SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERTLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
Commission File Number: 1-13760
THE NETWORK CONNECTION, INC.
1324 Union Hill Road
Alpharetta, Georgia 30201
(770-751-0889)
A Georgia Corporation IRS Employer ID No. 58-1712432
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 par value per share Registered on The Nasdaq Stock
Market
Common Stock Purchase Warrants Registered on The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of November 10, 1996, the registrant had outstanding 3,024,210 shares of
its Common Stock.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [
X ]
TABLE OF CONTENTS
ITEM
PAGE(S)
PART I. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS (Unaudited)
Balance Sheet September 30, 1996 3,4
Statements of Operations Three Months and Nine months
Ended September 30, 1996 and 1995 5
Statements of Cash Flows Three Months and Nine months
Ended September 30, 1996 and 1995 6
Notes to Financial Statements September 30, 1996 7
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8,9
PART II. OTHER INFORMATION
5. Other Information 10
6. Exhibits and Reports on Form 8-K 10
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE NETWORK CONNECTION, INC.
BALANCE SHEET
(Unaudited)
September 30, 1996
ASSETS
Current assets:
Cash $100,202
Restricted cash 1,000,000
Short-term investments 1,337,472
Accounts receivable, less allowance of $70,728 (Notes) 3,144,883
Inventory 654,618
Prepaid expenses 241,324
------------------
Total current assets 6,478,499
Property and equipment:
Land 150,000
Building and improvements 805,348
Furniture, fixtures and equipment 1,267,627
Software 30,637
Vehicles 133,106
------------------
2,386,718
Less accumulated depreciation (551,535)
------------------
1,835,183
Loan origination costs, net 15,000
Other assets, net 85,377
------------------
Total assets $8,414,059
==========
THE NETWORK CONNECTION, INC.
BALANCE SHEET
(Unaudited)
September 30, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $893,100
Payable to shareholders 70,144
Current portion of long-term debt and capital lease obligations 49,033
Borrowings under bank line of credit 614,000
--------------------
Total current liabilities 1,626,277
Long-term debt, less current portion 230,372
Obligations under capital leases, less current portion 33,990
--------------------
- --------------------
Total liabilities 1,890,639
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized, 2,500,000 shares;
Issued and outstanding, none
Common stock, $.001 par value:
Authorized, 10,000,000 shares;
Issued and outstanding, 3,024,210 shares 3,024
Additional paid-in capital 9,207,202
Accumulated deficit (2,686,806)
--------------------
Total shareholders' equity 6,523,420
--------------------
Total liabilities and shareholders' equity $8,414,059
===========
THE NETWORK CONNECTION, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended Nine months Ended Nine months Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
Revenues
$1,830,312 $958,588 $3,862,108 $2,821,844
Cost of revenues
1,255,773 625,488 2,681,481 1,822,814
- ---------------------------------------
- -------------------
- -------------------
Gross profit
574,539 333,100 1,180,627 999,030
Selling, general and administrative
876,304 782,026 2,660,970 1,667,421
- --------------------
- -------------------
- -------------------
- -------------------
Operating (loss) income
(301,765) (448,926) (1,480,343) (668,391)
Interest expense
(48,011) (29,665) (101,331) (103,521)
Other income
37,106 34,863 68,478 54,885
- --------------------
- -------------------
- -------------------
- -------------------
Net loss
($312,670) ($443,728) ($1,513,196) ($717,027)
============
===========
===========
===========
Net loss per share
($0.10) ($0.18) ($0.55) ($0.38)
============
===========
===========
===========
Shares used in per share calculation
2,982,043 2,450,000 2,763,435 1,898,479
============ =========== =========== ===========
THE NETWORK CONNECTION, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months Ended Nine months Ended
September 30, September 30,
1996 1995
Operating activities
Net loss ($1,513,196) ($717,027)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 180,000 118,304
Changes in operating assets and liabilities:
Accounts receivable (1,521,366) (882,943)
Inventory 93,207 (284,348)
Prepaid expenses and other assets (103,581) 132,947
Accounts payable and accrued expenses (48,147) (583,398)
- -------------------
- -------------------
Net cash used in operating activities (2,913,083) (2,216,465)
Investing activities:
Purchase of property and equipment (878,922) (448,290)
Purchase of short-term investments (1,337,472) 0
- -------------------
- -------------------
Net cash (used in) provided by investing activities
(2,216,394) (448,290)
Financing activities:
Proceeds from issuance of long-term debt 0 133,704
Net proceeds from issuance of stock 4,709,107 4,414,383
Proceeds from bank borrowings on line of credit
614,000 707,000
Payment of long-term debt and capital lease obligations
(120,873) (60,076)
Payment of shareholder debt 0 (59,618)
- -------------------
- -------------------
Net cash provided by financing activities
5,202,234 5,135,393
- -------------------
- -------------------
Net change in cash 72,757 2,470,638
Cash at beginning of period 27,445 0
- -------------------
- -------------------
Cash at end of period $100,202 $2,470,638
===========
===========
THE NETWORK CONNECTION, INC.
CONDENSED NOTES TO UNAUDITED INTERIM FINANCIAL
STATEMENTS
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month and nine month period ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information,
refer to the financial statements and footnotes thereto for the year ended
December 31, 1995, included in the Company's Annual Report on Form 10-
KSB.
Net Loss Per Common Share
Net loss per common share has been computed by dividing net loss by the
weighted average number of common shares outstanding during each period.
All share and per share data, except par value per share, have been
retroactively adjusted to reflect the 1.1562894 for 1 stock split of the
Company's common stock which occurred on March 7, 1995.
Accounts Receivable
The Company's products are often used with other products in large complex
projects. As a result, the Company may grant extended payment terms,
usually secured by irrevocable letters of credit, for certain sales. Accounts
receivable at September 30, 1996 consisted of approximately $1,198,000 from
sales to such customers with extended credit terms of up to 180 days based on
the nature of the project. Additionally, $226,194 represent amounts due from
sales type lease agreements with equal monthly payments over the next 8 to
13 months.
Management's Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Private Placement
On March 1, 1996, the Company completed a Private Placement of 300,000
shares of its Common Stock under Regulation D of the Securities and
Exchange Act of 1933. The transaction resulted in proceeds of $3.1 million
for the Company.
Forward-Looking Statements
Statements in this Quarterly Report on Form 10QSB that are not descriptions
of historical facts may be forward-looking statements that are subject to risks
and uncertainties, including economic, competitive and technological factors
affecting the Company's operations, markets, products, services and prices, as
well as other specific factors discussed in the Company's filings with the
Securities and Exchange Commission. These and other factors may cause
actual results to differ materially from those anticipated.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Revenues increased 91% to $1.8 million for the quarter and 37% to $3.9
million for the nine months ended September 30, 1996 from $958,588 and
$2.8 million for the quarter and nine months ended September 30, 1995,
respectively. This increase primarily resulted from increased international
sales through the Company's Korean reseller and initial sales to new strategic
alliance partners. More sales efforts in 1996 were focused on larger system
sales into niche markets of the Company's "turn-key" products (see below)
which have longer sales cycles and contribute to sales backlog for revenues
derived from multiple roll-out deliveries over 12 to 36 months. As a result,
the Company received awards for long-term programs with substantial
revenue opportunity if fully completed at the Korean Government School
Program ($15.0 million for 950 schools), Interactivo ($4.0 million for 80
hotels) and Allegis Systems, Ltd ($1.9 million for an AirView system)
The Company introduced several new products in late fiscal 1995 which
utilize its "Cheetah" high performance video servers. The new products in
1995 result from "turn-key" packaged solutions for (i) AirView, in the airline
market, (ii) TrainView, in the rail transportation market and (iii) InnView, in
the hospitality market. Research and development activities have been limited
to these products which represent enhancements of the existing "Cheetah"
server to meet the needs of specific applications.
Gross profit as a percentage of revenues decreased to 32% during the quarter
and 31% for the nine months ended September 30, 1996 as compared to 35%
and 35% for the same periods in 1995. This decrease was primarily due to a
higher percentage of revenues generated during the 1996 periods from new
resellers with a higher average discount for demonstration and development
systems and lower prices for the initial phase of orders from customers with
multiple site deliveries over several months. Management of the Company
believes that gross margins will improve as revenues from these initial
projects and sales from these new resellers increase.
Selling, general and administrative expenses increased by $94,278 (12%) for
the quarter and $993,549 (60%) for the nine months ended September 30,
1996, as compared to the same 1995 periods. This increase related primarily
to expenses, which were not incurred in the respective period in 1995 due to
deficient working capital prior to its initial public offering of common stock
in May of 1995, for additional (i) marketing costs (including advertising,
trade show, public relations, bidding and proposal and demonstration
expenses); (ii) recurring costs for a remote sales office in Virginia opened in
July 1995 and employment of sales and marketing personnel and related payroll
costs and; (iii) administrative expenses related to regulatory reporting
and investor relations. Management of the Company believes the investments
in sales and marketing will result in increased revenues and sales backlog for
the remainder of fiscal 1996 and first half of 1997.
The Company anticipates that it will continue to invest in its marketing and
sales generation strategy (advertising, trade show, demonstration and
proposal expenses and sales and marketing personnel with related payroll
costs) to increase revenues and increase net income from operations in the
future; such investment may adversely affect short-term operating
performance.
Changes in interest expense are attributable to changes in average
outstanding borrowings during the periods presented. Other income results
from interest income on restricted cash and short-term securities.
Liquidity and Capital Resources; Certain Transactions
During the nine months ended September 30, 1996, the Company's cash
increased $72,757 principally due to the net proceeds from the issuance of
common stock of $4.71 million and bank borrowings of $614,000 offset by
cash used in operating activities of $2.91 million and the purchase of short-
term investments of $1.34 million and property and equipment of $878,922.
The negative change in cash from operating activities primarily resulted from
a net loss of $1.60 million and an increase of $1.52 million in accounts
receivable, offset by a decrease in inventory of $93,207. The reduction in
cash from operating activities was offset by depreciation and amortization of
$180,000.
The Company's primary source of funds at September 30, 1996 consisted of
$1.10 million in cash, $1.34 million in short-term securities and funds
available under a $1.00 million revolving line of credit. $1.0 million of cash
represents two certificates of deposit which were restricted from use by the
fact that they were pledged as collateral for the availability of the line of
credit. The line of credit which expires May 1997 bears interest at an annual
rate of 6.92%. At September 30, 1996, the Company had $614,000
borrowings outstanding under the line of credit.
Capital expenditures for the purchase of property and equipment for the nine
months ended September 30, 1996 were $878,922 and consisted primarily of
(i) approximately $400,000 for land and a building which had previously
been leased on a month to month basis to increase engineering, warehousing
and production capacity in anticipation of increased revenues and: (ii)
approximately $375,000 for the purchase of additional equipment in order to
expand product demonstration and development capabilities. During 1996,
capital expenditures are anticipated to be funded through existing working
capital or other financing.
The Company is indebted to an institutional lender as of September 30, 1996,
in the aggregate amount of $230,372, for the purchase of its primary
operating facility. This loan is secured by the purchased real estate and the
personal guarantees of Wilbur and Barbara Riner, and bears annual interest at
the rate of such lender's prime rate plus 2%. A default by the Company in
payment of this mortgage loan could result in foreclosure against the
property.
The Company has outstanding at September 30, 1996, 1,051,550 Redeemable
Common Stock Purchase Warrants (the "Warrants") of the Company. Each
Warrant entitles the registered holder thereof to purchase, at any time during
the period commencing on May 11, 1995, one share of Common Stock at a
price of $5.00 per share, subject to adjustment under certain circumstances,
through May 11, 1998. The Warrants are not exercisable unless, at the time
of exercise, the Company has a current prospectus covering the shares of
Common Stock issuable upon exercise of the Warrants and such shares have
been registered, qualified or deemed to be exempt under the securities laws of
the states of residence of the exercising holders of the Warrants. Commencing
after May 11, 1996, the Warrants are subject to redemption by the Company
at $.25 per Warrant on 30 days' prior written notice if the closing bid price
for the Company's Common Stock, as reported on The Nasdaq SmallCap Market
("Nasdaq"), or the closing sale price as reported on a national or regional
securities exchange, as applicable, for 30 consecutive trading days ending
within 10 days of the notice of redemption of the Warrants, averages in
excess of $8.00. The Company is required to maintain an effective
registration statement with respect to the Common Stock underlying the
Warrants prior to redemption of the Warrants.
In March 1996, the Company completed a Private Placement of 300,000
shares of its Common Stock under Regulation D of the Securities and
Exchange Act of 1933. The transaction resulted in proceeds of $3.1 million
for the Company.
The Company believes that its working capital requirements will increase
throughout 1996 and beyond. The Company believes that currently available
cash, proceeds from the exercise of Warrants and funds generated from
operations, if any, further expansion of terms with trade creditors and the
existing line of credit will be sufficient to satisfy its cash needs for the
foreseeable future. However, maintaining an adequate level of working
capital through the end of 1996 and thereafter will depend in part on the
success of the Company's products in the marketplace, the relative
profitability of those products, continued availability of memory and storage
components at favorable pricing and the Company's ability to control
operating expenses. The Company may seek or require additional financing
for growth opportunities, including any expansion that the Company may
undertake internally, through strategic acquisitions or partnerships or through
expansion of additional sites. There can be no assurance that any such
financing will be available on terms acceptable to the Company, if at all.
PART II. OTHER INFORMATION
Item 5. Other Information
A Registration Statement filed by the Company on Form S-3 was
declared effective by the Securities and Exchange Commission on August 6,
1996, pursuant to which Registration Statement the 350,000 shares of
Common Stock was registered for selling stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE NETWORK
CONNECTION, INC.
(Registrant)
Date: November 13, 1996 By:__/s/ Wilbur
Riner________________________________
Wilbur Riner
Chairman and
Chief Executive Officer
By:__/s/ Bryan R.
Carr________________________________
Bryan R. Carr
Chief Financial
and Principal
Accounting
Officer
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<PERIOD-START> JAN-1-1996 JUN-1-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 1,100,202 1,100,202
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