-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TfNhJGA/a1RuRDabWUWVUmYdJEgGDxqPT9TAzIXlZjcyb/1lzw4U0HdEhH9YwAnP GUGL0QHFnudwIlSH/sdNew== 0000842722-99-000026.txt : 19990518 0000842722-99-000026.hdr.sgml : 19990518 ACCESSION NUMBER: 0000842722-99-000026 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK SYSTEMS INTERNATIONAL INC CENTRAL INDEX KEY: 0000842722 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 870460247 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-22991 FILM NUMBER: 99627121 BUSINESS ADDRESS: STREET 1: 200 NORTH ELM STREET CITY: GREENSBORO STATE: NC ZIP: 27401 BUSINESS PHONE: 6024648900 MAIL ADDRESS: STREET 1: 200 N ELM ST CITY: GREENSBORO STATE: NC ZIP: 27401 FORMER COMPANY: FORMER CONFORMED NAME: AQUA AUSTRALIS INC DATE OF NAME CHANGE: 19940322 10QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT of 1934. For the quarterly period ended March 31, 1999 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ________, 19__, to _______, 19__. Commission File Number: 0-22991 CUSIP NUMBER 64121L 10 3 NETWORK SYSTEMS INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Charter) Nevada 87-0460247 (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 200 North Elm Street, Greensboro, North Carolina 27401 Address of Principal Executive Offices, Including Zip Code) (336) 271-8400 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and has been subject to such filing requirements for the past 90 days. X YES ___ NO There were 7,680,504 shares of the Registrant's $.001 par value common stock and 5,725 shares of Registrants $.001 par value preferred stock outstanding as of March 31, 1998. Transitional Small Business Format (check one) Yes __ No X NETWORK SYSTEMS INTERNATIONAL, INC. Contents Part I - Financial Information Page Item 1. Financial Statements Consolidated Balance Sheet 3 Consolidated Statements of Income Three months ended March 31, 1999 and 1998 4 Six months ended March 31, 1999 and 1998 5 Consolidated Statements of Cash Flow Six months ended March 31, 1999 and 1998 6 Consolidated Statement of Changes in Stockholders' Equity 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Part II Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 Exhibit Index 19 Item 1. Financial Statements Network Systems International, Inc. and Subsidiaries Consolidated Balance Sheet March 31, 1999 (Unaudited)
ASSETS Current Assets: Cash and cash equivalents $ 1,101,164 Accounts receivable, trade, net of allowance of $588,000 3,709,785 Contracts receivable, net of allowance of $62,000 1,427,046 Accounts receivable, related parties 112,691 Note receivable, current 30,000 Other current assets 92,699 Total current assets 6,473,385 Property and equipment, net of accumulated depreciation 1,433,451 Other Assets: Note receivable, net of current portion 101,472 Software development costs, net of accumulated amortization 1,646,957 Other 316,214 Total other assets 2,064,643 Total assets $ 9,971,479 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade $ 1,439,932 Notes payable, current 35,000 Capital lease obligation, current 88,000 Other accrued liabilities 53,230 Income taxes payable 88,376 Unearned revenue 438,996 Total current liabilities 2,143,534 Long Term Liabilities: Deferred income taxes 470,000 Notes payable, net of current maturities 306,403 Capital lease obligation, net of current maturities 65,198 Total long term liabilities 841,601 Stockholders' Equity: Preferred Stock; $.001 par value; authorized 12,500 shares; issued and outstanding 5,725 shares 6 Common Stock; $.001 par value; authorized 100,000,000 shares; issued and outstanding 7,680,504 shares 7,681 Capital in excess of par value 3,292,143 Retained earnings 3,686,514 Total stockholders' equity 6,986,344 Total liabilities and stockholders' equity $ 9,971,479 The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 1999 1998 Revenue: Licensing and servicing revenue $ 2,364,729 $ 1,482,170 Equipment revenue 1,484,317 1,714,749 Total revenue 3,849,046 3,196,919 Operating expenses: Cost of sales and services 2,167,853 2,253,357 Research and development 123,528 142,830 Sales, general and administrative 468,212 240,530 Total operating expenses 2,759,593 2,636,717 Operating income 1,089,453 560,202 Other income (expenses) Interest, net 8,925 13,940 Other, net 513 15,008 Total other income 9,438 28,948 Income before income tax provision 1,098,891 589,150 Income tax provision 407,300 189,600 Net income $ 691,591 $ 399,550 Dividends on preferred shares 14,281 25,364 Net income for primary income per common share 677,310 374,186 Earnings per common share $ .09 $ .05 Earnings per common share- $ .09 $ .05 Assuming dilution The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited)
Six Months Ended March 31, 1999 1998 Revenue: Licensing and servicing revenue $ 4,475,541 $ 3,841,372 Equipment revenue 2,707,192 2,584,343 Total revenue 7,182,733 6,425,715 Operating expenses: Cost of sales and services 3,811,238 3,715,306 Research and development 203,528 215,575 Sales, general and administrative 1,166,605 679,723 Total operating expenses 5,181,371 4,610,604 Operating income 2,001,362 1,815,111 Other income (expenses) Interest, net 17,730 13,729 Other, net 981 15,008 Total other income 18,711 28,737 Income before income tax provision 2,020,073 1,843,848 Income tax provision 763,500 655,500 Net income $ 1,256,573 $ 1,188,348 Dividends on preferred shares 29,343 54,901 Net income for primary income per common shere 1,227,230 1,133,447 Earnings per common share $ .16 $ .16 Earnings per common share- Assuming dilution $ .16 $ .15 The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiaries Consolidated Statements of Cash Flow (Unaudited)
Six Months Ended March 31, 1999 1998 OPERATING ACTIVITIES Net income $ 1,256,573 $ 1,188,348 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 857,479 818,556 Promotional fees paid with stock - 72,000 Provision for bad debts 369,620 179,752 Change in operating assets and liabilities Accounts receivable and contracts (1,719,678) (1,272,872) receivable Prepaid assets, other receivables, and other assets (51,200) 271,033 Income tax accrual 108,001 288,040 Accounts payable and accrued liabilities 463,224 787,010 Unearned revenue 108,518 166,753 Deferred income taxes 3,000 (159,800) Total adjustments 138,964 1,150,472 Net cash provided by operating activities 1,395,537 2,338,820 INVESTING ACTIVITIES Acquisition of property and equipment (329,722) (312,392) Software development capitalized (988,496) (562,050) Issuance of note receivable - (200,000) Payment received on note receivable 9,801 213,456 Increase in cash surrender value of life insurance (166,302) (22,473) Net cash (used in) investing activities (1,474,719) (883,459) FINANCING ACTIVITIES Payment on notes payable and capital lease obligations (19,205) (48,986) Dividends paid (29,343) (54,901) Net cash (used in) financing activities (48,548) (103,887) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (127,730) 1,351,474 CASH AND CASH EQUIVALENTS AT OCTOBER 1: 1,228,894 491,413 CASH AND CASH EQUIVALENTS AT MARCH 31: $ 1,101,164 $ 1,842,887 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NONCASH INVESTING AND FINANCING ACTIVITIES Cash paid during the period for: Interest $ 16,616 $ 26,700 Taxes 652,500 468,660 The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiaries Consolidated Statement of Changes in Stockholders' Equity Six Months ended March 31, 1999 (Unaudited)
Common Stock Preferred Stock Balance Oct. 1, 1998 7,661,754 $7,662 6,100 $ 6 $3,292,162 $2,459,284 $5,759,114 Conversion of preferred stock 18,750 19 (375) - (19) - - Dividends on preferred stock - - - - - (29,343) (29,343) Net Income for the three months ended March 31, 1999 - - - - - 1,256,573 1,256,573 Balance Mar. 31,1999 7,680,504 $7,681 5,725 $ 6 $3,292,143 $3,686,514 $6,986,344 The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies A. Organization and Basis of Presentation Network Systems International, Inc. (the "Company"), a Nevada corporation, is the developer of the net collection(tm); the premier suite of enterprise-wide software products for complex manufacturers emphasizing sales order processing, Enterprise Resource Planning ("ERP"), manufacturing execution and distribution management. The Company closes the loop as a turn-key software solution integrator by providing hardware technology consulting and implementation services to its customer base. The Company and its three wholly owned subsidiaries: Network Information Services, Inc. ("NIS"), Network Investment Group, Inc. ("NIG"), and Network Systems International, Inc. of North Carolina ("NESI-NC") employs approximately 72 full- time associates. The Company is headquartered in Greensboro, North Carolina and has satellite sales and customer service offices in Greenville, S.C., Florence, S.C, Wilmington, N.C., Matthews, N.C., and Apollo Beach, FL. On July 10, 1998 the Company was officially approved for listing on NASDAQ and the Company's common stock began trading on NASDAQ Small Cap under the symbol NESI on that date. Basis of Preparation: The financial statements consolidate the accounts of Network Systems International, Inc. and its wholly owned subsidiaries Network Information Services, Inc., Network Investment Group, Inc. and Network Systems International, Inc. of North Carolina. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The interim financial information included herein is unaudited. Certain information and footnote disclosures normally included in the financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), although the Company believes that the disclosures made are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company's Form 10-KSB filed with the SEC on December 29, 1998. Other than indicated herein, there have been no significant changes from the financial data published in those reports. In the opinion of management, such unaudited information reflects all adjustments, consisting only of normal recurring accruals and other adjustments, necessary for a fair presentation of the unaudited information. Results for interim periods are not necessarily indicative of results expected for the full year. Certain prior year amounts have been reclassified to conform with the current year presentation. B. Significant Accounting Policies Software Development Cost: The Company capitalizes internally generated software development costs in compliance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". The Company capitalizes the direct costs and allocated overhead associated with the development of software products. Initial costs are charged to operations as research and development prior to the development of a detailed program design or a working model. Capitalization of computer software development costs begins upon the establishment of technical feasibility for the product. Costs incurred subsequent to the product release are charged to operations. Capitalized software development costs amounted to $988,496 and $562,050 for the six months ended March 31, 1999 and 1998, respectively. Amortization of capitalized computer software development costs begins when the products are available for general release to customers, and is computed on a straight line basis over the economic life. The Company has estimated that the useful economic life of its products is two years. Amortization expense of capitalized software cost amounts to $765,333 and $711,664 for the six months ended March 31, 1999 and 1998, respectively, and is included in cost of sales. Revenue Recognition: The Company's revenue is recognized in accordance with the American Institute of Certified Public Accountants Statement of Position Number 97-2 "Software Revenue Recognition". Revenue consists of primarily the following: Revenue from the sale of software licenses is recognized after shipment and fulfillment of all major obligations under the terms of the licensing agreements. The licensing agreements are typically for the use of Company products and are usually restricted by the number of copies, the number of users and the term. Revenues from fixed price contracts are recognized using the percentage-of-completion method, measured by direct hours. Contract costs include direct labor combined with allocations of operational overhead and other direct costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability that may result in revisions to costs and revisions, are recognized in the period in which the revenues are determined. For the six months ended March 31, 1999, there were no revenues from fixed priced contracts. Support agreements generally call for the Company to provide technical support and certain software updates to customers. Revenue on support and software updates is recognized ratably over the term of the support agreement. The Company provides consulting and educational services to its customers. Revenue from such services is generally recognized as the services are performed. Hardware revenue is recognized when the product is shipped to the customer. Earnings Per Share: Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution from the exercise or conversion of preferred stock into common stock. The following data shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock. Three months ended March 31, 1999 1998 Net income $ 691,591 $ 399,550 Less preferred stock dividends (14,281) (25,364) Income available to common stockholders used in basic EPS 677,310 374,186 Preferred stock dividends 14,281 25,364 Income available to common stockholders after assumed conversion of dilutive securities 691,591 399,550 Weighted average number of common shares used in basic EPS 7,678,444 7,380,416 Effect of dilutive convertible preferred stock 288,310 548,838 Weighted average number of common shares and dilutive potential common stock used in diluted EPS 7,966,754 7,929,254 Six months ended March 31, 1999 1998 Net income $1,256,573 1,188,348 Less preferred stock dividends (29,343) (54,901) Income available to common stockholders used in basic EPS 1,227,230 1,133,447 Preferred stock dividends 29,343 54,901 Income available to common stockholders after assumed conversion of dilutive securities 1,256,573 1,188,348 Weighted average number of common shares used in basic EPS 7,671,850 7,322,946 Effect of dilutive convertible preferred stock 294,904 582,510 Weighted average number of common shares and dilutive potential common stock used in diluted EPS 7,966,754 7,905,456 C. Note Payable On January 21, 1999, the Company refinanced the mortgage on its corporate office building. Monthly principal payments on the new note are $2,896 plus interest at a fixed rate of 7.53% through January 2009. The building and substantially all equipment collateralize the note. The note agreement contains a covenant with respect to consolidated cash flow, with which the Company was in compliance at March 31, 1999. Aggregate maturities of note payable as of March 31, 1999 were as follows: 1999 - $35,000; 2000 - $35,000; 2001 - $35,000; 2002 - $35,000; 2003 - $35,000; thereafter - $166,403. As of January 21, 1999, the Company has available a $1,000,000 bank line of credit to provide additional short- term working capital. Borrowings under this line of credit bear interest at prime minus .125% and collateralized substantially by all the assets of the Company. At March 31, 1999, there were no amounts outstanding. D. Major Customer For the three months ended March 31, 1999, sales to one customer amounted to approximately $2,439,000. For the three months ended March 31, 1998, sales to four customers amounted to approximately $1,764,000. For the six months ended March 31, 1999, sales to one customer amounted to approximately $4,284,000. For the six months ended March 31, 1998, sales to three customers amounted to approximately $3,172,000. The March 31, 1999 and 1998 accounts receivable balances from these customers include approximately $2,813,000 and $1,256,000 respectively. Subsequent collections of the March 31, 1999 accounts receivable balance have been approximately $802,000 for the one customer. E. Executive Employment Agreement On April 16, 1999 the Company entered into an employment agreement with an executive of the Company. Among other things, the agreement provides the executive a stock option arrangement of 500,000 shares of the Company's stock to be purchased at $1 and vest equally over a four-year period. The fair market value of the Company's stock at the date of the agreement was $3.75. Beginning in the quarter ended June 30, 1999, the Company will recognize a non-cash compensation expense of $343,750 per year recognized ratably each quarter for the next four years based on this agreement. F. Employee Incentive Stock Option Agreements Effective April 13, 1999, the Company granted 201,000 shares in incentive stock options to its employees under the Company's qualified Incentive Stock Option Plan. Under the terms of the plan, the employees will vest equally over a four-year period, as long as they remain employed with the Company, and have the right to purchase the Company's stock at $4.00 per share, the fair market value at April 13, 1999. G. Subsequent Events On April 27, 1999, the Company signed a letter of intent to acquire all of the capital stock of Vercom Software, Inc. a Texas based Corporation. Consummation of the pending acquisition is subject to ongoing due diligence. The Company believes that should the proposed acquisition ultimately be consummated, the net results of operations would be positively effected. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD LOOKING INFORMATION THIS MD&A CONTAINS FORWARD LOOKING INFORMATION. EXCEPT FOR HISTORICAL DATA, THE MATTERS DISCUSSED IN THIS FORM 10-QSB CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND UNCERTAINTIES. The Company would caution readers that in addition to the important factors described elsewhere in this Form 10-QSB, the following may contain forward looking statements that involve risk and uncertainties, including without limitations, continued acceptance of the Company's products and services, increased levels of competition, new products and technological changes, the Company's dependency on financing third party suppliers, intellectual property rights, material customers, the Company's business concentration risks within the textile industry, and other risks. The Company's actual consolidated financial results during 1999, and beyond, could differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company. RESULTS OF OPERATIONS Revenue. Total revenue for the three-month period ended March 31, 1999 was $3,849,046. This revenue represents a 20.4% increase over the Company's revenues for the three- month comparable period in 1998. For the six-month period ended March 31, 1999, revenues were $7,182,733 as compared to $6,425,715 for the same six-month period in fiscal 1998, an 11.8% increase. In the area of licensing and servicing revenues, the Company experienced an increase of approximately 60% to $2,364,729 at the March 31, 1999 quarter end as compared to $1,482,170 in the same period ending 1998. During the six-month period, licensing and servicing revenues increased approximately 17% from $3,841,372 in fiscal 1998 to $4,475,541 in 1999. This increase is attributable to servicing revenue increasing by 47% over the same period in 1998 due to increased billable development. Additionally, the increase was due to an upgrading of independent software products to the Company's integrated net collection and the addition of professional service staff to service the expansion of the Company's installed base of the net collection(tm). Software licensing revenue continues to lag behind 1998 by approximately 12% due to a weaker software market in general. The Company, however, feels the slow down will be short lived as the potential software market is able to expand spending on new automation since the majority of Year 2000 expenditures have been made. Hardware revenue for the three-month period ended March 31, 1999 was $1,484,317 as compared to $1,714,749 or a 14% decrease over the same period in 1998. For the six-month period ended March 31, 1998, hardware revenues increased approximately 5% from $2,584,343 in fiscal 1998 to $2,707,192 in 1999. This modest increase in hardware revenue is directly attributable to customer upgrades and increased demand for radio frequency technology. Hardware revenues, however, will continue to be directly proportionate to software licensing as the Company typically sells the majority of hardware technology to its customers within a few months of signing a licensing agreement. Licensing and service revenue amounted to 62% of total revenues for the Company compared to hardware revenues of 38% for the quarter ended March 31, 1999 and for the six- months ended March 31, 1999 Cost of Sales and Services. In the current quarter, the Company reclassified certain costs historically allocated in sales, general and administrative costs to cost of sales and services. The Company believes this reclassification more accurately states cost of sales and services as incurred in operations of the Company. Cost of sales and services amounted to $2,167,853 or 56% of total revenue during the quarter ended March 31, 1999 as compared to $2,253,357 or 70% of total revenue for the comparable period in fiscal 1998. During the six-month period, cost of sales and services was $3,811,238 or 53% of total revenue in March 1999 compared to $3,715,306 or 58% in 1998. Hardware technologies carry a higher percentage of cost (96% and 90% of hardware revenue) as compared to software licensing and servicing (31% and 48% of software and service revenue) for the quarter ended March 31, 1999 and 1998. For the six- month period ended March 31, 1999 and 1998, hardware technology cost to revenues was 91% and 93% as compared to software licensing and servicing of 30% and 34%. Hardware technologies profit margins range varies based on vendor discounts, commissions, and customer price point demands. Software and services margins vary due to the sales of software license that carry a higher margin. This is evident for software margins for the quarter ended March 31, 1999 verses 1998 as the quarter ended 1999 has approximately $500,000 more in software license revenue than 1998. Software Development Costs. Software development costs capitalized amounted to approximately $487,000 and $227,000 for the quarters ended March 31, 1999 and 1998, respectively. During the six-month period, software development costs capitalized amounted to approximately $988,000 in fiscal 1999 as compared to $562,000 in 1998. The increase is attributable to new development of products, technologies, and enhancements to the net collection(tm). It is anticipated that the Company will continue software development at the current rate both capitalized and expensed, as its continual efforts to accommodate customer and market needs for the net collection(tm) development. Additionally, the Company intends to continue recruiting and hiring additional software programmers and to consider additional complementary software technologies. Whether or not the Company will successfully achieve these goals cannot be assured since competition to hire programmers appears to be at an all time high and new technologies are uncertain. Sales, General and Administrative. In the current quarter, the Company reclassified certain costs historically allocated in sales, general and administrative costs to cost of sales and services. The Company believes this reclassification more accurately states cost of sales and services as incurred in operations of the Company. Sales, general and administrative expenses were 12% of revenue for the quarter ended March 31, 1999 as compared to 8% in the comparable period 1998. During the six-month period ended March 31, 1999 sales, general and administrative expense were 16% compared to 11% for 1998. The percentage increases are directly attributable to increases in sales, general and administrative salaries for new personnel and an increase in the write-off of uncollectible trade accounts. Provisions for Income Taxes. The income tax provision for the six-months ended March 31, 1999 and March 31, 1998 was $763,500 and $655,500, respectively. This represents an effective tax rate of 38% and 36%, for the same periods. Quarterly Results. Net income for the three months ended March 31, 1999 and 1998 was $677,310 and $374,186 respectively. For the six-month period, net income was $1,227,230 in fiscal 1999 and $1,133,447 for 1998. On a per share basis, earnings were $.09 and .05 for the three months ended March 31, 1999 and 1998, respectively. Per share earnings are $.16 for the six-months ending March 31, 1999 in comparison to $.16 for the six-months ending March 31, 1998. The Company believes that in the future its results may reflect quarterly fluctuations resulting from such factors as order deferrals in anticipation of new product releases, delays in the release of new products, a slower growth rate in the overall manufacturing industry or adverse general economic and manufacturing conditions in the industries in which the Company does business. Rapid technological change and the Company's ability to develop and market products that successfully adapt to that change may also have an impact on the results of operations. Further, increased competition in the design and distribution of manufacturing software products could also negatively impact the Company's results of operations. Liquidity and Capital Resources. The Company funded its activities entirely from cash generated from operations. The Company ended its first quarter with $1,101,164 in cash and cash equivalents. Long term cash requirements, other than normal operating expenses, are anticipated for development of new software products and enhancement of existing products; financing anticipated growth; adding additional personnel; and the possible acquisition of software companies and products or technologies complimentary to the Company's business. The Company believes the level of financial resources is a significant competitive factor in its industry. The Company intends to raise additional capital through debt or equity financing to strengthen its financial position, facilitate growth, and provide the Company with additional flexibility to take advantage of business opportunities that may arise. However, there are no assurances as to the timing or success of such financing, if made at all. If such financing is not obtained, the Company's further performance could be negatively impacted. Historically, accounts receivable for the Company has been generally high due to a number of factors. A primary contributor is the nature of how the Company's customer base pays for the software licensing fee of the Company's product. The Company records revenues from software license fees after an executed contract and shipment of the product. The Company then often establishes an extended payment schedule for its customers that does not exceed twelve months. Recent Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards for derivative instruments and hedging activities. The Statement is effective for fiscal years beginning after June 15, 1999. The Company's current policy is not to enter into any derivative instruments or hedging activities. OTHER MATTERS Some of the key variables and other qualitative and quantitative factors which might be deemed necessary to gain an understanding and valuation of the Company's business and risks associated therewith, are as follows: Outlook and Uncertainties. Although the Company operates its business on a three-year business plan, forecasts in the business plan do not guarantee potential future financial performance. While management is optimistic about long term prospects, the current business plan is but a future projection based upon past performance. Therefore, there can be no assurances that the Company will be able to achieve the projections provided for in its business plan or achieve continued growth demonstrated in past performance records. Rapid Technological Changes. The computer software industry is characterized by rapid technological change and uncertainty as to the impact of emerging software solutions and services to the general process manufacturing industry. The Company's success will depend upon its ability to enhance its current products and develop new products that address technological and market developments. Major changes in technology and/or additional competition could negatively impact the Company's future performance. Long-term Investment Cycle. Developing and localizing software for the process manufacturing industry is expensive and the investment in software development often involves a long payback cycle. The Company's plans for fiscal year 1999 include significant investments in software development and related product opportunities from which revenues may not be achieved for a number of years. Management expects total spending for software development in 1999 to increase over 1998. Expenditure of funds for research and development may or may not generate anticipated revenues in the event the final product developed does not meet market expectations and acceptance. Prices. Future prices the Company is able to obtain for its software and services may decrease from historical levels depending upon competitive markets, customer demand and other unknown and unforeseen factors. Sales and Marketing. The Company expects to continue to expand marketing efforts in order to gain name recognition of its corporate identity and in the promotion of its common stock. There can be no assurances that the expenditure of these funds will ultimately achieve anticipated goals set. Implementation and Development. A portion of the Company's income is derived from software implementation and developmental services to its customers. Increasing implementation demands will require the Company to expand its programming personnel and associated investment costs in the training of such personnel. Although the Company believes that current and projected cash flow will be sufficient to provide additional personnel in today's highly competitive market, there can be no assurance that the Company could absorb the cost of additional personnel over the long term without additional financing resources. Litigation. The Company is currently and will continue to be involved in routine legal proceedings that is incidental to the business. In the opinion of management, including in- house counsel, these routine proceedings will not have a material adverse effect on the Company's financial position or overall results of operations. However, there can be no assurance that significant litigation will not arise in the future. Should such litigation occur, the necessary cost to defend such litigation could negatively impact future earnings of the Company. On December 16, 1998 the Company received written correspondence on behalf of a former customer demanding a refund of fees paid for licensing, services, and equipment purchases. The matter is currently pending arbitration. The Company intends to vigorously defend the allegations and assert certain counter claims against the customer. Management believes that this dispute will ultimately be resolved such that it will not result in a material adverse effect on the Company's consolidated financial position. Time Delays. Traditionally, the Company experiences a significant delay between the time a customer is introduced to the Company's products and services and the final date upon which actual contracts are signed. Customers will often retain the services of outside consultants to search the market for available software most suited to their client's needs and will often require several demonstrations of the product for the consultant's staff and ultimately demonstrations with both the consultant and prospective customer. Time delays in completing these efforts often take up to twelve months. As a result, it is difficult to build a firm foundation for predicting revenues over an extended period of time. Additionally, by the time prospects become customers, time is usually of the essence and proper predictions for staffing needs must be made when implementation services are required. Although the Company has historically achieved a significant measure of success in developing and accurately predicting ongoing business plans, the known trends, events and uncertainties of the factors stated above could ultimately create a negative impact on the overall revenues and profitability of the Company. Account Closure. The Company's approach to account closure is to provide customers with its proprietary software for process manufacturing on a license fee basis; train customer associates on the proper and practical application of the software to the customers specific process needs; provide customers with process correct hardware to timely meet process applications; and provide maintenance service through continuous updating of program modules. The Company also provides a 24 hour "helpline" service to insure a non- disruptive flow of manufacturing processes once the customer has gone "on-line" with the net collection(tm) products. The Company's hardware division operates in a partnership arrangement with IBM and others to provide equipment for future update application and expansion. An unexpected disruption in one or more of these procedures could cause a negative impact on the Company's operating results and profitability. Material Customers. The Company could potentially face the risks related to loss of material customers. Such loss of customers would have an immediate negative impact on the profitability of the Company. Business Concentration Risk. The Company develops enterprise-wide software products for complex manufacturers to be utilized in all process manufacturing industries. However, the Company's current customer base is predominantly with companies in the textiles, apparel, hosiery, and home fashions industries. These industries as a whole tend to experience flat periods making it difficult for textile companies to fund major management information systems projects. Such flat periods could cause a negative impact on the Company's operating result. Year 2000 Issues. Year 2000 compliance issues are currently a grave concern throughout the software industry as a whole. From a legal context, no case law has yet been established that enables the industry to definitively address issues before they arrive. As such, the uncertainties in this area are significant and potentially devastating. Although the Company has fully established an internal Year 2000 compliance committee to conduct a detailed analysis of its products and believes that its products are fully compliant, there can be no assurance that some unknown and unanticipated negative event will not occur. Additionally, Year 2000 compliance issues are relatively new to the industry. How Year 2000 law will ultimately address liabilities for software sold prior to the time Year 2000 issues became known is uncertain and unclear. Like many other companies, the Year 2000 computer issue creates risks for the Company. If internal systems did not correctly recognize date information when the year changes to 2000, there could be an adverse impact on the Company's financial position. The Company organized a comprehensive compliance committee to conduct a detailed analysis of its products to assure it compliance and assure its computer systems for the Year 2000. The Company has made changes to its internal systems to insure compliance and will continue to test these systems throughout 1999. Additionally, the Company believes that its current products are compliant, however, the Company continually assesses capability of its products sold to customers to handle Year 2000. However, there can be no absolute assurance that the Company's products contain and will contain all features and functionality considered necessary by customers to be Year 2000 compliant. The Company refers to "Year 2000 Compliance" to mean that the net collection(tm) will function and operate in accordance with the program specifications and will provide the required output and will process data in accordance with the system specifications and logic during the Year 2000 and thereafter. The functions, calculations and other computing processes of the net collection(tm) perform in a consistent manner regardless of the date in time on which the processes are actually performed, and regardless of the date on which data was input into the product, whether before, on or after January 1, 2000 and whether or not the dates are affected by leap years. The net collection(tm) accepts, calculates, compares, sorts, extracts, sequences, and otherwise processes date inputs and date values, and returns date values in a consistent manner regardless of the dates used, whether before, on or after January 1, 2000. The Company is also contacting critical suppliers of hardware and software to determine that the suppliers' operations and the products and services they provide are Year 2000 capable. There can be no assurance that another company's failure to ensure Year 2000 capability would not have an adverse effect on the Company. To date, the Company has incurred limited expenses associated with its Year 2000 efforts in connection with both internal systems and products, which are immaterial to the Company's financial position. Management expects that the future costs of the Year 2000 assessment will not have a material effect on the Company's financial position. Part II Item 1. Legal Proceedings The Company is currently and will continue to be involved in routine legal proceedings that are incidental to the business. In the opinion of management, including in-house counsel, these routine proceedings will not have a material adverse effect on the Company's financial position or overall results of operations. On December 16, 1998 the Company received written correspondence on behalf of a former customer demanding a refund of fees paid for licensing, services, and equipment purchases. The matter is currently pending arbitration. The Company intends to vigorously defend the allegations and assert certain counter claims against the customer. Management believes that this dispute will ultimately be resolved such that it will not result in a material adverse effect on the Company's consolidated financial position. The estimate of the potential impact on the Company's financial position or overall results of operations for the above legal proceedings could change in the future. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits included herewith are: (11) Schedule of Computation of Net Income Per Common Share (27) Financial Data Schedule (b) Reports on Form 8-K 1. Form 8-K filed with the Securities and Exchange Commission January 26, 1999 announcing the appointment of KPMG LLP as the Company's independent accountants to audit the Company's financial statements for the year-ended September 30, 1999. This Form 8-K is incorporated by reference. 2. Form 8-K filed with the Securities and Exchange Commission April 14, 1999 announcing the hiring of Christopher Baker as President and Chief Operating Officer. This Form 8-K is incorporated by reference. 3. Form 8-K filed with the Securities and Exchange Commission May 12, 1999 announcing the signing of a letter of intent with a privately held Dallas, Texas based company. This Form 8-K is incorporated by reference. SIGNATURES In accordance with the requirements of the Securities and Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized. NETWORK SYSTEMS INTERNATIONAL, INC. Date: 05/17/1999 /s/ Robbie M. Efird Robbie M. Efird, Chief Executive Officer Date: 05/17/1999 /s/ Michael T. Spohn Michael T. Spohn, Chief Financial Officer EXHIBIT INDEX Exhibit Page (11) Schedule of Computation of Net Income Per Share (Unaudited) 17 (27) Financial Data Schedule 18 Six Months Ended March 31, Primary 1999 1998 Net income $ 1,256,573 $ 1,188,348 Less - preferred stock dividends (29,343) (54,901) Net income for primary income per Common Share $ 1,227,230 $ 1,133,447 Weighted average number of Common Shares outstanding during the year 7,671,850 7,322,946 Primary income per Common Share $ .16 $ .16 Fully Diluted Net income for primary income per Common Share $ 1,227,230 $ 1,133,447 Add - dividends on convertible preferred stock 29,343 54,901 Net income for fully diluted net income per share $ 1,256,573 $ 1,188,348 Weighted average number of shares used in calculating primary income per common share 7,671,850 7,322,946 Assuming conversion of convertible preferred stock (weighted average) 294,904 582,510 Weighted average number of common shares outstanding as adjusted 7,966,754 7,905,456 Fully diluted earnings per common share $ .16 $ .15 EX-27 2
5 6-MOS SEP-30-1999 MAR-31-1999 1,101,164 0 5,786,831 (650,000) 0 6,473,385 2,198,730 (765,279) 9,971,479 2,143,534 0 0 6 7,681 6,978,657 9,971,479 7,182,733 7,182,733 3,811,238 5,181,371 18,711 0 16,616 2,020,073 763,500 1,256,573 0 0 0 1,256,573 0.16 0.16
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