $2.00. Options to purchase 652,478 shares
were outstanding at December 31, 1998. Options to purchase
265,578 shares under the Plan were exercisable at December
31, 1998. There were 712,328 options outstanding as of
December 31, 1997.
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 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 1998, options to purchase 10,000 shares were granted
at per share prices ranging from $2.59 to $3.25. Options to
purchase 24,000 shares under the Directors Plan were
outstanding at December 31, 1998. Options to purchase 9,000
shares under the Directors Plan were exercisable at December
31, 1998. There were 14,000 options to purchase shares under
the Directors Plan outstanding at December 31, 1997.
Shares Weighted
Average Exercise Share Price
Options outstanding at 579,869 7.67
December 31, 1996
Granted 425,000 7.51
Canceled or expired (208,300) 7.60
Exercised (50,291) 4.19
Options outstanding at 746,328 7.85
December 31, 1997
Granted 365,000 2.03
Canceled or expired (344,250) 8.73
Exercised (90,600) 2.00
Options outstanding at 676,478 5.00
December 31, 1998
The Company accounts for its employee stock option plans in
accordance with the provisions of Accounting Principles
Board Opinion No. 25. In October 1995, the Financial
Accounting Standards Board issued Statements of Financial
Accounting Standards No, 123, "Accounting for Stock Based
Compensation" ("SFAS 123") which requires that companies
with stock-based compensation plans either recognize
compensation expense based on new fair value accounting
methods or continue to apply existing accounting rules and
disclose pro forma net income and earnings per share
assuming the fair value method had been applied. The
Company elected to adopt the disclosure method of SFAS 123.
Had compensation cost for the Company's option plans been
determined based on the fair value at the grant dates, as
prescribed in SFAS 123, the Company's net loss and pro forma
net loss per share would have been as follows:
1998 1997
Net loss: (millions)
As reported ($10.21) ($2.03)
Pro forma ($10.64) ($3.44)
Net loss per share:
As reported ($2.31) ($0.53)
Pro forma ($2.40) ($0.89)
The fair value was determined using the Black-Sholes option
pricing model incorporating the following range of
assumptions in the calculations:
1998 1997
Expected life 5.0 years 9.8 years
Interest rate at grant date 4.57% 6.19%
Volatility at grant date 86% 78%
Dividend yield 0% 0%
The following table summarizes information about all options
outstanding as of December 31, 1998:
Range of Outstand Outstand Weighted Exercise Exercise
Exercise ing ing Average able able
Prices Shares Weighted Remainin Shares Weighted
Average g Years Average
Share In Share
Price Contract Price
ual Life
$2.00 - 319,728 $2.09 4.61 131,478 $2.15
3.25
4.17 - 99,000 6.07 3.83 84,000 6.00
6.75
7.13 - 169,750 7.43 6.91 93,500 7.40
8.00
8.75 - 32,000 8.78 7.40 16,500 8.81
9.82
10.25 - 56,000 10.42 7.57 53,500 10.42
13.26
$2.00 - 676,478 $5.05 5.46 378,978 $5.76
13.26
Because additional stock options are expected to be granted
each year, the above pro forma disclosures are not
representative of pro forma effects on reported financial
results for future years.
9. Subsequent Events
On January 22, 1999, in consideration for the settlement of
outstanding litigation brought by Sigma Designs, Inc., a
vendor to the Company (the "Sigma") and the mutual release
of claims, under the terms of the Settlement Agreement, the
Company agreed to pay $50,000 in cash to Sigma and to issue
to Sigma 110,000 Initial Shares of Common Stock. The
Company also issued to Sigma a warrant to acquire 40,000
shares of Common Stock, exercisable at $3.44 per share. The
Company is obligated to file with the Securities and
Exchange Commission, a Registration Statement and to use its
best efforts to keep the Registration Statement effective
for a period of five (5) years after the Registration
Statement is declared effective, or until such earlier date
when the Offered Shares may be sold pursuant to Rule 144(k)
under the Securities Act. Under the terms of the Settlement
Agreement, the Company may be required to pay an additional
cash amount to the holder of the Shares in the event that on
the date of Registration (the "Repricing Date"), the market
price for the Initial Shares (the "Market Price") is not at
least $319,850 (the "Repricing Price").
The Company is currently using its working capital to
finance its current expenses, including installations,
equipment purchases, product development, inventory and
other expenses associated with the delivery and installation
of current systems. Cash liquidity from external sources
will be required to finance existing and anticipated growth
in the Company's accounts receivable and inventories
resulting from performance under outstanding orders,
including ongoing payroll expenses. The Company believes
that its working capital requirements will increase
throughout 1999 and beyond, particularly as its focus
continues on large, long-term projects. The Company is in
discussions with commercial and private lenders to obtain
the availability of borrowings secured by assets of the
Company and with investors for equity financing to prepare
for future operating needs in the event that the IFT
transaction is not completed. Even if the IFT transaction is
completed, maintaining an adequate level of working capital
through the end of 1999, and thereafter, will depend in part
on collection of accounts receivable on a timely basis,
successful litigation with non-paying customers already
delinquent, satisfactory settlements with vendor-creditors
(including those already suing the Company), the success of
the Company's products in the marketplace, the relative
profitability of those products, continued availability of
memory and storage components at favorable pricing and the
Company's ability to control operating expenses. Following
completion of the IFT transaction, the Company may still
seek or require additional financing for growth
opportunities, including any expansion that the Company may
undertake internally, for strategic acquisitions or
partnerships, or for expansion of additional sites or major
long-term projects. There can be no assurance that the IFT
transaction will be completed and that if not any financing
will be available on terms acceptable to the Company, if at
all. If future financing is not available when needed, the
Company will be forced to curtail or discontinue operations.
On February 4, 1999, the Company, entered into a non-binding
Letter of Intent with Interactive Flight Technologies, Inc.,
a Delaware corporation ("IFT") regarding the acquisition by
the Company of all or substantially all of the assets and
specified liabilities of IFT (the "Net Assets") relating to
IFT's interactive entertainment business (the "Business") in
consideration for the Company's issuance to IFT of that
number of shares of its Common Stock as would constitute 60%
of the Company's fully-diluted equity (the "Acquisition").
The Net Assets will include: $5 million in cash; accounts
receivable owing to IFT from Swissair; the proceeds and
other recoveries generated by certain litigation brought by
IFT; the Swissair warranty contract; the Swissair customer
relationship; all IFT interactive entertainment intellectual
property, and other tangible assets related to the Business
(including but not limited to customer lists and files,
trade secrets, trademarks, service marks, assignable
government permits and other rights under leases and rights
under specified contracts); inventory, furniture, fixtures,
computers and equipment related to the Business; other
infrastructure (including FAA certified repair station)
relating to the Business; IFT's engineering and technical
staff; and the benefit of all IFT research and development
efforts. The Acquisition will be effected in accordance with
a definitive agreement (the "Agreement") to be subsequently
negotiated and signed following the completion of due
diligence investigations by the Company and IFT. In
addition to the usual and customary representations,
covenants and conditions contained in agreements of the type
used to consummate transactions like the Acquisition, the
definitive agreement will provide that closing of the
Acquisition is subject (i) to approval by the shareholders
of the Company, if required under the rules of The Nasdaq
Stock Market, and (ii) the receipt of a "fairness opinion"
with respect to the terms of the Acquisition to the effect
that the Acquisition is fair from a financial point of view,
to the Company shareholders. Although the Letter of Intent
is otherwise not binding, the Company has agreed to refrain
from entering into negotiations with any other party for the
sale of all or substantially all of its assets, or for the
sale of control of the Company, until May 15, 1999. IFT
similarly agreed not to enter into negotiations for the
acquisition of control of any other company engaged in the
interactive entertainment business until May 15, 1999.
There is no guarantee that the Acquisition will be
consummated on the terms set forth in the Letter of Intent.
IFT developed interactive entertainment products for use in
the airline and travel industry, and it has ceased all
research and development activities with respect to such
products except as required under contract. It currently
maintains only one ongoing contract for its interactive
entertainment products, and is currently engaged in the
redirection of its business activities into new markets. IFT
is a Nasdaq: NMS registrant and trades under the ticker
symbol FLYT.
The Company also entered into a loan transaction with IFT,
pursuant to (i) a promissory note in the principal amount of
$750,000, bearing a rate of interest of 9.5% per annum, for
a term ending on the earlier of May 15, 1999, or the closing
date of a change of control transaction between the Company
and IFT and (ii) a security agreement granting IFT a
security interest in all accounts receivable of the Company.
10. Fourth Quarter Adjustments
The Company increased its provision for doubtful accounts
and inventory reserve by approximately $3.6 million in the
fourth fiscal quarter primarily due to the uncertainty of
recovery of certain amounts due from Continuous Network
Advisors ("CNA") related to the sale and installation of
CruiseView on a cruise ship for Star Cruises Management Ltd.
("Star"). In March 1999, the Company filed for arbitration
to enforce its rights under the terms of the Star Agreement.
The CruiseView system on the vessel was installed and has
been in commercial operation since November 1998. The
Company claims that Star and CNA are in default under the
payment obligations of the Star Agreement and intends to
aggressively pursue its rights under the terms of the Star
Agreement through arbitration and all remedies available,
including repossession of inventory, contractual and
otherwise.
Special charges in the fourth fiscal quarter resulted from
$595,263 for the impairment of other assets capitalized in
1997 related to costs for obtaining Federal Aviation
Administration (FAA) certification for the Company's AirView
system which were being amortized over 10 years. These
assets were written off due to the uncertainty of
recoverability resulting from the termination of the
Fairlines Agreement and the absence of any additional orders
received for the AirView system for use in commercial
aircraft requiring FAA certification.
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
None
PART III
Information with respect to Items 9, 10, 11 and 12 of Form
10-KSB is hereby incorporated by reference into this Part
III of Form 10-KSB from the Registrant's Definitive Proxy
Statement relating to the Registrant's 1998 Annual Meeting
of Stockholders to be filed by the Registrant with the
Securities and
Exchange Commission on or before April 30, 1999.
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this
report:
Exhibit
Description_______________________________________________
3.1 Amended and Restated Certificate of Incorporation
of Registrant (including all
amendments thereto). (7)
3.2 Amended and Restated By-laws of Registrant. (5)
4.3 1994 Employee Stock Option Plan , including form of
Stock Option Agreement. (1)
10.1 Employment Agreement, dated October 31, 1998,
by and between the Registrant
and Wilbur L. Riner.
10.3 Employment Agreement, dated October 31, 1998,
by and between the Registrant
and James E. Riner.
10.5 Employment Agreement, dated October 31, 1998,
by and between the Registrant
and Bryan R. Carr.
10.10 Promissory Note, dated September 1, 1994,
made by the Company to the order of
Wilbur Riner. (1)
10.12 Promissory Note, dated September 1, 1994,
made by the Company to the order of
James Riner. (1)
10.18 Business Partner Agreement, dated February
24, 1995, by and between the Company
and Conhan Co. Ltd. (South Korea distribution).
(3)
10.19 1995 Stock Option Plan for Non-Employee
Directors. (4)
10.22 Note and Security Agreement, dated May 26,
1995, by and between the Company
and Wachovia Bank of Georgia N.A. (4)
10.25 Securities Purchase Agreement dated as of October
23, 1998, between the Shaar Fund Ltd. (the "Shaar") and the
Registrant (7)
10.26 Registration Rights Agreement dated as of October
23, 1998, between Shaar and the Registrant (7)
10.27 Warrant Agreement dated October 23, 1998, between
Shaar and the Registrant (7)
10.28 Securities Purchase Agreement dated as of December
28, 1998, between Cache Capital and the Registrant
10.29 Registration Rights Agreement dated as of December
28, 1998, between Cache Capital and the Registrant
10.30 Letter of Intent, dated as of February 4,
1999, among The Network Connection, Inc. and
Interactive Flight Technologies, Inc.
27 Financial Data Schedule.
______________________
1. 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.
2. Incorporated by reference, filed as an exhibit with
Amendment No. 1 to the Company's Registration
Statement on Form SB-2 on March 24, 1994.
3. Incorporated by reference, filed as an exhibit with
Amendment No. 2 to the Company's Registration
Statement on Form SB-2 on April 27, 1995.
4. 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 on April 12, 1996.
5. Incorporated by reference, filed as an exhibit with
the Company's report on Form 8-K on June 21, 1996
6. Incorporated by reference, filed as an exhibit with the
Company's report on Form 8-K on March 17, 1998
7. 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.
(b) Reports on form 8-K for the fourth quarter ended
December 31, 1998:
None
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 hereto duly authorized, in the city of
Alpharetta, State of Georgia.
THE NETWORK CONNECTION, INC.
Dated: April 15, 1999 By: /s/ Wilbur R.
Riner___________________
Wilbur L. Riner
Chairman and Chief
Executive Officer
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/ Wilbur L. Riner________________ Chairman, Chief
Executive Officer April 15, 1999
Wilbur L. Riner and Director
/s/ Bryan R. Carr_________________ Vice President - Finance,
Chief Financial April 15, 1999
Bryan R. Carr and Principal Accounting
Officer and
Director
/s/ James E. Riner________________ Vice President -
Engineering, Secretary April 15, 1999
James E. Riner and Director
_____________________________ Director
April 15, 1999
Marc Doyle
_____________________________ Director
April 15, 1999
Arthur Bauer
<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE NETWORK
CONNECTION, INC. FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,015,000
<SECURITIES> 80,834
<RECEIVABLES> 4,666,779
<ALLOWANCES> 2,792,000
<INVENTORY> 2,758,168
<CURRENT-ASSETS> 5,974,141
<PP&E> 3,738,323
<DEPRECIATION> 1,383,635
<TOTAL-ASSETS> 8,415,801
<CURRENT-LIABILITIES> 5,829,949
<BONDS> 0
1,522,667
0
<COMMON> 5,070
<OTHER-SE> 358,117
<TOTAL-LIABILITY-AND-EQUITY> 8,415,801
<SALES> 5,003,290
<TOTAL-REVENUES> 5,003,290
<CGS> 3,005,151
<TOTAL-COSTS> 3,965,878
<OTHER-EXPENSES> 397,196
<LOSS-PROVISION> 7,059,327
<INTEREST-EXPENSE> 209,036
<INCOME-PRETAX> (9,633,298)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,633,298)
<EPS-PRIMARY> (2.31)
<EPS-DILUTED> (2.31)
</TABLE>
EMPLOYMENT AGREEMENT
Agreement made this 31st day of October, 1998, by and
between The Network Connection, Inc., with offices located
at 1324 Union Hill Road, Alpharetta, Ga. 30004 (the
"Company"), and Wilbur L. Riner, residing at 315 Anchorage
Place, Roswell, GA 30076 (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company is desirous of employing Employee
as Chairman of the Board, President and Chief Executive
Officer of Company and Employee is desirous of committing
himself to serve Company in such capacities, all upon the
terms and subject to the conditions hereinafter provided.
NOW, THEREFORE, in consideration of the mutual
covenants and agreements herein contained, the parties
hereto, intending to be legally bound, agree as follows:
1. Employment..
Company agrees to employ Employee, and employee agrees to be
employed by Company, upon the terms and subject to the
conditions of this Agreement.
2. Term.
The employment of Employee by Company as provided in
Section 1 will be for a period commencing on October 31,
1998, and ending on October 31, 2001, unless sooner
terminated as hereinafter set forth (the "Term").
3. Duties: Best Efforts: Indemnification.
Employee shall serve as Chairman of the Board,
President and Chief Executive Officer, subject only to the
directions from the Board of Directors of Company. Subject
only to the directions of those identified in the preceding
sentence, Employee shall have supervision and control over,
and sole responsibility for, all executive management of the
Company, and shall have such powers and duties as may be
from time to time prescribed by the Board of Directors of
the Company, provided that the nature of Employee's powers
and duties so prescribed shall not be inconsistent with
Employee's position and duties set forth herein.
Employee shall devote all of his business time,
attention and energies to the business and affairs of
Company, shall use his best efforts to advance the best
interests of Company and shall not during the Term be
actively engaged in any other business activity, whether or
not such business activity is pursued for gain, profit or
other pecuniary advantage. The Employee shall expend his
best efforts on behalf of the company and abide by all
reasonable Company policies now or hereafter existing.
Subject to the provisions of Company's Certificate of
Incorporation and Bylaws, each as amended from time to time,
Company shall indemnify Employee to the fullest extent
permitted by the General Corporation Law of the State of
Georgia, as amended from time to time, for all amounts (
including without limitation, judgments, fines, settlement
payments, expenses and attorney's fees) incurred or paid by
Employee in connection with any action, suit, investigation
or proceeding arising out of or relating to the performance
by Employee of services for, or the acting by Employee as a
director, officer or employee of, Company, or any other
person or enterprise in good faith at Company's request.
Company shall obtain and maintain in full force and effect
during the Term, directors' and officers' liability
insurance policies providing full and adequate protection
to Employee acting in good faith within his capacities for
the Company.
4. Place of Performance.
In connection with his employment of Company, Employee shall
be based at the principal manufacturing facility of Company
located at 1324 Union Hill Road, Alpharetta, Georgia 30004
(the "Offices"), and Employee shall have discretion
regarding his absence therefrom on travel status or
otherwise during any calendar year. Employee shall not be
required to move his present residence in order to perform
the services contemplated hereby. Subject to the foregoing,
in connection with any relocation of the Offices or transfer
consented to by Employee, Company will promptly pay (or
reimburse Employee for) all reasonable moving and moving
related expenses incurred by Employee as consequence of a
change of his
principal residence in connection with any such transfer or
relocation of the Offices.
5. Compensation.
(a) Base Salary. Company shall pay to Employee a base
salary (the "Base Salary") at a rate of not less than One
Hundred and Fifty-Six Thousand ($156,000) per annum,
payable in equal semi-monthly installments during the Term.
The Board of Directors of the Company, at least annually,
will review the Base Salary and other compensation during
the Term with a view toward the increase thereof base upon
Employee's performance, the performance of Company,
inflation, then prevailing industry salary scales and other
relevant factors. The Base Salary provided hereunder, as
increased by the Board of Directors of Company from time to
time, shall not be reduced without Employee's consent.
(b) Out-of-Pocket Expenses. Company shall promptly
pay to Employee the reasonable expenses incurred by his in
the performance of his duties hereunder, including, without
limitation, those incurred in connection with business
related travel or entertainment, or, if such expenses are
paid directly by Employee, Company shall promptly reimburse
Employee for such payment, provided that Employee properly
accounts therefor in accordance with Company's written
policy.
(c) Participation in Benefit Plans. Subject to the
terms and provisions of each plan respectively, Employee
shall be entitled to participate in or receive benefits
under any pension plan, profit sharing plan, stock option
plan, stock purchase plan or arrangement, health and
accident plan or any other employee benefit plan or
arrangement made available by Company to its executives and
key management employees.
(d) Vacation. Employee shall be entitled to paid
vacation days in each calendar year as determined by Company
from time to time, but not less than four (4) weeks in any
calendar year, prorated in any calendar year during which
Employee is employed hereunder for less than entire year in
accordance with the number of days in such year during which
Employee is so employed. Employee shall also be entitled to
all paid holidays given by Company to its executives and key
management employees.
(e) Other Benefits. In addition to the other
benefits specified pursuant to this Section 5, Company shall
provide Employee with an automobile allowance of $450.00 per
month to be used to meet the costs of operating an
automobile for business use.
(f) Incentive Compensation. The Company may also
pay to Employee other incentive compensation as may be set
by the Board of Directors from time to time to reflect
Employee's contribution to the financial goals of the
Company.
6. Termination.
Employee's employment hereunder shall be terminated
upon Employee's death and may be terminated as follows:
(a) Effective upon the giving of written notice by the
Board of Directors of Company to Employee in the event that
Employee hereafter (i) shall willfully fail to comply with
any of the material terms of this Agreement, (ii) shall fail
to adequately perform his duties hereunder, (iii) shall be
diagnosed with chronic alcoholism or any other form of
addiction which substantially impairs the Employee's ability
to perform his duties hereunder, or (iv) shall willfully
engage, in his capacity as an executive or officer of
Company, in gross misconduct injurious to the Company, and a
vote to such effect shall have been adopted by not less than
a majority of the directors (including Employee) then in
office of Company, after reasonable notice to Employee and
an opportunity for his to be heard before such Board. For
purposes of this Section 6(a), no act, or failure to act, on
Employee's part shall be considered "willful" unless done,
or omitted to be done, by Employee not in good faith and
without reasonable belief that his action(s) or omission(s)
were in the best interests of Company.
(b) Upon not less than sixty (60) days' written notice
by the Board of Directors of Company to Employee in the
event that (i) the Board shall have received a written
statement from a reputable independent physician to the
effect the Employee shall have become so incapacitated as to
be unable to resume, within the ensuing twelve (12) months
his "essential functions" of employment after reasonable
accommodation and without undue hardship, hereunder by
reason of physical or mental illness or injury, or (ii)
employee shall not have substantially performed his
"essential functions" of employment after reasonable
accommodation and without undue hardship, hereunder for six
(6) consecutive months (exclusive of any vacation permitted
under Section 5 (d) hereof) by reason of any such physical
or mental illness.
(c) If, within thirty (30) days' after any notice of
termination pursuant to Sections 6(a) or 6(b) hereof is
given, Employee informs Company in writing that a dispute
exists concerning such termination, such termination shall
be deemed to have occurred only upon the date on which such
dispute is finally resolved. During the pendency of any
such dispute and until such dispute is finally resolved,
Company shall continue to pay Employee the Base Salary in
effect at the date of such notice of termination pursuant to
Section 6(a) or 6(b). If such dispute results in a final
determination to the effect that Company did not have a
proper basis for such termination, Company shall promptly
pay to Employee any other payments to which Employee would
have been entitled to receive had Employee's employment
hereunder not been improperly terminated, and if such
dispute results in a final determination to the effect that
Company did have a proper basis for such termination, the
Base Salary pursuant to the preceding sentence shall cease
and terminate upon the date of such final determination.
(d) In the event of the termination of Employee's
employment pursuant to Section 6(b) hereof, for the longer
of one year following any such termination or the balance of
the Term (as if such termination had not occurred), Company
shall (i) continue to pay Employee the Base Salary in effect
at the time of such
termination less the amount, if any, then payable to
Employee under any disability benefits of Company,
(ii) pay to Employee at the end of the fiscal year in which
his termination occurred, the amount which would have been
payable to Employee pursuant to Company's bonus pool for the
entire year in which such termination occurred pro-rated to
the effective date of termination and (iii) maintain at its
expense, all major medical and other health, accident, life
or other disability plans and programs in
which Employee was entitled to participate immediately prior
to such termination.
(e) In the event of the termination of Employee's
employment as a result of Employee's death, Company shall
(i) pay to Employee's estate his Base Salary through the
date of his death, (ii) pay to Employee's estate at the end
of the fiscal year in which Employee's death occurred, the
amount which would have been payable to Employee pursuant to
Company's bonus pool for the entire fiscal year in which his
death occurred pro-rated to the date of his death and (iii)
for the longer of one year following Employee's death or the
balance of the Term (as if such termination had not
occurred), maintain, at Company's expense, for the continued
benefit of Employee's family, all major medical and other
health, accident, life or other disability plans and
programs in which Employee was entitled to participate
immediately prior to his death. Company shall also pay to
Employee's heirs a lump-sum death benefit
equal to 50% of any key employee life insurance obtained by
Company on the life of Employee.
7. Severance.
Upon (i) the acquisition by any person (as such term is
defined in sections 13 (d) and 14 (d) (2) of the Securities
Exchange Act of 1934, as amended), directly or indirectly of
securities of Company representing 51% or more combined
voting power of Company's then outstanding securities, (ii)
the future disposition by Company (whether direct or
indirect, by sale of assets or stock, merger, consolidation
or otherwise) of all or substantially all of its business
and/or assets in a transaction to which Employee does not
consent, (iii) the occurrence of any circumstance which, in
the reasonable judgment of Employee, has the effect of
significantly reducing Employee's duties or authority
provided for or contemplated herein, including a material
change in Employee's reporting responsibility as defined in
section 3 ,(iv) the breach by Company of its material
obligations under this Agreement, (v) the termination of
this Agreement by Company for any reason other than (X) that
specified in Section 6 (a) hereof or (Y) by mutual agreement
of Company and Employee (such events being hereinafter
collectively referred to as a "Severance Event"), Employee
shall have the right to terminate this Agreement within ten
(10) days after the occurrence of such Severance Event.
Upon the effective date of such termination, Employee shall
be entitled to receive a lump sum severance amount equal to
the sum of (I) the greater of (x) the present value of his
Base Salary in effect at the time of Severance Event for one
year or (y) the present value of his Base Salary in effect
at the time of the Severance Event for the remainder of the
Term (as if such termination had not occurred) and (iii) the
estimated amount which would have been payable to Employee
pursuant to Company's bonus pool for the fiscal year during
which such termination occurred, as determined in good faith
by the Board of Directors of Company based upon Company's
results of operations for the fiscal year through the
effective date of the termination and its historical results
of operations and pro-rated to the effective date of
termination. In addition, for the longer of one year
following any such termination or the balance of the Term
(as if such termination had not occurred), Company shall
maintain, at Company's expense, major medical and other
health, accident, life or other disability plans or programs
in which Employee was entitled to participate immediately
prior to such termination. For purposes of the Agreement,
the present value of Employee's Base Salary shall be based
upon an interest rate of ten percent (10%) per annum. Upon
the effective date of such termination, all stock options
granted to Employee by Company (regardless of whether such
options were exercisable at the time of the Severance Event,
shall become immediately exercisable and may be exercised at
any time within three months following the effective date of
termination. Employee shall not be required to mitigate the
amount of the termination payment provided pursuant to this
Section 7, nor will such payment be reduced by reason of
Employee's securing other employment.
8. Covenant Regarding Inventions and Copyrights.
Employee shall disclose promptly to Company any and
all inventions, discoveries, improvements and patentable or
copyrightable works initiated, conceived or made by
Employee, either alone or in conjunction with others, during
the Term and related to the business or activities of
Company and he assigns all of his interest therein to
Company or its nominee. Whenever requested to do so by
Company, Employee shall execute any and all applications,
assignments or other instruments which Company shall deem
necessary to apply for and obtain letters patent or
copyrights of the United States or any foreign country, or
otherwise protect Company's interest therein. These
obligations shall continue beyond the conclusion of the Term
with respect to inventions, discoveries, improvements or
copyrightable works initiated, conceived or made by Employee
during the Term and shall be binding upon Employee's
assigns, executors, administrators and other legal
representatives.
9. Protection of Confidential Information.
Employee acknowledges that he has been provided with
information about, and his employment by Company will,
throughout the Term bring his into close contact with many
confidential affairs of Company and its subsidiaries,
including information about costs, profits, markets, sales,
products, key personnel, customers, projects, pricing
policies, operational methods, technical processes and other
business affairs and methods, plans for future developments
and other information not readily available to the public.
In recognition of the foregoing, Employee covenants and
agrees that during the Term:
(i) he will keep secret all confidential matters of
Company and not disclose them to anyone outside of Company
either during or for 2 years after the Term, except with
Company's prior written consent or in the performance of his
duties hereunder. Employee make a good faith determination
that it is in the best interest of Company to disclose such
matter;
(ii) he will not make use of any of such confidential
matters for his own purposes or for the benefit of anyone
other than Company; and
(iii) he will deliver promptly to Company on
termination of this Agreement, or at any time Company may so
request, all confidential memoranda, notes, records, reports
and other confidential documents (and all copies thereof)
relating to the business of Company, which he may then
possess or have under his control.
The Non-Solicitation Agreement and the Non-Disclosure
Agreement dated July 24, 1998 between Company and Employee
are incorporated herein by reference.
10. Specific Remedies.
If Employee commits a breach of any of the provisions
of Sections 8 or 9 hereof, such violation shall be deemed to
be grounds for termination pursuant to Section 6 (a) hereof
and Company shall have (I) the right to have such provisions
specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed that any such
breach will cause irreparable injury to Company and that
money damages will not provide an adequate remedy to
Company, and (ii) the right to require Employee to account
for and pay over to Company all compensation, profits,
monies, accruals, increments and other benefits
(collectively "Benefits") derived or received by Employee as
a result of any transaction constituting a breach of any of
the provisions of Sections 8 or 9, and Employee hereby
agrees to account for and pay over such Benefits to Company.
11. Independence, Severability and Non-Exclusivity.
Each of the rights enumerated in Sections 8 or 9 hereof and
the remedies enumerated in Section 10 hereof shall be
independent of the others and shall be in addition to and
not in lieu of any other rights and remedies available to
Company at law or in equity. If any of the covenants
contained in Sections 8 or 9, or any part of any of them, is
hereinafter construed or adjudicated to be invalid or
unenforceable, the same shall not affect the remainder of
the covenant or covenants or rights or remedies which shall
be given full affect without regard to the invalid portions.
The parties intend to and do hereby confer jurisdiction to
enforce the covenants contained in Sections 8 or 9 and the
remedies enumerated in Section 10 upon the courts of any
state of the United States, and any other government
jurisdiction within the geographical scope of such
covenants. If any of the covenants contained in Sections 8
or 9 is held to be invalid or
unenforceable because of the duration of such provision or
the area covered thereby, the parties agree that
the court making such determination shall have the power to
reduce the duration and/or area of such provision and in its
reduced form said provision shall then be enforceable. No
such holding of invalidity or unenforceability in one
jurisdiction shall bar or in any way affect Company's
right to the relief provided in Section 10 or otherwise in
the courts of any other state or jurisdiction within the
geographical scope of such covenants as to breaches of such
covenants in such other respective states or jurisdictions,
such covenants being, for this purpose, severable into
diverse and independent covenants.
12. Disputes.
If Company or Employee shall dispute any termination of
Employee's employment hereunder or if a dispute concerning
any payment hereunder shall exist:
(a) either party shall have the right (but not the
obligation), in addition to all other rights and remedies
provided by law, to compel arbitration of the dispute in
Fulton County, Georgia, under the rules of the American
Arbitration Association by giving written notice of
arbitration to the other party within thirty (30) days after
notice of such dispute has been received by the party to
whom notice has been given; and
(b) if such dispute (whether or not submitted to
arbitration pursuant to Section 12 (a) hereof) results in a
determination that (I) Company did not have the right to
terminate Employee's Employment under the provisions of this
Agreement or (ii) the position taken by Employee concerning
payments to Employee is correct, Company shall promptly pay,
or if theretofore paid by Employee, shall promptly reimburse
Employee for, all costs and expenses (including attorney's
fees) reasonably incurred by Employee in connection with
such dispute.
13. Successors; Binding Agreement.
In the event of a future disposition by Company
(whether direct or indirect, by sale of assets or stock
merger, consolidation or otherwise) of all or substantially
all of its business and/or assets in a transaction to which
Employee consents, Company will require any successor, by
agreement in form and substance satisfactory to Employee, to
expressly assume and agree to perform this Agreement in the
same manner and to the same extent that Company would be
required to perform if no such disposition had taken place.
This Agreement and all rights of Employee hereunder
shall inure to the benefit of, and be enforceable by,
Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees
and legatees. If Employee should die while any amount would
still be payable to his hereunder if he had continued to
live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement
to Employee's estate.
14. Notices.
All notices, consents or other communications required
or permitted to be given by any party hereunder shall be in
writing (including telecopy or other similar writing) and
shall be given by personal delivery, certified or registered
mail, postage prepaid, or telecopy (or other similar
writing) as set forth in the first paragraph of this
Agreement, or at such other address or telecopy number (or
other similar number) as either party may from time to time
specify to the other. Any notice, consent or other
communication required or permitted to be given hereunder
shall have been deemed to be given on the date of mailing,
personal delivery or telecopy or other similar means
(provided the appropriate answer back is received) thereof
and shall be conclusively presumed to have been received on
the second business day following the date of mailing or, in
the case of personal delivery or telecopy or other similar
means, the day of delivery thereof, except that a change of
address shall not be effective unit actually received.
15. Modifications and Waivers.
No term, provision or condition of this Agreement may
be modified or discharged unless such modification or
discharge is authorized by the Board of Directors of
Company and is agreed to in writing and signed by Employee.
No waiver by either party hereto of any breach by the other
party hereto of any term, provision or condition of this
Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
16. Entire Agreement.
This Agreement constitutes the entire understanding between
the parties hereto relating to the subject matter hereof,
superseding all negotiations, prior discussions, preliminary
agreements and agreements relating to the subject matter
hereof made prior to the date hereof.
17. Governing Law.
Except as otherwise explicitly noted, this Agreement shall
be governed by and construed in accordance with the laws of
the State of Georgia (without giving effect to conflicts of
law).
18. Invalidity.
Except as otherwise specified herein, the invalidity or
unenforceability of any term or terms of this Agreement
shall not invalidate, make unenforceable or otherwise affect
any other term of this Agreement which shall remain in full
force and effect.
19. Headings.
The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year set forth above.
Company:
Employee:
By:_____________________________
By:_________________________________
EMPLOYMENT AGREEMENT
Agreement made this 31st day of October, 1998, by and
between The Network Connection, Inc., with offices located
at 1324 Union Hill Road, Alpharetta, Ga. 30004 (the
"Company"), and James E. Riner residing at 4402 Pinetree
Close, Cumming, GA 30076 (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company is desirous of employing Employee
as Vice President of Engineering, Secretary and Chief
Technical Officer of Company and Employee is desirous of
committing himself to serve Company in such capacities, all
upon the terms and subject to the conditions hereinafter
provided.
NOW, THEREFORE, in consideration of the mutual
covenants and agreements herein contained, the parties
hereto, intending to be legally bound, agree as follows:
1. Employment..
Company agrees to employ Employee, and employee agrees to be
employed by Company, upon the terms and subject to the
conditions of this Agreement.
2. Term.
The employment of Employee by Company as provided in
Section 1 will be for a period commencing on October 31,
1998, and ending on October 31, 2001, unless sooner
terminated as hereinafter set forth (the "Term").
3. Duties: Best Efforts: Indemnification.
Employee shall serve as Vice President of Engineering,
Secretary and Chief Technical Officer of Company, subject
only to the directions from the Chairman, Chief Executive
Officer, Vice Chairman, President and Board of Directors of
Company. Subject only to the directions of those identified
in the preceding sentence, Employee shall have supervision
and control over, and sole responsibility for, all research,
development and engineering management of the Company, and
shall have such powers and duties as may be from time to
time prescribed by the Board of Directors of the Company,
provided that the nature of Employee's powers and duties so
prescribed shall not be inconsistent with Employee's
position and duties set forth herein.
Employee shall devote all of his business time,
attention and energies to the business and affairs of
Company, shall use his best efforts to advance the best
interests of Company and shall not during the Term be
actively engaged in any other business activity, whether or
not such business activity is pursued for gain, profit or
other pecuniary advantage. The Employee shall expend his
best efforts on behalf of the company and abide by all
reasonable Company policies now or hereafter existing.
Subject to the provisions of Company's Certificate of
Incorporation and Bylaws, each as amended from time to time,
Company shall indemnify Employee to the fullest extent
permitted by the General Corporation Law of the State of
Georgia, as amended from time to time, for all amounts (
including without limitation, judgments, fines, settlement
payments, expenses and attorney's fees) incurred or paid by
Employee in connection with any action, suit, investigation
or proceeding arising out of or relating to the performance
by Employee of services for, or the acting by Employee as a
director, officer or employee of, Company, or any other
person or enterprise in good faith at Company's request.
Company shall obtain and maintain in full force and effect
during the Term, directors' and officers' liability
insurance policies providing full and adequate protection
to Employee acting in good faith within his capacities for
the Company.
4. Place of Performance.
In connection with his employment of Company, Employee shall
be based at the principal manufacturing facility of Company
located at 1324 Union Hill Road, Alpharetta, Georgia 30004
(the "Offices"), and Employee shall have discretion
regarding his absence therefrom on travel status or
otherwise during any calendar year. Employee shall not be
required to move his present residence in order to perform
the services contemplated hereby. Subject to the foregoing,
in connection with any relocation of the Offices or transfer
consented to by Employee, Company will promptly pay (or
reimburse Employee for) all reasonable moving and moving
related expenses incurred by Employee as consequence of a
change of his
principal residence in connection with any such transfer or
relocation of the Offices.
5. Compensation.
(a) Base Salary. Company shall pay to Employee a base
salary (the "Base Salary") at a rate of not less than
Eighty-Six Thousand - Seven Hundred and Ninety ($86,790) per
annum, payable in equal semi-monthly installments during the
Term. The Board of Directors of the Company, at least
annually, will review the Base Salary and other compensation
during the Term with a view toward the increase thereof base
upon Employee's performance, the performance of Company,
inflation, then prevailing industry salary scales and other
relevant factors. The Base Salary provided hereunder, as
increased by the Board of Directors of Company from time to
time, shall not be reduced without Employee's consent.
(b) Out-of-Pocket Expenses. Company shall promptly
pay to Employee the reasonable expenses incurred by his in
the performance of his duties hereunder, including, without
limitation, those incurred in connection with business
related travel or entertainment, or, if such expenses are
paid directly by Employee, Company shall promptly reimburse
Employee for such payment, provided that Employee properly
accounts therefor in accordance with Company's written
policy.
(c) Participation in Benefit Plans. Subject to the
terms and provisions of each plan respectively, Employee
shall be entitled to participate in or receive benefits
under any pension plan, profit sharing plan, stock option
plan, stock purchase plan or arrangement, health and
accident plan or any other employee benefit plan or
arrangement made available by Company to its executives and
key management employees.
(d) Vacation. Employee shall be entitled to paid
vacation days in each calendar year as determined by Company
from time to time, but not less than four (4) weeks in any
calendar year, prorated in any calendar year during which
Employee is employed hereunder for less than entire year in
accordance with the number of days in such year during which
Employee is so employed. Employee shall also be entitled to
all paid holidays given by Company to its executives and key
management employees.
(e) Other Benefits. In addition to the other
benefits specified pursuant to this Section 5, Company shall
provide Employee with an automobile allowance of $300.00 per
month to be used to meet the costs of operating an
automobile for business use.
(f) Incentive Compensation. The Company may also
pay to Employee other incentive compensation as may be set
by the Board of Directors from time to time to reflect
Employee's contribution to the financial goals of the
Company.
6. Termination.
Employee's employment hereunder shall be terminated
upon Employee's death and may be terminated as follows:
(a) Effective upon the giving of written notice by the
Board of Directors of Company to Employee in the event that
Employee hereafter (i) shall willfully fail to comply with
any of the material terms of this Agreement, (ii) shall fail
to adequately perform his duties hereunder, (iii) shall be
diagnosed with chronic alcoholism or any other form of
addiction which substantially impairs the Employee's ability
to perform his duties hereunder, or (iv) shall willfully
engage, in his capacity as an executive or officer of
Company, in gross misconduct injurious to the Company, and a
vote to such effect shall have been adopted by not less than
a majority of the directors (including Employee) then in
office of Company, after reasonable notice to Employee and
an opportunity for his to be heard before such Board. For
purposes of this Section 6(a), no act, or failure to act, on
Employee's part shall be considered "willful" unless done,
or omitted to be done, by Employee not in good faith and
without reasonable belief that his action(s) or omission(s)
were in the best interests of Company.
(b) Upon not less than sixty (60) days' written notice
by the Board of Directors of Company to Employee in the
event that (i) the Board shall have received a written
statement from a reputable independent physician to the
effect the Employee shall have become so incapacitated as to
be unable to resume, within the ensuing twelve (12) months
his "essential functions" of employment after reasonable
accommodation and without undue hardship, hereunder by
reason of physical or mental illness or injury, or (ii)
employee shall not have substantially performed his
"essential functions" of employment after reasonable
accommodation and without undue hardship, hereunder for six
(6) consecutive months (exclusive of any vacation permitted
under Section 5 (d) hereof) by reason of any such physical
or mental illness.
(c) If, within thirty (30) days' after any notice of
termination pursuant to Sections 6(a) or 6(b) hereof is
given, Employee informs Company in writing that a dispute
exists concerning such termination, such termination shall
be deemed to have occurred only upon the date on which such
dispute is finally resolved. During the pendency of any
such dispute and until such dispute is finally resolved,
Company shall continue to pay Employee the Base Salary in
effect at the date of such notice of termination pursuant to
Section 6(a) or 6(b). If such dispute results in a final
determination to the effect that Company did not have a
proper basis for such termination, Company shall promptly
pay to Employee any other payments to which Employee would
have been entitled to receive had Employee's employment
hereunder not been improperly terminated, and if such
dispute results in a final determination to the effect that
Company did have a proper basis for such termination, the
Base Salary pursuant to the preceding sentence shall cease
and terminate upon the date of such final determination.
(d) In the event of the termination of Employee's
employment pursuant to Section 6(b) hereof, for the longer
of one year following any such termination or the balance of
the Term (as if such termination had not occurred), Company
shall (i) continue to pay Employee the Base Salary in effect
at the time of such
termination less the amount, if any, then payable to
Employee under any disability benefits of Company,
(ii) pay to Employee at the end of the fiscal year in which
his termination occurred, the amount which would have been
payable to Employee pursuant to Company's bonus pool for the
entire year in which such termination occurred pro-rated to
the effective date of termination and (iii) maintain at its
expense, all major medical and other health, accident, life
or other disability plans and programs in
which Employee was entitled to participate immediately prior
to such termination.
(e) In the event of the termination of Employee's
employment as a result of Employee's death, Company shall
(i) pay to Employee's estate his Base Salary through the
date of his death, (ii) pay to Employee's estate at the end
of the fiscal year in which Employee's death occurred, the
amount which would have been payable to Employee pursuant to
Company's bonus pool for the entire fiscal year in which his
death occurred pro-rated to the date of his death and (iii)
for the longer of one year following Employee's death or the
balance of the Term (as if such termination had not
occurred), maintain, at Company's expense, for the continued
benefit of Employee's family, all major medical and other
health, accident, life or other disability plans and
programs in which Employee was entitled to participate
immediately prior to his death. Company shall also pay to
Employee's heirs a lump-sum death benefit
equal to 50% of any key employee life insurance obtained by
Company on the life of Employee.
7. Severance.
Upon (i) the acquisition by any person (as such term is
defined in sections 13 (d) and 14 (d) (2) of the Securities
Exchange Act of 1934, as amended), directly or indirectly of
securities of Company representing 51% or more combined
voting power of Company's then outstanding securities, (ii)
the future disposition by Company (whether direct or
indirect, by sale of assets or stock, merger, consolidation
or otherwise) of all or substantially all of its business
and/or assets in a transaction to which Employee does not
consent, (iii) the occurrence of any circumstance which, in
the reasonable judgment of Employee, has the effect of
significantly reducing Employee's duties or authority
provided for or contemplated herein, including a material
change in Employee's reporting responsibility as defined in
section 3 ,(iv) the breach by Company of its material
obligations under this Agreement, (v) the termination of
this Agreement by Company for any reason other than (X) that
specified in Section 6 (a) hereof or (Y) by mutual agreement
of Company and Employee (such events being hereinafter
collectively referred to as a "Severance Event"), Employee
shall have the right to terminate this Agreement within ten
(10) days after the occurrence of such Severance Event.
Upon the effective date of such termination, Employee shall
be entitled to receive a lump sum severance amount equal to
the sum of (I) the greater of (x) the present value of his
Base Salary in effect at the time of Severance Event for one
year or (y) the present value of his Base Salary in effect
at the time of the Severance Event for the remainder of the
Term (as if such termination had not occurred) and (iii) the
estimated amount which would have been payable to Employee
pursuant to Company's bonus pool for the fiscal year during
which such termination occurred, as determined in good faith
by the Board of Directors of Company based upon Company's
results of operations for the fiscal year through the
effective date of the termination and its historical results
of operations and pro-rated to the effective date of
termination. In addition, for the longer of one year
following any such termination or the balance of the Term
(as if such termination had not occurred), Company shall
maintain, at Company's expense, major medical and other
health, accident, life or other disability plans or programs
in which Employee was entitled to participate immediately
prior to such termination. For purposes of the Agreement,
the present value of Employee's Base Salary shall be based
upon an interest rate of ten percent (10%) per annum. Upon
the effective date of such termination, all stock options
granted to Employee by Company (regardless of whether such
options were exercisable at the time of the Severance Event,
shall become immediately exercisable and may be exercised at
any time within three months following the effective date of
termination. Employee shall not be required to mitigate the
amount of the termination payment provided pursuant to this
Section 7, nor will such payment be reduced by reason of
Employee's securing other employment.
8. Covenant Regarding Inventions and Copyrights.
Employee shall disclose promptly to Company any and
all inventions, discoveries, improvements and patentable or
copyrightable works initiated, conceived or made by
Employee, either alone or in conjunction with others, during
the Term and related to the business or activities of
Company and he assigns all of his interest therein to
Company or its nominee. Whenever requested to do so by
Company, Employee shall execute any and all applications,
assignments or other instruments which Company shall deem
necessary to apply for and obtain letters patent or
copyrights of the United States or any foreign country, or
otherwise protect Company's interest therein. These
obligations shall continue beyond the conclusion of the Term
with respect to inventions, discoveries, improvements or
copyrightable works initiated, conceived or made by Employee
during the Term and shall be binding upon Employee's
assigns, executors, administrators and other legal
representatives.
9. Protection of Confidential Information.
Employee acknowledges that he has been provided with
information about, and his employment by Company will,
throughout the Term bring his into close contact with many
confidential affairs of Company and its subsidiaries,
including information about costs, profits, markets, sales,
products, key personnel, customers, projects, pricing
policies, operational methods, technical processes and other
business affairs and methods, plans for future developments
and other information not readily available to the public.
In recognition of the foregoing, Employee covenants and
agrees that during the Term:
(i) he will keep secret all confidential matters of
Company and not disclose them to anyone outside of Company
either during or for 2 years after the Term, except with
Company's prior written consent or in the performance of his
duties hereunder. Employee make a good faith determination
that it is in the best interest of Company to disclose such
matter;
(ii) he will not make use of any of such confidential
matters for his own purposes or for the benefit of anyone
other than Company; and
(iii) he will deliver promptly to Company on
termination of this Agreement, or at any time Company may so
request, all confidential memoranda, notes, records, reports
and other confidential documents (and all copies thereof)
relating to the business of Company, which he may then
possess or have under his control.
The Non-Solicitation Agreement and the Non-Disclosure
Agreement dated July 27, 1998 between Company and Employee
are incorporated herein by reference.
10. Specific Remedies.
If Employee commits a breach of any of the provisions
of Sections 8 or 9 hereof, such violation shall be deemed to
be grounds for termination pursuant to Section 6 (a) hereof
and Company shall have (I) the right to have such provisions
specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed that any such
breach will cause irreparable injury to Company and that
money damages will not provide an adequate remedy to
Company, and (ii) the right to require Employee to account
for and pay over to Company all compensation, profits,
monies, accruals, increments and other benefits
(collectively "Benefits") derived or received by Employee as
a result of any transaction constituting a breach of any of
the provisions of Sections 8 or 9, and Employee hereby
agrees to account for and pay over such Benefits to Company.
11. Independence, Severability and Non-Exclusivity.
Each of the rights enumerated in Sections 8 or 9 hereof and
the remedies enumerated in Section 10 hereof shall be
independent of the others and shall be in addition to and
not in lieu of any other rights and remedies available to
Company at law or in equity. If any of the covenants
contained in Sections 8 or 9, or any part of any of them, is
hereinafter construed or adjudicated to be invalid or
unenforceable, the same shall not affect the remainder of
the covenant or covenants or rights or remedies which shall
be given full affect without regard to the invalid portions.
The parties intend to and do hereby confer jurisdiction to
enforce the covenants contained in Sections 8 or 9 and the
remedies enumerated in Section 10 upon the courts of any
state of the United States, and any other government
jurisdiction within the geographical scope of such
covenants. If any of the covenants contained in Sections 8
or 9 is held to be invalid or
unenforceable because of the duration of such provision or
the area covered thereby, the parties agree that
the court making such determination shall have the power to
reduce the duration and/or area of such provision and in its
reduced form said provision shall then be enforceable. No
such holding of invalidity or unenforceability in one
jurisdiction shall bar or in any way affect Company's
right to the relief provided in Section 10 or otherwise in
the courts of any other state or jurisdiction within the
geographical scope of such covenants as to breaches of such
covenants in such other respective states or jurisdictions,
such covenants being, for this purpose, severable into
diverse and independent covenants.
12. Disputes.
If Company or Employee shall dispute any termination of
Employee's employment hereunder or if a dispute concerning
any payment hereunder shall exist:
(a) either party shall have the right (but not the
obligation), in addition to all other rights and remedies
provided by law, to compel arbitration of the dispute in
Fulton County, Georgia, under the rules of the American
Arbitration Association by giving written notice of
arbitration to the other party within thirty (30) days after
notice of such dispute has been received by the party to
whom notice has been given; and
(b) if such dispute (whether or not submitted to
arbitration pursuant to Section 12 (a) hereof) results in a
determination that (I) Company did not have the right to
terminate Employee's Employment under the provisions of this
Agreement or (ii) the position taken by Employee concerning
payments to Employee is correct, Company shall promptly pay,
or if theretofore paid by Employee, shall promptly reimburse
Employee for, all costs and expenses (including attorney's
fees) reasonably incurred by Employee in connection with
such dispute.
13. Successors; Binding Agreement.
In the event of a future disposition by Company
(whether direct or indirect, by sale of assets or stock
merger, consolidation or otherwise) of all or substantially
all of its business and/or assets in a transaction to which
Employee consents, Company will require any successor, by
agreement in form and substance satisfactory to Employee, to
expressly assume and agree to perform this Agreement in the
same manner and to the same extent that Company would be
required to perform if no such disposition had taken place.
This Agreement and all rights of Employee hereunder
shall inure to the benefit of, and be enforceable by,
Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees
and legatees. If Employee should die while any amount would
still be payable to his hereunder if he had continued to
live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement
to Employee's estate.
14. Notices.
All notices, consents or other communications required
or permitted to be given by any party hereunder shall be in
writing (including telecopy or other similar writing) and
shall be given by personal delivery, certified or registered
mail, postage prepaid, or telecopy (or other similar
writing) as set forth in the first paragraph of this
Agreement, or at such other address or telecopy number (or
other similar number) as either party may from time to time
specify to the other. Any notice, consent or other
communication required or permitted to be given hereunder
shall have been deemed to be given on the date of mailing,
personal delivery or telecopy or other similar means
(provided the appropriate answer back is received) thereof
and shall be conclusively presumed to have been received on
the second business day following the date of mailing or, in
the case of personal delivery or telecopy or other similar
means, the day of delivery thereof, except that a change of
address shall not be effective unit actually received.
15. Modifications and Waivers.
No term, provision or condition of this Agreement may
be modified or discharged unless such modification or
discharge is authorized by the Board of Directors of
Company and is agreed to in writing and signed by Employee.
No waiver by either party hereto of any breach by the other
party hereto of any term, provision or condition of this
Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
16. Entire Agreement.
This Agreement constitutes the entire understanding between
the parties hereto relating to the subject matter hereof,
superseding all negotiations, prior discussions, preliminary
agreements and agreements relating to the subject matter
hereof made prior to the date hereof.
17. Governing Law.
Except as otherwise explicitly noted, this Agreement shall
be governed by and construed in accordance with the laws of
the State of Georgia (without giving effect to conflicts of
law).
18. Invalidity.
Except as otherwise specified herein, the invalidity or
unenforceability of any term or terms of this Agreement
shall not invalidate, make unenforceable or otherwise affect
any other term of this Agreement which shall remain in full
force and effect.
19. Headings.
The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year set forth above.
Company:
Employee:
By:_____________________________
By:_________________________________
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (the "Agreement") is
made as of December 28, 1998, among THE NETWORK CONNECTION, INC.,
a Georgia corporation (the "Company") and CACHE CAPITAL L.P. (the
"Purchaser").
R E C I T A L S
WHEREAS, the parties desire that upon the terms and subject
to the conditions contained herein, the Company shall issue to
the Purchaser, and the Purchaser shall purchase from the Company,
shares of the Company's Common Stock, $.001 par value per share
(the "Common Stock"), and Warrants to purchase up to 50,000
shares of the Company's Common Stock (the "Warrant") at a price
of 120% of closing bid price day of Closing (the "Warrant Price")
for an aggregate purchase price of eighty thousand shares of the
Company's Common Stock (80,000) shares at $3.50 per share
("Purchase Price"); and
WHEREAS, the purchase and sale of the Common Stock to the
Purchaser pursuant to the terms hereof will be made in reliance
upon the provisions of Section 4(2) of the Securities Act of
1933, as amended, Regulation D promulgated thereunder by the
United States Securities and Exchange Commission, such other
exemptions from the registration requirements of the Securities
Act of 1933, as amended, as may be available with respect to any
or all of the investments in Common Stock to be made hereunder.
NOW, THEREFORE, the parties in consideration of the mutual
agreements contained herein, and other good and valuable
consideration, acknowledged by each of the parties to be
satisfactory and adequate, do hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. As used in this Agreement, and unless the
context requires a different meaning, the following terms have
the meanings indicated:
"Agreement" means this Agreement (including the exhibits and
schedules hereto) as the same may be amended, supplemented or
modified in accordance with the terms hereof.
"Call Closing Date" has the meaning assigned in Section 2.6.
"Call Price" means the greater of one hundred thirty-three
percent (133%) of the Purchase Price of the Initial Shares or one
hundred percent (100%) of the Closing Bid Price of the Company's
Common Stock as reported by Bloomberg on the Call Closing Date
minus the Purchase Price.
"Closing" has the meaning assigned in Section 2.3.
"Closing Date" has the meaning assigned in Section 2.3.
"Commission" means the United States Securities and Exchange
Commission.
"Common Stock" means the common stock, $.001 par value, of
the Company.
"Company" means The Network Connection, Inc., a Georgia
corporation, and its successors, transfers and assigns.
"Disclosure Documents" has the meaning assigned in Section
5.2.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"First Repricing Date" means the effective date of the
Registration Statement on which 25% of the Initial Shares may be
repriced under the terms of Section 2.4(a).
"Initial Shares" shall mean that number of shares of Common
Stock determined by dividing the Purchase Price by the Share
Price determined as of the Closing Date, which number of shares
is set forth in Schedule I to this Agreement.
"Market Price" means, on any relevant date for
determination, the average closing bid price of the Common Stock
for the twenty (20) consecutive Trading Days immediately
preceding the relevant date for determination.
"Most Recent Filings Report" has the meaning assigned in
Section 5.2.
"Principal Market" means the Nasdaq National Market, the
Nasdaq SmallCap Market, the American Stock Exchange or the New
York Stock Exchange, or such other trading medium, whichever is
at the time the principal trading exchange or market for the
Common Stock.
"Purchase Price" means US $280,000 [80,000 shares multiplied
by $3.50].
"Registration Rights Agreement" means that certain
Registration Rights Agreement to be executed concurrently
herewith by and between the Company and the Purchaser, the form
of which is attached hereto as Exhibit "A".
"Repricing Dates" means the First Repricing Date, the Second
Repricing Date and the Third Repricing Date.
"Repricing Shares" means the shares of Common Stock issued
to the Purchaser pursuant to Section 2.4(a) hereof.
"Registration Statement" means a registration statement on
Form SB-2, Form S-3, or any successor or replacement forms
thereof, registering the resale of the Shares by the Purchaser
under the Securities Act.
"Regulation D" means Regulation D promulgated by the
Commission pursuant to Section 4(2) of the Securities Act, as
amended, and any successor or replacement rules or regulations.
"SEC Reports" has the meaning assigned in Section 5.2.
"Securities Act" means the Securities Act of 1933, as
amended, and the rules and regulation promulgated thereunder.
"Second Repricing Date" means the forth-fifth (45th) day
after the First Repricing Date, on which 25% of the Initial
Shares may be repriced under the terms of Section 2.4(a).
"Share Price" means, as of the closing, the closing bid
price of the Common Stock of the Company on the last Trading Day
preceding the Closing (including date of the Closing if the
Closing occurs on that date at 4:30 P.M. New York Time) as
reported by Bloomberg.
"Shares" means the Initial Shares and Repricing Shares
issued pursuant to this Agreement.
"Third Repricing Date" means the forth-fifth (45th) day
after the Second Repricing Date, on which 50% of the Initial
Shares may be repriced under the terms of Section 2.4(a).
"Trading Days" means any days during which the Principal
Market shall be open for business.
1.2 Accounting Terms. All accounting terms used herein not
expressly defined in this Agreement shall have the respective
meanings given to them in accordance with sound accounting
practice. The term "sound accounting practice" shall mean such
accounting practices as, in the opinion of independent certified
public accountants regularly retained by the Company, conforms at
the time to GAAP applied on a consistent basis except for changes
with which such accountants concur.
ARTICLE 2
CLOSING; REPRICING; CALL
2.1 Authorization. The Company has, or prior to the
Closing will have, authorized the issuance of up to 225,000
shares of Common Stock, subject to the terms and conditions set
forth herein.
2.2 Issuance of Shares. Subject to the terms and
conditions hereof, at the Closing (i) the Company will sell and
issue the Initial Shares to the Purchaser and (ii) in
consideration therefor the Company will receive the Purchase
Price from the Purchaser.
2.3 Closing. The issuance of the Initial Shares to the
Purchaser and the payment of the Purchase Price by the Purchaser
shall take place at the closing (the "Closing"), which shall
occur at such time and date as the parties hereto may agree (the
"Closing Date").
2.4 Repricing Dates.
(a) Issuance of Repricing Shares. Subject to Section
2.4(b), on each Repricing Date with respect to the number of the
Initial Shares to be repriced, the Company shall issue to the
Purchaser that number of Repricing Shares equal to a difference
between one hundred twenty-five percent (125%) of the Share Price
and the average of the lowest twenty (20) closing bid prices (the
"Average Price") during the forty-five (45) days prior to each
such Repricing Date (the "Discounted Share Price"), which
difference is multiplied by a fraction which equals the number of
Initial Shares subject to repricing divided by the Discounted
Share Price. There shall be no issuance of Repricing Shares of
the Discounted Share Price if the Company's Common Stock exceeds
one hundred twenty-five percent (125%) of the Share Price for the
Initial Shares issued.
(b) Notice of Repricing. On the business day immediately after
each Repricing Date, the Company shall send written notice to the
Purchaser informing the Purchaser of the applicable Discounted
Share Price, and the aggregate number of Repricing Shares issued
to the Purchaser pursuant to Section 2.4(a) on such Repricing
Date. Certificates for such Repricing Shares shall be delivered
to the Purchaser within five (5) business days after the notice
is sent.
(c) In order that the Company can comply with applicable Nasdaq
Rules concerning the issuance of shares of Common Stock in a
transaction in the absence of stockholder approval, the Company
shall be required to pay to the Purchaser the cash value [based
on the closing bid price of a share of Common Stock on the
principal market therefore on the Trading Day immediately
preceding the applicable Repricing Date] for each Repricing Share
that would otherwise have to be issued under the terms of Section
2.4(a), which Repricing Shares whose issuance would violate
Nasdaq Rule will not be issued by the Company.
2.5 Liquidated Damages. If the Company does not file a
Registration Statement within forty-five (45) days after the
Closing Date and have such registration effective one hundred
twenty (120) days thereafter or within ten (10) days of a no
comment letter, as specified in the Registration Rights
Agreement, the Company shall pay 1% per month, or a fraction
thereof, of the purchase price in cash to the Investor until such
registration is effective.
2.6 Call. At any time after the Closing Date, the
Company is entitled to purchase, and the Purchaser shall in such
event sell to the Company, any or all of the unsold outstanding
Shares pursuant to the terms of this Section 2.6 at the Call
Price defined herein. In order to exercise such right to
repurchase, the Company shall deliver written notice to the
Purchaser specifying (i) the date on which such repurchase is to
close (each a "Call Closing Date"), which shall be at least seven
(7) business days after such notice, (ii) the Call Price
applicable as of the specified Call Closing Date, and (iii) the
number of Shares that the Company will purchase from the
Purchaser on the Closing Date. On the specified Call Closing
Date, the Company shall deliver to the Purchaser an amount equal
to the Call Price multiplied by the number of Shares to be
purchased from the Purchaser and the Purchaser shall deliver to
the Company a certificate representing such Shares. If the Call
Closing Date shall pass without completion of the repurchase in
accordance with the terms above, such repurchase shall occur as
soon thereafter as practicable; provided, however, if such
closing of the repurchase shall not have closed on the Call
Closing Date through no fault of the Company, no adjustment to
the Call Price applicable to the repurchase if such repurchase
had closed on the specified Call Closing Date shall be made. If
Purchaser fails to deliver Shares being repurchased on Call
Closing Date, then Company shall be entitled to add stop transfer
restrictions on the shares with the Company's Transfer Agent, and
take such other steps as shall be reasonably necessary to prevent
transfers of the shares by the Purchaser.
2.7 If the Company does not make delivery of the Repricing
Shares, within eight (8) business days after date on which the
Company is required to deliver the Repricing Shares, then the
Company shall pay to the Purchaser an amount, in cash in
accordance with the following schedule, in which "No. Business
Days Late" is defined as the number of business days beyond the
eight (8) business days delivery period.
Late Payment for Each
$10,000 of Repricing
No. Business Days Late Shares to be Issued
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
>10 $1,000 + $200 for each
Business Day Beyond 10
The Company shall make any payments incurred under this
Section 2.7 in immediately available funds within five (5)
business days from incurring any specified late fee under the
terms hereof.
2.8 Right of Redemption.
The Company shall be allowed at any time to redeem
pursuant to Section 2.6 (the "Redemption Price"). Any such
notice of redemption shall be in writing to the Purchaser's
attention with payment within five Trading Days thereafter by
wire transfer to Purchaser pursuant to its Banking instructions.
If such redemption payment is not made timely, the redemption
shall be considered null and void and the Company shall pay as
damages a penalty in the amount of 10% of the redemption price in
cash.
2.9 Anti-Shorting, Hedging. The Purchaser agrees that it
will not take a short position or hedge against its position
during the filing and approval period of the Registration
Statement and further agrees, that during the Repricing Periods,
the Purchaser is entitled to take a short or hedge position only
to the extent of the number of free-trading shares of Common
Stock it has the potential to receive on the immediately
succeeding Repricing Date under the definitions provided in
Section 1.1.
2.10 Indemnification of Consultants. The Issuer and the
Purchaser recognize that the Consultants are an introducing party
of each and as such. No Consultant, nor its counsel, is
obligated nor responsible for any documentation, information,
financial data or other communications regarding this
transaction. The parties hereto agree that the Consultants shall
not be a party to any litigation involving any dispute which may
arise from this transaction and may not involve the Consultant in
any litigation that may arise out of this transaction in the
future, absent fraud or gross negligence, or willful misconduct
of Consultant..
2.11 First Right of Refusal to Future Equity Transactions.
Subject and subordinate to the priority Right of First Refusal
granted by the Company to The Shaar Fund Ltd. in the event the
Company proposes to offer to sell shares of Company Common Stock
at a price per share that is less than the then Market Price for
the Company Common Stock, the Company agrees that for a period of
up to 180 days after the Closing Date that it will first offer
such future equity transactions to the Purchaser in this
Agreement. Such offer shall be in writing and shall be delivered
in accordance with the Notice provision as herein defined. The
Purchaser agrees to respond in writing within two business days
of receiving such written offer and if Purchaser elects not to
acquire shares of Company Common Stock on the same terms as
stated in such written offer, then the Company is allowed to
close the future equity transaction with other parties. If the
Company closes any future equity transaction with another party
without first offering such transaction to the Purchaser herein,
then the Company shall be obligated to pay to the Purchaser as a
Penalty an amount equal to ten per cent (10%) of the net amount
raised by the Company in such equity transaction in cash with
such payment to be made within five business days of the Company
closing any such offer. If Purchaser accepts and determines to
proceed with the presented equity transaction, it must close that
transaction on the same terms as offered to the other parties
within two (2) business days of the effectiveness of its offer to
close the transaction (following rejection of the offer by The
Shaar Fund Ltd.) or forfeit its Right of First Refusal with
respect to future equity transactions proposed by the Company.
ARTICLE 3
CONDITIONS TO THE OBLIGATION OF PURCHASER TO CLOSE
The obligation of the Purchaser hereunder is conditioned
upon the occurrence of the following:
3.1 Documents. The Registration Rights Agreement shall have
been executed by the Company.
3.2 Market for Common Stock. The Company's Common Stock
shall be trading as of the Closing Date on the Nasdaq SmallCap
Market;
3.3 No Material Adverse Effect. There shall have been no
material adverse changes in the Company's business or financial
condition since the date of the latest balance sheet delivered to
the Purchaser as part of the Disclosure Documents.
3.4 Representations and Warranties. The representations
and warranties of the Company herein shall be true and correct in
all material respects on the Closing Date, as if made on such
date, and the Company shall deliver a certificate, signed by an
officer of the Company, to such effect to the Purchaser's Agent;
3.5 Reservation of Shares. The Company shall have reserved
225,000 for issuance pursuant to this Agreement.
ARTICLE 4
CONDITIONS TO THE OBLIGATION OF
THE COMPANY TO CLOSE
The obligations of the Company hereunder is conditioned
upon the occurrence of the following:
4.1 Representations and Warranties. The representations and
warranties of the Purchaser herein shall be true and correct in
all material respects on the Closing Date, as if made on such
date.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY TO PURCHASER
The Company hereby makes the following representations and
warranties to the Purchaser, except as disclosed in the
Disclosure Documents or otherwise disclosed to Purchaser, which
representations and warranties shall be true as of the date of
execution of this Agreement by the Company and as of Closing:
5.1 Organization, Good Standing, and Qualification. The
Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Georgia, and has all
requisite corporate power and authority to carry on its business
as now conducted and as currently proposed to be conducted. The
Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect on the business or
properties of the Company and its subsidiaries taken as a whole.
The Company is not the subject of any pending or, to its
knowledge, threatened or contemplated investigation or
administrative or legal proceeding by the Internal Revenue
Service, the taxing authorities of any state or local
jurisdiction, or the Commission, or any state securities
commission, or any other governmental entity, which are required
to be disclosed in the Disclosure Documents and have not been
disclosed.
5.2 Corporate Condition. The Company has timely filed all
forms, reports and documents with the Commission required to be
filed by it under the Exchange Act through the date hereof
(collectively, the "SEC Reports"). Each of the SEC Reports, at
the time filed, complied in all material respects with the
requirements of the Exchange Act. The Company has made available
to the Purchaser a copy of the Company's Form 10-KSB for the
fiscal year ended December 31, 1997, and a copy of each of the
Company's Forms 10-QSB and 8-K filed by the Company since
January 1, 1998 (the "Most Recent Filings Report"). Other than
as set forth in this Agreement, there have been no material
adverse changes in the Company's business, operations or
financial condition since the date of the Most Recent Filings
Report. The SEC Reports, together with this Agreement, and any
other documents listed herein and furnished by the Company to the
Purchaser are referred to collectively as the "Disclosure
Documents." The financial statements contained in the Disclosure
Documents have been prepared in accordance with generally
accepted accounting principles, consistently applied, and fairly
present, in all material respects, the consolidated financial
condition of the Company as of the dates of the balance sheets
included therein, and the consolidated results of its operations
and cash flows for the periods then ended. Without limiting the
foregoing, there are no material liabilities, contingent or
actual, that are not disclosed in the Disclosure Documents (other
than liabilities incurred by the Company in the ordinary course
of its business, consistent with its past practice, after the
periods covered by the Disclosure Documents). The Company has
paid all material taxes which are due, except for taxes which it
reasonably disputes. There is no material claim, litigation, or
administrative proceeding pending, or, to the best of the
Company's knowledge, threatened or contemplated against the
Company, except as disclosed in the Disclosure Documents.
5.3 Authorization. All corporate action on the part of the
Company by its officers, directors and shareholders necessary for
the authorization, execution and delivery of this Agreement, the
performance of all obligations of the Company hereunder and the
authorization, issuance and delivery of the Initial Shares and
reservation of any additional shares for issuance in accordance
with this Agreement have been taken, and this Agreement and the
Registration Rights Agreement constitute valid and legally
binding obligations of the Company, enforceable in accordance
with their terms; provided, however, that enforceability is
subject to: (i) applicable bankruptcy, reorganization,
insolvency, moratorium, fraudulent conveyance, and similar
federal and state laws affecting the rights and remedies of
creditors generally, and (ii) general principles of equity
limiting the availability of equitable remedies (including but
not limited to the remedy of specific performance), whether
considered in a proceeding at law or in equity. The Company has
obtained all consents and approvals required for it to execute,
deliver and perform this Agreement and the Registration Rights
Agreement.
5.4 Valid Issuance of Shares. The Shares, when and if
issued and delivered in accordance with the terms hereof, will be
validly issued, fully paid and nonassessable and, based in part
upon the representations of the Purchaser in this Agreement, will
be issued in compliance with all applicable federal and state
securities laws. The Shares will be issued free of any
preemptive rights.
5.5 Compliance with Other Instruments. The Company is not
in violation or default of any provisions of its Amended and
Restated Articles of Incorporation or Bylaws, as amended and in
effect on and as of the date of this Agreement, or of any
material provision of any material instrument or contract to
which it is a party or by which it is bound or, to its knowledge,
of any provision of any federal or state judgment, writ, decree,
order, statute, rule or governmental regulation applicable to the
Company, which would have a material adverse effect on the
Company's business, financial condition or results of operation,
except as described in the Disclosure Documents. The execution,
delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby will not result in any
such violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a
default under any such provision, instrument or contract or an
event which results in the creation of any lien, charge or
encumbrance upon any assets of the Company.
5.6 Reporting Company. The Company is subject to the
reporting requirements of the Exchange Act, and has a class of
securities registered under Section 12 or Section 15 of the
Exchange Act. When requested by the Purchaser, the Company shall
furnish copies of reports filed by the Company with the
Commission.
5.7 Authorized and Issued Shares. The authorized and
issued shares of Preferred Stock, Common Stock and warrants,
options, instruments convertible into Common Stock and rights to
acquire Preferred or Common Stock, as of December 23, 1998, are
as set forth in Exhibit "B".
5.8 Use of Proceeds. As of the date hereof, the Company
expects to use the proceeds from the issuance of the Shares (less
fees and expenses) for working capital, including the repayment
of outstanding indebtedness. These purposes are estimates and
are subject to change, but represent the Company's good faith
best estimate of anticipated uses.
5.9 Compliance with Laws. As of the date hereof, the
conduct of the business of the Company complies in all material
respects with all material statutes, laws, regulations,
ordinances, rules, judgments, orders or decrees applicable
thereto. The Company has not received notice of any alleged
violation of any statute, law, regulations, ordinance, rule,
judgment, order or decree from any governmental authority. The
Company shall comply with all applicable securities laws with
respect to the issuance of the Shares.
5.10 No Rights of Participation. No person or entity,
including, but not limited to, current or former shareholders of
the Company, underwriters, brokers, agents or other third
parties, has any right of first refusal, preemptive right, right
of participation, or any similar right to participate in the
acquisition of the Shares which has not been waived.
5.11 Disclosures. This Agreement and the Disclosure
Documents do not contain any untrue statement of material fact
and do not omit to state any material fact required to be stated
therein or herein necessary to make the statements contained
therein or herein not misleading in the light of the
circumstances under which they were made.
5.12 Representations True and Correct. The foregoing
representations, warranties and agreements are true, correct and
complete in all material respects, and shall survive the Closing
and the issuance of the Shares.
ARTICLE 6
REPRESENTATIONS AND
WARRANTIES OF PURCHASER
The Purchaser hereby makes the following
representations and warranties to the Company, which
representations and warranties shall be true as of the date of
execution of this Agreement by the Purchaser and as of the
Closing:
6.1 Accredited Investor. The Purchaser hereby represents
and warrants to the Company that it is an "accredited investor,"
as defined in Rule 501 of Regulation D.
6.2 Access to Information. The Purchaser or its
professional advisor has been granted the opportunity to ask
questions of and receive answers from representatives of the
Company, and its officers, directors, employees and agents
concerning the terms and conditions of the issuance of the
Shares, and the Company and its business and prospects, and to
obtain any additional information which the Purchaser or its
professional advisor deems necessary to verify the accuracy of
the information received. The foregoing, however, does not limit
or modify the Purchaser's right to rely upon representations and
warranties of the Company in Article 5 of this Agreement.
6.3 Ability to Evaluate. The Purchaser has such knowledge
and experience in financial and business matters that it is fully
capable of evaluating the merits and risks of an investment in
the Company, including without limitation those set forth in the
Disclosure Documents.
6.4 Disclosure Documents. The Purchaser has received and
reviewed the Disclosure Documents. The foregoing, however, does
not limit or modify the Purchaser's right to rely upon the
representations and warranties of the Company in Article 5 of
this Agreement.
6.5 Investment Experience; Fend for Self. The Purchaser
has substantial experience in investing in securities and has
made investments in securities other than those of the Company.
The Purchaser acknowledges that it is able to fend for itself in
the transaction contemplated by this Agreement and that it has
the ability to bear the economic risk of its investment in the
Company. The Purchaser has not been organized for the purpose of
investing in securities of the Company.
6.6 Not an Affiliate. The Purchaser is not now, and as a
result of the acquisition of the Initial Shares and any Repricing
Shares shall not become, an officer, director or "affiliate" (as
that term is defined in Rule 415 of the Securities Act) of the
Company.
6.7 Exempt Offering Under Regulation D.
(a) Investment; No Distribution. Without limiting the
rights of the Purchaser to sell the Shares under the Registration
Statement, the Purchaser is acquiring the Shares pursuant to this
Agreement solely for investment purposes and for the Purchaser's
own account (or for beneficiaries' accounts over which the
Purchaser has investment discretion but no discretionary
authority as to voting or disposition), and not with a view to a
distribution of all or any part thereof. The Purchaser is aware
that there are legal and practical limits on its ability to sell
or dispose of the Shares, and therefore, that the Purchaser must
bear the economic risk of its investment for an indefinite period
of time. The Purchaser has adequate means of providing for its
current needs and anticipated contingencies and has no need for
liquidity of this investment. The Purchaser's commitment to
illiquid investments is reasonable in relation to its net worth.
(b) No General Solicitation. The Shares were not
offered to the Purchaser through, and the Purchaser is not aware
of, any form of general solicitation or general advertising,
including, without limitation, (i) any advertisement, articles,
notice or other communication published in any newspaper,
magazine or similar media or broadcast over television or radio,
and (ii) any seminar or meeting whose attendees have been invited
by any general solicitation or general advertising.
(c) No Registration of Shares. The Purchaser
understands that the Shares are not registered and therefore are
"restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a
transaction not involving a public offering, and that, under such
laws and applicable regulations, such securities may not be
transferred or resold without registration under the Securities
Act or pursuant to an exemption therefrom. In this connection,
the Purchaser represents that it is familiar with Rule 144 under
the Securities Act, as presently in effect, and understands the
resale limitations imposed thereby and by the Securities Act.
The Purchaser further understands, however, pursuant to the terms
of the Registration Rights Agreement that the Company is
obligated to file a registration statement with the Commission to
register the Shares within forty-five (45) days from the Closing
Date and use its best efforts to cause such registration
statement to become effective within one hundred twenty (120)
days of the Closing Date.
6.8 Disposition. Without in any way limiting the
representations set forth in Section 6.7 above, the Purchaser
shall not sell, hold a short position in or any put or other
option to dispose of, any shares of Common Stock of the Company
or any securities convertible into shares of Common Stock or
otherwise make any disposition of all or any portion of the
Shares unless and until:
(a) There is then in effect a Registration Statement
covering such proposed disposition and such disposition is made
in accordance with such Registration Statement; or
(b) The Purchaser shall have notified the Company of
the proposed disposition and shall have furnished the Company
with a detailed statement of the circumstances surrounding the
proposed disposition, and if reasonably requested by the Company,
the Purchaser shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of the Shares under the
Securities Act.
6.9 Due Authorization.
(a) Authority. The Purchaser, if executing this
Agreement in a representative or fiduciary capacity, has full
power and authority to execute and deliver this Agreement and
each other document referred to herein for which a signature is
required in such capacity and on behalf of the subscribing
individual, partnership, trust, estate, corporation or other
entity for whom or which the Purchaser is executing this
Agreement.
(b) Due Authorization. The Purchaser is duly and
validly organized, validly existing and in good standing as such
entity under the laws of the jurisdiction of its organization,
with full power and authority to purchase the Shares and to
execute and deliver this Agreement.
6.10 Acknowledgments. The Purchaser is aware of the
following:
(a) Risks of Investment. The Purchaser recognizes
that investment in the Company involves certain risks, including
the potential loss of the Purchaser's investment herein.
(b) No Government Approval. The Purchaser
acknowledges that no federal, state or foreign agency has passed
upon or reviewed the terms and conditions of this Agreement or
the Shares or made any finding or determination as to the
fairness of this Agreement or the transactions contemplated
hereby.
(c) Restrictions on Transfer. The Purchaser may not
sell, transfer, assign, pledge or otherwise dispose of all or any
portion of the Shares in the absence of either an effective
Registration Statement or an exemption from the registration
requirements of the Securities Act and applicable state
securities law.
6.11 Exempt Transaction. The Shares are being offered and
sold in reliance on specific exemptions from the registration
requirements of federal and state law and the Purchaser's
representations, warranties, agreements, acknowledgments and
applicability of such exemptions and the suitability of the
Purchaser to acquire the Shares.
6.12 Legends. It is understood that any certificates
evidencing the Shares and shall bear the following legend:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS, NOR THE
SECURITIES LAWS OF ANY OTHER JURISDICTION. THEY MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THOSE SECURITIES
LAWS OR AN OPINION OF COUNSEL, REASONABLE SATISFACTORY
TO THE COMPANY, THAT THE SALE OR TRANSFER IS PURSUANT
TO AN EXEMPTION TO THE REGISTRATION REQUIREMENTS OF
THOSE SECURITIES LAWS."
ARTICLE 7
COVENANTS OF THE COMPANY
7.1 Independent Auditors. The Company shall, until at
least three (3) years after the Closing Date, maintain as its
independent auditors an accounting firm authorized to practice
before the Commission.
7.2 Corporate Existence and Taxes. The Company shall,
until at least three (3) years after the Closing Date, maintain
its corporate existence in good standing (provided, however, that
the foregoing covenant shall not prevent the Company from
entering into any merger or corporate reorganization so long as
the surviving entity in such transaction, if not the Company,
assumes all of the Company's obligations with respect to the
Shares) and shall pay all its taxes when due, except for taxes
which the Company disputes.
7.3 Registration of Shares. The Company will register the
Shares under the terms of the Registration Rights Agreement.
7.4 Filings with Commission. The Company shall provide
each Purchaser with copies of its annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB and current reports on Form 8-K
for as long as the Shares remain outstanding.
7.5 Removal of Legend Upon Registration. The restrictive
legend described in Section 6.12 above will be removed from the
Common Stock after the Registration Statement is effective,
subject to the Purchaser's covenant to sell the Shares pursuant
to the plan of distribution outlined in and upon delivery of the
final prospectus contained in such Registration Statement and in
compliance with the federal and state securities laws, and to
suspend sales of the shares at any time that the Company notifies
Purchaser that either there is not currently an effective
Registration Statement, the Registration Statement needs to be
amended or supplemented, or current sales would otherwise not be
in compliance with federal and state securities laws.
7.6 Listing. The Company shall use its best efforts to
maintain the listing of its Common Stock on the Nasdaq SmallCap
Market or another national securities exchange or national
quotation system.
ARTICLE 8
MISCELLANEOUS PROVISIONS
8.1 Representations and Warranties Survive the Closing;
Severability. The Purchaser's and the Company's representations
and warranties shall survive the Closing of the transaction
provided for hereby notwithstanding any due diligence
investigation made by or on behalf of the party seeking to rely
thereon. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in
full force and effect without said provision.
8.2 Successors and Assigns. The terms and conditions of
this Agreement shall inure to the benefit of and be binding upon
the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon
any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement. No party may assign its
rights hereunder without the prior written consent of the other
parties.
8.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Georgia without respect
to conflict of laws.
8.4 Execution in Counterparts Permitted. This Agreement
may be executed in any number of counterparts, each of which
shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one (1)
instrument.
8.5 Titles and Subtitles; Gender. The titles and subtitles
used in this Agreement are used for convenience only and are not
to be considered in construing or interpreting this Agreement.
The use in this Agreement of a masculine, feminine or neither
pronoun shall be deemed to include a reference to the others.
8.6 Written Notices, Etc. Any notice, demand or request
required or permitted to be given by the Company or a Purchaser
pursuant to the terms of this Agreement shall be in writing and
shall be deemed given when delivered personally, or by facsimile
(with a hard copy to follow by overnight or two (2) business day
courier), addressed to the parties at the addresses and/or
facsimile telephone number of the parties set forth in Schedule I
attached hereto or such other address as a party may request by
notifying the others in writing.
8.7 Expenses. Each of the Company and the Purchaser shall
pay all costs and expenses that it respectively incurs, with
respect to the negotiation, execution, delivery and performance
of this Agreement.
8.8 Entire Agreement; Written Amendments Required. This
Agreement, the Common Stock certificates, the Registration Rights
Agreement and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and
thereof, and no party shall be liable or bound to any other party
in any manner by any warranties, representations or covenants
except as specifically set forth herein. Neither this Agreement
nor any terms hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge
or termination is sought.
8.9 Rules of Construction. Unless the context otherwise
requires, "or" is not exclusive, and references to sections or
subsections refer to sections or subsections of this Agreement.
The Company and the Purchaser each acknowledge that it has had
the benefit of legal counsel of its own choice and has been
afforded an opportunity to review this Agreement with its legal
counsel and that this Agreement shall be construed as if jointly
drafted by the Company and the Purchaser.
8.10 No Fractional Shares. The Company shall not issue any
fraction of a Share in connection with this Agreement, and in any
case where the Purchaser would otherwise be entitled under the
terms of this Agreement to receive a fraction of a Share, the
Company shall issue the largest number of whole Shares issuable
under this Agreement. The Company shall not be required to make
any cash or other adjustment in respect of such fraction of a
Share to which the Purchaser would otherwise be entitled. The
Purchaser expressly waives its right to receive a certificate for
any fraction of a Share under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
"COMPANY"
THE NETWORK CONNECTION, INC.,
a Georgia corporation
By:
Wilbur Riner
Chairman of the Board and CEO
"PURCHASER"
CACHE CAPITAL L.P.
By:
Name:
Title:
SCHEDULE I
Number of Initial
Purchaser Purchase Price Shares Purchased
3.50 80,000
Cache Capital L.P.
Company's Notice Address:
The Network Connection, Inc.
1324 Union Hill Road
Alpharetta, Georgia 30201
Attn: Wilbur Riner
Telephone: (770) 751-0889
Nixon, Hargrave, Devans & Doyle, L.L.P.
437 Madison Avenue
New York, NY 10022-7001
Facsimile: (212) 940-3111
Attn: Peter W. Rothberg, Esq.
Purchaser's Notice Address:
Name: Cache Capital L.P.
Address: J.P. Carey, Inc.
Atlanta Financial Center, East Tower
3343 Peachtree Road, Suite 500
Atlanta, Georgia 30326
Attn: Jack Canouse
Telephone: 404 816-5339
Facsimile: 404 816-6268
EXHIBIT "A"
REGISTRATION RIGHTS AGREEMENT
[Follows Directly Behind This Page]
EXHIBIT "B"
The Network Connection, Inc.
Capitalization of Company
December 23, 1998
Common Stock, $.001 par value
Authorized 10,000,000 Shares
Issued and Outstanding - 4,959,696 Shares
Preferred Stock, $.01 par value
Authorized 2,500,000 Shares
Issued and Outstanding: 1,500 Shares Convertible
Series B
180,000 Warrants at $5.50 - expire 1/06/03
150,000 Warrants at $4.125 - expire 7/1/03
62,500 Warrants at $3.65 - expire 6/30/03
32,500 Warrants at $3.64 - expire 8/12/01
27,500 Warrants at $4.10 - expire 12/11/01
726,328 employee stock options currently outstanding at
exercise prices ranging from $2.00 through $11.62 per share.
The Capitalization referenced above does not reflect the
issuance of up to (i) 125,000 shares of Common Stock upon the
exercise of warrants and (ii) Conversion to common shares not to
exceed 991,443 common shares underlying 1,500 shares of Series B
Convertible preferred stock ($10 stated value) to The Shaar Fund
Ltd. under the terms of the Securities Purchase Agreement, dated
as of October 23, 1998, should the Company elect not to redeem in
cash $1,500,000 of preferred stock on January 15, 1999.
Conversion price is equal to the lower of a) the average of the
closing bid prices as reported on the Nasdaq Smallcap Market for
the lowest five of the twenty trading days immediately preceding
the closing date or b) 80% of the market price on the date of
closing.
The Capitalization referenced above does not reflect the
issuance in the aggregate of up to (i) 65,000 shares of Common
Stock upon the exercise of warrants and (ii) 650 shares of Series
C Convertible preferred stock ($10 stated value) to individual
investors under the terms of Securities Purchase Agreements,
dated as of October 12, 1998, should the Company elect not to
repay in cash $704,082 of indebtedness on January 12, 1999.
Conversion price is equal to the lower of a) the average of the
closing bid prices as reported on the Nasdaq Smallcap Market for
the lowest five of the twenty trading days immediately preceding
the closing date or b) 80% of the market price on the date of
closing. Conversion to common shares shall not exceed 991,443
common shares.
The Capitalization referenced above does not reflect the
issuance in the aggregate of up to (i) 35,000 shares of Common
Stock upon the exercise of warrants and (ii) 350 shares of Series
D Convertible preferred stock ($10 stated value) to individual
investors under the terms of Securities Purchase Agreements,
dated as of October 21, 1998, should the Company elect not to
repay in cash $350,000 of indebtedness on January 18, 1999.
Conversion price is equal to the lower of a) the average of the
closing bid prices as reported on the Nasdaq Smallcap Market for
the lowest five of the twenty trading days immediately preceding
the closing date or b) 80% of the market price on the date of
closing. Conversion to common shares shall not exceed 991,443
common shares.
The Capitalization referenced above does not reflect the
issuance in the aggregate of up to (i) 55,000 shares of Common
Stock upon the exercise of warrants and (ii) 550 shares of Series
E Convertible preferred stock ($10 stated value) to individual
investors under the terms of Securities Purchase Agreements,
dated as of November17, 1998, should the Company elect not to
repay in cash $550,000 of indebtedness on January 16, 1999.
Conversion price is equal to the lower of a) the average of the
closing bid prices as reported on the Nasdaq Smallcap Market for
the lowest five of the twenty trading days immediately preceding
the closing date or b) 80% of the market price on the date of
closing. Conversion to common shares shall not exceed 991,443
common shares.
RISK FACTORS
An investment in the Common Stock offered hereby involves a
high degree of risk and should not be made by persons who cannot
afford the loss of their entire investment. In analyzing an
investment in the Common Stock offered hereby, prospective
investors should carefully consider, along with the other matters
referred to herein, the following factors:
Early Stage of Business
The Company was organized in 1986. Although it has had prior
operating history as a VAD for products manufactured by others,
the Company's current business as a designer, manufacturer and
distributor of its own products did not become its principal
business until 1991. As a result, the Company has and may
continue to experience many of the problems, delays and expenses
encountered by any business in the early stage of its
development, some of which are beyond the Company's control.
These include, but are not limited to, substantial delays and
expenses related to testing and development of new products,
production and marketing problems in connection with existing
products, lack of market acceptance of such products, and other
unforeseen difficulties.
History of Losses; and Uncertainty of Profitability
For the two fiscal years ended December 31, 1997, and
through the nine months ended September 30, 1998, the Company
incurred accumulated losses of ($10,097,407), with such losses
decreasing from ($3,252,899) in fiscal 1996 to ($2,025,628) in
fiscal 1997. However, the Company's loss increased from
($1,072,123) for the nine months ended September 30, 1997, to
($3,943,117) for the nine months ended September 30, 1998. As it
expands its marketing efforts for existing products and develops
additional future products, the Company may incur significant
additional losses. There is no assurance that the Company will
be able to achieve or sustain profitability in the future.
Need for Additional Financing
Cash liquidity will be required to finance anticipated
growth in the Company's accounts receivable and inventories. The
Company has been in discussions with commercial and other lenders
for further financing, and it is very likely that the Company
will seek to obtain another revolving credit agreement, to supply
additional financing which may be necessary to support future
growth. Should it be successful in obtaining such revolving
credit financing, the Company will, in all likelihood, secure
borrowings with the granting of security interests in
substantially all of its assets in addition to its operating
facility (which is already subject to a mortgage with an
institutional lender due in 2009). In the event that the Company
should require additional financing, there can be no assurance
that such financing will be available on commercially reasonable
terms. If future financing is not available when needed, the
Company may be forced to curtail or discontinue operations. In
such event, the stockholders, including investors in the Common
Stock offered hereby, may lose, or experience a substantial
reduction in, the value of their investment in the Company.
Dependence on Growth of Market for Superservers
Currently, PCs are the dominant server platform for LANs and
WANs. The market for superservers, similar to those produced and
distributed by the Company, is not PC-based. The superserver
market is new and developing, currently comprises only a small
portion of the worldwide server market, and represents the
high-end (e.g., in terms of cost) and high performance segment of
the overall computer network server market. To date, the
superserver market is primarily motivated by cost considerations.
The current low penetration of superservers in the overall server
market may be attributed to the fact that the vast majority of
existing computer networks are small in size and have relatively
simple file, application and print sharing needs that do not
require a superserver and the costs attendant to their purchase.
Although the Company has not conducted its own market studies,
the Company believes that its future success will depend in part
upon the continued growth of the portion of the market for
networking servers and workstations consisting of more complex
and higher performance network equipment capable of interfacing
with increasingly sophisticated applications, where the benefits
of a superserver may more fully be realized. Businesses and
government agencies with sophisticated computing requirements
have traditionally relied on mainframes and minicomputers to
perform these functions. The Company's future success is
dependent, in part, upon the development of new sophisticated
application software products for LANs and WANs, and on the
willingness of mainframe and minicomputer users to migrate such
applications to superserver controlled networks. Enterprises
that have traditionally relied on mainframes and minicomputers to
implement business-critical applications may be reluctant to
implement such applications on networks, which traditionally have
not offered the performance and availability characteristic of
mainframes and minicomputers. Accordingly, there can be no
assurance that these applications will be developed or that end
users will implement these applications on LANs and WANs.
Dependence on Market Acceptance of the Products
The future of the Company is largely dependent upon the
success of the current and future generations of the Company's
superservers and other multimedia computer products. These
products are relatively new and have not been marketed
extensively. It is, therefore, not possible to predict when, if
at all, they will achieve the market acceptance anticipated by
the Company. Such acceptance is necessary for the Company to
achieve profitable operations.
Competition; Technological Change and Obsolescence
Technological competition from other and longer established
computer hardware manufacturers and software developers is
significant and expected to increase. The Company expects that
hardware manufacturers and software developers will continue to
enter the market to provide and package integrated information
distribution solutions to the same computer network users that
are served by the Company. All such market participants will
compete intensely to maintain or improve their market shares and
revenues. Most of the companies with which the Company competes
have substantially greater capital resources, research and
development staffs, marketing and distribution programs and
facilities, and many of them have substantially greater
experience in the production and marketing of products.
In the developing market for superservers and network
workstations, it can be expected that the Company will encounter
a number of significant long-term competitors, including such
major industry participants as IBM, Microsoft Corporation,
Novell, Inc. and Compaq Computers, Inc. Accordingly, there is no
assurance that the Company's products will gain sufficient market
acceptance to assure the Company's future success and long range
profitability in the face of competition with such significantly
larger and better capitalized companies. Many of the new and
smaller companies which are active in the network equipment
industry, such as Allin Communications and Interactive Flight
Technologies, have recently announced operating and financial
difficulties.
In addition, one or more of the Company's competitors may
succeed in developing technologies and products that are more
effective than any of those developed or being developed by the
Company, rendering the Company's technology and products obsolete
or noncompetitive. In the event that the high end of the network
equipment market does not develop as anticipated, the Company
will be required to continue to compete with PC-based servers
manufactured by IBM, Compaq, Dell and other major computer
manufacturers for a majority of its revenues.
Customer Concentration
The Company typically sells significant amounts of equipment
to a small number of customers, the composition of which changes
from year to year as customer equipment needs vary. Therefore,
at any one time, a large portion of the Company's revenues may be
derived from a limited number of customers. During the fiscal
year ended 1997, and for the nine months ended September 30,
1998, three customers accounted for approximately 79% and 80%,
respectively, but no other customer accounted for more than 10%,
of the Company's revenues during either period. The loss of any
of these major customers would have a material adverse effect on
the Company's operations if the Company does not replace such
customer on a timely basis. Moreover, although the Company's
contracts with each such major customer does not permit
unilateral termination of the Company's contract (but see
"Government Contracts," below), the Company's contracts provide
for contract termination in the event that the Company's
products, following installation, do not perform in accordance
with the contract terms. Should the Company's contract with any
of such major customers be terminated based upon a failure of
product performance, it would have a material, adverse effect on
the Company and its results of operations.
Risk Associated With International Sales
The Company currently derives a significant portion of its
revenues from international operations. For the fiscal year
ended 1997, and for the nine months ended September 30, 1998,
international sales accounted for approximately 76% and 80%,
respectively, of the Company's revenues. International sales are
subject to a variety of risks, including difficulties in
establishing and managing international distribution channels,
obtaining export licensing, servicing and supporting overseas
products and in translating product interfaces into foreign
languages. International operations are subject to difficulties
in collecting accounts receivable and as a result could affect
the timing of revenue recognition and bad debt reserves. Other
factors that can adversely affect international operations
include difficulties in staffing and managing personnel,
enforcing intellectual property rights, fluctuations in the value
of foreign currencies and currency exchange rates, changes in
import export duties and quotas, introduction of tariff or non-
tariff barriers and regulatory, economic or political changes in
international markets.
Reliance on Outside Manufacturers, Suppliers and Other
Contractors
The Company assembles the products that it sells principally
from standardized components purchased from independent sources,
and it is dependent upon such outside vendors for all of the
components and end-products it sells to customers. There can be
no assurance that these suppliers will be able to provide
adequately for the future equipment needs of the Company's
customers. In the event that any of its current suppliers should
suffer quality control problems or financial difficulties, the
Company would be required to find alternative sources, which
could result in temporary business dislocations and a decline in
revenues.
The Company's ability to develop additional products and
product enhancements is dependent upon the development activities
of its major vendors, as well as other companies that create
computer hardware and software products. To the extent that any
particular product release by the Company utilizes a component
expected to be developed by a third party, and that third party's
development activities are delayed or aborted, the Company's
product development activities can be jeopardized, resulting in
product release delays or terminations. In either event, the
resulting impact on the Company's product marketing efforts
and/or its ability to offer a comprehensive suite of products to
customers could have a material, adverse effect upon the
Company's future success and results of operations.
Finally, due to the Company's lack of expertise and
capabilities in avionics and the FAA approval process, in order
to install the AirView system on aircraft the Company must engage
an independent contractor to assist it in completing its
performance under any AirView system program contract. The
Company currently has an ongoing relationship with one such
contractor to assist it in completing installations of the
AirView system. Were that relationship to terminate, or
deteriorate, without the Company locating a substitute contractor
to provide the same installation services, the Company could not
complete its performance under AirView System program contracts
and its ability to market the AirView System program would be
materially, adversely affected.
Lack of Patent Protection; Possible Infringement
The Company's ability to compete with other companies will
depend to a great extent on maintaining the proprietary nature of
its technologies. The Company currently neither holds nor
licenses patents for the technologies included in its products.
In addition, there can be no assurance that any patents that may
be applied for by the Company in the future will ultimately be
issued in its favor, or that any patent so issued, or any patent
rights assigned or licensed to the Company, will afford necessary
protection or will be upheld in the event of a challenge.
There is also no assurance that the Company's products will
not infringe the patents of third parties. Problems with patents
could potentially increase the cost of the Company's products, or
delay or preclude new product development and commercialization
by the Company. If infringement claims against the Company are
deemed valid, the Company may seek licenses which might not be
available on acceptable terms or at all. Litigation could be
costly and time-consuming but may be necessary to protect the
Company's future patent and/or technology license positions, or
to defend against infringement claims. A successful challenge to
the Company's technology could have a materially adverse effect
on the Company and its business prospects. There can be no
assurance that any application of the Company's technology will
not infringe upon the proprietary rights of others or that
licenses required by the Company from others will be available on
commercially reasonable terms, if at all.
The Company relies heavily upon trade secrets and other
unpatented proprietary technology. No assurance exists that
other persons will not independently develop or acquire
technology substantially equivalent to the Company's, or that the
Company will successfully protect its unpatented technology and
trade secrets from misappropriation by others.
Dependence on Key Personnel
The professional and general development of the Company
largely depends upon the efforts of key management, engineering
and selling and marketing personnel, many of whom would be
difficult to replace. The Company does not have employment
agreements with its employees other than its principal executive
officers. The loss of the services of any of the key personnel
would have a material adverse effect on the Company's operations
and prospects. The success of the Company's future operations is
further dependent upon the Company's ability to attract and
retain additional qualified personnel, particularly those with
marketing expertise.
Certain Provisions in the Articles of Incorporation and Bylaws
The Company's Articles of Incorporation and Bylaws contain
certain provisions that could have the effect of delaying or
preventing a change of control of the Company, which could limit
stockholders' ability to dispose of their Common Stock in such
transactions. The Company's Articles of Incorporation authorizes
the Board of Directors to issue one or more series of preferred
stock and to establish the rights, privileges and preferences
inherent in ownership of such shares of preferred stock, without
shareholder approval. Shares of such preferred stock, if and
when issued, could have voting or other rights that adversely
affect the voting power of the holders of Common Stock.
The Company's Articles of Incorporation and Bylaws were
amended by vote of the shareholders of the Company at the annual
meeting of shareholders held on June 7, 1996, to (1) classify the
Board of Directors into three classes, as nearly equal in number
as possible, each of which, after an interim arrangement, will
serve for three years, with one class being elected each year;
(2) provide that directors may be removed only with cause and the
approval of the holders of at least 66.66% of the voting power of
each class or series of outstanding stock of the Company entitled
to vote generally in the election of directors; (3) provide that
special meetings of stockholders may not be called by
stockholders unless pursuant to a written demand by the holders
of at least 66.66% of the voting power of each class or series of
outstanding stock of the Company entitled to vote on the matter
requiring the special meeting; (4) delete the provisions from the
Amended Articles which authorize stockholders to act in lieu of
holding a meeting upon the written consent of the holders of a
majority of the stock of the Company entitled to vote thereon;
and (5) increase the stockholder vote required to alter, amend or
repeal the foregoing amendments from a majority to 66.66% of the
voting power of each class or series of outstanding stock of the
Company.
Such amendments to the Articles of Incorporation and Bylaws
of the Company, together with certain other provisions therein,
could have the effect of discouraging a third party from making a
tender offer or otherwise attempting to obtain control of the
Company even though such an attempt might be beneficial to the
Company and its stockholders. In addition, since the amendments
are designed to discourage accumulations of large blocks of the
Company's stock by purchasers whose objective is to have such
stock repurchased by the Company at a premium, adoption of the
amendments could tend to reduce the temporary fluctuations in the
market price of the Company's stock which are caused by
accumulations of large blocks of the Company's stock.
Accordingly, stockholders could be deprived of certain
opportunities to sell their stock at a higher market price.
Georgia Anti-Takeover Law
The provisions of the Georgia Business Corporation Code
relating to fair price requirements with respect to the Common
Stock and business combinations with interested stockholders are
applicable to the Company. Essentially, the fair price
provisions require any material transaction or series of
transactions of the Company with or for the benefit of an
interested stockholder or an affiliate thereof to be approved by
all of the directors who are unaffiliated with the interested
stockholder or by 2/3rds of such unaffiliated directors and the
holders of a majority of the shares of the Company entitled to
vote on such transaction or transactions, other than shares held
by the interested stockholder. The business combination
provisions generally prohibit the Company from entering into any
material transaction with an interested stockholder for a period
of five years after the stockholder became an interested
stockholder. The provisions do not apply if the transaction was
approved prior to the time that the stockholder became an
interested stockholder or if the interested stockholder holds 90%
or more of the Company's voting stock. The fair price and
business combination provisions of the Georgia Business
Corporation Code may render more difficult or discourage an
attempt to obtain control of the Company by means of a proxy
contest, tender offer, merger or otherwise, and thereby preserves
the continuity of the Company's management. In addition, in
certain cases, these provisions may prevent the Company's
stockholders from realizing a premium upon the sale of their
shares in any tender offer or merger opposed by the Company's
management.
No Dividends
Other than for certain distributions to stockholders under
Subchapter S of the Internal Revenue Code of 1986 made by the
Company prior to December 31, 1994, the Company has never paid
cash dividends on its capital stock and does not anticipate
paying cash dividends in the foreseeable future, but rather
intends instead to retain future earnings, if any, for
reinvestment in its business to the extent permissible under the
terms of its contractual obligations. The Company has the option
to pay dividends on the Preferred Stock in shares of Common Stock
rather than in cash. However, the Company is prohibited from
paying dividends on the Preferred Stock, to the extent the number
of such dividend shares, when added to the number of shares of
Common Stock which may be acquired upon conversion of the
Preferred Stock (along with the exercise of the Warrants),
respectively, aggregates 20% or more of the number of outstanding
shares of Common Stock on the date of purchase of the Preferred
Stock. Such prohibition is required in order for the Company to
comply with requirements of the Nasdaq Stock Market. As a
result, the Company intends to declare and pay dividends on the
Preferred Stock in the form of Common Stock to the fullest extent
possible without exceeding this 20% limit; but depending upon the
period of time prior to full conversion of the outstanding
Preferred Stock, and the applicable conversion ratios in effect
at the time of preferred stock conversions, the Company may be
required to pay an unspecified amount of dividends on the
Preferred Stock in cash, rather than in shares of Common Stock,
in order to avoid exceeding such 20% limit. In addition, the
Company's Certificate of Incorporation (with regard to the
Preferred Stock) contains restrictions, and any credit agreements
which in the future may be entered into by the Company with
institutional lenders will in all likelihood contain
restrictions, on the payment of dividends by the Company.
Moreover, any future determination to pay cash dividends on the
Common Stock will be at the discretion of the Board of Directors
and will be dependent upon the Company's financial condition,
results of operations, capital requirements and such other
factors as the Board of Directors deems relevant. Investors
should, therefore, be aware that it is highly unlikely that any
cash dividends will be paid on the Common Stock in the
foreseeable future.
Adequacy of Insurance
Although the Company maintains insurance coverage that it
believes to be customary and generally consistent with industry
practice, to the extent that such coverage is inadequate and it
incurs losses which are uninsured such losses could have a
materially adverse effect upon the Company and its capital
resources. The Company currently has in place a $2,000,000
umbrella general liability insurance policy which includes
coverage of product liability claims, to protect it against
product liability claims brought by customers in connection with
such customers' purchases of products sold by the Company. The
Company does not believe that its operations expose it to
potentially significant product liability claims, and it has not
experienced any such claims in the past.
Risk of Low-Priced Stocks
If the Company's securities were delisted from Nasdaq, and
no other exclusion from the definition of a "penny stock" under
applicable Securities and Exchange Commission regulations were
available, such securities would be subject to the penny stock
rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally defined
as investors with net worth in excess of $1,000,000 or annual
income exceeding $200,000, or $300,000 together with a spouse).
For transactions covered by these rules, the broker-dealer must
make a special suitability determination for the purchase and
must have received the purchaser's written consent to the
transaction prior to sale. Consequently, delisting from Nasdaq,
if it were to occur, would affect the ability of broker-dealers
to sell the Company's securities and the ability of purchasers of
the Common Stock to sell their securities in the secondary
market, when the ability to make public sales became available.
Elimination of Liability for Directors
The Company's Articles of Incorporation contain provisions
which eliminate the personal liability of directors, both to the
Company and to its stockholders, for monetary damages resulting
from breaches of certain of their fiduciary duties as directors
of the Company. As a result of such charter provisions, the
rights of Company shareholders to recover monetary damages from
directors of the Company for breaches of directors' fiduciary
duties may be significantly limited.
Beneficial Conversion Feature of Preferred Stock
The Company's convertible preferred stock contains a
beneficial conversion feature which will result in a non-cash
charge to dividends paid on preferred stock equal to $375,000 in
the fourth quarter ended December 31, 1998. This dividend does
not impact the number of shares into which the preferred stock is
convertible and will result in an increase in additional paid-in-
capital when and if the conversions are effected.
FOR ALL OF THE FOREGOING REASONS THE SECURITIES OFFERED
HEREBY INVOLVE A HIGH DEGREE OF RISK. ANY PERSON
CONSIDERING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY
SHOULD BE AWARE OF THESE AND OTHER FACTORS. THOSE
SECURITIES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN
AFFORD A TOTAL LOSS OF THEIR INVESTMENT IN THE COMPANY.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is
entered into as of December 28, 1998, by and between The
Network Connection, Inc., a Georgia corporation (the
"Company"), Cache Capital L.P. (hereinafter referred to as
"Purchaser") and WS Marketing & Financial Services, Inc.
(the Consultant) to the Company's offering ("Offering") of
up to 80,000 shares plus the Repricing Shares, if any, of
its common stock, including the Repricing Shares (the
"Purchase Shares"), as well as warrants (the "Warrants") to
acquire 50,000 shares of common stock (the "Warrant Shares")
by the Consultant, pursuant to the Common Stock Purchase
Agreement between the Company and Purchaser (the "Purchase
Agreement) and the Warrants, respectively, (with all such
shares being collectively referred to as the "Shares"), the
terms of which are incorporated herein and made a part
hereof.
1. Definitions. For purposes of this Agreement:
(a) The terms "register", "registered," and "registration"
refer to a registration effected by preparing and filing a
registration statement or similar document in compliance
with the Securities Act of 1933 (the "Act") and pursuant to
Rule 415 under the Act or any successor rule, and the
declaration or ordering of effectiveness of such
registration statement or document;
(b) For purposes of the Required Registration under
Section 2 hereof, the term "Registrable Securities" means
the _________________ Purchase Shares and 50,000 Warrant
Shares, together with any capital stock issued in
replacement of, in exchange for or otherwise in respect of
such common stock of the Company, $.001 par value (the
"Common Stock").
For purposes of a Demand Registration under
Section 3 hereof or a Piggyback Registration under Section 4
hereof, the term "Registrable Securities" shall have the
meaning set forth above, except that the following shall not
constitute Registrable Securities for purposes of a Demand
Registration under Section 3 hereof or a Piggyback
Registration under Section 4 hereof:
1. any Registrable Securities resold in a public
transaction shall cease to constitute Registrable
Securities.
2. any securities which at the time can be sold by the
Holder under Rule 144.
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of
Common Stock which have been issued or are issuable pursuant
to the Purchase Agreement at the time of such determination
and under the Warrants;
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any permitted
assignee thereof;
(e) The term "Due Date" means the date which is one hundred
twenty (120) days after the Closing (as defined in the
Purchase Agreement).
(f) The terms "Offering" and "Closing" shall have the
meanings ascribed to them in the Purchase Agreement.
2. Required Registration.
(a) Within forty five (45) days after the Closing of the
Purchase Agreement, the Company shall file a registration
statement ("Registration Statement") on Form S-3, SB-2 (or
other suitable form), covering the resale of all shares of
Registrable Securities then outstanding.
(b) The Company shall use all reasonable efforts to have
the Registration Statement declared effective on or before
the Due Date.
(c) If the Registration Statement is not declared effective
by the Due Date as a result of the Company's failure to file
such Registration Statement timely or failure to strive
diligently to have such Registration Statement declared
effective by the Due Date, the Company shall pay the
Purchaser an amount equal to one percent (1%) per month, or
a fraction of a month, of the aggregate amount of Purchase
Price sold in the Purchase Agreement, compounded monthly and
accruing daily, until the Registration Statement or a
registration statement filed pursuant to Section 3 or
Section 4 is declared effective, payable in cash. The
accrual amount payable will be tolled for any periods
occasioned by a delay of a Registration Statement under
Section 3 as a result of the choice of the Holders to have
that Registration Statement underwritten.
(d) If the Registration Statement is not declared effective
by the Due Date, but all the Registrable Securities held by
a Holder are available for sale by the Holder, in the
opinion of counsel to the Purchaser (which opinion shall be
reasonably acceptable to the Company to permit such sale)
(the "Opinion"), without compliance with the registration
and prospectus delivery requirements of the Act, so that all
transfer restrictions and restrictive legends pertaining to
the Registrable Securities may be removed prior to and upon
the consummation of such sale, then registration
contemplated hereby shall no longer be required with respect
to such Holder's Registrable Securities upon the furnishing
to the Company of the Opinion, and the Company will
cooperate fully with the Holder and use its best efforts to
facilitate removal of restrictive legends and transfer
restrictions pertaining to the Registrable Securities. Such
efforts shall include, but not be limited to, undertaking to
furnish such opinions of counsel to the Company as the
Company's transfer agent may reasonably require.
3. Demand Registration.
(a) If the Registration Statement described in Section 2
above is not effective by the Due Date, Initiating Holders
may notify the Company in writing and demand that the
Company file a registration statement under the Securities
Act (a "Demand Registration Statement") covering the resale
of the Registrable Securities then outstanding. Upon
receipt of such notice, the Company shall, within ten (10)
days thereafter, give written notice of such request to all
Holders and shall, subject to the limitations of
subsection 5(b), as soon as practicable, and in any event
within thirty (30) days after the receipt of such request,
file a registration under the Act of all Registrable
Securities which the Holders request, by notice given to the
Company.
(b) The Company is obligated to effect only one (1) demand
registration pursuant to Section 3 of this Agreement. The
Company agrees to include all Registrable Securities held by
all Holders in such Registration Statement without cutback
or reduction. In the event the Company breaches its
obligation of the preceding sentences, any Holders of the
Registrable Securities which were not included in such
Registration Statement shall be entitled to a second demand
registration for such excluded securities and the Company
shall keep such registration statement effective as required
by Section 7.
4. Piggyback Registration. If the Registration Statement
described in Section 2 is not effective by the Due Date, and
no demand for a Demand Registration Statement has been made
pursuant to Section 3, and if (but without any obligation to
do so) the Company proposes to register (including for this
purpose a registration effected by the Company for
shareholders other than the Holders, except that the rights
granted under this Section 4 shall not apply to any
registration statement filed with respect to capital shares
distributed by The Shaar Fund, Ltd., its successors or
assigns) any of its Common Stock under the Act in connection
with the public offering of such securities solely for cash
(other than a registration relating solely for the sale of
securities to participants in a Company stock or option plan
or a registration on Form S-4 promulgated under the Act or
any successor or similar form registering stock issuable
upon a reclassification, upon a business combination
involving an exchange of securities or upon an exchange
offer for securities of the issuer or another entity), the
Company shall, at such time, promptly give each Purchaser
written notice of such registration (a "Piggyback
Registration Statement"). Upon the written request of each
Purchaser given by fax within ten (10) days after mailing of
such notice by the Company, which request shall state the
intended method of disposition of such shares by such
Purchaser, the Company shall cause to be included in such
registration statement under the Act (subject to provisions
of Section 5 below) all of the Registrable Securities that
each such Purchaser has requested to be registered
("Piggyback Registration"); nothing herein shall prevent the
Company from withdrawing or abandoning the registration
statement prior to its effectiveness.
5. Limitation on Obligations to Register.
(a) In the case of a Piggyback Registration on an
underwritten public offering by the Company, if the managing
underwriter determines and advises in writing that the
inclusion in the registration statement of all Registrable
Securities proposed to be included would interfere with the
successful marketing of the securities proposed to be
registered by the Company, then the number of such
Registrable Securities to be included in the registration
statement shall be allocated among all Holders who had
requested Piggyback Registration, in the proportion that the
number of Registrable Securities which each such Purchaser,
including Consultant, seeks to register bears to the total
number of Registrable Securities sought to be included by
all Holders, including Consultant.
(b) Notwithstanding anything to the contrary herein, the
Company shall have the right (i) to defer the initial filing
or request for acceleration of effectiveness of any Demand
Registration Statement or Piggyback Registration Statement
or (ii) after effectiveness, to suspend effectiveness of any
such registration statement, if, in the good faith judgment
of the board of directors of the Company and upon the advice
of counsel to the Company, such delay in filing or
requesting acceleration of effectiveness or such suspension
of effectiveness is necessary in light of (i) the
requirement by the underwriter in a public offering by the
Company that such Registration Statement be delayed or
suspended or (ii) the existence of material non-public
information (financial or otherwise) concerning the Company,
disclosure of which at the time is not, in the opinion of
the board of directors of the Company upon the advice of
counsel, (A) otherwise required and (B) in the best
interests of the Company; provided, however, that solely in
the case of a demand registration the Company will not delay
filing or suspend effectiveness of such registration for
more than three (3) months from the date of the demand,
unless it is then engaged in an acquisition that would make
such registration impracticable, in which case it will use
its best efforts to eliminate such impracticability as soon
as possible after such three (3) month period.
(c) In the event the Company believes that shares sought to
be registered under Section 2, Section 3 or Section 4 by
Holders do not constitute "Registrable Securities" by virtue
of Section 1(b) of this Agreement, and the status of those
Shares as Registrable Securities is disputed, the Company
shall provide, at its expense, an opinion of counsel,
reasonably acceptable to the Holders of the Securities at
issue (and satisfactory to the Company's transfer agent to
permit the sale and transfer) that those securities may be
sold immediately, without restriction or resale, without
registration under the Act, by virtue of Rule 144 or other
applicable exemptions.
(d) The Company is not obligated to effect a Demand
Registration under Section 3: (i) during the ninety (90)
day period after the Due Date, so long as the Registration
Statement required under Section 2 has been filed, and the
Company is using all reasonable efforts to obtain a
declaration of the effectiveness of the Registration
Statement during such period or, (ii) if in the opinion of
counsel to the Company reasonably acceptable to the person
or persons from whom written request for registration has
been received (and satisfactory to the Company's transfer
agent to permit the transfer) that registration under the
Act is not required for the immediate transfer of all of the
Registrable Securities pursuant to Rule 144 or other
applicable exemption.
6. Obligations to Increase the Number of Available Shares.
In the event that the number of shares available under a
registration statement filed pursuant to Section 2 or
Section 3 is insufficient to cover all of the Registrable
Securities then outstanding, the Company shall amend that
registration statement, or file a new registration
statement, or both, so as to cover all shares of Registrable
Securities then outstanding. The Company shall effect such
amendment or file such new registration statement within
thirty (30) days of the date the registration statement
filed under Section 2 or Section 3 is insufficient to cover
all the shares of Registrable Securities then outstanding.
Any Registration Statement filed hereunder shall, to the
extent permissible by the Rules of the Securities and
Exchange Commission ("SEC"), state that, in accordance with
Rule 416 under the Act, such Registration Statement also
covers such indeterminate numbers of additional shares of
Common Stock as may become issuable to prevent dilution
resulting from stock changes. In the event that the Company
fails to comply timely with the provisions of this Section
6, the Purchaser shall have the rights described in
Section 2(c) above.
7. Obligations of the Company. Whenever required under
this Agreement to effect the registration of any Registrable
Securities, the Company shall, as expeditiously as
reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best
efforts to cause such registration statement to become
effective.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the
prospectus used in connection with such registration
statement as may be necessary to comply with the provisions
of the Act with respect to the disposition of all securities
covered by such registration statement.
(c) With respect to any Registration Statement filed
pursuant to this Agreement, keep such registration statement
effective until the earlier of (i) the Holders of
Registrable Securities covered by such registration
statement have completed the distribution described in the
registration statement; or (ii) nine (9) months after the
effective date of registration.
(d) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in
conformity with the requirements of the Act, and such other
documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned
by them.
(e) Use its best efforts to register and qualify the
securities covered by such registration statement under such
other securities or Blue Sky laws of such jurisdictions as
shall be reasonably requested by the Holders of the
Registrable Securities covered by such registration
statement, provided that the Company shall not be required
in connection therewith or as a condition thereto to qualify
to do business or to file a general consent to service of
process in any such states or jurisdictions.
(f) Notify each Purchaser of Registrable Securities covered
by such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Act
of the happening of any event as a result of which the
prospectus included in such registration statement, as then
in effect, includes an untrue statement of material fact or
omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading
in light of the circumstances then existing.
(g) As promptly as practicable after becoming aware of such
event, notify each Purchaser of the happening of any event
of which the Company has knowledge, as a result of which the
prospectus included in the Registration Statement, as then
in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading, and use its best efforts promptly to prepare a
supplement or amendment to the Registration Statement to
correct such untrue statement or omission, and deliver a
number of copies of such supplement or amendment to each
Purchaser as such Purchaser may reasonably request.
(h) Provide Holders with written notice of the date that a
registration statement registering the resale of the
Registrable Securities is declared effective by the SEC.
(i) Provide Holders and their representatives the
opportunity to conduct a reasonable due diligence inquiry of
Company's pertinent financial and other records and make
available its officers, directors and employees for
questions regarding such information as it relates to
information contained in the registration statement subject
to all information received by the Holders and their
representatives being kept confidential.
(j) Provide Holders and their representatives the
opportunity to review the registration statement and all
amendments thereto a reasonable period of time prior to
their filing with the SEC.
8. Furnish Information. It shall be a condition precedent
to the obligations of the Company to take any action
pursuant to this Agreement with regard to each selling
Purchaser that such selling Holders shall furnish to the
Company such information regarding themselves, the
Registrable Securities held by them, and the intended method
of disposition of such securities, as shall be required, in
the opinion of counsel to the company, to effect the
registration of their Registrable Securities or to determine
that registration is not required pursuant to Rule 144 or
other applicable provision of the Act.
9. Expenses of Required and Demand Registration. All
expenses other than underwriting discounts and commissions
and fees and expenses of counsel to the selling Holders
incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including
(without limitation) all registration, filing and
qualification fees, printers' and Company accounting fees,
fees and disbursements of counsel for the Company, shall be
borne by the Company.
10. Expenses of Company Registration. The Company shall
bear and pay all expenses incurred in connection with any
registration, filing or qualification of Registrable
Securities with respect to the registration pursuant to
Section 4 for each Purchaser, including (without limitation)
all registration, filing, and qualification fees, printers
and Company accounting fees relating or apportionable
thereto but excluding underwriting discounts and commissions
and fees and expenses of counsel to the selling Holders
relating to Registrable Securities.
11. Indemnification. In the event any Registrable
Securities are included in a registration statement under
this Agreement:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Purchaser, the officers and
directors of each Purchaser, any underwriter (as defined in
the Act) for such Purchaser and each person, if any, who
controls such Purchaser or underwriter within the meaning of
the Act or the Securities Exchange Act of 1934, as amended
(the " 1934 Act"), against any losses, claims, damages, or
liabilities (joint or several) to which they may become
subject under the Act, the 1934 Act or other federal or
state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or
are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue
statement or alleged untrue statement of a material fact
contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein
or any amendments or supplements thereto, (ii) the omission
or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the
statements therein not misleading, or (iii) any violation by
the Company of the Act, the 1934 Act, any state securities
law or any rule or regulation promulgated under the Act, the
1934 Act or any state securities law; and the Company will
reimburse each such Purchaser, officer or director,
underwriter or controlling person for any legal or other
expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity
agreement contained in this subsection 11(a) shall not apply
to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected
without the consent of the Company (which consent shall not
be unreasonably withheld), nor shall the Company be liable
in any such case for any such loss, claim, damage,
liability, or action to the extent that it arises out of or
is based upon a Violation which occurs in reliance upon and
in conformity with written information furnished expressly
for use in connection with such registration statement by
any such Purchaser, officer, director, underwriter or
controlling person.
(b) To the extent permitted by law, each selling Purchaser,
severally and not jointly, will indemnify and hold harmless
the Company, each of its directors, each of its officers who
have signed the registration statement, each person, if any,
who controls the Company within the meaning of the Act, any
underwriter and any other Purchaser selling securities in
such registration statement or any of its directors or
officers or any person who controls such Purchaser, against
any losses, claims, damages, or liabilities (joint or
several) to which the Company or any such director, officer,
controlling person, or underwriter or controlling person, or
other such Purchaser or director, officer or controlling
person may become subject, under the Act, the 1934 Act or
other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereto)
arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation
occurs in reliance upon and in conformity with written
information furnished by such Purchaser expressly for use in
connection with such registration; and each such Purchaser
will reimburse any legal or other expenses reasonably
incurred by the Company and any such director, officer,
controlling person, underwriter or controlling person, other
Purchaser, officer, director, or controlling person in
connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that
the indemnity agreement contained in this subsection 11(b)
shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement
is effected without the consent of the Purchaser, which
consent shall not be unreasonably withheld; provided, that,
in no event shall any indemnity under this subsection 10(b)
exceed the gross proceeds from the offering received by such
Purchaser.
(c) Promptly after receipt by an indemnified party under
this Section 11 of notice of the commencement of any action
(including any governmental action), such indemnified party
will, if a claim in respect thereof is to be made against
any indemnifying party under this Section 11, deliver to the
indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly
noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own
counsel, with the reasonably incurred fees and expenses of
one such counsel to be paid by the indemnifying party, if
representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate
due to actual conflicting interests between such indemnified
party and any other party represented by such counsel in
such proceeding; provided, however, that the indemnifying
parties shall only be responsible for payment of the fees of
one such additional counsel for all indemnified parties.
The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any
such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 11,
but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that
it may have to any indemnified party otherwise than under
this Section 11.
(d) In the event that the indemnity provided in paragraph
(a) or (b) of this Section 10 is unavailable to or
insufficient to hold harmless an indemnified party for any
reason, the Company and each holder of Registrable
Securities agree to contribute to the aggregate claims,
losses, damages and liabilities (including legal or other
expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to
which the Company and one or more of the holders of
Registrable Securities may be subject in such proportion as
is appropriate to reflect the relative fault of the Company
and the holders in connection with the statements or
omissions which resulted in such Losses; provided, however,
that in no case shall any holder be responsible for any
amount in excess of the purchase price of securities sold by
it under the registration statement. Relative fault shall
be determined by reference to whether any alleged untrue
statement or omission relates to information provided by the
Company or by the holders. The Company and the holders
agree that it would not be just and equitable if
contribution were determined by pro rata allocation or any
other method of allocation which does not take account of
the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph (d), no
person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this
Section 11, each person who controls a holder of Registrable
Securities within the meaning of either the Act or the 1934
Act and each director, officer, partner, employee and agent
of a holder shall have the same rights to contribution as
such holder, and each person who controls the Company within
the meaning of either the Act or the 1934 Act and each
director of the Company, and each officer of the Company who
has signed the registration statement, shall have the same
rights to contribution as the Company, subject in each case
to the applicable terms and conditions of this paragraph
(d).
(e) The obligations of the Company and Holders under this
Section 11 shall survive the completion of any offering of
Registrable Securities in a registration statement under
this Agreement, and otherwise.
12. Reports Under Securities Exchange Act of 1934. With a
view to making available to the Holders the benefits of Rule
144 promulgated under the Act and any other rule or
regulation of the SEC that may at any time permit a
Purchaser to sell securities of the Company to the public
without registration, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and
the 1934 Act; and
(c) furnish to any Purchaser, so long as the Purchaser owns
any Registrable Securities, forthwith upon request (i) a
written statement by the Company, if true, that it has
complied with the reporting requirements of SEC Rule 144,
the Act and the 1934 Act, (ii) a copy of the most recent
annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested
in availing any Purchaser of any rule or regulation of the
SEC which permits the selling of any such securities without
registration.
13. Amendment of Registration Rights. Any provision of this
Agreement may be amended and the observance thereof may be
waived (either generally or in a particular instance and
either retroactively or prospectively), only with the
written consent of the Company and the holders of a majority
of the Registrable Securities provided that the amendment
treats all Holders equally. Any amendment or waiver
effected in accordance with this paragraph shall be binding
upon each Purchaser, each future Purchaser, and the Company.
14. Notices. All notices required or permitted under this
Agreement shall be made in writing signed by the party
making the same, shall specify the section under this
Agreement pursuant to which it is given, and shall be
addressed if to (i) the Company: Wilbur Riner, at 1324
Union Hill Road, Alpharetta, Georgia 30201, Telephone No.
(770) 751-0889, with a copy to Peter W. Rothberg, esq. At
Nixon, Hargrave, Devans & Doyle, LLP, 437 Madison Avenue,
New York, NY 10022, Facsimile No: (212) 940-3111, and
(ii) the Holders at their respective last address as the
party shall have furnished in writing as a new address to be
entered on such register. Any notice, except as otherwise
provided in this Agreement, shall be made by fax and shall
be deemed given at the time of transmission of the fax, with
confirmations back.
15. Termination. This Agreement shall terminate on the
earlier to occur of (a) the date that is five (5) years from
the date of this Agreement and (b) the date the distribution
of all Registrable Securities described in any registration
statement filed pursuant to this Agreement is completed; but
without prejudice to (i) the parties' rights and obligations
arising from breaches of this Agreement occurring prior to
such termination (ii) other indemnification obligations
under this Agreement or (iii) the Company's obligation to
maintain the effectiveness of a registration statement filed
prior thereto in accordance with the terms hereof, and to
fulfill its obligation hereunder in respect thereof until it
is no longer required to maintain the effectiveness thereof.
16. Assignment. No assignment, transfer or delegation,
whether by operation of law or otherwise, of any rights or
obligations under this Agreement by the Company or any
Purchaser, respectively, shall be made without the prior
written consent of the majority in interest of the Holders
or the Company, respectively; provided that, subject to the
other terms of this Agreement, the rights of a Purchaser may
be transferred to a subsequent holder of the Purchaser's
Registrable Securities (provided such transferee shall
provide to the Company, together with or prior to such
transferee's request to have such Registrable Shares
included in a Demand Registration or Piggyback Registration,
a writing executed by such transferee agreeing to be bound
as a Purchaser by the terms of this Agreement); and provided
further that the Company may transfer its rights and
obligations under this Agreement to a purchaser of all or a
substantial portion of its business if the obligations of
the Company under this Agreement are assumed in connection
with such transfer, either by merger or other operation of
law (which may include without limitation a transaction
whereby the Registrable Shares are converted into securities
of the successor in interest) or by specific assumption
executed by the transferee.
17. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of
Georgia without giving effect to conflict of laws.
(b) Successors and Assigns. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of,
and be binding upon, the successors, assigns, heirs,
executors and administrators of the parties hereto.
(c) Delays or Omissions. No delay or omission to exercise
any right, power or remedy accruing to any holder of any
Registrable Shares, upon any breach or default of the
Company under this Agreement, shall impair any such right,
power or remedy of such holder nor shall it be construed to
be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or
default thereunder occurring, nor shall any waiver of any
single breach or default be deemed a waiver of any other
breach or default thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of
any holder of any breach or default under this Agreement, or
any waiver on the part of any party of any provisions of
conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in
such writing. All remedies, either under this Agreement, or
by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
(d) Counterparts. This Agreement may be executed in any
number of counterparts, each of which may be executed by
less than all of the Purchaser, each of which shall be
enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one
instrument.
(e) Severability. In the case any provision of this
Agreement shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired
thereby.
The foregoing Registration Rights Agreement is
hereby executed as of the date first above written.
THE NETWORK CONNECTION, INC.
By:
Wilbur Riner
Chairman and CEO
PURCHASER
Name: CACHE CAPITAL L.P.
By:
Print Name:
Title:
Address: c/o J.P. Carey
Atlanta Financial Center, East Tower
3343 Peachtree Road, Suite 500
Atlanta, Georgia 30326
CONSULTANT
WS MARKETING & FINANCIAL SERVICES, INC.
By:
Gary Wadkins
Chairman
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
4041 North Central Avenue, Suite B-200
Phoenix, Arizona 85012
February 4, 1999
Mr. Wilbur Riner, Sr.
President
The Network Connection, Inc.
1324 Union Hill Road
Alpharetta, Georgia 30201
Re: Acquisition of Certain Assets of Interactive Flight
Technologies, Inc.
Dear Mr. Riner:
This letter of intent ("Letter of Intent") will reflect the
mutual intent of Interactive Flight Technologies, Inc., a
Delaware corporation ("IFT"), and The Network Connection, Inc., a
Georgia corporation (the "Company"), regarding acquisition by the
Company (the "Acquisition") of all or substantially all of the
assets ("Assets") and specific liabilities ("Liabilities", with
the Assets, collectively the "Net Assets") of IFT relating to its
interactive entertainment business (the "Business") in exchange
for restricted Common Stock of the Company ("Company Shares").
The Company has ten million (10,000,000) shares of Common Stock
authorized and 5,072,196 shares issued and outstanding, and has
one thousand five hundred (1,500) shares of Preferred Stock
authorized and 1,500 shares issued and outstanding. The Company
also has options, warrants or other securities convertible into
capital stock ("Convertible Securities") outstanding.
The Company will acquire the Assets and assume the
Liabilities directly or through a wholly owned subsidiary. As a
result of the transaction, the Company will become a sixty
percent (60%) owned subsidiary of IFT upon the terms and
conditions provided herein and any additional terms which will be
set forth in a definitive agreement (the "Definitive Agreement")
to be concluded among us. The parties reserve the right, in the
Definitive Agreement, to restructure the proposed transaction
depending upon more favorable tax and related consequences that
alternative structures may pose for each of the parties.
1. Acquisition of Assets and Assumption of Liabilities.
1.1. Assets Conveyed and Liabilities Assumed.
The Company will acquire the Assets and will assume specified
Liabilities related to the Business. The Net Assets will
include: $5 million in cash; accounts receivable owing to IFT
from Swissair; the proceeds and other recoveries generated by
certain litigation brought by IFT against Avnet, Inc.; the
Swissair warranty contract; the Swissair customer relationship;
all IFT interactive entertainment intellectual property, and
other tangible assets related to the Business (including but not
limited to customer lists and files, trade secrets, trademarks,
service marks, assignable government permits and other rights
under leases and rights under specified contracts); inventory,
furniture, fixtures, computers and equipment related to the
Business; other infrastructure (including FAA certified repair
station) relating to the Business; IFT's engineering and
technical staff; and the benefit of all research and development
efforts (which have been developed at a cost of over $20,000,000
since the inception of IFT). The Assets to be acquired and
Liabilities to be assumed will be specifically delineated in the
Definitive Agreement.
1.2. Closing Date. The date of closing of the
transaction, as defined in the Definitive Agreement (the "Closing
Date"), shall be as soon as practicable after: (i) completion of
the mutual due diligence investigations contemplated under
Paragraph 6 below; (ii) execution of the Definitive Agreement;
(iii) satisfaction of all conditions of each party to closing set
forth in the Definitive Agreement; (iv) approval of the
transaction by the shareholders of each of IFT and the Company;
(v) receipt of "fairness opinions" by each of IFT and the Company
(if and to the extent deemed appropriate by each) with respect to
the fairness, from a financial point of view, of the Acquisition
to the stockholders of each of such companies, which fairness
opinions, respectively, are satisfactory in form and scope to the
boards of directors of such companies; (vi) receipt of the
required approvals under Delaware and Georgia corporate law, and
other required regulatory approvals for the Acquisition. The
Closing Date will not be later than May 15, 1999 without the
mutual consent of the parties.
1.3. Name. The Company will become a sixty percent
(60%) owned subsidiary of IFT and its name will continue to be
The Network Connection, Inc., unless provided otherwise in the
Definitive Agreement.
1.4. Exchange of Assets for Shares. On the Closing
Date, in exchange for the IFT Assets, the Company shall issue
that number of restricted shares of its Common Stock, par value
$.001 per share (the "Company Shares"), that equal 60% of the
issued and outstanding common stock of the Company, computed
after issuance of the Company Shares on and assuming the
conversion or exercise of all Convertible Securities of the
Company. Any shares of Common Stock of the Company that IFT
acquires under Paragraph 2.16 shall be in addition to the
foregoing Company Shares. The Company will issue the
certificates representing the Company Shares to IFT, the Company
will assume the Liabilities and IFT will transfer the Assets to
the Company. The Company will take such action with its current
shareholders (including, but not limited to, increasing the
number of authorized Company Shares) as necessary to effectuate
the transaction contemplated by this Letter of Intent.
1.5. No Additional Outstanding Options and Warrants.
The Company will not issue any additional shares of its capital
stock or any Convertible Securities between the date of this
Letter of Intent and the Closing Date without first consulting
with IFT.
2. Conditions to Closing - IFT.
The Definitive Agreement will contain (i) representations
and warranties; (ii) special conditions to the consummation of
the proposed transaction; and (iii) conditions that are usual and
customary in connection with similar transactions, including, but
not limited to, those set forth below, the failure of which
shall give IFT the right to terminate or abandon the transaction
at its option:
2.1. that if an action or proceeding before any court
or other governmental body shall be instituted or threatened to
restrain, prohibit or invalidate the transaction, or which might
affect the right of IFT to own the Company Shares or to operate
or control the Company after the Closing Date;
2.2. that IFT, on the Closing Date, shall receive the
Company Shares free and clear of any liens, encumbrances or other
obligations;
2.3. all trademarks, trade names, service marks,
licenses or other rights the Company uses in connection with its
business shall be free and clear of any encumbrances,
controversies, infringement or other claims or obligations on the
Closing Date which would have a Material Adverse Effect. For
purposes of this letter of intent, a "Material Adverse Effect"
represents an impact on the business, results of operations,
financial condition, or future prospects of either IFT or the
Company, respectively, which would be materially adverse.
2.4. the Company shall have no contingent or other
liabilities connected with its business which would have a
Material Adverse Effect , except as disclosed in its financial
statements or in schedules incorporated into the Definitive
Agreement delivered in connection with the Acquisition, or
otherwise permitted in accordance with the terms of the
Definitive Agreement; and
2.5. there shall be no salaries, advances, perquisites
or other forms of compensation, direct or indirect, to officers,
shareholders or employees as of the Closing Date other than those
already existing and disclosed to IFT or approved by IFT;
2.6. all material lines of credit, debts, financing
arrangements, leases and other contracts of the Company shall be
disclosed in the Definitive Agreement, and except as set forth
therein, shall continue under the terms and conditions in effect
on the Closing Date after the Closing Date, and all necessary and
required approvals relating to the transfer of control of the
Company and to effect the transaction contemplated hereby
required by the foregoing instruments and arrangements, the
absence of which would have a Material Adverse Effect, shall have
been obtained as of the Closing Date;
2.7. IFT shall have obtained shareholder approval, as
required under Delaware law and the rules of the Nasdaq Stock
Market, Inc., relating to the Acquisition;
2.8. the Company's financial statements, dated as of
the date specified by IFT, shall be acceptable to IFT, in its
sole discretion, and IFT shall have the opportunity in the due
diligence process to review such financial statements with the
Company's independent auditors, PriceWaterhouseCoopers;
2.9. between the date of this Letter of Intent and the
Closing Date the Company will not, without first consulting with
IFT, incur any liabilities or obligations, or increases in
salaries or other direct or indirect compensation expenses, other
than those incurred in the ordinary and necessary course of
business, undertake any extraordinary capital expenditures;
2.10. the Company has conducted its affairs in
accordance with all applicable laws and regulations, except for
any failure to do so which will not result in a Material Adverse
Effect;
2.11. the Company shall have entered into
employment and non-compete agreements with Frank Gomer and Morris
Aaron, and such other employees of the Company whom IFT shall
designate to the Company in the Definitive Agreement on or before
the Closing Date on terms and conditions acceptable to such
parties;
2.12. the Company shall own, or have rights to use,
and have protected, all intellectual property and confidential
and other information not generally known in the industry
relating to the Company's products and that is critical to the
successful operation of the Company's business, including without
limitation, patents, licenses, trade secrets, know-how, knowledge
or information with respect to processes, formulae, processing
and other techniques, operation of the business, forms, research,
development, inventory, manufacturing, production, marketing,
pricing and purchasing;
2.13. from the date of this Letter of Intent
through the Closing Date, the Company shall conduct its business
only in the usual and customary manner and shall not enter into
any new material contracts or assume any new material obligations
outside of the ordinary course of its business without consulting
with IFT;
2.14. the Company will provide IFT with all the
information regarding the Company reasonably required in
connection with IFT's preparation of its proxy materials relating
to the Acquisition;
2.15. if IFT deems it necessary, IFT shall have
received a "fairness opinion" with respect to the fairness, from
a financial point of view, of the Acquisition to the stockholders
of IFT, which fairness opinion is satisfactory in form and scope
to the board of directors of IFT;
2.16. on or before the execution of the Definitive
Agreement, the holders of the outstanding shares of Preferred
Stock and related warrants of the Company shall have reached
agreements with IFT or the Company, as the case may be, on terms
satisfactory to IFT, regarding the dispositions or conversions
into Common Stock of their holdings, and the holders shall have
closed such dispositions or conversions as of the Closing Date;
and
2.17. there shall be no material adverse change in
the business, financial conditions, results of operations or
prospects of the Company from the date of this Letter of Intent
to the Closing Date.
3. Conditions to Closing - The Company
The Definitive Agreement will contain (i)
representations and warranties, (ii) special conditions to the
consummation of the proposed transaction and (iii) conditions
that are usual and customary in connection with transactions,
including, but not limited to, those set forth below, the failure
of which shall give the Company the right to terminate or abandon
the transaction at its option:
3.1. that if an action or proceeding before any court
or other governmental body shall be instituted or threatened to
restrain, prohibit or invalidate the transaction, or which might
affect the right of the Company to own, operate and have assigned
to it the Assets;
3.2. the Company shall be satisfied with the financial
condition, business and prospects of IFT represented by the
Assets and Liabilities of IFT to be transferred and assumed, in
its sole discretion;
3.3. that the Assets shall be transferred free
and clear of any liens, encumbrances, controversies, conditional
sales agreements, infringements or other claim or obligations,
except as set forth in the Definitive Agreement;
3.4. all trademarks, trade names, service marks,
licenses or other rights IFT uses in connection with the Business
and which are transferred by IFT shall be free and clear of any
encumbrances, controversies, infringement or other claims or
obligations on the Closing Date;
3.5. the Company shall have obtained shareholder
approval, as required under Georgia law and the requirements of
the Nasdaq Stock Market, Inc. relating to the Acquisition;
3.6. that IFT shall have operated the Assets in
accordance with all applicable laws and regulations prior to the
Closing Date, except for any failure to do so will not result in
a Material Adverse Effect;
3.7. that IFT shall have no contingent or other
liabilities connected with the Business which would have a
Material Adverse Effect, except as disclosed in its financial
statements or in schedules incorporated into the Definitive
Agreement delivered in connection with the Acquisition, or
otherwise permitted in accordance with the terms of the
Definitive Agreement;
3.8. the Company shall have received a "fairness
opinion" with respect to the fairness, from a financial point of
view, of the Acquisition to the stockholders of the Company,
which fairness opinion is satisfactory in form and scope to the
board of directors of the Company;
3.9. IFT will provide the Company with all the
information regarding IFT required in connection with the
Company's preparation of its proxy materials relating to the
Acquisition; and
3.10. there shall be no material adverse change in
the business, financial condition, results of operations or
prospects of the Business from the date of the Definitive
Agreement to the Closing Date.
4. Approval by Boards of Directors of IFT and the Company
and their Shareholders. The Definitive Agreement to be executed
and delivered by IFT and the Company must be approved by their
respective Boards of Directors and shareholders, as required
under applicable Delaware and Georgia law and the rules and
regulations of the Nasdaq Stock Market, Inc. The parties
executing this Letter of Intent represent and warrant that this
Letter of Intent and the transactions contemplated hereunder have
been duly authorized by their respective Boards of Directors.
5. Board of Directors - Post Merger. On the Closing Date,
the Company's Board of Directors shall consist of the following
seven (7) persons; Irwin L. Gross (Chairman), Wilbur Riner, Sr.
(President and CEO), Morris C. Aaron (Executive Vice President),
Frank E. Gomer (Executive Vice President), two (2) outside
directors to be determined by IFT, and one (1) outside director
to be determined by the Company.
6. Due Diligence Inspection of Premises and Operations and
Confidentiality. IFT and its representatives, and the Company
and its representatives, shall have the right, upon execution
hereof, to inspect all plant, equipment and operations of the
Company and IFT, respectively, its premises and its financial and
other records and to discuss the affairs of the Company and IFT,
respectively, with its managers, employees, suppliers,
advertisers, retailers, banking and other financial
institutions, lessors and such other parties as IFT or the
Company deems appropriate, upon reasonable notice of the proposed
times and dates thereof. IFT and the Company shall complete
their comprehensive due diligence on or before the signing of the
Definitive Agreement. The parties will cooperate with all
reasonable requests by each other for information and shall use
their best efforts to secure the cooperation of the foregoing
third parties who may reasonably be requested to furnish
information. If the closing shall not occur, neither IFT nor the
Company shall divulge any information or confidential data
received by it or them, except to the extent required to so
disclose the same by law and except for information already
publicly available.
7. Negotiations with Third Parties. In consideration of
the undertakings by IFT or the Company of the substantial legal,
accounting and other expenses incident to IFT and the Company
entering into this Letter of Intent and proceeding toward the
consummation of the Acquisition, the Company undertakes and
agrees that, through the earlier of May 15, 1999 or the Closing
Date, neither the Company nor IFT will enter into or pursue any
arrangements or negotiations with any other party relative to (i)
the merger of the Company into any other party or any purchase or
sale of substantially all of the assets or control relative to
any extraordinary transaction, in the case of the Company,
without the consent of IFT, and (ii) the acquisition by IFT of
all or substantially all of the assets, or the voting control, of
a company whose business is related to or in competition with the
business conducted by the Company, without the consent of the
Company.
8. Expenses. IFT and the Company each agree to pay their
respective legal, accounting and other costs associated with the
proposed transaction.
9. Finder's Fee. IFT and the Company each represent and
warrant to each other that no agent or broker was authorized and
instrumental in negotiations of the transaction contemplated
herein. Each of the foregoing parties agrees to hold the other
harmless from any claim, commission, finder's or broker's fee
because of the act, omission or statement of any party pertaining
to the proposed transaction contemplated herein. In all events,
no Finder's Fee may be paid out of the assets of either party now
owned or hereafter acquired if the parties consummate the
transaction contemplated by this Letter of Intent.
10. Definitive Agreement. The objective of the parties'
discussions has been the eventual execution and consummation of
the Definitive Agreement reflecting the foregoing provisions and
including such other terms and conditions as may be agreed upon
in the course of good faith negotiations between the parties and
as are customary in transactions of this type. In this regard,
the Definitive Agreement will contain full and complete
warranties and representations, and related indemnities, with
respect to the Company's and IFT's respective audited financial
statements, litigation, tax and other liabilities, titles to
properties, long-term contracts, contracts and transactions with
management, trademarks, franchises, licenses, undisclosed
liabilities and such other items as may bear upon the value of
the Company's and IFT's respective businesses and financial
conditions. In addition, the Definitive Agreement will restrict
the Company in incurring additional indebtedness, issuing
additional shares of stock of any class, declaring dividends,
paying bonuses to employees and entering into transactions other
than in the lawful and ordinary course of business prior to the
Closing Date.
11. Binding Effect. The parties intend to proceed with the
transactions contemplated herein and to negotiate a Definitive
Agreement. Each party shall promptly notify the other of its
progress on the matters specified herein. Further, this letter
of Intent shall not constitute a legal and binding obligation
between the parties, except for Paragraphs 6, "Due Diligence
Inspection of Premises and Operations and Confidentiality," 7,
"Negotiations with Third Parties," 8, "Expenses," and 9,
"Finder's Fee," hereof and no party hereto shall have any
obligation of any kind to consummate the Acquisition until, and
unless the Definitive Agreement is authorized, executed and
delivered.
Sincerely yours,
INTERACTIVE FLIGHT TECHNOLOGIES,
INC.
By
Irwin L. Gross
CEO
APPROVED AND AGREED to this
4th day of February, 1999
THE NETWORK CONNECTION, INC.
By
Wilbur Riner, Sr.
Its President and CEO
