-----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, LplIm8FuXlxLIhbhat80XqRCDiiX60JsSBfuHWMgT8RG1xmnxKbqBPzIItN65Dzk +gATxHINteF/bODM7l6zfw== /in/edgar/work/20000814/0000842722-00-000060/0000842722-00-000060.txt : 20000921 0000842722-00-000060.hdr.sgml : 20000921 ACCESSION NUMBER: 0000842722-00-000060 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK SYSTEMS INTERNATIONAL INC CENTRAL INDEX KEY: 0000842722 STANDARD INDUSTRIAL CLASSIFICATION: [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: 700658 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 0001.txt 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 June 30, 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 7,813,154 shares of the Registrant's $.001 par value common stock and 3,455 shares of Registrant's $.001 par value preferred stock outstanding as of June 30, 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 June 30, 2000 and 1999 4 Nine months ended June 30, 2000 and 1999 5 Consolidated Statement of Changes in Stockholders' Equity 6 Consolidated Statements of Cash Flow Nine months ended June 30, 2000 and 1999 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 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 Subsidiary Consolidated Balance Sheet (Unaudited)
June 30, 2000 ASSETS Current Assets: Cash and cash equivalents $ 251,972 Accounts receivable, trade, net of allowance of $250,000 1,108,399 Accounts receivable, related parties 129,997 Refundable income taxes 782,395 Deferred income taxes 126,688 Other current assets 163,790 Total current assets 2,563,241 Property and equipment, net of accumulated depreciation and amortization 1,244,160 Intangible assets, net of accumulated amortization of $827,354 5,267,448 Other 371,650 Total assets $9,446,499 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade $ 979,021 Note payable 298,324 Capital lease obligations 45,603 Other accrued liabilities 317,781 Unearned revenue 1,225,637 Revolving credit agreement 3,235,000 Total current liabilities 6,101,366 Deferred income taxes 126,688 Stockholders' Equity: Preferred Stock; $.001 par value; authorized 12,500 shares; issued and outstanding 3,455,liquidation preference of $345,500 3 Common Stock; $.001 par value; authorized 100,000,000 shares; issued and outstanding 7,813,154 7,813 Capital in excess of par value 3,930,923 Retained earnings (720,294) Total stockholders' equity 3,218,445 Total liabilities and stockholders' equity $9,446,499 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 June 30, 2000 1999 Revenue: Licensing revenue $ 21,783 $ 527,480 Servicing revenue 1,142,072 1,852,468 Equipment revenue 392,852 2,198,966 Total revenue 1,556,707 4,578,914 Operating expenses: Cost of licensing 96,906 28,820 Cost of services 909,888 891,536 Cost of equipment 262,997 1,922,812 Research and development 303,120 444,583 Sales, general and administrative 1,216,448 1,477,067 Amortization of excess of cost over net assets acquired 123,933 - Total operating expenses 2,913,292 4,764,818 Operating loss (1,356,585) (185,904) Other income (expenses) Interest, net (74,195) 10,550 Loss before income tax provision (benefit) (1,430,780) (175,354) Income tax provision (benefit) (351,463) 58,114 Net loss $(1,079,317) $ (233,468) Dividends on preferred shares 8,193 10,125 Net loss applicable to common shares (1,087,510) (243,593) Loss per common share, basic and $ (.14) $ (.03) diluted The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiary Consolidated Statements of Operations (Unaudited)
Nine Months Ended June 30, 2000 1999 Revenue: Licensing revenue $ 142,090 $ 1,879,667 Servicing revenue 4,891,818 4,975,822 Equipment revenue 1,535,588 4,906,158 Total revenue 6,569,496 11,761,647 Operating expenses: Cost of licensing 280,927 63,126 Cost of services 3,349,662 2,524,499 Cost of equipment 1,221,408 4,385,739 Research and development 927,343 648,111 Sales, general and administrative 3,769,085 2,546,896 Amortization of excess of cost over net assets acquired 387,423 - Gain on sale of fixed asset (1,670) - Total operating expenses 9,934,178 10,168,371 Operating income (loss) (3,364,682) 1,593,276 Other income (expenses) Interest, net (238,827) 28,280 Income (loss) before income tax provision (benefit) (3,603,509) 1,621,556 Income tax provision (benefit) (1,080,729) 734,580 Net income (loss) $(2,522,780) $ 886,976 Dividends on preferred shares 25,485 39,468 Net income (loss) applicable to common shares (2,548,265) 847,508 Earnings (loss) per common share, basic and diluted $ (.33) $ .11 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 Nine Months Ended June 30, 2000 (Unaudited)
Common Stock Preferred Stock Number of Number Capital in Retained Shares of excess of Earnings Shares Par Value $.001 $.001 Common stock Total Par Par subject to Value Value redemption Balance Oct. 1, 7,776,854 3,906 $3,531,426 $1,827,971 1999 $7,777 $ 4 $(1,896,000) $ 3,471,178 Conver- sion of prefer- red 22,550 (451) (22) - stock 23 (1) - - Compen- sation related to grant of stock - - 257,814 - options - - - 257,814 Compen- sation related to put - - 96,250 - options - - - 96,250 Compen- sation related to common stock issued to Board of Direc- 13,750 - 45,455 - tors 13 - - 45,468 Divi- dends on pre- ferred - - - (25,485) stock - - - (25,485) Expira- tion of put options of common stock subject to re- demp- - - - - tion - - 1,896,000 1,896,000 Net loss for the nine months ended June 30, - - - (2,522,780) 2000 - - - (2,522,780) Balance June 30, 7,813,154 3,455 $3,930,923 $ (720,294) 2000 $7,813 $ 3 $ - $3,218,445 The accompanying notes are an integral part of the consolidated financial statements.
Network Systems International, Inc. and Subsidiary Consolidated Statements of Cash Flow (Unaudited)
Nine Months Ended June 30, 2000 1999 OPERATING ACTIVITIES Net income (loss) (2,522,780) 886,976 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 745,930 171,333 Non-cash compensation expense 364,376 85,938 Provision for bad debts 617,055 250,000 Gain on sale of property and equipment (1,670) - Increase in cash surrender value of life insurance (6,331) (180,925) Change in operating assets and liabilities: Accounts receivable 1,139,938 (1,185,288) Other current assets 28,102 (53,368) Income taxes 50,374 (330,119) Accounts payable and other accrued liabilities (249,069) 1,146,137 Unearned revenue 612,644 428,668 Deferred income taxes (411,103) 508,725 Total adjustments 2,890,246 841,101 Net cash provided by operating activities 367,466 1,728,077 INVESTING ACTIVITIES Acquisition of property and equipment (139,830) (515,499) Reimbursement of Vercom acquisition escrowed funds 75,000 - Acquisition of Vercom, net of purchased research and development - (5,888,221) Proceeds from sale of property and equipment 262,000 - Net cash provided by (used in) investing activities 197,170 (6,403,720) FINANCING ACTIVITIES Payment on notes payable and capital lease obligations (85,467) (51,776) Advances on (payment on) revolving credit agreement (265,000) 3,700,000 Dividends paid (25,485) (39,468) Net cash provided by (used in) financing activities (375,952) 3,608,756 Net increase (decrease) in cash and cash equivalents 188,684 (1,066,887) Cash and cash equivalents at October 1: 63,288 1,228,894 Cash and cash equivalents at June 30: 251,972 162,007 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest $ 208,845 $ 25,600 Taxes $ - $1,084,800 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 67 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 June 30, 2000 1999 Net loss $ (1,079,317) $ (233,468) Less preferred stock dividends (8,193) (10,125) Loss applicable to common shares (1,087,510) (243,593) Preferred stock dividends - - Loss applicable to common shares after assumed conversion of dilutive securities (1,087,510) (243,593) Weighted average number of common shares used in basic EPS 7,805,544 7,757,260 Effect of dilutive convertible preferred stock - - Weighted average number of common shares and dilutive potential common shares used in diluted EPS 7,805,544 7,757,260 Nine months ended June 30, 2000 1999 Net income (loss) $(2,522,780) $ 886,976 Less preferred stock dividends (25,485) (39,468) Income (loss) applicable to common shares (2,548,265) 847,508 Preferred stock dividends - 39,468 Income (loss) applicable to common shares after assumed conversion of dilutive securities (2,548,265) 886,976 Weighted average number of common shares used in basic EPS 7,799,027 7,700,320 Effect of dilutive convertible preferred stock - 273,420 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 7,799,027 7,973,740 The Company has 704,000 options and 3,455 shares of preferred stock that were antidilutive and are not included in the earnings per share calculation for the quarter and period ended June 30, 2000. C. Revolving Credit Agreement, Note Payable and Liquidity At June 30, 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. As of July 10, 2000, the Company and four of its majority stockholders entered into a stock purchase agreement to raise adequate funding to satisfy the terms of this revolving credit agreement. See note H outlining the details of this transaction. As of the filing, the bank has not exercised its right under the default provisions of the agreement. 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 June 30, 2000, there were no significant sales to any one customer. For the three months ended June 30, 1999, sales to two customers amounted to approximately $2,946,000. For the nine months ended June 30, 2000 and 1999, sales to one customer amounted to approximately $1,424,000 and $6,740,000, 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. Common Stock Subject to Redemption On May 1, 2000, the Company entered into a two-year employment agreement with a former consultant of the Company. Among other things, the employment agreement terminated the prior consulting agreement between the parties including the termination of the consultant's right to put 10,000 shares of restricted stock owned by the consultant back to the Company each quarter. G. 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. The following is a summary of segment information for the nine-month period ended June 30, 2000 and 1999: 2000 1999 Revenues: Software licensing $ 142,090 $ 1,879,667 Services 4,891,818 4,975,822 Hardware 1,535,588 4,906,158 Total $ 6,569,496 $11,761,647 Operating profit (loss): Software licensing $(2,008,451) $ 531,706 Services (719,295) 923,185 Hardware (251,183) 138,385 Total $(2,978,929) 1,593,276 Reconciliation to net income (loss) Interest, net $ (238,827) 28,280 Amortization of excess cost over net assets acquired (387,423) - Gain on sale of fixed assets 1,670 - Income tax (provision) benefit 1,080,729 (734,580) Net income (loss) $(2,522,780) 886,976 Depreciation and amortization of $745,930 for 2000 and $171,333 for 1999 have been allocated to the segment information above. H. Subsequent Event On July 10, 2000, the Company entered into a Stock Purchase Agreement dated July 10, 2000 (the "Stock Purchase Agreement") with Richard T. Clark, Joel C. Holt, D. Mark White, George D. Gordon, Bryan John, John Signorello and Steven Elias (the "Initial Investors"). Subject to the terms and conditions of the Stock Purchase Agreement, the Company issued 1,666,667 new, restricted shares of the Company's common stock at $0.60 per share to the Initial Investors in a private placement organized by Millennium Holdings Group, Inc. ("Millennium"). The sale under the Stock Purchase Agreement was subject to the satisfaction of the following conditions, which are discussed in more detail below: (i) certain of the Company's current management shareholders must agree to sell 2,700,000 shares of the Company's common stock to accredited investors arranged by Millennium, (ii) these current management shareholders must grant the Company a put option giving the Company the right to require such management shareholders to purchase substantially all of the assets associated with the Company's business as currently conducted for $3,000,000, (iii) all of the Company's current directors must resign and a designated representative of the Initial Investors must be appointed to replace the former directors effective as of the closing date of the stock sale, and (iv) the Company must receive the consent of its current revolving credit lender, Wachovia Bank, N.A. ("Wachovia"). The sale under the Stock Purchase Agreement closed on July 25, 2000. As a condition to the Initial Investors' obligations pursuant to the terms of the Stock Purchase Agreement, four of the Company's current management shareholders, Robbie M. Efird, E. W. "Sonny" Miller, Jr., David F. Christian and James W. Moseley (collectively, the "Selling Shareholders") entered into Stock Purchase Agreements dated July 21, 2000 (the "Investment Agreements") to collectively sell 2,700,000 shares to Herbert Tabin, a managing partner with Millennium, for $1,500,000 (approximately $0.56 per share) in a second private placement arranged by Millennium. As a further condition to the Initial Investors' obligations under the Stock Purchase Agreement, the Selling Shareholders granted the Company a put option, expiring forty-five (45) days after the closing date, giving the Company the right to require the Selling Shareholders to purchase substantially all of the Company's operating assets and liabilities (the "Company Assets") and substantially all of the operating assets and liabilities of Vercom Software, Inc., a wholly- owned subsidiary corporation of the Company ("Vercom") (the "Vercom Assets"; the Company Assets and the Vercom Assets shall collectively be referred to as the "Assets") for $3,000,000. The Assets include all of the operating assets related to the Company's business as currently conducted. During this 45-day period, the Company will determine the value of the Assets and evaluate whether it is in the best interests of the Company and its shareholders for the Company to sell the Assets to the Selling Shareholders at the put price, to sell the Assets to a third party, to retain the Assets or to take other appropriate action. In order to facilitate the Company's potential exercise of the put option, the Company contributed the Company Assets to a recently formed wholly-owned subsidiary corporation, Network Systems International of North Carolina, Inc. on July 20, 2000. As part of this process, the Company assigned its rights and obligations under substantially all of its current agreements (including its software license agreements, service agreements and employment agreements) to Network Systems International of North Carolina, Inc. In order to satisfy a condition to the Initial Investors' obligations under the Stock Purchase Agreement, all of the Company's current directors resigned effective as of the closing date, except for Mr. Efird. The current officers of the Company also resigned as of the closing date. Herbert Tabin has been appointed to the Company's Board of Directors as of the closing date. If the Company elects to exercise the put option and require the Selling Shareholders to purchase the Assets for $3,000,000, the Selling Shareholders will make an initial cash payment of $1,500,000 to the Company. The Selling Shareholders will deliver a non-recourse promissory note in the principal amount of $1,500,000, payable in one hundred twenty (120) days, for the remaining purchase price. The Selling Shareholders will pledge all of their remaining 2,925,856 shares of the Company's common stock (the "Pledged Shares") as security for the payment of the promissory note. The Company's right to exercise the put option will be conditioned upon the Company using $2,000,000 of the sales price received for the Assets to reduce the obligation under the revolving credit arrangement with Wachovia. The Company plans to use $1,250,000 from the Selling Shareholders' initial cash payment and $750,000 from the sale, if any, of the Pledged Shares to reduce the outstanding indebtedness. The sale of the Pledged Shares is discussed below. As a further condition to the Company's right to exercise the put option, the Company will also agree to change its name on its corporate charter, to discontinue the use of the name "Network Systems International" and to transfer all rights to the name "Network Systems International" to the Selling Shareholders. The Company understands that Millennium will use its best efforts to place the Pledged Shares with accredited investors on behalf of the Selling Shareholders for at least $1,500,000, or approximately $0.513 per share. Millennium will remit the proceeds generated by the sale of the Pledged Shares, up to $1,500,000, to the Company to satisfy the remaining balance of the purchase price for the Assets. If all of the Pledged Shares are sold for an amount greater than $1,500,000, Millennium will retain the excess. If Millennium cannot sell all of the Pledged Shares for at least $1,500,000, Millennium will use its best efforts to place as many of the Pledged Shares as possible with accredited investors on behalf of the Selling Shareholders for approximately $0.513 per share. Pursuant to the terms of the put option, the Company will use the first $750,000 from the sale of the Pledged Shares to reduce the obligation under the revolving credit arrangement with Wachovia. If Millennium is unable to sell all of the Pledged Shares, the Company will extinguish the promissory note at maturity and retain any remaining shares in satisfaction of the outstanding purchase price for the sale of the Subsidiaries to the Selling Shareholders. 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 June 30, 2000 was $1,556,707, a 66% decrease from the comparable period in 1999. For the nine-month period ended June 30, 2000, revenues were $6,569,496 as compared to $11,761,647 for the same nine month period in fiscal 1999, a 44% 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, services and hardware revenues are directly impacted by a slowdown in software licensing, as most new customers require implementation services and 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 into the later part of 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 $21,783 for the three-month period ended June 30, 2000 compared to $527,480 for the same period in 1999. During the nine-month period ended June 30, 2000 and 1999, licensing revenue decreased to $142,090 from $1,879,667, respectively. Though licensing revenue decreased during the Company's third fiscal quarter 2000 compared to the first and second fiscal quarters, the Company, however, signed new software deals in the fiscal third quarter amounting to approximately $170,000 in which the software products will be delivered and implementation will begin in the Company's fiscal forth quarter. The Company, however, recognizes that licensing continues to be 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 June 30, service revenues decreased from $1,852,468 in 1999 to $1,142,072 in 2000 representing a decrease of 38%. For the nine months ended June 30, 2000 and 1999, the decrease was 2% from $4,975,822 to $4,891,818. The decrease in service revenues was directly related to the decreased demand of implementation services in 2000 as compared to 1999 due to the slowdown in software sales. The inclusion of service revenue from Vercom in fiscal 2000 of $1,586,408 further highlights the decrease in implementation service revenue during 2000. In the hardware segment of the business, revenues for the three-month period ended June 30, 2000 totaled $392,852 as compared to $2,198,966 for the comparable period ended June 30, 1999. For the nine-month period ended June 30, 2000 and 1999, hardware revenues amounted to $1,535,588 and $4,906,158, 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 for Year 2000 readiness. 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 June 30, 2000, costs associated to licensing amounted to $96,906 in 2000 compared to $28,820 in 1999. The costs associated with the nine- month period ended June 30, 2000 and 1999 were $280,927 and $63,126, 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 June 30, 2000 and $210,000 for the nine-month period ended June 30, 2000. Cost of services increased to $909,888 or 80% of service revenues for the three months ended June 30, 2000 compared to $891,536 or 48% in 1999. For the nine-month period ended June 30, 2000 cost of services increased to $3,349,662 or 68% of service revenue compared with $2,524,499 and 51% in 1999. The primary increase 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 increase in the cost of service percentage for fiscal 2000 is directly related to the slowdown in software license sales and the subsequent implementation services. Due to these factors, the Company has reduced its workforce approximately 50% during fiscal 2000 in order to bring service expenses in line with sales. Cost of equipment as a percent to revenue was 67% or $262,997 in 2000 compared to 87% or $1,922,812 in 1999 for the three-month period ended June 30. For the nine- month period ended June 30, 2000 and 1999, cost of equipment percentage was 80% and 89%. 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 June 30, 2000 was $1,216,448 compared to $1,477,067 for the same period ended in 1999. The nine-month period ended June 30, 2000 and 1999 was $3,769,085 and $2,546,896. The increase in sales, general and administrative expenses for the nine- month period is directly related to the inclusion of sales, general and administrative expenses of Vercom amounting to $870,443. In addition, the Company incurred approximately $364,000 in non-cash compensation during the nine months ended June 30, 2000 not charged in fiscal 1999. After taking the aforementioned items into consideration, sales, general and administrative expenses decreased slightly for the nine-month and three-month periods ended June 30, 2000 as compared to the same period in 1999. Research and Development Costs. Research and development costs amounted to $303,120 for the three-month period ended June 30, 2000 compared to $444,583 in 1999 which included $300,000 of purchased in-process research and development. For the nine months ended June 30, 2000 and 1999, research and development cost increased $279,232 to $927,343 from $648,111, respectively. The primary increase is due to the inclusion of research and development expenses incurred by Vercom since the acquisition date. 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 June 30, 2000 and 1999 was $(351,463) and $58,114, respectively. For the nine-month period ended June 30, 2000 and 1999 the income tax provision (benefit) was $(1,080,729) and $734,580, respectively. The effective tax rate for the three and nine month periods ended June 30, were (25%) and (30)% in 2000, respectively, and 33% and 45% in 1999, respectively. Liquidity and Capital Resources. Cash and Cash Equivalents were $251,972, representing a increase of $89,965 from the same period ended June 30, 1999. 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. On July 10, 2000, the Company entered into a Stock Purchase Agreement dated July 10, 2000 (the "Stock Purchase Agreement") with Richard T. Clark, Joel C. Holt, D. Mark White, George D. Gordon, Bryan John, John Signorello and Steven Elias (the "Initial Investors"). Subject to the terms and conditions of the Stock Purchase Agreement, the Company issued 1,666,667 new, restricted shares of the Company's common stock at $0.60 per share generating $1,000,000 which was used to pay down the revolving credit agreement. In addition, on July 10, 2000, certain of the Company's current management shareholders have sold 2,700,000 shares of the Company's common stock to accredited investors arranged by Millennium and these current management shareholders have granted the Company a put option giving the Company the right to require such management shareholders to purchase substantially all of the assets associated with the Company's business as currently conducted for $3,000,000. If the Company elects to exercise the put option and require the Selling Shareholders to purchase the Assets for $3,000,000, the Selling Shareholders will make an initial cash payment of $1,500,000 to the Company. The Selling Shareholders will deliver a non- recourse promissory note in the principal amount of $1,500,000, payable in one hundred twenty (120) days, for the remaining purchase price. The Selling Shareholders will pledge all of their remaining 2,925,856 shares of the Company's common stock (the "Pledged Shares") as security for the payment of the promissory note. The Company's right to exercise the put option will be conditioned upon the Company using $2,000,000 of the sales price received for the Assets to reduce the obligation under the revolving credit arrangement with Wachovia. The Company plans to use $1,250,000 from the Selling Shareholders' initial cash payment and $750,000 from the sale, if any, of the Pledged Shares to reduce the outstanding indebtedness. These transactions will reduce the Company's indebtedness on the revolving credit arrangement to approximately $400,000 net of related bank and legal fees. In addition, the Company's other primary sources of liquidity are funds generated by operations. Based on the transactions described above, the Company has adequate resources and liquidity to fund operations of the Company. However, if one or all of the transactions do not materialize, along with the slowdown in software license sales, doubt is raised about the ability of the Company to continue as a going concern as well as the continuing carrying value of the assets. Quarterly Results. Net loss for the three-month period ended June 30, 2000 and 1999 was $(1,079,317) and $(233,468), respectively. For the nine months ended June 30, 2000 and 1999, net income (loss) was $(2,522,780) and $886,976, respectively. On a per share basis, losses were $(.14) and $(.03) for the three months ended June 30, 2000 and 1999, respectively. For the nine months ended June 30, 2000 and 1999 earnings (loss) per share amounted to $(.33) and .11, respectively. The decrease in earnings was directly impacted by a reduction in software license, services and hardware revenues due to post Year 2000 software slowdown. 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 June 30, 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 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. 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. 2. Form 8-K filed with the Securities and Exchange Commission July 10, 2000 announcing that the Company entered into a Stock Purchase Agreement dated July 10, 2000 with Richard T. Clark, Joel C. Holt, D. Mark White, George D. Gordon, Bryan John, John Signorello and Steven Elias. 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: 08/14/00 /s/ Herbert Tabin Herbert Tabin, President Date: 08/14/00 /s/ Robbie Efird Robbie Efird, Director EXHIBIT INDEX Exhibit (11) Schedule of Computation of Net Income Per Share (Unaudited) (27) Financial Data Schedule EX-27 2 0002.txt
5 9-MOS SEP-30-2000 Jun-30-2000 251,972 0 1,358,399 (250,000) 0 2,563,241 2,296,183 (1,052,023) 9,446,499 6,101,366 0 0 3 7,813 3,210,629 9,446,499 6,569,496 6,569,496 4,851,997 9,934,178 0 0 238,827 ( 3,603,509) (1,080,729) (2,522,780) 0 0 0 (2,522,780) (0.33) (0.33)
EX-11 3 0003.txt Three Months Ended June 30, Primary 2000 1999 Net loss $(1,079,317) $ (233,468) Less - preferred stock dividends (8,193) (10,125) Net loss applicable for common shares $(1,087,510) $ (243,593) Weighted average number of common shares outstanding during the year 7,805,544 7,757,260 Basic loss per common share $ (.14) $ (.03) Fully Diluted Net loss applicable for common share $(1,087,510) $ (243,593) Add - dividends on convertible preferred stock - - Net (loss) for fully diluted net income per share $(1,087,510) $ (243,593) Weighted average number of shares used in calculating primary loss per common share 7,805,544 7,757,260 Assuming conversion of convertible preferred stock and stock options (weighted average) - - Weighted average number of common shares outstanding as adjusted 7,805,544 7,757,260 Fully diluted loss per common share $ (.14) $ (.03) Nine Months Ended June 30, Primary 2000 1999 Net income (loss) $(2,522,780) $ 886,976 Less - preferred stock dividends (25,485) (39,468) Net income (loss) applicable for common shares $(2,548,265) $ 847,508 Weighted average number of common shares outstanding during the year 7,799,027 7,700,320 Basic income (loss) per common share $ (.33) $ .11 Fully Diluted Net income (loss) applicable for common share $(2,548,265) $ 847,508 Add - dividends on convertible preferred stock - 39,468 Net income (loss) for fully diluted net income per share $(2,548,265) $ 886,976 Weighted average number of shares used in calculating primary income (loss) per common share 7,799,027 7,700,320 Assuming conversion of convertible preferred stock and stock options (weighted average) - 273,420 Weighted average number of common shares outstanding as adjusted 7,799,027 7,973,740 Fully diluted earnings (loss) per common share $ (.33) $ .11 -----END PRIVACY-ENHANCED MESSAGE-----