-----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, I34xBX7LX/2hEbVHq94P7/lkk1UZLR7WPTH6LWuhhi4s7f+2PWa1uxcKbKOFb7e6 Bk0ICQTtRnjWEW+RGZn/Yw== 0000842722-00-000032.txt : 20000516 0000842722-00-000032.hdr.sgml : 20000516 ACCESSION NUMBER: 0000842722-00-000032 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 635327 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, 2000 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 March 31, 2000. Transitional Small Business Format (check one) Yes __ No X NETWORK SYSTEMS INTERNATIONAL, INC. Contents Part I - Financial Information Page Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheet 3 Consolidated Statements of Operations Three months ended March 31, 2000 and 1999 4 Six months ended March 31, 2000 and 1999 5 Consolidated Statement of Changes in Stockholders'Equity 6 Consolidated Statements of Cash Flow Six months ended March 31, 2000 and 1999 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 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)
March 31, 2000 ASSETS Current Assets: Cash and cash equivalents $ 22,611 Accounts receivable, trade, net of allowance of $675,000 2,586,131 Accounts receivable, related parties 128,491 Income tax receivable 455,872 Deferred income taxes 298,708 Other current assets 150,561 Total current assets 3,642,374 Property and equipment, net of accumulated depreciation and amortization 1,250,971 Intangible assets, net of accumulated amortization of $633,421 5,536,381 Other 353,405 Total assets $10,783,131 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade $ 784,687 Note payable 307,013 Capital lease obligations 63,497 Other accrued liabilities 437,569 Unearned revenue 1,434,653 Revolving credit agreement 3,235,000 Total current liabilities 6,262,419 Deferred income taxes 323,648 Common stock subject to redemption 1,812,600 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 3,820,932 Common stock subject to redemption (1,812,600) Retained earnings 368,325 Total stockholders' equity $2,384,464 Total liabilities and stockholders' equity 10,783,131 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 March 31, 2000 1999 Revenue: Licensing revenue $ 108,379 $ 647,982 Servicing revenue 2,069,104 1,716,747 Equipment revenue 477,652 1,484,317 Total revenue 2,655,135 3,849,046 Operating expenses: Cost of licensing 92,797 11,528 Cost of services 1,188,086 649,122 Cost of equipment 428,040 1,431,309 Research and development 365,078 123,528 Sales, general and administrative 1,449,771 640,684 Amortization of excess of cost over net assets acquired 131,745 - Total operating expenses 3,655,517 2,856,171 Operating income (loss) (1,000,382) 992,875 Other income (expenses) Interest, net (75,129) 8,925 Income (loss) before income tax provision (benefit) (1,075,511) 1,001,800 Income tax provision (benefit) (335,645) 369,434 Net income (loss) $ (739,866) 632,366 Dividends on preferred shares 8,343 14,281 Net income (loss) applicable to common shares (748,209) 618,085 Earnings (loss) per common share, basic and diluted $ (.10) $ .08 The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiary Consolidated Statements of Operations (Unaudited)
Six Months Ended March 31, 2000 1999 Revenue: Licensing revenue $ 120,307 $ 1,358,187 Servicing revenue 3,749,746 3,117,354 Equipment revenue 1,142,736 2,707,192 Total revenue 5,012,789 7,182,733 Operating expenses: Cost of licensing 184,021 22,963 Cost of services 2,439,774 1,212,271 Cost of equipment 958,411 2,462,927 Research and development 624,223 203,528 Sales, general and administrative 2,552,637 1,501,863 Amortization of excess of cost over net assets acquired 263,490 - Gain on sale of fixed asset (2,777) - Total operating expenses 7,019,779 5,403,552 Operating income (loss) (2,006,990) 1,779,181 Other income (expenses) Interest, net (164,630) 17,730 Income (loss) before income tax provision (benefit) (2,171,620) 1,796,911 Income tax provision (benefit) (729,266) 676,466 Net income (loss) $(1,442,354) 1,120,445 Dividends on preferred shares 17,292 29,343 Net income (loss) applicable to common shares (1,459,646) 1,091,102 Earnings (loss) per common share, $ (.19) .14 basic and diluted 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 Six Months Ended March 31, 2000 (Unaudited)
Common Stock Preferred Stock Number Number Capital in Retained of of excess of Earnings shares shares Par Value $.001 $.001 Common Total Par Par stock 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 Conver- sion of Pre- ferred Stock 20,050 (401) (20) - 20 - - - Compen- sation related to grant of stock options - - 171,876 - - - - 171,876 Compen- sation related to put options - - 82,500 - - - - 82,500 Compen- sation related to common stock issued to board of direc- tors 6,250 - 35,150 - 6 - - 35,156 Divi- dends on pre- ferred stock - - - (17,292) - - - (17,292) Expir- ation of put options of common stock subject to redemp- tion - - - - - - 83,400 83,400 Net loss for the six months ended Mar. 31, 2000 - - - (1,442,354) - - - (1,442,354) Balance Mar. 31, 2000 7,803,154 3,505 $3,820,932 $368,325 $7,803 $4 $(1,812,600) $2,384,464 The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiary Consolidated Statements of Cash Flow (Unaudited)
Six Months Ended March 31, 2000 1999 OPERATING ACTIVITIES Net income (loss) $(1,442,354) $1,120,445 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 497,801 92,146 Non-cash compensation expense 284,376 - Provision for bad debts 406,785 369,620 Gain on sale of property and equipment (2,777) - Increase in cash surrender value of life insurance (23,461) (166,302) Change in operating assets and liabilities: Accounts receivable (127,524) (1,719,678) Other current assets 78,212 (41,399) Income taxes 376,897 20,966 Accounts payable and other accrued liabilities (353,615) 463,224 Unearned revenue 821,660 108,518 Deferred income taxes (386,163) 3,000 Total adjustments 1,572,191 (869,905) Net cash provided by operating activities 129,837 250,540 INVESTING ACTIVITIES Acquisition of property and equipment (91,338) (329,722) Proceeds from sale of property and equipment 262,000 - Net cash provided by (used in) investing activities 170,662 (329,722) FINANCING ACTIVITIES Payment on notes payable and capital lease obligations (58,884) (19,205) Payment on revolving credit agreement (265,000) - Dividends paid (17,292) (29,343) Net cash used in financing activities (341,176) (48,548) Net decrease in cash and cash equivalents (40,677) (127,730) Cash and cash equivalents at October 1: 63,288 1,228,894 Cash and cash equivalents at March 31: 22,611 1,101,164 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest $ 138,665 $ 16,616 Taxes $ - 652,500 The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiary Notes to Consolidated Financial Statements (Unaudited) 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 91 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. 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. 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. 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. B. 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 March 31, 2000 1999 Net income (loss) $ (739,866) $ 632,366 Less preferred stock dividends (8,343) (14,281) Income (loss) applicable to common shares (748,209) 618,085 Preferred stock dividends - 14,281 Income (loss) applicable to common shares after assumed conversion of dilutive securities (748,209) 632,366 Weighted average number of common shares used in basic EPS 7,803,154 7,678,444 Effect of dilutive convertible preferred stock - 288,310 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 7,803,154 7,966,754 Six months ended March 31, 2000 1999 Net income (loss) $(1,442,354) $1,120,445 Less preferred stock dividends (17,292) (29,343) Income (loss) applicable to common shares (1,459,646) 1,091,102 Preferred stock dividends - 29,343 Income (loss) applicable to common shares after assumed conversion of dilutive securities (1,459,646) 1,120,445 Weighted average number of common shares used in basic EPS 7,795,786 7,671,850 Effect of dilutive convertible preferred stock - 294,904 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 7,795,786 7,966,754 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 and period ended March 31, 2000. In addition, common stock subject to redemption could be dilutive if the current stock price is below the put price. C. Revolving Credit Agreement, Note Payable and Liquidity At March 31, 2000, the Company was in default under certain material provisions of the Revolving Credit Agreement including the financial covenants related to (1) Consolidated Cash Flow to Consolidated Funded Debt and (2) Consolidated Liabilities to Consolidated Tangible Net Worth. As a result, the debt under this agreement has been shown as a current liability in the balance sheet. The Company is currently in discussions with its bank to amend the terms of the revolving credit agreement to address the defaults of the financial covenants and material provisions of the agreement. As of the filing, the bank has not exercised its right under the default provisions of the agreement. In addition to the discussions with its current lender, the Company is exploring financing alternatives with other lenders. Note payable has been classified as a current liability due to the cross default provision of the Revolving Credit Agreement as discussed above. D. Major Customers For the three months ended March 31, 2000 and 1999, sales to one customer amounted to approximately $915,000 and $2,439,000, respectively. For the six months ended March 31, 2000 and 1999, sales to one customer amounted to approximately $1,358,000 and $4,284,000, respectively. The March 31, 2000 and 1999 accounts receivable balances from these customers were approximately $726,000 and $2,813,000, respectively. E. Legal Proceedings The Company is currently a party in a lawsuit 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 damages are not definite, as the total damages, if the plaintiff is successful, depend on the stock price and the date on which the resulting damages, if any, are determined. Management believes the case is without merit, but, if the Company is found in breach of contract, the damages could have a material adverse effect on the Company. 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. 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 six-month period ended March 31, 2000 and 1999: 2000 1999 Revenues: Software licensing $ 120,307 $ 1,358,187 Services 3,749,746 3,117,354 Hardware 1,142,736 2,707,192 Total $ 5,012,789 $ 7,182,733 Operating profit (loss): Software licensing $(1,326,096) $ 756,230 Services (221,610) 1,003,966 Hardware (198,571) 18,985 Total $(1,746,277) 1,779,181 Reconciliation to net income (loss) Interest, net $ (164,630) $ 17,730 Amortization of excess cost over net assets acquired (263,490) - Gain on sale of fixed assets 2,777 - Income tax (provision) benefit 729,266 (676,466) Net income (loss) $(1,442,354) $ 1,120,445 Depreciation and amortization of $497,801 for 2000 and $92,146 for 1999 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 limitation, 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. Certain prior year amounts have been reclassified to conform to the current year presentation. Revenue. Net revenue for the three-month period ended March 31, 2000 was $2,655,135, a 31% decrease from the comparable period in 1999. For the six-month period ended March 31, 2000, revenues were $5,012,789 as compared to $7,182,733 for the same six month period in fiscal 1999, a 30% decrease. 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 the unique conditions created by the Y2K phenomenon resulted in increased focus by companies ensuring that their existing systems were compliant with requirements related to the Year 2000, which directly resulted in a postponement in purchasing decisions well into fiscal 2000. The Company's operations are classified into three principal segments for reporting purposes. They are: (1) software licensing revenue, (2) consulting and implementation services and (3) hardware sales. Revenues from licensing software amounted to $108,379 for the three-month period ended March 31, 2000 compared to $647,982 for the same period in 1999. During the six-month period ended March 31, 2000 and 1999, licensing revenue decreased to $120,307 from $1,358,187, respectively. Though licensing revenue increased slightly during the Company's second fiscal quarter 2000 compared to the first fiscal quarter, the Company licensing is slow to rebound to the prior year levels due to the post Year 2000 purchasing decisions from the Company's current prospects. For the three months ended March 31, service revenues increased from $1,716,747 in 1999 to $2,069,104 in 2000 representing an increase of 21%. For the six months ended March 31, 2000 and 1999, the increase was 20% from $3,117,354 to $3,749,746. The increase in service revenues was directly related to the inclusion of service revenue from Vercom in fiscal 2000 of $1,005,039. Without Vercom, service revenues declined approximately $400,000 from prior year levels due to the significant decrease in software sales resulting in decreased service implementation revenue. In the hardware segment of the business, revenues for the three-month period ended March 31, 2000 totaled $477,652 as compared to $1,484,317 for the comparable period ended March 31, 1999. For the six-month period ended March 31, 2000 and 1999, hardware revenues amounted to $1,142,736 and $2,707,192, respectively. The decrease is primarily 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. Current fiscal year hardware revenue is being derived from hardware accessories which complement the base systems which run the Company's products compared to entire base system sales in the prior year to new and existing customers. 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. For the three-month period ended March 31, 2000 costs associated to licensing amounted to $92,797 in 2000 compared to $11,528 in 1999. The costs associated with the six-month period ended March 31, 2000 and 1999 were $184,021 and $22,963, respectively. 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 March 31, 2000 and $140,000 for the six-month period ended March 31, 2000. Cost of services increased to $1,188,086 or 57% of service revenues for the three months ended March 31, 2000 compared to $649,122 or 38% in 1999. For the six-month period ended March 31, 2000 cost of services increased to $2,439,774 or 65% of service revenue compared with $1,212,271 and 39% in 1999. The primary increases in cost of services was the addition of Vercom, which has a lower percentage of servicing revenue compared to the Company in the prior year. In addition, the progressive decrease in cost of services percentage for fiscal 2000 is related to the Company reducing personnel costs during the first calendar quarter. Cost of equipment as a percent to revenue was 90% or $428,040 in 2000 compared to 96% or $1,431,309 in 1999 for the three-month period ended March 31. For the six- month period ended March 31, 2000 and 1999, cost of equipment percentage was 84% and 91%. The overriding factor for the increase in profit margin is the inclusion of equipment sales at Vercom, which carry a higher profit margin percentage. Sales, General and Administrative. Sales, general and administrative expense for the three-month period ended March 31, 2000 was $1,449,771 compared to $640,684 for the same period ended in 1999. The six-month period ended March 31, 2000 and 1999 was $2,552,637 and $1,501,863. The increase in sales, general and administrative expenses for the periods was directly related to the inclusion of sales, general and administrative expenses of Vercom amounting to $574,284 for the six-month period and $283,596 for the three- month period subsequent to the acquisition date. In addition, the Company incurs approximately $142,000 in non- cash compensation each quarter in fiscal 2000 not charged in fiscal 1999. After taking the aforementioned items into consideration, sales, general and administrative expenses increased by approximately $192,000 for the six-month period ended March 31, 2000 as compared to the same period in 1999 and $383,000 for the three-month period ended March 31, 2000 as compared to 1999. The increase is attributable to the addition of personnel on the sales and marketing team as well as the Company's decision to increase its allowance for doubtful accounts higher than the prior year. The increase in this allowance was precipitated by the bankruptcy filing of one of the Company's larger customers. Research and Development Costs. Research and development costs amounted to $365,078 for the three-month period ended March 31, 2000 compared to $123,528 in 1999 or a $241,550 increase. For the six months ended March 31, 2000 and 1999, research and development cost increased $420,695 to $624,223 from $203,528, respectively. The primary increase is due to the inclusion of research and development expenses incurred by Vercom for the development of the Company's Powerbuilder products. In March of the current quarter 2000, the Company elected to defer the development of these products until a later date. Management expects that future quarters research and development expenses will be significantly reduced from the current levels. 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 March 31, 2000 and 1999 was $(335,645) and $369,434, respectively. For the six-month period ended March 31, 2000 and 1999 the income tax provision (benefit) was $(729,266) and $676,466, respectively. The effective tax rate for the three and six month periods ended March 31,were (31%) and (34%) in 2000, respectively, and 37% and 38% in 1999, respectively. Liquidity and Capital Resources. Cash and Cash Equivalents were $22,611, representing a decrease of $1,078,553 from the same period ended March 31, 1999. The decrease is primarily due to the acquisition of Vercom in which the Company utilized cash from operations and its revolving credit agreement with a bank. Currently, the Company is in default under certain of the material provisions of the revolving credit agreement, including the financial covenants related to (1) Consolidated Cash Flow to Consolidated Funded Debt, (2)Consolidated Liabilities to Consolidated Tangible Net Worth. Until the Company can renegotiate its current revolving credit agreement or secure refinancing with another lender, the Company's principle sources of liquidity are funds generated by operations. These matters, along with the slowdown in software license sales, raise doubt about the ability of the Company to continue as a going concern. Quarterly Results. Net income (loss) for the three-month period ended March 31, 2000 and 1999 was $(739,866) and $632,366, respectively. For the six months ended March 31, 2000 and 1999, net income (loss) was $(1,442,354) and 1,120,445, respectively. On a per share basis, earnings (loss) were $(.10) and $.08 for the three-months ended March 31, 2000 and 1999, respectively. For the six months ended March 31, 2000 and 1999 earnings (loss) per share amounted to $(.19) and .14, respectively. The decrease in earnings was directly impacted by a reduction in software license and hardware revenues and increases in 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. Due to the Company's limited use of derivative financial instruments, adoption of Statement 133 is not expected to have a significant effect on the Company's consolidated results of operations , financial position, or cash flows. 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. 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. Prior to December 31, 1999, the Company took what it believes as the appropriate steps to prevent Y2K related compliance issues with its proprietary software and internal software and systems. As of March 31, 2000, the Company is not aware of any Y2K related occurrences with its proprietary software or internal software and systems that have or may have caused some unknown or unanticipated event related to Y2K compliance 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, it appears that the ERP software industry segment has experience a slowdown in overall business activities as customer demands for products and services have 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 lawsuit 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 damages are 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 believes the case is without merit, but, if the Company is found in breach of contract, the damages could have a material adverse effect on the Company. 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: 05/15/00 /s/ Robbie M. Efird Robbie M. Efird, Chief Executive Officer Date: 05/15/00 /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 EX-27 2
5 6-MOS SEP-30-2000 Mar-31-2000 22,611 0 3,261,131 (675,000) 0 3,642,374 2,248,797 (997,826) 10,783,131 6,262,419 0 0 4 7,803 2,376,657 10,783,131 5,012,789 5,012,789 3,582,206 7,019,779 0 0 164,630 (2,171,620) (729,266) (1,442,354) 0 0 0 (1,442,354) (0.19) (0.19)
EX-11 3 Three Months Ended March 31, Primary 2000 1999 Net income (loss) $ (739,866) $ 632,366 Less - preferred stock dividends (8,343) (14,281) Net income (loss) applicable for common shares $ (748,209) $ 618,085 Weighted average number of common shares outstanding during the year 7,803,154 7,678,444 Basic income (loss) per common share $ (.10) $ .08 Fully Diluted Net income (loss) applicable for common share $(748,209) $ 618,085 Add - dividends on convertible preferred stock - 14,281 Net income (loss) for fully diluted net income per share $(748,209) $ 632,366 Weighted average number of shares used in calculating primary income (loss) per common share 7,803,154 7,678,444 Assuming conversion of convertible preferred stock and stock options (weighted average) - 288,310 Weighted average number of common shares outstanding as adjusted 7,803,154 7,966,754 Fully diluted earnings (loss) per common share $ (.10) $ .08 Six Months Ended March 31, Primary 2000 1999 Net income (loss) $(1,442,354) $1,120,445 Less - preferred stock dividends (17,292) (29,343) Net income (loss) applicable for common shares $(1,459,646) $ 1,091,102 Weighted average number of common shares outstanding during the year 7,795,786 7,671,850 Basic income (loss) per common share $ (.19) $ .14 Fully Diluted Net income (loss) applicable for common share $ (1,459,646) $ 1,091,102 Add - dividends on convertible preferred stock - 29,343 Net income (loss) for fully diluted net income per share $(1,459,646) $ 1,120,445 Weighted average number of shares used in calculating primary income (loss) per common share 7,795,786 7,671,850 Assuming conversion of convertible preferred stock and stock options (weighted average) - 294,904 Weighted average number of common shares outstanding as adjusted 7,795,786 7,966,754 Fully diluted earnings (loss) per common share $ (.19) $ .14 -----END PRIVACY-ENHANCED MESSAGE-----