SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or
any amendment of this Form 10-KSB. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sale price of the Common Stock on
April 1, 1997, in the over-the-counter market as reported by The Nasdaq
SmallCap Market, was approximately $11.8 million. Shares of Common
Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of April 1, 1997, the registrant had outstanding 3,419,304 shares of its
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business
GLOSSARY
Superserver - a network computer designed to provide local
area networks with the performance, availability, scalability and
upgradability characteristic of mainframes and minicomputers, as well as
the compatibility of a PC; superservers reduce the input/output
bottlenecks and performance degradation typically associated with
PC-based servers attempting to perform multiple tasks concurrently using
a single microprocessor.
Compatibility - also called openness; supports
industry-standard network operating systems, applications and
application development tools, and network connectivity products;
non-proprietary.
Local Area Network or LAN - a network or connected group
of computers or workstations located within the confines of a single
physical structure or related group of structures, all the members of which
group are in close proximity to each other.
Performance - a level of compute power, data I/O and
communication capability comparable to that provided by mainframes
and minicomputers; meets the requirements of large numbers of users
running compute and I/O- intensive applications and high-speed
communication functions.
Availability - providing the reliability, data integrity and
recoverability features required for business-critical applications;
providing reliability features that increase the mean-time between failures
and promote the continuing operation of the superserver after failure;
offering data integrity features that protect against data loss or corruption
during system operation; and incorporating recoverability features to
facilitate recovery when a stoppage does occur.
Scalability - also called expandability; the ability to maintain
rapid response time to each client as the number of concurrent clients or
applications increases; supported in the field through the incorporation of
an additional central processing unit subsystem, main memory chips,
mass storage and other subsystems, such as network interface cards;
scalability extends the superserver's useful life and protects the end user's
initial investment.
Upgradability - the ability to replace subsystems and disk
drives economically, within superserver product generations, with higher
performance products that either are available today or become available
in the future, without requiring alteration of the superserver's network
operating system, application software or other hardware.
Wide Area Network or WAN - a network of computers or
workstations the individual members of which are geographically
dispersed and generally interconnected through the facilities of a
common carrier telecommunications system.
General
The Company designs, manufactures and distributes computer
networking products and systems, including high performance
superservers and workstations, which provide users with video on
demand applications and support and full motion digital video, imaging
and other multimedia processes. The Company's networking products are
used in connection with employee training, academic,
telecommunications, entertainment and other industry applications.
Video on demand permits new ways to employ video as an instructional,
entertaining and communications medium over existing computer
networks. Each user is given the ability to call-up video content as
needed, without affecting any other network participant's requirements on
the system, and without requiring any other system participant
simultaneously to view the same content.
The Company was originally incorporated in 1986 to distribute
computer network products as a value added distributor ("VAD") of such
products. Although its principal business continued as a VAD, in 1987
the Company made a strategic shift in its business operations by moving
away from the distribution of products manufactured by others and to
seek to become principally a manufacturer of its own superserver and
workstation products. This shift resulted from changing trends in the
computer industry, which included increased profit margin pressures on
VADs due to the perception that VADs were offering simple
commodities rather than value added products for sale to their customers.
The Company's products are sold under the name TRIUMPH,
and are based upon non-proprietary PC hardware standards and utilize
standard major components and subsystems in order to provide flexibility
and reliability. The Company's products are designed to be compatible
with industry standard network operating systems, such as Novell
NetWare, Microsoft LAN Manager, Windows NT, OS2, UNIX (SCO,
SVR4, MPX) and new network operating systems as they become
available. Product design allows compatibility with most applications
running in such network environments, and enables TRIUMPH
superserver systems to operate efficiently as servers and work stations for
groups of interconnected PCs arranged in LANs and WANs. The
Company currently distributes its products worldwide principally through
its own internal sales force and strategic resellers.
Background and Industry
During the 1980s, personal computers played an increasingly
significant role in the workplace. The need of PC users to share files,
applications and peripherals, such as printers, has resulted in the
widespread proliferation of LANs. Each LAN requires a network
operating system to function. This need is being filled by such products
as Microsoft Windows NT, Novell NetWare, Microsoft LAN Manager,
SCO UNIX and Banyan VINES, among others. Each LAN also requires
a computer to manage its operations. In simple LANs, a dedicated
personal computer acts as the LAN's "server." Larger LANs have
employed high-end PCs, such as the Compaq SystemPro, to act as
servers.
The number, size and complexity of LANs have increased
dramatically in recent years. New LANs are being developed that support
a greater number of users than in the past, and groups of smaller LANs
are being replaced by single, larger LANs. In addition, multiple LANs are
being internetworked to form WANs. More sophisticated tasks, such as
document and image processing, employee training, academic teaching,
medical diagnostic services and multimedia publishing and broadcasting
editing are increasingly being implemented on LANs. Some applications,
such as groupware (e.g., Lotus' Notes and electronic mail), are
implemented only on networks. In addition, companies such as Oracle
Systems Corporation, Informix Corporation, Sybase, Inc. and Centura
Software have recently introduced network versions of sophisticated
database management applications that have traditionally been run on
mainframes or minicomputers.
Large organizations with multiple sites are creating
enterprise-wide networks to more fully integrate their various geographic
locations. In this regard, enterprises are interconnecting their multiple
LANs, WANs, digital satellite communication channels, mainframes,
minicomputers and other computing resources to facilitate
communication and information sharing within the organization.
Innovations such as multi-protocol routing, LAN-to-mainframe gateway
software and network management products are facilitating such
interconnectivity. The Company believes that these communication
functions will increasingly be executed on network servers.
As organizations migrate toward enterprise networking,
superservers that perform more complex and business-critical tasks will
be required. Although PCs have adequately addressed simple file serving,
even high-end PCs do not have the required performance and
input/output ("I/O") capability to meet the needs of large and complex
networks efficiently. In addition, as business-critical applications and
communication functions are increasingly implemented on the network,
network servers need to offer the availability, scalability and
upgradability that are characteristic of mainframes and minicomputers.
One of the developing distribution functions that is increasingly
being demanded for LAN processing is video display and information
distribution. Video technology requires amounts of information (e.g.,
data per second) to be available and distributed which is in excess of that
required by other applications, such as word processing, even when that
information is technologically compressed. Available hard disk storage
and network bandwidth is consumed by video information at far faster
rates than by other types of processed data. Furthermore, to meet the
demands of current applications video information also must be provided
continuously and smoothly to multiple users simultaneously. Thus, the
current challenge for manufacturers and distributors of superservers is to
create a cost effective, standardized product to satisfy the demands of a
marketplace for video/multimedia network equipment and software that
Management of the Company expects will experience rapid growth in the
next three years.
The Company believes that mainframes and minicomputers are
too costly a means for satisfactory service of this emerging market, and
their proprietary architectures are generally incompatible with the PC
networks which are increasingly used for information processing in
today's more decentralized business environment. Thus, as networks
increase in size and complexity and as business-critical applications and
communication functions are increasingly implemented on networks, a
need is emerging for servers both designed specifically for the demands
of this new enterprise, and video/multimedia, networking environment,
and made available as a cost-effective means for distributing the required
information.
The Network Connection Solution
In 1987, the Company first introduced the initial entry of its
TRIUMPH family of superservers, which is designed to provide the
compatibility, performance, availability, scalability and upgradability
necessary for sophisticated networks. The Company believes that its
superservers contain the following features.
Compatibility
The TRIUMPH family is based upon PC hardware standards
and is designed to be compatible with industry standard network
operating systems, such as Windows NT, Novell NetWare, Microsoft
LAN Manager, SCO UNIX and Banyan VINES, and with new network
operating systems as they become available. In addition, the Company's
products are designed to be compatible with applications designed to run
in such network environments. TRIUMPH superserver use of common
PC "interfaces" (e.g., products utilized to increase system functionality in
terms of system power and/or special or additional features availability),
such as the Small Computer System Interface ("SCSI"), and its
employment of Peripheral Component Interconnect (PCI) and
Extended Industry Standard Architecture ("EISA"), also enables the
Company's products to connect with hardware produced by third-party
vendors. The TRIUMPH superserver also provides for ease of support of
a wide range of network connectivity standards.
Performance
The TRIUMPH architecture consists of independent subsystems
interfaced by a high-speed multiprocessor connection system. This
architecture is designed to reduce the I/O bottlenecks and performance
degradation typically associated with PC- based servers attempting to
perform multiple tasks concurrently with a single microprocessor. The
TRIUMPH open systems architecture and RAID ("redundant array of
independent disks") technology incorporates the fault tolerance and high
throughput necessary to provide simultaneous services, such as
video-on-demand, LAN-based video training, and database/file imaging
and printing. In addition, as the TRIUMPH superservers can provide
video/multimedia systems encompassing voice or sound, pictorial and
graphic, live or recorded, and touch technologies, the Company believes
that easy access to information in a "user friendly" environment is made
available. In this respect, the TRIUMPH architecture is designed to
provide features found in mainframes and minicomputers at a
significantly lower cost. A single TRIUMPH superserver may often be
used to replace multiple high-end PCs acting as LAN servers. Returning
these high- end PCs to the desktop to perform other tasks reduces the
effective cost of the TRIUMPH superserver.
Availability
The TRIUMPH architecture is designed to permit systems to be
configured to provide the high level of availability required for
business-critical applications through reliability, data integrity and
recoverability features. Reliability features available for certain
TRIUMPH models include power supply and other key module
redundancy to promote continued system operation, cooling system
redundancy to protect against premature component failure and disk
mirroring and automatic disk backup by providing an ability to replace
hard disks during system operation without interruption. The TRIUMPH
data integrity features minimize the potential for data loss during system
operation and, in addition to the disk backup features described above,
include data parity checking to enhance data integrity. Recoverability
features facilitate recovery when a stoppage does occur and include
subsystems which permit remote diagnostics subsystems for TRIUMPH
superservers running Novell NetWare and Microsoft NT Advanced
Server.
Scalability
The TRIUMPH platform is configurable to meet the less
demanding requirements of simpler LAN applications and may
subsequently be scaled up in the field as the user enlarges its network or
implements more sophisticated applications. An additional Intelligent I/O
Processor subsystem, an additional Central Processing Unit ("CPU")
subsystem, components such as memory chips and disk drives, and
PCI/EISA- compatible subsystems such as network interface cards, may
be added.
Upgradability
The TRIUMPH superserver subsystems and disk drives may be
replaced economically in the field with higher performance products that
either are available today or, presumably become available in the future,
without requiring alteration of the network operating system, application
software or other hardware.
Product Strategy
The Company is implementing certain technology, product,
distribution and manufacturing strategies to effectuate the Network
Connection Solution.
Technology and Product Strategy
Support Popular Network Operating Systems
The Company intends to support new releases of popular
network operating systems that it currently supports as they become
available. The Company also intends to support additional network
operating systems as their popularity increases. The TRIUMPH
superserver open architecture and compatibility features permit ease of
support. In addition, Windows NT takes advantage of the TRIUMPH
superserver shared memory architecture, as does SCO UNIX (and
presumably as will other multi-processing network operating systems as
they become available).
Develop Higher Performance Superservers While
Maintaining Compatibility
The Company's principal technological challenge with respect
to the development of its TRIUMPH family of superservers was to
simultaneously deliver high performance and compatibility with existing
PC hardware and software standards. The Company intends to continue
improving the performance of its superservers while maintaining
compatibility with popular network operating systems and hardware
interfaces.
Offer Broad Product Line
The scalability of TRIUMPH superservers increases the
desirability of these products from the perspective of a user who currently
has a simple LAN that is anticipated to grow or to support new, more
sophisticated applications. As a result, the Company believes that it is
important to offer a base configuration product at a relatively low price
point to induce these users to purchase the next level TRIUMPH
superserver in anticipation of scaling up as network demands increase
(e.g., video/multimedia). On the other hand, users with sophisticated
applications or complex LANs typically require superservers configured
with faster microprocessors and other higher performance subsystems
(e.g., video and other multimedia accessibility). Therefore, the Company
also offers higher performance TRIUMPH superservers at higher price
points. In 1995, the Company introduced, hardware, software and
services packaged as complete value added system solutions for the travel
and transportation commercial markets. See Turnkey Packaging below.
Turnkey Packaging
Sales of the Company's TRIUMPH superservers are made
increasingly as "turnkey" systems. The Company sells its products as a
complete solution to a customer's needs, rather than as only a "finger in
the dike" or a niche filler. In 1995, the Company introduced, hardware,
software and services packaged as complete value added system solutions
for the travel and transportation commercial markets: (i) AirView an
in-flight interactive entertainment and cabin management system
mounted in individual airline seats, (ii) TrainView an in-transit
interactive entertainment and railcar management system mounted in
individual railcar seats and (iii) InnView an in-room interactive
entertainment system for the hotel hospitality market and (iv)
CruiseView an in-room interactive entertainment system for the cruise
ship market. This sales trend is expected to continue, and even to
accelerate, as video/multimedia superserver equipment become more and
more of a commodity.
Distribution Strategy
Leverage Existing Distribution Channels
The Company intends to continue to direct and operate its
internal sales force primarily from its Georgia headquarters as its
principal means of product distribution sales. However, in the future it
plans to increase the number of such sales personnel and to augment the
scope of their responsibilities to include opening remote sales offices and
new, strategic channels of distribution outlined below. Since 1995, the
Company has established external employee sales representation in
Virginia and Singapore.
Create International Distribution
The Company believes that foreign countries offer significant
potential markets for its products due to increasing worldwide demand
for complex networking solutions. Approximately 38% of the
Companys revenues for fiscal 1996 were derived from sales of its
products in foreign countries. The Company is not assured of success in
its international distribution efforts; however, those efforts will be
intensified. Management believes that foreign purchasers are more
receptive than domestic purchasers to new "United States" technologies,
for fear of being left behind. At the same time international customers
have grown accustomed to higher relative prices for new American
technologies.
Establish Relationships with Independent Vendors
The Company is developing relationships with independent
vendors that encourage their customers to purchase the Company's
systems in conjunction with their products on the basis that overall
system performance and value will be enhanced. In 1996, the Company
entered into a worldwide distribution agreement with Siemens A.G.
(Siemens) for TrainView and InnView in the rail and hotel marketplace
and a non-binding memorandum of agreement to define a cooperative
business relationship with Lockheed Martin Display Systems (LMDS)
for AirView in the airline market. Additionally the Company entered into
an OEM agreement with Advanced Telecommunications Module, Inc
(ATML) for the Cheetah server packaged with asynchronous transfer
mode (ATM) switching to be used in Intranet applications worldwide.
Approximately 14% of the Companys revenues for 1996 were derived
form this OEM relationship. The Company intends to leverage these and
other similar relationships to enhance its ability to target application
specific end users.
Manufacturing Strategy
Subsystem Manufacturing
The Company believes that one of its significant strengths is its
hardware architecture development expertise.
Nevertheless, the Company does not at this time subcontract the
manufacture, assembly and test function of printed circuit boards or the
assembly of mechanical components. The Company does subcontract the
manufacture of cabinets for its products. In the future, as production
levels and product sales increase, the Company may subcontract to third
parties, such as Allied Signal and Siemens, the manufacture, assembly
and test functions that it currently performs for particular product
offerings.
Subcontract Higher Level Manufacturing
Based upon successful teaming relationships with respect to the
development and sale of its AirView and TrainView products, the
Company has plans to develop manufacturing relationships with LMDS
for AirView and Siemens for TrainView in order to permit performance
of higher level system manufacturing, integration and test functions for
its current generation of products. Such arrangements, if effected, would
enable the Company to manufacture its next generation superservers (if
developed) in its existing facility, thereby avoiding the need to provide
for additional manufacturing capacity, if required.
Technology
The Company believes that the TRIUMPH architecture allows
its products to provide the performance and availability advantages of a
mainframe without sacrificing compatibility with PC hardware and
software standards. This architecture consists of independent subsystems
interfaced by the Company's high-speed system Bus. These subsystems
include: the Company's proprietary TRIUMPH RAID Accelerated
Controller ("TRAC"), an Intel Pentium-based Intelligent Input/Output
Processor subsystem; the Intel Pentium-based CPU subsystem; the
PCI/EISA Bus subsystem; and the main memory subsystem. These
subsystems operate independently and thus reduce the I/O bottlenecks
and performance degradation typically associated with PC-based servers
attempting to perform multiple tasks concurrently using a single
microprocessor.
Network Operating System Compatibility Features. Network operating
systems are designed to work with architectures that incorporate industry
standard connection features. When a server design features an
architecture that does not incorporate such industry standards, the server
manufacturer must modify the network operating systems utilized in
order for it to work with its nonstandard architecture. Generally, the time,
expense and knowledge necessary to complete these modifications limit
the number of network operating systems supported by these proprietary
servers and restrict their ability to respond quickly to new NOS releases.
The TRIUMPH superserver open architecture is compatible with the
basic I/O system that allows computer hardware to connect to a network
operating system. This enables the TRIUMPH superserver to support any
network operating systems with the relatively simple addition of drivers
specific to that network operating system. TRIUMPH superservers are,
therefore, compatible with leading network operating systems such as
Windows NT, Novell NetWare, Microsoft LAN Manager, SCO UNIX
and Banyan VINES. The Company's products are also designed to be
compatible with new network operating systems as they become
available.
Application Compatibility Features. The TRIUMPH superserver open
architecture permits applications written for use with the network
operating systems supported by the Company to run unmodified.
TRIUMPH superservers, therefore, support applications that require both
network operating systems and basic I/O system compatibility.
Hardware Interface Protocols. Each TRIUMPH subsystem provides
hardware compatibility by supporting industry standard interfaces with
simple software drivers. The TRAC subsystem offers SCSI compatibility,
the CPU subsystem offers Intel compatibility and the Bus subsystem
offers PCI/EISA compatibility. SCSI peripherals, network interface cards
or other subsystems designed by third parties that incorporate
technological advances in any of these standards-based product areas
may be added easily to TRIUMPH superservers.
Intelligent I/0 Processor Subsystem. The TRAC subsystem includes an
Intel processor, which is dedicated to managing mass storage and
consequently relieves the main CPU of that task and improves overall
system performance. With the TRAC, data is accessed from the disk
drives and is more easily and economically (in terms of bandwidth usage)
available to the CPU and main memory. Each TRAC contains two SCSI
channels, each of which is capable of supporting up to seven fast SCSI
disk drives or other SCSI peripherals, including third-party disk arrays,
tape backup units, printers and CD-ROM drives. Up to two TRACs can
be configured in a TRIUMPH superserver, allowing a maximum of 35
SCSI peripherals per system.
The TRAC also incorporates RAID technology at the output and
input levels to help protect the system from data loss. This technology,
which is commonly referred to as data striping and disk mirroring, also
improves system performance by reducing data transfer and access times
from disk drives.
Central Processing Unit Subsystem. The CPU subsystem runs the NOS
and applications in client-server environments. The CPUoffers complete
Intel compatibility. Each subsystem may be upgraded with a CPU that
incorporates a microprocessor operating at a higher clock speed.
Availability Features. The TRIUMPH superserver's architecture is
designed to permit systems to be configured to provide the high level of
availability required for business- critical applications through reliability,
data integrity and recoverability features. Reliability features available for
certain TRIUMPH models include power supply and other key module
redundancy to promote continued system operation, cooling system
redundancy to protect against premature component failure and disk
mirroring and automatic disk backup through duplexing and hot sparing
supported at the hardware level. The TRIUMPH superserver data
integrity features minimize the potential for data loss during system
operation and, in addition to the disk backup features described above,
include data parity checking to enhance data integrity. Recoverability
features facilitate recovery when a stoppage does occur and include
systems providing a remote diagnostics subsystem for TRIUMPH
superservers running Novell NetWare.
Products
The current TRIUMPH product line consists of: the Cheetah
Enterprise Video File Server, the M2 Enterprise File Server, the TNX
Large Workgroup File Server, the T4000 Small Workgroup File Server,
the T300 and T5000 high end network work stations, and the TNX/C
Video File Encoder.
The following lists the basic features of each model in the
Company's current generation of TRIUMPH products:
VIDEO SERVERS
Cheetah? Enterprise Video File Server. The Cheetah? or MV2 has the
same capabilities as the M2 Enterprise File Server (see below), except
that it contains certain configuration enhancements that allow for the
support of video applications across entire networks. It is designed to
serve up to 300 simultaneous video users per single system and can be
rack mounted to achieve up to 336 gigabytes of disk storage. The
Cheetah? sells for between $70,000 to $500,000 per system, depending
upon functions and configurations required.
Cheetah? Large Workgroup Video File Server. The video capable
version of the TNX is very similar to Cheetah? described above, but
with reduced work station service capacity and reduced disk storage
capabilities. This product sells for between $25,000 to $50,000 per
system, depending upon functions and configurations required.
FILE SERVERS
M2 Enterprise File Server. The Company's top-level non-video file
server, it is designed to serve over 1000 work stations. The M2 may
contain up to six CPUs and has a disk storage capacity of up to 100
gigabytes. This system contains an enhanced cooling system and RAID 5
and multiple power supplies for support of its large disk hard drive
capacity. The M2 sells for between $30,000 and $150,000 per system,
depending upon functions and configurations required.
TNX Large Workgroup File Server. The Company's mid-level file
server, it is designed to serve between 40-100 work stations. The TNX
may contain up to 6 processors and has a disk capacity of between 12-16
gigabytes. This system may or may not contain disk redundancy features
depending upon the needs of the particular customer. The TNX sells for
between $8,000 and $30,000 per system, depending upon functions and
configurations required.
T4000 Small Workgroup File Server. The Company's entry level file
server, it is designed as a "commodity" product to serve 10-20 work
stations. It contains a single CPU processor and has a small disk capacity
(between 4-8 gigabytes). This system may or may not contain disk
redundancy features depending upon the needs of the particular customer.
The T4000 sells for between $4,000 and $10,000 per system, depending
upon functions and configurations required.
WORK STATIONS
T3000. An entry level network work station, includes the capability of
providing normal office automation, graphics and word processing. The
T3000 sells for between $900 and $4,000, depending upon functions and
configuration required.
T5000. A high end, engineering work station, with single or multiple
processor configurations, designed for a range of desktop applications;
including - computer aided design, graphics, mathematical applications
and computer modeling. The T5000 sells for between $3,000 and
$10,000, depending upon functions and configurations required.
OTHER PRODUCTS
TNX-C Encoder. The TNX-C is a real-time, networked Motion Pictures
Export Group (MPEG) encoder impression station. It converts analog
video data to digital files when conjoined with either of the Company's
video file servers. All encoded files are compressed and able to run
throughout an associated network at 30 frames per second and near
broadcast quality. It sells for $49,000.
TURN-KEY PACKAGED SOLUTIONS
AirView. An in-flight interactive entertainment and cabin management
system mounted in individual airline seats.
TrainView. An in-transit interactive entertainment and railcar
management system mounted in individual railcar seats.
InnView. An in-room interactive entertainment system for the hotel
hospitality market.
CruiseView An in-room interactive entertainment system for the cruise
ship market.
End Users
The Company's products are sold to end users in a wide range of
industries. Customers that have purchased the Company's products are
financial institutions, health care companies, academic institutions,
communications/broadcasting companies, governmental agencies and
other bureaucracies, entertainment providers and end-users operating in
various other industries.
In late 1995, the Company began offering its interactive
video-on-demand (IVOD) systems to commercial airlines (AirView),
rail companies (TrainView) and related aircraft and railcar
manufacturers, and hotels (InnView) and in 1996 introduced
CruiseView to cruise ship operators. The systems are designed to deliver
VHS-quality video material to travelers using seat back displays, or to
displays in hotel or cruise ship rooms, and include a file server which can
support up to 300 simultaneous users and with disk drives that can store
up to 700 hours of video content. Only one order for AirView, delivered
to the United States Air Force, 417th Squadron, has been received to date.
The Company has not yet received any firm orders for TrainView or
CruiseView systems. The Company currently has responded to major
requests for proposal and is in various stages of negotiation for
CruiseView, InnView, AirView and TrainView systems with multi-
year deliveries from some of the worlds largest travel related
companies. There can be no assurance however, that the Company will
successfully negotiate definitive agreements for the purchase of these
systems.
In 1996, three customers of the Company accounted for greater
than 10% of total sales. The United States government (encompassed by
aggregated sales to several federal agencies and United States
government controlled bureaucracies), Conhan Ltd. and ATML,
accounted for approximately 15%, 38% and 14%, respectively, of the
Company's total sales during that period. The Company believes that its
sales to the United States government, as well as to state governments
and their agencies which make purchases in accordance with federal
Government Services Administration ("GSA") guidelines, will continue
to grow. The Company is on the GSA list of qualified vendors and
descriptions of the Company's superserver products have been recently
included as the required design specifications identified in federal
government request for proposals distributed to potential vendors.
Backlog
The Company does not have significant backlog because it is
able to manufacture and deliver products generally within only 45 days
of order receipt and it has no long-term contracts to supply products to
customers (but rather manufactures and sells products on the basis of
individual purchase orders as and when received). The Company cannot
determine when customer orders will be received, and to date all of the
Company's customers have ordered products on an as-needed basis. As a
result, backlog at the beginning of a quarter may not represent a
significant percentage of the products anticipated to be sold in that
quarter. Quarterly revenues and operating results, therefore, depend on
the volume and timing of bookings received during the quarter, which are
difficult to forecast. As a result, the Company's Management does not
consider order backlog at this time a significant indicator of the
Company's future revenues. However, as significant orders under long-
term contracts, if any, are placed for the Companys turn-key packaged
systems, backlog will become a significant indicator of future revenues.
Sales and Distribution
The Company currently distributes its products principally
through the efforts of its internal direct sales force and to a much lesser
extent through independent sales representatives. In the future the
Company intends to offer its products through an augmented internal
sales force. The Company also distributes its superserver products
through a select group of network-oriented resellers, including VADs and
system integrators, OEMs and international distributors. The Company
recently entered into distribution agreements with distributors of
computer equipment in South Africa, South Korea, Austria, United Arab
Emirates, Thailand and Brazil and is currently negotiating for distribution
of its products with companies in Japan, Singapore, Hong Kong,
Australia, Sweden, France and the United Kingdom. Currently, the
Company's principal means of conducting its sales effort internationally
is through trade show attendance, holding end-user seminars to
demonstrate Company products, internal and a limited amount of
customer on site demonstrations of product use (solely for superserver
products), print advertising in trade publications and telemarketing. The
Company will continue and accelerate these marketing efforts. (See
Distribution Strategy)
The Company is also attempting to develop relationships with
software and other product vendor "partners" capable of encouraging
their customers to purchase the Company's systems in conjunction with
their own products on the basis that overall system or product
performance will be enhanced (see Distribution Strategy). The
Company would assist these partner-vendors by determining the
configuration of the Companys products that will deliver optimal
performance along with the partner-vendor's products. In 1996, the
Company entered into a worldwide distribution agreement with Siemens
A.G. for TrainView and InnView in the rail and hotel marketplace and a
non-binding memorandum of agreement to define a cooperative business
relationship with Lockheed Martin Display Systems for AirView in the
airline market. Additionally the Company entered into an OEM
agreement with Advanced Telecommunications Module, Inc for the
Cheetah server packaged with asynchronous transfer mode (ATM)
switching to be used in Intranet applications worldwide. Approximately
14% of the Companys revenues for 1996 were derived form this OEM
relationship.
The Companys marketing efforts focus on holding end-user
seminars and attending trade shows (including international trade shows)
as the primary method to create market awareness of the Company and
its products. The Company also invested approximately $400,000 to
build and operate at customer locations three product demonstration
projects and also to expand its demonstration capabilities at its corporate
offices. See ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ." Approximately 38% of the Companys revenues for
fiscal 1996 were derived from sales of its products in foreign countries.
In 1996, three customers accounted for 67.0% (38%, 15% and 14%,
respectively) of the Companys revenues. During 1995, one customer
accounted for approximately 19% of the Companys revenues.
The purchase price for the Companys turn-key packaged
systems for the travel related entertainment market is relatively high -
estimated to range from approximately $500,000 to $4,000,000 per
system depending upon various factors such as the size and type of
airplane, train, hotel or ship, and the requested system features. The high
system purchase price is anticipated to result in a relatively extensive
sales cycle, which will include the evaluation of the Companys
technology, a test installation of the system and negotiation of related
agreements. The sales cycle is also dependent upon a number of factors
beyond the Companys control such as the financial condition, safety and
maintenance concerns, regulatory issues and purchasing patterns of
particular operators, and the respective industry generally. As a result,
this can result in extremely cyclical buying patterns.
Customer Support
The Company believes that customer service and support is a
significant competitive factor in the network server market which will
become increasingly important as LANs become more complex and as
more enterprises implement business-critical applications on their
networks. The Company supports its customers by providing rapid
problem resolution both during and after the installation process. The
Company maintains a small technical support organization that assists
customers in troubleshooting problems and providing replacement parts.
The Company provides a toll-free hotline to help diagnose and correct
system interruptions as they occur at customer sites and its support staff is
available seven days a week.
The Company warrants all of its TRIUMPH superservers
against defects in materials and workmanship for one year (three years
for disk drives). During the warranty period the Company will repair or
replace, within four days, any TRIUMPH server component(s) which the
Company identifies as containing defects which do not prevent the
continued use of the server. For defects that do prevent the continued use
of the server, the Company will attempt to repair or replace the identified
defective component within 24-hours. The Company's product warranties
do not materially differ from those generally available in the industry.
To date, the Company has not experienced significant claims
under such warranties, and its ability to meet the full demands of having a
significant number of units sold to customers who require such service
has not been tested. The Company has contracted with a hardware
manufacturer to provide nationwide customer support services for the
Company's products, which customer services are paid for by the
Company on the basis of a fee for service schedule. The Company also
passes through to end users the warranties that it receives from vendors
on any separate hardware, software or component parts that it sells
independently of full systems.
Manufacturing
The Company currently manufactures all of its TRIUMPH
products in the United States at its Atlanta, Georgia metropolitan area
facility.
The Company obtains electronic components for its TRIUMPH
products "off-the-shelf" from a number of wholesalers and performs at its
own facility the assembly and test of the printed circuit boards and
mechanical components incorporated into its products. The only
significant subcontracted manufacturing work performed for the
Company is the manufacture of cabinets for its file servers. The
Company has established a comprehensive testing and qualification
program with the goal of ensuring that all subassemblies meet the
Company's specifications and standards before final assembly and
testing.
Diagnostic tests, assembly, burn-in, final configuration and final
quality assurance tests currently are completed at the Company's
manufacturing facility. The Company employs statistical process controls
at its manufacturing facility. The Company has also implemented quality
control policies that are reviewed and accepted by the Company's major
customers. The Company believes that this procedure helps ensure a
high-quality product.
The Company has elected to assemble into its products
principally off the shelf component parts available from multiple sources.
The Company believes that this practice helps to ensure better quality
control and pricing, by allowing the Company to select the best
manufactured and best performing components available on the market
(rather than a proprietary product that may fall behind the "curve" in
terms of either such characteristic) and to purchase such components
from marketplace sources that offer the best prices at the time that the
particular components are needed for production (rather than to have
prices dictated by the limited sources able to provide a proprietary
component). The Company obtains component parts on a purchase order
basis and does not have long-term contracts with any of its suppliers. To
date, the Company has not experienced interruptions in the supply of
such component parts, and believes that numerous qualified suppliers are
available. The inability of any of its current suppliers, except as identified
below, to provide component parts to the Company would not adversely
affect the Company's operations. Alternate sources could be readily
established.
Based upon the success of the strategic alliances with LMDS
and Siemens for the development and sale of its AirView and TrainView
products, the Company has further plans to develop manufacturing
relationships with LMDS for AirView and Siemens for TrainView in
order to permit performance of higher level system manufacturing,
integration and test functions for its current generation of products. Such
arrangements, if effected, would enable the Company to manufacture its
next generation superservers (if developed) in its existing facility, thereby
avoiding the need to provide for additional manufacturing capacity, if
required.
Competition
The Company faces substantial competition from the
manufacturers of several different types of products used as network
servers. The Company expects competition to intensify as more firms
enter the market and compete for market share. In addition, companies
currently in the server market will continue to change product offerings
in order to capture further market share. Many of these companies have
substantially greater financial resources, research and development staffs,
manufacturing, marketing and distribution facilities than the Company.
The Company also expects its competitors to continue to improve their
network-oriented distribution channels.
With respect to base configuration TRIUMPH superservers for
simple LANs, the Company competes with manufacturers of high-end
PCs used as network servers. Competitors offering products in this
market include International Business Machines Corporation ("IBM"),
Compaq Computer, Inc., Dell Corporation, Tricord Corporation
("Tricord") and Network Netframe Systems, Inc. ("Net Frame"). In
addition, NetFrame offers superservers that compete in this market. One
of the principal competitive factors in the market for simple LANs is
price, and the economies of scale available to high-end PC manufacturers
may permit them to offer their products at a lower price. The Company
expects its competitors to continue to improve the performance,
availability, scalability and upgradability features of their products. The
Company expects all of its competitors in the simple LAN market to
improve the distribution channels for their products used as servers.
With respect to more fully configured TRIUMPH superservers
for larger and more complex LANs and more sophisticated or
business-critical applications, the Company competes indirectly with
manufacturers of mainframes and minicomputers. In addition, certain
manufacturers promote their mainframes and minicomputers as being
appropriate for use as network servers. Competitors offering products in
this market include IBM, Digital Equipment Corporation,
Hewlett-Packard Corporation, National Cash Register Corporation,
UNYSIS, Inc. and Sequent Corporation. The Company believes that the
positive competitive factors in this market include the Company's ability
to provide server products with performance and availability
characteristic of mainframes and minicomputers, at a significantly
reduced cost, as well as with the compatibility to support current and
future networking solutions built around industry standard hardware and
software. The Company's operating results could, however, be adversely
affected if one or more of these competitors elects to compete more
aggressively with respect to price or product features of their mainframes
or minicomputers. The Company competes in the market for complex
LANs with other manufacturers of superservers, including NetFrame,
Tricord and Parallan, Inc. ("Parallan"). The Company competes in the
market for turn-key systems for travel related entertainment with other
manufacturers of complete systems , including BE Aeorspace, Sony
Transcom, Matsushita, Interactive Flight Technologies, Seavision and
Trans Digital. The Company believes that it competes favorably with
other manufacturers of superservers and turn-key systems with respect
to the compatibility, performance, availability, scalability, upgradability
and technical support required for sophisticated network computing
available with the Companys products. In addition , components of the
Companys products are smaller, weigh considerably less and consume
much less power than those of several competitors. Because these factors
affect operating costs for the operator, they may be critical factors for
customers.
There can be no assurance that alternative technologies will not
be developed in the future that will be capable of providing certain
services now performed by network servers. The development of such
technologies could reduce the need for network servers and adversely
affect the Company's operating results.
As many of the Company's competitors are more established,
benefit from greater market recognition and have greater financial,
technological, production and marketing resources than the Company,
establishing and maintaining the Company's competitive position will
require continued investment by the Company in research and
development and sales and marketing. There can be no assurance that the
Company will have sufficient resources to make such investments or that
the Company will be able to make the necessary technological advances.
In addition, if more manufacturers of PCs, mainframes or minicomputers
were to develop and market their own superserver class of products, the
Company's operating results could be adversely affected.
Research and Development
The market for the Company's 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. The Company believes that its future success will depend
upon its ability to develop, manufacture and market new products and
enhancements to existing products on a cost-effective and timely basis.
The Company introduced in 1995, hardware, software and services
packaged as complete value added system solutions for the travel and
transportation commercial markets: (i) AirView an in-flight interactive
entertainment and cabin management system mounted in individual
airline seats, (ii) TrainView an in-transit interactive entertainment and
railcar management system mounted in individual railcar seats and (iii)
InnView an in-room interactive entertainment system for the hotel
hospitality market; and (iv) in 1996, CruiseView an in-room interactive
entertainment system for the cruise ship market.
If the Company is unable, for technological or other reasons, to
develop products in a timely manner in response to changes in the
industry, or if products or product enhancements that the Company
develops do not achieve market acceptance, the Company's business will
be materially and adversely affected. The Company has in the past
experienced delays in introducing certain of its products and
enhancements, and there can be no assurance that it will not encounter
technical or other difficulties that could in the future delay the
introduction of new products or enhancements. Such delays in the past
have generally resulted from the Company's need to obtain a requisite
component from a third-party vendor whose own development process
has been delayed (e.g., 9 month delay in Microsoft's development in
1992 of Microsoft Windows NT, the primary operating software system
used in the Company's superserver products).
The Company performs all of its research and development
activities at its headquarters in Alpharetta, Georgia. During 1995 and
1996, research and development expenses totaled $88,015 and $160,276,
respectively. The Company intends to continue to invest in research and
development. Approximately 5 employees, including James Riner, who
is Vice President - Research and Development and Engineering, currently
are engaged in research and development activities.
Intellectual Property
The Company currently holds no patents and has no patent
applications pending with respect to its products or technology. The
Company currently holds federal trademarks, for the marks "TNX",
"TRIUMPH", "THE NETWORK CONNECTION", "M2", "M2V" and
"T.R.A.C.", "CHEETAH", EDUVIEW, AIRVIEW, TRAINVIEW
and has trademark applications pending for the marks QUAD-
CHEETAH,CHEETAH WORKGROUP, BATTLEVIEW and
INNVIEW. The Company also relies on a combination of trade secret
and other intellectual property law, nondisclosure agreements with all of
its employees and other protective measures, to establish and protect its
proprietary rights in its products. The Company believes that because of
the rapid pace of technological change in the networking industry, legal
protection of its proprietary information is less significant to the
Company's competitive position than factors such as the Company's
strategy, the knowledge, ability and experience of the Company's
personnel, new product development, market recognition and ongoing
product maintenance and support. Without legal protection, however, it
may be possible for third parties to copy aspects of the Company's
products or technology or to obtain and use information that the
Company regards 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 the
Company continues to implement protective measures and intends to
defend its proprietary rights vigorously, there can be no assurance that
these efforts will be successful. The failure or inability of the Company to
effectively protect its proprietary information could have an adverse
effect on the Company's business.
There can be no assurance that third parties will not assert
intellectual property infringement claims against the Company. Although
no claims or litigation related to any such matter are currently pending
against the Company, there can be no assurance that none will be
initiated, that the Company would prevail in any such litigation seeking
damages or an injunction against the sale of the Company's products, or
that the Company would be able to obtain any necessary licenses on
reasonable terms if at all.
Employees
As of December 31, 1996, the Company had 32 employees,
including 16 in marketing and sales, 4 in engineering, research and
development, 8 in manufacturing, operations and support services and 4
in corporate operations and administration. The Company's success
depends to a significant extent upon the performance of its executive
officers and other key personnel.
Item 2. Property
The Company's primary operations are performed in its 20,000
square foot, owned facilities located on two acres in Alpharetta, Georgia.
The Company is indebted to an institutional lender as of December 31,
1996, in the aggregate amount of $.25 million, for the purchase of this
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 lenders prime rate plus 2%.
The Company believes that its current facilities described above
are adequate for its immediate and near-term needs and does not
anticipate the need for significant expansion in the near future.
Item 3. Legal Proceedings
Except for ordinary, routine proceedings incidental to its
business, there are no pending legal proceedings to which the Company
or any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrants Common Equity and Related
Stockholder Matters
Market for Common Stock
The Companys common stock trades on The Nasdaq SmallCap Market
tier of The Nasdaq Stock Market under the symbol TNCX. The
following table sets forth the high and low sale prices for the Companys
common stock for each quarter of fiscal 1995 (commencing with the
inception of trading) and for fiscal 1996 as reported by The Nasdaq Stock
Market:
High Low
Fiscal 1995:
Second Quarter $6.250 $5.000
Third Quarter 7.750 4.875
Fourth Quarter 9.250 6.875
Fiscal 1996:
First Quarter $25.375 $7.625
Second Quarter 26.125 9.875
Third Quarter 14.750 8.500
Fourth Quarter 13.750 8.750
The Company completed an initial public offering of its common stock
on May 11, 1995. Prior to May 11, 1995, there was no public market for
trading the securities of the Company.
Holders of Record
At April 1, 1997, there were approximately 62 shareholders of
record of the Companys common stock, but the Company believes that
there are over 1,000 beneficial shareholders, based upon broker requests
for distribution of annual meeting materials.
Dividends
Other than prior to September 22, 1994 when the Company
made distributions to shareholders as an S Corporation, the Company has
not declared or paid any cash dividends on its Common Stock and does
not intend to do so in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in
conjunction with the information set forth in the Financial Statements and
notes thereto included elsewhere in this report.
Company Overview
The Company designs, manufactures and distributes computer
networking products, including high performance superservers and
workstations, which provide full motion digital video, imaging and other
multimedia processes. The Company's products are used in employee
training, academic, telecommunications, entertainment and other industry
applications. Sold under the name TRIUMPH, the Company's products
utilize standard PC hardware, major components and subsystems, and are
designed to be compatible with industry standard network operating
systems, such as Novell NetWare, Microsoft LAN Manager, Windows
NT, OS2, UNIX (SCO, SVR4, MPX) and new network operating
systems as they become available. The Company has always focused on
the single factor which has made LANs so successful, which is the ability
to use "open systems," which principally consist of standard interfaces
between system components and standard operating systems. In today's
market, and for the foreseeable future, the Company believes that its
place in the market for network equipment results from its ability to
produce high performing LAN systems for demanding combined video
and data applications using an open systems, standards based design. The
Company believes that its equipment may be distinguished from the
products of competitors by the Company's attention to constant shifts in
the developing market for network equipment, and by the design quality
of the equipment the Company produces to take advantage of those
shifts. The Company believes that its principal "value added
contribution" is its ability to design standards based equipment that
provides higher performance than that designed and offered by its
competitors, an advantage that the Company intends to maintain in the
future.
The market niches for the Company's high-end, high
performance, video capable superserver products currently encompass,
but are not limited to, applications for education and corporate skills
training, product training, hotel, train, ship and airplane video-on-demand
and retail facility information kiosks. Due to the fact that all of the
markets for this type of product are in their infancy, and their actual
aggregate size is impossible to measure accurately, the Company is
unable to determine the shares of these markets held by its own products.
There Company has made no sales of products for the train, ship and
commercial airline video-on-demand applications. Nevertheless,
following the current developmental period, Management of the
Company expects the video server market to experience significant
growth, with the growth to come principally from the high-performance
superserver segment of the market.
Enhanced video capability differentiates the Company's
products from competing lower cost PC-based server products. To
maintain its competitive position the Company is committed to
expanding the range of equipment and software features available to its
customers. The current principal markets for the Company's superservers
is corporate training, education and travel related interactive
entertainment (although the Company has made no significant sales of
products for the travel related entertainment market). Although training
and education applications has in the past been considered a non-critical
function, that does not appear to be an accurate assessment of the
importance of training and education in today's environment.
Management of the Company believes both that corporations and
academic institutions have significantly expanded their budgets in recent
years, and that a significant percentage of the resulting training and
education applications will be provided with video content distributed by
network superservers, which application demands high performance
equipment. Given the magnitude of these budgeted expenditures, despite
the high price and technical, high performance requirements of the
equipment necessary to meet this application's demands, management
believes that departments responsible for administering these budgets will
not settle for low performance, PC-based equipment. Travel related
entertainment systems, to date based on broadcast analog distribution
technology, are not designed for interactive use and have not been
successful in meeting the requirements of todays market applications.
Management of the Company believes this to be a rapid growth market
where proven interactive technology of LANs which support the high
performance demands of video data, like the products of the Company,
are uniquely applicable and will become dominant. Management of the
Company further believes that although the market for network
equipment is currently cost driven, with PC- based servers
predominating, the future market for server equipment will be dictated by
performance and available features, with video capability being a primary
sales motivator.
It is expected that print advertising, other than publicity for new
product announcements and technical journal analyses of product
capabilities, will not play the most significant role in developing a
customer base for the Company's products. The Company's management
believes that its greatest success can be gained through informational
seminars and hands-on product demonstrations, at which potential
customers can experience directly the capabilities of the Company's
products.
The Company's marketing strategy encompasses attendance and
presentations at targeted trade shows. The Company also targets the
establishment of demonstration projects at customer facilities. The latter
allows the Company to show-off product capabilities in a specific
customer's operational setting. This marketing method is intended to give
the prospective customer a "reality" experience at minimal economic or
other risk, with the equipment being operated by its own personnel. This
method of marketing has an adverse impact on the Company's results of
operations in the short-run, by requiring the Company to build the
demonstration equipment at its own expense, obtain a minimal rental
charge, if any, during the demonstration period, and achieve recoupment
of expenses and any "profit" only upon the ultimate sale of the equipment
to the customer. Management estimates that approximately one-third of
its demonstration projects result in system sales, and believes that this
ratio of demonstration projects to actual sales should continue in the
future. The proceeds of the Companys 1995 public offering and the
Private Placement in 1996 boosted the Companys resources available for
additional sales generation (in terms of increased advertising budgets,
larger sales and demonstration project personnel and equipment and
increased funds to support seminar and trade show attendance), and
Management believes that expenditure of the proceeds of such offerings
for such marketing activities can lead to increasing levels of revenues
from operations in the future.
The Company does not believe that its server products will
compete in the near future with those manufactured by IBM, Compaq
Computers, Inc. or the other "major players" in the industry. The
Company believes that the major computer manufacturers will generally
seek to produce and service higher production-lower margin commodity
products, and will refrain from producing lower production-higher
margin products (like the Company's video servers) until the market for
each related product and product series is perceived to be large enough to
support the sizable investments in production capability and advertising
that the "major players" must make prior to launching new products.
Nevertheless, based upon the perceived size of the market for video
capable network equipment, the Company's management recognizes that
it will only be a matter of time before the "major players" will start to
produce higher margin network equipment products which will compete
directly with those produced by the Company.
Despite the general trend away from mainframe computing,
some resistance to network-based computing continues due to existing
mainframe investments. Furthermore, there is always the possibility that
in the competition for equipment sales mainframe and mini computer
manufacturers may attempt to aggressively price their excess equipment
inventories to maintain marketability. However, as network server power
increases, the Company believes that equipment downsizing will
continue and local network server computing will continue to gain
acceptance as a reliable replacement for centralized mainframe
processing. Moreover, with network-based computing becoming the
standard for operating efficiency, even at lower pricing excess mainframe
inventories are not a serious threat to sales of network equipment. In
addition, the costs associated with maintenance of mainframe and mini
computers is typically much higher than network servers.
To enhance product awareness, image and market credibility,
the Company continually considers strategic business alliances and OEM
arrangements (original equipment manufacturer agreements) with larger
companies in the computer equipment and other types of equipment
manufacturing industry. Management believes strategic business
alliances will play a vital role in achieving success for the Companys
products in the travel related entertainment market and will continue to
evaluate the advantages and disadvantages to the Company from such
arrangements. At present, the Company has entered into a worldwide
distribution agreement with Siemens A.G. for TrainView and InnView in
the rail and hotel marketplace and a non-binding memorandum of
agreement to define a cooperative business relationship with Lockheed
Martin Display Systems for AirView in the airline market. Additionally
the Company has entered into an OEM agreement with Advanced
Telecommunications Module, Inc for the Cheetah server packaged with
asynchronous transfer mode (ATM) switching to be used in Intranet
applications worldwide. Management of the Company believes that such
strategic relationships will provide the Company with enhanced
credibility and access to the greater resources that are needed to be
successful in the travel related entertainment markets.
Results of Operations: Year Ended December 31, 1996 Compared
With Year Ended December 31, 1995.
Revenues increased 6.4% to $4.1 million for the year ended December
31, 1996 from $3.8 million for the year ended December 31, 1995,
respectively. This increase primarily resulted from increased
international sales through the Companys Korean reseller (38% of
revenues) and initial sales to resellers and new strategic alliance
partners (ATML and Siemens). More sales efforts in 1996 were
focused on larger system sales into niche markets of the Companys
turn-key products (see below) which have longer sales cycles and
will contribute to sales backlog for revenues derived from multiple roll-
out deliveries over 12 to 36 months. As a result, the Company entered
into nonbinding arrangements on long-term programs with substantial
revenue opportunity if fully completed over 12 to 24 months at the
Korean Government School Program (sales of up to $15.0 million for
950 schools, if all systems are purchased, of which approximately $1.1
million was recognized in revenues in 1996), Interactivo (sales of up to
$4.0 million for 80 hotels, if all systems are purchased, of which
approximately $78,000 was recognized in revenues in 1996) and
Allegis Systems, Ltd ($1.9 million letter of intent for an AirView
system, subject to completion of a definitive agreement). However,
there can be no assurance that the Company will successfully negotiate
definitive agreements or receive firm orders for the remainder of these
programs.
The Company introduced several new products in late fiscal 1995 and
early 1996 which utilize its "Cheetah" high performance video servers.
The new products result from turn-key packaged solutions for (i)
AirView, in the airline market, (ii) TrainView, in the rail transportation
market, (iii) InnView, in the hospitality market and (iv) CruiseView, in
the cruise ship 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 market applications.
Gross profit as a percentage of revenues decreased to 26% for the year
ended December 31, 1996 as compared to 37% for the same period 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 $1,667,064
(70%) for the year ended December 31, 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 the 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 for 1997.
By maintaining its current level of operations through fiscal 1997,
management believes that it will be more capable of improving sales
levels and directing sales activities by expanding its internal sales force
and forming strategic business alliances (see ITEM 1 Distribution
Strategy), rather than by attempting to create a network of independent
distributors, resellers and sales representatives.
The Company believes that its own cost of sales will continue to be
affected in the future by two major factors:
Selling Price The average selling price should continue to increase
based upon product mix, which will continue to be in favor of higher
selling price, larger server systems.
Gross Margin Margins should continue to increase because of the
increased added value in performance and application capability offered
to the customer. In addition, whether the application is data serving or
video serving, the components of these systems remain the same. This
tends to further reduce actual cost due to the benefits of volume
purchasing discounts.
Another major factor in overall revenue generation is that with the
assumed increase of average selling price from higher end servers and
the assumption that the same system volume will continue, then overall
revenues should increase. Since significant further assets need not be
employed, selling, general and administrative costs will decrease as a
percentage of revenue as average selling price increases.
The Company anticipates that it will continue to invest in its
marketing and sales generation strategy (advertising, trade show
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.
Research and development expense is comprised primarily of
the salaries of employees devoted to development. However, fluctuations
in the periods presented are due to increased material and outside labor
costs associated with the further development in 1996 of the travel related
entertainment products.
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 year ended December 31, 1996, the Companys cash did not
change principally due to the net proceeds from the issuance of
common stock of $4.70 million and bank borrowings of $496,000,
offset by cash used in operating activities of $3.29 million, and the
purchase of short-term investments of $495,713 and of property and
equipment of $1.28 million. The negative change in cash from
operating activities primarily resulted from a net loss of $3.25 million
and an increase of $331,826 in accounts receivable and $360,585 in
inventory, offset by a decrease in accounts payable and accrued
expenses of $236,665. The reduction in cash from operating activities
was offset by depreciation and amortization of $271,000 and bad debts
of $150,064.
The Companys 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 December 31, 1996 consisted of
approximately $451,000 from sales to such customers with extended
credit terms of up to 180 days based on the nature of the project.
The Company's inventory increased between December 31, 1995 and
December 31, 1996 due to the transformation of the Company's business
from its principally being a seller of workstations to being principally a
seller of high-end, higher priced file superservers (including those with
video capability). This transformation has resulted in higher dollar values
for existing inventory. Management believes that this increase in
inventory does not have an effect on the Company's liquidity due to the
fact that substantially all of the Company's current inventory is useable,
saleable and readily liquid and is closely matched with orders in process.
The Companys primary source of funds at December 31, 1996
consisted of $1.00 million in cash, $495,713 in short-term securities
and funds available under a $1.00 million revolving line of credit.
$1.00 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 December 31,
1996, the Company had $496,000 borrowings outstanding under the
line of credit.
Capital expenditures for the purchase of property and equipment for
the year ended December 31, 1996 were $1.28 million 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 $794,000 for the purchase
of additional equipment in order to expand product demonstration and
development capabilities. During 1997, capital expenditures are
anticipated to be funded through existing working capital or other
financing.
The Company is indebted to an institutional lender as of December 31,
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 lenders 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 December 31, 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.
On February 26, 1997, the Company announced it will redeem in
whole its publicly traded Redeemable Common Stock Purchase
Warrants ( the Warrants) on March 31, 1997 at the redemption price
of $.25 per Warrant. On March 18, 1997 the Company extended the
date of redemption until April 30, 1997. Anticipated proceeds from the
redemption are $5.23 million.
The Company believes that its working capital requirements will
increase throughout 1997 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 1997 and
thereafter will depend in part on the success of the Companys products
in the marketplace, the relative profitability of those products,
continued availability of memory and storage components at favorable
pricing and the Companys 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 sales activities and locations. There
can be no assurance that any such financing will be available on terms
acceptable to the Company, if at all.
Forward Looking Statements
Except for historical information contained herein, the matters
discussed in this ITEM 6 and elsewhere in this annual Report on Form
10KSB are forward-looking statements (within the meaning of Section
27A of the Securities Act of 1933, as amended (the Securities Act)
and Section 21E of the Securities Exchange Act of 1934, as amended (
the Exchange Act) ) that are subject to certain risks and uncertainties
that could cause actual results to differ materially from those set forth
in such forward-looking statements. Such risks and uncertainties
include, bet are not limited to, the failure to execute definitive
agreements with additional customers on favorable terms or at all, the
failure of the Company to receive sufficient financing to perform
under any new contracts or to perform sufficient research and
development, the impact of competition and downward pricing
pressures, the effect of changing economic conditions and conditions in
the specific industries the Company has targeted, the impact of any
changes in domestic and foreign regulatory environments or the
Companys inability to obtain requisite government approvals, risks in
technology development, the risks involved in currency fluctuations,
and the other risks and uncertainties detailed herein.
Item 7. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors 24
Balance Sheet as of December 31, 1996 25
Statements of Operations for the years ended December 31, 1996 and
1995 27
Statements of Shareholders Equity(Deficit)for the years ended
December 31, 1996 and 1995 28
Statements of Cash Flows for the years ended December 31, 1996 and
1995 29
Notes to Financial Statements 30
Report of Independent Accountants
To the Shareholders and Board of Directors
of The Network Connection, Inc.
We have audited the accompanying balance sheet
of The Network Connection Inc. as
of December 31, 1996, and the related
statements of operations, shareholders
equity (deficit), and cash flows for the years
ended December 31, 1996 and 1995.
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 audits provide 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. as
of December 31, 1996, and the results of its
operations and its cash flows for
the years ended December 31, 1996 and 1995, in
conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P
Atlanta, Georgia
February 26, 1997
THE NETWORK CONNECTION, INC.
BALANCE SHEET
December 31,
1996
ASSETS
Current assets:
Restricted cash $1,000,000
Short term investments 495,713
Accounts receivable, less allowance of $220,792 1,805,279
Inventories 1,108,410
Prepaid expenses 131,901
------------------
Total current assets 4,541,303
Property and equipment:
Land 150,000
Building and improvements 806,409
Furniture, fixtures and equipment 1,686,290
Software 31,829
Vehicles 112,420
------------------
2,786,948
Less accumulated depreciation and amortization (627,535)
------------------
2,159,413
Other assets, net 91,883
------------------
Total assets $6,792,599
==========
THE NETWORK CONNECTION, INC.
BALANCE SHEET
December 31,
1996
LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $1,177,912
Payable to shareholders 68,851
Borrowings under bank line of credit 496,000
Current portion of long-term debt and capital lease obligations
35,066
--------------------
Total current liabilities 1,777,829
Long-term debt, less current portion 250,600
Obligations under capital leases, less current portion 7,817
--------------------
Total liabilities 2,036,246
Shareholders' equity (deficit):
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, 3,036,710 shares 3,037
Additional paid-in capital 9,179,825
Accumulated deficit (4,426,509)
--------------------
Total shareholders' equity 4,756,353
--------------------
Total liabilities and shareholders' equity $6,792,599
============
THE NETWORK CONNECTION, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31,
1996 1995
Revenues $4,092,023 $3,846,189
Cost of revenues
3,050,596 2,425,278
- - --------------------
- - -------------------
Gross profit
1,041,427 1,420,911
Selling, general and administrative
4,016,351 2,349,287
Loan origination expense
60,000 0
Research and development
160,276 88,015
- - --------------------
- - --------------------
Operating loss
(3,195,200)(1,016,391)
Interest expense
(99,026)(134,530)
Other income
41,327 54,443
- - --------------------
- - -------------------
Net loss
($3,252,899)($1,096,478)
============
===========
Net loss per share
($1.14)($0.54)
============
===========
Weighted average shares outstanding
2,846,715 2,036,359
============
===========
THE NETWORK CONNECTION, INC.
STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
Common Stock Preferred Stock Additional Accumulated Total
Shares Amount Shares Amount PIC Deficit Equity(Deficit)
Balance at January 1, 1995
1,288,438 $1,288 0 $0 $71,233 ($77,132) ($4,611)
Preferred stock sold
11,562 116 39,884 40,000
Common Stock sold
1,150,000 1,150 4,373,335 4,374,485
Conversion of preferred stock to common stock
11,562 12 (11,562) (116) (104)
Stock option plan
14,217 14,217
Net Loss
(1,096,478) (1,096,478)
__________
__________
________
__________
_________
____________
____________
Balance at December 31, 1995
2,450,000 2,450 0 0 4,498,669 (1,173,610) 3,327,509
Common Stock sold
300,000 300 2,945,155 2,945,455
Conversion of warrants to common stock
214,950 215 1,433,685 1,433,900
Stock option plan
71,760 72 302,316 302,388
Net Loss
(3,252,899) (3,252,899)
_________
__________
________
__________
_________
____________
____________
Balance at December 31, 1996
3,036,710 $3,037 0 $0 $9,179,825 ($4,426,509) $4,756,353
THE NETWORK CONNECTION, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31,
1996 1995
Operating activities
Net loss
($3,252,899)($1,096,478)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization
271,000 184,919
Allowance for doubtful accounts
150,064 0
Noncash expenses charged for issuance of common stock options
0 14,215
Changes in operating assets and liabilities:
Accounts receivable
(331,826)(1,043,645)
Inventories
(360,585)(377,093)
Prepaids and other assets
(664) 9,956
Accounts payable and accrued expenses
236,665 (415,011)
Payable to shareholders
(1,293) 3,014
- - -------------------
- - -------------------
Net cash used in operating activities
(3,289,538)(2,720,123)
Investing activities:
Purchase of property and equipment
(1,279,152) (537,726)
Purchase of short-term investments(495,713)0
- - -------------------
- - ------------------
Net cash (used in) provided by investing activities
(1,774,865)(537,726)
Financing activities:
Proceeds from bank line of credit
496,000 0
Payment of shareholder debt
0 (59,618)
Net proceeds from issuance of stock
4,681,743 4,414,383
Payment of long-term debt and capital lease obligations
(140,785)(69,471)
- - -------------------
- - -------------------
Net cash provided by financing activities
5,036,958 4,285,294
- - -------------------
- - -------------------
Net change in cash
(27,445) 1,027,445
Cash at beginning of year
1,027,045 0
- - -------------------
- - -------------------
Cash at end of year
$1,000,00 $1,027,445
===========
===========
Supplemental Information:
Assets acquired in exchange for debt
$0 $113,018
Assets acquired in exchange for capital lease obligations
$0 $20,686
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Basis of Presentation
The Network Connection, Inc. (the Company) was incorporated on
December 30, 1986. The Company designs, manufactures and
distributes computer networking products for use in employee training,
academic, telecommunications, entertainment and other industry
applications. The Companys products are based upon a proprietary
engineered process utilizing non-proprietary personal computer
hardware standards with standard major components and subsystems.
The Companys products are designed to be compatible with industry
standard network operating systems.
Concentration of Credit Risk
The Companys principal financial instruments subject to potential
credit risk are cash and equivalents and trade accounts receivable. The
Company invests its cash and credit instruments with highly rated
financial institutions and performs periodic evaluations of the relative
standing of these financial institutions. Other than for international
sales, which are usually secured by letters of credit, trade accounts
receivable are generally unsecured; therefore, the Company is at risk to
the extent such amounts become uncollectible. (See Note 12.)
In 1996, three customers accounted for 67.0% (38%, 15% and 14%,
respectively) of the Companys revenues. During 1995, one customer
accounted for approximately 19% of the Companys revenues.
Cash and Cash Equivalents
The Company considers all financial instruments with an initial maturity of
3 months or less to be cash equivalents.
Inventories
Inventories consist primarily of components purchased for assembly
into products and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization are calculated using the straight-line method over the
estimated useful lives of the assets, principally five years, except for
buildings for which the life is forty years.
Income Taxes
Under the Statement of Financial Accounting Standards No. 109
(SFAS 109), Accounting for Income Taxes, the liability method is
used in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
The Company provides a valuation allowance for deferred tax assets
which are determined by management to be below the threshold for
realization established by SFAS 109.
Revenue Recognition
Revenues are recognized when the products are shipped.
Other Assets
Costs incurred to establish and defend trademarks and patents are
capitalized. Such costs are amortized using the straight-line method
over 20 years.
The Company capitalized $150,000 in loan origination costs in
connection with a $500,000 line of credit agreement with Stanhope
Capital, Inc. (Stanhope) (Note 4). These costs are being amortized
using the straight-line method over the three year life of the agreement.
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 Companys common stock which occurred on March 7,
1995.
Managements 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.
Advertising Costs
Costs of advertising are expensed when incurred. The Company
recognized advertising expenses of approximately $646,000 and
$190,000 in 1996 and 1995, respectively.
2. Accounts Receivable
The Companys 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 December 31, 1996 consisted of
approximately $705,000 from sales to such customers with extended
credit terms of up to 180 days based on the nature of the project.
3. Commitments and Contingencies
The Company leases certain equipment and office space. Property and
equipment includes $102,476 of equipment under capital lease
agreements at December 31, 1996. Accumulated amortization was
$26,151 at December 31, 1996. Amortization of leased assets is
included in depreciation and amortization expense. The Company also
leases certain equipment under noncancelable operating leases that
expire in various years through 2001.
Future minimum lease payments required under capital lease
obligations and noncancelable operating leases with initial or
remaining terms of one year or more are summarized as follows at
December 31, 1996:
Year ending December 31, Capital Operating
1997 $19,513 $25,294
1998 7,223 23,288
1999 1,392 19,960
2000 0 15,288
2001 0 7,644
Total minimum lease payments $28,128 $91,474
Less amounts representing interest
572
Present value of minimum capital lease payments
27,556
Less current portion
19,739
Long-term obligations under capital leases
$ 7,817
During 1996 and 1995, total rental expense for all operating leases was
approximately $36,000 and $25,000, respectively.
4. Debt Obligations
Debt obligations consist of the following:
1996 1995
Note payable due in varying installments through 2009, interest at
prime (8.5% at December 31, 1996) plus 2%, collateralized by
certain commercial property and personally guaranteed by two
shareholders
$249,350 $259,128
Note payable due in varying installments through 2005, interest
at 9.5%, collateralized by commercial property.
0 86,900
Note payable due in varying installments through 2000, interest at
11.0%, collateralized by a vehicle.
16,577 20,605
265,927 366,633
Less current portion
15,327 19,731
$250,600 $346,902
Aggregate maturities of long-term debt as of December 31, 1996 are as
follows:
1997 $ 15,327
1998 17,041
1999 18,947
2000 16,297
2001 16,457
Thereafter 181,858
$265,927
On June 15, 1994, the Company entered into a three year $500,000 line
of credit agreement with Stanhope. Outstanding advances bear interest
at 10% per annum through the maturity date of June 15, 1997, and
thereafter at 14% per annum. Advances in excess of aggregate
outstanding borrowings of $150,000 require consent of Stanhope.
Interest is payable quarterly in arrears, commencing September 30,
1994. On September 30, 1994, the Company issued common stock to
Stanhope in connection with the line of credit. In connection with this
stock transaction, the Company recorded $150,000 in deferred loan
origination costs and charged expense in the amount of $450,000 in
1994. The amount of deferred loan origination costs was imputed by
management at approximately 33% to reflect the anticipated returns
associated with higher risk borrowings such as venture capital and
accounts receivable factoring. Loan origination costs charged to
expense represent the fair value of the shares issued in excess of the
deferred loan origination costs. There were no advances under this line
of credit as of December 31, 1996 or 1995, respectively.
On May 28, 1996, the Company entered into a $1,000,000 line of
credit agreement with a bank. Outstanding advances bear interest at
6.92% per annum through the maturity date of May 28, 1997. Interest
is payable monthly in arrears, commencing January 1, 1997. As of
December 31, 1996, there was $496,000 advanced under this line of
credit. This line of credit is collateralized by two certificates of deposit
in the total amount of $1.00 million and are presented in the balance
sheet as restricted cash.
The Company paid interest of approximately $99,000 and $75,000
during fiscal years 1996 and 1995, respectively.
5. Common Stock
On March 7, 1995, the Company effected an additional stock split such
that every share of the Companys common stock became equal to
1.1562894 shares of common stock. All share and per share amounts
related to the common stock have been retroactively restated to reflect
the stock split for all periods presented.
On February 17, 1995, the Companys Board of Directors acted to
create 100,000 shares of Series A 8% Convertible Preferred Stock, out
of its authorized preferred stock, and issued 11,562 shares of the
Preferred Stock at that time for an aggregate consideration of $38,000
(which was net of issuance costs of $2,000). Each share of Preferred
Stock was convertible into one share of Common Stock at any time at
the option of the holder. Upon consummation of the public offering in
1995, the outstanding Preferred Stock was automatically converted into
shares of Common Stock.
An initial public offering of 1,000,000 shares of the Companys
common stock and 1,000,000 warrants, each providing the owner the
right to purchase 1 additional share of common stock for $5.00 per
share, became effective May 11, 1995. The selling price of the
warrants initially was $.125 per warrant. On June 13, 1995, the
underwriters exercised an over-allotment option to acquire an
additional 150,000 common shares and 150,000 warrants. The
Company generated gross proceeds of approximately $5.9 million.
During 1996 and 1995, the Company recognized compensation
expense of $0 and $14,217, respectively, from the grant of stock
options under the 1994 Employee Stock Option Plan.
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. On June 28, 1996, the
Company completed a registration statement with the Securities and
Exchange Commission to register the 300,000 shares for sale to the
public.
On March 15, 1996 the Companys 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 Goodbodys compensation under the contract would
be a three (3) year warrant to acquire 50,000 shares of the Companys
common stock at an exercise price of $12.00 per share. In 1996 the
Company recognized $30,000 of consulting expense related to this
agreement.
6. Income Taxes
The Company has accounted for income taxes under the liability
method required by SFAS 109. Deferred income taxes reflect the net
effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. At December 31, 1996, the Company had a net
deferred tax asset of approximately $1,909,000 which was totally offset
by a valuation allowance because the assets do not meet the criteria for
recognition in SFAS 109. Significant components of the Companys
deferred tax liabilities and assets as of December 31, 1996 and 1995
are as follows:
1996
1995
Deferred tax liabilities:
Tax over book depreciation ($27,000)
($29,000)
Tax over book amortization (31,000)
(23,000)
Total deferred tax liabilities ($58,000)
($52,000)
Deferred tax assets:
Bad debt reserve $ 27,000
$ 27,000
Accrued salary 0
18,000
Non-qualified stock options 0
5,000
Uniform capitalization 22,000
2,000
Net operating loss 1,918,000
487,000
Total deferred tax assets $1,967,000
$539,000
Net deferred tax assets 1,909,000
$487,000
Valuation allowance (1,909,000)
(487,000)
Net deferred taxes $ 0
$ 0
The valuation allowance for deferred tax assets as of January 1, 1996
was approximately $487,000. The net change in the total valuation
allowance for 1996 was approximately $1,422,000. This change
resulted primarily from increases in the above described temporary
differences on which a valuation allowance was provided.
The Company did not record any income tax expense or benefit from
operations for the years ended December 31, 1996 and 1995,
respectively. The following table provides a reconciliation between the
Federal income tax rate and the Companys effective income tax rate:
1996 1995
Statutory Federal income tax rate 34% 34%
Disallowed meals and entertainment (1) (1)
Increase in valuation allowance (32) (31)
Other, net (1) (2)
Effective tax rate 0% 0%
At December 31, 1996, the Company has net operating loss (NOL)
carryforwards of approximately $5,132,000. The NOLs expire, if not
utilized, as follows:
December 31, 2009 $ 168,000
December 31, 2010 $1,112,000
December 31, 2011 $3,852,000
7. Related Party Transactions
The Company owed $27,311 to two shareholders/officers as of
December 31, 1996.
On September 1, 1994, the Company entered into four promissory
notes in the aggregate amount of $69, 290 payable to certain
shareholders/officers for accrued and unpaid salaries owed through
August 31, 1994. Under the terms of the notes, outstanding amounts
bear interest at 5% per annum, with payments of principal and accrued
interest being payable to the extent certain operating cash flow
requirements are met. As of December 31, 1996, $60,248 remained
outstanding under these notes.
8. 401(k) Plan
During 1995, the Company established a deferred compensation plan
(the 401(k) Plan) pursuant to Section 401(k) of the Internal Revenue
Code, whereby substantially all employees are eligible to contribute up
to 15% of their pre-tax earnings, not to exceed amounts allowed under
the Internal Revenue Code. The Company may make contributions to
the 401(k) Plan at the discretion of the Board of Directors. No
employer contributions have been made to the 401(k) Plan by the
Company.
9. Stock Options
Under the Companys 1994 Employee Stock Option Plan (the Plan),
as amended, the Company has reserved an aggregate of 700,000 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 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 1996, options to purchase 540,500 shares were
granted at per share prices ranging from $6.48 to $11.62. Options to
purchase 575,869 shares were outstanding at December 31, 1996.
Options to purchase 61,305 shares under the Plan were exercisable at
December 31, 1996. There were 206,629 options outstanding as of
December 31, 1995.
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
1,000 shares of the Companys 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. Options to purchase 4,000 shares under the Directors Plan were
outstanding at December 31, 1996. Options to purchase 3,000 shares
under the Directors Plan were exercisable at December 31, 1996. There
were 2,000 options to purchase shares under the Directors Plan
outstanding at December 31, 1995.
Shares
Weighted Average Exercise Share Price
Options outstanding at December 31, 1994
0
Granted
208,629
$4.219
Canceled or expired
0
Exercised
0
Options outstanding at December 31, 1995
208,629
4.219
Granted
542,500
8.663
Canceled or expired
(99,500)
8.359
Exercised
(71,760)
4.214
Options outstanding at December 31, 1996
579,869
$7.667
The Company accounts for its employee stock option plans in
accordance with the provisions of Accounting Principles Board
Opinion No. 25. 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 had been applied. The Company elected to adopt the
disclosure method of SFAS 123. Had compensation cost for the
Companys option plans been determined based on the fair value at the
grant dates, as prescribed in SFAS 123, the Companys net loss and pro
forma net loss per share would have been as follows:
1996 1995
Net loss: (millions)
As reported ($3.25) ($1.10)
Pro forma ($3.98) ($1.25)
Net loss per share:
As reported ($1.14) ($0.54)
Pro forma ($1.40) ($0.61)
The fair value was determined using the Black-Sholes option pricing
model incorporating the following range of assumptions in the
calculations:
1996 1995
Expected life 4.3 years 3.4
years
Interest rate at grant date 5.93% 6.83%
Volatility at grant date 72% 72%
Dividend yield 0% 0%
The following table summarizes information about all options
outstanding as of December 31, 1996:
Range of
Exercise Prices
Outstanding
Shares
Outstanding
Weighted
Average Share
Price
Weighted
Average
Remaining
Years In
Contractual
Life
Exerciseable
Shares
Exerciseable
Weighted
Average Share
Price
$2.59 - 2.85
219,128
$2.78
4.5
22,060
$2.79
4.17 - 5.63
18,000
4.17
3.5
12,250
4.17
6.48 - 9.38
415,000
8.33
8.1
29,500
6.74
9.75 - 13.26
68,000
10.20
4.8
0
0
$2.59 - 13.26
579,869
$7.67
7.1
63,810
$4.88
Because additional stock options are expected to be granted each year,
the above pro forma disclosures are not representative of pro forma
effects on reported financial results for future years.
10. Warrants
The Company had outstanding at December 31, 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.
11. Subsequent Events
On February 26, 1997, the Company announced it will redeem in
whole its publicly traded Redeemable Common Stock Purchase
Warrants ( the Warrants) on March 31, 1997 at the redemption price
of $.25 per Warrant. On March 18, 1997 the Company extended the
date of redemption until April 30, 1997. Anticipated proceeds from the
redemption are $5.26 million.
12. Fourth Quarter Adjustments
Approximately $1 million or 35 cents per share of the loss in 1996 was
for charges during the fourth fiscal quarter with no material affect on
cash from returns and allowances and pre-contract expenses associated
with initial project development activities
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
None
PART III
Item 9. Directors and Executive Officers of the Registrant
The following table sets forth certain information concerning the
directors and executive officers of the Company.
Name
Age
Position
Wilbur Riner (2)
68
Chief Executive Officer; Chairman of the Board of Directors since
1986 until the 1998 annual shareholders meeting
Barbara Riner
53
President since 1986
James Riner (2)
32
Vice President - Research and Development and Engineering,
Director since 1986 until the 1997 annual shareholders meeting
Bryan Carr(1)
42
Vice President - Finance and Chief Financial Officer, Treasurer,
Director since 1996 until the 1998 annual shareholders meeting
Luther Maners
56
Vice President of Sales & Marketing
Transportation & Entertainment
Kevin Sheldon
42
Secretary, General Counsel
Marc Doyle (1)(2)
49
Director since 1995 until the 1996 annual shareholders meeting
James Newman (1)(2)
71
Director since 1995 until the 1997 annual shareholders meeting
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Wilbur Riner - Chairman and Chief Executive Officer.
Mr. Riner co-founded the Company with his son, James Riner, in 1986,
at which time he became Chairman and Chief Executive Officer. He is
responsible for the overall direction of the Company and its operating
divisions. Prior to joining the Company, from 1984 to 1986, Mr. Riner
was the CEO of Asher Technologies, which was a manufacturer of
telecommunications products. Prior to that, Mr. Riner had served as
Executive Vice President for OKI Telecom's operations in the United
States (1981-1984), Vice President/United States Sales and Marketing
for Mitel Corp. (1979 to 1981), and General Manager of ITT North
Microsystems for ITT Telecommunication (1975 to 1979). In all of
these positions, Mr. Riner has combined technical expertise in
telecommunications engineering with sales and marketing business
acumen. Mr. Riner is the husband of Barbara Riner, the father of James
Riner and the father-in-law of Kevin Sheldon.
Barbara Riner - President. Ms. Riner co-founded the
Company in 1986, and has been responsible for overseeing the
purchasing department of the Company as well as its accounting
department since that time. From 1966 to April 1971, Ms. Riner
worked in the accounting office of SCM Corporation. From 1971 to
1986, Ms. Riner was a homemaker. Ms. Riner is the wife of Wilbur
Riner, the step mother of James Riner, and the mother-in-law of Kevin
Sheldon.
James Riner - Vice President - Research and Development
and Engineering and Director. Mr. Riner co-founded the Company in
1986, joining the Company on a full-time basis as Vice President -
Engineering and Research and Development, Secretary and Treasurer in
1987. In that capacity he is responsible for all product technical support,
as well as all new product development. Mr. Riner co-developed the
Company's TRIUMPH family of servers, including the TRAC
asymmetric I/O processor to provide RAID level protection (1992).
Mr. Riner is the son of Wilbur Riner and the step son of Barbara Riner.
Bryan Carr - Vice President - Finance and Chief Financial
Officer, Treasurer and Director. Mr. Carr joined the Company in July
1995 as Chief Financial Officer and was appointed Vice President -
Finance in November 1995. Mr. Carr was appointed a director of the
Company in April of 1996, and was appointed Treasurer of the
Company in November of 1996. He is responsible for the Companys
overall financial management and policy making and conduct of the
Companys relationship with creditors, shareholders and the financial
community. Prior to joining the Company, from 1988 to 1995, Mr.
Carr was Director of Business Administration for LXE, Inc., a public
company providing wireless data communications products worldwide.
From 1981 to 1988 he was Controller for UTL Corporation, a public
company providing advanced communications systems for Government
and commercial applications internationally. Prior to 1981 he was a
senior auditor with Coopers & Lybrand.
Luther Maners - Vice President of Sales and Marketing -
Transportation and Entertainment. Mr. Maners joined the Company in
January 1996 as Vice President - AirView Sales with responsibility for
sales management and marketing support for the AirView products of
the Company. From 1986 to 1996, Mr. Maners was Vice President of
Sales for Burns Aerospace, a worldwide supplier of aircraft seats and
cabin management system integration. His responsibilities included
overall sales management and direct account responsibility for selected
airline and major leasing companies. From 1980 to 1986, he held
various direct sales management positions at Burns Aerospace. From
1981 to 1986, Mr. Maners was Director of Contract Services for World
Airways, a company providing third party contract aircraft maintenance
services worldwide.
Kevin Sheldon - Secretary. Mr. Sheldon re-joined the
Company in August of 1996 as General Counsel with responsibility for
the legal, risk management and human resource affairs of the Company.
Mr. Sheldon was appointed to the position of Secretary of the Company
in November of 1996. Prior to joining the Company, from 1994 to
1996, Mr. Sheldon was Legal Counsel and Contracts Manager for
LXE, Inc., a public company providing wireless data communications
products worldwide. His responsibilities included negotiating and
drafting a full range of high technology commercial licenses and various
other agreements as well as managing the contractual aspects of LXEs
distribution channels. He served his first term with the Company from
1992 to 1994 as its Corporate Counsel. Prior to that, Mr. Sheldon was
in private practice at the law firm of Brown Raysman and Millstein in
New York from 1990 to 1992 where he specialized in high technology
commercial transactions. Mr. Sheldon is the son-in-law of Wilbur
Riner and Barbara Riner.
Marc Doyle - Director. Mr. Doyle joined the Company in
July 1995 as a director. Mr. Doyle founded in 1988, and is currently
President of, Doyle & Associates, a program development and
production company for television and industrial video material. From
1974 to 1988, Mr. Doyle was Director of Station Operations at WAGA-
TV, a CBS affiliate, responsible for managing program acquisition and
development as well as operational functions such as program
production and marketing. During his tenure at WAGA, Mr. Doyle was
a three time Emmy award winner and produced numerous award
winning programs.
James Newman - Director. Mr. Newman joined the
Company in July 1995 as a director. Mr. Newman, a behavioral
scientist, founded and has managed the PACE organization, a
motivational development company, providing tools for increased
success to top executives and sales professionals since 1961. Mr.
Newman is a well recognized author and speaker on human behavior
topics.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires
the Companys directors and officers, and persons who own beneficially
more than ten percent (10%) of the Common Stock of the Company, to
file reports of ownership and changes of ownership with the Securities
and Exchange Commission. Copies of all reports are required to be
furnished to the Company pursuant to Section 16(a). Based solely on
the reports received by the Company and on written representations
from reporting persons, the Company believes that persons subject to
the reporting requirements complied with all applicable Section 16(a)
filing requirements during the fiscal year ended December 31, 1996.
PART III
Item 10. Executive Compensation
The following table sets forth certain information, for the years
ended December 31, 1996, 1995 and 1994, with respect to
compensation paid or accrued by the Company to the Company's Chief
Executive Officer and to each of the most highly compensated other
executive officers whose combined salary and bonus compensation for
1996 exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term
Compensation
Name and
Principal Position
Year
Salary
Bonus
Other annual
Compensation
Securities
Underlying
Options/SARs (#)
Wilbur Riner, Chairman and Chief
Executive Officer
1996
1995
1994
$101,414
85,000
85,000(1)
- - -0-
- - -0-
- - -0-
$24,375(2)
23,400(2)
6,300(2)
20,000
- - -0-
- - -0-
(1) Includes $10,229 of accrued salary owed to Wilbur Riner as of
December 31, 1994.
(2) Consists of the following:
Automobile
Allowance
Commissions
Total
Wilbur Riner --- 1996
$5,625
$18,750
$24,375
Wilbur Riner --- 1995
5,400
18,000
23,400
Wilbur Riner --- 1994
5,400
900
6,300
Mr. Riner, from time to time, provided significant assistance
to the Company's sales and marketing staff in effecting sales of the
Company's products, for which sales he received commission
compensation.
Option/SAR Grants in Last Fiscal Year
The following table sets forth certain information with respect
to individual grants of stock options and freestanding SARs made to
named executive officers during the year ended December 31, 1996.
Individual Grants
Name
Number of
Securities
Underlying
Options/
SARs
Granted
% of Total
Options/
SARs
Granted to
Employees
in Fiscal
Year
Exercise
of Base
Price
($/Sh)
Expiration
Date
Wilbur Riner
70,000
3.7%
$8.750
7/23/06
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
The following table sets forth certain information with respect
to the exercise of stock options and freestanding SARs by each of the
named executive officers during the last completed fiscal year, and the
fiscal year-end value of unexercised options and SARs for the last
completed fiscal year.
Name
Shares Acquired
on Exercise (#)
Value
Realized ($)
Number of
Securities
Underlying
Unexercised
Options/SARs
at FY-End (#)
Exercisable/
Unexercisable
Value of
Unexercised
In-the-Money
Options/SARs
at FY-End ($)
Exercisable/
Unexercisable
Wilbur Riner
- - -0-
- - -0-
0 /
70,000
$0 /
$70,000
Compensation of Directors
Directors who are employees of the Company receive no remuneration
for their service as directors of the Company. Pursuant to the
Companys 1995 Stock Option Plan for Non-Employee Directors,
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 1,000 shares of the
Companys 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.
The Company reimburses directors for travel and lodging expenses, if
any, in connection with attendance at Board meetings.
Employment Contracts and Termination of Employment and
Change-in-Control Arrangements
All of the Company's executive officers are employed under
contracts approved by the Board of Directors.
Wilbur L. Riner serves as Chief Executive Officer of the
Company pursuant to the terms of a five-year employment agreement
which terminates on October 31, 1998. Mr. Riner receives an annual
base salary of $101,414 per year. The employment agreement provides
for payment of bonuses and for such other fringe benefits as are paid to
other executive officers of the Company. Such fringe benefits take the
form of medical coverage and an automobile expense allowance of $470
per month, the aggregate value of which is estimated at approximately
$5,640 per year.
Barbara L. Riner serves as President of the Company pursuant
to the terms of a five-year employment agreement which terminates on
October 31, 1998. Ms. Riner receives an annual base salary of $66,760
per year. The employment agreement provides for payment of bonuses
and for such other fringe benefits as are paid to other executive officers
of the Company. Such fringe benefits take the form of medical coverage
and an automobile expense allowance of $450 per month, the aggregate
value of which is estimated at approximately $5,400 per year.
James E. Riner serves as Vice President of Research and
Development and Engineering pursuant to the terms of a five-year
employment agreement which terminates on October 31, 1998.
Mr. Riner receives an annual salary of $86,790 per year. The
employment agreement provides for payment of bonuses and for such
other fringe benefits as are paid to other executive officers of the
Company. Such fringe benefits take the form of medical coverage and
an automobile expense allowance of $300 per month, the aggregate
value of which is estimated at approximately $3,600 per year.
Bryan Carr serves as Vice President - Finance and Chief
Financial Officer of the Company pursuant to the terms of an
employment agreement which terminates on October 31, 1998.
Mr. Carr receives an annual base salary of $100,000 per year and
commissions of .5% for net sales which exceed $500,000 in a fiscal
month. The employment agreement provides for payment of bonuses
and for such other fringe benefits as are paid to other executive officers
of the Company. Such fringe benefits take the form of medical coverage
and an automobile expense allowance of $400 per month, the aggregate
value of which is estimated at approximately $4,800 per year.
Luther Maners serves as Vice President - AirView Sales of the
Company pursuant to the terms of an employment agreement which
terminates on January 11, 1999. Mr. Maners receives an annual base
salary of $82,000 per year. The employment agreement provides for
payment of bonuses and for such other fringe benefits as are paid to
other executive officers of the Company. Such fringe benefits take the
form of medical coverage and an automobile expense allowance of $450
per month, the aggregate value of which is estimated at approximately
$5,400 per year.
Kevin D. Sheldon serves as General Counsel and Secretary of
the Company pursuant to the terms of a three-year employment
agreement which terminates on December 6, 1999. Mr. Sheldon
receives an annual base salary of $70,000 per year. The employment
agreement provides for payment of bonuses and for such other fringe
benefits as are paid to other executive officers of the Company. Such
fringe benefits take the form of medical coverage and an automobile
expense allowance of $400 per month, the aggregate value of which is
estimated at approximately $4,800 per year.
Board Compensation Committee Report on Executive
Compensation
The Board of Directors of the Company has decided that the
best way to attract and retain capable employees on a basis that will
encourage them to perform at increasing levels of effectiveness and to
use their best efforts to promote the growth and profitability of the
Company and its subsidiaries, is to enter into employment agreements
with its senior executive officers. During the fiscal year ended
December 31, 1996, Messrs. Wilbur Riner, James Riner, Bryan Carr,
Luther Maners and Kevin Sheldon and Ms. Barbara Riner were all
under contract with the Company. This enabled the Board to
concentrate on particular employment contracts rather than on the
formulation of more general compensation policies for all management
and other personnel. As of April 1, 1997, all of the Companys senior
executive officers were employed under contracts approved by the full
Board of Directors. The Company believes that its compensation levels
as to all of its employees are comparable to industry standards.
In setting levels of compensation under such employment
contracts, including that of Mr. Wilbur Riner as Chairman and Chief
Executive Officer, and in approving managements compensation of all
other Company employees, the Board of Directors evaluates the
Companys overall revenue levels, the contribution of particular
individuals to Company performance and industry compensation
standards. Applying those standards, the Companys Compensation
Committee in 1996 approved a fifteen percent increase in the
compensation to Messrs. Wilbur Riner and James Riner and Ms.
Barbara Riner. The members of the Companys Board of Directors
Compensation Committee are Messrs. Bryan Carr, Mark Doyle and
James Newman.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information concerning
shares of the Companys Common Stock beneficially owned as of April
1, 1997 by the Companys directors and namned officers, and as of
December 31, 1996 by persons who beneficially own more than 5% of
the Common Stock. Except as otherwise indicated, the named person
has sole voting power and sole investment power of the securities.
Name and Address of Beneficial Owner
Number
Percent
Shares Beneficially
Owned
Wilbur Riner (2)(3)
0
0
Barbara Riner (2)(4)
538,044
15.6
James Riner (2)(5)
86,134
2.5
Bryan Carr (2)(6)
73,500
2.1
James Newman, PO Box 1378, Studio City, CA 91614 (7)
1,500
0
Marc Doyle, PO Box 8688, Atlanta, GA 30306 (7)
500
Focus Financial Corp. (8)
627,561
18.2
Infinity Fund L.P. (9)
271,861
7.9
Officers and Directors as a Group (10 Persons) (10)
862,344
25.1
(1) As used herein, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of
1934 as consisting of sole or shared voting power (including the power
to vote or direct the vote) and/or sole or shared investment power
(including the power to dispose or direct the disposition of) with respect
to the security through any contract, arrangement, understanding,
relationship or otherwise, including a right to acquire such power(s)
during the next 60 days. Unless otherwise noted, beneficial ownership
consists of sole ownership, voting and investment power with respect to
all shares shown as beneficially owned by them.
(2) The business address for the named person is 1324 Union Hill
Road, Alpharetta, Georgia 30201.
(3) Does not include 490,120 shares held by Barbara Riner, the
wife of Wilbur Riner. Also does not include options exercisable within
60 days of April 1, 1997 to purchase an aggregate of 47,924 shares held
by Barbara Riner. Mr. Riner has disclaimed all beneficial interest in the
shares held by his wife.
(4) Includes options exercisable to acquire 47,924 shares. Barbara
Riner is the wife of Wilbur Riner.
(5) Includes options exercisable to acquire 6,848 shares of the
Companys common stock.
(6) Includes options exercisable to acquire 42,500 shares of the
Companys common stock.
(7) Includes options exercisable to acquire 500 shares of the
Companys common stock.
(8) The business address of Focus Financial Corp. is 9341 Collins
Avenue, Suite 804, Surfside, Florida 33154. Includes 80,100 shares
with sole voting power and 547,461 shares with shared voting power;
and includes 80,100 shares with sole investment power and 547,461
shares with shared investment power. All information is derived from
Securities and Exchange Commission filings.
(9) The business address for Infinity Fund L.P. is 3565 Piedmont
Road, N.E., 3 Piedmont Center, Suite 210, Atlanta, Georgia 30305.
All such information is derived from Securities and Exchange
Commission filings.
(10) Includes options, which are exercisable to acquire 114,371
shares by officers, directors and key employees of the
Company.
Certain Relationships and Related Transactions
In March 1996, Barron Chase, the lead underwriter of its May
1995 initial public offering released certain lock-up restrictions on
the holders of the Companys common stock, by (I) immediately
releasing transfer restrictions on approximately 58,000 shares of
common stock underlying stock options granted to members of
management in January 1995 under the Companys employee stock
option plan, (II) effective January 1, 1997, releasing transfer
restrictions on another approximately 58,000 shares of common stock
underlying stock options granted to members of management in
January 1995 under the employee stock option plan, and (III) effective
May 11, 1996, releasing transfer restrictions on shares of common
stock purchased by shareholders prior to the date of the Companys
May 1995 initial public offering other than the shares held by
management and members of the immediate family of Wilbur Riner,
the Chairman and Chief Executive Officer of the Company.
The Company purchased property and equipment in the
amount of $89,668, on May 26, 1995, from Wilbur Riner, Chairman
and Chief Executive Officer of the Company. Mr. Riner acquired the
property in 1990 for approximately $115,000. Prior to its purchase by
the Company, the acquired property had been used in the Companys
business operations.
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this report:
Exhibit
Description________________________________________
_______
3.1 Amended and Restated Certificate of Incorporation
of Registrant (including all
amendments thereto). (5)
3.2 Amended and Restated By-laws of Registrant. (5)
4.1 Specimen certificate of common stock. (1)
4.2 Warrant to Purchase Common Stock of the
Registrant. (6)
4.3 Stock Option Plan , including form of Stock Option
Agreement. (1)
5.1 Opinion of Greenberg, Traurig, Hoffman, Rosen,
Lipoff & Quental, counsel to the Registrant. (6)
10.1 Employment Agreement, dated November 1, 1993,
by and between the Registrant
and Wilbur L. Riner. (1)
10.2 Employment Agreement, dated November 1, 1993,
by and between the Registrant
and Barbara L. Riner. (1)
10.3 Employment Agreement, dated November 1, 1993,
by and between the Registrant
and James E. Riner. (1)
10.4 Employment Agreement, dated November 1, 1993,
by and between the Registrant
and Stephen H. Stethers. (1)
10.5 Employment Agreement, dated July 15, 1995, by and
between the Registrant
and Bryan R. Carr. (4)
10.6 Employment Agreement, dated December 31, 1995,
by and between the Registrant
and Kevin Sheldon.
10.7 Employment Agreement, dated January 11, 1996, by
and between the Registrant
and Luther Del Maners. (4)
10.8 $20,000 Demand Promissory Note of the Registrant,
dated April 1, 1993, made to
the order of Barbara L. Riner. (1)
10.9 Letter Agreement with Barbara Riner dated
September 15, 1994. (1)
10.10 Promissory Note, dated September 1, 1994, made by
the Company to the order of
Wilbur Riner. (1)
10.11 Promissory Note, dated September 1, 1994, made by
the Company to the order of
Barbara Riner. (1)
10.12 Promissory Note, dated September 1, 1994, made by
the Company to the order of
James Riner. (1)
10.13 Promissory Note, dated September 1, 1994, made by
the Company to the order of
Stephen Stethers. (1)
10.17 Agreement, dated January 10, 1994, by and between
the Company and Computer
Alliance (Pty) Ltd. (South Africa distribution). (3)
10.18 Business Partner Agreement, dated February 24,
1995, by and between the Company
and Conhan Co. Ltd. (South Korea distribution). (3)
10.19 1995 Stock Option Plan for Non-Employee
Directors. (4)
10.20 Note and Security Agreement, dated November 27,
1995, by and between the Company
and Wachovia Bank of Georgia N.A. (4)
10.21 Collateral Assignment Agreement, dated November
27, 1995, by and between the
the Company and Wachovia Bank of Georgia N.A.
(4)
10.22 Note and Security Agreement, dated May 26, 1995,
by and between the Company
and Wachovia Bank of Georgia N.A. (4)
23.1 Consent of Coopers & Lybrand L.L.P. (6)
23.2 Consent of Ernst & Young LLP. (6)
23.3 Consent of Greenberg, Traurig, Hoffman, Rosen,
Lipoff &Quental (included in Exhibit 5.1) (6)
27 Financial data schedule
______________________
1. Incorporated by reference, filed as an exhibit with the Companys
Registration Statement on Form
SB-2 on October 26, 1994. SEC File No. 33-85654.
2. Incorporated by reference, filed as an exhibit with Amendment No.
1 to the Companys Registration
Statement on Form SB-2 on March 24, 1994.
3. Incorporated by reference, filed as an exhibit with Amendment No.
2 to the Companys Registration
Statement on Form SB-2 on April 27, 1995.
4. Incorporated by reference, filed as an exhibit with the Companys
Annual Report on Form 10KSB for the fiscal year ended
December 31, 1995 on April 12, 1996.
5. Incorporated by reference and filed as Exhibits to Report on Form
8-K filed with the Securities and Exchange Commission on June
21, 1996 File No. 1-13760.
6. Incorporated by reference, filed as an exhibit with the Companys
Registration Statement on Form
S-3 on June 28, 1996. SEC File No. 33-07093.
(b) Reports on form 8-K:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned hereto duly
authorized, in the city of Alpharetta, State of Georgia.
THE
NETWORK CONNECTION, INC.
Dated: April 15, 1997 By: /s/ Wilbur R.
Riner___________________
Wilbur
L. Riner
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report ha been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title
Date
/s/ Wilbur L. Riner________________ Chairman, Chief
Executive Officer April 15, 1997
Wilbur L. Riner and Director
/s/ Bryan R. Carr_________________ Vice President - Finance,
Chief Financial April 15, 1997
Bryan R. Carr and Principal Accounting
Officer and
Director
/s/ James E. Riner________________ Vice President -
Engineering April 15, 1997
James E. Riner and Director
/s/ Marc Doyle___________________ Director
April 15, 1997
Marc Doyle
/s/ James Newman________________ Director
April 15, 1997
James Newman
EMPLOYMENT AGREEMENT
Agreement made this 6th day of December, 1996, by and between
The Network Connection, Inc., with offices located at 1324 Union Hill
Road, Alpharetta, GA, 30201 (the Company), and Kevin D. Sheldon
residing at 10970 Donamere Drive, Alpharetta, Georgia 30202 (the
Employee).
W I T N E S S E T H:
WHEREAS, Company is desirous of employing Employee as
General Counsel and Corporate Secretary of Company, and Employee
is desirous of committing himself to serve Company in such capacities,
all upon the terms and subject to the conditions hereinafter provided.
NOW, THEREFORE, in consideration of the mutual covenants
and agreements herein contained, the parties hereto, intending to be
legally bound, agree as follows:
1. Employment..
Company agrees to employ Employee, and employee agrees to be
employed by Company, upon the terms and subject to the conditions of
this Agreement.
2. Term.
The employment of Employee by Company as provided in Section
1 will be for a period commencing on December 6, 1996 and ending
on December 6, 1999, unless sooner terminated as hereinafter set forth
(the Term).
3. Duties: Best Efforts: Indemnification.
Employee shall serve as General Counsel and Secretary of the
Company, subject only to the directions from the Chairman, Chief
Executive Officer, Vice Chairman, President, Chief Financial Officer
and Board of Directors of Company. Subject only to the directions of
those identified in the preceding sentence, Employee shall have
supervision and control over, and sole responsibility for the legal, risk
management and human resource affairs of the Company as well as
Secretarial responsibilities as defined in the Companys Bylaws, and
shall have such powers and duties as may be from time to time
prescribed by the Board of Directors of Company, provided that the
nature of Employees powers and duties so prescribed shall not be
inconsistent with Employees position and duties set forth herein.
Employee shall devote all of his business time, attention and
energies to the business and affairs of Company, shall use his best
efforts to advance the best interests of Company and shall not during
the Term be actively engaged in any other business activity, whether or
not such business activity is pursued for gain, profit or other pecuniary
advantage. The Employee shall expend his best efforts on behalf of the
Company and abide by all reasonable Company policies now or
hereafter existing.
Subject to the provisions of Companys Certificate of Incorporation
and Bylaws, each as amended from time to time, Company shall
indemnify Employee to the fullest extent permitted by the General
Corporation Law of the State of Georgia, as amended from time to
time, for all amounts ( including without limitation, judgments, fines,
settlement payments, expenses and attorneys fees) incurred or paid by
Employee in connection with any action, suit, investigation or
proceeding arising out of or relating to the performance by Employee
of services for, or the acting by Employee as a director, officer or
employee of, Company, or any other person or enterprise at
Companys request. Company shall obtain and maintain in full force
and effect during the Term, directors and officers liability insurance
policies providing full and adequate protection to Employee acting
within his capacities for the Company.
4. Place of Performance.
In connection with his employment by Company, Employee shall be
based at the principal manufacturing facility of Company located at
1324 Union Hill Road, Alpharetta, Georgia 30201 (the Offices), and
Employee shall have discretion regarding his absence therefrom on
travel status or otherwise during any calendar year. Employee shall not
be required to move his present residence in order to perform the
services contemplated hereby. Subject to the foregoing, in connection
with any relocation of the Offices or transfer consented to by
Employee, Company will promptly pay (or reimburse Employee for)
all reasonable moving and moving related expenses incurred by
Employee as a consequence of a change of his principal residence in
connection with any such transfer or relocation of the Offices.
5. Compensation.
(a) Base Salary. Company shall pay to Employee a base salary (the
Base Salary) at a rate of not less than Seventy thousand dollars
($70,000) per annum, payable in equal semi-monthly installments
during the Term. The Board of Directors of the Company, at least
annually, will review the Base Salary and other compensation during
the Term with a view toward the increase thereof based upon
Employees performance, the performance of Company, inflation, then
prevailing industry salary scales and other relevant factors. The Base
Salary provided hereunder, as may be increased by the Board of
Directors of Company from time to time, shall not be reduced without
Employees consent.
(b) Out-of-Pocket Expenses. Company shall promptly pay to
Employee the reasonable expenses incurred by him in the performance
of his duties hereunder, including, without limitation, those incurred in
connection with business related travel or entertainment, or, if such
expenses are paid directly by Employee, Company shall promptly
reimburse Employee for such payment, provided that Employee
properly accounts therefor in accordance with Companys written
policy.
(c) Participation in Benefit Plans. Employee shall be entitled to
participate in or receive benefits under any pension plan, profit sharing
plan, stock option plan, stock purchase plan or arrangement, health and
accident plan or any other employee benefit plan or arrangement made
available by Company to its executives and key management
employees.
(d) Vacation. Employee shall be entitled to paid vacation days in
each calendar year as determined by Company from time to time, but
not less than three (3) weeks in any calendar year, prorated in any
calendar year during which Employee is employed hereunder for less
than entire year in accordance with the number of days in such year
during which Employee is so employed. Employee shall also be
entitled to all paid holidays given by Company to its executives and
key management employees.
(e) Other Benefits. In addition to the other benefits specified
pursuant to this Section 5, Company shall provide Employee with an
automobile allowance of $400.00 per month to be used to meet the
costs of operating an automobile for business use.
(f) Incentive Compensation. The Company may also pay to
Employee other incentive compensation as may be set by the Board of
Directors from time to time to reflect Employees contribution to the
financial goals of the Company.
6. Termination.
Employees employment hereunder shall be terminated upon
Employees death and may be terminated as follows:
(a) Effective upon the giving of written notice by the Board of
Directors of Company to Employee in the event that Employee
hereafter (i) shall willfully fail to comply with any of the material terms
of this Agreement, (ii) shall fail to perform his duties hereunder, (iii)
shall be diagnosed with chronic alcoholism or any other form of
addiction which substantially impairs the Employees ability to
perform his duties hereunder, or (iv) shall willfully engage, in his
capacity as an executive or officer of Company, in gross misconduct
injurious to the Company, and a vote to such effect shall have been
adopted by not less than a majority of the directors (including
Employee) then in office of Company, after reasonable notice to
Employee and an opportunity for him to be heard before such Board.
For purposes of this Section 6(a), no act, or failure to act, on
Employees part shall be considered willful unless done, or omitted
to be done, by Employee not in good faith and without reasonable
belief that his action(s) or omission(s) were in the best interests of
Company.
(b) Upon not less than sixty (60) days written notice by the Board
of Directors of Company to Employee in the event that (i) the Board
shall have received a written statement from a reputable independent
physician to the effect the Employee shall have become so
incapacitated as to be unable to resume, within the ensuing twelve (12)
months his employment hereunder by reason of physical or mental
illness or injury, or (ii) Employee shall not have substantially
performed his duties hereunder for six (6) consecutive months
(exclusive of any vacation permitted under Section 5 (d) hereof) by
reason of any such physical or mental illness.
(c) If, within thirty (30) days after any notice of termination
pursuant to Sections 6(a) or 6(b) hereof is given, Employee informs
Company in writing that a dispute exists concerning such termination,
such termination shall be deemed to have occurred only upon the date
on which such dispute is finally resolved. During the pendency of any
such dispute and until such dispute is finally resolved, Company shall
continue to pay Employee the Base Salary in effect at the date of such
notice of termination pursuant to Section 6(a) or 6(b). If such dispute
results in a final determination to the effect that Company did not have
a proper basis for such termination, Company shall promptly pay to
Employee any other payments to which Employee would have been
entitled to receive had Employees employment hereunder not been
improperly terminated, and if such dispute results in a final
determination to the effect that Company did have a proper basis for
such termination, the Base Salary pursuant to the preceding sentence
shall cease and terminate upon the date of such final determination.
(d) In the event of the termination of Employees employment
pursuant to Section 6(b) hereof, for the longer of one year following
any such termination or the balance of the Term (as if such termination
had not occurred), Company shall (i) continue to pay Employee the
Base Salary in effect at the time of such
termination less the amount, if any, then payable to Employee under
any disability benefits of Company,
(ii) pay to Employee at the end of the fiscal year in which his
termination occurred, the amount which would have been payable to
Employee pursuant to Companys bonus pool, if any, for the entire
year in which such termination occurred pro-rated to the effective date
of termination and (iii) maintain at its expense, all major medical and
other health, accident, life or other disability plans and programs in
which Employee participated immediately prior to such termination.
(e) In the event of the termination of Employees employment as a
result of Employees death, Company shall (i) for the longer of (X) one
year following Employees death or (Y) the balance of the Term (as if
such termination had not occurred), continue to pay to Employees
estate Employees Base Salary in effect at the time of such termination,
(ii) pay to Employees estate at the end of the fiscal year in which
Employees death occurred, the amount which would have been
payable to Employee pursuant to Companys bonus pool, if any, for the
entire fiscal year in which his death occurred pro-rated to the date of
his death, and (iii) for the longer of one year following Employees
death or the balance of the Term (as if such termination had not
occurred), maintain, at Companys expense, for the continued benefit
of Employees family, all major medical and other health, accident, life
or other disability plans and programs in which Employee participated
immediately prior to his death. Company shall also pay to Employees
heirs a lump-sum death benefit equal to 50% of any key employee life
insurance obtained by Company on the life of Employee.
7. Severance.
Upon (i) the acquisition by any person (as such term is defined in
sections 13 (d) and 14 (d) (2) of the Securities Exchange Act of 1934,
as amended), directly or indirectly of securities of Company
representing 51% or more combined voting power of Companys then
outstanding securities, (ii) the future disposition by Company (whether
direct or indirect, by sale of assets or stock, merger, consolidation or
otherwise) of all or substantially all of its business and/or assets in a
transaction to which Employee does not consent, (iii) the breach by
Company of its material obligations under this Agreement, or (iv) the
termination of this Agreement by Company for any reason other than
(X) that specified in Section 6 (a) hereof or (Y) by mutual agreement of
Company and Employee (such events being hereinafter collectively
referred to as a Severance Event), Employee shall have the right to
terminate this Agreement within ten (10) days after the occurrence of
such Severance Event. Upon the effective date of such termination,
Employee shall be entitled to receive a lump sum severance amount
equal to the sum of (I) the greater of (x) the present value of his Base
Salary in effect at the time of Severance Event for one year or (y) the
present value of his Base Salary in effect at the time of the Severance
Event for the remainder of the Term (as if such termination had not
occurred) plus (II) the estimated amount which would have been
payable to Employee pursuant to Companys bonus pool, if any, for
the fiscal year during which such termination occurred, as determined
in good faith by the Board of Directors of Company based upon
Companys results of operations for the fiscal year through the
effective date of the termination and its historical results of operations
and pro-rated to the effective date of termination. In addition, for the
longer of one year following any such termination or the balance of the
Term (as if such termination had not occurred), Company shall
maintain, at Companys expense, major medical and other health,
accident, life or other disability plans or programs in which Employee
participated immediately prior to such termination. For purposes of
this Agreement, the present value of Employees Base Salary shall be
based upon an interest rate of ten percent (10%) per annum. Employee
shall not be required to mitigate the amount of the termination payment
provided pursuant to this Section 7, nor will such payment be reduced
by reason of Employees securing other employment.
8. Covenant Regarding Inventions and Copyrights; Protection of
Confidential Information.
The Employee Invention, Non-Disclosure and Non-Solicitation
Agreement dated September 24, 1996 between Company and
Employee (the NDA Agreement) is incorporated herein by reference.
9. Disputes.
If Company or Employee shall dispute any termination of
Employees employment hereunder or if a dispute concerning any
payment hereunder shall exist:
(a) either party shall have the right (but not the obligation), in
addition to all other rights and remedies provided by law, to compel
arbitration of the dispute in Fulton County, Georgia, under the rules of
the American Arbitration Association by giving written notice of
arbitration to the other party within thirty (30) days after notice of such
dispute has been received by the party to whom notice has been given;
and
(b) if such dispute (whether or not submitted to arbitration pursuant
to Section 9 (a) hereof) results in a determination that (i) Company did
not have the right to terminate Employees Employment under the
provisions of this Agreement or (ii) the position taken by Employee
concerning payments to Employee is correct, Company shall promptly
pay, or if theretofore paid by Employee, shall promptly reimburse
Employee for, all costs and expenses (including attorneys fees)
reasonably incurred by Employee in connection with such dispute.
10. Successors; Binding Agreement.
(a) In the event of a future disposition by Company (whether direct
or indirect, by sale of assets or stock merger, consolidation or
otherwise) of all or substantially all of its business and/or assets in a
transaction to which Employee consents, Company will require any
successor, by agreement in form and substance satisfactory to
Employee, to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that Company would be
required to perform if no such disposition had taken place.
(b) This Agreement and all rights of Employee hereunder shall
inure to the benefit of, and be enforceable by, Employees personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If Employee should die while any
amount would still be payable to him hereunder if he had continued to
live, all such amounts, unless otherwise provided herein, shall be paid
in accordance with the terms of this Agreement to Employees estate.
11. Notices.
All notices, consents or other communications required or permitted
to be given by any party hereunder shall be in writing (including
telecopy or other similar writing) and shall be given by personal
delivery, certified or registered mail, postage prepaid, or telecopy (or
other similar writing) as follows:
To Company: To
Employee:
The Network Connection Kevin
D. Sheldon
1324 Union Hill Road 10970
Donamere Drive
Alpharetta, Georgia 30201
Alpharetta, Georgia 30202
Attn: CEO
or at such other address or telecopy number (or other similar number)
as either party may from time to time specify to the other. Any notice,
consent or other communication required or permitted to be given
hereunder shall have been deemed to be given on the date of mailing,
personal delivery or telecopy or other similar means (provided the
appropriate answer back is received) thereof and shall be conclusively
presumed to have been received on the second business day following
the date of mailing or, in the case of personal delivery or telecopy or
other similar means, the day of delivery thereof, except that a change
of address shall not be effective unit actually received.
12. Modifications and Waivers.
No term, provision or condition of this Agreement may be modified
or discharged unless such modification or discharge is authorized by
the Board of Directors of Company and is agreed to in writing and
signed by Employee and Company. No waiver by either party hereto
of any breach by the other party hereto of any term, provision or
condition of this Agreement to be performed by such other party shall
be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
13. Entire Agreement.
This Agreement constitutes the entire understanding between the
parties hereto relating to the subject matter hereof, superseding all
negotiations, prior discussions, preliminary agreements and agreements
relating to the subject matter hereof made prior to the date hereof.
14. Governing Law.
Except as otherwise explicitly noted, this Agreement shall be
governed by and construed in accordance with the laws of the State of
Georgia (without giving effect to conflicts of law).
15. Invalidity.
Except as otherwise specified herein, the invalidity or
unenforceability of any term or terms of this Agreement shall not
invalidate, make unenforceable or otherwise affect any other term of
this Agreement which shall remain in full force and effect.
16. Headings.
The headings contained in this Agreement are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.
EACH OF THE PARTIES HERETO ACKNOWLEDGES THAT
THEY HAVE READ AND UNDERSTAND THIS AGREEMENT
AND AGREE TO BE BOUND BY ITS TERMS.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year set forth above.
Company:
Employee:
By:_____________________________
By:_________________________________
Title: Chairman and CEO
Kevin D. Sheldon
<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE NETWORK
CONNECTION, INC. FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,000,000
<SECURITIES> 495,713
<RECEIVABLES> 2,026,071
<ALLOWANCES> 220,792
<INVENTORY> 1,108,410
<CURRENT-ASSETS> 4,541,303
<PP&E> 2,786,948
<DEPRECIATION> 627,535
<TOTAL-ASSETS> 6,792,599
<CURRENT-LIABILITIES> 1,777,829
<BONDS> 0
0
0
<COMMON> 3,037
<OTHER-SE> 4,753,316
<TOTAL-LIABILITY-AND-EQUITY> 6,792,599
<SALES> 4,092,023
<TOTAL-REVENUES> 4,092,023
<CGS> 3,050,596
<TOTAL-COSTS> 4,016,351
<OTHER-EXPENSES> 178,949
<LOSS-PROVISION> 150,064
<INTEREST-EXPENSE> 99,026
<INCOME-PRETAX> (3,252,899)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,252,899)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)
</TABLE>
