SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERTLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31,1997
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 May 14, 1997, the registrant had outstanding 4,093,602 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 March 31,1997
3,4
Statements of Operations Three Months Ended
March 31,1997 and 1996
5
Statements of Cash Flows Three Months Ended
March 31,1997 and 1996
6
Notes to Financial Statements March 31,1997
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)
March 31,
1997
ASSETS
Current assets:
Cash $1,143,982
Restricted cash 1,000,000
Accounts receivable, less allowance of $220,792 (Notes) 2,971,917
Inventory 490,098
Prepaid expenses 196,839
------------------
Total current assets 5,802,836
Property and equipment:
Land 150,000
Building and improvements 814,615
Furniture, fixtures and equipment 1,707,965
Software 47,971
Vehicles 196,839
------------------
2,833,795
Less accumulated depreciation (680,035)
------------------
2,153,760
Other assets, net 105,051
------------------
Total assets $8,061,647
===========
THE NETWORK CONNECTION, INC.
BALANCE SHEET
(Unaudited)
March 31,
1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $1,013,604
Payable to shareholders 68,851
Current portion of long-term debt and capital lease obligations
35,066
--------------------
Total current liabilities 1,117,521
Long-term debt, less current portion 235,900
Obligations under capital leases, less current portion 10,916
---------------------
Total liabilities 1,364,337
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized, 2,500,000 shares;
Issued and outstanding, none
Common stock, $.001 par value:
Authorized, 10,000,000 shares;
Issued and outstanding, 3,419,304 shares 3,419
Additional paid-in capital 11,230,927
Accumulated deficit (4,537,036)
--------------------
Total shareholders' equity 6,697,310
--------------------
Total liabilities and shareholders' equity $8,061,647
============
THE NETWORK CONNECTION, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996
Revenues $2,307,816 $571,398
Cost of revenues 1,497,313 380,387
---------------------------------------
Gross profit 810,503 191,011
Selling, general and administrative 902,810 802,550
---------------------------------------
Operating (loss) income (92,307) (611,539)
Interest expense (19,593) (31,373)
Other income 1,372 10,909
---------------------------------------
Net loss ($110,528) ($632,003)
============ ============
Net loss per share ($0.03) ($0.26)
============ ============
Shares used in per share calculation 3,185,908 2,470,000
============ ============
THE NETWORK CONNECTION, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
e months
Ended
Three months
Ended
March 31,
March 31,
1997
1996
Operating activities
Net loss ($110,528) ($632,003)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 52,500 60,000
Changes in operating assets and liabilities:
Accounts receivable (1,166,638) 3,029
Inventory 618,312 26,725
Prepaid expenses and other assets (78,105) (134,659)
Accounts payable and accrued expenses (164,308) (456,031)
---------------------
Net cash used in operating activities (848,767) (1,132,939)
Investing activities:
(Purchase) of property and equipment (46,847) (107,401)
(Purchase) sale of short-term investments 495,713 (1,500,000)
-------------------
Net cash (used in) provided by investing activities 448,866 (1,607,401)
Financing activities:
Payment of bank borrowings under line of credit (496,000) 0
Net proceeds from issuance of stock 2,051,484 3,040,001
Payment of long-term debt and capital lease obligations (11,601) (16,089)
-------------------
Net cash provided by financing activities 1,543,883 3,023,912
-------------------
Net change in cash 1,143,982 283,572
Cash at beginning of period 1,000,000 27,445
-------------------
Cash at end of period $2,143,982 $311,017
======================
THE NETWORK CONNECTION, INC.
CONDENSED NOTES TO UNAUDITED INTERIM FINANCIAL
STATEMENTS
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three month period ended
March 31,1997 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 March 31,1997 consisted of approximately
$1,379,000 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 February 26, 1997, the Company announced it would redeem in whole
its unexercised 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. At March 31, 1997, proceeds from the
exercise and conversion of Warrants to common stock were $1.8 million.
At April 30,1997, the redemption date, net proceeds from the exercise of
Warrants to common stock were $5.26 million, representing the successful
conversion to common stock of 99.7% of the unexercised Warrants.
Forward-Looking Statements
Statements in this Quarterly Report on Form 10QSB that are not
descriptions of historical facts may be forward-looking statements that are
subject to risks and uncertainties, including economic, competitive and
technological factors affecting the Company's operations, markets,
products, services and prices, as well as other specific factors discussed in
the Company's filings with the Securities and Exchange Commission.
These and other factors may cause actual results to differ materially from
those anticipated.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Revenues increased 304% to $2.3 million for the quarter ended March
31,1997 from $571,398 for the quarter ended March 31, 1996. This
increase primarily resulted from increased international sales through the
Company's Korean reseller and initial sales to new strategic alliance
partners.
Gross profit as a percentage of revenues increased to 35% during the
quarter ended March 31,1997 as compared to 33% for the same period in
1995. 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 by $109,953 (14%)
for the quarter ended March 31,1997, as compared to the same 1996
period. This increase related primarily to expenses, which were not
incurred in the respective period in 1996, for additional (i) marketing costs
(including advertising, trade show, public relations, bidding and proposal
and demonstration expenses) and; (ii) employment of sales and marketing
personnel and related payroll costs. Management of the Company believes
the 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 three months ended March 31,1997, the Company's cash
increased $1.14 million principally due to the net proceeds from the
issuance of common stock of $2.05 million and the sale of short term
investments of $495,713 offset by cash used in operating activities of
$848,767 and the purchase of property and equipment of $46,847. The
negative change in cash from operating activities primarily resulted from a
net loss of $110,528 and an increase of $1.17 million in accounts
receivable, offset by a decrease in inventory of $618,312. The reduction in
cash from operating activities was offset by depreciation and amortization
of $52,500. Backlog at March 31, 1997 was approximately $4.4 million.
The Company's primary source of funds at March 31,1997 consisted of
$2.14 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 May 1997 bears interest at an annual rate of 6.92%. At March
31,1997, the Company had no borrowings outstanding under the line of
credit. At April 30, 1997, the Company's cash position increased to
approximately $5.5 million as a result of the exercise and conversion to
common stock of the warrants described below.
The Company had outstanding at March 31,1997, 684,456 Redeemable
Common Stock Purchase Warrants (the "Warrants") of the Company.
Each Warrant entitled 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. On February 26, 1997, the
Company announced it would redeem in whole its unexercised publicly
traded 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. At March 31, 1997, proceeds from the
exercise of Warrants to common stock were $1.84 million. At April
30,1997, the redemption date, net proceeds from the exercise of Warrants
to common stock were $5.26 million, representing the successful
conversion to common stock of 99.7% of the unexercised Warrants.
Capital expenditures for the purchase of property and equipment for the
three months ended March 31,1997 were $46,847, 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 March 31,1997,
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, the proceeds 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 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE NETWORK
CONNECTION, INC.
(Registrant)
Date: May 14, 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
3
13
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE NETWORK
CONNECTION, INC. FOR THE QUARTER ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,143,982
<SECURITIES> 0
<RECEIVABLES> 3,192,709
<ALLOWANCES> 220,792
<INVENTORY> 490,098
<CURRENT-ASSETS> 5,802,836
<PP&E> 2,833,795
<DEPRECIATION> 680,035
<TOTAL-ASSETS> 8,061,647
<CURRENT-LIABILITIES> 1,117,521
<BONDS> 0
0
0
<COMMON> 3,419
<OTHER-SE> 6,693,891
<TOTAL-LIABILITY-AND-EQUITY> 8,061,647
<SALES> 2,307,816
<TOTAL-REVENUES> 2,307,816
<CGS> 1,497,313
<TOTAL-COSTS> 902,810
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<INTEREST-EXPENSE> 19,593
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<NET-INCOME> (110,528)
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