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 31,1998
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
Common Stock Purchase WarrantsRegistered 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 15, 1998, the registrant had outstanding 4,154,943
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 31,1998
3,4
Statements of Operations Three Months Ended
March 31,1998 and 1997
5
Statements of Cash Flows Three Months Ended
March 31,1998 and 1997
6
Notes to Financial Statements March 31,1998
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,
1998
ASSETS
Current assets:
Restricted cash 1,040,000
Short-term 107,284
investments
Accounts 4,418,058
receivable, less
allowance of
$31,547 (Notes)
Inventory 3,400,386
Prepaid expenses 308,672
---------
---------
Total current 9,274,400
assets
Property and
equipment:
Land 150,000
Building and 762,635
improvements
Furniture, 2,095,827
fixtures and
equipment
Software 49,998
Vehicles 162,773
---------
---------
3,221,233
Less accumulated (1,045,56
depreciation 4)
---------
---------
2,175,669
Other assets, net 674,924
---------
---------
Total assets $12,124,9
93
=========
==
THE NETWORK
CONNECTION, INC.
BALANCE SHEET
(Unaudited)
March 31,
1998
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Current
liabilities:
Accounts payable $2,709,563
and accrued
expenses
Payable to 70,929
shareholders
Current portion 39,455
of long-term debt
and capital lease
obligations
----------
----------
-
Total current 2,819,947
liabilities
Long-term debt, 2,447,964
less current
portion (Notes)
Obligations under 1,222
capital leases,
less current
portion
----------
----------
----------
----------
--
Total liabilities 5,269,133
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 4,152
outstanding,
4,152,393 shares
Additional paid- 14,460,110
in capital
Accumulated (7,608,402
deficit )
----------
----------
-
Total 6,855,860
shareholders'
equity
----------
----------
-
Total liabilities $12,124,99
and shareholders' 3
equity
==========
==
THE NETWORK CONNECTION,
INC.
STATEMENTS OF
OPERATIONS
(Unaudited)
Three T
Months h
Ended r
e
e
M
o
n
t
h
s
E
n
d
e
d
March 31, M
a
r
c
h
3
1
,
1998 1997
Revenues $111,907 $2,307,816
Cost of revenues 102,206 1,497,313
---------- -----------
---------- ---------
Gross profit 9,701 810,503
Selling, general and 1,028,426 902,810
administrative
Research and 52,380 0
development
---------- -----------
---------- ---------
Operating (loss) income (1,071,105 (92,307)
)
Interest expense (70,317) (19,593)
Other income (expense) (14,843) 1,372
---------- -----------
---------- ---------
Net loss ($1,156,26 ($110,528)
5)
========== ===========
== =
Basic and Diluted Net ($0.28) ($0.03)
loss per share
========== ===========
== =
Shares used in per 4,152,393 3,185,908
share calculation
========== ===========
== =
THE NETWORK
CONNECTION, INC.
STATEMENTS OF
CASH FLOWS
(Unaudited)
Three T
months h
Ended r
e
e
m
o
n
t
h
s
E
n
d
e
d
March 31, M
a
r
c
h
3
1
,
1998 1997
Operating
activities
Net loss ($1,156,2 ($110,528)
65)
Adjustments to
reconcile net
loss to net cash
used
in operating
activities
Depreciation 153,598 52,500
and amortization
Changes in
operating assets
and liabilities:
Accounts 518,444 (1,166,638
receivable )
Inventory 44,609 618,312
Prepaid (101,340) (78,105)
expenses and
other assets
Accounts (1,458,55 (164,308)
payable and 4)
accrued expenses
--------- ----------
--------- ---------
-
Net cash used in (1,999,50 (848,767)
operating 8)
activities
Investing
activities:
(Purchase) of (16,994) (46,847)
property and
equipment
(Purchase) sale 531,275 495,713
of short-term
investments
--------- ----------
--------- ---------
-
Net cash (used 514,281 448,866
in) provided by
investing
activities
Financing
activities:
Payment of bank (526,000) (496,000)
borrowings under
line of credit
Net proceeds from 0 2,051,484
issuance of stock
Net proceeds from 2,037,722 0
issuance of
convertible debt
Payment of long- (11,143) (11,601)
term debt and
capital lease
obligations
--------- ----------
--------- ---------
-
Net cash provided 1,500,579 1,543,883
by financing
activities
--------- ----------
--------- ---------
-
Net change in 15,352 1,143,982
cash
Cash at 1,024,648 1,000,000
beginning of
period
--------- ----------
--------- ---------
-
Cash at end of $1,040,00 $2,143,982
period 0
========= ==========
== =
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 31,1998 are not necessarily indicative of the
results that may be expected for the year ended December 31,
1998. For further information, refer to the financial statements
and footnotes thereto for the year ended December 31, 1997,
included in the Company's Annual Report on Form 10-KSB.
Basic and Diluted Net Loss Per Common Share
Basic and Diluted net loss per common share have 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 for certain sales. Accounts receivable at
March 31, 1998 consisted of approximately $3.9 million from sales
to such customers with extended credit terms of up to 180 days
based on the nature of the project. Management believes that the
concentration of credit risk with respect to trade accounts
receivable is high due to the limited number of customers
requiring large shipments.
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.
Long-Term Debt
On March 11, 1998, pursuant to a Convertible Purchase Agreement,
dated March 11, 1998 (the "Purchase Agreement"), the Company sold
$2.2 Million aggregate principal of its 4% Convertible
Debentures, due March 11, 2003 (the "Debentures"), to a single
investor in a private placement. Each Debenture was sold for
$50,000 and is convertible at the option of the holder into
shares of the Company's Common Stock, $.001 par value (the
"Common Stock"), at a price per share equal to the lesser of (i)
$8.02 or (ii) 80% of the average closing market price of the
Common Stock during the 21-trading days prior to conversion; but
in no event can the conversion price be less than $3.00 per
share. In the event that following March 11, 2001 the market
price of the Common Stock for any five (5) consecutive trading
days exceeds $3.00, the Holder must convert the Debentures to
Common Stock under the terms of the Debenture.
Each Debenture is convertible, in whole or in part, from time to
time upon a date (the "Conversion Date") which is the earlier to
occur of (1) 105 days after the March 11, 1998 Original Issue
Date or (2) the date that a registration statement with respect
to the resale of the Common Stock which may be acquired upon
conversion of the Debentures is declared effective by the
Securities and Exchange Commission (the "Commission"), subject to
the restriction that the Debenture holder shall be entitled to
convert up to 25% of Debentures principal on the Conversion Date,
up to 50% of Debentures principal on the first month anniversary
of the Conversion Date, up to 75% of Debentures principal on the
second month anniversary of the Conversion Date and the entire
Debentures principal on the third month anniversary of the
Conversion Date.
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 $2.2 million to $111,907 for the quarter ended
March 31, 1998 from $2.3 million for the quarter ended March 31,
1997. This decrease primarily resulted from the timing of
purchase decisions by customers for local area networking
products due to Year 2000 issue investment decisions and expected
availability of high bandwidth Internet solutions, and a
significant slowdown in shipments for international orders
through the Company's Korean reseller, due to adverse economic
conditions in Asia. Orders in the first quarter of 1998
increased by $7 million resulting in a backlog of firm and option
orders at March 31, 1998 of $14 million. The Company anticipates
that approximately $11 million of outstanding orders at March 31,
1998 will be delivered in 1998. However, due to variation in
delivery intervals, material availability, customer and product
mix delivery schedules, among other reasons, outstanding orders
as of any particular date may not be representative of actual
sales for any succeeding period.
Selling, general and administrative expenses increased by
$127,296 (14%) for the quarter ended March 31, 1998, as compared
to the same 1997 period. This increase related primarily to non-
cash expenses, which were not incurred in the respective period
in 1997, for increased depreciation and amortization expenses.
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 and
interest from the issuance of $2.2 million of convertible debt in
March 1998.
Liquidity and Capital Resources; Certain Transactions
During the three months ended March 31,1998, the Company's cash
increased $15,352 principally due to the net proceeds from the
issuance of convertible debt of $2.1 million and the sale of
short term investments of $531,275, offset by cash used in
operating activities of $2.0 million and the payment of
borrowings under the line of credit of $526,000. The negative
change in cash from operating activities primarily resulted from
a net loss of $1.2 million and a decrease of $1.5 million in
accounts payable and accrued expenses, offset by a decrease in
accounts receivable of $518,444. The reduction in cash from
operating activities was offset by depreciation and amortization
of $153,598.
The Company's primary source of funds at March 31,1998 consisted
of $1.0 million in cash and funds available under a $1.0 million
revolving line of credit. $1.0 million of cash represents two
certificates of deposit which are restricted from use by the fact
that they are pledged as collateral for the availability of the
line of credit. The line of credit expires May 1998 and bears
interest at an annual rate of 7.16%. At March 31,1998, the
Company had no borrowings outstanding under the line of credit.
Capital expenditures for the purchase of property and equipment
for the three months ended March 31,1998 were $16,994, primarily
for the purchase of additional equipment to expand product
demonstration and development capabilities. During 1998, 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
31,1998, in the aggregate amount of $235,834, 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 1998 and beyond. The Company is in
discussions with commercial and private lenders to increase the
availability of borrowings secured by assets of the Company. The
Company believes that currently available cash, the proceeds
received from the issuance of convertible debt and funds
generated from operations, if any, further expansion of terms
with trade creditors and increasing the line of credit facility
will be sufficient to satisfy its cash needs for the foreseeable
future. However, maintaining an adequate level of working
capital through the end of 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 or major long-term projects.
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
On May 1, 1998, the Company filed a registration on Form S-
3, to register up to 830,829 underlying common stock shares for
issuance pertaining to the Company's Convertible Debentures
issued in a private placement on March 11, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
On March 17, 1998, the Company filed a report on Form 8-
K which announced the sale of $2.2 Million aggregate
principal of its 4% Convertible Debentures, due March 11,
2003, to a single investor in a private placement.
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 15, 1998 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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE NETWORK
CONNECTION, INC. FOR THE QUARTER ENDED MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,040,000
<SECURITIES> 107,284
<RECEIVABLES> 4,449,605
<ALLOWANCES> 31,547
<INVENTORY> 3,400,386
<CURRENT-ASSETS> 9,274,400
<PP&E> 3,221,233
<DEPRECIATION> 1,045,564
<TOTAL-ASSETS> 12,124,993
<CURRENT-LIABILITIES> 2,819,947
<BONDS> 2,447,964
0
0
<COMMON> 4,152
<OTHER-SE> 6,851,708
<TOTAL-LIABILITY-AND-EQUITY> 12,124,993
<SALES> 111,907
<TOTAL-REVENUES> 111,907
<CGS> 102,206
<TOTAL-COSTS> 1,028,426
<OTHER-EXPENSES> 52,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,317
<INCOME-PRETAX> (1,156,265)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,156,265)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
