SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERTLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
Commission File Number: 1-13760
THE NETWORK CONNECTION, INC.
1324 Union Hill Road
Alpharetta, Georgia 30201
(770-751-0889)
A Georgia Corporation IRS Employer ID No. 58-1712432
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 par value per share Registered on The Nasdaq Stock
Market
Common Stock Purchase Warrants Registered on The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 10, 1997, the registrant had outstanding 4,109,690 shares of
its Common Stock.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No
[ X ]
TABLE OF CONTENTS
ITEM
PAGE(S)
PART I. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS (Unaudited)
Balance Sheet June 30, 1997
3,4
Statements of Operations Three Months and Six Months
Ended
June 30, 1997 and 1996
5
Statements of Cash Flows Three Months and Six Months
Ended
June 30, 1997 and 1996
6
Notes to Financial Statements June 30, 1997
7
2. Management's Discussion and Analysis of Financial Condition and
Results
of Operations
8,9
PART II. OTHER INFORMATION
5. Other Information
10
6. Exhibits and Reports on Form 8-K
10
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE NETWORK CONNECTION, INC.
BALANCE SHEET
(Unaudited)
June 30,
1997
ASSETS
Current assets:
Cash $2,968,834
Restricted cash 1,000,000
Accounts receivable, less allowance of $224,335 (Notes) 2,978,903
Inventory 538,300
Prepaid expenses 234,745
------------------
Total current assets 7,720,782
Property and equipment:
Land 150,000
Building and improvements 832,762
Furniture, fixtures and equipment 1,725,814
Software 50,066
Vehicles 160,299
------------------
2,918,941
Less accumulated depreciation (732,535)
------------------
2,186,406
Other assets, net 210,328
------------------
Total assets $10,117,516
==========
THE NETWORK CONNECTION, INC.
BALANCE SHEET
(Unaudited)
June 30,
1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $727,238
Payable to shareholders 67,422
Current portion of long-term debt and capital lease obligations 34,235
--------------------
Total current liabilities 828,895
Long-term debt, less current portion 281,289
Obligations under capital leases, less current portion 4,223
--------------------
- --------------------
Total liabilities 1,114,407
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized, 2,500,000 shares;
Issued and outstanding, none
Common stock, $.001 par value:
Authorized, 10,000,000 shares;
Issued and outstanding, 4,109,690 shares 4,110
Additional paid-in capital 14,606,422
Accumulated deficit (5,607,423)
--------------------
Total shareholders' equity 9,003,109
--------------------
Total liabilities and shareholders' equity $10,117,516
===========
THE NETWORK CONNECTION, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
Revenues
$1,054,764 $1,460,399 $3,362,580 $2,031,797
Cost of revenues
658,752 1,045,321 2,156,065 1,425,708
- ----------------------------------------------------------------------
Gross profit
396,012 415,078 1,206,515 606,089
Selling, general and administrative
1,328,428 991,809 2,285,238 1,784,667
Research and development
86,944 86,944
- ----------------------------------------------------------------------
Operating loss
(1,073,360) (576,731) (1,165,667) (1,178,578)
Interest expense
(13,479) (17,576) (29,990) (48,949)
Other net
16,452 25,784 14,743 27,000
- ------------------------------------------------------------------------
Net loss
($1,070,387) ($568,523) ($1,180,914) ($1,200,527)
============ ============ ============ ===========
Net loss per share
($0.27) ($0.20) ($0.33) ($0.45)
============ ============ ============ ===========
Shares used in per share calculation
3,931,685 2,838,263 3,558,797 2,654,132
============ ============ ============ ===========
THE NETWORK CONNECTION, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
Six Months
Ended Six Months
Ended
June 30, June 30,
1997 1996
Operating activities
Net loss ($1,180,914) ($1,200,527)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 105,000 90,000
Changes in operating assets and liabilities:
Accounts receivable (1,173,624) (827,327)
Inventory 570,510 13,445
Prepaid expenses and other assets (221,289) (68,658)
Accounts payable and accrued expenses (450,674) 93,823
--------------------------------------
Net cash used in operating activities (2,351,391) (1,899,244)
Investing activities:
Purchase of property and equipment (131,993) (646,719)
Sale of short-term investments 495,713 (1,331,209)
--------------------------------------
Net cash (used in) provided by investing activities
363,720 (1,977,928)
Financing activities:
Proceeds from issuance of long-term debt 48,000 0
Net proceeds from issuance of stock 5,427,670 3,924,132
Proceeds (payment) of bank borrowings on line of credit
(496,000) 164,000
Payment of long-term debt and capital lease obligations
(21,736) (33,570)
Payment of shareholder debt (1,429) 0
--------------------------------------
Net cash provided by financing activities 4,956,505 4,054,562
--------------------------------------
Net change in cash 2,968,834 177,390
Cash at beginning of period 1,000,000 27,445
--------------------------------------
Cash at end of period $3,968,834 $204,835
=========== ===========
THE NETWORK CONNECTION, INC.
CONDENSED NOTES TO UNAUDITED INTERIM FINANCIAL
STATEMENTS
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended June 30,
1997 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. For further information, refer to the
financial statements and footnotes thereto for the year ended December 31,
1996, included in the Company's Annual Report on Form 10-KSB.
Net Loss Per Common Share
Net loss per common share has been computed by dividing net loss by the
weighted average number of common shares outstanding during each
period.
Accounts Receivable
The Company's products are often used with other products in large
complex projects. As a result, the Company may grant extended payment
terms, usually secured by irrevocable letters of credit, for certain sales.
Accounts receivable at June 30, 1997 consisted of approximately
$1,456,000 from sales to such customers with extended credit terms of up to
180 days based on the nature of the project.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Warrant Redemption
On May 8, 1997, the Company announced that holders of 99.7% of the
Company's publicly traded Redeemable Common Stock Purchase Warrants
( the "Warrants") elected to exercise and convert to common stock at $5.00
per share rather than redeem their Warrants, at the redemption price of $.25
per Warrant, raising $5.3 million.
Forward-Looking Statements
Statements in this Quarterly Report on Form 10QSB that are not
descriptions of historical facts may be forward-looking statements that are
subject to risks and uncertainties, including economic, competitive and
technological factors affecting the Company's operations, markets, products,
services and prices, as well as other specific factors discussed in the
Company's filings with the Securities and Exchange Commission. These
and other factors may cause actual results to differ materially from those
anticipated.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Revenues decreased 28% to $1.1 million for the quarter and increased 66%
to $3.4 million for the six months ended June 30, 1997 from $1.5 million
for the quarter and $2.0 million for the six months ended June 30, 1996.
This decrease in the second quarter primarily resulted from customer delays
in the startup of larger programs awarded in the second quarter. The
increase for the six months primarily resulted from increased international
sales through the Company's Korean reseller and initial sales to new
strategic alliance partners. More sales efforts in 1997 were focused on larger
system sales into niche markets of the Company's "turn-key" products
(AirView, CruiseView, TrainView and InnView) which have longer sales
cycles and contribute to sales backlog for revenues derived from multiple
roll-out deliveries over 12 to 36 months. As a result, the Company received
awards for long-term programs with substantial revenue opportunity, if fully
completed, at Fairlines ($10-$13 million for AirView), Korean Government
School Program ($5.3 million for 400 schools), Department of Defense
Breast Cancer Awareness ($500,000 initial order on $10 million program)
and two corporate training customers ($1.7 million).
Gross profit as a percentage of revenues increased by 10 % to 38% during
the quarter ended June 30, 1997 as compared to 28% for the same period in
1996. This increase was primarily due to a higher percentage of revenues
generated during the 1997 period from larger superserver systems sales with
higher average margins and a shift from initial sales with lower margins to
full production for customers with multiple site deliveries over several
months. Gross margins for any particular period are not necessarily
indicative of the results that may occur in any future period due to factors
including, but not limited to, changes in product mix, fluctuating
component cost, critical component availability and industry competition.
Selling, general and administrative expenses increased $390,619 (39%) for
the quarter ended and $500,571(28%) for the six months ended June 30,
1997, as compared to the same 1996 periods. This increase related
primarily to expenses, which were not incurred in the respective periods in
1996, for additional (i) marketing expenses (including advertising, trade
show, public relations, bidding and proposal and demonstration expenses)
associated with the introduction of new products for Courseware on
Demand and increased activity in the cruise line market and; (ii)
employment of sales and marketing personnel and related payroll and non-
recurring legal and administrative expenses related to establishing a sales
office in Singapore. Management of the Company believes approximately
$250,000 of these expenses are non-recurring and that these investments in
sales and marketing will result in increased revenues and sales backlog for
the remainder of 1997.
The Company anticipates that it will continue to invest in its marketing and
sales generation strategy (increasing advertising, trade show,
demonstration and proposal expenses and sales and marketing personnel,
with related payroll costs) to increase revenues and increase net income
from operations in the future; such investment may adversely affect short-
term operating performance.
Changes in interest expense are attributable to changes in average
outstanding borrowings during the periods presented. Other income results
from interest income on restricted cash and short-term securities.
Liquidity and Capital Resources; Certain Transactions
During the six months ended June 30, 1997, the Company's cash increased
$3.0 million principally due to the net proceeds from the issuance of
common stock of $5.4 million and the sale of short term investments of
$495,713, offset by cash used in operating activities of $2.4 million, the
payment of bank borrowings under the line of credit of $496,000 and the
purchase of property and equipment of $131,993. The negative change in
cash from operating activities primarily resulted from a net loss of $1.2
million, a decrease in accounts payable and accrued expenses of $450,674,
and an increase of $1.2 million in accounts receivable, offset by a decrease
in inventory of $570,110. The reduction in cash from operating activities
was offset by depreciation and amortization of $105,000. Backlog at June
30, 1997 was approximately $13.7 million.
The Company's primary source of funds at June 30, 1997 consisted of $4.0
million in cash and funds available under a $1.00 million revolving line of
credit. $1.0 million of cash represents two certificates of deposit which were
restricted from use by the fact that they were pledged as collateral for the
availability of the line of credit. The line of credit, which expires in May
1998, bears interest at an annual rate of 6.92%. At June 30, 1997, the
Company had no borrowings outstanding under the line of credit.
On May 8, 1997, the Company announced that holders of 99.7% of the
Company's publicly traded Redeemable Common Stock Purchase Warrants
( the "Warrants") elected to exercise and convert to common stock at $5.00
per share rather than redeem their Warrants, at the redemption price of $.25
per Warrant, raising $5.3 million.
Capital expenditures for the purchase of property and equipment for the six
months ended June 30, 1997 were $131,993, primarily for the purchase of
additional equipment and software 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 June 30, 1997, in
the aggregate amount of $247,613, for the purchase of its primary
operating facility. This loan is secured by the purchased real estate and the
personal guarantees of Wilbur and Barbara Riner, and bears annual interest
at the rate of such lender's prime rate plus 2%. A default by the Company
in payment of this mortgage loan could result in foreclosure against the
property.
The Company believes that its working capital requirements will increase
throughout 1997 and beyond. The Company believes that currently
available cash, including the proceeds already received 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 Company's products in the
marketplace, the relative profitability of those products, continued
availability of memory and storage components at favorable pricing and the
Company's ability to control operating expenses. The Company may seek or
require additional financing for growth opportunities, including any
expansion that the Company may undertake internally, for strategic
acquisitions or partnerships or for expansion of additional sites. There can
be no assurance that any such financing will be available on terms
acceptable to the Company, if at all.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 12, 1997, the Company held its 1997 Annual
Meeting of Stockholders (the "Annual Meeting"). At the Annual Meeting, the
following directors were elected, with the effect being that their terms
continued
after the Annual Meeting: Marc Doyle (3,114,141 votes in favor and 214,113
votes against).
The following additional matters were also voted on and approved at
the Annual Meeting, with the following vote tabulations being registered:
1. That the Corporation appoint Coopers & Lybrand L.L.P. as the
Corporation's independent auditors for the fiscal year ending December 31,
1997. The following votes were cast: 3,286,744 in favor; 41,510 against.
2. That the Corporation authorize and ratify an increase of the
number of shares of Common Stock underlying and available for the granting of
options under the Corporation's 1994 Employee Stock Option Plan, from the
existing 700,000 shares of Common Stock to 1,200,000 shares of Common
Stock. The following votes were cast: 1,187,197 in favor; 625,103 against;
15,135 abstaining; and 1,500,819 broker non-votes.
Item 5. Other Information
On July 5, 1997, Mr. James Newman, a member of the board of
directors, died. The Company intends to find a successor for the board
member position held by Mr. Newman.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
On May 8, 1997, the Company filed a report on Form 8-K
which announced the results of the call for redemption on April 30,
1997, of its publicly traded Redeemable Common Stock Purchase
Warrants.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE NETWORK
CONNECTION, INC.
(Registrant)
Date: August 13, 1997 By:__/s/ Wilbur
Riner________________________________
Wilbur Riner
Chairman
and Chief Executive Officer
By:__/s/ Bryan R.
Carr________________________________
Bryan R. Carr
Chief
Financial and Principal
Accounting
Officer
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