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 June 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 dur
ing the preceding 12 months, and (2) has been subject to such filing requirem
ents for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 10, 1996, the registrant had outstanding 2,913,810 shares of its C
ommon 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 June 30, 1996 3,4
Statements of Operations Three Months and Six Months Ended
June 30, 1996 and 1995 5
Statements of Cash Flows Three Months and Six Months Ended
June 30, 1996 and 1995 6
Notes to Financial Statements June 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)
June 30,
1996
ASSETS
Current assets:
Cash $204,835
Restricted cash 1,000,000
Short-term investments 1,331,209
Accounts receivable, less allowance of $70,728 (Notes) 2,450,844
Inventory 734,380
Prepaid expenses 222,392
------------------
Total current assets 5,943,660
Property and equipment:
Land 150,000
Building and improvements 801,070
Furniture, fixtures and equipment 1,043,302
Software 27,902
Vehicles 132,241
------------------
2,154,515
Less accumulated depreciation (506,535)
------------------
1,647,980
Loan origination costs, net 30,000
Other assets, net 99,386
------------------
Total assets $7,721,026
==========
THE NETWORK CONNECTION, INC.
BALANCE SHEET (Unaudited)
June 30,
1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $1,035,070
Payable to shareholders 70,144
Current portion of long-term debt and capital lease obligations 49,032
Borrowings under bank line of credit 164,000
-------------
Total current liabilities 1,318,246
Long-term debt, less current portion 313,553
Obligations under capital leases, less current portion 38,112
-------------
Total liabilities 1,669,911
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, 2,913,810 shares 2,913
Additional paid-in capital 8,422,338
Accumulated deficit (2,374,136)
--------------
Total shareholders' equity 6,051,115
-------------
Total liabilities and shareholders' equity $7,721,026
========
THE NETWORK CONNECTION, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
Revenues $1,460,399 $811,268 $2,031,797 $1,863,256
Cost of revenues 1,045,321 510,382 1,425,708 1,197,327
-----------------------------------------------------------------------------
Gross profit 415,078 300,886 606,089 665,929
Selling, general and administrative
991,809 535,260 1,784,667 894,362
-------------------- ------------------- ------------------- --------------
(loss) income
(576,731) (234,415) (1,178,578) (228,433)
Interest expense (17,576) (29,396) (48,949) (57,221)
Other income 25,784 12,355 27,000 12,355
-------------------- ------------------- ------------------- -------------
- ------
Net loss ($568,523) ($251,415) ($1,200,527) ($273,299)
============
===========
===========
===========
Net loss per share ($0.20) ($0.13) ($0.45) ($0.17)
============
===========
===========
===========
Shares used in per share calculation
2,838,263 1,898,082 2,654,132 1,624,952
============
===========
===========
===========
THE NETWORK CONNECTION, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended Six Months Ended
June 30, June 30,
1996 1995
Operating activities
Net loss ($1,200,527) ($273,299)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 90,000 71,668
Changes in operating assets and liabilities:
Accounts receivable (827,327) (670,650)
Inventory 13,445 (144,861)
Prepaid expenses and other assets(68,658) 146,565
Accounts payable and accrued expenses
93,823 (518,424)
------------------- ------------------
Net cash used in operating activities
(1,899,244) (1,388,981)
Investing activities:
Purchase of property and equipment(646,719) (156,320)
Purchase of short-term investments(1,331,209) 0
- -------------------
- ------------------
Net cash (used in) provided by investing activities
(1,977,928) (156,320)
Financing activities:
Proceeds from issuance of long-term debt
0 113,017
Net proceeds from issuance of stock
3,924,132 4,414,383
Proceeds from bank borrowings on line of credit
164,000 0
Payment of long-term debt and capital lease obligations
(33,570) (47,761)
Payment of shareholder debt 0 (59,618)
- -------------------
- -------------------
Net cash provided by financing activities
4,054,562 4,420,021
- -------------------
- -------------------
Net change in cash 177,390 2,874,720
Cash at beginning of period 27,445 0
- -------------------
- -------------------
Cash at end of period $204,835 $2,874,720
===========
===========
THE NETWORK CONNECTION, INC.
CONDENSED NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordanc
e with generally accepted accounting principles for interim financial inform
ation and with the instructions to Form 10-QSB. Accordingly, they do not inc
lude all of the information and footnotes required by generally accepted acc
ounting principles for complete financial statements. In the opinion of man
agement, all adjustments (consisting of normal recurring accruals) considere
d necessary for a fair presentation have been include
Net Loss Per Common Share
Net loss per common share has been computed by dividing net loss by the weigh
ted average number of common shares outstanding during each period. All shar
e and per share data, except par value per share, have been retroactively adj
usted to reflect the 1.1562894 for 1 stock split of the Company's common sto
ck which occurred on March 7, 1995.
Accounts Receivable
All share and per share data, except par value per share, have been retroac
tively adjusted to reflect the 1.1562894 for 1 stock split of the Company's c
ommon stock which occurred on March 7, 1995.
Accounts Receivable
The Company's products are often used with other products in la
rge complex projects. As a result, the Company may grant extended payment term
s
, usually secured by irrevocable letters of credit, for certain sales. Accoun
ts receivable at June 30, 1996 consisted of approximately $454,000 from sales
to such customers with extended credit terms of up to 180 days based on the
nature of the project. Additionally, $211,562 represent amounts due from
sales type leas
e agreements with equal monthly payments over the
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 a
nd 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 anticip
Item 2. Management's Discussion and Analysis of Financial Condition and Result
s of Operations
RESULTS OF OPERATIONS
Revenues increased 80% to $1.5 million for the quarter and 9% to $2.0 million
for the six months ended June 30, 1996 from $811,268 and $1.9 million for
the quarter and six months ended June 30, 1995, respectively. This increase
primarily resulted from increased inteonnel 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 beginning in
the second half 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 performan
ce.
Changes in interest expense are attributable to changes in average outstand
ing borrowings during the periods presented. Other income results from
interest income on restricted cash and short-term securities.
Liquidity and Capital Resources; Certain Transactions
s.
Liquidity and Capital Resources; Certain Transactions
During the six months ended June 30, 1996, the Company's cash increased
$177,390 principally due to the net proceeds from the issuance of common
stock of $3.92 million, offset by cash used in operating activities of
$1.89 million and the purchase of short-term investments of $1.33 million
and property and equipment of $646,719. The negative change in cash from
operating acwith 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
Selling, general and administrative expenses increased by $456,549 (85%) for
the quarter and $890,305 (100%) for the six months ended June 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 sales 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 beginning in
the second half 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
s.
roperty.
The Company has outstanding at June 30, 1996, 1,063,550 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 C
med 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 d
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.
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 acquire
50,000 shares of the Company's common stock at an exercise price of $15.00
per share. On June 19, 1996, the Board authorized an amendment of the agree
ment with Goodbody to extend the term for service and as
$12.00 for the common stock 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
ontinued 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
On June 20, 1996, the Company filed a report on Form 8-K which announced
the results of matters voted on at the Annual Meeting of Shareholders held
on June 7, 1996.
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: August 19, 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
8
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