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 September 30, 1997
Commission File Number: 1-13760
THE NETWORK CONNECTION, INC.
1324 Union Hill Road
Alpharetta, Georgia 30004
(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
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 November 10, 1997, the registrant had outstanding 4,152,190 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 September 30, 1997
3,4
Statements of Operations Three Months and Nine
Months Ended
September 30, 1997 and 1996
5
Statements of Cash Flows Three Months and Nine
Months Ended
September 30, 1997 and 1996
6
Notes to Financial Statements September 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)
September 30,
1997
ASSETS
Current assets:
Cash $484,135
Restricted cash 1,000,000
Short-term investments 1,618,633
Accounts receivable, less allowance of $224,335 (Notes) 4,927,588
Inventory 1,138,305
Prepaid expenses 258,110
------------------
Total current assets 9,426,771
Property and equipment:
Land 150,000
Building and improvements 840,023
Furniture, fixtures and equipment 1,886,810
Software 50,395
Vehicles 161,107
------------------
3,088,335
Less accumulated depreciation (785,035)
------------------
2,303,300
Other assets, net 375,470
------------------
Total assets $12,105,541
==========
THE NETWORK CONNECTION, INC.
BALANCE SHEET
(Unaudited)
September 30,
1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $2,505,175
Payable to shareholders 67,422
Current portion of long-term debt and capital lease obligations 35,066
--------------------
Total current liabilities 2,607,663
Long-term debt, less current portion 265,2223
Obligations under capital leases, less current portion 7,524
--------------------
--------------------
Total liabilities 2,880,410
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, 4,152,190 shares 4,152
Additional paid-in capital 14,719,611
Accumulated deficit (5,498,632)
--------------------
Total shareholders' equity 9,225,131
--------------------
Total liabilities and shareholders' equity $12,105,541
===========
THE NETWORK CONNECTION, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
Revenues
$3,518,632 $1,830,312 $6,881,212 $3,862,108
Cost of revenues
2,342,072 1,255,773 4,498,138 2,681,481
- ----------------------------------------------------------------------------
Gross profit
1,176,560 574,539 2,383,074 1,180,627
Selling, general and administrative
1,008,970 876,304 3,294,208 2,660,970
Research and development
75,730 162,674
- ----------------------------------------------------------------------------
Operating income (loss)
91,860 (301,765) (1,073,808) (1,480,343)
Interest expense
(7,422) (48,011) (37,400) (101,331)
Other, net
24,354 37,106 39,085 68,478
- ----------------------------------------------------------------------------
Net income (loss)
$108,792 ($312,670) ($1,072,123) ($1,513,196)
============ ============ ============ ===========
Net income (loss) per share
$0.03 ($0.10) ($0.28) ($0.55)
============ ============ ============ ===========
Shares used in per share calculation
4,242,520 2,982,043 3,786,704 2,763,435
============ ============ ============ ===========
THE NETWORK CONNECTION, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
1997 1996
Operating activities
Net loss ($1,072,123) ($1,513,196)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 157,500 180,000
Changes in operating assets and liabilities:
Accounts receivable (3,122,309) (1,521,366)
Inventory (29,895) 93,207
Prepaid expenses and other assets (409,796) (103,581)
Accounts payable and accrued expenses 1,327,263 (48,147)
--------------------------------------
Net cash used in operating activities (3,149,360) (2,913,083)
Investing activities:
Purchase of property and equipment (301,387) (878,922)
Purchase of short-term investments (1,122,920) (1,337,472)
------------------- -------------------
Net cash (used in) provided by investing activities
(1,424,307) (2,216,394)
Financing activities:
Proceeds from issuance of long-term debt 48,000 0
Net proceeds from issuance of stock 5,540,901 4,709,107
Proceeds (payment) of bank borrowings on line of credit
(496,000) 614,000
Payment of long-term debt and capital lease obligations
(33,760) (120,873)
Payment of shareholder debt (1,429) 0
--------------------------------------
Net cash provided by financing activities 5,057,802 5,202,234
--------------------------------------
Net change in cash 484,135 72,757
Cash at beginning of period 1,000,000 27,445
--------------------------------------
Cash at end of period $1,484,135 $100,202
=========== ===========
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
September 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 Income (Loss) Per Common Share
Net income (loss) per common share has been computed by dividing net
income (loss) by the weighted average number of common shares
outstanding plus weighted average number of common stock equivalents
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 September 30, 1997 consisted of approximately
$1,530,000 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.
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 92% to $3.5 million for the quarter and increased 78%
to $6.9 million for the nine months ended September 30, 1997 from $1.8
million for the quarter and $3.9 million for the nine months ended
September 30, 1996. This increase in the third quarter revenue primarily
resulted from initial deliveries in the startup of larger programs awarded in
the first half of fiscal 1997. Nine month results reflect the success realized
from the initial implementation of previously announced long-term larger
system programs with Fairlines, the Department of Defense Breast Cancer
Awareness, and increased shipments on the South Korean Government
High School Program.
Gross profit as a percentage of revenues increased by 2 % to 33% during
the quarter ended September 30, 1997 as compared to 31% for the same
period in 1996. For the nine month period ended September 30, 1997,
gross profit was up 4% to 36% over the prior period in 1996. This increase
was primarily due to a higher percentage of revenues generated during the
1997 period from larger server systems sales with higher average gross
profit. Gross profit 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 $132,666 (15%) for
the quarter ended and $633,238 (24%) for the nine months ended
September 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 the expenses for the nine month period 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 nine months ended September 30, 1997, the Company's cash
increased $3.0 million principally due to the net proceeds from the
issuance of common stock of $5.5 million, offset by cash used in operating
activities of $3.1 million, the payment of bank borrowings under the line
of credit of $496,000, the purchase of short -term investments of $1.1
million and the purchase of property and equipment of $301,387. The
negative change in cash from operating activities primarily resulted from a
net loss of $1.1 million and an increase of $3.1 million in accounts
receivable, an increase in prepaids and other assets of $170,105 and an
increase in accounts payable and accrued expenses of $1.3 million,. The
reduction in cash from operating activities was offset by depreciation and
amortization of $157,500. Backlog at September 30, 1997 was
approximately $12.0 million.
The Company's primary source of funds at September 30, 1997 consisted
of $3.1 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 7.16%. At
September 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
nine months ended September 30, 1997 were $301,387, 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 September 30,
1997, in the aggregate amount of $241,480, 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 mid 1998, 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
None
Item 5. Other Information
On August 21, 1997, Mr. Art Bauer, became a member of the
board of directors as a successor for the board member position previously
held by Mr. James Newman.
On October 23, 1997, the Securities and Exchange Commission
declared effective, registration statements filed on Form S-8, by the
Company, to register the underlying common stock for 1,200,000 and
100,000 shares available for issue under the Company's 1994 Employee
Stock Option Plan and 1995 Stock Option Plan for Non-Employee
Directors, respectively.
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: November 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
<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-1-1997 JUL-1-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 1,484,135 1,484,135
<SECURITIES> 1,618,633 1,618,633
<RECEIVABLES> 5,151,923 5,151,923
<ALLOWANCES> 224,335 224,335
<INVENTORY> 1,138,305 1,138,305
<CURRENT-ASSETS> 9,426,771 9,426,771
<PP&E> 3,088,335 3,088,335
<DEPRECIATION> 785,035 785,035
<TOTAL-ASSETS> 12,105,541 12,105,541
<CURRENT-LIABILITIES> 2,607,663 2,607,663
<BONDS> 0 0
0 0
0 0
<COMMON> 4,152 4,152
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 12,105,541 12,105,541
<SALES> 6,881,212 3,518,632
<TOTAL-REVENUES> 6,881,212 3,518,632
<CGS> 4,498,138 2,342,072
<TOTAL-COSTS> 4,498,138 2,342,072
<OTHER-EXPENSES> 3,456,882 1,084,700
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 37,400 7,422
<INCOME-PRETAX> (1,072,123) 108,792
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,072,123) 108,792
<EPS-PRIMARY> (0.28) 0.03
<EPS-DILUTED> (0.28) 0.03
</TABLE>
