-----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, OKmvvtk3R3sa2CCK4ytVP4fp2A7gRziMhhr5ZDMI+Z+lDJ6ZducM27F7kraLXDKu B8chH7MdSwgngJy7AWfj8A== 0000842722-00-000014.txt : 20000214 0000842722-00-000014.hdr.sgml : 20000214 ACCESSION NUMBER: 0000842722-00-000014 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 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: 536219 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 December 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 7,803,154 shares of the Registrant's $.001 par value common stock and 3,505 shares of Registrants $.001 par value preferred stock outstanding as of December 31, 1999. Transitional Small Business Format (check one) Yes __ No X NETWORK SYSTEMS INTERNATIONAL, INC. Contents Part I - Financial Information Page Item 1. Consolidated Financial Statements Consolidated Balance Sheet 3 Consolidated Statements of Operations Three months ended December 31, 1999 and 1998 4 Consolidated Statement of Changes in Stockholders' Equity 5 Consolidated Statements of Cash Flow Three months ended December 31, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Part II Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 Exhibit Index 18 Item 1. Financial Statements Network Systems International, Inc. and Subsidiary Consolidated Balance Sheet (Unaudited)
December 31, 1999 ASSETS Current Assets: Cash and cash equivalents $ 62,178 Accounts receivable, trade, net of allowance of $450,000 3,761,004 Accounts receivable, related parties 125,478 Income tax receivable 384,748 Deferred income taxes 214,631 Other current assets 100,965 Total current assets 4,649,004 Property and equipment, net of accumulated depreciation and amortization 1,246,538 Intangible assets, net of accumulated amortization of $431,676 5,738,126 Other 357,257 Total assets $11,990,925 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade $ 1,129,944 Notes payable, current 35,000 Capital lease obligations, current 68,000 Other accrued liabilities 462,277 Unearned revenue 1,495,577 Revolving credit agreement, current 185,000 Total current liabilities 3,375,798 Long Term Liabilities: Revolving credit agreement, net of current maturities 3,000,000 Deferred income taxes 504,092 Notes payable, net of current maturities 280,702 Capital lease obligations, net of current maturities 12,248 Total long term liabilities 3,797,042 Common stock subject to redemption 1,896,000 Stockholders' Equity: Preferred Stock; $.001 par value; authorized 12,500 shares; issued and outstanding 3,505, liquidation preference of $350,500 4 Common Stock; $.001 par value; authorized 100,000,000 shares; issued and outstanding 7,803,154 7,803 Capital in excess of par value 3,693,744 Less common stock subject to redemption (1,896,000) Retained earnings 1,116,534 Total stockholders' equity 2,922,085 Total liabilities and stockholders' equity $11,990,925 The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiary Consolidated Statements of Operations (Unaudited)
Three Months Ended December 31, 1999 1998 Revenue: Licensing revenue $ 11,928 $ 709,205 Servicing revenue 1,680,642 1,401,607 Equipment revenue 665,084 1,222,875 Total revenue 2,357,654 3,333,687 Operating expenses: Cost of licensing 91,224 11,435 Cost of services 1,251,688 660,739 Cost of equipment 530,371 1,031,618 Research and development 259,145 80,000 Sales, general and administrative 1,102,866 763,589 Amortization of excess of cost over net assets acquired 131,745 - Gain on sale of fixed asset (2,777) - Total operating expenses 3,364,262 2,547,381 Operating income (loss) (1,006,608) 786,306 Other income (expenses) Interest, net (89,501) 8,805 Income (loss) before income tax provision (benefit) (1,096,109) 795,111 Income tax provision (benefit) (393,621) 307,032 Net income (loss) $ (702,488) $ 488,079 Dividends on preferred shares 8,949 15,061 Net income (loss) applicable to common shares (711,437) 473,018 Earnings (loss) per common share, basic and diluted $ (.09) $ .06 The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiary Consolidated Statement of Changes in Stockholders' Equity Three Months Ended December 31, 1999 (Unaudited)
Number Number Capital in Retained of of Excess of Earnings Shares Shares Par Value $.001 Par $.001 Par Common Stock Total Value Value Subject to Redemption Balance Oct.1, 1999 7,776,854 3,906 $3,531,426 $1,827,971 $7,777 4 $(1,896,000) $3,471,178 Conversion of Preferred Stock 20,050 (401) (20) - 20 - - - Compen- sation related to grant of stock options - - 85,938 - - - - 85,938 Compen- sation related to put of stock options - - 41,250 - - - - 41,250 Compen- sation related to common stock issued to board of directors 6,250 - 35,150 - 6 - - 35,156 Dividends on preferred stock - - - (8,949) - - - (8,949) Net loss for the 3 months ended December 31, 1999 - - - (702,488) - - - (702,488) Balance December 31, 1999 $7,803,154 3,505 $3,693,744 $1,116,534 $7,803 $4 $(1,896,000) $2,922,085 The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiary Consolidated Statements of Cash Flow (Unaudited)
Thee Months Ended December 31, 1999 1998 OPERATING ACTIVITIES Net income (loss) $(702,488) $488,079 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 254,850 47,146 Non-cash compensation expense 142,188 - Provision for bad debts - 265,427 Gain on sale of property and equipment (2,777) - Increase in cash surrender value of life insurance (23,461) (140,056) Change in operating assets and liabilities: Accounts receivable (895,612) (737,594) Other current assets 126,968 (19,061) Income taxes 448,021 328,200 Accounts payable and other accrued liabilities 31,351 37,497 Unearned revenue 882,584 (92,882) Deferred income taxes (121,642) (46,168) Total adjustments 842,470 (357,491) Net cash provided by operating activities 139,982 130,588 INVESTING ACTIVITIES Acquisition of property and equipment (45,699) (82,897) Proceeds from sale of property and equipment 262,000 - Payment received on note receivable - 7,321 Net cash provided by (used in) investing activities 216,301 (75,576) FINANCING ACTIVITIES Payment on notes payable and capital lease obligations (33,444) (27,636) Payment on revolving credit agreement (315,000) - Dividends paid (8,949) (15,061) Net cash used in financing activities (357,393) (42,697) Net (decrease) increase in cash and cash equivalents (1,110) 12,315 Cash and cash equivalents at October 1: 63,288 1,228,894 Cash and cash equivalents at December 31: 62,178 1,241,209 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest $ 84,260 $ 10,234 Taxes $ - $ 25,000 The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiary Notes to Consolidated Financial Statements A. Organization and Basis of Preparation Organization Network Systems International, Inc. (the "Company"), a Nevada corporation, is a vertical market company that is the developer of the net collection(TM) and Primac software systems. These products are suites of supply chain management and enterprise-wide software products for the textile, apparel, home furnishing, and printing industries. The Company offers hardware products as well as consulting and implementation services that provide a solution to its customer's technology needs. The Company and its wholly owned subsidiary Vercom Software Inc. ("Vercom") employ approximately 105 full-time associates. The Company is headquartered in Greensboro, North Carolina with offices in Dallas, Texas and Duncan, South Carolina. All intercompany transactions have been eliminated in consolidation. The Company's common stock trades on the NASDAQ SmallCap Exchange under the symbol NESI. Basis of Preparation: The financial statements consolidate the accounts of Network Systems International, Inc. and its wholly owned subsidiary, Vercom Software Inc. 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 January 13, 2000. 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 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 to the current year presentation. B. Summaries of Significant Accounting Policies Cash and Cash Equivalents: The Company considers cash and all highly liquid investments with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. Substantially all of its cash and cash equivalents are in the custody of three major financial institutions. Fair Value of Financial Instruments: The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and other accrued liabilities approximate fair value as of December 31, 1999 and 1998. Carrying values of notes payable and capital lease obligations approximate the fair values because their interest rates are similar to interest rates currently available to the Company for similar notes payable and capital lease obligations. The revolving credit agreement carrying amount approximates fair value because this financial instrument bears interest at a variable rate consistent for loans with similar maturities and credit qualities. Property and Equipment: Property and equipment are stated at cost. Depreciation is computed for financial reporting purposes principally using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 39 years. Equipment under capital leases is stated at the present value of minimum lease payments and is amortized over the shorter of the lease term or estimated useful life of the asset. Intangibles: Intangibles include the excess of purchase price over fair value of tangible net assets acquired and is represented by goodwill amortized over 10 years, customer base amortized over 10 years, assembled work force amortized over 5 years, and purchased software amortized over 5 years. The Company assesses the recoverability of these intangible assets by determining whether the amortization of the intangibles balances over their remaining lives can be recovered through undiscounted future operating cash flows of the acquired operation. The assessment of the recoverability of intangibles will be impacted if estimated future operating cash flows are not achieved. Recoverability of intangible assets is measured by a comparison of the carrying amount to future net cash flows expected to be generated. If intangibles are considered to be impaired, the Company would recognize this impairment measured by the amount by which the carrying amount exceeds the fair value. Preferred Stock: At December 31, 1999 the Company had 3,505 shares outstanding, respectively, of its Series A Convertible Preferred Stock ("Series A"). This issue has a stated liquidation preference value of $100 per share redeemable at the Company's option, has no voting rights, and each preferred stock is convertible to 50 shares of the Company's common stock. Dividends on the Series A are payable monthly in cash at a rate of 12% of the original issue. Purchased Software: The Company amortizes purchased software over a 5-year period. Amortization expense of purchased software amounted to $70,000 for the three months ended December 31, 1999 and is included in cost of licensing . Recoverability of purchased software is measured by a comparison of the carrying amount to future net cash flows expected to be generated. If purchased software is considered to be impaired, the Company would recognize this impairment measured by the amount by which the carrying amount exceeds the fair value. 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 is derived from the sale of software licenses, hardware, and software services. In arrangements where multiple elements exist, revenue is allocated to each element of the arrangement based on the relative fair values of the elements, which is established by the price charged when the respective element is sold separately. 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. Revenue from license fees and hardware is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collectibility is probable. Maintenance agreements generally call for the Company to provide technical support and unspecified software upgrades to customers. Revenue on maintenance agreements 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 charged on an hourly basis and is recognized as the services are performed. Accounts receivable include amounts due from customers for which revenue has been recognized. Unearned revenue consists of amounts collected from customers for maintenance agreements that have not met the criteria for revenue recognition. Research and Development: Research and development is expensed as incurred. Research and development costs amounted to $259,145 and $80,000 for the three months ended December 31, 1999 and 1998, respectively. Income Taxes: The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, the liability method is used in accounting for income taxes and deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Stock Option Plans: The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. 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 that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. C. Earnings Per Share: The consolidated financial statements presents earnings (loss) per common share, basic and diluted, in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "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 securities into common stock. The following data shows the amounts used in computing earnings (loss) per share and the effect on income (loss) and the weighted average number of shares of the potential dilution from the exercise or conversion of securities into common stock. Three months ended December 31, 1999 1998 Net income (loss) $ (702,488) $ 488,079 Less preferred stock dividends (8,949) (15,061) Income (loss) applicable to common shares (711,437) 473,018 Preferred stock dividends - 15,061 Income (loss) applicable to common shares after assumed conversion of dilutive securities (711,437) 488,079 Weighted average number of common shares used in basic EPS 7,783,484 7,665,257 Effect of dilutive convertible preferred stock - 310,997 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 7,783,484 7,976,254 The Company has 748,000 options and 3,505 shares of preferred stock that were antidilutive and are not included in the earnings per share calculation for the quarter ended December 31, 1999. In addition, common stock subject to redemption could be dilutive if the current stock price is below the put price. At December 31, 1999, common stock subject to redemption was antidilutive. D. Major Customers For the three months ended December 31, 1999, sales to two customers amounted to approximately $685,000. For the three months ended December 31, 1998, sales to one customer amounted to approximately $1,845,000. The December 31, 1999 and 1998 accounts receivable balances from these customers were approximately $840,470 and $2,273,000, respectively. E. Recent Accounting Pronouncements The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-9 ("SOP 98-9") "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. SOP 98-9 amends paragraphs 11 and 12 of SOP 97-2 to require revenue recognition using the "residual method" when certain vendor-specific objective evidence is met. This SOP is effective for fiscal years beginning after March 15, 1999. The Company has adopted the provisions of SOP 98-9 during the fiscal quarter ended December 31, 1999 and the financial statements have not been impacted due to this adoption. F. Segment Information The Company's operations involve the design and development of integrated software solutions for Enterprise Resource Management ("ERP") and supply chain management for the process manufacturing industry. The Company also offers hardware products and technical consulting and implementation services providing a complete solution to its customer's technology needs. The Company conducts business primarily in the United States. The Company's management uses an internal management accounting system to make financial decisions and allocate resources based on the revenues and operating income (loss) before interest, amortization of certain intangibles acquired and income taxes from these reports. Based on the criteria set forth in SFAS No. 131, the Company has three reportable segments: software licensing, technical consulting and implementation services, and hardware product sales. In addition to the aforementioned operating segments, the sales and marketing, research and development, and administrative groups are allocated to the operating segments and are included in the operating profit (loss) reported below. The Company's management does not identify or allocate assets by operating segment, nor does management evaluate each segment based on these criteria. Operating segments do not sell products to each other, and accordingly, there are no inter-segment revenues to be reported. The Company does not allocate interest, amortization of certain intangibles acquired or income taxes to operating segments. The accounting policies for segment reporting are the same as for the Company as a whole (see "Significant Accounting Policies"). The following is a summary of segment information for the three-month period ended December 31, 1999 and 1998: 1999 1998 Revenues: Software licensing $ 11,928 $ 709,205 Services 1,680,642 1,401,607 Hardware 665,084 1,222,875 Total $ 2,357,654 3,333,687 Operating profit (loss): Software licensing $ (614,157) $ 426,873 Services (232,766) 282,715 Hardware (30,717) 76,718 Total $ (877,640) $ 786,306 Reconciliation to net income Interest, net $ (89,501) $ 8,805 Amortization of excess cost over net assets acquired (131,745) - Gain on sale of fixed assets 2,777 - Income tax (provision) benefit 393,621 (307,032) Net income $ (702,488) 488,079 Depreciation and amortization of $123,105 for 1999 and $47,146 for 1998 have been allocated to the segment information above. 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, business concentration risks within the textile and printing industries, business combinations, and other risks. The Company's actual consolidated financial results during 2000, and beyond, could differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events and circumstances that arise after the date hereof. RESULTS OF OPERATIONS Results of the Company's newly acquired subsidiary, Vercom Software Inc., are included in the financial statements since its June 16, 1999 acquisition date. The Company has reclassified certain costs to more accurately reflect the proper classification of these costs. All periods presented reflect these reclassifications. Revenue. Net revenue for the three-month period was $2,357,654, a 29% decrease from the comparable period in 1998. This decrease is a result of decreased licensing and hardware revenues. Software license revenues decreased between periods as a result of a slowdown in demand for software products like those offered by the Company. In addition, hardware revenues are directly impacted by a slowdown in software licensing as most new customers require system upgrades. Management believes this slowdown is a result of increased focus by companies in ensuring that their existing systems were compliant with requirements related to the Year 2000, which appears to have resulted in a postponement in purchasing decisions. The Company's operations are classified into three principal segments for reporting purposes. They are: (1) software licensing sales, (2) consulting and implementation services and (3) hardware sales. Revenues from licensing software amounted to $11,928 for the three-month period ended December 31, 1999 compared to $709,205 for the same period in 1998. This decrease management feels is due in large part to customers concerns related to the Year 2000 problem as described above. Service revenues increased from $1,401,607 in 1998 to $1,680,642 in 1999 representing an increase of 20%. The increase in service revenues was primarily related to the inclusion of service revenue of Vercom in 1999 of $517,549. In the hardware segment of the business, revenues for the period ended December 31, 1999 totaled $665,084 as compared to $1,222,875 for the comparable period ended December 31, 1998. This reduction is related to the reduction in software licenses to new customers and the postponement of purchases related to businesses that focused on the readiness of their existing hardware and software systems for Year 2000. Cost of Licensing, Services and Equipment. Cost of software licensing consists of the costs of software reproductions and delivery, media, packaging, documentation and other related costs and the amortization of purchased software. Costs associated to licensing amounted to $91,224 in 1999 compared to $11,435 in 1998. The increase is attributable to the amortization of purchased software from the acquisition of Vercom amounting to $70,000 for the three- month period ended December 31, 1999. Cost of services increased to $1,251,688 or 75% of service revenues in 1999 from $660,739 or 47% in 1998. The primary increases in cost of services were the addition of Vercom, which has a lower margin percentage of servicing revenue compared to the Company in the prior year. Cost of equipment as a percent to revenue was 80% or $530,371 in 1999 compared to 84% or $1,031,618 in 1998. The overriding factor for the decrease is the inclusion of equipment sales at Vercom, which carry a higher margin percentage. Sales, General and Administrative. Sales, general and administrative expense for the three-month period ended December 31, 1999 was $1,102,866 compared to $763,589 for the same period ended in 1998. The increase in sales, general and administrative expenses were directly related to the inclusion of sales, general and administrative expenses of Vercom amounting to $290,688 subsequent to the acquisition date. In addition the company incurred approximately $142,000 in non-cash compensation in 1999. After taking the aforementioned items into consideration, sales, general and administrative expenses decreased by approximately $93,000 as compared to the same period in 1998. Research and Development Costs. Research and development costs amounted to $259,145 in fiscal year ended 1999, as compared to $80,000 in fiscal 1998. The primary increase of approximately $200,000 is due to the inclusion of research and development expenses incurred by Vercom for the development of the Company's Powerbuilder products. Provisions for Income Taxes. Income taxes are provided for transactions reported in the financial statements and consist of taxes currently due, plus deferred income taxes. The income tax provision (benefit) for the three-month period ended December 31, 1999 and 1998 was $(393,621) and $307,032, respectively. The effective tax rate for the three-month period ended September 30, 1999 and 1998 was (36%) and 39%, respectively. Liquidity and Capital Resources. Cash and Cash Equivalents were $62,178, representing a decrease of $1,179,031 from the same period ended December 31, 1998. The decrease is primarily due to the acquisition of Vercom in which the Company utilized cash from operations and a revolving credit arrangement with a bank. The revolver has the following declining availability: $4.0 million through March 30, 2000; $3.5 million through June 30, 2000; and $3.0 million through June 30, 2001. Notwithstanding the above, the aggregate amount outstanding under the loan shall not exceed 80% of eligible accounts receivable plus the following dollar amounts for the for the following effective periods: January 1 - February 29, 2000, $800,000; March 1 - March 31, 2000, $700,000;April 1 - April 30, 2000, $600,000; May 1- May 31, 2000, $500,000; June 1, 2000 and thereafter, $400,000. The revolver includes financial covenants that impose restrictions with respect to the maintenance of 1) Consolidated Cash Flow to Consolidated Funded Debt and 2) Consolidated Liabilities to Consolidated Tangible Net Worth which is applicable beginning March 31, 2000. The Company was in compliance with the applicable covenant at December 31, 1999. The Company's principle sources of liquidity are funds generated by operations and bank borrowings. The Company believes these sources will be adequate to support its normal operations for the foreseeable future. Quarterly Results. Net income (loss) for the three-month period December 31, 1999 and 1998 was $(702,488) and $488,079, respectively. On a per share basis, earnings (loss) were $(.09) and $.06 for the three-months ended December 31, 1999 and 1998, respectively. The decrease in earnings was directly impacted by a reduction in software license and hardware revenues and increases sales, general and administrative expenses as discussed above. 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 Financial Accounting Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" deferring the effective date to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company's current policy is not to enter into any derivative instruments or hedging activities. The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-9 ("SOP 98-9") "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. SOP 98-9 amends paragraphs 11 and 12 of SOP 97-2 to require revenue recognition using the "residual method" when certain vendor-specific objective evidence is met. This SOP is effective for fiscal years beginning after March 15, 1999. OTHER MATTERS Some of the key variables and other qualitative and quantitative factors which might be deemed necessary to an understanding and valuation of the Company's business and risks associated therewith are as follows: 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 and/or additional competition could negatively impact the Company's future performance. Long-term Investment Cycle. Developing software is expensive and the investment in software development often involves a long payback cycle. The Company plans to continue to make significant investments in software development. Expenditure of funds for research and development may not generate anticipated revenues in the event the final product developed does not meet market expectations and acceptance. Sales Cycle. Traditionally, the Company experiences a significant period between the time a customer is introduced to the Company's products and services and the final date upon which actual contracts are signed. The period to complete these efforts often takes up to twelve months or longer. 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 well in advance of the time implementation services are required. The uncertainties stated above could ultimately create a negative impact on the overall revenues and profitability of the Company 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 predominately with companies in the textiles, apparel, home fashions, and printing industries. A downturn in these industries could cause a negative impact on the Company's operating results. Year 2000 Issues. The Company continues to actively address the business issues associated with the expected impact of the Year 2000 ("Y2K") on proprietary software, information technology systems, and non-information technology systems (i.e., embedded technology) both internally and in relation to the Company's external customers and suppliers. Factors involved in assessing such business issues include the evaluation and testing of the Company's proprietary software; evaluating, upgrading, and testing of the Company's internal systems; and assessing the compliance of significant customers and vendors as well as monitoring their continued compliance. The Company created a Y2K Committee for the purpose of directing the Company's compliance efforts and identifying and addressing the impact of non-compliance on information technology systems and non-information technology systems. A testing plan was developed and implemented against the Company's proprietary software. The Company tested the date sensitive code within the proprietary software and has determined the tested code to be Y2K compliant or made necessary revisions as necessary. In addition, an inventory of all the Company's equipment containing date sensitive embedded technology has been completed in which all equipment has been either tested and/or deemed to be Y2K compliant. At the present time, the Company believes it has completed the necessary proprietary software, internal software, and hardware implementation required for Y2K compliance. The Company does not believe any material exposures or contingencies exist with respect to its proprietary or internal systems. The Company has requested assurances from its major suppliers and business partners that they will be Y2K compliant so that there will be no disruption of their products or services. Where appropriate, contingency plans and alternative suppliers have been investigated. Presently, the Company is not aware of any material exposures or contingencies as the result of Y2K compliance of its significant vendors or business partners, if a significant vendor or business partner should become non- compliant there can be no assurance such an event will not have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. The Company believes the actions it has taken will minimize these risks and believes it has taken responsible steps to prevent any major disruptions. The Company believes the actions it has taken with regard to Y2K issues have minimized Y2K related capital costs and expenses incurred to date and estimates that it has already incurred its Y2K compliance expenditures. The Company did not have any Y2K expenditures for internal information technology systems or its proprietary software in the three- months ended December 31, 1999. The Company does not anticipate any expenditures in 2000 relating to Y2K compliance. The Company has taken what it believes as the appropriate steps to prevent Y2K related compliance issues, however, there can be no assurance that some unknown or unanticipated event could occur causing a Y2K compliance issue for the Company or its business partners. General. 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 global economy, a loss of significant associates to competition 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. Lastly, the software industry may well experience a downturn in overall business activities as customer demands for products and services are lessened after Year 2000 compliance has been achieved. Due to the factors stated above, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenues or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's stock. Part II Item 1. Legal Proceedings The Company is currently a party in a contract dispute in which the plaintiff, "Canton Financial Services Corporation", is seeking damages from the Company for an alleged breach of contract. The Company contends that there was no contract between the parties. The case is currently in the Circuit Court for Hillsborough County, Florida. The Company is defending the allegations and may exert counterclaims against the plaintiff. The plaintiff is seeking 355,000 shares of the Company's stock and the potential damage claim is not definite, as the total damages if the plaintiff is successful depend on the stock price and the date on which the damages, if any, are determined. Management, however, believes the case is without merit and does not believe the outcome will have a material adverse effect on the Company's consolidated financial position. However, under a worst case scenario, if the Company is found in breach of contract, then the damages could have a material adverse effect on the Company's consolidated financial position or results of operations. The Company is currently involved in other routine legal proceedings that are incidental to the business. In the opinion of management, these other routine proceedings will not have a material adverse effect on the Company's financial position or overall trends in results of operations. 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 13, 2000 announcing 1999 earnings, one- time charges, and results of a change in the application of an accounting standard. 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: 02/11/00 /s/ Robbie M. Efird Robbie M. Efird, Chief Executive Officer Date: 02/11/00 /s/ Michael T. Spohn Michael T. Spohn, Chief Financial Officer EXHIBIT INDEX Exhibit (11) Schedule of Computation of Net Income Per Share (Unaudited) (27) Financial Data Schedule Three Months Ended December 31, Primary 1999 1998 Net income $ (702,488) $ 488,079 Less - preferred stock dividends (8,949) (15,061) Net income applicable for common shares $ (711,437) $ 473,018 Weighted average number of common shares outstanding during the year 7,783,484 7,665,257 Basic income per common share $ (.09) $ .06 Fully Diluted Net income applicable for common share $ (711,437) $ 473,018 Add - dividends on convertible preferred stock - 15,061 Net income for fully diluted net income per share (711,437) $ 488,079 Weighted average number of shares used in calculating primary income per common share 7,783,484 7,665,257 Assuming conversion of convertible preferred stock and stock options (weighted average) - 310,997 Weighted average number of common shares outstanding as adjusted 7,783,484 7,976,254 Fully diluted earnings per common share $ (.09) $ .06 EX-27 2
5 3-MOS SEP-30-2000 DEC-31-1999 62,178 0 4,211,004 (450,000) 0 4,649,004 2,203,159 (956,621) 11,990,925 3,375,798 0 0 4 7,803 2,914,278 11,990,925 2,357,654 2,357,654 1,873,283 3,364,262 0 0 89,501 (1,096,109) (393,621) (702,488) 0 0 0 (702,488) (0.09) (0.09)
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