<PAGE>
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 March 31, 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 April 30, 1996, the registrant had outstanding 2,777,360 shares of its
Common Stock.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [ X ]
<PAGE>
TABLE OF CONTENTS
ITEM PAGE(S)
PART I. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS (Unaudited)
Balance Sheet March 31, 1996 3,4
Statements of Operations Three Months Ended March 31,
1996 and 1995 5
Statements of Cash Flows Three Months Ended March 31,
1996 and 1995 6
Notes to Financial Statements March 31, 1996 7,8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9,10,11
PART II. OTHER INFORMATION
5. Other Information 12
6. Exhibits and Reports on Form 8-K 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE NETWORK CONNECTION, INC.
BALANCE SHEET
(UNAUDITED)
March 31,
1996
----
ASSETS
Current assets:
Cash $311,017
Restricted cash 1,000,000
Short-term investments 1,500,000
Accounts receivable, less allowance of $70,728 1,620,488
Inventory 721,100
Prepaid expenses 193,986
------------------
Total current assets 5,346,591
Property and equipment:
Land 50,000
Building and improvements 503,288
Furniture, fixtures and equipment 989,524
Software 26,125
Vehicles 46,260
------------------
1,615,197
Less accumulated depreciation (461,535)
------------------
1,153,662
Loan origination costs, net 45,000
Other assets, net 163,793
------------------
Total assets $6,709,046
==================
3
<PAGE>
THE NETWORK CONNECTION, INC.
BALANCE SHEET
(UNAUDITED)
March 31,
1996
----
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $485,216
Payable to shareholders 70,144
Current portion of long-term debt and capital
lease obligations 48,895
-------------
Total current liabilities 604,255
Long-term debt, less current portion 331,172
Obligations under capital leases,
less current portion 38,112
-------------
-------------
Total liabilities 973,539
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, 2,750,000 shares 2,750
Additional paid-in capital 7,538,370
Accumulated deficit (1,805,613)
-------------
Total shareholders' equity 5,735,507
-------------
Total liabilities and shareholders' equity $6,709,046
=============
4
<PAGE>
THE NETWORK CONNECTION, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Three Months
Ended Ended
March 31, March 31,
------------ ------------
1996 1995
---- ----
Revenues $571,398 $1,051,988
Cost of revenues 380,387 686,945
------------ ------------
Gross profit 191,011 365,043
Selling, general and administrative 802,550 359,102
------------ ------------
Operating (loss) income (611,539) 5,941
Interest expense (31,373) (27,825)
Other income 10,909 0
------------ ------------
Net loss ($632,003) ($21,884)
============ ===========
Net loss per share ($0.26) ($0.02)
============ ===========
Shares used in per share calculation 2,470,000 1,347,354
============ ===========
5
<PAGE>
THE NETWORK CONNECTION, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
---- ----
OPERATING ACTIVITIES
Net loss ($632,003) ($21,884)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 60,000 37,073
Changes in operating assets and liabilities:
Accounts receivable 3,029 (244,073)
Inventory 26,725 127,140
Prepaid expenses and other assets (134,659) (67,061)
Accounts payable and accrued expenses (456,031) 71,375
------------- -----------
Net cash used in operating activities (1,132,939) (97,430)
INVESTING ACTIVITIES:
Purchase of property and equipment (107,401) (49,797)
Purchase of short-term investments (1,500,000) 0
------------- -----------
Net cash (used in) provided by
investing activities (1,607,401) (49,797)
FINANCING ACTIVITIES:
Proceeds from shareholder debt 0 90,382
Proceeds from issuance of long-term debt 0 23,349
Net proceeds from issuance of stock 3,040,001 40,000
Payment of long-term debt and capital
lease obligations (16,089) (6,504)
------------- -----------
Net cash provided by financing activities 3,023,912 147,227
------------- -----------
Net change in cash 283,572 0
Cash at beginning of period 27,445 0
------------- -----------
Cash at end of period $311,017 $0
============= ===========
6
<PAGE>
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
period ended March 31, 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.
FINANCIAL INSTRUMENTS
Cash, restricted cash and short-term investments are stated at cost plus accrued
interest which approximates market value.
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.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In October 1995, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No, 123, "Accounting for Stock Based
Compensation", ("SFAS 123") which requires that companies with stock-based
compensation plans either recognize compensation expense based on new fair value
accounting methods or continue to apply existing accounting rules and disclose
pro forma net income and earnings per share assuming the fair value method been
applied. Because the Company has not determined which alternative it will elect
in adoption of SFAS 123, the impact of adoption can not currently be determined.
The pronouncement is effective for years beginning after December 15, 1995.
The Financial Accounting Standards Board has issued Statement of Accounting
Standards No. 121 ("SFAS 121"), "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," which the Company is required to
adopt in 1996. SFAS 121 requires that Long-Lived Assets be reviewed for
impairment whenever events or circumstances indicate that the carrying amount of
the asset may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) form an asset to be held and used in
operations is less than the carrying value of the assets, an impairment loss
must be recognized in the amount of the difference between the carrying value
and the fair value. Assets to be disposed of must be valued at the lower of
carrying value or fair value less cost to sell. In management's opinion,
adoption of SFAS 121 will not have a material impact on the Company's financial
position.
7
<PAGE>
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
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.
STOCK OPTIONS
On March 15, 1996, the Company's Board of Directors adopted an increase to
700,000 shares, subject to shareholder approval, in the shares reserved for
issuance pursuant to the 1994 Employee Stock Option Plan.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS: FISCAL QUARTER ENDED MARCH 31, 1996 COMPARED TO FISCAL
QUARTER ENDED MARCH 31, 1995
Revenues decreased 45.7% to $571,398 for the quarter ended March 31, 1996 from
$1,051,988 for the quarter ended March 31, 1995. This decrease resulted from
interrupted purchasing decisions and a delay in the approval of amending the
Company's GSA contract to reflect new products within the federal government as
a result of the budget impasse in late 1995. Additionally, more sales efforts
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 24
months. Sales backlog at March 31, 1996 was approximately $5.00 million. Prior
to March 31, 1996, backlog was not significant as customers placed orders on an
as-needed basis with delivery within 45 days of order placement. Because of
variations in the timing of orders, delivery intervals, material availability,
customer and product mix and delivery schedules, among other reasons, the
Company's backlog as of any particular date may not be representative of actual
sales for any succeeding period.
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. The Company anticipates that this type
of activity, rather than new technology development, will continue into the
foreseeable future as the Company's current product generations gain market
acceptance and implementation.
Gross profit as a percentage of revenues decreased to 33.4% during the quarter
ended March 31, 1996 as compared to 34.7% for the same period in 1995. This
decrease was primarily due to a higher percentage of revenues generated during
the 1996 quarter from resellers with a higher average discount than end users.
Selling, general and administrative expenses increased by approximately $443,000
to approximately $802,000 for the quarter ended March 31, 1996, from
approximately $359,000 for the quarter ended March 31, 1995. This increase
related primarily to (i) approximately $186,000 of additional marketing costs
(including advertising, trade show, public relations, bidding and proposal and
demonstration expenses); (ii) increased recurring costs of approximately
$139,000 for a remote sales office in Virginia and employment of sales and
marketing personnel and related payroll costs and; (iii) approximately $67,000
of expenses related to investor relations incurred during the quarter ended
March 31, 1996 which were not incurred in the respective period in 1995.
Management of the Company believes the investments in sales and marketing will
result in increased revenues beginning in the third quarter of fiscal 1996.
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 fiscal quarter ended March 31, 1996, the Company's cash increased
$1.78 million principally due to the net proceeds from the issuance of common
stock of $3.04 million, offset by cash used in
9
<PAGE>
operating activities of $1.13 million and the purchase of property and
equipment of $107,401. The negative change in cash from operating activities
primarily resulted from a net loss of $632,032, an increase of $134,659 in
prepaid expenses and other assets due to trade show deposits and a down payment
for the purchase of property which is currently being leased and a reduction in
accounts payable of $.46 million to reduce overdue balances. The reduction in
cash from operating activities was offset by depreciation and amortization of
$60,000.
The Company's primary source of funds at March 31, 1996 consisted of $1.31
million in cash, $1.50 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 1996 bears interest at an annual rate of 7.495%. At
March 31, 1996, the Company had no borrowings outstanding under the line of
credit.
Capital expenditures for the purchase of property and equipment for quarter
ended March 31, 1996 were $107,401 and consisted primarily of equipment for
expanding 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 March 31, 1996, in the
aggregate amount of $.26 million, for the purchase of its primary operating
facility. This loan is secured by the purchased real estate and the personal
guarantees of Wilbur and Barbara Riner, and bears annual interest at the rate of
such lender's prime rate plus 2%. A default by the Company in payment of this
mortgage loan could result in foreclosure against the property. On July 7, 1995,
the Company entered into an agreement, to purchase land and a building in close
proximity and of the same size and use as its primary operating facility for
$.36 million. The building will be used to expand the Company's production and
warehousing capacity in anticipation of increased revenue, and the building is
currently partially occupied by the Company under a month to month lease. Such
purchase is planned to be completed in May 1996 and is expected to be funded by
mortgage financing with the property as collateral.
The Company has outstanding at March 31, 1996, 1,150,000 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. Prior to May 11, 1996, the Warrants will
not be redeemable by the Company without the written consent of Barron Chase
Securities, Inc, the lead underwriter of it's initial public offering.
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.
On March 15, 1996 the Company's Board of Directors authorized the Company to
enter into a financial public relations and financial consulting agreement with
Goodbody International Inc. ("Goodbody"), pursuant to which Goodbody's
compensation under the contract would be a three (3) year warrant to
10
<PAGE>
acquire 50,000 shares of the Company's common stock at an exercise price of
$15.00 per share, based upon a closing price of $18.00 per share on that date.
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.
EFFECTS OF INFLATION
During the past two years, inflation has not been a material factor affecting
the Company's business. However, the Company's manufacturing operations are
subject to the effects of inflation to the extent that inflation may adversely
affect its customers' borrowing rates and their availability of credit, which
could directly and adversely affect customer equipment purchasing power.
SEASONALITY
The Company's results of operations are not significantly affected by seasonal
factors. However, rapid changes in prices of computer components which could
have a material affect on the Company's results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this report 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.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On April 29, 1996, Barbara Riner resigned as a member of the Board of
Directors. Bryan Carr was appointed as member of the Board of Directors on April
29, 1996.
On April 29, 1996, The Board of Directors also authorized an amendment to
the Company's By-Laws, by adding new Articles X and XI thereto, in order to
specifically make the provisions of the Georgia Business Corporation Code
relating to fair price requirements with respect to the Common Stock and
business combinations with interested stockholders applicable to the Company.
In the absence of By-law provisions such as those authorized by the Board, these
provisions of the Georgia Business Corporation Code would be inapplicable to the
Company. The fair price and business combination provisions of the Georgia
Business Corporation Code might be viewed as having an anti-takeover effect.
FAIR PRICE PROVISIONS. Article X of the By-Laws specifically provides that
all of the provisions of Sections 14-2-1110 through 14-2-1113 are applicable to
the Company. Essentially, these fair price provisions require any material
transaction or series of transactions of the Company with or for the benefit of
an interested stockholder or an affiliate thereof to be approved by all of the
directors who are unaffiliated with the interested stockholder or by 2/3rds of
such unaffiliated directors and the holders of a majority of the shares of the
Company entitled to vote on such transaction or transactions, other than shares
held by the interested stockholder. Under such provisions, an interested
stockholder is generally the holder of 10% or more of the voting power of the
outstanding voting shares of the Corporation. However, under the fair price
provisions, the voting requirements discussed above will not apply if certain
conditions designed to ensure the fairness of the transaction or transactions to
be voted upon are satisfied.
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS. Article XI of the By-
Laws specifically provides that all of the provisions of Sections 14-2-1110
through 14-2-1113 are applicable to the Company. These provisions generally
prohibit the Company from entering into any material transaction with an
interested stockholder (as defined above) for a period of five years after the
stockholder became an interested stockholder. The provisions do not apply if
the transaction was approved prior to the time that the stockholder became an
interested stockholder or if the interested stockholder holds 90% or more of the
Company's voting stock.
In tandem or separately, these provisions impose restrictions on hostile
takeover business transactions and present a meaningful deterrent to such
hostile takeover activities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On March 13, 1996, the Company filed a report on Form 8-K which
announced the sale of an aggregate of 300,000 shares of it's common stock
at $10.25 per share, subject to Securities Purchase Agreements dated
February 22, 1996, to ten accredited investors.
12
<PAGE>
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: May 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
13
