As filed with the Securities and Exchange Commission on June 7, 2000
Registration No. 333-30980
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
The Network Connection, Inc.
(Exact Name of Registrant as specified in its Charter)
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Georgia 3571 58-1712432
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code number) Identification Number)
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222 North 44th Street, Phoenix, Arizona 85034
(602) 629-6200
(Address and Telephone Number of Principal Executive Offices)
Morris C. Aaron, Executive Vice President and Chief Financial Officer
222 North 44th Street, Phoenix, Arizona 85034
Telephone: (602) 629-6200
(Address of Principal Place of Business)
(Name, Address and Telephone Number of Agent for Service)
Copies of all communications to:
Richard P. Jaffe, Esquire
Mesirov Gelman Jaffe Cramer & Jamieson, LLP
1735 Market Street, 38th Floor
Philadelphia, PA 19103-7598
Telephone: (215) 994-1046
Telefax: (215) 994-1111
Approximate Date of Proposed Sale to the Public: As soon as practicable
after this registration statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis, pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ____________
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If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ____________
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following box. [ ]
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CALCULATION OF ADDITIONAL REGISTRATION FEE
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DOLLAR PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED (6) PER SHARE OFFERING PRICE REGISTRATION FEE (2)
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Common stock,
$0.001 par value $22,459,900 $9.50 (1) $22,459,900 (1) $5,924.42
Common stock,
$0.001 par value (3) $ 8,320,000 $3.25 (4) $ 8,320,000 (4) $2,196.48
Total $30,779,900 $8,120.90 (5)
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(1) Estimated solely for purposes of computing the registration fee. In
accordance with Rule 457(c), the price used is the average of the high and
low sales price of the common stock as quoted on the Nasdaq SmallCap Market
as of the close of trading on February 17, 2000.
(2) Calculated by multiplying the aggregate offering amount by .000264.
(3) Includes 2,560,000 shares estimated to be issuable in connection with a
Master Facility Agreement with Fusion Capital Fund II, LLC. See "The Fusion
Transaction".
(4) Estimated solely for purposes of computing the registration fee. In
accordance with Rule 457(c), the price used is the average of the high and
low sales price of the common stock as quoted on the Nasdaq SmallCap Market
as of the close of trading on June 2, 2000.
(5) $5,924.42 previously paid.
(6) Pursuant to Rule 416 of the Securities Act of 1933, as amended, this
registration statement also registers such additional number of shares of
the registrant's common stock as may become issuable upon exercise of the
warrants or upon conversions pursuant to the Master Facility Agreement as a
result of stock split, stock dividends and similar transactions.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the SEC acting pursuant to said Section 8(a), may
determine.
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INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY CHANGE. A REGISTRATION
STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 7, 2000
PROSPECTUS NETWORK CONNECTION LOGO
2,846,933 SHARES
THE NETWORK CONNECTION, INC.
COMMON STOCK
This prospectus relates to the offer for sale from time to time of up
to 286,933 shares of our common stock by some of our current shareholders who,
in some cases, hold warrants to purchase shares of common stock, as well as up
to 2,560,000 shares, consisting of 2,110,000 shares which we currently estimate
is the maximum number of shares that are purchasable pursuant to a $12,000,000
equity purchase agreement to be entered into with Fusion Capital Fund II, LLC
and 450,000 shares which we currently estimate we will issue to Fusion Capital
as a commitment fee. If more than 2,110,000 shares are purchasable by Fusion
Capital under the equity purchase agreement, we have the right, and presently
intend, to terminate the equity purchase agreement without any payment to or
liability to Fusion Capital. For more information on the selling shareholders,
please see "Selling Security Holders" beginning on page 51. For more information
on the Fusion financing, please see "The Fusion Transaction" beginning on page
34.
We will not receive any of the proceeds from the resale of these shares
by these selling shareholders, although we would receive certain benefits from
conversions under the equity purchase agreement and possibly receive exercise
proceeds from the exercise of the warrants. For more information on proceeds,
please see "Use of Proceeds" on page 11.
The Network Connection's common stock is traded on the Nasdaq SmallCap
Market under the symbol TNCX. On June 2, 2000, the last reported sales price of
our common stock was $3.25 per share.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 1 FOR A DISCUSSION OF
CERTAIN FACTORS YOU SHOULD CONSIDER IN CONNECTION WITH ANY DECISION TO PURCHASE
SHARES IN THIS OFFERING.
The selling shareholders may sell the shares of common stock described
in this prospectus in public or private transactions, on or off the Nasdaq
SmallCap Market, at prevailing market prices, or at privately negotiated prices.
The selling shareholders may sell shares directly to purchasers or through
brokers or dealers. Brokers or dealers may receive compensation in the form of
discounts, concessions or commissions from the selling shareholders. Fusion
Capital is an "underwriter" within the meaning of the Securities Act of 1933.
For more information on how the shares may be distributed, see "Plan of
Distribution" on page 52.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is June __, 2000.
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TABLE OF CONTENTS
PAGE
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Forward-Looking Statements and Associated Risks..............................ii
Risk Factors..................................................................1
Use of Proceeds..............................................................11
Market For Our Common Stock and Related Shareholder Matters..................11
Our Business.................................................................12
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................25
The Fusion Transaction.......................................................34
Management...................................................................39
Security Ownership of Certain Beneficial Owners and Management...............47
Certain Relationships and Related Transactions...............................48
Description of Securities....................................................49
Selling Security Holders.....................................................51
Plan of Distribution.........................................................52
Disclosure of The SEC's Position on Indemnification
For Securities Act Liabilities..............................................55
Experts......................................................................56
Legal Matters................................................................56
Where You Can Find More Information..........................................57
Index to Financial Statements...............................................F-1
We are a Georgia corporation. Our principal executive offices are
located at 222 North 44th Street, Phoenix, Arizona 85034, and our telephone
number is (602) 629-6200. In this prospectus, "The Network Connection," "we,"
"us," and "our," and other possessive and other derivations thereof, refer to
The Network Connection, Inc. and its consolidated subsidiary, unless the context
otherwise requires. All trademarks and tradenames appearing in this prospectus
are the property of The Network Connection, unless otherwise indicated.
We may amend or supplement this prospectus from time to time by filing
amendments or supplements as required. Please read this entire prospectus and
any amendments or supplements carefully before making your investment decision
to purchase shares in this offering. You should rely only on the information
provided in this prospectus and any amendments or supplements. We have
authorized no one to provide you with different information. We are not making
an offer of these securities in any jurisdiction where the offer is not
permitted.
DEALER PROSPECTUS DELIVERY OBLIGATION
Until ___________ __, 2000, all dealers that effect transactions in
these securities, whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus includes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves as long as they identify
these statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results.
All statements other than statements of historical fact we make in this
prospectus are forward-looking. In particular, the statements in this prospectus
regarding our future results of operations or financial position are
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of such terms or other comparable terminology.
Forward-looking statements reflect our current expectations but are
inherently uncertain. For these statements, we claim the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. You should understand that future events, in
addition to those discussed elsewhere in this prospectus, particularly under
"Risk Factors," and also in prior filings made by us with the Securities and
Exchange Commission, could affect our future operations and cause our results to
differ materially from those expressed in our forward-looking statements. The
cautionary statements made in this prospectus should be read as being applicable
to all related forward-looking statements contained in this prospectus.
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RISK FACTORS
Investing in our common stock will subject you to risks inherent in our
business. The performance of our common stock will reflect the performance of
our business relative to, among other things, our competition, general economic
and market conditions and industry conditions. The value of your investment may
increase or decline and could result in a total loss. You should carefully
consider the following factors as well as other information contained in this
prospectus before deciding to invest in our common stock.
WE HAVE A LIMITED OPERATING HISTORY UNDER NEW MANAGEMENT AND ARE IMPLEMENTING A
NEW BUSINESS STRATEGY THAT MAY NOT PROVE SUCCESSFUL.
On May 18, 1999, Global Technologies, Ltd. acquired control of us. As
of the date of this prospectus, Global Technologies owned approximately 80% of
our common equity on a fully converted basis, without taking into effect any
future dilution on account of our financing with Fusion Capital (see "The Fusion
Transaction" on page 34). In connection with its acquisition, Global
Technologies elected a new board of directors which, in turn, put in place a new
management team. The new management team has modified our business strategy. We
used to focus solely on video server sales to the education market and
entertainment system sales to airlines and cruise ship lines. By contrast, our
focus under new management is sales of interactive information and entertainment
systems to four markets: the hotel and hospitality, cruise ship, educational
institutions and corporate training, and passenger rail markets. Because this
strategy has only been implemented recently, there is virtually no operating
history on which to evaluate the strategy's prospects and new management's
ability to implement it. There is no assurance that we will have success in
implementing our new strategy, or that we will obtain the financial returns
sufficient to justify the expenditures we have made, and will continue to make,
in hopes of penetrating our newly designated target markets.
WE HAVE A HISTORY OF LOSSES AND EXPECT CONTINUED LOSSES.
We generated revenues of $11.1 million and $18.8 million for the fiscal
years ended October 31, 1997 and 1998, respectively, and realized net losses for
those years of $53.2 million and $7.2 million, respectively. For the eight-month
transition period ended June 30, 1999, we generated revenues of $1 million, and
realized net income of $2.3 million (this net income was due entirely to
reversal of prior accruals). For the nine months ended March 31, 2000, we
generated revenues of $5.7 million on which we realized a net loss of $4.4
million. Almost all of the revenues generated came from the sale of 195
Cheetah(R) video servers in connection with the Georgia Metropolitan Regional
Education Services Agency (MRESA) Net 2000 project. Without these sales, we
would have had a loss of $6.4 million for the nine months ended March 31, 2000.
As of March 31, 2000, our accumulated deficit was $87.4 million and working
capital was $0.1 million.
We expect to incur losses in the future as we focus on developing,
installing and maintaining interactive information and entertainment systems in
our four targeted markets. Each system installation is a capital-intensive
project. The majority of these systems will be installed at our cost and
1
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recorded as our assets. Our revenues will be generated primarily from future
usage of these systems. It will take a significant amount of time before we can
generate sufficient revenues to cover our operating costs, including
depreciation, expenses related to the costs of installing systems and corporate
overhead expenses. There can be no assurance that usage of the systems will ever
generate sufficient revenues to cover the costs of maintaining these systems.
IF WE CANNOT RENEGOTIATE AN AGREEMENT WITH CARNIVAL, WE MAY INCUR SIGNIFICANT
LOSSES.
Prior management entered into an agreement with Carnival Cruise Lines
for the purchase, installation and maintenance of our CruiseView(TM) system on a
minimum of one Carnival Cruise Lines ship. The Carnival agreement obligates us
to install and maintain CruiseView(TM) on an unspecified number of additional
ships designated by Carnival through December 2002. Pursuant to this agreement,
we installed systems on two Carnival ships, one on a Fantasy class ship and one
on a Destiny class ship. Under the terms of the agreement, we receive payment
for 50% of the sales price of the system in installments through commencement of
operation of the system for passenger use, with the remainder recovered through
receipt of our 50% share of net profits generated if any from the use of the
system.
Furthermore, the terms of the Carnival agreement provide that Carnival
may return the CruiseView(TM) system within an acceptance period, as established
for each order, or for breach of warranty. The acceptance period for the Fantasy
and Destiny class ships are twelve months and three months, respectively, from
completion of installation and testing, which occurred in February 1999 and
October 1999, respectively. The initial warranty period for these systems is
three years.
We have determined that the cost of building and installing the
CruiseView(TM) systems on the existing two Carnival ships pursuant to the
current Carnival agreement exceeds the revenue that can be earned in connection
therewith. Should we be required to build and install CruiseView(TM) on
additional ships pursuant to the current agreement, such arrangements could
prove unprofitable and have a negative effect on our working capital.
Given these costs, and ongoing technical issues, we notified Carnival
of our desire to renegotiate the current agreement and have been endeavoring to
do so. During these discussions, Carnival notified us in a letter dated April
24, 2000 that it sought to terminate the agreement and to assert certain
remedies thereunder, including a refund of amounts paid to us, potential
warranty/de-installation obligations and other matters. We continue to seek to
resolve issues under the Carnival agreement. There is no assurance that we will
be able to reach a mutually satisfactory resolution of the Carnival agreement
and secure a new, more favorable long-term contract with Carnival.
While we are optimistic about our discussions with Carnival, if we
cannot renegotiate a mutually satisfactory agreement with Carnival, or if we
should have to refund amounts paid to us or remove our CruiseView(TM) systems
from the Carnival ships, we would incur substantial losses. Such losses could
have a material adverse effect on our business, operating results and financial
condition.
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WE WILL REQUIRE ADDITIONAL FINANCING.
We will need to invest a great deal of capital in the implementation of
our new business strategy. The sales-cycle time for our products and services is
long and could exceed one year in certain cases. Consequently, even if our new
strategy is successful, unless we can obtain additional sales orders in the
short-term from the education market, we will continue to incur losses in the
foreseeable future. In addition, we will require substantial capital to purchase
and install equipment for sales in our other markets. Our contracts with hotels
require us to invest in the necessary equipment to operate our systems. Such
costs are expected to be recovered from revenues generated by the system over
the course of the contract, which approximate seven years. Furthermore, because
of the long sales cycle for our systems, we will require additional working
capital to fund operations, including inventory and accounts receivable. There
is no assurance we will be able to obtain such working capital. Therefore, our
accumulated deficit will probably increase, working capital will probably
decrease, and we will need to obtain financing to implement our business plan.
As of June 2, 2000, we have drawn $3.6 million against our $5.0 million
revolving credit facility agreement with Global Technologies. Absent alternative
sources of financing, we will likely continue to draw on the credit facility to
finance the production of some or all of the product development necessary for
our interactive information and entertainment systems, as well as to cover other
commitments and operating expenses. Global does not currently have sufficient
cash for us to borrow the full $5.0 million under the credit facility. Should we
be unable to borrow funds under the facility, it could have a material adverse
effect on our operating results and financial condition.
We recently signed an agreement with an investment fund pursuant to
which we have established a $12 million private equity line. We may draw against
this private equity line up to approximately $1,000,000 a month over a twelve
month period. See "The Fusion Transaction" on page 34.
WE HAVE A VERY SMALL BACKLOG OF ORDERS.
We have received only four orders for installation of our InnView(TM)
system - two for hotels in California, one for a hotel in Arizona and one for a
hotel in Indiana. We have no additional orders from Carnival Cruise Lines or
from MRESA. We do not believe our sales to date are sufficient to determine
whether there is meaningful demand for our products. We intend to continue to
devote significant resources to our sales and marketing efforts in an effort to
promote interest in our products. There is no assurance that we will be
successful with these efforts or that significant market demand for our products
will ever develop.
WE MAY NOT BE ABLE TO MANAGE OUR PLANNED GROWTH.
We have expanded and plan to continue to expand our business operations
during fiscal year 2000. This expansion could strain our limited personnel,
financial, management and other resources. To implement our new business
strategy, we will need to, among other things, maintain and expand our current
sales and marketing efforts. In addition, we will need to adapt our financial
planning, accounting systems and management structure to accommodate the growth
if it occurs. Our failure to anticipate or manage our growth, if any, could
adversely affect our business, operating results and financial condition.
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OUR SYSTEMS MAY SUFFER FROM DEFECTS.
The systems we sell incorporate a combination of sophisticated computer
chip, electronic circuit and network technology. To enhance the operation of our
systems and adapt them for the various environments in which they are installed,
we modify and reconfigure our systems from time to time. In addition, we rely on
subcontractors to manufacture, assemble and install many components of our
systems. Although we have quality control procedures designed to detect
manufacturing and system design errors and although we test our products before
marketing them, any component product may contain flaws which we may not detect
through these procedures. There is no assurance that we will identify all
defects. We believe that reliable operation will be an important purchase
consideration for our customers. Failure to detect and prevent design flaws or
flaws within components of our systems could adversely affect our business,
financial condition and operating results.
WE FACE SIGNIFICANT COMPETITION.
The market for our systems, products and services is highly competitive
and competition is likely to intensify.
* The major competitors in our hotels and hospitality market are On
Command Corporation, LodgeNet Entertainment Corporation and Quadriga.
On Command currently serves an estimated 960,000 rooms and LodgeNet,
approximately 680,000 rooms. We are unable to determine the extent of
Quadriga's market. On Command and LodgeNet focus their sales and
marketing efforts on North American properties, whereas Quadriga
markets its products primarily to European hotels and, to a much
lesser extent, Middle Eastern and African hotels.
* In the cruise ship market, we compete primarily with Allin Corporation
and Siemens. We estimate that Allin currently has systems installed on
seven cruise ships, and Siemens has a system installed on one. Allin
Corporation may have orders for additional cruise ships.
* In the education and corporate training market, our servers compete
primarily with those of other companies that manufacture video server
products, such as Sony, Dell, Gateway, Silicon Graphics, Compaq and
Hewlett Packard. Many regional competitors provide technology services
which may be similar to ours to the education and corporate training
markets.
* SmartWorld, a UK-based company, has announced its intention to develop
and offer a limited video-on-demand system for the passenger rail
market. In addition, we are aware that another UK-based company,
ALSTOM, is planning to create a subsidiary to develop systems
competitive with ours for the passenger rail industry.
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Most of these companies have greater financial, technical and marketing
resources than we do. Moreover, each of them is well established in its
respective market and has developed customer and end user goodwill and brand
recognition that may be difficult for us to overcome. We expect that, to the
extent that the market for our systems, services and products develops,
competition will intensify and new competitors will enter our designated target
markets. For example, large manufacturers of in-flight entertainment systems may
consider entry into any of our markets.
We may not be able to compete successfully against existing and new
competitors as the market for our systems, products and services evolves and the
level of competition increases. A failure to compete successfully against
existing and new competitors would have a materially adverse effect on our
business and results of operations.
GLOBAL TECHNOLOGIES EXERCISES SUBSTANTIAL CONTROL OVER US.
Global Technologies owns shares of our capital stock which entitles it
to elect a majority of our directors. Consequently, Global Technologies will be
able to exert virtually unlimited influence over the direction of our business
and policies.
WE DEPEND ON KEY EXECUTIVES.
Our potential for success depends significantly on certain key
management employees, including our Chairman and Chief Executive Officer, Irwin
L. Gross, our President and Chief Operating Officer, Robert Pringle, our Chief
Financial Officer, Morris C. Aaron, our Executive Vice President, Jay Rosan, and
our Chief Technology Officer, Richard Genzer. The loss of the services of any
one of them or of any of our other key employees would have a materially adverse
effect on us. We also believe that our future success will depend in large part
on our ability to attract and retain additional highly skilled content,
technical, management, sales and marketing personnel. Competition for quality,
highly skilled employees is intense. We give no assurance that we will be
successful in retaining our key personnel or in attracting and retaining the
personnel we require for expansion.
WE MAY NOT BE SUCCESSFUL IN PROCURING AND PROVIDING COMPELLING CONTENT FOR OUR
SYSTEMS.
Being able to procure and provide compelling content for our
interactive information and entertainment systems is integral to our success.
Our revenue models in each of our target markets, other than the education and
corporate training market, involve providing system infrastructure by us with
little or no upfront cost to our customers. In fact, in the hotel and
hospitality market, the model involves provision of the system infrastructure at
no cost to our customers. Our plan is to receive a share of the revenue
generated from the content that we procure and provide for use through the
systems pursuant to a multi-year contract.
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We are in the process of acquiring the rights to and packaging suites
of content to be provided through our systems, each suite being specific to the
environment in which the system is being installed. For example, the content
provided through CruiseView(TM) will be intended to appeal to cruise ship
travelers, the content provided through InnView(TM) will be intended to appeal
to hotel guests, and the content provided through TrainView(R) will be intended
to appeal to rail passengers. We give no assurance that we will be able to
develop, procure or integrate a compelling suite of content for any of our
systems. If we are unable to do so, system-users will not use the system and we
will not earn content revenues. Our business would be adversely affected because
we rely on the content revenue to make up for the discount we allow on the
system infrastructure. In addition, if we were unable to provide compelling
content, our target customers would not likely be receptive to our systems,
which would adversely affect our business, as well.
OUR QUARTERLY OPERATING RESULTS WILL VARY.
We expect to experience significant fluctuations in our operating
results. Fluctuations in operating results may cause the price of our common
stock to be volatile. Our operating results may vary as a result of many
factors, including:
* our ability to implement our new business strategy, which requires the
commitment of a great deal of capital, developing new applications for
our interactive information and entertainment systems and penetrating
newly designated target markets, such as the passenger rail, hotel and
hospitality and corporate training industries;
* our ability to integrate, retain and manage our new management team;
* our ability to generate further revenues on a profitable basis from
the markets in which we currently operate, such as the education and
cruise ship markets;
* our ability to procure and provide desirable content for our
interactive information and entertainment systems;
* our ability to generate orders so as to manage the long sales cycle
for our systems. This sales cycle involves evaluation and
customization of a system for each project, a test installation of
each customized system, and negotiation of related agreements from
other providers, such as movie and Internet access providers. All of
this is prior, in most cases, to a contract being signed between us
and a prospective purchaser of our systems; and
* our ability to compete successfully in our designated target markets.
Each of these factors is difficult to control and forecast. Thus, they
could have a material effect on our business, financial condition and results of
operations. For example, during the quarter ended September 30, 1999, we
recorded revenue of approximately $5.3 million from sales in connection with the
Georgia MRESA Net 2000 project. We have not received any additional orders in
connection with that project, nor have we recorded significant revenue in
connection with any project since then.
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Notwithstanding the difficulty in forecasting future sales, we
nonetheless must undertake research and development and sales and marketing
activities and other commitments months or years in advance. Accordingly, any
shortfall in product revenues in a given quarter may have a materially adverse
effect on our business, because we are unable to adjust expenses during the
quarter to match the level of product revenues, if any, for the quarter. We
believe that period-to-period comparisons of our operating results are not
meaningful. If our operating results in one or more quarters do not meet
expectations, the price of our stock could decrease.
OUR STOCK PRICE MAY BE VOLATILE.
The market price for our common stock may be affected by a number of
factors, including the announcement of orders for our products or product
enhancements by us or competitors, the loss of services of one or more of our
key employees, quarterly variations in our results of operations or those of our
competitors, changes in earnings estimates, developments in our industry, sales
of substantial numbers of shares of our common stock in the public market,
general market conditions and other factors, including factors unrelated to our
operating performance or the operating performance of our competitors. To date,
the market price for our common stock has been volatile and has fluctuated
significantly. The trading price of our common stock is likely to continue to be
highly volatile. In addition, the stock market in general and the market for
technology-oriented companies in particular, have experienced extreme price and
volume fluctuations. These broad market and industry factors may materially and
adversely affect the market price of our common stock, regardless of our actual
operating performance.
DELISTING OF OUR COMMON STOCK FROM TRADING ON THE NASDAQ SMALLCAP MARKET WOULD
REDUCE THE MARKETABILITY OF OUR SHARES.
Our common stock is listed for trading on the Nasdaq SmallCap Market
under the symbol TNCX. A listed company may be delisted if it fails to maintain
minimum levels of stockholders' equity, shares publicly held, bid price, number
of stockholders or aggregate market value, or if it violates other aspects of
its listing agreement. At March 31, 2000 we did not satisfy the minimum level of
net tangible assets required to be listed ($2 million), nor did we have
sufficient non-affiliate market capitalization ($35 million) or net income
($500,000 for two of the past three years). We are seeking additional capital
and attempting to effect other equity transactions to, among other things,
increase our net tangible assets to at least the minimum level required. There
can be no assurance that we will be able to raise this additional capital, or if
we are able to raise additional capital it will be on terms satisfactory to us,
or to effect other equity transactions currently under consideration. If we fail
to satisfy the criteria for continued listing, our common stock may be delisted.
If our common stock is delisted, public trading, if any, would
thereafter be conducted in the over-the-counter market in the so-called "pink
sheets," or on the NASD's "Electronic Bulletin Board." In this event, it may be
more difficult to dispose of, or even to obtain quotations as to the price of,
our common stock and the price, if any, offered for our common stock may be
substantially reduced.
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In addition, if our common stock is delisted from trading on the Nasdaq
SmallCap Market, and the market price of our common stock is less than $5.00 per
share, subject to certain exceptions, trading in our common stock would be
subject to the requirements of Rule 15g-9 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Under this rule,
broker/dealers who recommend such securities to persons other than established
customers and accredited investors (generally institutions or high-net worth
individuals) must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. The requirements of Rule 15g-9, if applicable, may affect the ability
of broker/dealers to sell our securities and may also affect the ability of
purchasers in this offering to sell their shares in the secondary market.
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
(the "Penny Stock Rule") also requires additional disclosure in connection with
any trades involving a stock defined as penny stock (any non-Nasdaq equity
security that has a market price or exercise price of less than $5.00 per share,
subject to certain exceptions). Unless exempt, the rules require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
prepared by the SEC explaining important concepts involving the penny stock
market, the nature of such market, terms used in such market, the
broker/dealer's duties to the customer, a toll-free telephone number for
inquiries about the broker/dealer's disciplinary history and the customer's
rights and remedies in case of fraud or abuse in the sale. Disclosure must also
be made about commissions payable to both the broker/dealer and the registered
representative, and current quotations for the securities. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
THE MARKETS IN WHICH WE OPERATE ARE CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE.
The markets in which we operate are characterized by rapid
technological change, frequent new product and service introductions and
evolving industry standards. Significant technological changes could render our
existing technologies, products and services obsolete. The networking solutions,
content and server markets' growth and intense competition exacerbate these
conditions. If we are unable successfully to respond to these developments or do
not respond in a cost-effective way, our business, financial condition and
operating results will be adversely affected. To be successful, we must adapt to
these rapidly changing markets by continually improving the responsiveness,
services and features of our products and services and by developing new
features and gathering new and appealing content to meet the needs of our
customers. We also need to respond to technological advances and emerging
industry standards in a cost-effective and timely manner.
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OUR INTELLECTUAL PROPERTY MAY NOT BE ADEQUATELY PROTECTED AND WE MAY INFRINGE
THE RIGHTS OF OTHERS.
Our success will depend in part on our ability to protect our
proprietary technology. We rely primarily on a combination of trademark laws and
employee and third-party nondisclosure agreements to protect our proprietary
rights. Further, we intend to distribute our products in a number of foreign
countries. The laws of those countries may not protect our proprietary rights to
the same extent as the laws of the United States. We may be involved from time
to time in litigation to determine the enforceability, scope and validity of our
proprietary rights, or to defend ourselves from third parties asserting
infringement claims against us. Any such litigation could result in substantial
costs to us and could divert our management and technical personnel away from
their normal responsibilities.
WE MAY NOT BE ABLE TO OBTAIN CRITICAL COMPONENTS FROM OUR SUPPLIERS.
Currently, we obtain certain key components used in our systems and
products from a number of sources. We do not have long term supply contracts
with these or any other component vendors and we purchase all of our components
on a purchase order basis. Component shortages may occur and we may not be able
to obtain the components we need in a timely manner or on a commercially
reasonable basis. In addition, we subcontract for the manufacture, assembly and
installation of many components of our systems. If we were unable to obtain
sufficient quantities of key components used in our systems or products due to
availability of raw material and labor or to other constraints beyond our
control, we could experience delays in the development of our systems or in
product shipments, or be forced to redesign our systems or products. Any of
these scenarios would have a materially adverse affect on our business. In
addition, there is no assurance that our subcontractors will be able to support
our manufacturing, assembly and installation requirements in the future.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE DEPRESSED BECAUSE OF SHARES
ELIGIBLE FOR FUTURE SALE AND SHARES RESERVED FOR FUTURE ISSUANCE UPON THE
EXERCISE OF OPTIONS AND WARRANTS AND THE CONVERSION OF PREFERRED SHARES.
Sales of a substantial number of shares of common stock in the public
market in connection with and following this offering could adversely affect the
market price for our common stock. On the date of this prospectus, we had
12,911,479 shares of common stock outstanding. Approximately 44% of these shares
are, and upon effectiveness of this registration statement 45% of these shares
will be, freely tradeable without restriction under the Securities Act of 1933.
The remaining shares may be sold in accordance with Rule 144 promulgated under
the Securities Act when the applicable holding period has been satisfied. In
addition, we have registered a total of 1.3 million shares of our common stock
reserved for issuance under our stock option plans, of which an aggregate of
approximately 358,974 shares had been issued as of the date of this prospectus.
The remaining 941,026 shares, when and if issued, would be freely tradeable
(unless acquired by any of our affiliates, in which case they would be subject
to volume and other limitations under Rule 144). In addition, we are registering
179,500 shares underlying warrants pursuant to this prospectus which will be
freely tradable upon effectiveness of this registration statement. We are also
permitted to issue up to $12 million of our common stock under the Fusion
financing during the remainder of its term. The shares we sell under the Fusion
financing will be available for resale in the public market pursuant to this
prospectus. The market price of our common stock could fall as a result of the
sale of any of these shares.
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WE MAY BE SUBJECT TO REGULATION.
In the United States, we are not currently subject to direct regulation
other than federal and state regulation applicable to businesses generally.
However, changes in the regulatory environment relating to the
telecommunications and media industry could have an adverse effect on our
business as it relates to the procurement of content for our systems.
Other legislative proposals from international, federal and state
governmental bodies in the areas of content regulation, intellectual property,
privacy rights and state tax issues could impose additional regulations and
obligations on us. We cannot predict whether or not any legislation of these
types might pass, nor the financial impact, if any, the resulting regulation may
have on us. Moreover, the applicability to content, online service and Internet
access providers of existing laws governing issues such as intellectual property
ownership, libel and personal privacy is uncertain. The law relating to the
liability of online service companies and Internet access providers for
information carried on or disseminated through their systems is also currently
unsettled and has been the subject of several recent private lawsuits. If
similar actions were to be initiated against us, costs incurred as a result of
such actions could have a material adverse effect on our business.
We may offer gaming activities from time to time through our
interactive information and entertainment systems in those jurisdictions where
we may do so legally. Gaming activities are highly regulated and illegal in most
jurisdictions in the United States. Complying with gaming laws and regulations
at both the state and federal levels could result in added expense, lower
margins and delays in implementing gaming options for use through our systems.
Additionally, we must generally comply with various safety regulations
when installing our systems. Compliance with these regulations may increase the
expense of a system and decrease our margins, or delay, or even prevent,
installation, any of which could have an adverse effect on our business.
WE ARE A DEFENDANT IN A MULTI-DISTRICT, MASS-TORT CLASS ACTION LAWSUIT.
On September 2, 1998, Swissair flight 111 crashed. The aircraft
involved in the crash was a McDonnell Douglas MD-11 equipped with an in-flight
interactive entertainment system developed by the Interactive Entertainment
Division we acquired from Global Technologies. Since then, a number of claims
have been filed by the families of the victims of the crash. We have been named
as one of the many defendants, including Swissair, Boeing, DuPont and Global
Technologies, in this consolidated multi-district litigation. Global
Technologies' aviation insurer is defending us in the action. Global
Technologies has $10.0 million in insurance coverage related to the action.
Global Technologies also has an umbrella policy for an additional $10.0 million
in coverage, however, Global Technologies and the umbrella carrier are currently
litigating the applicability of this policy to the action. We did not assume any
liability of Global Technologies in connection with the Swissair crash. If
liability is assessed against us directly, to the extent this liability exceeds
the available insurance, our business will be adversely affected.
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USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our
common stock being sold pursuant to this prospectus. The selling shareholders
will receive all net proceeds from any sale of such shares.
MARKET FOR OUR COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the Nasdaq SmallCap Market under the
symbol "TNCX." The table below sets forth the range of quarterly high and low
closing prices for our common stock on the Nasdaq SmallCap Market during the
quarters indicated.
QUARTER ENDED HIGH LOW
------------- ---- ---
June 30, 2000
(to the date of this prospectus) $ 8.719 $3.000
March 31, 2000 13.375 5.375
December 31, 1999 7.000 1.438
September 30, 1999 2.906 1.250
June 30, 1999 3.375 1.375
March 31, 1999 3.938 2.125
December 31, 1998 4.125 2.000
September 30, 1998 4.938 1.813
June 30, 1998 5.688 3.188
March 31, 1998 7.125 3.625
RECORD HOLDERS OF OUR COMMON STOCK
As of the date of this prospectus, there were approximately 100 holders
of record of our common stock, and we believe there are approximately 2,200
beneficial holders of our common stock, based on broker requests for
distribution.
DIVIDEND POLICY
We have not paid any dividends on our common stock in the last two
years and we do not expect to do so in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay dividends will be at
the discretion of our board of directors and will depend upon our financial
condition, operating results, capital requirements and such other factors as the
board of directors deems relevant.
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OUR BUSINESS
GENERAL DESCRIPTION OF OUR BUSINESS AND RECENT DEVELOPMENTS
We design, manufacture, install and maintain advanced, high-end,
high-performance computer servers and interactive, broad-band information and
entertainment systems, and procure and provide the content available through the
systems. These all-digital systems deliver an on-demand multimedia experience
via high-speed, high-performance Internet Protocol (IP) networks. These systems
are designed to provide users access to information, entertainment and a wide
array of service options, such as shopping for goods and services, computer
games, access to the World Wide Web and on-line gambling where permitted by
applicable law. The service options available are customized for each
installation and generally vary depending on the environment in which each
system is installed. Our targeted markets for these systems are hotels and
time-share properties, cruise ships, educational institutions and corporate
training, and passenger trains.
We have had the following recent developments:
* EXECUTIVE MANAGEMENT -- In March 2000, we announced the
appointment of a new executive management team, including Robert
S. Pringle, President and Chief Operating Officer, Dr. Jay R.
Rosan, Executive Vice President, and Richard E. Genzer, Chief
Technology Officer. These well-regarded Internet executives have
broad experience in building branded Internet portals, creating
successful e-commerce solutions, and aggregating information and
entertainment content.
* CONTENT DIVISION - In March 2000, we formed a new division to
focus on creating long-term business models for content,
commerce, community and connectivity. This division will create
an enhanced away-from-home experience where people can access and
customize content and date.
* HOTEL & HOSPITALITY DIVISION - Since December 1999, we have
recruited five national and regional sales executives and several
third-party agents. Gregory Varey leads our U.S. sales team and
Theodore P. Racz leads our international sales efforts. In this
timeframe, we have signed contracts from four hotels for
installation of our interactive information and entertainment
systems for hotel and time-share properties, which we call
"InnView(TM)."
* CRUISE SHIP DIVISION - We have developed an enhanced version of
our CruiseView(TM) technology platform, increasing its
performance and capabilities, and are in advanced discussions
with several major cruise companies about installing this
interactive system, including Carnival. We have created a
portable demonstration system, which we use to demonstrate the
system's capabilities to industry players and are exhibiting at
the Posidonia Sea Trade conference in Greece in June. Walter O.
Gerber leads this division.
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We are currently negotiating with Carnival to resolve issues
regarding recovery of amounts paid to us (recorded as deferred
revenue), our recovery of our inventory costs, potential
warranty/de-installation obligations and other matters (see risk
factors regarding Carnival on page 2 above).
* EDUCATION & CORPORATE TRAINING DIVISION- In September 1999, we
completed delivery and installation of 195 Cheetah(R) video
servers to Georgia schools in connection with the Georgia
Metropolitan Regional Education Services Agency (MRESA) Net 2000
project. We received payment of $5.3 million in connection with
the project. In December 1999, we hired James D. Oots to lead the
division.
* PASSENGER RAIL DIVISION- In September 1999, we hired Stephen J.
Ollier to lead the division. We have submitted pricing proposals
to two of the world's largest train operators for new and
retrofit installations of TrainView(R) systems. We intend to
launch our new TrainView(R) showroom and demonstration system in
June in the United Kingdom and have invited key industry
executives to an opening reception.
Guest Services available through our CruiseView(TM) and InnView(TM)
Systems include:
* on-demand films, short video features and music videos;
* free-to-guest television programs;
* concierge information and reservations;
* in-room guest messaging and bulletin boards; and
* in-room folio review, express check-out and guest surveys.
Eventually, we also plan to include the following guest services
through our InnView(TM) System:
* high-speed access to the World Wide Web and e-mail;
* voice-over IP (i.e., long distance telephone calls over the
Internet);
* e-commerce services, such as interactive shopping;
* interactive games and casino-style gambling where permitted by
law; and
* interactive advertising and promotion of customer events, shops
and restaurants.
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BUSINESS STRATEGY
Our primary objective is to be a leading provider of scaleable
multimedia, interactive information and entertainment systems. To this end, we
have developed the following strategies:
* BE RECOGNIZED AS A TOTAL SOLUTION PROVIDER. We will continue to
develop our content division, which will acquire, package and
monitor a broad range of compelling multimedia content tailored
to appeal to the typical end-users in each of our market
segments. We believe this is necessary so that we can be viewed
by our customers not as a system infrastructure provider, but
rather as a total solution provider.
* LEVERAGE OUR CORE TECHNOLOGY ACROSS MARKET SEGMENTS. We will
pursue new markets and applications for our systems, products and
technologies.
* NURTURE KEY BUSINESS PARTNERS AND STRATEGIC ALLIANCES. We will
nurture our existing business relationships, and develop new ones
with partners with strong national and international presences.
We will use these business relationships to further penetrate our
targeted markets.
* DEVELOP OUR NEWLY CREATED DIVISIONS AND PENETRATE FURTHER THE
MARKETS THEY SERVE. We will continue to invest in our newly
created divisions and staff them with the skilled professionals
necessary to effectively and efficiently maximize order
generation for our systems, products and services in the markets
they serve.
* INVEST IN OUR CORE COMPETENCIES. We will continue to attract and
retain highly skilled professionals in these critical
disciplines: industry specific marketing and sales; multimedia
content development, acquisition and management; systems and
software engineering; supplier management; finance; contracts
administration; and program management applied to large-scale
systems.
PRODUCTS AND SERVICES
TECHNOLOGY
The hardware for our interactive systems consists of high speed
Cheetah(R) servers, multiple disk drives, switches, cabling, set-top personal
computers, and televisions or other electronic displays to serve as monitors for
our systems. Our TransPORTAL(TM) system software is based on standardized Web
browser component technology. Our systems provide a variety of informative,
entertainment and interactive content which may be accessed and viewed in the
hotel room or cruise ship cabin on demand. Our systems are 100% digital and
offer our customers flexibility in adding new content to the system, as well as
the ability to brand their marketing vision via the "look and feel" of the
underlying graphical user interface.
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Dual, fault-tolerant Cheetah(R) servers serve as the heart of our
systems. One Cheetah(R) server serves as the local area network backbone and can
provide 100 megabit connectivity to each user on the system. The scaleable
architecture of our server is based on Intel processors and Microsoft operating
systems. Our systems interface with both color flat panel computer monitors and
television displays.
The design for our interactive information and entertainment systems
are proprietary to us, as are our Cheetah(R) video servers and TransPORTAL(TM)
software tools. However, other hardware used in our systems is predominantly
commercial, off-the-shelf hardware, based on non-proprietary or open-system
computer and Internet Protocol (IP) network standards. We believe that this use
of available commercial hardware allows us to outsource component product
manufacturing to suppliers without compromising overall product quality and
reliability. We believe that it also allows us to focus our operations resources
on supplier management, final assembly and testing.
Each of our servers can serve up to 300 simultaneous users. We install
enough servers in each customer location so that the total number of servers,
when multiplied by 300 users per server, will meet customer specifications in
terms of the maximum number of expected users at any time.
TURNKEY INTERACTIVE INFORMATION AND ENTERTAINMENT SYSTEMS
We currently market three customized turnkey systems. Each of these
systems is built on our Cheetah(R) servers and TransPORTAL(TM) software package.
We customize the content available through our systems to provide the best total
solution for our respective market purchasers:
* CruiseView(TM) is our system solution for the cruise ship market.
The system is designed to provide information, entertainment,
gaming, shore excursions and free-to-guest services. The system
is also designed to provide Internet access over the television,
voice over IP, and concierge and other guest services. Some of
the content can be available free of charge, some can be
advertising supported, and some can be available on a pay-per-use
basis. We will share revenues from advertising and pay-per-use
with the cruise lines on a negotiated percentage basis.
* InnView(TM) is our system solution for the hotel and time-share
market. In accordance with our three hotel agreements, we will
provide interactive and entertainment content for use by the
hotel guests. The system is also designed to provide Internet
access over the television, voice over IP, and concierge and
other guest services. Some of the content can be available free
of charge, some can be advertising supported, and some can be
available on a pay-per-use basis. We will share revenues from
advertising and pay-per-use with the hotels on a negotiated
percentage basis.
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* TrainView(R) is our newest system solution. We anticipate that
our TrainView(R) system will provide interactive, entertainment
and other content to be determined in conjunction with future
customers, if any. We have developed a TrainView(R) prototype,
which we are currently marketing to train operators in Europe and
Asia.
SERVER SALES
Our current business strategy is to offer and sell complete, turnkey
interactive information and entertainment systems. However, a substantial
portion of our revenues generated since June 30, 1999 have come from the sale of
our Cheetah(R) video servers which have been installed as part of a system
designed and installed by others. Although we will continue to offer and sell
the servers as stand-alone, high-end, video servers, we are endeavoring to be
known as a total system solution provider in the education market as well as in
the other markets we serve.
CONTENT
We obtain the content which we show on our systems in several different
ways. Movies are obtained by licensing products from industry suppliers. Other
content is purchased or licensed from other providers.
We expect to expand all of our systems to include additional content
and features, such as Internet access, on-line shopping and local entertainment
guides. We are currently developing our content division which will oversee this
development. Our content division is also looking to provide a total solution
system for the education and corporate training markets.
OUR HISTORY
We were incorporated in Georgia in 1985 . Our common stock is listed on
the Nasdaq SmallCap Market under the ticker symbol "TNCX." Our primary focus
under prior management from inception to 1995 was providing video products and
services to the educational market. After an initial public offering in 1995,
prior management began to market interactive information and entertainment
systems to the commercial airline and passenger cruise ship industries.
Our AirView(R) product was installed on two Fairlines Airlines
aircraft. In addition, the in-flight entertainment system developed by the
Interactive Entertainment Division we acquired from Global Technologies was
installed on 19 Swissair aircraft, two Debonair Airlines aircraft and three
Alitalia aircraft. The heavily regulated nature of the airline market
prohibitively increased our costs. Fairlines filed for bankruptcy protection and
we were never able to collect the amounts owed to us. These facts, together with
the Swissair litigation, led us and Global Technologies to stop pursuing this
market in 1998. See "Risk Factors - We are a defendant in a multi-district, mass
tort class action lawsuit."
In addition, prior management entered into agreements with Carnival
Cruise Lines and Star Cruises to install our systems on their cruise ships.
Operational problems on the Star cruise ship led Star to cancel its agreement,
and we were unable to recover our investment. Prior management also installed a
system on one Carnival ship. Under the Carnival agreement, we are obligated to
remove any installed system and refund Carnival's payments for that system for a
period of time after installation. We are currently endeavoring to renegotiate
our agreement with Carnival. See "RISK FACTORS -- If we cannot renegotiate an
agreement with Carnival, we may incur significant losses" on page 2.
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Early in 1999, prior management's inability to collect receivables and
other administrative problems left us struggling financially and in need of
capital. In May 1999, Global Technologies, Ltd., a Delaware corporation listed
on the Nasdaq National Market under the ticker symbol "GTLL," acquired majority
control of us by exchanging the assets of its Interactive Entertainment Division
and approximately $4.25 million in cash for 1,055,745 shares of our common stock
and 2,945,400 shares of our Series D Convertible Preferred Stock. This
transaction gave Global Technologies ownership of approximately 60% of our then
outstanding common equity on a fully diluted basis. Through a series of
additional transactions, Global Technologies acquired additional shares of our
common stock and shares of our Series B Convertible Preferred Stock so that, on
a fully converted basis, it now owns approximately 80% of our outstanding common
equity, without taking into effect any future dilution on account of our
financing with Fusion Capital (see "The Fusion Transaction" on page 34). The
transaction brought together synergistic technologies, and the engineering and
program management capabilities of two companies experienced in the field of
developing, manufacturing, marketing and installing interactive information and
entertainment systems.
In connection with the acquisition, Global Technologies elected a new
board of directors, which put in place our current management team. The board of
directors was re-elected, with the exception that Robert Pringle was elected to
take the place of Morris Aaron, at the 2000 annual meeting of shareholders on
May 11, 2000.
OUR DIVISIONS AND MARKETS
Under new management, we have identified four primary markets for our
products and services. We believe these markets represent opportunities to
achieve substantial market share and profitability. These markets are hotels and
time-share properties, cruise ships, educational institutions and corporate
training, and long-haul passenger trains. In an effort to capitalize on
opportunities in these markets, we have formed separate sales and marketing
divisions, and have recently hired experienced executives to lead each of the
four divisions.
HOTELS AND TIME-SHARE PROPERTIES
We have begun to market our products and services to "land-based"
hotels and time-share properties in North America. In addition, we are in the
process of developing sales and marketing strategies for hotels and time-share
properties in Europe, Asia and South America. We call the system we market to
the hotel and time-share market "InnView(TM)." Initially, we are focusing our
efforts on hotels with 100 or more rooms.
We formed our Hotel & Hospitality Division in December 1999. Management
believes there are approximately 3.6 million rooms in the domestic hotel market,
approximately 1.9 million of which do not have in-room information and
entertainment systems. Management also believes there are almost 0.5 million
time-share properties which also do not have installed information and
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entertainment systems. Of the unserved hotel rooms, we estimate that
approximately 0.8 million would meet the economic criteria for installation of
our InnView(TM) systems. In addition, we estimate that contracts covering
approximately 1.7 million domestic hotel rooms currently served by a
competitor's system will come up for renewal over the next five years.
Since forming this division, we have retained several national and
international sales executives. To date, we have entered into agreements for our
InnView(TM) system for the following locations:
* Radisson Resorts' Knott's Berry Farm Hotel in Buena Park,
California;
* Embassy Suites Resort Paradise Valley, Arizona;
* Radisson Resorts' SFO Airport Hotel in San Francisco, California;
and
* Marriott's Fairfield Inn in Indianapolis, Indiana.
Our InnView(TM) system installed in the Embassy Suites Resort Paradise
Valley became operational in May 2000. Generally, we expect our InnView(TM)
systems to become operational within four months after entering into an
agreement with a particular hotel. Our systems in the Radisson hotels are
expected to become operational in June 2000. We have not installed InnView(TM)
in any time-share properties. We provide the systems at no cost to the hotel in
exchange for a revenue share agreement in which we retain the majority of such
revenues.
CRUISE SHIPS
Management estimates that there are currently more than 70 cruise ships
in revenue service with 500 or more guest cabins. We estimate that the current
construction schedules for ships of this size show more than 30 new ships
entering service between now and the end of 2004. In total, we estimate the
market to host over 10 million passenger cruises annually, the vast majority of
which are hosted by one of a handful of leading cruise operators. We believe
that only about ten ships to date have had interactive entertainment and
information systems installed.
Historically, the cruise line industry has not embraced the
installation of interactive systems in individual cabins like their hotel
counterparts. The major reason for this reluctance is not related to a lack of
demand. Only recently has the technology of interactive guest systems progressed
to levels that enable them to profitably and logistically contribute to cruise
line profits and the vacation experience. In fact, the most significant hurdles
have been adapting the system to the compact configuration and harsh environment
of cruise ships, while maintaining adequate levels of price and performance.
We have had over a year's experience with our systems aboard Carnival
Cruise Lines , and have recently developed an enhanced version of our
CruiseView(TM) technology platform, increasing its performance and capabilities.
We are in advanced discussions with several major cruise companies about
installing this interactive system, including Carnival.
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We are currently negotiating with Carnival to resolve issues regarding
recovery of amounts paid to us (recorded as deferred revenue), our recovery of
our inventory costs, potential warranty/de-installation obligations and other
matters (see risk factors regarding Carnival on page 2 above).
EDUCATION AND CORPORATE TRAINING
We continue to manufacture our Cheetah(R) family of multimedia servers
for the interactive education and corporate training markets. Sales of servers
have historically been a core business of ours, with over 2,000 Cheetah(R) video
servers sold worldwide.
In August 1999, we sold multimedia servers in connection with the first
phase of the Georgia school system's Net 2000 project. We supplied our
Cheetah(R) video servers as the central backbone of 193 Georgia schools'
multimedia networks. Two other Cheetah(R) servers were delivered in connection
with the order and installed at the Georgia schools' network operating center.
Using our servers, students and teachers are able to access, on-demand, hundreds
of hours of digitally stored multimedia content, access the Internet and build
interactive courses. The total value of orders received under the program to
date is $5.3 million. We believe that this installation is the largest of its
kind in the country and that it may well be a model for the expansion of this
type of program. Our sales to MRESA were limited to our Cheetah(R) video
servers. In the future, we hope to be able to sell entire interactive systems,
which we call "EduView(R)," to school related purchasers.
In 1999, the Federal government instituted the E-Rate Program, which
has a primary goal of bringing the Internet and various forms of multimedia
content directly to elementary and secondary classrooms. The program makes $2.25
billion available to schools to obtain the technology necessary to achieve this
goal. To obtain these funds, a school district must make application and pay a
portion of the equipment cost. A significant amount of the funding for our
delivery of 195 Cheetah(R) video servers to Georgia schools in connection with
the Georgia MRESA Net 2000 project came from the E-Rate Program.
We formed our Education & Corporate Training Division in December 1999
to promote our interactive products and services to educational institutions and
corporate training departments. In addition, we hired James D. Oots as Senior
Vice President of this new division. Mr. Oots brings to us a great deal of
experience in the corporate training and education markets. Under the leadership
of Mr. Oots, we plan to begin marketing our systems and servers to the corporate
training market.
PASSENGER RAIL
There are currently 11 operators of long-haul passenger trains in the
world. We believe that each of these operators are potential customers for our
TrainView(R) system over the next several years. The fleets operated by these
companies contain an aggregate of approximately 981,000 seats that could be
fitted with our TrainView(R) systems. However, to date, no trains have been
fitted with information or entertainment systems.
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In September 1999, we formed a Passenger Rail Division to promote our
interactive information and entertainment systems for installation at individual
seats on long-haul and cross-country passenger trains in the U.S., European and
Asian markets. This system is called "TrainView(R)." We announced the
appointment of Stephen J. Ollier, the former General Manager of ALSTOM Railway
Maintenance Services, Ltd., as President of the division. We believe that Mr.
Ollier is uniquely qualified for the position, offering both the technical and
industry experience we believe necessary to bring TrainView(R) to the
international rail market.
In May 1999, ALSTOM Transport Ltd., a unit of ALSTOM SA, which is one
of the largest train manufacturers in the world, contracted with us to engineer
TrainView(R) into ALSTOM's high-speed train design. We were paid in connection
with the contract but expect no further business from ALSTOM because we have
become aware that ALSTOM is in the process of creating a subsidiary to compete
with us in the passenger rail market.
Under the direction of Mr. Ollier, we have submitted pricing proposals
to two train operators in the United Kingdom for installation of TrainView(R)
systems. To date, we have not installed TrainView(R) on any passenger train.
ACQUISITION, PACKAGING AND MONITORING OF BROADBAND, MULTIMEDIA CONTENT
In an effort to capitalize on what we believe to be the advantages of
our system architecture and technology, we are developing a division to acquire,
package and monitor a broad range of compelling multimedia content tailored to
appeal to the typical end-users in each of our market segments. We believe that
the provision of compelling content through our systems will encourage user
interaction with the system, which, in turn, should maximize pay-for-use revenue
generation for us and for our vertical market partners.
We believe that our content division will be integral to our success.
The revenue generated from content can be long-term and should span the
life-cycle of our systems. In addition, because it is generally industry
practice in the markets we serve to share the cost of system hardware, and in
the hotel market to provide the hardware free of charge, content revenue will be
an essential revenue source.
OUR SALES, MARKETING AND DISTRIBUTION
We currently market our systems, products and services worldwide
through the efforts of our sales people in each operating division. We also plan
to market our systems through value-added resellers, distributors and alliance
partners. System installation and on-site customer support are provided through
internal customer engineering personnel and may, in the future, be provided
through the efforts of value-added resellers and alliance partners.
The sales arrangements for our systems depends upon various factors,
such as the size and type of hotel, time-share property, ship or train, and the
system features and other requested customization. There is generally a long
sales-cycle for our systems because of the need to design the system
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configuration for the particular environment in which the system will be
installed, test each installed system and to negotiate any necessary agreements
with other providers. The sales cycle is also dependent upon a number of factors
beyond our control, such as the financial condition of the customer, safety and
maintenance concerns, regulatory issues, and purchasing patterns of particular
operators and the industry generally. This is expected to result in long and
unpredictable buying patterns for our systems.
OUR COMPETITION
We face substantial competition in each of our markets. Some general
factors which we believe will influence whether we succeed include:
* the ability to deliver total system solutions for our customers,
including, in particular, content acquisition and management;
* system quality, reliability and performance;
* product hardware and software that can easily be upgraded during
the product life cycle;
* market-driven pricing of our systems, products and services; and
* the ability to deliver new sources of revenue generation for our
customers.
There are three major providers of interactive guest services systems
in the hospitality market. On Command has the greatest market share with
approximately 960,000 rooms, followed by LodgeNet Entertainment Corporation with
approximately 680,000 rooms, and Quadriga. On Command and LodgeNet focus their
sales and marketing efforts on North American properties, whereas Quadriga
markets its products primarily to European hotels and to a much lesser extent
Middle Eastern and African Hotels. All of these competitors employ a technology
which is different from ours. We believe our systems designs are superior to
those of our competitors because the scalability of our servers permits us to
provide the content at each site such that all selections are always available.
By contrast, our competitors are sometimes required to omit titles which are
temporarily unavailable because the number of copies of those titles at the site
are all in use. In addition, we believe that our system designs are superior
based on the content and features offered, such as Internet connectivity and
voice-over IP that can be made available through the systems. Our two primary
competitors in the cruise ship market are Allin Interactive and Siemens. We
estimate that Allin has systems installed on seven to ten cruise ships, while
Siemens has a system installed on one.
Although we have an opportunity to be first-to-market in providing
train operators with interactive multimedia information and entertainment system
solutions, SmartWorld, a UK-based company, has announced its intention to
develop and offer a limited video-on-demand system for the passenger rail
market. Matsushita, a leading provider of in-flight entertainment systems in the
long-haul commercial airplane market, is considering an entry into this market.
In addition, we are aware that ALSTOM is creating a subsidiary in an effort to
compete in this market.
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Our Cheetah(R) video servers apply hardware control of video streaming
to achieve high-integrity, MPEG-2 quality images and pause, fast-forward, and
rewind capabilities. These servers are scaleable to provide up to 300
simultaneous video streams. Competitor video server products in this market,
such as are provided by Sony, Dell, Gateway, Silicon Graphics, Compaq and
Hewlett Packard, are high-speed, general-purpose servers, with software control
of limited video streams (typically less than 10 to 15).
All of these companies have greater financial, technical and marketing
resources than we do. Moreover, our competitors have developed goodwill and name
recognition among the hospitality operators whom we call on to solicit sales,
and also among end users who have grown accustomed to their offerings. In
addition, we expect that to the extent that the market for our systems, services
and products develops, competition will intensify and new competitors will enter
our designated target markets. We may not be able to compete successfully
against existing and new competitors as the market for our systems, products and
services evolves and the level of competition increases. A failure to compete
successfully against existing and new competitors would have a materially
adverse effect on our business and results of operations.
OUR OPERATIONS AND MANUFACTURING
Contract manufacturers assemble our proprietary systems in the United
States. Final assembly, integration, burn-in and functional testing are
conducted at our facilities in Phoenix, Arizona or at supplier or customer
locations.
We obtain electronic components and finished sub-assemblies for our
system components "off-the-shelf" from a number of qualified suppliers. We have
established a testing protocol in an effort to ensure that components and
sub-assemblies meet our specifications and standards before final assembly and
integration. We have elected to procure off-the-shelf component parts and
sub-assemblies from suppliers in an effort to ensure better quality control and
pricing. To date, we have experienced some interruptions in the supply of
component parts and sub-assemblies due to the lack of availability of certain
electronic components, and are identifying additional qualified suppliers. The
inability of our current suppliers to provide component parts to us, coupled
with our inability to find alternative sources, would adversely affect our
operations.
RESEARCH AND DEVELOPMENT
The market for our systems and 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. We believe that our
future success will depend upon our ability to develop, manufacture and market
new systems and products and enhancements to existing systems and products on a
cost-effective and timely basis. The system architecture for our interactive
information and entertainment systems has been designed to permit hardware and
software upgrades over time. Moreover, we believe that the current architecture
presents no known limits on a customer's ability to offer compelling content to
the user in a rapid and reliable manner. Therefore, a major focus of our
research and development efforts is to reduce the cost of network and client
hardware and to enhance the core software of the system to permit even easier
integration of new content.
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If we are unable, for technological or other reasons, to develop new
systems and products in a timely manner in response to changes in the industry,
or if systems and products or system and product enhancements that we develop do
not achieve market acceptance, our business will be materially adversely
affected. There can be no assurance that technical or other difficulties in the
future will not delay the introduction of new systems, products or enhancements.
PROTECTING OUR INTELLECTUAL PROPERTY
We rely on a combination of trade secret and other intellectual
property law, nondisclosure agreements with most of our employees and other
protective measures to establish and protect our proprietary rights in our
systems and products. We believe that because of the rapid pace of technological
change in the open systems networking industry, legal protection of our
proprietary information is less significant to our competitive position than
factors such as our strategy, the knowledge, ability and experience of our
personnel, new system and product development and enhancement, market
recognition and ongoing product maintenance and support. Without legal
protection, however, it may be possible for third parties to copy aspects of our
systems and products or technology or to obtain and use information that we
regard 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 we continue to implement protective
measures and intend to defend our proprietary rights vigorously, we give no
assurance that these efforts will be successful. Our failure or inability to
effectively protect our proprietary rights could have an adverse affect on our
business.
OUR FACILITIES
We lease the following facilities, which we believe are adequate and
suitable for current operations:
* approximately 17,000 square feet of office and production space
located at 222 North 44th Street, Phoenix, Arizona;
* approximately 1,000 square feet of space in Derby, England where
our Passenger Rail Division is headquartered;
* approximately 1,500 square feet of office space located at 1811
Chestnut Street, Philadelphia, Pennsylvania used for executive
and administrative purposes; and
* approximately 16,000 square feet of office space in Conshohocken,
Pennsylvania used for administrative purposes and our content
operations.
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OUR EMPLOYEES
We employ 60 full-time staff at our various locations and sales offices
and we are adding skilled personnel in the following fields: content procurement
and development; software, systems and hardware engineering; program management;
contracts administration; supplier management; customer engineering; and sales
and marketing.
We have formed separate vertical sales and marketing divisions for each
of our four target markets. These divisions are anchored by the recent hiring of
experienced executives from within each of these markets. We anticipate that
these executives will be able to leverage our core technology in broadband,
multimedia content distribution and IP network solutions to increase sales of
our systems, products and services. We have recognized the need to create an
additional internal operating division to provide our customers with the
personalized programming necessary to bring users a broad range of content
options. We are in the process of hiring personnel to anchor this new division.
LEGAL PROCEEDINGS
BRYAN R. CARR V. THE NETWORK CONNECTION, INC. AND GLOBAL TECHNOLOGIES,
LTD., Superior Court of Georgia, Civil Action No. 99-CV-1307. Bryan Carr, a
former director and our former Chief Operating Officer and Chief Financial
Officer, has filed a claim alleging a breach of his employment agreement. Carr
claims he is entitled to the present value of his base salary through October
31, 2001, a share of our "bonus pool, " the value of his stock options and
accrued vacation time. We deny any liability and are defending the claims.
SWISSAIR/MDL-1269, IN RE: AIR CRASH NEAR PEGGY'S COVE, NOVA SCOTIA.
This multi-district litigation relates to the crash of Swissair Flight 111 on
September 2, 1998. The Swissair MD-11 aircraft involved in the crash was
equipped with an in-flight entertainment system sold to it by Interactive Flight
Technologies, Inc., which was merged into Global Technologies. Estates of the
victims of the crash have filed lawsuits throughout the United States against
Swissair, Boeing, Dupont and various other parties, including Global
Technologies as successor to the business of Interactive Flight. Because we
bought the assets of Interactive Flight's in-flight entertainment division from
Global Technologies, we have been named in some of the lawsuits on a claim of
successor liability. We are being defended by the aviation insurer for Global
Technologies.
A suit captioned LODGENET ENTERTAINMENT CORPORATION V. THE NETWORK
CONNECTION, INC. was filed April 5, 2000 in the Circuit Court for the Second
Judicial Circuit of the State of South Dakota. The action arises out of the
Company's hiring of Theodore P. Racz, a former LodgeNet employee, as its Senior
Vice President of the Hotels & Hospitality division. LodgeNet is alleging
tortious interference with contract and tortious interference with business
relationships. LodgeNet is seeking to prohibit Mr. Racz from being employed by
the Company, damages, and fees and costs.
A suit captioned AVNET, INC. V. THE NETWORK CONNECTION, INC., was filed
May 17, 2000 in Maricopa County Superior Court, CV2000-009416. The suit relates
to unpaid invoices for inventory purchased in December 1998 for which the
Company has included in accounts payable. Avnet, Inc. seeks payment of the
invoices, interest and legal fees. The Company has a separate warranty claim
against Avnet, Inc. To date, we have not paid such amounts claimed by Avnet,
Inc. on account of our pending warranty claim against Avnet, Inc.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ TOGETHER WITH THE CONSOLIDATED FINANCIAL STATEMENTS
AND THE RELATED NOTES INCLUDED IN ANOTHER PART OF THIS PROSPECTUS AND WHICH ARE
DEEMED TO BE INCORPORATED INTO THIS SECTION. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THOSE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING BUT NOT LIMITED TO, THOSE
SET FORTH UNDER AND INCLUDED IN OTHER PORTIONS OF THIS PROSPECTUS. SEE
"FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS" ON PAGE ii.
BACKGROUND AND BASIS OF PRESENTATION
We design, manufacture, install and maintain advanced, high-performance
computer servers and interactive, broad-band information and entertainment
systems. We also procure and provide the content available through the systems.
These all-digital systems deliver an on-demand, multimedia experience via
high-speed, high-performance Internet Protocol (IP) networks. These systems are
designed to provide users access to information, entertainment and a wide array
of service options, such as shopping for goods and services, computer games,
access to the World Wide Web and on-line gambling, where permitted by applicable
law. The targeted markets for our products are hotels and time-share properties,
cruise ships, educational institutions and corporate training, and passenger
trains.
On May 18, 1999, we obtained substantially all of the assets and
certain liabilities of the Interactive Entertainment Division of Global
Technologies, Ltd. (formerly known as Interactive Flight Technologies, Inc.) and
$4,250,000 in cash in exchange for 1,055,745 shares of our common stock and
2,495,400 shares of our Series D Convertible Preferred Stock. For accounting
purposes, this acquisition is treated as a reverse merger. Global Technologies
is deemed to have acquired us. As a result, we are treated as the successor to
the historical operations of the Interactive Entertainment Division and our
financial statements, which have been reported to the SEC on Forms 10-KSB and
10-QSB, among others, have been replaced with those of the Interactive
Entertainment Division. We will continue to file as a SEC registrant and
continue to report under the name The Network Connection, Inc.
In August 1999, we changed our fiscal year-end from December 31 to June
30. Accordingly, the eight-month period resulting from this change -- November
1, 1999 through June 30, 1999 -- is referred to in this report as the
"transition period."
For accounting purposes, the date of the acquisition of the Interactive
Entertainment Division was May 1, 1999. The financial statements as of and for
the years ended October 31, 1998 and October 31, 1997, respectively, and the
three months and nine months ended March 31, 1999, respectively, reflect the
historical results of the Interactive Entertainment Division as previously
included in Global Technologies' consolidated financial statements. Included in
the financial statements for the eight months ended June 30, 1999 are the
historical results of the Interactive Entertainment Division through April 30,
1999, and the results of the post-transaction company for the two months ended
June 30, 1999.
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As of March 31, 2000, we were an 80% owned subsidiary of Global
Technologies, whose ownership was represented by 1,500 shares of our Series B 8%
Convertible Preferred Stock, 2,495,000 shares of our Series D Preferred Stock
and approximately 6.8 million shares of our common stock. In addition, pursuant
to the terms of the acquisition of Global Technologies' Interactive
Entertainment Division, Global Technologies may be entitled to receive
additional equity on account of claims arising during the one-year period
following the acquisition. Global Technologies has notified us and we are
currently trying to assess how much they may be entitled to.
RESULTS OF OPERATIONS
REVENUES. Revenue for the quarter ended March 31, 2000 was $590 and was
generated from the sale of server equipment. Revenue for the nine months ended
March 31, 2000 was $5,657,736, an increase of $5,179,671 (or 1,083%) compared to
revenue of $478,065 for the corresponding period of the previous fiscal year. We
deferred revenue of approximately $2.1 million in connection with the Carnival
agreement pending the outcome of current contract negotiations. Equipment sales
during the nine months ended March 31, 2000 are comprised principally of
approximately $5.4 million generated from the sale of 195 of the Company's
Cheetah(R) video servers in connection with the Georgia Metropolitan Regional
Education Services Agency ("MRESA") Net 2000 . Service income of $59,827 for the
nine months ended March 31, 2000 was generated from system design services
provided to ALSTOM Transport LTD. We provided these services to ALSTOM, but
expect no further business from ALSTOM , as it plans to create a subsidiary that
would compete with us in the passenger rail market. Equipment sales of $89,028
during the nine-month period ended March 31, 1999 were generated from the sale
of spare parts needed for the entertainment networks installed previously on
three Swissair aircraft. Service income of $389,037 for the nine-month period
ended March 31, 1999, was principally generated from programming services
provided to Swissair, representing our share of gaming profits generated by the
Swissair systems and revenue earned under the Swissair extended warranty
contract. There will be no further revenue under the Swissair agreement.
COST OF SALES. Cost of equipment sales for the three-month period ended
March 31, 2000 was $225,669 and was comprised principally of the excess costs
over expected revenue related to Carnival. Cost of service income for the
current period was $21,189 attributable to video content costs. Cost of
equipment sales for the nine months ended March 31, 2000 was $3,680,584, and was
principally comprised of material costs and estimated warranty costs for the 195
video servers for the Georgia schools project, as well as the excess of costs
over expected revenue related to Carnival. Cost of equipment sales of $283,714
for the corresponding period ended March 31, 1999 was comprised of material,
installation and maintenance costs, as well as estimated warranty costs and
costs of upgrades to the entertainment networks installed in Swissair aircraft.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
quarter ended March 31, 2000 were $2,103,517 an increase of $1,174,917 (or 127%)
compared to expenses of $928,600 for the corresponding quarter of the previous
fiscal year. General and administrative expenses for the nine months ended March
31, 2000 were $4,678,325, a decrease of $2,269,493 (or 33%) compared to expenses
of $6,947,818 for the corresponding period of the previous fiscal year.
Significant components attributable to the increase in the current quarter
include the addition of our Philadelphia office, expenses incurred by our UK
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subsidiary and an increase in payroll and benefit costs generated by a 60%
increase in personnel in the current quarter. The decrease in expenses during
the nine-months ended March 31, 2000 compared to the corresponding period of the
previous fiscal year is principally attributed to a $3.1 million severance
payment recorded September 1998 for three former executives of the former
Interactive Entertainment Division, offset partially by the increase in expenses
in the current period. Significant components of general and administrative
expenses include payroll costs and legal and professional fees.
NON-CASH COMPENSATION. Non-cash compensation expense of $238,429 in the
three-month period ended March 31, 2000 is related to the issuance of warrants
and stock in exchange for services . Non-cash compensation expense of $545,311
for the nine-month period ended March 31, 2000 is comprised of an $85,000
expense for a former employee as part of a severance package as well as $460,311
of expense related to the issuance of warrants and stock in exchange for
services.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
for the quarter ended March 31, 2000 was $332,511, an increase of $271,990 (or
449%) compared to depreciation and amortization expense of $60,521 for the
corresponding period in the previous fiscal year. Depreciation and amortization
expense for the quarter ended March 31, 2000 are comprised of property, plant
and equipment depreciation of $139,279 and intangible amortization of $193,232.
Depreciation and amortization expense for the corresponding period ended March
31, 1999 was comprised of property, plant and equipment depreciation of $60,521.
There was no intangible amortization expense for the 1999 period. The increase
in depreciation expense in the current quarter can be attributed to fixed assets
acquired during May 1999 as a result of the merger and an increase in fixed
asset purchases in the current period. Depreciation and amortization expense for
the nine months ended March 31, 2000 was $972,528, an increase of $528,908 (or
119%) compared to depreciation and amortization expense of $443,620 for the
corresponding period ended March 31, 1999. Depreciation and amortization expense
for the nine months ended March 31, 2000 is comprised of property, plant and
equipment depreciation of $404,641 and intangible amortization of $567,887.
Depreciation and amortization expense for the corresponding period ended March
31, 1999 is comprised of property, plant and equipment depreciation of $443,620.
There was no intangible amortization for the 1999 period. The decrease in
property, plant and equipment depreciation in the current nine-month period is a
result of equipment write-offs of $1,006,532 during October 1998 , substantially
offset by the depreciation of assets acquired during May 1999 as a result of the
merger as well as the increase in fixed asset purchases in the current period.
SPECIAL CHARGES. Special charges for the nine months ended March 31,
2000 were zero compared to a credit of $190,000 during the corresponding period
ended March 31, 1999. A recovery of $190,000 was recognized during September
1998 as a result of a reduction in the number of entertainment networks
installed in Swissair aircraft requiring maintenance.
PROVISION FOR DOUBTFUL ACCOUNTS. There were no provisions for doubtful
accounts for the three and nine months ended March 31, 2000 compared to $28,647
for the corresponding periods of the previous fiscal year. The provisions in the
previous fiscal year resulted from entertainment programming services provided
to Swissair for which we have not been paid.
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INTEREST EXPENSE. Interest expense for the quarter ended March 31, 2000
was $11,331 compared to $1,358 for the corresponding period ended March 31,
1999. Interest expense for the nine months ended March 31, 2000 was $150,839
compared to $5,614 for the corresponding period ended March 31, 1999. Interest
expense for the three-month period of the current fiscal year can be attributed
to the cost of cash borrowed against the revolving credit facility with Global
Technologies. Interest expense for the nine-month period of the current fiscal
year can be attributed principally to our prior long-term debt obligations ,
whereas interest expense for the corresponding period of the previous fiscal
year is attributable to our capital leases for furniture which expired in
September 1999.
INTEREST INCOME. Interest income was $13,354 and $90,728 for the three
and nine months ended March 31, 2000 compared to $39,529 and $118,188 for the
three and nine months ended March 31, 1999, respectively. Interest income for
the three and nine-month period ended March 31, 2000 was principally generated
from short-term investments of working capital, whereas interest income for the
corresponding period ended March 31, 1999 is principally attributable to
Swissair extended warranty billings.
OTHER EXPENSE. Other expense of $15,911 and $24,741 for the three and
nine months ended March 31, 2000, respectively, represent a loss on the buyout
of a capital lease for furniture , losses incurred on the sale of two buildings
located in Alpharetta, Georgia and a loss incurred on the buyout of a vehicle
lease. Other expense of $567,317 for the nine-month period ended March 31, 1999
resulted from furniture and equipment write-offs of $1,006,532 during October
1998, partially offset by the recovery of furniture and equipment written off in
fiscal 1997.
TRANSITION PERIOD ENDED JUNE 30, 1999 AND YEARS ENDED OCTOBER 31, 1997
AND OCTOBER 31, 1998.
REVENUES. Revenue were $11,100,709 for the year ended October 31, 1997,
$18,816,962 for the year ended October 31, 1998 and $958,607 for the transition
period ended June 30, 1999. Revenues consisted principally of equipment sales,
service income and our share of gaming profits. The decline in revenue is the
primarily the result of a lack of new customer orders. In fiscal year 1997, we
completed installations under the Swissair program in nine business class
aircraft and one first class aircraft. In fiscal year 1998 we completed
installations in ten such business class aircraft and eighteen first class
aircraft. These aircraft installations represented the last nine such
installations we performed. For the transition period, equipment sales were
generated on only one of four entertainment networks installed and billed to
Swissair. Service income followed a similar pattern. Service income was $575,881
for the year ended October 31, 1997, $778,343 for the year ended October 31,
1998 and $82,650 for the transition period. Service income was principally
generated from programming services provided to Swissair, services relating to
the initial entertainment system design for Alstom Transport and system upgrades
provided to the Georgia schools.
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COST OF EQUIPMENT SALES AND SERVICE. Cost of equipment sales were
$24,878,460 for the year ended October 31, 1997, $15,537,071 for the year ended
October 31, 1998 and $1,517,803 for the transition period ended June 30, 1999.
The decrease in cost of equipment sales in fiscal year 1998 is primarily a
result of the inclusion of provisions for inventory obsolescence, unusable
inventory and rework adjustments of $11,496,748 in cost of equipment sales for
fiscal 1997. The 1997 provision for inventory obsolescence was a result of our
purchasing inventory for installation in the economy sections of Swissair
aircraft and actually completing only three economy installations. The unusable
inventory and rework adjustments primarily resulted from our redesign of the
tray table utilized in the entertainment networks for the economy section of an
aircraft. The decrease is also attributable to reductions in maintenance costs
and estimated one-year warranty costs as the reliability of the entertainment
networks improved. Additionally, we recognized a reduction in installation costs
from our subcontractor during fiscal 1998. We do not expect to realize such
decreases in the future.
PROVISION FOR DOUBTFUL ACCOUNTS. Provisions for doubtful accounts were
$216,820 for the year ended October 31, 1997, zero for the year ended October
31, 1998 and $28,648 for the transition period ended June 30, 1999. Such
provisions result from one-time write-offs on account of entertainment
programming services provided to a previous customer in 1997 and Swissair in the
transition period. For the year ended October 31, 1997, we recovered $1,064,284
on account of an accounts receivable under a customer agreement which was
reserved for during the fourth quarter of our fiscal year ended October 31,
1996.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $7,821,640 for the year ended October 31, 1997, $1,092,316 for the year
ended October 31, 1998 and zero for the transition period ended June 30, 1999.
The decreases reflect our decision not to develop the next generation of the
entertainment network and the resulting reduction in staff and professional
fees. We do not plan to continue our research and development in the in-flight
entertainment business beyond those efforts that are required contractually by
the Swissair agreement. The Swissair agreement requires us to provide specific
upgrades to the entertainment network, however, we have ceased development of
these upgrades as a result of Swissair's breach of its agreement and do not plan
to develop any further upgrades.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $12,574,223 for the year ended October 31, 1997, $9,019,872 for
the year ended October 31, 1998 and $3,703,633 for the transition period ended
June 30, 1999. General and administrative expenses include principally costs of
consulting agreements, legal and professional fees, corporate insurance costs
and legal fees related to the acquisition of the Interactive Entertainment
Division from Global Technologies. General and administrative expenses have
decreased primarily because of reductions in staff in administrative areas,
including production, marketing and program management. As of May 29, 1998, we
terminated almost all sales and marketing efforts related to the Interactive
Entertainment Division. The decrease in general and administrative expenses
during fiscal year 1998 was partly offset by the payment of $3,053,642 in
severance to three former executives. The decrease in general and administrative
expenses in the transition period were offset by a 1999 accrual of approximately
$1.6 million to write-off certain consulting agreements determined to have no
future value.
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WARRANTY AND SUPPORT EXPENSES. For the transition period ended June 30,
1999, we recorded warranty, maintenance, commission and support cost accrual
adjustments of $5,117,704, $504,409, $303,321 and $1,225,959, respectively. Such
adjustments to prior period estimates, which totaled $7,151,393, resulted from
an evaluation of specific contractual obligations and discussions between our
new management team and other parties related to such contracts. Based on the
results of our findings during fiscal 1999, such accruals were no longer
considered necessary.
SPECIAL CHARGES. Special charges were $19,649,765 for the year ended
October 31, 1997, $400,024 for the year ended October 31, 1998 and $521,590 for
the transition period ended June 30, 1999. Special charges in fiscal year 1998
primarily resulted from write-offs of $1,006,532 for excess computers, furniture
and other equipment of which we are in the process of disposing. These equipment
write-offs were partly offset by a recovery of special charges expensed in
fiscal 1997. In fiscal year 1998, we recognized a recovery of $190,000 as a
special charge credit as a result of a reduction in the number of entertainment
networks requiring maintenance and a recovery of $416,508 related to Swissair's
decision to not develop the system for the front row in the economy sections of
its aircraft. Special charges in fiscal 1997 primarily resulted from the
installation of entertainment networks on three Swissair aircraft and
installations required by the Debonair agreement. The costs for these three
systems of $14,292,404 were recorded as a special charge during fiscal 1997. Due
to the termination of the Debonair agreement, the costs of the installed system
$956,447 and all inventory on-hand under the Debonair agreement $2,881,962 were
written off as a special charge in fiscal 1997. Additionally, in fiscal year
1997, we recorded a special charge of $1,518,952 for the write-off of a system
integration lab utilized in software development and testing. The lab equipment
will not be utilized in our future operations.
INTEREST. Interest income was zero for the year ended October 31, 1997,
$53,465 for the year ended October 31, 1998 and $77,682 for the transition
period ended June 30, 1999. Interest income during these periods was due
principally to Swissair extended warranty billings. Interest expense was $13,423
for the year ended October 31, 1997, $11,954 for the year ended October 31, 1998
and $83,029 for the transition period ended June 30, 1999. Interest expense
during these periods was due principally to long-term debt obligations and
capital leases for furniture that expired in September 1999.
LIQUIDITY AND CAPITAL RESOURCES
We are currently using our working capital to finance inventory
purchases and other expenses associated with the delivery and installation of
our products, and general and administrative costs.
Prior to June 30, 1999, our primary source of funding had been through
contributed capital from Global Technologies. In August 1999, we received an
order for $5.3 million for the manufacture, delivery and installation of 195 of
our Cheetah(R) multimedia video servers in connection with the Georgia MRESA Net
2000 project; and a service order under an agreement with Carnival for
installation of a second CruiseView(TM) system. In addition, as of the date of
this prospectus, we have received orders for the installation of our InnView(TM)
system in two hotels in California, one hotel in Arizona and one hotel in
Indiana. We have received the full payment of $5.3 million in connection with
the Net 2000 project. We received payments from Carnival for the two ships
currently under contract, which have been recorded as deferred revenue (the
aggregate amount of which is $2.1 million as of March 31, 2000) (See Notes to
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Condensed Consolidated Financial Statements, Notes 7(b) and 8, on pages F-30 and
F-31). Working capital will continue to decrease as we continue to invest in
inventory for orders under the agreement with Carnival and the four hotel
orders, invest in business development, and invest in additional inventory to
the extent we are successful in generating additional orders for sales of our
systems, which are longer term by nature.
During the nine months ended March 31, 2000, we used $3,794,972 of cash
for operating activities, a decrease of $3,991,096 from the $7,786,068 of cash
used for the corresponding period of 1999. The cash utilized in operations
during the nine months ended March 31, 2000 resulted primarily from the net
loss, increases in inventory related to installations of InnView(TM) and
CruiseView(TM), as well as decreases in accrued liabilities, partially offset by
increases in deferred revenue related to the Carnival agreement, increases in
accounts payable resulting from inventory purchases and accrued product
warranties related to the Carnival agreement.
Cash flows provided by investing activities were $745,989 during the
nine months ended March 31, 2000. The increase in cash resulted primarily from
the sale of investment securities in the quarter ended December 31, 1999 and
proceeds from the sale of two buildings held for sale (one in the first quarter,
and one in the second quarter), offset by purchases of property and equipment in
the first and third quarter.
During the nine months ended March 31, 2000, cash provided by financing
activities of $557,077 resulted primarily from borrowings under the credit
facility with Global Technologies, payments made by an affiliate and from
exercise of employee stock options, as well as payments made on notes payable
and in the purchase of outstanding warrants.
In October 1999, a note payable in the principle amount of $400,000 due
September 5, 1999 was converted into 200,000 shares of our common stock.
Prior to the acquisition of the Interactive Entertainment Division, we
entered into a secured promissory note with Global Technologies in the principal
amount of $750,000, bearing interest at a rate of 9.5% per annum, and a related
security agreement granting Global Technologies a security interest in its
assets. This promissory note is convertible into shares of our Series C 8%
Convertible Preferred Stock at the discretion of Global Technologies. The note
had an original maturity of May 14, 1999, but has been extended until September
2001.
In July and August 1999, Global Technologies purchased all of our
Series A and E notes and the Series D notes, respectively, from the holders of
such notes. Concurrent with such purchase by Global Technologies, we executed
several allonges to the promissory note which cancelled such Series Notes and
rolled the principal balance, plus accrued but unpaid interest, penalties and
redemption premiums on the Series Notes into the principal balance of the
promissory note. Subsequent to May 18, 1999, Global Technologies had also
advanced working capital to us in the form of intercompany advances. In August
1999, we executed an allonge to the promissory note which rolled the
intercompany advances into the principal balance of the promissory note and
granted Global Technologies the ability to convert the promissory note directly
into shares of our common stock as an administrative convenience.
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On August 24, 1999, the board of directors of Global Technologies
approved the conversion of the promissory note into shares of our common stock.
Such conversion, to the extent it exceeded approximately one million shares of
our common stock on August 24, 1999, was contingent upon receiving shareholder
approval to increase our authorized share capital. This increase in authorized
share capital was subsequently approved on September 17, 1999 at the September
17, 1999 Special Meeting of our shareholders. Accordingly, in December 1999, we
issued to Global Technologies 4,802,377 shares of our common stock based on the
conversion date of August 24, 1999. Separately from the promissory note, we
issued 886,140 shares of our common stock to Global Technologies upon conversion
of our Series C 8% Convertible Preferred Stock held by it.
On August 24, 1999, the board of directors of Global Technologies
approved a $5 million secured revolving credit facility by and between Global
Technologies and us. This credit facility provides that we may borrow up to $5
million for working capital and general corporate purposes at the prime rate of
interest plus 3%. The credit facility matures in September 2001. We paid an
origination fee of $50,000 to Global Technologies and will pay an unused line
fee of 0.5% per annum. The credit facility is secured by all of our assets and
is convertible, at Global Technologies' option, into shares of our common stock
at a price equal to the lesser of 66.7% of the trailing five-day average share
price of the preceding 20 days, $1.50 per share, or any lesser amount at which
common stock has been issued to third parties. Pursuant to Nasdaq rules, Global
Technologies may not convert borrowings under the credit facility into shares of
our common stock in excess of 19.99% of the number of shares of common stock
outstanding on August 24, 1999, without shareholder approval. As of March 31,
2000, $1,080,000 was outstanding under the credit facility. As of March 31,
2000, Global Technologies did not have sufficient cash for us to borrow the full
$5 million under the credit facility. Should we be unable to borrow funds under
the credit facility, it could result in a material adverse effect on our
operating results and financial condition.
In September 1999, we sold one of our two buildings in Alpharetta,
Georgia. The net proceeds from the sale, plus cash of approximately $80,000 was
used by us to repay a note payable due April 19, 2001 in the principal amount of
$470,000. The sale of the second building occurred in November 1999. The net
proceeds of approximately $367,000 from sale were used to retire a note payable
due 2009 in the principal amount of $217,000.
The terms of the Carnival agreement provide that Carnival may return
the CruiseView(TM) system within the acceptance period, as defined in the
Carnival agreement, or for breach of warranty. The acceptance period for the
Fantasy and Destiny class ships are twelve months and three months,
respectively, from completion of installation and testing which occurred in
February 1999 and October 1999, respectively. The initial warranty period for
these systems is three years. As of March 31, 2000, we had recorded deferred
revenue of approximately $2.1 million related to the two Carnival ships. (See
Notes to Condensed Consolidated Financial Statements, Notes 7(b) and 8, on pages
F-30 and F-31).
In the quarter ended March 31, 2000, we concluded that the cost of
building and installing CruiseView(TM) systems on the existing two Carnival
ships pursuant to the Carnival agreement has exceeded the revenue that can be
earned in connection therewith. Accordingly, we have recorded an expense of
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$208,146 in the period ended March 31, 2000, reflecting the excess of cost over
expected revenue. Carnival's continuing to exercise its option for building and
installing CruiseView(TM) on additional ships under the agreement may prove
unprofitable, and therefore have a negative effect on our working capital. We
are currently endeavoring to renegotiate the terms of the agreement with
Carnival.
Although we signed a letter of intent in January 2000 to obtain net
loan proceeds of $5.8 million, we were unable to reach agreement on certain
material terms of the proposed transaction with the prospective lender.
Consequently, we did not pursue this financing. However, we continue to pursue
additional financing.
We expect to use a significant amount of cash in the next 12 months.
Cash will be used primarily to finance anticipated operating losses, increases
in inventories and accounts receivable, and to make capital expenditures
required for sales of our systems. While we believe that our current cash
balances , the $5 million credit facility with Global Technologies (of which
approximately $1.6 million remains available as of June 2, 2000), and the Fusion
financing will be sufficient to meet our currently anticipated cash requirements
for operations for at least the next 12 months, our inability to draw on the
credit facility with Global Technologies or to obtain funds pursuant to the
Fusion financing could have a material adverse effect on our operating results
and financial condition. Global Technologies does not currently have sufficient
cash for us to borrow under the credit facility and no assurance can be given
that Fusion will have the resources necessary to meet its commitments as we draw
down from time to time pursuant to our private equity line. For more information
on the Fusion financing, please refer to "The Fusion Transaction" on page 34.
We are also currently negotiating equipment financing to fund the cost
of our systems which are expected to be installed at customer locations. Our
inability to secure such financing could have a material adverse effect on our
operating results and financial condition.
INFLATION AND SEASONALITY
We do not believe that we are significantly impacted by inflation. Our
operations are not seasonal in nature, except to extent fluctuations in
quarterly operating results occur due to the cyclical nature of government
funding obtained in connection with education programs with which we may become
involved, if any. We are not currently involved with any such program and give
no assurance that we will be in the future.
YEAR 2000
Many currently installed computer systems and software products were
coded to accept only two digit year entries in the date code field.
Consequently, subsequent to December 31, 1999, many of these systems became
subject to failure or malfunction. Although we are not aware of any material
Year 2000 issues at this time, Year 2000 problems may occur or be made known to
us in the future. Year 2000 issues may possibly affect software solutions
developed by us or third-party software incorporated into our solutions. We
generally do not guarantee that the software licensed from third-parties by our
clients is Year 2000 compliant, but we sometimes do warrant that the solutions
developed by us are Year 2000 compliant.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for the
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
statement generally requires recognition of gains and losses on hedging
instruments, based on changes in fair value or the earnings effect of forecasted
transactions. As issued, SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--An
Amendment of FASB Statement No. 133," which deferred the effective date of SFAS
No. 133 until June 15, 2000. We are currently evaluating the impact of SFAS No.
133.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation (an interpretation of APB Opinion No. 25). This interpretation
provides guidance regarding the application of APB Opinion 25 to Stock
Compensation involving employees. This interpretation is effective July 1, 2000
and is not expected to have a material effect on our consolidated financial
statements.
THE FUSION TRANSACTION
GENERAL
On June 1, 2000 we executed a master facility agreement with Fusion
Capital Fund II, LLC pursuant to which Fusion Capital agreed to enter into an
equity purchase agreement with an aggregate available amount of $12,000,000.
Under the master facility agreement, the equity purchase agreement grants Fusion
Capital the right to purchase from us shares of common stock up to $12,000,000
at a price equal to the lesser of (1) $8.00 or (2) a price based upon the future
performance of the common stock, in each case without any fixed discount to the
market price.
The equity purchase agreement will be executed by Fusion Capital within
five trading days after the effective date of this registration statement. This
date is referred to as the "closing date." The obligation of Fusion Capital to
enter into the equity purchase agreement is subject only to customary closing
conditions, all of which are outside the control of Fusion Capital.
PURCHASE OF SHARES UNDER THE EQUITY PURCHASE AGREEMENT
GENERAL. Under the equity purchase agreement Fusion Capital will
purchase shares of our common stock by "converting" a specified dollar amount of
the outstanding available amount into common stock. Subject to the limits on
conversion and the termination rights described below, each month during the
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twelve-month term of the equity purchase agreement Fusion Capital will have the
right to convert up to $1.0 million of the available amount of the equity
purchase agreement, plus any amounts for any prior month that have not yet been
converted, into shares of our common stock at the applicable conversion price.
After the end of such term, Fusion Capital may convert the entire remaining
available amount at the applicable conversion price.
The conversion price per share is equal to the lesser of:
* the lowest sale price of our common stock on the day of
submission of a conversion notice by Fusion Capital; or
* the average of any two closing bid prices of our common stock
selected by Fusion Capital during the 12 consecutive trading days
prior to the submission of a conversion notice by Fusion Capital;
or
* $8.00.
The following table sets forth the number of shares of our common stock
that would be issuable to Fusion Capital upon conversion of the equity purchase
agreement at varying conversion prices:
<TABLE>
<CAPTION>
NUMBER OF SHARES TO BE ISSUED PERCENT OF OUR
UPON A FULL CONVERSION OF THE COMMON STOCK OUTSTANDING
ASSUMED CONVERSION PRICE EQUITY PURCHASE AGREEMENT (1) AS OF JUNE 1, 2000 (1)
------------------------ ------------------------- ----------------------
<S> <C> <C>
$2.50 4,800,000 (3) 37.2%
$3.28 (2) 3,664,122 (3) 28.4%
$4.00 3,000,000 (3) 23.2%
$5.00 2,400,000 18.6%
$8.00 (4) 1,500,000 11.6%
</TABLE>
----------
(1) Represents percentage immediately preceding conversion. As of June 1, 2000,
there were 12,911,479 shares of our common stock outstanding. Note, no
issuance of common stock upon conversions are permitted in violation of
Nasdaq listing requirements.
(2) The conversion price on June 1, 2000.
(3) We originally estimated that we would issue no more than 2,560,000 shares
to Fusion Capital upon conversion of the equity purchase agreement and the
issuance of shares as a commitment fee, all of which are included in this
offering.
(4) The fixed conversion price.
OUR RIGHT TO PREVENT CONVERSIONS. If the closing sale price of our
common stock is below $8.00 on any trading day, we will have the unconditional
right to suspend conversions upon three trading days notice until the earlier of
(1) our revocation of such suspension and (2) when the sale price of our common
stock is above $8.00.
OUR MANDATORY CONVERSION RIGHTS. If the closing sale price of our
common stock on each of the five trading days immediately prior to the first
trading day of any monthly period is at least $3.20 and no event of default
under the equity purchase agreement has occurred and is continuing, we will have
the right to require that Fusion Capital convert all or a portion of the
available amount of the equity purchase agreement during the next two monthly
periods. We may revoke, in our sole discretion, upon three trading days' notice,
our written request with respect to any conversions in excess of the amount that
Fusion Capital is otherwise permitted to convert.
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LIMITATION ON ISSUANCES. Notwithstanding the foregoing, no conversion
of the equity purchase agreement will be permitted if it would result in Fusion
Capital or its affiliates beneficially owning more than 4.99% of our then
aggregate outstanding common stock immediately after the proposed conversion. In
addition, no conversion of the equity purchase agreement, including shares
issued for Fusion Capital's commitment fee, will be permitted if it would result
in a violation of Nasdaq listing regulations.
OUR TERMINATION RIGHTS
If the closing sale price of our common stock is below $8.00 for any 10
consecutive trading days, then we may elect upon three trading days notice to
terminate the equity purchase agreement without any liability or payment to
Fusion Capital.
ADJUSTMENT TO CONVERSION PRICE
The conversion price of the equity purchase agreement will be adjusted
for any reorganization, recapitalization, non-cash dividend, stock split or
other similar transaction.
MAJOR TRANSACTION
The following types of transactions are each referred to as "Major
Transactions":
* the consolidation, merger or other business combination with
another entity;
* any transaction which could involve a fair value of $5,000,000 or
more in a single transaction or a series of related transactions;
* the issuance of debt or equity securities in a single transaction
or a series of related transactions involving the receipt by us
of proceeds of $5,000,000 or more; or
* a purchase, tender or exchange offer made to the holders of 50%
of the outstanding shares of common stock
If we enter into a Major Transaction, then we may not terminate the
equity purchase agreement until 30 trading days after public announcement of the
Major Transaction. If we publicly announce a Major Transaction within 30 trading
days after terminating the equity purchase agreement, then we must pay to Fusion
Capital the amount, if any that, the average of the closing sale price of our
common stock for the ten trading days following either the public announcement
or the completion, as selected by Fusion Capital, of the Major Transaction
exceeds the conversion price determined as of the date that the agreement is
terminated multiplied by the number of shares of our common stock issuable upon
conversion of the available amount on such date.
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NO SHORT-SELLING OR HEDGING BY FUSION CAPITAL
Fusion Capital has agreed that neither it nor its affiliates will
engage in any direct or indirect short-selling or hedging of our common stock
during any time prior to the termination of the master facility agreement except
in connection with a simultaneous conversion pursuant to the equity purchase
agreement.
EVENTS OF DEFAULT
Generally, Fusion Capital may terminate the equity purchase agreement
without any liability or payment to us upon the occurrence of any of the
following events of default:
* if for any reason the shares offered by this prospectus cannot be
sold pursuant to this prospectus for a period of 10 consecutive
trading days or for more than an aggregate of 30 trading days in
any 365-day period;
* suspension by The Nasdaq SmallCap Market of our common stock from
trading for a period of 10 consecutive trading days or for more
than an aggregate of 30 trading days in any 365-day period;
* our failure to satisfy any listing criteria of our principal
securities exchange or market for a period of 10 consecutive
trading days or for more than an aggregate of 45 trading days in
any 365-day period;
* (1) notice from us or our transfer agent to the effect that
either of us intends not to comply with a proper request for
conversion of the available amount under the equity purchase
agreement into shares of common stock or (2) our failure to
confirm to the transfer agent Fusion Capital's conversion notice
or (3) the failure of the transfer agent to issue shares of our
common stock upon delivery of a conversion notice;
* any issuance of our common stock upon a conversion which would
violate Nasdaq listing requirements;
* any breach of the representations or warranties or covenants
contained in the master facility agreement or any related
agreements which has or which could have a material adverse
effect on us or the value of the equity purchase agreement,
subject to a cure period of 10 trading days for a curable breach
of covenant;
* a default of any of our payment obligations in excess of $1
million; or
* our participation in insolvency or bankruptcy proceedings by or
against us.
Not withstanding the foregoing, Fusion Capital has agreed that no Event
of Default shall be declared by Fusion Capital under the Equity Purchase
Agreement from our failure to meet the requirements of the Principal Market
until 40 Trading Days after we receive written notice thereof from the Principal
Market.
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ADDITIONAL SHARES ISSUED TO FUSION CAPITAL
Under the terms of the master facility agreement, in connection with
the execution of the equity purchase agreement, Fusion Capital will receive
additional shares of our common stock as a commitment fee in two tranches as
follows:
* initially, the number of shares equal to $960,000 divided by the
lower of (1) the average of the closing sale price of our common
stock for the five consecutive trading days immediately preceding
the trading day that is two trading days prior to the closing
date for the equity purchase agreement and (2) $3.275, the
average of the closing sale price of our common stock for the
five consecutive trading days immediately preceding the date of
the master facility agreement; and
* upon (i) our receipt of at least $8,000,100 pursuant to
conversions under the equity purchase agreement or (ii) at any
time prior to the end of the eighth monthly period after the
closing date of the equity purchase agreement, so long as we have
received at least $6 million pursuant to conversions under the
equity purchase agreement at an average conversion price of
either (x) $4.00 or (y) an average of $3.00 for the first four
monthly periods and $5.00 for the next four monthly periods, at
the option of Fusion Capital, then the number of shares equal to
$480,000 divided by the lower of (1) the average of the closing
sale price of our common stock for the five consecutive trading
days immediately preceding the trading day that is two trading
days prior to the closing date for the equity purchase agreement
and (2) $3.275, the average of the closing sale price of our
common stock for the five consecutive trading days immediately
preceding the date of the master facility agreement.
If the closing date for the equity purchase agreement had been June 1,
2000, Fusion Capital would have received an aggregate of 293,130 shares of our
common stock as a commitment fee under the initial tranche. Unless an event of
default occurs, these shares must be held by Fusion Capital until the master
facility agreement or equity purchase agreement has been terminated. Fusion
Capital may also transfer these shares to its affiliates or pledge them in
connection with a margin account. In addition, should the master facility
agreement be terminated on account of a failure to close, we will generally be
obligated to issue a portion of or the entire commitment fee, depending on the
circumstances, to Fusion Capital.
NO VARIABLE PRICED FINANCINGS
So long as this financing is in effect, we have agreed not to issue, or
enter into any agreement with respect to the issuance of, any variable priced
equity or variable priced equity-like securities unless we have obtained Fusion
Capital's prior written consent.
HOLDINGS OF FUSION CAPITAL UPON TERMINATION OF THIS OFFERING
Because Fusion Capital may sell all, some or none of the common stock
offered by this prospectus, no estimate can be given as to the amount of common
stock that will be held by Fusion Capital upon termination of the offering.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of The Network Connection, Inc.,
and their ages are as follows:
NAME AGE POSITION
---- --- --------
Irwin L. Gross 56 Chairman of the Board of Directors and Chief
Executive Officer
Robert Pringle 39 Director, President and Chief Operating Officer
Morris C. Aaron 36 Executive Vice President, Chief Financial
Officer and Secretary
M. Moshe Porat (1)(2) 52 Director
Stephen Schachman (1)(2) 55 Director
Jay R. Rosan 55 Executive Vice President
Richard E. Genzer 38 Chief Technology Officer
----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
IRWIN L. GROSS has been the Chairman of the Board of Directors and
Chief Executive Officer of The Network Connection since May 18, 1999. Mr. Gross
was reelected to the board of directors in May 2000 and will serve until the
2003 annual meeting of shareholders. He is also Chairman of the Board of
Directors and Chief Executive Officer of Global Technologies, Ltd., a publicly
held company listed on the Nasdaq National Market. Global Technologies is a
technology incubator that invests in, develops and manages emerging growth
companies focused on e-commerce, networking solutions, telecommunications and
gaming. Mr. Gross also currently sits on the board of directors of U.S. Wireless
Corporation, a publicly held company listed on the Nasdaq National Market. Mr.
Gross is a founder of Rare Medium, Inc., a publicly held company listed on the
Nasdaq National Market, and was Chairman of the Board of Directors of Rare
Medium from 1984 to 1998. In addition, Mr. Gross served as the Chief Executive
Officer of Engelhard/ICC, a joint venture between Rare Medium and Engelhard. Mr.
Gross has served as a consultant to, investor in and director of, numerous
publicly held and private companies, and serves on the board of directors of
several charitable organizations. Mr. Gross has a Bachelor of Science degree in
Accounting from Temple University and a Juris Doctor degree from Villanova
University.
ROBERT PRINGLE has served as President and Chief Operating Officer of
the Company since March 5, 2000. He is also a director, having been elected at
the 2000 annual meeting of shareholders on May 11, 2000 and will serve until the
2002 annual meeting of shareholders. Before his employment with the Company, Mr.
Pringle served as President and Chief Operating Officer for InteliHealth, Inc.
from September 1997 to October 1999. Prior thereto, Mr. Pringle was Vice
President for InteliHealth, Inc., a subsidiary of Reuters, from January 1996 to
September 1997. Prior thereto, Mr. Pringle was Vice President for Reality
Online, Inc. from September 1994 to January 1996. Mr. Pringle has a Bachelor of
Science in Economics degree from the Wharton School at the University of
Pennsylvania, a Bachelor of Applied Science from the Moore School of Electrical
Engineering at the University of Pennsylvania, and a Masters in Business
Administration from the University of Chicago Graduate School of Business.
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MORRIS C. AARON has been Executive Vice President and Chief Financial
Officer of The Network Connection since May 18, 1999. From May 1999 to May 2000,
Mr. Aaron also served as a member of our board of directors. From September 1998
to December 1999, Mr. Aaron served as Senior Vice-President and Chief Financial
Officer of Global Technologies. From January 1996 to September 1998, Mr. Aaron
was the Chief Financial Officer and Treasurer of Employee Solutions, Inc., a
publicly held company listed on the Nasdaq National Market. From 1986 to 1996,
Mr. Aaron was with the firm of Arthur Andersen, LLP in the corporate finance and
corporate restructuring group. Mr. Aaron holds a Bachelors Degree in Accounting
from Pennsylvania State University, an M.B.A. from Columbia University and is a
Certified Public Accountant in the State of New York.
M. MOSHE PORAT has been a director of The Network Connection since May
18, 1999. Mr. Porat was reelected to the board of directors in May 2000 and will
serve until the 2001 annual meeting of shareholders. Dr. Porat is also a
director of Global Technologies. Since September 1996, Dr. Porat has served as
the Dean of the School of Business and Management at Temple University. From
1988 to 1996 he was Chairman of the Risk Management, Insurance and Actuarial
Science Department at Temple University. Dr. Porat received his undergraduate
degree in economics and statistics (with distinction) from Tel Aviv University
and his M.B.A. (MAGNA CUM LAUDE) from the Recanati Graduate School of Management
at Tel Aviv University, and he completed his doctoral work at Temple University.
Dr. Porat is the Chairholder of the Joseph E. Boettner Professorship in Risk
Management and Insurance and has won several other awards in the insurance
field. He holds the CPCU professional designation, and is a member of ARIA
(American 25 Risk and Insurance Association), IIS (International Insurance
Society), RIMS (Risk and Insurance Management Society) and the Society of CPCU.
Dr. Porat has authored several monographs on captive insurance companies and
their use in risk management, and has published numerous articles on captive
insurance companies, self-insurance and other financial and risk topics.
STEPHEN SCHACHMAN has been a director of The Network Connection since
May 18, 1999. Mr. Schachman was reelected to the board of directors in May 2000
and will serve until the 2001 annual meeting of shareholders. Mr. Schachman is
also a director of Global Technologies. Since 1995, Mr. Schachman has been the
owner of his own consulting firm, Public Affairs Management, which is located in
the suburban Philadelphia area. From 1992 to 1995, Mr. Schachman was an
executive officer and consultant to Penn Fuel Gas Company, a supplier of natural
gas products. Prior thereto, he was an attorney with the Philadelphia law firm
Dilworth, Paxson, Kalish & Kaufman. Mr. Schachman was also an Executive Vice
President of Bell Atlantic Mobile Systems and prior thereto, President of the
Philadelphia Gas Works, the largest municipally owned gas company in the United
States. Mr. Schachman has a Bachelor of Arts degree from the University of
Pennsylvania and Juris Doctor degree from the Georgetown University Law School.
JAY R. ROSAN has served as Executive Vice President of the Company
since March 6, 2000. Prior to that he served as Executive Vice President of
InteliHealth, a leading consumer health information web company, from August 1,
1998. He also was on the board of directors of InteliHealth. Prior to that he
was the Senior Vice President and Corporate Medical Director for Aetna US
Healthcare from June 16, 1996 to August 1, 1998. Prior to June 16, 1996 he was
the cofounder and Executive Vice President of InteliHealth from June, 1995.
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RICHARD E. GENZER has served as Chief Technology Officer of the Company
since March 6, 2000. Before his employment with the Company, Mr. Genzer served
as Chief Technology Officer for InteliHealth, Inc. from April 1996 to November
1999. Prior thereto, Mr. Genzer was Vice President of Engineering for Reality
Online, Inc. from 1989 to February 1996. Prior thereto, Mr. Genzer was an
electrical engineer with the US Department of Defense from 1983 to 1989 .
All executive officers serve at the discretion of the board of
directors. There are no family relationships between any of the directors or
executive officers of The Network Connection.
DIRECTOR COMPENSATION
Each of our non-employee directors is paid $1,000 for attendance in
person at each meeting of the board of directors and $500 for participation in
each telephonic Board meeting. In addition, each non-employee director receives
$500 for attendance at each meeting of a Board Committee of which he is a
member. In addition, we reimburse directors for their out-of-pocket expenses
incurred in connection with their service on the board of directors. On June 11,
1999, Mr. Schachman and Dr. Porat were each granted a non-qualified option under
the 1995 Stock Option Plan for Non-Employee Directors to acquire 30,000 shares
of our common stock at an exercise price of $2.25 per share, the fair market
value per share on the date of grant. All options granted to non-employee
directors vest in equal annual installments beginning June 11, 2000 and ending
June 11, 2002.
EXECUTIVE COMPENSATION
The following table sets forth certain information for the transition
period ended June 30, 1999 and our last three completed fiscal years ended
December 31, 1998, 1997 and 1996, with respect to compensation we paid or
accrued to each person who served as our Chief Executive Officer during such
period, our other executive officers who were serving as such at June 30, 1999
and whose combined salary and bonus exceeded $100,000, and one other highly
compensated officer who was not serving as an executive officer at June 30,
1999.
41
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation/
Annual Compensation Awards
-------------------------- Securities
Other Annual Underlying
Name and Principal Position Year Salary ($) Compensation ($) Options (#)
--------------------------- ---- ---------- ---------------- -----------
<S> <C> <C> <C> <C>
Irwin L. Gross 1999 -- -- --
Chairman of the Board and Chief 1998 -- -- --
Executive Officer (1) 1997 -- -- --
1996 -- -- --
Frank E. Gomer 1999 21,348 -- 50,000
President and Chief Operating 1998 -- -- --
Officer(1)(6) 1997 -- -- --
1996 -- -- --
Morris C. Aaron 1999 14,884 -- 50,000
Executive Vice President and Chief 1998 -- -- --
Financial Officer (1)(2) 1997 -- -- --
1996 -- -- --
Wilbur L. Riner, Sr. 1999 104,000 3,600 (4) 25,000
Executive Vice President - Business 1998 156,000 22,900 (4) 100,000
Development (1) 1997 104,322 23,400 (4) 100,000
1996 101,414 24,375 (4) 20,000
James E. Riner 1999 94,031 (3) 2,400 (4) 10,000
Vice President - Engineering 1998 91,790 3,600 (4) 25,000
1997 86,790 3,600 (4) 25,000
Bryan R. Carr 1999 70,000 2,800 (4) --
Vice President - Finance and Chief 1998 120,000 15,301 (4) 50,000
Financial Officer (5) 1997 101,667 30,171 (4) 80,000
1996 95,625 18,888 99,000
</TABLE>
----------
(1) Global Technologies acquired control of The Network Connection on May 18,
1999. Prior to the acquisition, Wilbur L. Riner, Sr. served as our
Chairman, President and Chief Executive Officer and Bryan R. Carr served as
our Vice President - Finance and Chief Financial Officer. In connection
with the acquisition, on May 18, 1999, Irwin L. Gross replaced Wilbur L.
Riner, Sr. as our Chairman and Chief Executive Officer and Frank E. Gomer
became our President and Chief Operating Officer. Wilbur L. Riner, Sr.
remained with us as Executive Vice President - Business Development until
December 31, 1999, when his employment with us terminated in accordance
with a separation and release agreement. Also in connection with the
acquisition, on May 18, 1999, Morris C. Aaron became our Executive Vice
President and Chief Financial Officer.
(2) Until December 15, 1999 (the date on which Global Technologies hired its
new Chief Financial Officer, Patrick J. Fodale), Morris C. Aaron also
served as Chief Financial Officer of Global Technologies and devoted
approximately 40% of his time to Global Technologies. Mr. Aaron received
approximately 40% of his compensation from Global Technologies until the
hire of Mr. Fodale.
(3) Includes approximately $14,000 for moving expenses.
(4) Consists of the following:
AUTOMOBILE
NAME YEAR ALLOWANCE ($) COMMISSIONS ($) TOTAL ($)
---- ---- ------------- --------------- ---------
Wilbur L. Riner, Sr. 1999 3,600 -- 3,600
1998 5,400 17,500 22,900
1997 5,400 18,000 23,400
1996 5,625 18,750 24,375
James E. Riner 1999 2,400 -- 2,400
1998 3,600 -- 3,600
1997 3,600 -- 3,600
Bryan R. Carr 1999 2,800 -- 2,800
1998 4,800 10,501 15,301
1997 5,000 25,171 30,171
1996 4,800 14,088 18,888
42
<PAGE>
(5) Mr. Carr's employment with us was terminated on May 31, 1999.
(6) Dr. Gomer is currently a consultant for the Company. At the end of the
transition period ended June 30, 1999 and until March 6, 2000, Dr. Gomer
was our President and Chief Operating Officer. On March 6, 2000, Robert
Pringle was hired as our President and Chief Operating Officer.
During fiscal years 1998 and 1997, Wilbur L. Riner, Sr. and Bryan R.
Carr provided, from time to time, significant assistance to our sales and
marketing staff in effecting sales of our products, for which sales they
received commission compensation.
OPTION GRANTS
(INDIVIDUAL GRANTS)
The following tables set forth certain information with respect to
individual grants of stock options made to the named executive officers during
the eight-month transition period ended June 30, 1999 and the fiscal year ended
October 31, 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE OR BASE
NAME OPTIONS (#) FISCAL YEAR (%) PRICE ($) (1) EXPIRATION DATE
---- ----------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Irwin L. Gross (5) -- -- -- --
Frank E. Gomer (2) 50,000 14.50 2.25 6/11/09
Morris C. Aaron (2) 50,000 14.50 2.25 6/11/09
Wilbur L. Riner, Sr. (3) 25,000 7.25 2.25 6/11/09
James E. Riner (4) 10,000 2.90 2.25 6/11/09
Bryan R. Carr -- -- -- --
</TABLE>
----------
(1) Represents the closing price of our common stock on the grant date of June
11, 1999.
(2) These qualified options vest as follows: 10,000 on each of June 11, 1999,
June 11, 2000, June 11, 2001, June 11, 2002 and June 11, 2003. Subsequent
to the transition period ended June 30, 1999, Dr. Gomer has ceased to be
employed by us, and 30,000 of these options have since been canceled. For
more information, please refer to "Employment Arrangements" below.
(3) These qualified options vest as follows: 12,500 on each of June 11, 2000
and June 11, 2001.
(4) These qualified options vest as follows: 2,500 on each of June 11, 2000,
June 11, 2001, June 11, 2002, June 11, 2003 and June 11, 2004.
(5) On November 10, 1999, the Compensation Committee of the board of directors
recommended option grants to purchase up to 500,000 shares of the Company's
Common Stock to Mr. Irwin L. Gross, Chairman and Chief Executive Officer of
The Network Connection. Such recommendation was adopted and approved by the
board of directors on November 29, 1999. One quarter of these options
vested immediately and one quarter vest over three years. The remainder
vest on the sixth anniversary of the date of grant, subject to acceleration
to a three-year schedule in the event certain performance milestones are
achieved. The exercise price of the options is $2.00, the closing market
price of the Company's Common Stock on November 10, 1999. The options
expire in November 2009.
43
<PAGE>
AGGREGATED OPTION EXERCISES
AND OPTION VALUES AS OF JUNE 30, 1999
The following table sets forth certain information with respect to the
exercise of stock options by each of the named executive officers during the
transition period ended June 30, 1999 and the fiscal year ended October 31,
1998, and the value of unexercised options as of the end of the transition
period:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END (#) AT FISCAL YEAR END ($) (1) (2)
------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Irwin L. Gross -- -- -- --
Frank E. Gomer 10,000 40,000 -- --
Morris C. Aaron 10,000 40,000 -- --
Wilbur L. Riner, Sr. -- 40,000 -- --
James E. Riner 12,500 54,348 3,125 --
Bryan R. Carr -- -- -- --
</TABLE>
----------
(1) Market value of underlying securities at fiscal year-end minus exercise
price multiplied by the number of shares.
(2) If no value is indicated, these options did not have an exercise price less
than the closing bid price per share of our common stock on the Nasdaq
SmallCap Market at June 30, 1999.
EMPLOYMENT ARRANGEMENTS
Wilbur L. Riner, Sr. served as Executive Vice President - Business
Development pursuant to the terms of an employment agreement that would have
terminated on May 18, 2001, had we not entered into a separation and release
agreement with Mr. Riner providing for his termination on December 31, 1999.
Pursuant to his employment agreement, Mr. Riner received a minimum annual base
salary of $156,000 per year. The employment agreement provided for a severance
payment in the event we terminated Mr. Riner's employment other than for "cause"
as defined in the agreement. The severance payment amount was to be equal to the
lesser of Mr. Riner's base annual salary or his base salary for the remaining
term of the agreement. The employment agreement also provided that we may pay
other incentive compensation as may be set by the board of directors from time
to time and for such other fringe benefits as are paid to our other executive
officers.
On December 2, 1999, we entered into a separation and release agreement
with Mr. Riner and his spouse pursuant to which Mr. Riner resigned all positions
with us as of December 31, 1999. In exchange, we paid Mr. Riner a lump-sum
44
<PAGE>
payment equal to two months base salary (offset in part by certain indebtedness
owed to us), and acknowledged certain option exercise rights belonging to him
and his spouse and the right of his spouse to sell certain restricted shares of
our common stock. Each of Mr. Riner and his spouse provided a full release to us
with respect to any potential claims arising prior to the date of the agreement.
Pursuant to the agreement, both Mr. Riner and his spouse entered into customary
non-compete covenants with us, and Mr. Riner acknowledged his obligations of
confidentiality under a non-disclosure agreement that he entered into with us
previously.
James E. Riner serves as Vice President - Engineering pursuant to the
terms of an employment agreement that terminates on October 31, 2001. Mr. Riner
receives a minimum annual base salary of $140,000 per year. The employment
agreement provides for a severance payment in the event that we terminate Mr.
Riner's employment other than for "cause" as defined in the agreement. The
severance payment amount would be equal to the lesser of his base annual salary
or his base salary for the remaining term of the agreement. The employment
agreement also provides that we may pay other incentive compensation as may be
set by the board of directors from time to time and for such other fringe
benefits as are paid to our other executive officers.
Bryan Carr served as Vice President - Finance, Treasurer, Chief
Financial Officer and Chief Operating Officer until May 1999, pursuant to the
terms of an employment agreement providing for a minimum annual base salary of
$120,000 per year and for commissions of .5% for net sales that exceed $500,000
in any calendar month. The employment agreement also provided for a severance
payment in the event of termination due to certain events, including a
change-in-control or the disposition of substantially all of our business and/or
assets, and any event that has the effect of significantly reducing the duties
or authority of Mr. Carr. The severance payment amount would equal the greater
of the present value of his base annual salary for one year or the remainder of
his term. The employment agreement also provided that we may pay other incentive
compensation as may be set by the board of directors from time to time and for
such other fringe benefits as are paid to our other executive officers. Mr.
Carr's employment was terminated on May 31, 1999. He received no severance
payment in connection with the termination and we do not believe any additional
amounts are due to Mr. Carr under the agreement. We are currently engaged in
litigation with Mr. Carr regarding his termination and intends to defend its
position vigorously. See "Legal Proceedings."
Frank E. Gomer served as President and Chief Operating Officer at the
end of the transition period ended June 30, 1999, and most recently as President
of our systems group, pursuant to the terms of an employment agreement that by
its terms would have terminated on June 10, 2001. Dr. Gomer received a minimum
annual base salary of $215,000. Beginning June 11, 1999 and ending June 11,
2003, Dr. Gomer also received 50,000 10-year options under our employee stock
option plan, which vest in increments of 10,000 options per year pursuant to the
terms and conditions of the employment agreement. The employment agreement also
provided for a severance payment in the event that Dr. Gomer was terminated
other than for "cause" as defined in the employment agreement. The severance
payment was to be equal to two times the remaining balance of his base salary
for the remainder of the then current term. The employment agreement also
provided for a payment in the event we terminated Dr. Gomer due to a termination
45
<PAGE>
of our business as defined in the employment agreement or upon termination
without cause following a change in control. In either such event, Dr. Gomer was
to receive an amount equal to two times his remaining base salary for the then
current term, but not less than his annual base salary for one year. The
employment agreement also provides that we may pay other incentive compensation
as may be set by the board of directors from time to time and for such other
fringe benefits as are paid to our other executive officers. Such fringe
benefits take the form of medical and dental coverage and an automobile
allowance of $500 per month. On April 12, 2000, we and Dr. Gomer entered into a
Separation Agreement and Release of All Claims. The agreement provides that Dr.
Gomer's employment with us terminated on April 12, 2000, that he will receive
one year's severance and benefits, and an additional payment of $28,500 in
return for serving as a consultant to us on certain matters, cancellation of
substantially all of his unvested options, and a release of all claims against
us. Under the terms of the agreement, Dr. Gomer has agreed to customary
non-solicitation, non-competition and confidentiality obligations.
Morris C. Aaron serves as Executive Vice President and Chief Financial
Officer pursuant to the terms of an employment agreement that terminates on June
10, 2001. Mr. Aaron receives a minimum annual base salary of $215,000. Beginning
June 11, 1999 and ending June 11, 2003, Mr. Aaron also received 50,000 10-year
options under our employee stock option plan, which vest in increments of 10,000
options per year pursuant to the terms of the employment agreement. The
employment agreement provides for a severance payment in the event that we
terminate Mr. Aaron other than for "cause" as defined in the employment
agreement. The severance payment would be equal to two times the remaining
balance of his base salary for the remainder of the then current term. The
employment agreement also provides a payment in the event we terminate Mr. Aaron
due to a termination of our business as defined in the employment agreement. In
the event of the termination of our business, Mr. Aaron would receive an amount
equal to two times his remaining base salary for the then current term, but not
less than his annual base salary for one year. The employment agreement also
provides that we may pay other incentive compensation as may be set by the board
of directors from time to time and for such other fringe benefits as are paid to
our other executive officers. Such fringe benefits take the form of medical and
dental coverage and an automobile allowance of $500 per month.
Until December 15, 1999, the date on which Global Technologies hired
its new Chief Financial Officer, Patrick J. Fodale, Mr. Aaron also served as
Chief Financial Officer of Global Technologies and devoted approximately 40% of
his time to Global Technologies. Mr. Aaron received approximately 40% of his
compensation from Global Technologies until Mr. Fodale's hire.
REPORT ON REPRICING OF OPTIONS
On June 11, 1999, we cancelled existing options to purchase 20,000
shares of our common stock previously granted to Wilbur L. Riner, Sr. at an
exercise price of $8.75 per share. We repriced these options and granted Mr.
Riner incentive stock options to purchase 20,000 shares of our common stock at
an exercise price of $2.25 per share, half of which vest on the first
anniversary of the date of grant and half of which vest on the second
anniversary of the date of grant. We repriced these options in connection with
Global Technologies' acquisition of us to provide additional incentive to Mr.
Riner.
46
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The table below sets forth the following information, as of May 15,
2000:
* beneficial ownership of our common stock by each person known by
us to own more than 5% of our common stock ; and
* beneficial ownership of each class of our equity securities, and
the equity securities of Global Technologies, by each of our
executive officers and directors, and by all of our executive
officers and directors as a group.
<TABLE>
<CAPTION>
THE NETWORK CONNECTION GLOBAL TECHNOLOGIES
COMMON STOCK CLASS A COMMON STOCK
--------------------------------- ---------------------------------
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF NUMBER OF SHARES PERCENT OF
OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED CLASS (2) BENEFICIALLY OWNED CLASS (3)
----------------------- ------------------ --------- ------------------ ---------
<S> <C> <C> <C> <C>
Irwin L. Gross 338,667 (4) 2.6% 2,283,108 (5) 21.0%
Morris C. Aaron 20,000 (6) * 24,148 (7) *
Frank E. Gomer 20,000 (8) * 6,592 (9) *
Wilbur L. Riner, Sr. -- (10) -- -- --
M. Moshe Porat 10,000 (11) * 405,000 (12) 3.9%
Stephen Schachman 10,000 (13) * 26,400 (14) *
Robert Pringle 160,000 (15) 1.2 -- --
Global Technologies, Ltd. 23,437,903 (16) 79.5% -- --
All directors and executive officers
as a group (7 persons) 558,667 (17) 4.2% 2,745,248 (18) 25.13%
</TABLE>
----------
* Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
The Network Connection, Inc., 1811 Chestnut Street, Suite 120,
Philadelphia, PA 19103.
(2) Based on 12,911,479 shares of common stock outstanding.
(3) Based on 10,498,488 shares of Class A Common Stock outstanding.
(4) Includes 125,000 shares issuable upon the exercise of options exercisable
within 60 days, and 213,667 shares beneficially owned by Mr. Gross directly
and indirectly through various entities.
(5) Includes 375,000 shares issuable upon the exercise of options exercisable
within 60 days, and 50,949 shares owned by trusts for the benefit of Mr.
Gross' children as to which Mr. Gross disclaims beneficial ownership.
(6) Represents 20,000 shares issuable to Mr. Aaron upon exercise of options
exercisable within 60 days. Mr. Aaron's address is 222 North 44th Street
Phoenix, AZ 85034.
(7) Includes 15,000 shares issuable upon the exercise of options exercisable
within 60 days.
(8) Represents 20,000 shares issuable upon the exercise of options exercisable
within 60 days. 10,000 of these options will be held in escrow until April
12, 2001 in accordance with the terms of Dr. Gomer's Separation Agreement
and Release of All Claims. Dr. Gomer's address is 222 North 44th Street
Phoenix, AZ 85034.
(9) Includes 3,592 shares issuable upon the exercise of options exercisable
within 60 days.
(10) Does not include 420,120 shares owned by Barbara Riner, Mr. Riner's wife.
Mr. Riner has disclaimed all beneficial interest in the shares held by his
wife. Mr. Riner's address is 1324 Union Hill Road, Alpharetta, GA 30201.
47
<PAGE>
(11) Includes 10,000 shares issuable upon the exercise of options exercisable
within 60 days.
(12) Includes 15,000 shares issuable upon the exercise of options exercisable
within 60 days, and 375,000 shares over which Mr. Porat retains voting
power pursuant to a certain proxy agreement.
(13) Includes 10,000 shares issuable upon the exercise of options exercisable
within 60 days.
(14) Includes 15,000 shares issuable upon the exercise of options exercisable
within 60 days.
(15) Includes 160,000 shares issuable upon the exercise of options exercisable
within 60 days.
(16) Includes 1,176,471 shares of common stock issuable upon conversion of
shares of Series B 8% Convertible Preferred Stock, 15,097,170 shares of
common stock issuable upon conversion of our Series D Convertible Preferred
Stock and 310,000 shares of common stock issuable upon exercise of
warrants.
(17) See footnotes 4, 6, 11, 13 and 15.
(18) See footnotes 5, 7, 9, 12 and 14.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Chief Executive Officer is a principal of Ocean Castle Partners,
LLC which maintains administrative offices for our Chief Executive Officer and
certain other employees of Global Technologies. During the year ended October
31, 1998, Ocean Castle executed consulting agreements with two shareholders of
Global Technologies, Don Goldman and Yuri Itkis. We assumed the rights and
obligations of Ocean Castle under the agreements in connection with Global
Technologies' acquisition of its interest in our company. The consulting
agreements require payments aggregating $1,000,000 to each of the consultants
through December 2003 in exchange for advisory services. Each of the consultants
also received stock options to purchase 33,333 shares of Class A Common Stock of
Global Technologies at an exercise price of $4.50. As of June 30, 1999, we
determined that the consulting agreements had no future value due to our shift
away from in-flight entertainment and into alternative markets. Only limited
services were provided in 1999 and no future services will be utilized.
Accordingly, we recorded a charge to general and administrative expenses in the
eight-month transition period ended June 30, 1999 of $1.6 million representing
the balance due under such contracts.
In August 1999, we executed a separation and release agreement with
Barbara Riner, a shareholder and former officer, pursuant to which we paid
approximately $85,000 in the form of unregistered shares of our common stock.
In June 1999, we loaned $75,000 to James Riner, one of our vice
presidents for the purpose of assisting in a corporate relocation to our
headquarters in Phoenix, Arizona. The loan is secured by assets of the employee.
The note matures in August 2009 and bears an interest rate of approximately 6%.
Global Technologies was party to an intellectual property license and
support services agreement for certain technology with FortuNet, Inc. FortuNet
is owned by Yuri Itkis, a shareholder of Global Technologies and previous
director of Global Technologies. The license agreement provides for an annual
license fee of $100,000 commencing in October 1994 and continuing through
November 2002. We assumed this liability in connection with Global Technologies'
acquisition of its interest in our company. We paid FortuNet $100,000 during
48
<PAGE>
each of the years ended October 31, 1998 and 1997. In the second half of 1999 we
reached agreement with FortuNet with respect to a termination of this agreement
and paid FortuNet $100,000 plus legal fees. During the transition period ended
June 30, 1999, we revised our estimated accrual to $200,000, which is included
in accrued liabilities at June 30, 1999.
During the year ended October 31, 1998, Global Technologies extended by
one year a consulting agreement with Steve Fieldman, one of its former vice
presidents pursuant to which Global Technologies will pay $55,000 for services
received during the period November 1999 through October 2000. We have assumed
the liability for the consulting agreement in connection with Global
Technologies' acquisition of its interest in our company in the amount of
approximately $45,250, which is included in accrued liabilities at December 31,
1999.
During the year ended October 31, 1998, Global Technologies executed
severance and consulting agreements with three of its former officers, pursuant
to which Global Technologies paid the former officers and set aside restricted
funds in the amounts of $3,053,642 and $735,000, respectively. The consulting
agreements all expire by September 1999. Payments totaling $735,000 have been
made from restricted cash through September 1999. Expenses associated with these
agreements were charged to general and administrative expenses in the year ended
October 31, 1998.
During the year ended October 31, 1996, Global Technologies executed
severance agreements with three former officers pursuant to which it will pay
severance of $752,500 over a three-year period. As of June 30, 1999 and October
31, 1998, $18,000 and $55,000 remained to be paid under these agreements. Such
liabilities were assumed by us in connection with our acquisition of Global
Technologies' Interactive Entertainment Division in May 1999.
We have agreed to reimburse B.H.G. Flight, LLC ("BHG") for costs and
expenses associated with our use for corporate purposes of an airplane owned by
BHG. Irwin L. Gross, our Chairman of the Board and Chief Executive Officer, owns
a 50% interest in BHG. To date, we have incurred approximately $43,800 for such
costs and expenses.
Global Technologies owns a controlling interest in our company. See
"Security Ownership of Certain Beneficial Owners and Management." Global
Technologies generally acquired its interest in our company on May 18, 1999. See
"Management's Discussions and Analysis of Financial Conditions and Results of
Operation." See also the description of the $5 million line of credit with
Global Technologies on page 34.
DESCRIPTION OF SECURITIES
OUR COMMON STOCK
We have authorized 40,000,000 shares of our common stock, par value
$0.001 per share. The holders of our common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of the
shareholders. Subject to preferences that may be applicable to any shares of
preferred stock issued in the future, holders of common stock are entitled to
receive ratably such dividends as may be declared by the board of directors out
of funds legally available therefor. In the event of our liquidation,
49
<PAGE>
dissolution or winding up, holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding preferred stock. Holders of common stock have
no preemptive rights and no right to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are, and all shares of
common stock to be outstanding upon completion of the offering contemplated
hereby, will be fully paid and nonassessable.
OUR PREFERRED STOCK
We have authorized 2,500,000 shares of preferred stock. Shares of
preferred stock may be issued without shareholder approval. The board of
directors is authorized to issue such shares in one or more series and to fix
the rights, preferences, privileges, qualifications, limitations and
restrictions thereof, including dividend rights and rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the designation of such
series, without any vote or action by the shareholders. Any preferred stock to
be issued could rank prior to our common stock with respect to dividend rights
and rights on liquidation. Our board of directors, without shareholder approval,
may issue preferred stock with voting and conversion rights which could
adversely affect the voting power of holders of common stock and discourage,
delay or prevent a change in control of The Network Connection.
We currently have 1,500 shares of Series B 8% convertible preferred
stock outstanding. The Series B preferred stock has a stated value of $1,000 per
share and a liquidation value of 120% of the stated value. The holders of the
Series B preferred stock are entitled to an annual cumulative dividend of $80
per share, payable quarterly in cash or common stock. Cumulative unpaid
dividends at June 30, 1999 totaled $20,000. Each share of Series B preferred
stock is convertible into common stock at a price equal to the lowest of: (a)
75% of the average price of the common stock or (b) 75% of the average price of
the common stock, calculated as if April 29, 1999 were the conversion date. The
Series B convertible preferred stock has no voting rights. Global Technologies
owns 100% of the issued and outstanding Series B 8% Convertible Preferred Stock.
We currently have 2,495,400 shares of Series D convertible preferred
stock outstanding. The Series D convertible preferred stock has a stated value
of $10 per share and a liquidation value of 120% of the stated value. The
holders of the Series D preferred stock are entitled to an annual dividend as
and when declared by our board of directors. Each share of the Series D
convertible preferred stock is convertible into 6.05 shares of common stock. The
Series D convertible preferred stock has six votes per share. Global
Technologies owns 100% of the issued and outstanding Series D convertible
preferred stock.
OUR TRANSFER AGENT
Continental Stock Transfer & Trust Company, New York, New York, serves
as transfer agent for the shares of common stock.
50
<PAGE>
SELLING SECURITY HOLDERS
The following table sets forth for each selling shareholder (i) the
name of the selling shareholder, (ii) the number of shares of our common stock
owned by the selling shareholder before the offering (in some cases, as noted in
the footnotes to the table, some or all shares underlie warrants held by the
selling shareholder), (iii) the number of shares of our common stock offered by
the selling shareholder under this prospectus, (iv) the number of shares of our
common stock that will be owned by the selling shareholder assuming that all
shares of our common stock registered hereby on that shareholder's behalf are
sold, and (v) the percentage of our outstanding shares of common stock that
those remaining shares will represent. Each of the selling shareholders is a
party to an agreement by which we agreed to register their shares of our common
stock. Registration of these shares enables the selling shareholders to sell the
shares from time to time in any manner described in "Plan of Distribution"
below, but does not necessarily mean that the selling shareholders will sell all
or any of the shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES NUMBER OF SHARES COMMON STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED BEFORE NUMBER OF OWNED OWNED AFTER
NAME OF SELLING SHAREHOLDER OFFERING SHARES OFFERED AFTER OFFERING OFFERING
--------------------------- -------- -------------- -------------- --------
<S> <C> <C> <C> <C>
Fusion Capital Fund II, LLC (1) 2,560,000 2,560,000 -- --
Goodbody International 107,433 107,433 -- --
Continental Capital & Equity Corp. (2) 129,500 129,500 -- --
Emden Consulting Corp. (3) 25,000 25,000 -- --
Waterton Group LLC (4) 25,000 25,000 -- --
</TABLE>
----------
(1) Includes 450,000 shares to be issued as a commitment fee in connection with
the execution of an equity purchase agreement and an estimated 2,110,000
shares which are issuable upon conversion of the equity purchase agreement
which has a principal amount of $12,000,000. The equity purchase agreement
provides that Fusion Capital may not beneficially own in excess of 4.99% of
our outstanding common stock. See "The Fusion Transaction" on page 34.
(2) Continental Capital & Equity Corp. owns 29,500 shares of common stock and
warrants exercisable for 100,000 shares of common stock. The exercise
prices payable under the warrants range from $6.00 to $10.00.
(3) Emden Consulting Corp. owns warrants exercisable for 25,000 shares of
common stock at an exercise price of $6.50.
(4) Waterton Group LLC owns warrants exercisable for 25,000 shares of common
stock at an exercise price of $6.50.
51
<PAGE>
PLAN OF DISTRIBUTION
The selling shareholders or their respective pledgees, donees,
transferees or other successors-in-interest:
* may sell shares of common stock offered hereby by delivery of
this prospectus from time to time in one or more transactions
(which may involve block transactions) on the Nasdaq SmallCap
Market or on such other market on which the common stock may from
time to time be trading;
* may sell the shares offered hereby in privately negotiated
transactions, may sell shares of common stock short and (if such
short sales were effected pursuant hereto and a copy of this
prospectus delivered therewith) deliver the shares offered hereby
to close out such transactions;
* may engage in the sale of such shares through equity-swaps or the
purchase or sale of options; and/or
* may pledge the shares offered hereby to a broker or dealer or
other financial institution, and upon default, the broker or
dealer may effect sales of the pledged shares by delivery of this
prospectus or as otherwise described herein or any combination
thereof.
The sale price to the public may be the market price for common stock
prevailing at the time of sale, a price related to such prevailing market price,
at negotiated prices or such other price as the selling shareholders determine
from time to time. The shares offered hereby may also be sold pursuant to Rule
144 under the Securities Act without delivery of this prospectus. The selling
shareholders shall have the sole discretion not to accept any purchase offer or
make any sale of shares if they deem the purchase price to be unsatisfactory at
any particular time. There can be no assurance that all or any part of the
shares offered hereby will be sold by the selling shareholders.
The selling shareholders or their respective pledgees, donees,
transferees or other successors-in-interest may also sell the shares directly to
market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. These broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling shareholders
and/or the purchasers of shares for whom the broker-dealers may act as agents or
52
<PAGE>
to whom they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling shareholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price.
The selling shareholders, alternatively, may sell all or any part of
the shares offered hereby through an underwriter. No selling shareholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into. If a selling shareholder
enters into such an agreement or agreements, the relevant details will be set
forth in a supplement or revisions to this prospectus. To the extent required,
we will amend or supplement this prospectus to disclose material arrangements
regarding the plan of distribution.
Fusion Capital is an "underwriter" within the meaning of Section 2(11)
of the Securities Act of 1933. The other selling shareholders may be deemed to
be "underwriters" within the meaning of Section 2(11) of the Securities Act .
Therefore, Fusion Capital and any other selling shareholder that may be deemed
to be an underwriter will be subject to prospectus delivery requirements under
the Securities Act. Any broker-dealers who act in connection with the sale of
the shares hereunder may be deemed to be "underwriters" within the meaning of
the Securities Act, and any commissions they receive and proceeds of any sale of
the shares may be deemed to be underwriting discounts and commissions under the
Securities Act.
To comply with the securities laws of certain jurisdictions, the shares
offered by this prospectus may need to be offered or sold in such jurisdictions
only through registered or licensed brokers or dealers. Under applicable rules
and regulations promulgated under the Exchange Act, any person engaged in a
distribution of the shares of common stock covered by this prospectus may be
limited in its ability to engage in market activities with respect to such
shares. The selling shareholders, for example, will be subject to the applicable
provisions of the Exchange Act and the rules and regulations promulgated
thereunder, including, without limitation, Regulation M, which provisions may
restrict certain activities of the selling shareholders and limit the timing of
purchases and sales of any shares of common stock by the selling shareholders.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. The foregoing may affect the marketability of the shares offered by
this prospectus.
We have agreed to pay certain expenses of the offering and issuance of
the shares of common stock covered by this prospectus, including the printing,
legal and accounting expenses we incur and the registration and filing fees
imposed by the Commission and the Nasdaq SmallCap Market. Certain of the selling
shareholders will be indemnified by us against certain civil liabilities,
including certain liabilities under the Securities Act, or will be entitled to
contribution in connection therewith. We will be indemnified by certain of the
selling shareholders against certain civil liabilities, including certain
liabilities under the Securities Act, or will be entitled to contribution in
connection therewith.
53
<PAGE>
Upon a sale of common stock pursuant to this registration statement of
which this prospectus forms a part, the common stock will be freely tradable in
the hands of persons other than our affiliates. We will not pay brokerage
commissions or taxes associated with sales by the selling shareholders.
FUSION CAPITAL AND ITS AFFILIATES HAVE AGREED NOT TO ENGAGE IN ANY
DIRECT OR INDIRECT SHORT SELLING OR HEDGING OF OUR COMMON STOCK DURING THE TERM
OF THE EQUITY PURCHASE AGREEMENT.
This offering will terminate on the earlier of (1) the date on which
the shares are eligible for resale without restrictions in accordance with Rule
144(k) under the Securities Act or (2) the date on which all shares offered by
this prospectus have been sold by the selling shareholders.
54
<PAGE>
DISCLOSURE OF THE SEC'S POSITION ON
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our articles of incorporation and bylaws provide that we will indemnify
our directors, officers, employees and agents to the fullest extent permitted by
Georgia law. Specifically, our articles of incorporation eliminate the personal
liability of directors to us or our shareholders for monetary damages for breach
of fiduciary duty as a director; provided, however, that such elimination of the
personal liability of a director to us does not apply for any liability for:
* any appropriation, in violation of his duties, of any business
opportunity of ours,
* acts or omissions which involve intentional misconduct or a
knowing violation of law,
* actions prohibited under Section 14-2-832 of the Georgia Business
Corporation Code (i.e., liabilities imposed upon directors who
vote for or assent to the unlawful payment of dividends, unlawful
payment of dividends, unlawful repurchases or redemption of
stock, unlawful distribution of our assets to the shareholders
without the prior payment or discharge of our debts or
obligations, or unlawful making or guaranteeing of loans to
directors), or
* any transaction from which the director derived an improper
personal benefit.
We intend to enter into indemnity agreements with each of our directors
and executive officers to indemnify them against expenses and losses incurred
for claims brought against them in their capacities as directors or executive
officers. We maintain directors' and officers' liability insurance.
These provisions do not affect, however, a director's or officer's
responsibilities under any other laws, such as the federal securities laws.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and control persons of The Network
Connection pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act of 1933, and is, therefore,
unenforceable.
There is no pending litigation or proceeding involving a director or
officer as to which indemnification is being sought. We are not aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer. See, however, "Legal Proceedings," which discusses
the Carr case. Mr. Carr was previously a director and officer of our company.
55
<PAGE>
EXPERTS
Our financial statements dated as of June 30, 1999 and October 31,
1998, and for the transition period ended June 30, 1999 and each of the years in
the two year period ended October 31, 1998 have been included in this prospectus
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS.
On May 18, 1999 we acquired the Interactive Entertainment Division of
Global Technologies. This transaction was treated as a reverse acquisition of us
by Global Technologies. As a result of this reverse acquisition, our board of
directors determined to terminate its engagement of PricewaterhouseCoopers, LLP
as independent accountants, effective as of July 30, 1999.
None of the reports of PricewaterhouseCoopers on our financial
statements contained an adverse opinion or disclaimer of opinion, or was
modified as to uncertainty, audit scope or accounting principles, except that
such financial statements for the period ended December 31, 1998 contained a
modification as to our ability to continue as a going concern.
There were no disagreements with PricewaterhouseCoopers, whether or not
resolved, on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which if not resolved to
the satisfaction of PricewaterhouseCoopers, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report.
PricewaterhouseCoopers did not note any reportable conditions for the
period ended December 31, 1998. PricewaterhouseCoopers has not been engaged nor
has it performed any audit procedures subsequent to their audit of the December
31, 1998 financial statements and up to the date of its termination.
We engaged the firm of KPMG LLP, effective July 30, 1999, to audit our
financial statements commencing with the financial statements to be included in
our transition report on Form 10-KSB for the transition period ended June 30,
1999.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
us by Mesirov Gelman Jaffe Cramer & Jamieson, LLP, Philadelphia, Pennsylvania.
56
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Commission. You may read and copy any such documents
that we have filed. You may do so at the Commission's public reference room,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
These documents are also available at the following Regional Office: 7 World
Trade Center, Suite 1300, New York, New York 10048. Please call the Commission
at 1-800-SEC-0330 for further information on the public reference rooms.
Our SEC filings are also available to the public on the Commission's
web site at http://www.sec.gov. Our web site can be found at
http://www.tncx.com.
57
<PAGE>
THE NETWORK CONNECTION, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
ANNUAL FINANCIAL STATEMENTS:
Independent Auditors' Report.............................................. F-2
Balance Sheets as of June 30, 1999 and October 31, 1998................... F-3
Statements of Operations for the Transition Period Ended June 30, 1999
and the Years Ended October 31, 1998 and 1997............................ F-4
Statements of Cash Flows for the Transition Period Ended June 30, 1999
and the Years Ended October 31, 1998 and 1997............................ F-5
Statements of Stockholders' Equity (Deficiency) and Comprehensive Income
for the Transition Period Ended June 30, 1999 and the Years Ended
October 31, 1998 and 1997................................................ F-6
Notes to Financial Statements............................................. F-7
INTERIM FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of March 31, 2000
(unaudited) and June 30, 1999 (audited).................................. F-24
Condensed Consolidated Statement of Operations for the Three Months
and Nine Months Ended March 31, 2000 and 1999 (unaudited)................ F-25
Condensed Consolidated Statement of Cash Flows for the Nine Months
Ended March 31, 2000 and 1999 (unaudited)................................ F-26
Notes to Condensed Consolidated Financial Statements...................... F-27
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
The Network Connection, Inc.:
We have audited the accompanying balance sheets of The Network Connection, Inc.
as of June 30, 1999 and October 31, 1998 and the related statements of
operations, changes in stockholders' equity (deficiency) and comprehensive
income and cash flows for the Transition Period ended June 30, 1999 and each of
the years in the two year period ended October 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of The Network Connection, Inc. at
June 30, 1999 and October 31, 1998 and 1997 and the results of its operations
and its cash flows for the Transition Period ended June 30, 1999 and each of the
years in the two year period ended October 31, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Phoenix, Arizona
October 12, 1999
F-2
<PAGE>
THE NETWORK CONNECTION, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, OCTOBER 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,751,506 $ 14,348
Restricted cash 446,679 437,502
Investment securities 302,589 --
Accounts receivable, net 75,792 1,130,648
Notes receivable from related parties 98,932 --
Inventories, net 1,400,000 1,005,427
Prepaid expenses 169,429 44,695
Assets held for sale 800,000 --
Other current assets 173,999 270,225
------------ ------------
Total current assets 6,218,926 2,902,845
Note receivable from related party 75,000 --
Property and equipment, net 1,338,580 780,035
Intangibles, net 7,119,806 --
Other assets 150 555,150
------------ ------------
Total assets $ 14,752,462 $ 4,238,030
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 1,681,771 $ 891,242
Accrued liabilities 2,209,682 3,280,378
Deferred revenue 365,851 453,022
Accrued product warranties -- 5,369,008
Current maturities of long-term debt 24,391 --
Notes payable to related parties 68,836 --
------------ ------------
Total current liabilities 4,350,531 9,993,650
Notes payable 3,467,045 --
Due to affiliate 1,647,692 --
------------ ------------
Total liabilities 9,465,268 9,993,650
------------ ------------
Commitments and contingencies
Stockholders' equity (deficiency):
Series B preferred stock par value $0.01 per share,
1,500 shares authorized, issued and outstanding 15 --
Series C preferred stock par value $0.01 per share,
1,600 shares authorized; 800 shares issued and outstanding 8 --
Series D preferred stock par value $0.01 per share,
2,495,400 authorized, issued and outstanding 24,954 --
Common stock par value $0.001 per share, 10,000,000 shares
authorized; 6,339,076 issued and outstanding 6,339 --
Additional paid-in capital 88,316,945 --
Contributed capital in excess of par value -- 79,618,459
Accumulated other comprehensive income:
Net unrealized loss on investment securities (526) --
Accumulated deficit (83,060,541) (85,374,079)
------------ ------------
Total stockholders' equity (deficiency) 5,287,194 (5,755,620)
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 14,752,462 $ 4,238,030
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
THE NETWORK CONNECTION, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED
JUNE 30, YEAR ENDED OCTOBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Equipment sales $ 875,957 $ 18,038,619 $ 10,524,828
Service income 82,650 778,343 575,881
------------ ------------ ------------
958,607 18,816,962 11,100,709
------------ ------------ ------------
Costs and expenses:
Cost of equipment sales 1,517,323 15,523,282 24,646,334
Cost of service income 480 13,789 232,126
Provision for doubtful accounts 28,648 -- 216,820
Research and development expenses -- 1,092,316 7,821,640
General and administrative expenses 3,703,633 9,019,872 12,574,223
Special charges 521,590 400,024 19,649,765
Reversal of warranty, maintenance and
commission accruals (7,151,393) -- --
Bad debt recoveries -- -- (1,064,284)
------------ ------------ ------------
(1,379,719) 26,049,283 64,076,624
------------ ------------ ------------
Operating income (loss) 2,338,326 (7,232,321) (52,975,915)
Other:
Interest expense (83,029) (11,954) (13,423)
Interest income 77,682 53,465 --
Other income (expense) 11,226 10,179 (203,649)
------------ ------------ ------------
Net income (loss) 2,344,205 (7,180,631) (53,192,987)
Cumulative dividend on preferred stock (30,667) -- --
------------ ------------ ------------
Net income (loss) attributable to common stockholders $ 2,313,538 $ (7,180,631) $(53,192,987)
============ ============ ============
Basic net income (loss) per common share $ 0.97 $ (6.80) $ (50.38)
============ ============ ============
Weighted average number of shares outstanding 2,387,223 1,055,745 1,055,745
============ ============ ============
Diluted net income (loss) per common share $ 0.13 $ (6.80) $ (50.38)
============ ============ ============
Weighted average number of common and
dilutive shares outstanding 18,543,707 1,055,745 1,055,745
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
THE NETWORK CONNECTION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED
JUNE 30, YEAR ENDED OCTOBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,313,538 $ (7,180,631) $(53,192,987)
Adjustments to reconcile net income (loss) to net cash:
Depreciation and amortization 342,544 1,205,361 1,815,779
Change in inventory valuation allowance (892,010) -- 8,297,933
Special charges 521,590 400,024 19,649,765
Reversal of warranty, maintenance and commission accruals (7,151,393) -- --
Loss on disposal of equipment -- -- 203,649
Non cash compensation expense -- -- 480,749
Changes in net assets and liabilities, net of effect
of Transaction:
Decrease (increase) in accounts receivable (482,344) 4,523,470 (5,754,771)
Decrease (increase) in inventories 1,897,437 5,105,334 (12,563,721)
Decrease (increase) in prepaid expenses (116,717) 47,428 183,394
Decrease in other current assets 78,134 247,549 --
Increase in other assets -- (411,042) --
(Decrease) increase in accounts payable (1,449,333) (4,933,431) 1,673,893
(Decrease) increase in accrued liabilities 702,559 (1,758,210) (584,655)
(Decrease) increase in deferred revenue 1,138,048 (1,930,882) 2,383,904
Increase in accrued product warranties -- 758,321 836,667
------------ ------------ ------------
Net cash used in operating activities $ (3,097,947) $ (3,926,709) $(36,570,401)
Cash flows from investing activities:
Purchases of investment securities (302,589) -- --
Purchases of property and equipment (18,243) (36,008) (10,341,561)
Proceeds from sale of equipment -- 3,620 --
Cash acquired in Transaction 23,997 -- --
Increase in restricted cash (9,177) (437,502) --
------------ ------------ ------------
Net cash used in investing activities $ (306,012) $ (469,890) $(10,341,561)
Cash flows from financing activities:
Payments on notes payable (58,450) (80,753) (53,085)
Advances from parent 805,616 -- --
Contributed capital 5,391,951 4,427,544 47,029,203
Proceeds from issuance of stock 2,000 -- --
------------ ------------ ------------
Net cash provided by financing activities $ 6,141,117 $ 4,346,791 $ 46,976,118
Net increase (decrease) in cash and cash equivalents 2,737,158 (49,808) 64,156
Cash and cash equivalents at beginning of year 14,348 64,156 --
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,751,506 $ 14,348 $ 64,156
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
THE NETWORK CONNECTION, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) AND COMPREHENSIVE INCOME
TRANSITION PERIOD ENDED JUNE 30, 1999 YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL
SERIES B SERIES C SERIES D COMMON PAID-IN
PREFERRED PREFERRED PREFERRED STOCK CAPITAL
--------- --------- ---------- ------ ------------
<S> <C> <C> <C> <C> <C>
Balance as of October 31, 1996 $ -- $ -- $ -- $ -- $ --
Contributed capital -- -- -- -- --
Net loss -- -- -- -- --
------ ------ ---------- ------ ------------
Balance as of October 31, 1997 $ -- $ -- $ -- $ -- $ --
Contributed capital -- -- -- -- --
Net loss -- -- -- -- --
------ ------ ---------- ------ ------------
Balance as of October 31, 1998 $ -- $ -- $ -- $ -- $ --
Contributed capital -- -- -- -- --
Contribution of advances to capital -- -- -- -- 85,010,410
Issuance of stock 15 8 24,954 6,338 3,304,536
Exercise of stock options -- -- -- 1 1,999
Comprehensive income (loss):
Unrealized loss on available for
sale securities -- -- -- -- --
Net income -- -- -- -- --
Total comprehensive income -- -- -- -- --
------ ------ ---------- ------ ------------
Balance as of June 30, 1999 $ 15 $ 8 $ 24,954 $6,339 $ 88,316,945
====== ====== ========== ====== ============
ACCUMULATED
OTHER ACCUMULATED TOTAL
CONTRIBUTED COMPREHENSIVE (DEFICIT) STOCKHOLDERS'
CAPITAL INCOME EARNINGS EQUITY
----------- ------------ ------------ -----------
Balance as of October 31, 1996 $ 28,161,712 $ -- $(25,000,461) $ 3,161,251
Contributed capital 47,029,203 -- -- 47,029,203
Net loss -- -- (53,192,987) (53,192,987)
----------- ------------ ------------ -----------
Balance as of October 31, 1997 $ 75,190,915 $ -- $(78,193,448) $(3,002,533)
Contributed capital 4,427,544 -- -- 4,427,544
Net loss -- -- (7,180,631) (7,180,631)
----------- ------------ ------------ -----------
Balance as of October 31, 1998 $ 79,618,459 $ -- $(85,374,079) $(5,755,620)
Contributed capital 5,391,951 -- -- 5,391,951
Contribution of advances to capital (85,010,410) -- -- --
Issuance of stock -- -- -- 3,335,851
Exercise of stock options -- -- -- 2,000
Comprehensive income (loss):
Unrealized loss on available for
sale securities -- (526) -- --
Net income -- -- 2,313,538 --
Total comprehensive income -- -- -- 2,313,012
----------- ------------ ------------ -----------
Balance as of June 30, 1999 $ -- $ (526) $(83,060,541) $ 5,287,194
=========== ============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
THE NETWORK CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) DESCRIPTION OF BUSINESS
The Network Connection, Inc. (the "Company" or "TNCi") is engaged in
the development, manufacturing and marketing of computer-based
entertainment and data networks, which provides users access to
information, entertainment and a wide array of service options, such
as movies, shopping for goods and services, computer games, access the
World Wide Web and gambling, where permitted by applicable law. The
Company's primary markets for its products are cruise ships, passenger
trains, schools and corporate training. Secondary markets include
business jets and hotel operators, among others.
(b) BASIS OF PRESENTATION
On May 18, 1999, Global Technologies, Ltd. (formerly known as
Interactive Flight Technologies, Inc.) ("GTL") received from the
Company 1,055,745 shares of its common stock and 2,495,400 shares of
its Series D Convertible Preferred Stock in exchange for $4,250,000 in
cash and substantially all the assets and certain liabilities of GTL's
Interactive Entertainment Division ("IED"), as defined in the Asset
Purchase and Sale Agreement dated April 30, 1999, as amended (the
"Transaction"). The Transaction has been accounted for as a reverse
merger whereby, for accounting purposes, GTL is considered the
accounting acquiror, and although the legal capital structure carries
forward, and the Company is treated as the successor to the historical
operations of IED. Accordingly, the historical financial statements of
the Company, which previously have been reported to the Securities and
Exchange Commission ("SEC") on Forms 10-KSB, 10-QSB, among others, as
of and for all periods through March 31, 1999, will be replaced with
those of IED.
The Company will continue to file as a SEC registrant and continue to
report under the name The Network Connection, Inc. The financial
statements as of and for the years ended October 31, 1998 and 1997
reflect the historical results of GTL's IED as previously included in
GTL's consolidated financial statements. Included in the results of
operations for the eight months ended June 30, 1999 are the historical
results of GTL's IED through April 30, 1999, and the results of the
post Transaction company for the two months ended June 30, 1999. The
Transaction date for accounting purposes is May 1, 1999. Contributed
capital reflects the cash consideration paid by GTL to the Company in
the Transaction in addition to funding of IED historical operations.
GTL will continue to report as a separate SEC registrant, owning the
shares of the Company as described above. As of June 30, 1999, the
Company is a majority owned subsidiary of GTL whose ownership, through
a combination of the Transaction described above and GTL's purchase of
Series B 8 % preferred stock of the Company and 110,000 shares of the
Company's common stock from third party investors, approximates 78% of
the Company on an if-converted common stock basis (See note 15.) The
historical financial statements of the Company up to the date of the
Transaction as previously reported will no longer be included in
future filings of the Company.
(c) CHANGE IN FISCAL YEAR-END
The Company has changed its fiscal year-end from December 31 to June
30. The Transition Period resulting from the change in fiscal year-end
is measured from IED's former fiscal year-end of October 31.
Accordingly, the eight-month period resulting from this change,
November 1, 1998 through June 30, 1999, is referred to as the
"Transition Period."
F-7
<PAGE>
(d) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Additionally, such estimates and
assumptions affect the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
(e) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities at the date of purchase of three months or less to be cash
and cash equivalents.
(f) RESTRICTED CASH
At June 30, 1999 and October 31, 1998, the Company held restricted
cash of $446,679 and $437,502, respectively, in a trust fund for
payments which may be required under severance agreements with one
former executive of GTL. (See note 15.)
(g) INVESTMENT SECURITIES
Investment securities consist of debt securities with a maturity
greater than three months at the time of purchase. In accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS No. 115")
the debt securities are classified as available-for-sale and carried
at fair value, based on quoted market prices. The net unrealized gains
or losses on these investments are reported in stockholders' equity,
net of tax. The specific identification method is used to compute the
realized gains and losses on the debt securities.
(h) INVENTORIES
Inventories consisting principally of entertainment network components
are stated at the lower of cost (first-in, first-out method) or
market.
(i) GOODWILL
The Company classifies as goodwill the excess of the purchase price
over the fair value of the net assets acquired and is amortized over
ten years using the straight line method.
(j) PROPERTY AND EQUIPMENT
Property and equipment are stated at the lower of cost or net
realizable value. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the assets
ranging from three to seven years. Leasehold improvements are
depreciated using the straight-line method over the shorter of the
underlying lease term or asset life.
(k) REVENUE RECOGNITION
The Company's revenue derived from sales and installation of equipment
is recognized upon installation and acceptance by the customer. Fees
derived from servicing installed systems is recognized when earned,
according to the terms of the service contract. Revenue pursuant to
contracts that provide for revenue sharing with customers and/or
others is recognized as cash is received in the amount of the
Company's retained portion of the cash pursuant to the revenue sharing
agreement. Revenue earned pursuant to extended warranty agreements is
recognized ratably over the warranty period.
F-8
<PAGE>
(l) DEFERRED REVENUE
Deferred revenue represents cash received on advance billings of
equipment sales as allowed under installation and extended warranty
contracts.
(m) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred except for
development costs required by a customer contract. Development costs
incurred pursuant to contractual obligations are allocated to
deliverable units. These development costs are expensed as cost of
goods sold upon installation of the complete product and acceptance by
the customer.
(n) WARRANTY COSTS
The Company provides, by a current charge to income, an amount it
estimates will be needed to cover future warranty obligations for
products sold with an initial warranty period. Revenue and expenses
under extended warranty agreements are recognized ratably over the
term of the extended warranty.
(o) IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount.
(p) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(q) INCOME (LOSS) PER SHARE
During fiscal 1998, the Company adopted Financial Accounting Standards
Board (FASB) SFAS No. 128, "Earnings per Share" (SFAS No. 128). Income
(loss) per share for all prior periods have been restated to conform
to the provisions of SFAS 128. Basic income (loss) per share is
computed by dividing income (loss) attributable to common
stockholders, by the weighted average number of common shares
outstanding for the period. Diluted income (loss) per share reflects
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then
shared in the income (loss) of the Company. In calculating net loss
per common share for 1998 and 1997, $15.1 million and $15.1 million,
respectively, common stock equivalent shares consisting of convertible
preferred stock issued to GTL in connection with the Transaction have
been excluded because their inclusion would have been anti-dilutive.
F-9
<PAGE>
(r) STOCK-BASED COMPENSATION
In accordance with the provisions of Accounting Principals Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
the Company measures stock-based compensation expense as the excess of
the market price at the grant date over the amount the employee must
pay for the stock. The Company's policy is to generally grant stock
options at fair market value at the date of grant; accordingly, no
compensation expense is recognized. As permitted, the Company has
elected to adopt the pro forma disclosure provisions only of SFAS No.
123, "Accounting for Stock-Based Compensation". (See note 11.)
(s) In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes standards for the accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. This statement generally
requires recognition of gains and losses on hedging instruments, based
on changes in fair value or the earnings effect of forecasted
transactions. As issued, SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133--An Amendment of FASB Statement No. 133," which
deferred the effective date of SFAS No. 133 until June 15, 2000. We
are currently evaluating the impact of SFAS No. 133.
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components
in a full set of financial statements. Comprehensive income consists
of net income and unrealized gains and losses on investment securities
net of taxes and is presented in the consolidated statements of
stockholders' equity (deficiency) and comprehensive income; it does
not affect the Company's financial position or results of operations.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise" replacing the "industry segment" approach with
the "management" approach. The management approach designates the
internal organization that is used by management for making operating
decisions and assessing performance as the source of the Company's
reportable segments. SFAS No. 131 also requires disclosure about
products and services, geographical areas, and major customers. The
adoption of SFAS No. 131 does not affect results of operations or
financial position but does affect the disclosure of segment
information.
F-10
<PAGE>
(2) ACQUISITION
The Transaction has been accounted for by the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based upon estimated fair values at
the date of acquisition as follows:
Purchase price:
Cash $ 4,250,000
Net liabilities of IED contributed (4,012,430)
-----------
Total $ 237,570
===========
Assets acquired and liabilities assumed:
Historical book value of net liabilities $(2,457,723)
Fair value adjustments:
Inventory (1,280,847)
Property and equipment (806,873)
Other assets (368,255)
Liabilities (681,390)
-----------
Total fair value of liabilities assumed $(5,597,086)
Excess of fair value of TNCi Series B Preferred Stock
and Series C Preferred Stock over its recorded value $(1,501,000)
Purchase of Common Stock of TNCi (254,658)
===========
Excess of purchase price over fair value of net
liabilities assumed (goodwill) $ 7,115,174
===========
The excess of fair value of TNC Series B Preferred Stock and Series C
Preferred Stock is the result of GTL's acquisition of such shares based on
the fair value of the GTL Series A Preferred Stock amounting to $4,080,000,
less $1,030,000 cash received and the historical value of $1,549,000 of the
Series B Preferred Stock.
Purchase of 110,000 shares of Common Stock of TNCi from a third party was
valued based on the cash consideration paid by GTL for the shares.
(3) INVESTMENT SECURITIES
A summary of investment securities by major security type at June 30, 1999
is as follows:
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
JUNE 30, 1999
Available-for-sale:
Corporate debt securities $303,115 $167 $(693) $302,589
======== ==== ===== ========
As of June 30, 1999 all maturities are less than one year.
F-11
<PAGE>
(4) INVENTORIES
Inventories consist of the following:
JUNE 30, OCTOBER 31,
1999 1998
----------- -----------
Raw materials $ 2,398,973 $ 2,192,442
Work in process 1,405,372 3,439,888
Finished goods 5,433,250 4,102,702
----------- -----------
9,237,595 9,735,032
Less: inventory valuation allowance (7,837,595) (8,729,605)
----------- -----------
$ 1,400,000 $ 1,005,427
=========== ===========
(5) ASSETS HELD FOR SALE
In connection with the Transaction, the Company relocated its corporate
offices and production capabilities to its Phoenix, Arizona offices.
Accordingly, as of June 30, 1999 the decision to sell the Georgia property
was made and the assets were recorded at their net realizable value and
classified as assets held for sale.
(6) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30, OCTOBER 31,
1999 1998
----------- -----------
Leasehold improvements $ 24,117 $ 237,551
Purchased software 149,703 149,703
Furniture 163,609 138,609
Equipment 1,684,180 903,873
----------- -----------
2,021,609 1,429,736
Less: accumulated depreciation (683,029) (649,701)
----------- -----------
$ 1,338,580 $ 780,035
=========== ===========
During the year ended October 31, 1998, the Company recorded equipment
write-offs of $1,006,531 which are included in special charges on the
statement of operations. The write-offs are principally related to excess
computers, furniture and other equipment that the Company is not utilizing.
(7) INTANGIBLES
Intangibles consist of the following:
JUNE 30,
1999
-----------
Goodwill $ 7,115,174
Other intangibles 79,613
-----------
7,194,787
Accumulated amortization (74,981)
-----------
$ 7,119,806
===========
F-12
<PAGE>
(8) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
JUNE 30, OCTOBER 31,
1999 1998
---------- ----------
Accrued development and support costs $ -- $1,845,915
Accrued maintenance costs -- 402,418
Due to related parties (see note 15) 1,891,123 455,000
Other accrued expenses 318,559 577,045
---------- ----------
Accrued liabilities $2,209,682 $3,280,378
========== ==========
(9) NOTES PAYABLE AND DUE TO AFFILATE
Notes Payable consists of the following:
JUNE 30,
1999
----------
Series A, D and E Notes (see below) $2,386,048
Note payable due September 5, 1999, interest at 7%,
convertible to preferred stock at the option of the
Company 400,000
Note payable due in varying installments through 2009,
interest at prime (8.25% at June 30, 1999) plus 2%,
collateralized by certain commercial property and
personally guaranteed by two stockholders 220,508
Note payable due in varying installments through 2000,
interest at 6.9%, collateralized by a vehicle 10,308
Note payable due and payable April 19, 2001, interest at
16% payable monthly, collateralized by certain
commercial property 470,000
Note payable due in varying installments through 2000,
interest at 11%, collateralized by a vehicle 4,572
----------
3,491,436
Less current portion 24,391
----------
$3,467,045
==========
Aggregate maturities of notes payable as of June 30, 1999 are as follows:
2000 $ 24,391
2001 890,491
2002 2,403,402
2003 19,126
2004 21,078
Thereafter 132,948
----------
$3,491,436
==========
F-13
<PAGE>
The Series A, D and E Notes ("Series Notes") were issued by the Company in
1998 prior to the Transaction. The Series Notes all had original maturities
of approximately 135 days with interest at approximately 7% to 8% per
annum. The Company could choose to repay such Notes in cash subject to a
payment charge equal to approximately 7% of the face amount of the Note or
the Company could elect to convert the Series Notes into preferred stock of
the Company which is convertible into common stock at various discounts to
market ranging from 15% to 25%. The Company was in default on the Series
Notes on June 30, 1999. (See note 20.)
The note payable due September 5, 1999 was in default at June 30, 1999.
Subsequent to year-end, the note was converted into 200,000 shares of the
Company's common stock. Therefore, the note payable has been classified as
long-term at June 30, 1999.
Prior to the Transaction, the Company entered into a Secured Promissory
Note with GTL in the principal amount of $750,000, bearing interest at a
rate of 9.5% per annum, and a related security agreement granting GTL a
security interest in its assets (the "Promissory Note"). The Promissory
Note is convertible into shares of the Company's Series C 8% preferred
stock at the discretion of GTL.
GTL has also advanced approximately $898,000 to the Company in the form of
intercompany advances. Both the Promissory Note and the advances have been
classified as due to affiliate in the balance sheet as of June 30, 1999.
(See note 20.)
Notes payable in the amount of $68,836 to related parties with interest
payable at approximately 5% per annum become due and payable upon
achievement of certain operational goals.
(10) INCOME (LOSS) PER SHARE
Basic and diluted weighted average number of shares outstanding for the two
years ended October 31, 1998 and 1997, included 1,055,745 shares of the
Company's common stock, representing 100% of the Company's capital stock
which was all owned by GTL. No effect was given to common stock equivalents
in the computation of diluted loss per share as their effect would have
been anti-dilutive.
For the Transition Period, basic weighted average number of shares
outstanding includes 1,055,745 common shares held by GTL for the full
period and approximately 5.3 million shares (the shares issued and
outstanding prior to the Transaction) for two months. Diluted weighted
average number of shares outstanding for the Transition Period include
1,055,745 common shares and 15,097,170 potential dilutive securities
resulting from the Series D Convertible Preferred Stock for the entire
Transition Period (both issued to GTL in connection with the Transaction);
plus 5,278,737 common shares outstanding prior to the merger, and 1,133,120
common stock equivalents related to the Convertible Promissory Note, Series
A, D and E Convertible Notes, Series B 8% Convertible Preferred Stock,
Series C 8% Convertible Preferred Stock and options each weighted for the
two months ended June 30, 1999.
F-14
<PAGE>
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED
JUNE 30, YEAR ENDED OCTOBER 31,
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Net income (loss) $ 2,344,205 $(7,180,631) $(53,192,987)
Less: preferred stock dividends (30,667) -- --
------------ ----------- ------------
Income (loss) available to common
stockholders $ 2,313,538 $(7,180,631) $(53,192,987)
============ =========== ============
Basic EPS - weighted average shares
outstanding 2,387,223 1,055,745 1,055,745
============ =========== ============
Basic income (loss) per share $ 0.97 $ (6.80) $ (50.38)
============ =========== ============
Basic EPS - weighted average shares
outstanding 2,387,223 1,055,745 1,055,745
Effect of dilutive securities:
Stock Purchase Options - common stock 82,033 -- --
Convertible preferred stock 15,570,814 -- --
Convertible debt 503,638 -- --
------------ ----------- ------------
Dilutive EPS - weighted average shares
outstanding 18,543,708 1,055,745 1,055,745
Net income (loss) $ 2,344,205 $(7,180,631) $(53,192,987)
------------ ----------- ------------
Diluted income (loss) per share $ 0.13 $ (6.80) $ (50.38)
============ =========== ============
</TABLE>
(11) STOCK OPTION PLANS
Under the Company's 1994 Employee Stock Option Plan (the "Plan"), as
amended, the Company has reserved an aggregate of 1,200,000 shares of
Common Stock for issuance under the Plan. Options granted under the Plan
are for periods not to exceed ten years. Under the Plan, incentive and
non-qualified stock options may be granted. All option grants under the
Plan are subject to the terms and conditions established by the Plan and
the Stock Option Committee of the Board of Directors. Options must be
granted at not less than 100% of fair value for incentive options and not
less than 85% of fair value of non-qualified options of the stock as of the
date of grant and generally are exerciseable in increments of 25% each year
subject to continued employment with the Company. Options generally expire
five to ten years from the date of grant. Options canceled represent the
unexercised options of former employees, returned to the option pool in
accordance with the terms of the Plan upon departure from the Company. The
Board of Directors may terminate the Plan at any time at their discretion.
During fiscal 1999, 285,348 stock options with up to a four-year vesting
period were granted at exercise prices ranging from $2.25 to $3.125.
On August 16, 1995, the Company adopted the 1995 Stock Option Plan For
Non-Employee Directors (the "Directors Plan") and reserved 100,000 shares
of unissued common stock for issuance to all non-employee directors of the
Company. The Directors Plan is administered by a committee appointed by the
Board of Directors consisting of directors who are not eligible to
participate in the Directors Plan. Pursuant to the Directors Plan,
directors who are not employees of the Company receive for their services,
on the date first elected as a member of the Board and on each anniversary
thereafter, if they continue to serve on the Board of Directors, an
automatically granted option to acquire 5,000 shares of the Company's
common stock at its fair market value on the date of grant; such options
become exercisable in two equal annual installments if the individual
continues at that time to serve as a director, and once exercisable remain
so until the fifth anniversary of the date of grant. During fiscal 1999,
60,000 options were granted.
F-15
<PAGE>
In accordance with the provisions of APB 25, the Company measures
stock-based compensation expense as the excess of the market price at the
grant date over the amount the employee must pay for the stock. The
Company's policy is to generally grant stock options at fair market value
at the date of grant, so no compensation expense is recognized. As
permitted, the Company has elected to adopt the disclosure provisions only
of SFAS No. 123.
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net earnings and net
earnings per share on a pro forma basis would be as indicated below:
TRANSITION PERIOD
ENDED
JUNE 30, 1999
-----------------
Net earnings:
As reported $2,313,538
==========
Pro forma $2,018,009
==========
Basic net earnings per share:
As reported $ 0.97
==========
Pro forma $ 0.85
==========
Diluted net earnings per share:
As reported $ 0.13
==========
Pro forma $ 0.11
==========
Pro forma net earnings reflect only options granted during the Transition
Period and in each of the fiscal years ended 1998, 1997 and 1996. There
were no options granted related to IED for the years ended October 31, 1998
and 1997. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
earnings amount presented above because compensation cost is reflected over
the options' vesting period and compensation cost for options granted prior
to November 1995 are not considered under SFAS No. 123.
For purposes of the SFAS No. 123 pro forma net earnings and net earnings
per share calculations, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in fiscal 1999:
TRANSITION PERIOD
ENDED
JUNE 30, 1999
-----------------
Dividend yield 0%
Expected volatility 58.76%
Risk free interest rate 5.67%
Expected lives (years) 10.0
F-16
<PAGE>
Activity related to the stock option plans is summarized below:
TRANSITION PERIOD ENDED
JUNE 30, 1999
--------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Balance at the beginning of year 676,478 $5.00
Granted 345,348 2.25
Exercised (20,000) 3.84
Forfeited (281,848) 4.75
--------
Balance at the end of year 719,978 3.09
========
Exercisable at the end of year 331,731 4.29
========
Weighted-average fair value of options
granted during the year $ 1.66
========
The following table summarizes the status of outstanding stock options as
of June 30, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ------------ -------- ----------- --------
$2.00 - $2.25 528,096 7.68 $2.16 159,848 $2.04
$2.50 - $4.17 51,383 7.04 3.41 31,383 3.60
$6.48 - $7.25 85,750 4.02 6.59 85,750 6.59
$7.50 - $9.82 54,750 8.07 7.63 54,750 7.63
======= =======
719,978 331,731
======= =======
(12) BENEFIT PLAN
On June 1, 1999 a formal termination of the Company's 401(k) plan was
initiated. The 401(K) plan of parent company GTL was amended June 1, 1999
to include employees of the Company.
GTL has adopted a defined contribution benefit plan that complies with
section 401(k) of the Internal Revenue Code and provides for discretionary
company contribution. Employees who complete three months of service are
eligible to participate in the Plan.
(13) STOCKHOLDERS' EQUITY
PREFERRED STOCK
Series B 8% Convertible Preferred Stock ("Series B Stock"); stated value
$1,000 per share and liquidation value of 120% of stated value. The Holder
of Series B Stock is entitled to an annual cumulative dividend of $80 per
share payable quarterly in cash or Common Stock. Cumulative unpaid
dividends at June 30, 1999 total $20,000. Each share of Series B Stock is
convertible into Common Stock at a price equal to the lowest of: a) 75% of
the Average Price of Common Stock, as defined, or b) 75% of the Average
Price of Common Stock, as defined calculated as if April 29, 1999 were the
conversion date. The Series B Stock has no voting rights. GTL owns 100% of
the issued and outstanding Series B Stock.
F-17
<PAGE>
Series C 8% Convertible Preferred Stock ("Series C Stock"); stated value
$1,000 per share and liquidation value of 120% of stated value. The Holder
of Series C Stock is entitled to an annual cumulative dividend of $80 per
share payable quarterly in cash or Common Stock. Cumulative unpaid
dividends at June 30, 1999 total $10,667. Each share of Series C Stock is
convertible into Common Stock at a price equal to the lowest of: a) $2.6875
per share, or b) 66.67% of the Average Price, as defined, or c) at the
lowest rate the Company issues equity securities, as defined. The Series C
Stock generally has no voting rights. On August 24, 1999, GTL notified the
Company of its intent to convert such shares into Common Stock. (See note
20.) GTL owns 100% of the issued and outstanding and accumulated unpaid
dividends Series C Stock.
Series D Convertible Preferred Stock ("Series D Stock"); stated value $10
per share and liquidation value of 120% of stated value. The Holder of
Series D Stock is entitled to an annual dividend as and when declared by
the Board of Directors of the Company. Each share of Series D Stock is
convertible into 6.05 shares of the Company's Common Stock. The Series D
Stock generally has no voting rights.
COMMON STOCK
Each share of Common Stock is entitled to one vote per share.
WARRANTS
During the Transition Period, the Company issued 489,429 warrants,
resulting in 1,206,025 warrants outstanding at June 30, 1999. Each warrant
represents the right to purchase one share of the Company's Common Stock at
exercise prices ranging from $2.34 to $4.13 per share, until such warrants
expire beginning November 1, 2001 through April 1, 2004. All outstanding
warrants are exercisable as of June 30, 1999.
(14) INCOME TAXES
Income tax (benefit) differed from the amounts computed by applying the
U.S. Federal corporate income tax rate of 34% to net income (loss) as a
result of the following:
TRANSITION
PERIOD ENDED YEAR ENDED OCTOBER 31,
JUNE 30, 1999 1998 1997
------------- ---- ----
Computed expected tax (benefit) $ 786,603 $(2,441,415) $(18,085,616)
Change in valuation allowance (983,188) 2,100,322 18,066,284
Nondeductible expense 16,320 416,498 --
Other 180,265 (75,405) 19,332
--------- ----------- ------------
$ -- $ -- $ --
========= =========== ============
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are presented below:
F-18
<PAGE>
TRANSITION
PERIOD ENDED
JUNE 30, 1999
-------------
Deferred tax assets:
Net operating loss carryforward $ 5,443,825
Property and equipment 972,785
Allowance for bad debts 1,517,277
Provision for inventory valuation 3,142,092
Accrued liabilities 770,859
Deferred revenue 146,699
Other 262,589
------------
$ 12,256,126
Less valuation allowance (12,256,126)
------------
Net deferred tax asset $ --
============
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
has provided a valuation allowance for 100% of the deferred tax assets as
the likelihood of realization cannot be determined. As of June 30, 1999,
the Company has a net operating loss (NOL) carryforward for federal income
tax purposes of approximately $13,977,000, which begins to expire in 2009.
The Company likely underwent a change in ownership in accordance with
Internal Revenue Code Section 382, the effect of which has not yet been
determined by the Company. This change would effect the timing of the
utilization of the NOL, as well as the amount of the NOL which may
ultimately be utilized, though it is not expected to materially effect the
amount of the NOL carryforward.
(15) RELATED PARTY TRANSACTIONS
The Company's Chief Executive Officer is a principal of Ocean Castle
Investments, LLC (Ocean Castle) which maintains administrative offices for
the Company's Chief Executive Officer and certain other employees of GTL.
During the year ended October 31, 1998, Ocean Castle executed consulting
agreements with two principal stockholders of GTL. The rights and
obligations of Ocean Castle under the agreements were assumed by the
Company in connection with the Transaction. The consulting agreements
require payments aggregating $1,000,000 to each of the consultants through
December 2003 in exchange for advisory services. Each of the consultants
also received stock options to purchase 33,333 shares of Class A common
stock of GTL at an exercise price of $4.50. As of June 30, 1999, the
Company determined that the consulting agreements had no future value due
to the Company's shift away from in-flight entertainment into alternative
markets such as leisure cruise and passenger rail transport. Only limited
services were provided in 1999 and no future services will be utilized.
Accordingly, the Company recorded a charge to general and administrative
expenses in the Transition Period of $1.6 million representing the balance
due under such contracts.
In August 1999, the Company executed a separation and release agreement
with a stockholder and former officer of the Company, pursuant to which the
Company paid approximately $85,000 in the form of unregistered shares of
the Company's common stock.
In June 1999, the Company loaned to a vice president, $75,000 for the
purpose of assisting in a corporate relocation to the Company's
headquarters in Phoenix, Arizona. Such loan is secured by assets of the
employee. The note matures in August 2009 and bears an interest rate of
approximately 5%.
F-19
<PAGE>
GTL had an Intellectual Property License and Support Services Agreement
(the "License Agreement") for certain technology with FortuNet, Inc.
("FortuNet"). FortuNet is owned by a principal stockholder and previous
director of GTL. The License Agreement provides for an annual license fee
of $100,000 commencing in October 1994 and continuing through November
2002. GTL was required to pay FortuNet $100,000 commencing in October 1994
and continuing through November 2002. The Company paid FortuNet $100,000
during each of the years ended October 31, 1998 and 1997. As of October 31,
1998, the remaining commitment of $400,000 is included in accrued
liabilities on the balance sheet. The Company assumed this liability in
connection with the Transaction. Subsequent to June 30, 1999, the Company
agreed to a termination of this agreement and paid FortuNet $100,000 plus
legal fees. During the Transition Period ended June 30, 1999, the Company
had revised its estimated accrual to $200,000 which is included in accrued
liabilities at June 30, 1999.
During the year ended October 31, 1998, GTL extended by one year a
consulting agreement with a former officer of GTL pursuant to which GTL
will pay $55,000 for services received during the period November 1999
through October 2000. The Company has assumed the liability for the
consulting agreement in connection with the Transaction in the amount of
$73,000 which is included in accrued liabilities at June 30, 1999.
During the year ended October 31, 1998, GTL executed severance and
consulting agreements with three former officers, pursuant to which GTL
paid the former officers and set aside restricted funds in the amounts of
$3,053,642 and $735,000, respectively. The consulting agreements all expire
by September 1999. Payments totaling $735,000 have been and continue to be
made from restricted cash of GTL through September 1999. Expenses
associated with these agreements were charged to general and administrative
expenses in the year ended October 31, 1998.
During the year ended October 31, 1996, GTL executed severance agreements
with three former officers pursuant to which the Company will pay severance
of $752,500 over a three-year period. As of June 30, 1999 and October 31,
1998, $18,000 and $55,000 remained to be paid under these agreements. Such
liabilities were assumed by the Company in connection with the Transaction.
(16) COMMITMENTS AND CONTINGENCIES
(a) LAWSUIT
Hollingsead International, Inc. v. The Network Connection, Inc., State
Court of Forsyth County, State of Georgia, Civil Action File No. 99S0053.
Hollingsead International, Inc. ("Hollingsead") filed suit against the
Company on January 28, 1999, alleging that the Company failed to pay
invoices submitted for installation and service of audio-visual systems in
its aircraft. Hollingsead sought damages in the amount of $357,850, in
addition to interest at the rate of 18% per annum from March 2, 1998,
attorneys' fees and punitive damages. On March 29, 1999, the Company filed
a timely answer and asserted counterclaims against Hollingsead. The parties
entered into a settlement agreement on or about August 5, 1999 that
provided for the payment of $427,870 by the Company, to be paid in
installments, including interest accruing at 8.0% per annum from July 28,
1999 until the balance is paid. The Company has provided for such amount as
of May 1, 1999. The agreement also provides for Hollingsead to pay $5,399
as reimbursement for attorneys' fees. The last installment is due on or
before December 20, 1999. Under the settlement agreement, the Company will
dismiss its counterclaims with prejudice and Hollingsead will dismiss its
Complaint with prejudice upon completion of all payments by the Company.
Sigma Designs, Inc. ("Sigma") v. the Network Connection, Inc., United
States District Court, Northern District of California, San Jose Division,
Civil Action File No. 98-21149J(EAI). Sigma filed a Complaint against the
Company on December 1, 1998, alleging breach of contract and action on
account. Sigma claims that the Company failed to pay for goods that it
F-20
<PAGE>
shipped to the Company. The matter was settled by written agreement dated
January 22, 1999, contingent upon registration of the Company stock and
warrants issued to Sigma as part of such settlement and payment by the
Company of $50,000. The Company did not complete its obligations under the
terms of the original settlement agreement. On or about May 1999, the
shares of the Company issued to Sigma as a part of the settlement of the
above-referenced lawsuit were sold by Sigma to GTL, the parent company of
the Company. The lawsuit was dismissed with prejudice on July 12, 1999.
Swissair/MDL-1269, In re Air Crash near Peggy's Cove, Nova Scotia. This
multi-district litigation relates to the crash of Swissair Flight 111 on
September 2, 1998 in waters near Peggy's Cove, Nova Scotia resulting in the
death of all 229 people on board. The Swissair MD-11 aircraft involved in
the crash was equipped with an Entertainment Network System that had been
sold to Swissair by Interactive Flight Technologies, Inc. Following the
crash, investigations were conducted and continue to be conducted by
Canadian and United States agencies concerning the cause of the crash.
Estates of the victims of the crash have filed lawsuits throughout the
United States against Swissair, Boeing, Dupont and various other parties,
including Interactive Flight Technologies, Inc. TNCi was not a party to the
contract for the Entertainment Network System, but has been named in some
of the lawsuits filed by families of victims on a claim successor
liability. TNCi denies all liability for the crash. TNCi is being defended
by the aviation insurer for Interactive Flight Technologies, Inc.
Federal Express Corporation v. The Network Connection, Inc., State Court of
Forsyth County, State of Georgia, Civil Action File No. 99-V51560685. This
lawsuit was served on the Company on or about July 22, 1999 by Federal
Express Corporation. The suit alleges the Company owes Federal Express
approximately $110,000 for past services rendered. The Company intends to
defend itself vigorously.
The Company is subject to other lawsuits and claims arising in the ordinary
course of its business. In the Company's opinion, as of June 30, 1999, the
effect of such matters will not have a material adverse effect on the
Company's results of operations and financial position.
(b) LEASE OBLIGATIONS
The Company leases office space and equipment under operating leases which
expire at various dates through June 2002. The future minimum lease
commitments under these leases are as follows:
YEAR ENDING JUNE 30, 1999 OPERATING LEASES
------------------------- ----------------
2000 $120,000
2001 120,000
2002 120,000
--------
Total minimum lease payments $360,000
========
Rental expense under operating leases totaled $292,042, $944,932 and
$920,412 for the Transition Period ended June 30, 1999 and fiscal years
ended October 31, 1998 and October 31, 1997, respectively.
(c) CARNIVAL AGREEMENT
In September 1998, the Company entered into a Turnkey Agreement (the
"Carnival Agreement") with Carnival Corporation ("Carnival"), for the
purchase, installation and maintenance of its advanced cabin entertainment
and management system for the cruise industry ("CruiseView") on a minimum
of one Carnival Cruise Lines ship. During the four-year period commencing
on the date of the Carnival Agreement, Carnival has the right to designate
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<PAGE>
an unspecified number of additional ships for the installation of
CruiseView by the Company. The cost per cabin for CruiseView purchase and
installation on each ship is provided for in the Carnival Agreement. In
December 1998, Carnival ordered the installation of CruiseView on the
Carnival Cruise Lines "M/S Sensation," which has been in operational use,
on a test basis, since August 1999. In August 1999, Carnival ordered the
installation of CruiseView on the Carnival Cruise Lines "M/S Triumph."
The terms of the Carnival Agreement provide that Carnival may return the
CruiseView system within the Acceptance Period, as defined in the Carnival
Agreement. For the M/S Sensation, the acceptance period is 12 months. As of
June 30, 1999, the Company recorded deferred revenue of $365,851,
reflecting amounts paid by Carnival. As of June 30, 1999, the Company has
not recognized any revenue in association with the Carnival Agreement. The
Company would be required to return such funds to Carnival in the event
Carnival does not accept the system. Under the Carnival Agreement, the
Company is required to provide a performance bond or standby letter of
credit in favor of Carnival ensuring Carnival's ability to be repaid
amounts previously paid to the Company in the event Carnival determines not
to accept the system as permitted under the Carnival Agreement.
The Company has not provided a bond or letter of credit as of June 30,
1999. Should Carnival require the Company to obtain a bond or letter of
credit, the Company may be required to provide cash collateral to a
financial institution securing such obligation.
(17) SPECIAL CHARGES AND REVERSAL OF WARRANTY, MAINTENANCE AND COMMISSION
ACCRUALS
GTL had previously entered into sales contracts with three airlines,
Schweizerische Luftverkehr AG (Swissair), Debonair Airways, Ltd. (Debonair)
and Alitalia Airlines, S.p.A. (Alitalia) for the manufacture and
installation of its in-flight entertainment network, and to provide
hardware and software upgrades, as defined in the agreements. In connection
with the Transaction, the Company assumed all rights and obligations of the
above contracts.
Pursuant to the October 1997 agreement with Swissair, Swissair purchased
shipsets for the first and business class sections of sixteen aircraft for
an average of $1.7 million per aircraft. Included in the purchase price was
material, installation, maintenance through September 1998, one-year
warranty and upgrade costs for the sixteen aircraft. As of October 31,
1998, the Company had completed installations of the entertainment network
on all of these aircraft. The agreement also required the Company to
install the entertainment network in the first, business and economy class
sections of three additional aircraft, at no charge to Swissair. The
Company was responsible for all costs including entertainment network
components, installation and maintenance through September 1998 for the
three aircraft. As of October 31, 1998, the Company had completed
installations of the entertainment network on all of these aircraft and
title to each of these three shipsets had been transferred to Swissair. The
estimated material, installation, maintenance and one-year warranty and
upgrade costs for these three shipsets of $14,292,404 is included in the
accompanying statement of operations as a special charge for the year ended
October 31, 1997. During the fiscal year ended October 31, 1998, the
Company recognized a recovery of special charges of $606,508. The recovery
of special charges resulted from a reduction in the number of entertainment
networks requiring maintenance in the economy class sections of the
Swissair aircraft and a reduction in development expenses.
In April 1998 and October 1998, the Company entered into additional
contracts with Swissair. The first letter of intent relates to a $4.7
million order for first and business class installations on four Swissair
MD-11 aircraft that are being added to the Swissair fleet. Swissair had
made payments of $1,450,000 on the $4.7 million order through February
1999. No payments have been received since February. The second contract
was to extend the warranty on all installed systems for a second and third
year at a price of $3,975,000. Through February 1999, the Company had been
paid $707,500 under this contract. No subsequent payments have been
received from Swissair.
F-22
<PAGE>
On October 29, 1998, the Company was notified by Swissair of its decision
to deactivate the entertainment networks on all Swissair aircraft. However,
by April 1999, discussions between the Company and Swissair regarding
outstanding financial matters related to current accounts receivable,
inventory, purchase commitments and extended warranty obligations, as well
as planning discussions for an October 1999 reactivation ceased to be
productive. On May 6, 1999, GTL filed a lawsuit against Swissair in the
United States District Court for the District of Arizona seeking damages
for Swissair's failure to honor its obligations for payment and
reactivation of the Company's Entertainment Network.
The Swissair agreements are not assignable to third parties under the terms
of such agreements. However, in connection with the Transaction, GTL has
agreed to pay to the Company any net proceeds, if any, received from
Swissair as a result of the above litigation or otherwise. Further, the
Company, as a subcontractor to GTL, will assume any operational
responsibilities of the Swissair agreement in the event that such
requirement arises. The Company has not assumed any liabilities or
obligations arising out of the crash of Swissair Flight No. 111.
As a result of the above events, management concluded that its only source
of future payment, if any, will be through the litigation process. In
addition, with the deactivation of the entertainment system and Swissair's
breach of its agreements with GTL, the Company believes it will not be
called upon by Swissair to perform any ongoing warranty, maintenance or
development services. Swissair's actions have rendered the Company's
accounts receivable, inventory and deposits worthless as of June 30, 1999.
Accordingly, the Company has recognized deferred revenue on equipment sales
to the extent of cash received of $876,000; charged off inventory to cost
of equipment sales in the amount of $1,517,000; wrote off deposits of
$655,000 to special charges; and reversed all warranty and maintenance
accruals totaling $5,164,000.
Pursuant to an agreement with Debonair, the Company was to manufacture,
install, operate, and maintain the entertainment network on six Debonair
aircraft for a period of eight years from installation. In February 1998,
the Company and Debonair signed a Termination Agreement. Pursuant to the
Termination Agreement, Debonair removed the entertainment network from its
aircraft and the Company paid Debonair $134,235 as full and final
settlement of all of its obligations with Debonair. Included in the
accompanying statement of operations for the year ended October 31, 1997
are special charges of $956,447 for the cost of the first completed shipset
and $2,881,962 to write-down all inventory related to the Debonair program.
In connection with these agreements with Swissair and Debonair and the
absence of any new entertainment network orders for the Company, property
and equipment write-downs of $1,006,532 and $1,518,952 were recorded as
special charges during fiscal 1998 and 1997, respectively.
Pursuant to an agreement with Alitalia, the Company delivered five first
generation shipsets for installation on Alitalia aircraft during fiscal
1996. Alitalia has notified the Company that it does not intend to continue
operation of the shipsets, and the Company has indicated that it will not
support the shipsets.
For the Transition Period ended June 30, 1999, the Company recorded
warranty, maintenance and commission accrual adjustments of $5,117,704,
$1,730,368 and $303,321, respectively, related to the Swissair and Alitalia
matters. Such adjustments to prior period estimates, which totaled
$7,151,393 resulted from an evaluation of specific contractual obligations
and discussions between the new management of the Company and other parties
related to such contracts. Based on the results of the Company's findings
during this period, such accruals were no longer considered necessary.
F-23
<PAGE>
(18) SEGMENT INFORMATION
The Company operates principally in one industry segment; development,
manufacturing and marketing of computer-based entertainment and data
networks. Historically, the Company's principal revenues have been derived
from European customers.
For the Transition Period and fiscal years ended October 31, 1998 and 1997,
one customer accounted for approximately 91%, 98% and 95% of the Company's
sales. Outstanding receivables from this customer were zero and $1.1
million respectively at June 30, 1999 and October 31, 1998. (See note 15.)
(19) SUPPLEMENTAL FINANCIAL INFORMATION
Supplemental disclosure of cash flow information is as follows:
TRANSITION
PERIOD ENDED YEAR ENDED OCTOBER 31,
JUNE 30, 1999 1998 1997
------------- ------- --------
Cash paid for interest $ -- $11,954 $ 13,423
========= ======= ========
Noncash investing and
financing activities:
Capital lease obligations incurred $ -- $ -- $210,678
========= ======= ========
(20) SUBSEQUENT EVENTS
In July and August 1999, GTL purchased all of the Series A and E notes and
the Series D notes, respectively, from the holders of such notes.
Concurrent with such purchase by GTL, the Company executed the fifth and
sixth allonges to the Promissory Note which cancelled such Series Notes and
rolled the principal balance, plus accrued but unpaid interest, penalties
and redemption premiums on the Series Notes into the principal balance of
the Promissory Note.
On August 24, 1999, the Board of Directors of GTL approved the conversion
of the Promissory Note and outstanding advances to the Company into Series
C Stock of the Company and, the simultaneous conversion of the Series C
Stock into the Company's common stock in accordance with the designation of
the Series C Stock. Such conversion, to the extent it exceeded
approximately one million shares of the Company's common stock on August
24, 1999, was contingent upon receiving stockholder approval to increase
the authorized share capital of the Company which was subsequently approved
on September 17, 1999. Accordingly, the Company will issue to GTL
approximately 5.6 million shares of its common stock in October 1999, based
on an anticipated conversion date of August 24, 1999. Had this transaction
occurred on June 30, 1999, pro forma stockholders' equity and tangible net
worth would have been $9,320,934 (unaudited) and $2,201,128 (unaudited),
respectively.
In September 1999, the Company sold one of its two buildings in Alpharetta,
Georgia. The net proceeds from the sale, plus cash of approximately $80,000
was used by the Company to repay the Note payable due April 19, 2001. The
sale of the second building is expected to occur in November 1999 and net
proceeds are expected to be used to retire the Note payable due 2009.
On August 24, 1999, the GTL Board of Directors approved a $5 million
secured revolving credit facility by and among GTL and the Company (the
"Facility"). The Facility provides that the Company may borrow up to $5
million for working capital and general corporate purposes at the prime
rate of interest plus 3%. The Facility matures in September 2001. The
Company paid an origination fee of $50,000 to GTL and will pay an unused
line fee of 0.5% per annum. The Facility is secured by all of the assets of
the Company and is convertible, at GTL's option, into shares of the
Company's Series C stock. The Company executed the Facility on October 12,
1999.
F-24
<PAGE>
THE NETWORK CONNECTION, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
ASSETS 2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 258,459 $ 2,751,506
Restricted cash 463,405 446,679
Short-term investments -- 302,589
Accounts receivable 21,087 75,792
Notes receivable from related parties 53,551 98,932
Inventories, net of allowance of $7,837,595 5,010,311 1,400,000
Prepaid expenses 202,361 169,429
Assets held for sale -- 800,000
Due from affiliate 48,986 --
Other current assets 257,973 173,999
------------ ------------
Total current assets 6,316,133 6,218,926
Note receivable from related party 78,000 75,000
Property and equipment, net of accumulated depreciation
of $1,087,670 and $683,029, respectively 1,235,920 1,338,580
Intangibles, net of accumulated amortization of $630,368
and $74,981, respectively 6,767,262 7,119,806
Other assets 37,650 150
------------ ------------
Total assets $ 14,434,965 $ 14,752,462
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,778,905 $ 1,663,411
Accrued liabilities 925,336 989,342
Deferred revenue 2,108,151 365,851
Accrued product warranties 291,796 --
Dividends payable 110,000 --
Notes payable 6,190 42,751
Notes payable to related parties -- 68,836
------------ ------------
Total current liabilities 6,220,378 3,130,191
Notes payable 1,080,000 3,467,045
Other liabilities 945,765 1,220,340
Due to affiliate -- 1,647,692
------------ ------------
Total liabilities 8,246,143 9,465,268
------------ ------------
Commitments and contingencies
Stockholders' equity:
Series B preferred stock par value $0.01 per share, 1,500
shares authorized issued and outstanding 15 15
Series C preferred stock par value $0.01 per share, 1,600 shares
authorized; zero and 800 issued and outstanding, respectively -- 8
Series D preferred stock par value $0.01 per share, 2,495,400
authorized, issued and outstanding 24,954 24,954
Common stock par value $0.001 per share, 40,000,000 shares
authorized; 12,800,046 and 6,339,076 issued and
outstanding, respectively 12,801 6,339
Additional paid-in capital 93,522,223 88,316,945
Accumulated other comprehensive income:
Loss on foreign currency translation (1,141) --
Net unrealized loss on investment securities -- (526)
Accumulated deficit (87,370,030) (83,060,541)
------------ ------------
Total stockholders' equity 6,188,822 5,287,194
------------ ------------
Total liabilities and stockholders' equity $ 14,434,965 $ 14,752,462
============ ============
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
THE NETWORK CONNECTION, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31, Nine months ended March 31,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Equipment sales $ 590 $ -- $ 5,597,909 $ 89,028
Service income -- -- 59,827 389,037
------------ ------------ ------------ ------------
590 -- 5,657,736 478,065
------------ ------------ ------------ ------------
Costs and expenses:
Cost of equipment sales 225,669 -- 3,680,584 283,714
Cost of service income 21,189 -- 36,292 736
General and administrative expenses 2,103,517 928,600 4,678,325 6,947,818
Non cash compensation expense 238,429 -- 545,311 --
Provision for doubtful accounts -- -- -- 28,647
Special charges -- -- -- (190,000)
Depreciation and amortization expense 332,511 60,521 972,528 443,620
------------ ------------ ------------ ------------
2,921,315 989,121 9,913,040 7,514,535
------------ ------------ ------------ ------------
Operating loss (2,920,725) (989,121) (4,255,304) (7,036,470)
Other:
Interest expense (11,331) (1,358) (150,839) (5,614)
Interest income 13,354 39,529 90,728 118,188
Other expense (15,911) -- (24,741) (567,317)
------------ ------------ ------------ ------------
Net loss (2,934,613) (950,950) (4,340,156) (7,491,213)
Cumulative dividend on preferred stock (30,000) -- (90,000) --
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (2,964,613) $ (950,950) $ (4,430,156) $ (7,491,213)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.24) $ (0.90) $ (0.52) $ (7.10)
============ ============ ============ ============
Weighted average number of shares
outstanding, basic and diluted 12,432,543 1,055,475 8,476,461 1,055,475
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
THE NETWORK CONNECTION, INC.
Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE NINE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,340,156) $(7,491,213)
Adjustments to reconcile net loss to net cash:
Depreciation and amortization 972,528 443,620
Special charges -- (190,000)
Loss on sale of assets held for sale 37,893 --
Loss on disposal of equipment -- 1,006,523
Non cash compensation expense 545,311 --
Changes in net assets and liabilities, net of
effect of acquisition:
Increase (decrease) in accounts receivable 54,705 (717,550)
Payments due from affiliate (48,986) --
(Increase) decrease in inventories (3,610,311) 86,643
(Increase) decrease in prepaid expenses (32,932) 175,286
(Increase) decrease in other current assets (83,974) 293,919
(Increase) decrease in other assets (43,750) 66,695
Increase (decrease) in accounts payable 916,910 (877,794)
Decrease in accrued liabilities (196,208) (1,056,702)
Increase in deferred revenue 1,742,300 1,900,518
Increase (decrease) in accrued product warranties 291,698 (1,426,013)
----------- -----------
Net cash used in operating activities $(3,794,972) $(7,786,068)
----------- -----------
Cash flows from investing activities:
Purchases of investment securities (542) --
Sale of investment securities 303,131 --
Purchases of property and equipment (305,571) (31,346)
Proceeds from sale of equipment 3,590 13,216
Proceeds from sale of assets held for sale 762,107 --
Increase in restricted cash (16,726) (442,282)
----------- -----------
Net cash provided by (used in) investing activities $ 745,989 $ (460,412)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (785,364) --
Payments received on notes receivable 42,381 --
Borrowings under revolving credit facility 1,080,000 --
Payments from affilate 289,017 --
Re-purchase of outstanding warrants (296,036) --
Capital contribution -- 8,312,363
Employee stock option exercises 227,079 --
Payments on capital lease obligations -- (63,910)
----------- -----------
Net cash provided by financing activities $ 557,077 $ 8,248,453
----------- -----------
Effect of exchange rate on cash and cash equivalents (1,141) --
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,493,047) 1,973
Cash and cash equivalents at beginning of period 2,751,506 111,418
----------- -----------
Cash and cash equivalents at end of period $ 258,459 $ 113,391
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
THE NETWORK CONNECTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PART I. FINANCIAL INFORMATION
BASIS OF PRESENTATION
(1) PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
The Network Connection, Inc. and its wholly-owned subsidiary TNCi UK Limited
(the "Company" or "TNCi"). All significant intercompany accounts have been
eliminated.
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles, pursuant
to the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the accompanying condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals)
which are necessary for a fair presentation of the results for the interim
periods presented. Certain information and footnote disclosures normally
included in financial statements have been condensed or omitted pursuant to such
rules and regulations. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements and
notes thereto for the eight-month transition period ended June 30, 1999,
included in the Company's Transition Report on Form 10-KSB.
The results of operations for the three months and nine months ended
March 31, 2000 are not necessarily indicative of the results to be expected for
the entire fiscal year. Certain reclassifications have been made to the amounts
in the June 30, 1999 balance sheet to conform with the March 31, 2000
presentation.
On May 18, 1999, Global Technologies, Ltd. ("Global") received from the
Company 1,055,745 shares of its Common Stock and 2,495,400 shares of its Series
D Convertible Preferred Stock in exchange for $4,250,000 in cash and
substantially all the assets and certain liabilities of Global's Interactive
Entertainment Division ("IED"), as defined in the Asset Purchase and Sale
Agreement dated April 30, 1999, as amended (the "Transaction"). The Transaction
has been accounted for as a reverse merger whereby, for accounting purposes,
Global is considered the accounting acquiror, and although the legal capital
structure carries forward, the Company is treated as the successor to the
historical operations of IED. Accordingly, the historical financial statements
of the Company, which previously have been reported to the Securities and
Exchange Commission ("SEC") on Forms 10-KSB, and 10-QSB, among others, as of and
for all periods through March 31, 1999, will be replaced with those of IED.
The financial statements as of and for the three months and nine months
ended March 31, 1999, reflect the historical results of Global's IED as
previously included in Global's consolidated financial statements. The
Transaction date for accounting purposes was May 1, 1999. As of March 31, 2000,
the Company is an 80% owned subsidiary of Global, whose ownership is represented
by 1,500 shares of the Company's Series B 8% Convertible Preferred Stock,
2,495,400 shares of the Company's Series D Convertible Preferred Stock and
approximately 6.8 million shares of the Company's Common Stock. The historical
financial statements of the Company up to the date of the Transaction as
previously reported will no longer be included in future filings of the Company.
F-28
<PAGE>
(2) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Additionally, such estimates and assumptions affect the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
(3) NOTES PAYABLE
Prior to the Transaction, the Company entered into a Secured Promissory
Note with Global in the principal amount of $750,000, bearing interest at a rate
of 9.5% per annum, and a related security agreement granting Global a security
interest in its assets (the "Promissory Note"). The Promissory Note was
convertible into shares of the Company's Series C 8% Convertible Preferred Stock
("Series C Stock") at the discretion of Global. The Note had an original
maturity of May 14, 1999, but had been extended until September 2001.
In July and August 1999, Global purchased all of the Series A and E
notes and the Series D notes of the Company, respectively, from the holders of
such notes (the "Series Notes"). Concurrent with such purchase by Global, the
Company executed several allonges to the Promissory Note which cancelled such
Series Notes and rolled the principal balance, plus accrued but unpaid interest,
penalties and redemption premiums on the Series Notes into the principal balance
of the Promissory Note. Subsequent to May 18, 1999, Global had also advanced
working capital to the Company in the form of intercompany advances. In August
1999, the Company executed an allonge to the Promissory Note which rolled the
intercompany advances into the principal balance of the Promissory Note and
granted Global the ability to convert the Promissory Note directly into shares
of the Company's Common Stock, without first converting to Series C Stock, as an
administrative convenience.
On August 24, 1999, the Board of Directors of Global approved the
conversion of the Promissory Note into shares of the Company's Common Stock.
Such conversion, to the extent it exceeded approximately one million shares of
the Company's Common Stock on August 24, 1999, was contingent upon receiving
shareholder approval to increase the authorized share capital of the Company.
This increase in authorized share capital was subsequently approved at the
September 17, 1999 Special Meeting of the Company's shareholders. Accordingly,
in December 1999, the Company issued to Global 4,802,377 shares of its Common
Stock based on the conversion date of August 24, 1999. Separately from the
Promissory Note, in December 1999, the Company issued 886,140 shares of its
Common Stock to Global upon conversion of the Series C Stock held by Global.
Also on August 24, 1999, the Global Board of Directors approved a $5
million secured revolving credit facility by and between Global and the Company
(the "Facility"). The Facility provides that the Company may borrow up to $5
million for working capital and general corporate purposes at the prime rate of
interest plus 3%. The Facility matures in September 2001. The Company paid an
origination fee of $50,000 to Global and will pay an unused line fee of 0.5% per
annum. The Facility is secured by all of the assets of the Company and is
convertible, at Global's option, into shares of the Company's Common Stock at a
price equal to the lesser of 66.7% of the trailing five-day average share price
of the preceding 20 days, $1.50 per share or any lesser amount at which Common
Stock has been issued to third parties. Pursuant to Nasdaq rules, Global may not
convert borrowings under the Facility into shares of Common Stock in excess of
19.99% of the number of shares of Common Stock outstanding on August 24, 1999
without shareholder approval. As of March 31, 2000, $1,080,000 was outstanding
under the Facility.
F-29
<PAGE>
In September 1999, the Company sold one of its two buildings in
Alpharetta, Georgia. The net proceeds from the sale, plus cash of approximately
$80,000 was used by the Company to repay a Note payable due April 19, 2001 in
the principal amount of $470,000. The sale of the second building occurred in
November 1999. The net proceeds of approximately $367,000 from the sale were
used to retire a Note payable due 2009 in the principal amount of $217,000.
In October 1999, a note payable in the principle amount of $400,000 due
September 5, 1999 was converted into 200,000 shares of the Company's Common
Stock.
(4) WARRANTS
In December 1999, the Company issued common stock purchase warrants to
purchase 25,000 shares of the Company's Common Stock at $6.50 per share to Emden
Consulting Corp. in exchange for advisory services. The exercise period of the
warrants expires in December 2004. Non-cash compensation expense of $110,941 was
recorded in the quarter ended December 31, 1999.
In December 1999, the Company issued common stock purchase warrants to
purchase 25,000 shares of the Company's Common Stock at $6.50 per share to
Waterton Group LLC in exchange for advisory services. The exercise period of the
warrants expires in December 2004. Non-cash compensation expense of $110,941 was
recorded in the quarter ended December 31, 1999.
In December 1999, the Company issued common stock purchase warrants to
purchase 100,000 shares of the Company's Common Stock at prices ranging from $6
to $10 per share to Continental Capital & Equity Corp. in exchange for public
relations and financial advisory services. The warrants vest over a period of
270 days and expire in February 2002. Non-cash compensation expense of $151,286
was recognized in the three months ended March 31, 2000 and additional non-cash
compensation expense may be recognized, under variable plan accounting, over the
remaining nine months of the agreement.
On March 13, 2000, the Company issued 236,080 shares of stock in
connection with the cashless exercise of common stock purchase warrants held by
the former holders of the Company's Series A and E notes. The warrants exercised
represented warrants to purchase 311,525 shares of the Company's Common Stock.
(5) OPTION GRANTS
In November 1999, the Compensation Committee of the Board of Directors
of the Company recommended option grants to purchase up to 500,000 shares of the
Company's Common Stock to Mr. Irwin L. Gross, Chairman and Chief Executive
Officer of the Company. Such recommendation was accepted and approved by the
Board of Directors. One quarter of these options vested immediately and one
quarter vest in equal annual installments over three years. The remainder vest
on the sixth anniversary of the date of grant, subject to acceleration to a
three-year vesting schedule in the event certain performance milestones are
achieved. Exercise price of the options is equal to the closing market price of
the Company's Common Stock on the day of grant, and the options expire in
October 2009.
On March 6, 2000, the Company granted options to purchase up to 800,000
shares of the Company's Common Stock to Mr. Robert Pringle, President and Chief
Operating Officer of the Company. One fifth of these options vest on June 6,
2000, with the remainder vesting in four equal annual installments beginning
March 6, 2001. Exercise price of the options is equal to the closing market
price of the Company's Common Stock on the day prior to grant, and the options
expire on March 6, 2010.
On March 6, 2000, the Company granted options to purchase up to 800,000
shares of the Company's Common Stock to Dr. Jay Rosan, an Executive Vice
President of the Company. One fifth of these options vest on June 6, 2000, with
the remainder vesting in four equal annual installments beginning March 6, 2001.
Exercise price of the options is equal to the closing market price of the
Company's Common Stock on the day prior to grant, and the options expire on
March 6, 2010.
F-30
<PAGE>
On March 6, 2000, the Company granted options to purchase up to 250,000
shares of the Company's Common Stock to Mr. Richard Genzer, Chief Technology
Officer of the Company. One fifth of these options vest on June 6, 2000, with
the remainder vesting in four equal annual installments beginning March 6, 2001.
Exercise price of the options is equal to the closing market price of the
Company's Common Stock on the day prior to grant, and the options expire on
March 6, 2010.
(6) SEGMENT INFORMATION
For the nine months ended March 31, 2000 and 1999, respectively, the
Company operated principally in one industry segment; development, manufacturing
and marketing of computer-based entertainment and data networks. Historically,
the Company's principal revenues have been derived from European customers.
For the nine months ended March 31, 2000 and 1999, respectively, one
customer accounted for approximately 97% and a separate customer accounted for
almost 100% of the Company's sales. Outstanding receivables from these customers
were $0 and $4,188,712 respectively, at March 31, 2000 and March 31, 1999.
(7) COMMITMENTS AND CONTINGENCIES
(a) LAWSUITS
SWISSAIR/MDL-1269, IN RE AIR CRASH NEAR PEGGY'S COVE, NOVA SCOTIA. This
multi-district litigation, which is being overseen by the United States District
Court for the Eastern District of Pennsylvania, relates to the crash of Swissair
Flight No. 111 on September 2, 1998. The Swissair MD-11 aircraft involved in the
crash was equipped with an entertainment network system that had been sold to
Swissair by Global Technologies, Ltd. ("Global" formerly known as Interactive
Flight Technologies, Inc.). Estates of the victims of the crash have filed
lawsuits throughout the United States against Swissair, Boeing, Dupont and
various other parties, including Global. TNCi has been named in some of the
lawsuits filed on a successor liability theory. TNCi denies all liability for
the crash. TNCi is being defended by the aviation insurer for Global.
FEDERAL EXPRESS CORPORATION V. THE NETWORK CONNECTION, INC., State
Court of Forsyth County, State of Georgia, Civil Action File No. 99-SC-0053.
This lawsuit was served on the Company on or about July 22, 1999 by Federal
Express Corporation and relates to charges incurred by prior management. The
suit alleged the Company owes Federal Express approximately $110,000 for past
services rendered. The Company has settled this matter for $75,000, with $25,000
having been paid on execution of the settlement agreement on March 3, 2000,
$10,000 having been paid on each of April 1, 2000 and May 1, 2000 and three
additional payments of $10,000 to be paid on each of June 1, 2000, July 1, 2000
and August 1, 2000.
BRYAN R. CARR V. THE NETWORK CONNECTION, INC. AND GLOBAL TECHNOLOGIES,
LTD., Superior Court of Georgia, Civil Action No. 99-CV-1307. Bryan R. Carr, the
Company's former Chief Operating and Financial Officer, and a former Director,
filed a claim on November 24, 1999 alleging a breach of his employment
agreement. Mr. Carr claims that he is entitled to the present value of his base
salary through October 31, 2001, a share of any "bonus pool," the value of his
stock options and accrued vacation time. The Company is currently defending the
claim.
A suit captioned LODGENET ENTERTAINMENT CORPORATION V. THE NETWORK
CONNECTION, INC. was filed April 5, 2000 in the Circuit Court for the Second
Judicial Circuit of the State of South Dakota. The action arises out of the
Company's hiring of Theodore P. Racz, a former LodgeNet Entertainment
Corporation ("LodgeNet") employee, as its Senior Vice President of the Hotels &
Hospitality division. LodgeNet is alleging tortious interference with contract
and tortious interference with business relationships. LodgeNet is seeking to
prohibit Mr. Racz from being employed by the Company, as well as seeking
damages, fees and costs.
The Company may be subject to other lawsuits and claims arising in the
ordinary course of its business. In the Company's opinion, as of March 31, 2000,
the effect of such matters are not expected to have a material adverse effect on
the Company's results of operations and financial position.
F-31
<PAGE>
(b) CARNIVAL AGREEMENT
In September 1998, the Company entered into a Turnkey Agreement (the
"Carnival Agreement") with Carnival Corporation ("Carnival") for the purchase,
installation and maintenance of its advanced cabin entertainment and management
system for the cruise industry ("CruiseView(TM)") on a minimum of one Carnival
Cruise Lines ship. During the four-year period commencing on the date of the
Carnival Agreement, Carnival has the right to designate an unspecified number of
additional ships for the installation of CruiseView(TM). The cost per cabin for
CruiseView(TM) purchase and installation on each ship is provided for in the
Carnival Agreement. In December 1998, Carnival ordered the installation of
CruiseView(TM) on one Carnival Cruise Lines "Fantasy" class ship which has been
in operational use since August 1999. In August 1999, Carnival ordered the
installation of CruiseView(TM) on one Carnival Cruise Lines "Destiny" class ship
which has been in operational use since October 1999. Under the terms of the
agreement, the Company receives payment for 50% of the sales price of the system
in installments through commencement of operation of the system. Recovery of the
remaining sales price of the system is to be achieved through the receipt of the
Company's 50% share of net profits, as defined in the Carnival Agreement,
generated by the system over future periods.
The terms of the Carnival Agreement provide that Carnival may return
the CruiseView(TM) system within the acceptance period, as defined in the
Carnival Agreement, or for breach of warranty. The acceptance period for the
Fantasy and Destiny class ships are twelve months and three months,
respectively, from completion of installation and testing, which occurred in
February 1999 and October 1999, respectively. The initial warranty period for
these systems is three years. As of March 31, 2000, the Company had recorded
deferred revenue of approximately $2.1 million related to the two Carnival
ships.
In the quarter ended March 31, 2000, the Company concluded that the
cost of building and installing CruiseView(TM) systems on the existing two
Carnival ships pursuant to the Carnival Agreement has exceeded the revenue that
can be earned in connection therewith. Accordingly, the Company has recorded an
expense of $208,146 in the period ended March 31, 2000 reflecting the excess of
cost over expected revenue. Carnival's continuing to exercise its option for
building and installing CruiseView(TM) on additional ships under the agreement
may prove unprofitable and therefore have a negative effect on the Company's
working capital. The Company is currently endeavoring to renegotiate the terms
of the agreement with Carnival. (See "Note 8 - Subsequent Event").
NOTE (8) SUBSEQUENT EVENT
Since the installation of the CruiseView(TM) system on two Carnival
cruise ships, and beginning in the quarter ended March 31, 2000, the Company has
experienced costs in excess of those recoverable under the Carnival Agreement.
Given these costs, and ongoing technical issues, the Company notified Carnival
of its desire to renegotiate the Carnival Agreement. During these discussions,
Carnival notified the Company in a letter dated April 24, 2000 that it sought to
terminate the Carnival Agreement and sought to assert certain remedies
thereunder. The Company and Carnival are in discussions seeking to resolve
issues under the Carnival Agreement regarding recovery of amounts paid to the
Company (recorded as deferred revenue), the Company's recovery of its inventory
costs, potential warranty/de-installation obligations and other matters.
Concurrently, the Company and Carnival are in discussions with respect
to a new agreement which would cover the installation of the Company's latest
CruiseView(TM) technology on the "Fantasy" class ship discussed above, and
contractual terms more favorable to the Company than the Carnival Agreement,
including a longer-term and multiple ship arrangement. The Company believes its
new technology improves the Company's ability to create multiple new content and
commerce-based revenue streams, and to establish a business relationship
providing appropriate returns to each partner. However, while the Company is
optimistic about the discussions, there is no assurance that the Company will be
successful in reaching a mutually satisfactory resolution of the Carnival
Agreement and in securing a new, more favorable long term contract with
Carnival.
F-32
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XI of the Amended and Restated Articles of Incorporation of The
Network Connection, Inc. eliminates the personal liability of directors to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that such elimination of the personal
liability of a director to the corporation does not apply for any liability for:
(i) any appropriation, in violation of his duties, of any business
opportunity of the corporation,
(ii) acts or omissions which involve intentional misconduct or a
knowing violation of law,
(iii) actions prohibited under Section 14-2-832 of the Georgia Business
Corporation Code (i.e., liabilities imposed upon directors who vote for or
assent to the unlawful payment of dividends, unlawful payment of dividends,
unlawful repurchases or redemption of stock, unlawful distribution of assets of
the corporation to the shareholders without the prior payment or discharge of
the corporation's debts or obligations, or unlawful making or guaranteeing of
loans to directors), or
(iv) any transaction from which the director derived an improper
personal benefit.
In addition, Article XII of the corporation's Amended and Restated
Articles of Incorporation provides that the corporation shall indemnify its
corporate personnel, directors and officers to the fullest extent permitted by
the Georgia Business Corporation Code, as amended from time to time.
Article VI of the corporation's Bylaws reiterates that the corporation
shall indemnify any and all persons it has the power to indemnify to the fullest
extent permitted by the Georgia Business Corporation Code. However, the Bylaws
further provide that such authorization shall not be deemed to be exclusive of
any other rights to which those indemnified may be entitled by way of agreement,
resolution of shareholders or disinterested directors, or otherwise.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of the offering, which are to be borne by the corporation,
are estimated as follows:
SEC registration fee $ 8,120.90
NASD registration fee 2,000.00
Legal services and expenses 50,000.00
Accounting services 20,000.00
Taxes 5,000.00
Transfer Agent Fees 2,000.00
Printing 2,000.00
----------
Total $89,120.90
==========
All of the above expenses except for registration fee are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On October 23, 1998, the Network Connection, Inc. elected to exchange a
promissory note with an institutional investor in the amount of $1,250,000 for
1,500 shares of the Network Connection's Series B 8% Convertible Preferred Stock
and warrants to acquire 100,000 shares of common stock issued to the holder of
the Series B Preferred Stock.
On December 29, 1998, in consideration for $280,000 in cash the Network
Connection sold in a private placement to a single institutional investor, Cache
Capital, LLC, 80,000 shares of its common stock in association with the right to
acquire up to 80,000 additional repricing shares of common stock without the
payment of additional consideration pursuant to the terms of a common stock
purchase agreement dated as of December 28, 1998.
On January 22, 1999, in consideration for the settlement of outstanding
litigation brought by Sigma Design, Inc., a vendor of the Network Connection,
and the mutual release of claims under the terms of the Settlement Agreement,
the Network Connection agreed to pay $50,000.00 in cash to Sigma and to issue to
Sigma 110,000 initial shares of common stock. Global Technologies purchased
these securities from Sigma in June 1999.
On May 11, 1999, Global Technologies acquired directly from the Network
Connection 800 shares of Series C 8% Convertible Preferred Shares of the Network
Connection, par value $.01 per share, Stated Value $1,000 per share, in
consideration for Global Technologies' waiver of all our prior defaults and
arrearages arising out of or related to the Series B shares, which it purchased
from a third-party investor on the same date.
On May 17, 1999, Global Technologies acquired 1,055,745 shares of the
common stock of the Network Connection, and 2,495,400 shares of the Series D
Convertible Preferred Stock of the Network Connection, par value $.01 per share,
stated value $10.00 per share, in exchange for certain assets relating to its
Interactive Entertainment Division, including all fixed assets, inventory, and
intellectual property rights and other intangibles, prepaid expenses and other
property of Global Technologies used in such division, plus cash in the amount
of $4,250,000. The cash transfer to the Network Connection by Global
II-2
<PAGE>
Technologies was obtained from the working capital of Global Technologies. As
part of the May 17, 1999 transaction, the Network Connection also assumed
certain liabilities related to the Global Technologies assets transfer.
On September 14, 1999, the Network Connection issued 66,667 shares of
common stock of the Network Connection to Barbara Riner in consideration for the
execution and delivery of a separation and release agreement. The issuance was
exempt under Section 4(2) of the Securities Act.
On October 13, 1999, the Network Connection issued 200,000 shares of
common stock to Atlantis Capital, LLC pursuant to conversion of a convertible
note payable in the amount of $400,000.00. The issuance was exempt under Section
4(2) of the Securities Act.
On November 10, 1999, the Company granted Irwin L. Gross an option to
purchase up to 500,000 shares of its Common Stock at an exercise price per share
of $2.00, the closing price of a share of stock as reported on the Nasdaq
SmallCap Market for November 10, 1999. One quarter of the options vested on the
date of grant and one quarter vest in equal installments on each of the first
three anniversaries of the date of grant. The remaining half of the options vest
on the sixth anniversary of the date of grant, subject to acceleration to a
three-year vesting schedule in the event of the achievement of certain
performance milestones. These options were granted in a transaction exempt from
the registration provisions of the Securities Act pursuant to Section 4(2)
thereof.
In November 1999, the Board of Directors approved the issuance of
79,091 shares of the Company's common stock to Coche Capital in connection with
an April 1999 financing agreement. This transaction is exempt under Section 4(2)
of the Securities Act.
In December 1999, the Company issued stock purchase warrants to
purchase 25,000 shares of common stock at $6.50 per share to Emden Consulting
Corp. in exchange for advisory services. The exercise period of the warrants
expires in December 2004. This issuance is exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) thereof.
In December 1999, the Company issued stock purchase warrants to
purchase 25,000 shares of common stock at $6.50 per share to Waterton Group LLC
in exchange for advisory services. The exercise period of the Warrants expires
in December 2004. This issuance is exempt from the registration provisions of
the Securities Act pursuant to Section 4(2) thereof.
On December 27, 1999, the Company entered into an agreement to issue
29,500 shares of its common stock to Continental Capital & Equity Corp.
("CCEC"). In addition, the Company will issue a warrant covering 100,000 shares
of common stock to CCEC. The warrants are exercisable at prices ranging from
$6.00 to $10.00 per share of common stock and vest over a period of 270 days
from issuance. The warrants expire in February 2002. These issues were made in
consideration of public relations and advisory services to be provided by CCEC
and are exempt from the registration provisions of the Securities Act under
Section 4(2) thereof.
II-3
<PAGE>
On March 6, 2000, the Company granted options to purchase up to 800,000
shares of the Company's Common Stock to Mr. Robert Pringle, President and Chief
Operating Officer of the Company. One fifth of these options vest on June 6,
2000, with the remainder vesting in four equal annual installments beginning
March 6, 2001. Exercise price of the options is equal to the closing market
price of the Company's Common Stock on the day prior to grant, and the options
expire on March 6, 2010. These options were granted in a transaction exempt from
the registration provisions of the Securities Act pursuant to section 4(2)
thereof.
On March 6, 2000, the Company granted options to purchase up to 800,000
shares of the Company's Common Stock to Dr. Jay Rosan, an Executive Vice
President of the Company. One fifth of these options vest on June 6, 2000, with
the remainder vesting in four equal annual installments beginning March 6, 2001.
Exercise price of the options is equal to the closing market price of the
Company's Common Stock on the day prior to grant, and the options expire on
March 6, 2010. These options were granted in a transaction exempt from the
registration provisions of the Securities Act pursuant to section 4(2) thereof.
On March 6, 2000, the Company granted options to purchase up to 250,000
shares of the Company's Common Stock to Mr. Richard Genzer, Chief Technology
Officer of the Company. One fifth of these options vest on June 6, 2000, with
the remainder vesting in four equal annual installments beginning March 6, 2001.
Exercise price of the options is equal to the closing market price of the
Company's Common Stock on the day prior to grant, and the options expire on
March 6, 2010. These options were granted in a transaction exempt from the
registration provisions of the Securities Act pursuant to section 4(2) thereof.
On March 13, 2000, the Company issued 236,080 shares of its common
stock in connection with the cashless exercise of common stock purchase warrants
held by the former holders of Series A and E notes. The warrants exercised
represented warrants to purchase 311,525 shares of the Company's Common Stock.
These shares were issued in a transaction exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) thereof.
On May 4, 2000, the Company issued 107,433 shares of its common stock
in connection with the cashless exercise of common stock purchase warrants held
by Goodbody International. The warrants exercised represented warrants to
purchase 184,700 shares of the Company's Common Stock. These shares were issued
in a transaction exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof.
ITEM 27. EXHIBITS.
Exhibit
Number Description
------ -----------
3.1.1 Second Amended and Restated Articles of Incorporation (1.1)
3.1.2 Articles of Amendment to the Articles of Incorporation (re: Series A
Preferred) (1.2)
3.1.3 Articles of Amendment to the Articles of Incorporation (re: Series B
Preferred) (2)
3.1.4 Articles of Amendment to the Articles of Incorporation (re:
elimination of Series A preferred) (10)
3.1.5 Articles of Amendment to the Articles of Incorporation (re:
Amendment to Series B Preferred) (6)
3.1.6 Articles of Amendment to the Articles of Incorporation (re: Series C
Preferred) (6)
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<PAGE>
Exhibit
Number Description
------ -----------
3.1.7 Articles of Amendment to the Articles of Incorporation (re: Series D
Preferred) (8)
3.1.8 Articles of amendment to the Second Amended and Restated Articles of
Incorporation (re: increase of authorized shares) (1.3)
3.1.9 Articles of Amendment to the Second Amended and Restated Articles of
Incorporation (re: increase in shares of Series C Preferred) (1.3)
3.2 Amended and Restated Bylaws (1.1)
5.1 Opinion of Mesirov Gelman Jaffe Cramer & Jamieson, LLP *
10.1 Employment Agreement, dated October 31, 1998, by and between the
corporation and Wilbur L. Riner (2)
10.2 Addendum and Modification to Employment Agreement, dated May 14,
1999, by and between the corporation and Wilbur L. Riner (8)
10.3 Employment Agreement, dated October 31, 1998, by and between the
corporation and James E. Riner (2)
10.4 Addendum and Modification to Employment Agreement, dated May 14,
1999, by and between the corporation and James E. Riner (8)
10.5 Employment Agreement, dated October 31, 1998, by and between the
corporation and Bryan R. Carr (2)
10.6.1 Employment Agreement, effective June 11, 1999, by and between the
corporation and Frank Gomer (8)
10.6.2 Separation Agreement and Release of All Claims, effective April 12,
2000, by and between the corporation and Frank Gomer *
10.7 Employment Agreement, effective June 11, 1999, by and between the
corporation and Morris C. Aaron (8)
10.10 1994 Employee Stock Option Plan, including form of Stock Option
Agreement (3)
10.11 1995 Stock Option Plan for Non-Employee Directors (4)
10.12 Securities Purchase Agreement dated as of October 23, 1998, between
the Shaar Fund Ltd. and the corporation (5)
10.13 Registration Rights Agreement dated as of October 23, 1998, between
Shaar and the corporation (5)
10.14 Warrant Agreement dated October 23, 1998, between Shaar and the
corporation (5)
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<PAGE>
Exhibit
Number Description
------ -----------
10.15 Securities Purchase Agreement dated as of December 28, 1998, between
Cache Capital and the corporation (2)
10.16 Registration Rights Agreement dated as of December 28, 1998, between
Cache Capital and the corporation (2)
10.17 Service Agreement between The Network Connection and Stephen J.
Ollier (9)
10.18 Securities Purchase Agreement, dated as of May 10, 1999, between the
corporation and Interactive Flight Technologies, Inc. (6)
10.19 Secured Promissory Note, dated January 25, 1999, made in favor of
Interactive Flight Technologies, Inc. (6)
10.20 First Allonge to Secured Promissory Note, dated May 10, 1999, made
in favor of Interactive Flight Technologies, Inc. (6)
10.21 Second Allonge to Secured Promissory Note, dated May 10, 1999, made
in favor of Interactive Flight Technologies, Inc. (6)
10.22 Third Allonge to Secured Promissory Note, dated May 10, 1999, made
in favor of Interactive Flight Technologies, Inc. (6)
10.23 Fourth Allonge to Secured Promissory Note, dated May 10, 1999, made
in favor of Interactive Flight Technologies, Inc. (6)
10.24 Amendment No. 1 to Registration Rights Agreement, dated May 10,
1999, between the corporation and Interactive Flight Technologies,
Inc. (6)
10.25 Fifth Allonge to Secured Promissory Note, dated July 16, 1999, made
in favor of Interactive Flight Technologies, Inc. (8)
10.26 Sixth Allonge to Secured Promissory Note, dated August 9, 1999,
made in favor of Interactive Flight Technologies, Inc. (8)
10.27 Seventh Allonge to Secured Promissory Note, dated August 24, 1999,
made in favor of Interactive Flight Technologies, Inc. (8)
10.28 Revolving Credit Note in the aggregate amount of $5,000,000 in
favor of Interactive Flight Technologies, Inc. (8)
10.29 Agreement between Carnival Corporation and The Network Connection
(9)
10.30 Agreement between Embassy Suites and The Network Connection (9)
10.31 Agreement between Radisson Resort and The Network Connection (9)
10.32 Amended and Restated Seventh Allonge to Secured Promissory Note,
dated December 10, 1999. (10)
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<PAGE>
Exhibit
Number Description
------ -----------
10.33 Employment Agreement between Robert Pringle and the corporation,
dated March 6, 2000. (11)
10.34 Employment Agreement between Jay Rosan and the corporation, dated
March 6, 2000. (11)
10.35 Employment Agreement between Richard Genzer and the corporation,
dated March 6, 2000. (11)
10.36 Option Agreement between Robert Pringle and the corporation, dated
March 6, 2000. (11)
10.37 Option Agreement between Jay Rosan and the corporation, dated
March 6, 2000. (11)
10.38 Option Agreement between Richard Genzer and the corporation, dated
March 6, 2000. (11)
10.39 Registration Rights Agreement between the corporation and Robert
Pringle, Jay Rosan and Richard Genzer, dated March 6, 2000. (11)
10.40 Agreement between Brisbane Lodging LP DBA Radisson Hotel San
Francisco Airport at Sierra Point and the corporation. (11)
10.41 Master Facility Agreement by and between the corporation and Fusion
Capital Fund II, LLC dated as of June 1, 2000. *
16.1 Letter on Change in Certifying Accountant (9)
21.1 Schedule of Subsidiaries (10)
23.1 Consent of KPMG LLP *
23.2 Consent of Mesirov Gelman Jaffe Cramer & Jamieson, LLP (included as
part of Exhibit 5.1) *
----------
* Filed with this registration statement.
(1.1) Incorporated by reference, filed as an exhibit with The Network
Connection's Current Report on Form 8-K on June 21, 1996.
(1.2) Incorporated by reference, filed as an exhibit with The Network
Connection's Current Report on Form 8-K on June 9, 1998.
(1.3) Incorporated by reference, filed as an exhibit with The Network
Connection's Quarterly Report 10-QSB for the quarter ended September 30,
1999 on November 17, 1999.
(2) Incorporated by reference, filed as an exhibit with The Network
Connection's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998 on April 15, 1999.
(3) Incorporated by reference, filed as an exhibit with The Network
Connection's registration statement on Form SB-2 on October 26, 1994. SEC
File No. 33-85654.
(4) Incorporated by reference, filed as an exhibit with The Network
Connection's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995.
(5) Incorporated by reference, filed as an exhibit with the corporation's
Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30,
1998 on November 16, 1998.
(6) Incorporated by reference, filed as an exhibit with the Network
Connection's Quarterly Report on Form 10-QSB for the fiscal quarter ended
March 31, 1999.
(7) Incorporated by reference, filed as an exhibit with The Network
Connection's Current Report on Form 8-K on August 3, 1999.
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<PAGE>
(8) Incorporated by reference, filed as an exhibit with The Network
Connection's Annual Report on Form 10-KSB for the fiscal year ended June
30, 1999 on October 14, 1999.
(9) Incorporated by reference to the respective exhibits filed with The
Network Connection's Quarterly Report on Form 10-QSB for the fiscal
quarter ended December 31, 1999 on February 14, 2000.
(10) Previously filed with this registration statement.
(11) Incorporated by reference, filed as an exhibit with the corporation's
Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31,
2000 on May 15, 2000.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, (ii)
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement, or (iii) include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933 (the "Securities Act"), each post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of those securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the end of the
offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(5) For determining any liability under the Securities Act, it will
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1), or (4), or 497(h) under
the Securities Act as part of this registration statement as of the time the SEC
declared it effective.
(6) For determining any liability under the Securities Act, it will
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Phoenix,
State of Arizona on June __, 2000.
THE NETWORK CONNECTION, INC.
Date: June 6, 2000 By: /s/ Irwin L. Gross
---------------------------------------
Irwin L. Gross, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Date Signature and Title
---- -------------------
June 6, 2000 /s/ Irwin L. Gross
-------------------------------------------
Irwin L. Gross, Chief Executive Officer
and Chairman of the Board of Directors
(principal executive officer)
June 6, 2000 /s/ Morris C. Aaron
-------------------------------------------
Morris C. Aaron, Executive V. P., Chief
Financial Officer and Director
(principal financial and accounting
officer)
June 6, 2000 /s/ Frank E. Gomer
-------------------------------------------
Frank E. Gomer, President, Chief Operating
Officer and Director
June 6, 2000 /s/ M. Moshe Porat
-------------------------------------------
M. Moshe Porat, Director
June 6, 2000 /s/ Stephen Schachman
-------------------------------------------
Stephen Schachman, Director
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