AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 23, 2000
Registration No.: 333-____________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE NETWORK CONNECTION, INC.
(Exact Name of Registrant as specified in its Charter)
GEORGIA 58-1712432
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3571
(Primary Standard Industrial
Classification Code number)
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. [ ]____________
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. [ ]
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================
DOLLAR PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE(2)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock,
$0.001 par value $22,459,900 $9.50 $22,459,900 $5,924.42
=======================================================================================
</TABLE>
- ----------
(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
System as of the close of trading on February 17, 2000.
(2) Calculated by multiplying the aggregate offering amount of $22,459,900 by
.000264.
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.
================================================================================
<PAGE>
SUBJECT TO COMPLETION FEBRUARY 23, 2000
P R O S P E C T U S
2,364,200 SHARES
THE NETWORK CONNECTION, INC.
COMMON STOCK
The Network Connection Inc. has registered for sale 2,364,200 shares of
common stock. Global Technologies, Ltd. owns 2,000,000 of these shares.
Continental Capital & Equity Corporation owns 29,500 of these shares. The
balance of the registered shares can be acquired upon the exercise of
outstanding warrants. Goodbody International, Inc., Continental Capital & Equity
Corporation, Emden Consulting Corp., and the Waterton Group, LLC own warrants
which entitle them to acquire 184,700, 100,000, 25,000 and 25,000 of these
shares. In this Prospectus, we refer to Global Technologies, Goodbody
International, Continental Capital & Equity, Emden and Waterton collectively as
the "selling shareholders." The Network Connection will not receive any proceeds
from the sale of these shares.
* The selling shareholders may offer their Network Connection common stock
through public or private transactions, on or off the Nasdaq SmallCap
Market, at prevailing market prices, or at privately negotiated prices.
* The Network Connection's common stock is traded on the Nasdaq SmallCap
Market under the symbol TNCX. On February 17, 2000, the last reported sales
price of our common stock was $9.50 per share.
- --------------------------------------------------------------------------------
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 2 FOR A DISCUSSION OF CERTAIN
FACTORS YOU SHOULD CONSIDER IN CONNECTION WITH ANY DECISION TO PURCHASE SHARES
IN THIS OFFERING.
- --------------------------------------------------------------------------------
The Network Connection 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.
The Network Connection has filed a registration statement with the
Securities and Exchange Commission, which includes this prospectus, relating to
these securities.
The information in this prospectus is not complete and may be changed. The
selling shareholders will not sell these securities until the registration
statement filed with the Securities and Exchange Commission 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 state where the offer or sale is not
permitted.
The Network Connection's principal executive offices are located at 222
North 44th Street, Phoenix, Arizona 85034. The Network Connection's telephone
number is (602) 629-6200.
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 March __, 2000.
<PAGE>
TABLE OF CONTENTS
PAGE
----
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS............................ 1
RISK FACTORS............................................................... 2
USE OF PROCEEDS............................................................ 8
MARKET FOR OUR COMMON STOCK AND RELATED SHAREHOLDER MATTERS................ 9
OUR BUSINESS............................................................... 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................ 19
MANAGEMENT................................................................. 26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 33
DESCRIPTION OF SECURITIES.................................................. 34
SELLING SECURITY HOLDERS................................................... 35
PLAN OF DISTRIBUTION....................................................... 35
DISCLOSURE OF THE SEC'S POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES................................................. 37
EXPERTS.................................................................... 38
LEGAL MATTERS.............................................................. 38
WHERE YOU CAN FIND MORE INFORMATION........................................ 38
DEALER PROSPECTUS DELIVERY OBLIGATION...................................... 38
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.
You should rely only on the information provided in this prospectus. We
have authorized no one to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted.
SEE THE SECTION OF THIS PROSPECTUS ENTITLED "RISK FACTORS" FOR A DISCUSSION
OF CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON STOCK
OFFERED IN THIS PROSPECTUS. ALL TRADEMARKS AND TRADENAMES APPEARING IN THIS
PROSPECTUS ARE THE PROPERTY OF THE NETWORK CONNECTION, UNLESS OTHERWISE
INDICATED.
i
<PAGE>
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.
1
<PAGE>
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, on a fully converted basis, Global Technologies
owned approximately 81% of our common equity. 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
rail passenger 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 $0.9 million,
and realized net income of $2.3 million (this net income was due entirely to
reversal of prior accruals). For the six months ended December 31, 1999, we
generated revenues of $5.7 million on which we realized a net loss of $1.4
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 $3.4 million for the six months ended December 31,
1999. As of December 31, 1999, our accumulated deficit was $84.4 million and
working capital was $1.9 million.
Prior management entered into an agreement with Carnival Cruise Lines which
obligates us to install CruiseView(TM) systems on all ships designated by
Carnival through December 2002. We have already installed systems on two
Carnival ships. The cost of building and installing CruiseView(TM) systems on
Carnival ships pursuant to that agreement may exceed the revenue we can earn
under the agreement. Revenue is derived by us from upfront payments we receive
when we install the system and payments received thereafter through a revenue
share agreement. If Carnival requests that we build and install CruiseView(TM)
systems on additional ships under the agreement, we could lose money, which
would have a negative effect on our working capital. We are currently
endeavoring to renegotiate the terms of the agreement with Carnival, but give no
assurance that we will be successful in doing so.
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. 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. In addition, 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
2
<PAGE>
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.
Although we signed a letter of intent in January, 2000 to obtain net loan
proceeds of $5.8 million, we and the prospective lender have been unable to
reach agreement on certain material terms of the proposed transaction.
Accordingly, we do not anticipate pursuing this financing. We will therefore
require financing, including equipment financing for hotel sales, to implement
our new business strategy.
WE HAVE A VERY SMALL BACKLOG OF ORDERS.
We have received only two orders for installation of our InnView(TM) system
- -- one for a hotel in California and another for a hotel in Arizona. In January,
2000 we received notice from Carnival that it desires that we install a
CruiseView(TM) system on a third Carnival ship; however, we have not yet
received the required deposit and have not taken any action toward the third
ship installation. 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.
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
extensively before marketing them, any component product may contain flaws we
are unable to 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 900,000 rooms and LodgeNet,
approximately 700,000 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.
3
<PAGE>
* 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. We are unaware of any significant competitors
marketing entire interactive systems to the education and corporate
training market.
* 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.
All 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.
Even assuming that Global Technologies sells all of the shares that it is
offering under this prospectus, it will own shares of our capital stock after
this offering which will entitle 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, Frank E. Gomer, our Chief Financial
Officer, Morris C. Aaron, our division heads, Stephen J. Ollier, James D. Oots,
Theodore P. Racz and Scott W. Currier, and our Vice President - Engineering,
James E. Riner. 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 the provision of system infrastructure by us at less
than cost. 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.
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
4
<PAGE>
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. In addition, because the Carnival
agreement provides for evaluation periods with respect to each installed system,
we defer recognition of Carnival revenue until the end of the respective
evaluation period. Because two evaluation periods ended in January 2000, we
expect to record $2.1 million of revenue from Carnival sales in the quarter
ending March 31, 2000; however, no profit will be recognized because we use the
cost recovery method of accounting due to the uncertainty of revenue under
revenue-sharing arrangements in the Carnival agreement. The cost recovery method
of accounting requires all costs to be recognized before profits may be
realized. Profits, if any, may result in future periods from our revenue sharing
agreements with Carnival.
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,
5
<PAGE>
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.
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.
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.
SALES OF OUTSTANDING SHARES MAY HURT OUR STOCK PRICE.
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
12,401,906 shares of common stock outstanding. Approximately 40% of these shares
are, and upon effectiveness of this registration statement 56% 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 353,975 shares had been issued as of the date of this prospectus.
The remaining 946,025 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
334,700 shares underlying warrants pursuant to this prospectus which will be
freely tradable upon effectiveness of this registration statement.
6
<PAGE>
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. For
example, there are laws in existence prohibiting the use of an interactive
computer service to send or display "indecent" communications to minors or to
knowingly and intentionally permit a telecommunications facility controlled by a
minor to be used for such purposes and laws that make it illegal to traffic by
computer in obscene or child pornographic materials. Although we do not believe
that our activities violate any of these laws, we cannot predict how a court
would interpret these laws and what duties might be imposed on us.
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.
7
<PAGE>
OUR ARTICLES OF INCORPORATION PROVIDE FOR LIMITATION OF LIABILITY AND
INDEMNIFICATION.
As permitted by Georgia law, our articles of incorporation contain
provisions that eliminate the personal liability of directors for monetary
damages to us or our shareholders for breach of their fiduciary duties. These
provisions do not limit the liability of any director:
* for any appropriation of a business opportunity of ours in violation
of the director's duty;
* for acts or omissions which involve intentional misconduct or a
knowing violation of law;
* for any dividend payment, stock repurchase, stock redemption or
distribution in liquidation that is prohibited under Georgia law; and
* for any transaction from which a director derived an improper personal
benefit.
These provisions do not limit or eliminate our rights or the rights of any
shareholder to seek an injunction or any other non-monetary relief in the event
of a breach of a director's fiduciary duty.
Our articles of incorporation also provide for indemnification of directors
against expenses and liability (including amounts paid in settlement) arising
out of third-party proceedings (as well as proceedings brought by or in our
right), provided that the liability has not been incurred in a proceeding
determined against the director for any of the reasons set out above. The
purpose of these provisions is to assist us in retaining qualified individuals
to serve as directors by limiting their exposure to personal liability. We
maintain directors and officers liability insurance for coverages that are
customary for companies of similar size and in similar circumstances in our
industry.
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.
8
<PAGE>
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
- ------------- ---- ---
March 31, 2000
(to the date of this prospectus) $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.
OUR BUSINESS
GENERAL DESCRIPTION OF OUR BUSINESS AND RECENT DEVELOPMENTS
We design, manufacture, install and maintain advanced, high-performance
computer servers and interactive, broadband 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 Internet Protocol (IP) networks. Our systems are scaleable, meaning
that they can effectively accommodate increasing or decreasing numbers of users.
Our targeted markets for these systems are owners and operators of hotels
and time-share properties, cruise lines, educational institutions and corporate
training, and passenger train operators. We have recently created four operating
divisions, one to focus on each of these markets. We have also created a fifth
division which acquires, packages and monitors the content available through all
of our systems. In each division, we have had the following significant recent
developments:
* HOTEL & HOSPITALITY DIVISION - In December 1999, we hired Theodore P.
Racz and Scott W. Currier to lead the division. Since their joining us
we have received orders from two hotels for installation of our
interactive information and entertainment systems for hotel and
time-share properties, which we call "InnView(TM)."
* CRUISE SHIP DIVISION - The evaluation periods for both of the Carnival
ships on which we installed CruiseView(TM) ended in January 2000.
Carnival did not elect to return our systems, so we expect to
9
<PAGE>
recognize $2.1 million in revenue for the quarter ended March 31,
2000. We have received a notice from Carnival that they desire us to
install a CruiseView(TM) system on a third Carnival ship; however, we
have not received the required deposit. We are not obligated to
perform the installation until the required deposit is received.
* 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.
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.
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 must 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 need to find
new markets and applications for our systems, products and
technologies.
* NURTURE KEY BUSINESS PARTNERS AND STRATEGIC ALLIANCES. We must nurture
our existing business relationships, and develop new ones with
partners with strong national and international presences. We must use
these business relationships to further penetrate our targeted
markets.
10
<PAGE>
* DEVELOP OUR NEWLY CREATED DIVISIONS AND PENETRATE FURTHER THE MARKETS
THEY SERVE. We must 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 must 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.
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 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 400 simultaneous users. We install
enough servers in each customer location so that the total number of servers,
when multiplied by 400 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. We
currently provide gaming and entertainment content for use by cruise
ship passengers, and Carnival provides additional content on shore
excursions and free-to-guest services. Passengers on the cruise ship
can watch select movies and play games on the system on a pay-per-use
basis. In accordance with our contract with Carnival, we share in the
usage revenue on a negotiated percentage basis.
* InnView(TM) is our system solution for the hotel and time-share
market. In accordance with our two 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 is available free of charge, and some is available
on a pay-per-use basis. We share the revenues from the pay-per-use
content with the hotel on a negotiated percentage basis.
11
<PAGE>
* 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. General audience and adult films 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 and 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, 2 Debonair Airlines aircraft and 3 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. As a result, at December 31, 1999, we had recorded
Carnival receipts as deferred revenues until the end of the applicable
evaluation periods. The evaluation periods for the first two ships ended in
January 2000. Consequently, we expect to recognize revenues in the amount of
$2.1 million in the quarter ending March 31, 2000; however, no profit will be
recognized because we use the cost recovery method of accounting. The cost
recovery method of accounting requires all costs to be recognized before profits
may be realized.
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
12
<PAGE>
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 81% of our outstanding common
equity. 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.
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 vertical sales and
marketing divisions, and have recently hired experienced executives to lead
three of the four divisions.
HOTELS AND TIME-SHARE PROPERTIES
Because cruise ships are essentially "floating" hotels, as a natural
extension to providing interactive information and entertainment systems to the
cruise ship industry, 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 150 or more rooms.
We formed our Hotel & Hospitality Division in December 1999 and hired two
experienced sales and marketing executives, Theodore P. Racz and Scott W.
Currier, to lead the division. In January 2000, we entered into contracts with
Radisson Resorts to install InnView(TM) in its 320-room Knott's Berry Farm Hotel
in Buena Park, California, and with Embassy Suites to install InnView(TM) in its
270-room Embassy Suites Resort at Stonecreek in Paradise Valley, Arizona. We
expect our systems to become operational in June, 2000 and March, 2000,
respectively. To date we have not installed InnView(TM) in any hotel or
time-share properties.
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 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.
In addition to installing InnView(TM) systems, we procure and manage the
content that is available through the systems. This is an integral part of our
hotel and time-share business as the InnView(TM) system itself is provided to
the hotel or time-share customer at little to no cost. Our revenue is expected
to be generated pursuant to contracts for the provision of the content available
through the systems. These contracts generally provide for us to receive a
negotiated percentage of all revenue generated from content.
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. We believe that only ten ships
to date have had interactive entertainment and information systems installed.
Our initial installation of an interactive, broadband information and
entertainment system occurred in December 1998, with the installation of our
CruiseView(TM) system aboard a Carnival Cruise Lines 1,040-cabin Fantasy Class
13
<PAGE>
ship. In October 1999 we installed a CruiseView(TM) system aboard a 1,400-cabin
Destiny Class Carnival ship. We have received a notice from Carnival that it
desires that we install a CruiseView(TM) system on a third Carnival ship;
however, we have not received the required deposit and have not taken any action
toward the third ship installation.
Current management believes that the cost of manufacturing and installing
CruiseView(TM) systems in Carnival ships and providing content for those systems
pursuant to the agreement negotiated by prior management may be unprofitable. We
are currently working to renegotiate the terms of the agreement with Carnival.
To date, we have received a verbal commitment from Carnival to alter the terms
of our agreement to allow for us to share in content revenue without a cap on
the dollar amount received. We believe this modification will make the agreement
more remunerative for us, but we are seeking further concessions from Carnival
in the renegotiation process. We give no assurance that we will be successful in
obtaining any concessions from Carnival.
Under the leadership of Dr. Frank E. Gomer, we will continue to market
CruiseView(TM) to the cruise ship industry.
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 systems' 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. To date, we have not seriously pursued this 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.
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.
14
<PAGE>
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 our customers.
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 purchase price 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
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.
15
<PAGE>
There are three major providers of interactive guest services systems in
the hospitality market. On Command has the greatest market share with
approximately 900,000 rooms, followed by LodgeNet Entertainment Corporation with
approximately 700,000 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 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 systems 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 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.
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 400
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 what we believe to be a comprehensive 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 not experienced
interruptions in the supply of component parts and sub-assemblies, and believe
that numerous qualified suppliers are available. 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.
16
<PAGE>
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.
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 approximately 17,000 square feet of office and production space
located at 222 North 44th Street, Phoenix, Arizona, and approximately 1,000
square feet of space in Derby, England where our Passenger Rail Division is
headquartered. We are also temporarily leasing 10,000 square feet of space in
Alpharetta, Georgia pursuant to a six-month agreement expiring in April, 2000.
We believe that the leased properties are adequate and suitable for current
operations.
OUR EMPLOYEES
We employ 31 full-time staff at our Phoenix headquarters 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.
17
<PAGE>
LEGAL PROCEEDINGS
We are involved in the following 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.
18
<PAGE>
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 1.
BACKGROUND AND BASIS OF PRESENTATION
We design, manufacture, install and maintain advanced, high-performance
computer servers and interactive, broadband information and entertainment
systems and provide the content available through the systems. These all-digital
systems deliver an on-demand multimedia experience via high-speed Internet
Protocol (IP) networks. Our systems are scaleable, meaning that they can
effectively accommodate increasing or decreasing numbers of users.
The company expects to establish reportable divisions for these market
segments as business develops. As of December 31, 1999, we had contracts for the
hospitality, cruise and educational markets. We left the commercial air
transport in-flight entertainment business in 1999 and the majority of our
accumulated deficit has resulted from losses in that market.
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, for all periods through March 31, 1999, 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 for the years
ended October 31, 1998 and October 31, 1997, respectively, reflect the
historical results of the Interactive Entertainment Division. 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.
19
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999.
REVENUES. Revenue for the six months ended December 31, 1999 was
$5,657,146, an increase of $5,179,081 (or 1,083%) compared to revenue of
$478,065 for the corresponding period of the previous fiscal year. Equipment
sales generated during six months ended December 31, 1999 were principally from
the sale of 195 of the Company's Cheetah(TM) video servers in connection with
the Georgia Metropolitan Regional Education Services Agency (MRESA) Net 2000
project. Service income of $59,827 for the six months ended December 31, 1999
was generated from system design services provided to ALSTOM Transport Ltd. We
provided these services to ALSTOM, but expect no further business from ALSTOM
because it plans to create a subsidiary that would compete with us in the
passenger rail market. Equipment sales of $89,028 during the six-month period
ended December 31, 1998 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 six months ended December 31, 1998 was
principally generated from programming services provided to Swissair, the
Company's share of gaming profits generated by the Swissair systems and revenue
earned under the Swissair extended warranty contract. There will be no further
revenue under the Swissair agreements.
COST OF SALES. Cost of equipment sales and service income for the six
months ended December 31, 1999 were $3,470,018, an increase of $3,185,568 or
(1,120%) over cost of equipment sales and service income of $284,450 for the
corresponding period of the previous fiscal year. Cost of equipment sales for
the six months ended December 31, 1999 was comprised principally of material
costs and estimated warranty costs for the 195 video servers for the Georgia
schools project. Cost of equipment sales for the corresponding period ended
December 31, 1998 was comprised of material, installation and maintenance costs,
as well as estimated warranty costs and costs of upgrades to the entertainment
networks installed in Swissair aircraft.
20
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the six
months ended December 31, 1999 were $2,574,808, a decrease of $3,359,410 (or
56%) compared to expenses of $6,019,218 for the corresponding period of the
previous fiscal year. The decrease in expenses during the six months ended 1999
over 1998 is principally attributed to a $3.1 million severance payment recorded
September 1998 for three former executives of the former Interactive
Entertainment Division. Significant components of general and administrative
expenses include payroll costs and legal and professional fees.
NON-CASH COMPENSATION. A non-cash charge of $221,882 of compensation
expense related to the issuance of warrants in exchange for services in the six
months ended December 31, 1999, and $85,000 related to non-cash compensation to
a former employee as part of a severance package in the six months ended
December 31, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the six months ended December 31, 1999 was $640,017, an increase of $256,918 (or
67%) compared to depreciation and amortization expense of 407,056 for the
corresponding period ended December 31, 1998. Depreciation and amortization
expense for the six months ended December 31, 1999 is comprised of property,
plant and equipment depreciation of $265,362 and intangible amortization of
$374,655. Depreciation and amortization expense for the corresponding period
ended December 31, 1998 is comprised of property, plant and equipment
depreciation of $383,099. There was no intangible amortization for the 1998
period. The decrease in property, plant and equipment depreciation in the
current six-month period is a result of equipment write-offs of $1,006,532
during October 1998 partially offset by depreciation of assets acquired during
May 1999 as a result of the merger.
SPECIAL CHARGES. Special charges for the six months ended December 31, 1999
were zero compared to a credit of $190,000 during the corresponding period ended
December 31, 1998. 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 six months ended December 31, 1999 compared to $28,647 for the
corresponding periods of the previous fiscal year. The provisions in the
previous fiscal year resulted from entertainment programming services provided
to Swissair for which the Company has not been paid.
INTEREST EXPENSE. Interest expense for the six months ended December 31,
1999 was $139,508 compared to $4,256 for the corresponding period ended December
31, 1998. Interest expense for the six-month period of the current fiscal year
can be attributed principally to long-term debt obligations of the Company,
whereas interest expense for the corresponding period of the previous fiscal
year is attributable to the Company's capital leases for furniture which expired
in September 1999.
INTEREST INCOME. Interest income was $77,374 for the six months ended
December 31, 1999 compared to $78,659 for the six months ended December 31,
1998. Interest income for the six-month period ended December 31, 1999 was
principally generated from short-term investments of working capital, whereas
interest income for the corresponding period ended December 31, 1998 is
attributable to Swissair extended warranty billings.
OTHER EXPENSE. Other expense of $8,830 for the six months ended December
31, 1999 represent a loss on the buyout of a capital lease for furniture as well
as losses incurred on the sale of two buildings located in Alpharetta, Georgia.
Other expense of $567,317 for the six-month period ended December 31, 1998
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.
21
<PAGE>
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.
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.
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
22
<PAGE>
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
At December 31, 1999, we had working capital of approximately $1,945,000.
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
the our Cheetah(TM) multimedia video servers in connection with the Georgia
MRESA Net 2000 project; and a service order under an agreement with Carnival
Cruise Lines for installation of a second CruiseView(TM) system. In addition, as
of the date of this prospectus, we have received orders for installation of our
InnView(TM) system in one hotel in California and one hotel in Arizona. We have
received the full payment of $5.3 million in connection with the Net 2000
project. We received an installment payment from Carnival in August 1999 on
account of the second ship installation. Working capital will continue to
decrease as we purchase inventory for orders under the Carnival agreement, the
two hotel orders, and any additional orders we may receive in the future. Our
continued investment in business development will also require cash resources.
During the six months ended December 31, 1999, we used $1,944,738 of cash
for operating activities, a decrease of $5,716,196 from the $7,660,934 of cash
used for the corresponding period of 1998. The cash used in operations during
the six months ended December 31, 1999 resulted primarily from our net loss for
the period, substantial increases in accounts receivable and inventories, as
well as decreases in accounts payable and accrued liabilities, partially offset
by increases in deferred revenue and accrued product warranties.
Cash flows provided by investing activities were $921,352 during the six
months ended December 31, 1999. 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
first quarter.
During the six months ended December 31, 1999, cash used in financing
activities of $867,909 resulted primarily from payments made on notes payable,
as well as payments made to an affiliate.
In October 1999, a note payable in the principal amount of $400,000 due
September 5, 1999 was converted into 200,000 shares of our common stock.
23
<PAGE>
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 our
assets. The promissory note is convertible into shares of our Series C 8%
Convertible Preferred Stock at the discretion of Global Technologies. The
promissory 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 the 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 the
allonges to Global Technologies' secured promissory note which cancelled such
notes and rolled the principal balance, plus accrued but unpaid interest,
penalties and redemption premiums on the notes into the principal balance of
Global Technologies' 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 Global Technologies
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.
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 at the September 17, 1999 special
meeting of 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 common stock to Global Technologies upon conversion of our Series C 8%
Convertible Preferred Stock held by Global Technologies.
Also, on August 24, 1999, the board of directors of Global Technologies
approved a $5 million secured revolving credit facility for us. The 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 five low day average share price of the preceding 20
trading days, $1.50 per share, or any lesser amount at which our 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 as
of August 24, 1999, without shareholder approval. No amounts are currently
outstanding under the credit facility. Having closed a $10.0 million preferred
equity financing on February 16, 2000, Global Technologies currently has
sufficient cash to fund the credit facility.
In September 1999, we sold one of our two buildings in Alpharetta, Georgia.
We used the net proceeds from the sale, plus cash of approximately $80,000, 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 agreement with Carnival provide that Carnival may return
any CruiseView(TM) system within an evaluation period. For the "Fantasy" class
ship on which CruiseView(TM) was installed in December 1998, the evaluation
period was 12 months. The evaluation period for the system installed in October
1999 on the "Destiny" class ship was three months. As of December 31, 1999, we
recorded deferred revenue of $2,108,151, reflecting amounts paid by Carnival for
installations on two Carnival ships. As of December 31, 1999, we had not
recognized any revenue in association with the Carnival agreement. The
evaluation periods for the systems installed aboard the Fantasy and Destiny
Class ships expired in January 2000. We therefore expect to record $2.1 million
of revenue from Carnival sales in the quarter ending March 31, 2000; however, no
profit will be recognized because we use the cost recovery method of accounting
due to uncertainty of revenue under revenue-sharing arrangements in the Carnival
agreement.
We have concluded that the cost of building and installing CruiseView(TM)
systems in Carnival ships pursuant to the agreement with Carnival may exceed the
revenue earned in connection therewith. 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.
24
<PAGE>
Although we signed a letter of intent in January 2000 to obtain net loan
proceeds of $5.8 million, we and the prospective lender have been unable to
reach agreement on certain material terms of the proposed transaction.
Consequently, we do no anticipate pursuing this 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. However, we believe that our current cash balances
plus interest received on such balances, and the $5 million credit facility with
Global Technologies, will be sufficient to meet our currently anticipated cash
requirements for at least the next 12 months.
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.
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. We are not currently involved with any such program and give no
assurance that we will be in the future.
MARKET RISK
To date, we have not utilized derivative financial instruments. We do not
expect to employ these or other strategies to hedge market risk in the
foreseeable future. We invest our cash in money market funds, which are subject
to minimal credit and market risk. We believe that the market risk associated
with these financial instruments are immaterial. We are exposed to interest rate
risk on our revolving credit facility with Global Technologies as interest costs
are tied to the prime rate of interest.
All of the revenues are realized currently in U.S. Dollars and are from
customers primarily in the United States. Therefore, we do not believe that we
currently have any significant direct foreign currency exchange-rate risk.
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.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, The Network Connection 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 shareholders' equity (deficiency) and comprehensive
income; it does not affect The Network Connection's financial position or
results of operations.
On January 1, 1998, The Network Connection 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 Network Connection'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.
25
<PAGE>
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.
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
Frank E. Gomer 52 Director, President and Chief Operating Officer
Morris C. Aaron 35 Director, Executive Vice President and Chief
Financial Officer
M. Moshe Porat(1)(2) 52 Director
Stephen Schachman(1)(2) 55 Director
Stephen J. Ollier 50 President - Passenger Rail Division
James D. Oots 55 Senior Vice President - Education and
Corporate Training Division
Theodore P. Racz 59 Senior Vice President - Hotel and Hospitality
Division
- ----------
(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. 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 SmallCap 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.
FRANK E. GOMER has served as a director, President and Chief Operating
Officer of The Network Connection since May 18, 1999. From October 1, 1998 to
May 18, 1999, Dr. Gomer served as President of Global Technologies' Interactive
Entertainment Division, and from February 10, 1997 to October 1, 1998 as Vice
President of Engineering and Operations, of Global Technologies. Prior to
joining Global Technologies in 1997, Dr. Gomer was responsible for all
electronic display systems developed and manufactured by Honeywell Air Transport
Systems Division. From 1986 to 1997, he held a series of senior engineering and
program management positions with Honeywell. Dr. Gomer has a Bachelor of Science
degree from Colgate University and a Doctor of Philosophy degree from Washington
University in St. Louis.
26
<PAGE>
MORRIS C. AARON has been a director, Executive Vice President and Chief
Financial Officer of The Network Connection since May 18, 1999. Since December
1999 to present, Mr. Aaron serves as Vice President - Finance for Global
Technologies. 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. 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 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 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.
STEPHEN J. OLLIER has served as President of The Network Connection's newly
formed Passenger Rail Division since September 20, 1999. Prior to taking this
position, Mr. Ollier served as General Manager of ALSTOM Railway Maintenance
Services, Ltd., a subsidiary of ALSTOM SA, from 1994 to 1999. ALSTOM is a
publicly held company that is listed on the NYSE and is a leader in the
manufacture of high-speed trains, electric multiple units, metros., propulsion
systems and services.
JAMES D. OOTS has served as Senior Vice President of The Network
Connection's newly formed Education and Corporate Training Division since
December 1999. Prior to his employment with The Network Connection, during the
ten-year period from 1987 to 1997, Mr. Oots founded, developed and sold a
multi-million dollar revenue business called Digital Presentations, Inc. Prior
thereto, Mr. Oots held executive positions with Digital Video Systems, Inc.,
Educational Industrial Sales, Inc. and Chevron USA.
THEODORE P. RACZ has served as Senior Vice President of The Network
Connection's newly formed Hotel and Hospitality Division since December 1999.
Prior to taking this position, Mr. Racz served as Vice President of Sales of
LodgeNet Entertainment from 1996 to 1999, and as Director of Operations --
Moscow of MetroMedia International from 1994 to 1996.
In May 1999, Global Technologies elected our current board of directors,
who, in turn, appointed the executive officers. All directors are elected
annually and serve until the next annual meeting of shareholders or until the
election and qualification of their successors. 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.
27
<PAGE>
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 information concerning the compensation
awarded to, earned by, or paid for services rendered to The Network Connection
in all capacities during the transition period ended June 30, 1999, and our
previous two fiscal years ended October 31, 1998 and October 31, 1997 by (i) our
chief executive officer and (ii) each of our most highly compensated other
executive officers whose salary and bonus for the transition period ended June
30, 1999 exceeded $100,000 (except as noted below). The transition period ended
June 30, 1999 consisted of only eight months because during that period, we
changed our fiscal year end from October 31 to June 30.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
OTHER ANNUAL SECURITIES
BONUS COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($) ($) OPTIONS (#)
- --------------------------- ---- --------- --- --- -----------
<S> <C> <C> <C> <C> <C>
Irwin L. Gross, Chairman of 1999 -- -- -- --
the Board and Chief Executive
Officer(1)
Frank E.Gomer, President and 1999 21,348 -- -- 50,000
Chief Operating Officer(1)
Morris C. Aaron, Executive Vice 1999 14,884 -- -- 50,000
President and Chief Financial
Officer(1)(2)
Wilbur L. Riner, Sr., Executive 1999 104,000 -- 3,600(4) 25,000
Vice President - Business 1998 156,000 -- 22,900(4) 100,000
Development(1) 1997 104,322 -- 23,400(4) 100,000
James E. Riner, Vice President - 1999 94,031(3) -- 2,400(4) 10,000
Engineering 1998 91,790 -- 3,600(4) 25,000
1997 86,790 -- 3,600(4) 25,000
Bryan R. Carr, Vice President - 1999 70,000 -- 2,800(4) --
Finance and Chief Financial 1998 120,000 -- 15,301(4) 50,000
Officer(1) 1997 101,667 -- 30,171(4) 80,000
</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. Bryan R. Carr's employment with us
was terminated on May 31, 1999.
28
<PAGE>
(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
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
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.
The following tables set forth certain information for the named executive
officers with respect to individual grants of stock options made to such named
executive officers during the eight-month transition period ended June 30, 1999:
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<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.
(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 $2.00, the closing market
price of the Company's Common Stock on November 10, 1999. The options
expire in November 2009.
29
<PAGE>
The following table sets forth certain information regarding the exercise of
stock options by each of the named executive officers during the last fiscal
completed year, and the fiscal year-end value of unexercised options for that
year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END (#) FISCAL YEAR END ($) (1)
------------------------------ --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Irwin L. Gross -- -- -- --
Frank E. Gomer 10,000 40,000 --(2) --(2)
Morris C. Aaron 10,000 40,000 --(2) --(2)
Wilbur L. Riner, Sr -- 40,000 --(2) --(2)
James E. Riner 12,500 54,348 3,125 --(2)
Bryan R. Carr -- -- -- --
- ----------
(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
payment equal to two months base salary (offset in part by certain indebtedness
owed to us), and acknowledged certain option exercise rights belonging to he 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.
30
<PAGE>
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 our 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 provides for a severance
payment in the event of termination due to certain events, including a
change-in-control or the disposition of substantially all of 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 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. 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 intend to defend our
position vigorously. See "Legal Proceedings."
Frank E. Gomer serves as our President and Chief Operating Officer pursuant
to the terms of an employment agreement that terminates on June 10, 2001. Dr.
Gomer receives a minimum annual base salary of $215,000. Beginning June 11, 1999
and ending June 11, 2003, Dr. Gomer also receives 50,000 10-year options under
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 provides for a severance payment in the event that we
terminate Dr. Gomer other than for "cause" as defined in the employment
agreement. The severance payment would be equal to two times the remaining
balance of his base salary for the remainder of the then current term. The
employment agreement also provides for a payment in the event we terminate Dr.
Gomer due to a termination 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 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.
Morris C. Aaron serves as our Executive Vice President and Chief Financial
Officer pursuant to the terms of an employment agreement that terminates on June
10, 2001. Mr. Aaron receives a minimum annual base salary of $215,000. Beginning
June 11, 1999 and ending June 11, 2003, Mr. Aaron also receives 50,000 10-year
options under 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.
31
<PAGE>
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 $2.50 per share, half of which vest on the first anniversary
of the date of grant and half of which vest on the second anniversary of the
date of grant. We repriced these options in connection with Global Technologies'
acquisition of us to provide additional incentive to Mr. Riner.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of the date of this
prospectus, with respect to the number of shares of our common stock and
preferred stock beneficially owned by persons known by us to own more than 5% of
our common stock or preferred stock, each of our directors and named executive
officers, and our directors and executive officers as a group. Other than our
common stock and the Series B and D preferred stock listed in the table and
discussed in the footnotes below, we have no class of voting stock outstanding.
All information with respect to beneficial ownership has been furnished by the
respective director, executive officer or five percent beneficial owner, as the
case may be. Except as otherwise described below, all shares of common stock and
preferred stock are owned directly and the indicated person has sole voting and
investment power.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK SHARES OF PERCENT OF
BENEFICIALLY PERCENT OF PREFERRED STOCK PREFERRED
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED COMMON STOCK BENEFICIALLY OWNED STOCK (1)
- ------------------------------------ ----- ------------ ------------------ ---------
<S> <C> <C> <C> <C>
Global Technologies, Ltd. 23,437,903(1) 80.9% 1,500 Series B 100%
1811 Chestnut Street, Suite 120 2,495,400 Series D 100%
Philadelphia, PA 19103
Irwin L. Gross 211,667(2) 1.7% -- --
1811 Chestnut Street, Suite 120
Philadelphia, PA 19103
Morris C. Aaron 10,000(3) * -- --
222 North 44th Street
Phoenix, AZ 85034
Frank E. Gomer 10,000(3) * -- --
222 North 44th Street
Phoenix, AZ 85034
Wilbur L. Riner, Sr. -0-(4) * -- --
1324 Union Hill Road
Alpharetta, GA 30201
M. Moshe Porat -- -- -- --
Temple University Fox
School of Business
111 Speakman Hall
Philadelphia, PA 19122
Stephen Schachman -- -- -- --
19 West Lancaster Avenue
Ardmore, PA 19003
Barbara Riner 420,120 3.4% -- --
1324 Union Hill Road
Alpharetta, GA 30201
All directors and executive 231,667 1.9% -- --
officers as a
group (8 persons)
</TABLE>
- ----------
* Less than 1%
32
<PAGE>
(1) 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.
(2) Includes 125,000 shares which may be acquired upon exercise of vested
options, but does not include any shares owned by Global Technologies.
(3) Consists of options currently exercisable to acquire 10,000 shares of our
common stock.
(4) Does not include 420,120 shares held by Barbara Riner, the wife of Wilbur
L. Riner, Sr. Mr. Riner has disclaimed beneficial interest in the shares
held by his wife.
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
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.
33
<PAGE>
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."
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, 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.
34
<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>
NUMBER OF SHARES NUMBER OF SHARES
BENEFICIALLY NUMBER OF BENEFICIALLY PERCENTAGE OF COMMON
OWNED BEFORE SHARES OWNED AFTER STOCK BENEFICIALLY
NAME OF SELLING SHAREHOLDER OFFERING OFFERED OFFERING OWNED AFTER OFFERING
- --------------------------- -------- ------- -------- --------------------
<S> <C> <C> <C> <C>
Global Technologies, Ltd.(1) 23,437,903 2,000,000 21,437,903 74.0%
Goodbody International(2) 184,700 184,700 -- --
Continental Capital & Equity
Corp.(3) 129,500 129,500 -- --
Emden Consulting Corp.(4) 25,000 25,000 -- --
Waterton Group LLC(5) 25,000 25,000 -- --
</TABLE>
- ----------
(1) See "Security Ownership of Certain Beneficial Owners and Management."
(2) Goodbody International owns warrants exercisable into 180,000 and 4,700
shares of common stock, respectively. The exercise prices payable under the
warrants are $4.00 and $3.81, respectively.
(3) 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.
(4) Emden Consulting Corp. owns warrants exercisable for 25,000 shares of
common stock at an exercise price of $6.50.
(5) Waterton Group LLC owns warrants exercisable for 25,000 shares of common
stock at an exercise price of $6.50.
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
35
<PAGE>
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.
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
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.
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 and any
brokers, dealers or agents, upon effecting the sale of any of the shares offered
hereby, may be deemed "underwriters" as that term is defined under the
Securities Act or the Exchange Act, or the rules and regulations promulgated
thereunder.
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.
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.
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.
36
<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 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, our articles of incorporation provide that the corporation
will indemnify its corporate personnel and officers to the fullest extent
permitted by the Georgia Business Corporation Code, as amended from time to
time.
Our bylaws reiterate that the corporation will 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 will 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.
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. The Network Connection maintains directors' and officers' liability
insurance.
These provisions do not affect a director's or officer's responsibilities
under any other laws, such as the federal securities laws.
Further, 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.
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, The
Network Connection has 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.
37
<PAGE>
EXPERTS
The financial statements of The Network Connection 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.
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.
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.
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.
38
<PAGE>
THE NETWORK CONNECTION, INC.
Index to Financial Statements
Page
----
Condensed Consolidated Balance Sheets as of
December 31, 1999 (unaudited) and June 30, 1999 (audited)................ F-2
Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended December 31, 1999 (unaudited).......... F-3
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended December 31, 1999 (unaudited)........................... F-4
Notes to Condensed Consolidated Financial Statements....................... F-5
Independent Auditors' Report............................................... F-9
Balance Sheets as of June 30, 1999 and October 31, 1998.................... F-10
Statements of Operations for the Transition Period Ended
June 30, 1999 and the Years Ended October 31, 1998 and 1997.............. F-11
Statements of Cash Flows for the Transition Period Ended
June 30, 1999 and the Years Ended October 31, 1998 and 1997.............. F-12
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-13
Notes to Financial Statements.............................................. F-14
F-1
<PAGE>
THE NETWORK CONNECTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1999 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 860,211 $ 2,751,506
Restricted cash 462,819 446,679
Short-term investments -- 302,589
Accounts receivable 1,031,726 75,792
Notes receivable from related parties 78,932 98,932
Inventories, net of allowance of $7,837,595 3,751,153 1,400,000
Prepaid expenses 214,478 169,429
Assets held for sale -- 800,000
Due from affiliate 11,222 --
Other current assets 100,750 173,999
------------ ------------
Total current assets 6,511,291 6,218,926
Note receivable from related party 78,000 75,000
Property and equipment, net of accumulated
depreciation of $948,392 and $683,029, respectively 1,200,421 1,338,580
Intangibles, net of accumulated
amortization of $443,386 and $74,981, respectively 6,796,980 7,119,806
Other assets 43,900 150
------------ ------------
Total assets $ 14,630,592 $ 14,752,462
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,418,007 $ 1,663,411
Accrued liabilities 761,727 989,342
Deferred revenue 2,108,151 365,851
Accrued product warranties 144,750 --
Dividends payable 80,000 --
Notes Payable 9,121 42,751
Notes payable to related parties 44,694 68,836
------------ ------------
Total current liabilities 4,566,450 3,130,191
Notes payable -- 3,467,045
Other liabilities 1,037,289 1,220,340
Due to affiliate -- 1,647,692
------------ ------------
Total liabilities 5,603,739 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 0 and 800 shares 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; 12,314,513 and 6,339,076 issued
and outstanding respectively 12,314 6,339
Additional paid-in capital 93,424,987 88,316,945
Accumulated other comprehensive income:
Net unrealized loss on investment securities -- (526)
Accumulated deficit (84,435,417) (83,060,541)
------------ ------------
Total stockholders' equity 9,026,853 5,287,194
------------ ------------
Total liabilities and stockholders' equity $ 14,630,592 $ 14,752,462
============ ============
See accompanying notes to financial statements.
</TABLE>
F-2
<PAGE>
THE NETWORK CONNECTION, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Equipment sales $ 46,759 $ -- $ 5,597,319 $ 89,028
Service income -- 143,740 59,827 389,037
----------- ----------- ------------ ------------
46,759 143,740 5,657,146 478,065
----------- ----------- ------------ ------------
Costs and expenses:
Cost of equipment sales 34,534 -- 3,454,915 283,714
Cost of service income 6,523 480 15,103 736
General and administrative expenses 1,312,312 1,411,270 2,574,808 6,019,218
Non-cash compensation expense 221,882 -- 306,882 --
Provision for doubtful accounts -- 28,647 -- 28,647
Special charges -- -- -- (190,000)
Depreciation and amortization expense 323,722 61,720 640,017 383,099
----------- ----------- ------------ ------------
1,898,973 1,502,117 6,991,725 6,525,414
----------- ----------- ------------ ------------
Operating loss (1,852,214) (1,358,377) (1,334,579) (6,047,349)
Other:
Interest expense (3,859) (1,866) (139,508) (4,256)
Interest income 36,954 47,945 77,374 78,659
Other expense (16,100) (564,689) (8,830) (567,317)
----------- ----------- ------------ ------------
Net loss (1,835,219) (1,876,987) (1,405,543) (6,540,263)
Cumulative dividend on preferred stock (14,000) -- (60,000) --
----------- ----------- ------------ ------------
Net loss attributable to common stockholders $(1,849,219) $(1,876,987) $ (1,465,543) $ (6,540,263)
=========== =========== ============ ============
Basic and diluted net loss per common share $ (0.27) $ (1.78) $ (0.22) $ (6.20)
=========== =========== ============ ============
Weighted average number of shares outstanding,
basic and diluted 6,893,790 1,055,475 6,591,491 1,055,475
=========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
THE NETWORK CONNECTION, INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
Cash flows from operating activities:
Net loss $(1,405,543) $(6,540,263)
Adjustments to reconcile net loss to net cash:
Depreciation and amortization 640,017 383,099
Special charges -- (190,000)
Loss on sale of assets held for sale 37,893
Loss on disposal of equipment -- 1,008,953
Non cash compensation expense 306,884 --
Changes in net assets and liabilities,
net of effect of acquisition:
Increase in accounts receivable (955,934) (4,878,997)
Payments due from affiliate 477,416 --
(Increase) decrease in inventories (2,351,153) 107,959
(Increase) decrease in prepaid expenses (45,049) 105,664
Decrease in other current assets 73,249 315,236
(Increase) decrease in other assets (43,750) 66,695
Decrease in accounts payable (286,724) (402,497)
Decrease in accrued liabilities (279,092) (804,607)
Increase in deferred revenue 1,742,300 4,483,870
Increase (decrease) in accrued product
warranties 144,750 (1,316,046)
----------- -----------
Net cash used in operating activities $(1,944,738) $(7,660,934)
----------- -----------
Cash flows from investing activities:
Purchases of investment securities (542) --
Sale of investment securities 303,131
Purchases of property and equipment (127,204) (10,676)
Proceeds from sale of equipment -- 9,366
Proceeds from sale of assets held for sale 762,107 --
Increase in restricted cash (16,140) (437,503)
----------- -----------
Net cash provided by (used in)
investing activities $ 921,352 $ (438,813)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (738,260) --
Payments received on notes receivable 17,000 --
Payments to affilate (188,399) --
Capital contribution -- 8,163,300
Employee stock option exercises 41,750 --
Payments on capital lease obligations -- (62,849)
----------- -----------
Net cash provided by (used in)
financing activities $ (867,909) $ 8,100,451
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,891,295) 704
Cash and cash equivalents at beginning of period 2,751,506 111,418
----------- -----------
Cash and cash equivalents at end of period $ 860,211 $ 112,122
=========== ===========
See accompanying notes to financial statements.
F-4
<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 Annual Report on Form 10-KSB.
The results of operations for the three months and six months ended
December 31, 1999 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 December 31, 1999
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 acquirer, 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 six months
ended December 31, 1998, reflect the historical results of Global's IED as
previously included in Global's consolidated financial statements. The
Transaction date for accounting purposes was May 1, 1999. As of December 31,
1999, the Company is an 81% 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 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.
(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
F-5
<PAGE>
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 the 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 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, 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 as of August 24,
1999, without shareholder approval. As of December 31, 1999, no amounts were
outstanding under the Facility. As of December 31, 1999, Global did not have
sufficient cash for the Company to borrow the full $5 million under the
Facility. Should the Company draw on the Facility, Global would have to obtain
financing or sell assets to meet its obligations under the Facility.
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 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 current period.
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 current period.
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 advisory services. The warrants vest over a period of 270 days and
the exercise period of the warrants expires in February 2002. Non-cash
compensation expense will be recognized over the 12 months of the agreement.
F-6
<PAGE>
(5) OPTION GRANTS
In October 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 adopted and approved by the
Board of Directors. 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. 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 in October 2009.
(6) SEGMENT INFORMATION
Through December 31, 1999 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 six months ended December 31, 1999 and 1998, respectively, one
customer accounted for approximately 96% and a separate customer accounted for
almost 100% of the Company's sales. Outstanding receivables from these two
customers were $9,576 and $5,278,545, respectively, at December 31, 1999 and
December 31, 1998.
(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. Ill 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 by families of victims 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-V51560685. 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
alleges the Company owes Federal Express approximately $110,000 for past
services rendered. The Company is currently discussing settlement with Federal
Express.
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.
The Company is subject to other lawsuits and claims arising in the ordinary
course of its business. In the Company's opinion, as of December 31, 1999, the
effect of such matters will not have a material adverse effect on the Company's
results of operations and financial position.
(b) CARNIVAL AGREEMENT
In September 1998, the Company entered into a Turnkey Agreement (the
"Carnival Agreement") with Carnival Corporation ("Carnival") for the purchase,
installation and maintenance of its advanced cabin entertainment and management
system for the cruise industry ("CruiseView(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
F-7
<PAGE>
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 done through the receipt of the
Company's 50% share of revenues 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. The acceptance period for the Fantasy and Destiny class ships are
twelve months and three months, respectively. As of December 31, 1999, the
Company recorded deferred revenue of $2,108,151, reflecting amounts paid by
Carnival towards the purchase price of CruiseView(TM) aboard these ships. As of
December 31, 1999, the Company had not recognized any revenue in association
with the Carnival Agreement. In January 2000, the systems installed aboard the
Fantasy and Destiny class ships were accepted by Carnival.
The Company has concluded that the cost of building and installing
CruiseView(TM) systems in carnival ships pursuant to the agreement with Carnival
may exceed the revenue earned in connection therewith. 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.
(8) SUBSEQUENT EVENTS -- LETTER OF INTENT FOR CONVERTIBLE DEBENTURES
Although in January 2000 the Company entered into a letter of intent to
obtain net loan proceeds of $5.8 million, we and the prospective lender have
been unable to reach agreement on certain material terms of the proposed
transaction. Consequently, we do not anticipate pursuing this financing.
F-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-23
<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-23
<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-24
<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-25
<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-26
<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-27
<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
F-28
<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-29
<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-30
<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-31
<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.
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 $ 5,924.42
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 $ 86,924.42
===========
[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.
II-1
<PAGE>
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
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 4,802,377 million and 886,000 shares
of its Common Stock to Global Technologies, Ltd. (Global) in connection with
Global's conversion of its Secured Promissory Note and Series C Stock,
respectively. These transactions are exempt under Section 4(2) of the Securities
Act.
II-2
<PAGE>
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.
ITEM 27. EXHIBITS.
Exhibit
Number Description Reference
------ ----------- ---------
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) (3)
3.1.4 Articles of Amendment to the Articles of Incorporation
(re: elimination of Series A preferred) *
3.1.5 Articles of Amendment to the Articles of Incorporation
(re: Amendment to Series B Preferred) (7)
3.1.6 Articles of Amendment to the Articles of Incorporation
(re: Series C Preferred) (7)
3.1.7 Articles of Amendment to the Articles of Incorporation
(re: Series D Preferred) (9)
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 (2)
10.1 Employment Agreement, dated October 31, 1998, by and
between the corporation and Wilbur L. Riner (3)
10.2 Addendum and Modification to Employment Agreement,
dated May 14, 1999, by and between the corporation and
Wilbur L. Riner (9)
10.3 Employment Agreement, dated October 31, 1998, by and
between the corporation and James E. Riner (3)
10.4 Addendum and Modification to Employment Agreement, dated
May 14, 1999, by and between the corporation and
James E. Riner (9)
10.5 Employment Agreement, dated October 31, 1998, by and
between the corporation and Bryan R. Carr (3)
10.6 Employment Agreement, effective June 11, 1999, by and
between the corporation and Frank Gomer (9)
10.7 Employment Agreement, effective June 11, 1999, by and
between the corporation and Morris C. Aaron (9)
II-3
<PAGE>
Exhibit
Number Description Reference
------ ----------- ---------
10.8 Promissory Note, dated September 1, 1994, from the
corporation to Wilbur Riner (4)
10.9 Promissory Note, dated September 1, 1994, from the
corporation to James Riner (4)
10.10 1994 Employee Stock Option Plan, including form of
Stock Option Agreement (4)
10.11 1995 Stock Option Plan for Non-Employee Directors (5)
10.12 Securities Purchase Agreement dated as of
October 23, 1998, between the Shaar Fund Ltd. and
the corporation (6)
10.13 Registration Rights Agreement dated as of
October 23, 1998, between Shaar and the corporation (6)
10.14 Warrant Agreement dated October 23, 1998, between Shaar
and the corporation (6)
10.15 Securities Purchase Agreement dated as of December
28, 1998, between Cache Capital and the corporation (3)
10.16 Registration Rights Agreement dated as of December
28, 1998, between Cache Capital and the corporation (3)
10.17 Service Agreement between The Network Connection
and Stephen J. Ollier (10)
10.18 Securities Purchase Agreement, dated as of May
10, 1999, between the corporation and Interactive
Flight Technologies, Inc. (7)
10.19 Secured Promissory Note, dated January 25, 1999,
made in favor of Interactive Flight Technologies, Inc. (7)
10.20 First Allonge to Secured Promissory Note, dated
May 10, 1999, made in favor of Interactive Flight
Technologies, Inc. (7)
10.21 Second Allonge to Secured Promissory Note, dated
May 10, 1999, made in favor of Interactive Flight
Technologies, Inc. (7)
10.22 Third Allonge to Secured Promissory Note, dated
May 10, 1999, made in favor of Interactive Flight
Technologies, Inc. (7)
10.23 Fourth Allonge to Secured Promissory Note, dated
May 10, 1999, made in favor of Interactive Flight
Technologies, Inc. (7)
10.24 Amendment No. 1 to Registration Rights Agreement, dated
May 10, 1999, between the corporation and Interactive
Flight Technologies, Inc. (7)
10.25 Fifth Allonge to Secured Promissory Note, dated July
16, 1999, made in favor of Interactive Flight
Technologies, Inc. (9)
10.26 Sixth Allonge to Secured Promissory Note, dated August
9, 1999, made in favor of Interactive Flight
Technologies, Inc. (9)
10.27 Seventh Allonge to Secured Promissory Note, dated
August 24, 1999, made in favor of Interactive Flight
Technologies, Inc. (9)
10.28 Revolving Credit Note in the aggregate amount of
$5,000,000 in favor of Interactive Flight
Technologies, Inc. (9)
10.29 Agreement between Carnival Corporation and The
Network Connection (10)
10.30 Agreement between Embassy Suites and The Network
Connection (10)
10.31 Agreement between Radisson Resort and The Network
Connection (10)
10.32 Amended and Restated Seventh Allonge to Secured Promissory
Note, dated December 10, 1999 *
16.1 Letter on Change in Certifying Accountant (8)
21.1 Schedule of Subsidiaries *
23.1 Consent of KPMG LLP *
23.2 Consent of Mesirov Gelman Jaffe Cramer & Jamieson, LLP
(included as part of Exhibit 5.1) (2)
II-4
<PAGE>
- ----------
* 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) To be filed by amendment.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) Incorporated by reference, filed as an exhibit with The Network
Connection's Current Report on Form 8-K on August 3, 1999.
(9) 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.
(10) 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.
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 (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, (ii) to
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) to include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement; provided, however, that clauses
(a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included
in the post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, 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.
II-5
<PAGE>
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 February 23, 2000.
THE NETWORK CONNECTION, INC.
Date: February 23, 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
/s/ Irwin L. Gross
February 23, 2000 -------------------------------------------
Irwin L. Gross, Chief Executive Officer
and Chairman of the Board of Directors
(principal executive officer)
/s/ Morris C. Aaron
February 23, 2000 -------------------------------------------
Morris C. Aaron, Executive V. P., Chief
Financial Officer and Director
(principal financial and accounting
officer)
/s/ Frank E. Gomer
February 23, 2000 -------------------------------------------
Frank E. Gomer, President, Chief Operating
Officer and Director
/s/ M. Moshe Porat
February 23, 2000 -------------------------------------------
M. Moshe Porat, Director
/s/ Stephen Schachman
February 23, 2000 -------------------------------------------
Stephen Schachman, Director
Exhibit 3.1.4
ARTICLES OF AMENDMENT TO
THE ARTICLES OF INCORPORATION
OF THE NETWORK CONNECTION, INC.
These amended Articles of Incorporation are being executed as of April 30, 1999,
for the purpose of amending the Articles of Incorporation of The Network
Connection, Inc. (the "Company"), pursuant to Section 14-2-602 of Georgia
Business Corporation Code.
NOW, THEREFORE, the undersigned hereby certifies as follows:
FIRST: The name of the Company is The Network Connections, Inc.
SECOND: That, pursuant to authority conferred upon the Board of Directors by the
Articles of Incorporation, said Board of Directors, at a meeting of the Board of
Directors adopted a resolution providing for the elimination of the existing 4%
Series A Convertible Preferred Stock, $.01 par value per share (the "Preferred
Stock"), designation from Article V of the Articles of Incorporation of the
Company due to the fact that there are no outstanding shares of Preferred Stock
because all previously outstanding shares of Preferred Stock have prior to the
date hereof been converted into shares of the Company's Common Stock, $.001 par
value.
The amended Articles of Incorporation were approved by the Board of Directors in
the manner required by Section 14-2-602 of the Georgia Business Corporation Code
as of April 30, 1999, and shareholder approval was not required.
(REMAINDER OF PAGE INTENTIONALLY KEPT BLANK.
SIGNATURE PAGE FOLLOWS)
<PAGE>
IN WITNESS WHEREAS, the undersigned have hereunto signed their names and
affirmed that the statements made herein are true under the penalties of perjury
as of this 30th day of April, 1999.
/s/ Wilbur L. Riner
----------------------------------------
Wilbur L. Riner, Chairman
ATTEST:
/s/ James Riner
----------------------------------------
James Riner, Secretary
2
AMENDED AND RESTATED
SEVENTH ALLONGE TO SECURED PROMISSORY NOTE
WHEREAS, the parties entered into a Seventh Allonge to Secured Promissory
Note dated August 24, 1999, attached to and forming a part of the Secured
Promissory Note, dated January 26, 1999, made by THE NETWORK CONNECTION, INC., a
Georgia corporation ("MAKER"), payable to the order of Interactive Flight
Technologies, Inc., a Delaware corporation, now known as Global Technologies,
Ltd. ("PAYEE"), in the original principal amount of $500,000 and in the
principal amount as of the date hereof of $3,122,757.
WHEREAS, the Seventh Allonge contained an inaccurate description of the
conversion calculation set forth in Paragraph 16;
WHEREAS, the parties now wish to amend and restate the Seventh Allonge to
correctly reflect the intent of the parties;
NOW THEREFORE, the parties agree that the Seventh Allonge is hereby amended
and restated to read in its entirety as follows:
ALLONGE, dated effective as of August 24, 1999, attached to and forming a
part of the Secured Promissory Note, dated January 26, 1999, as amended by the
Allonge to Secured Promissory Note dated January 29, 1999, the Second Allonge to
Secured Promissory Note dated March 19, 1999, the Third Allonge to Secured
Promissory Note dated March 24, 1999, the Fourth Allonge to Secured Promissory
Note dated May 10, 1999, the Fifth Allonge to Secured Promissory Note dated July
16, 1999, and the Sixth Allonge to Secured Promissory Note dated August 9, 1999
(collectively, the "NOTE"), made by THE NETWORK CONNECTION, INC., a Georgia
corporation ("MAKER"), payable to the order of GLOBAL TECHNOLOGIES, LTD., a
Delaware corporation ("PAYEE"), in the original principal amount of $500,000 and
in the principal amount as of the date hereof of $3,122,757.
1. In consideration of the payment by Payee of certain obligations of
Maker, the principal amount of the Note is hereby increased by One Million Two
Hundred Thousand Dollars ($1,200,000) to Four Million Three Hundred Twenty-Two
Thousand Seven Hundred Fifty Seven Dollars ($4,322,757). Accordingly, the first
paragraph of the Note is hereby amended as follows:
<PAGE>
FOR VALUE RECEIVED, the undersigned, The Network connection, Inc., a
Georgia corporation (the "MAKER"), hereby promises to pay to the order
of Interactive Flight Technologies, Inc., a Delaware corporation, its
successors and assigns (the "PAYEE"), the principal sum of Four
Million Three Hundred Twenty-Two Thousand Seven Hundred Fifty-Seven
Dollars ($4,322,757), together with interest on the outstanding
principal balance thereof accrued from the date hereof: (a) at the
fixed rate of 9.5% per annum in respect of all periods during which no
Event of Default (as such term is hereinafter defined) is continuing;
and (b) at the fixed rate of 12.5% in respect of all periods during
which any Event of Default is continuing. All payments of principal
and/or interest shall be paid in lawful money of the United States of
America in immediately available funds to an account designated by
Payee.
2. Paragraph 16 is hereby amended and restated in full to read as follows:
16. CONVERSION RIGHTS. Payee shall be entitled, at any time and from
time to time and in its sole discretion, to convert all or a portion of the
principal amount and accrued interest due under this Note into shares of
the Maker's Series C 8% Convertible Preferred Stock, $.01 par value, Stated
Value $1,000 per share (the "PREFERRED STOCK") or, at the option of Payee,
into the Maker's Common Stock (the "COMMON STOCK"). Any such conversion
into Preferred Stock shall be effected at the rate of one share of
Preferred Stock for each $1,000 due hereunder which Payee has elected to
convert (the "CONVERSION RATE"). If Payee elects to convert all or a
portion of the principal amount and accrued interest due under this Note
directly into the Common Stock, the number of shares to be issued shall be
calculated as if such amount had first been converted to Preferred Stock
hereunder (calculated without regard to any insufficiency of authorized
shares of Preferred Stock) and such resulting shares of Preferred Stock
had, in turn, immediately been converted to Common Stock at a conversion
price per share equal to the lowest of (a) $1.50, (b) 66.67% of the Average
Price (as hereafter defined), (c) the price per share at which the Maker,
after the date of this Allonge, issues and sells any Common Stock, or (d)
where coupled with the right of the purchaser(s) thereof to demand that the
Corporation register under the Securities Act of 1933 any Common Shares
(not theretofore registered) for which any warrants or options may be
exercised or any convertible, exchangeable or exercisable securities may be
converted, exercised or exchanged, (i) the exercise price of any such
warrants or options issued by the Maker after the date of this Allonge, or
(ii) the conversion rate, exchange rate or exercise price, respectively, of
any such convertible, exchangeable or exercisable security issued by the
Maker after the date of this Allonge, except for stock option agreements or
stock incentive agreements issued pursuant to employee benefit plans. For
purposes of this Paragraph 16, the term "Average Price" per share of Common
Stock means the average of the closing bid prices as reported on the Nasdaq
Stock Market (or if not then traded on such market, on such exchange or
quotation system where such shares are then traded) for the lowest five of
the twenty trading days immediately preceding the Conversion Date.
-2-
<PAGE>
Payee may elect to convert by delivering to Maker, by facsimile, telecopier
or other expedient means of transmission, a notice of conversion stating
(i) the principal amount and/or accrued interest to be converted, (ii) the
number of shares of Preferred Stock or Common Stock to be issued as a
result of such conversion; and (iii) the person(s) in whose name the
Preferred Stock or Common Stock is to be issued. The conversion of any
portion of this Note and the resulting issuance of Preferred Stock or
Common Stock shall be effective upon the date that Maker receives the
corresponding notice of conversion, and Maker shall deliver to Payee one or
more certificates evidencing such shares no later than five days following
such effective date. Upon a conversion of all amounts due hereunder, Payee
shall deliver the original Note (including all Allonges), marked "PAID," to
Maker no later than five days following the delivery to Maker of the
conversion notice. In the event of a conversion of less than all amounts
due hereunder, (A) no principal amount under the Note shall be deemed
converted unless and until all accrued interest under the Note shall be
first converted; and (B) the portion of the amounts due hereunder that are
so converted shall be deemed repaid. The parties shall mark on the grid
attached to the Fourth Allonge to Secured Promissory Note dated May 10,
1999 the facts related to such partial conversion and shall confirm the
accuracy of the entry by signing next to each such entry.
3. Any agreement to subordinate, or any subordination, of the indebtedness
represented by the Note to bank or finance company indebtedness, which may
heretofore have been given by Payee, is null and void and of no force or effect.
Maker represents and warrants to Payee that since execution of the Note, Payee
retains a first priority security interest in the Collateral granted by Maker to
Payee pursuant to that certain Security Agreement dated January 25, 1999 as
amended, ("SECURITY AGREEMENT"). The Maker's obligations under the Note, as
amended hereby, shall be and are deemed to be secured by the Collateral and
subject to the terms of the Security Agreement, all of which are confirmed and
ratified as of the date hereof, including, but not limited to, all of the
representations, warranties and covenants therein.
4. In all other respects, the Note is confirmed, ratified, and approved
and, as amended by this Amended and Restated Seventh Allonge, shall continue in
full force and effect.
IN WITNESS WHEREOF, Maker and Payee have caused this Amended and Restated
Seventh Allonge to be executed and delivered by their respective duly authorized
officers on this 10th day of December, 1999, to be effective as of the day and
year first above written.
THE NETWORK CONNECTION INC.
By: /s/ Morris C. Aaron
-------------------------
Morris C. Aaron
Accepted and agreed to:
GLOBAL TECHNOLOGIES, LTD.
By: /s/ Irwin L. Gross
-------------------------
Irwin L. Gross
EXHIBIT 21.1
Subsidiaries
TNCi UK Limited is a wholly-owned subsidiary formed in the United Kingdom.
TNCi UK Limited does business as The Network Connection. Our Passenger Rail
Division is operated through this subsidiary.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The Network Connection, Inc.
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Experts" in the registration statement on Form SB-2.
/s/ KPMG LLP
Phoenix, Arizona
February 22, 2000
