15
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, 1996
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: 33-25308-D
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
Incorporation or Organization) Number)
200 North Elm Street, Greensboro, North Carolina 27401
(Address of Principal Executive Offices, Including Zip Code)
(910) 271-8400
(Registrant's Telephone Number, Including Area Code)
AQUA AUSTRALIS, INC.
1901 East University, Suite 200, Mesa, AZ 85023
(Former Name, Former Address and Former Fiscal Year, if Changed)
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 5,806,176 shares of the Registrant's .001 par value
common stock outstanding as of June 30, 1996.
Transitional Small Business Format (check one) Yes __ No X
NETWORK SYSTEMS INTERNATIONAL, INC.
(Formerly Aqua Australis, Inc.)
Contents
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1996 3
Consolidated Statement of Operations
Three months ended June 30, 1996 and 1995 and
Six months ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flow
Six months ended June 30, 1996 and 1995 5
Consolidated Statement of Changes in Stockholder's Equity 6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-18
Part II
Item 4. Submission of Matters to Vote of Security Holders 19
Item 5. Other matters 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
<page2>
Item 1. Financial Statements
Network Systems International, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 1996 (unaudited)
Assets
Current Assets
Cash $ 228,388
Accounts receivable, trade, net of
allowance of $455,000 1,147,910
Cost and estimated earnings in excess
of billings on uncompleted contracts 10,212
Accounts receivable, related parties 13,362
Marketable securities and other current
assets 32,215
1,432,087
Property and equipment, net of accumulated
depreciation 858,871
Other Assets
Software development costs, net of
accumulated amortization 922,981
Other 17,664
940,645
$3,231,603
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable, current portion $ 84,500
Capital lease obligation, current portion 50,306
Accounts payable, trade 158,707
Other accrued liabilities 42,226
Deferred revenue 102,314
Income taxes payable 106,600
Billings in excess of costs and earnings
on uncompleted contracts 116,640
Total current liabilities 661,293
Long Term Liabilities:
Income tax payable 287,600
Deferred income taxes 359,100
Notes payable, net of current maturities 410,115
Capital lease obligation, net of current
maturities 177,272
Total long term liabilities 1,234,087
Stockholders' Equity
Common Stock; $.001 par value; authorized
100,000,000 shares; issued and
outstanding 5,806,176 shares 5,806
Capital in excess of par value 2,137,335
Accumulated (Deficit) (787,731)
Notes receivable from officers on common
stock purchases (7,348)
Unrealized loss on Marketable securities (11,839)
Total stockholders' equity 1,336,223
$3,231,603
The accompanying notes are an integral part of the consolidated financial
statements.
<page3>
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Operations (unaudited)
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenue:
Licensing revenue $ 154,959 $ 199,364 $ 445,958 $ 363,666
Equipment revenue 80,592 162,401 803,629 788,680
Servicing revenue 367,530 379,150 1,392,776 490,969
Total revenue 603,081 740,915 2,642,363 1,643,315
Operating expenses
Cost of sales and 180,211 334,526 1,101,633 977,602
services
Research and 87,410 128,550 113,798 257,100
development
General and 294,499 383,252 708,309 777,904
administrative
562,120 846,328 1,923,740 2,012,606
Operating income (loss) 40,961 (105,413) 718,623 (369,291)
Other income (expenses)
Interest (22,662) (13,878) (34,632) (25,568)
Other income 3,434 1,595 10,609 9,677
(19,228) (12,283) (24,023) (15,891)
Income (loss) before
income tax provision 21,733 (117,696) 694,600 (385,182)
Income tax provision 753,300 __________ 753,300 ___________
Net loss (731,567)* (117,696) (58,700) (385,182)
Primary net loss per
common share (0.09) (0.01) (0.00) (0.02)
Weighted average common
stock outstanding 8,595,668 18,003,500 13,299,584 18,003,500
</TABLE>
* See accompanying income tax provision statement on page 12
The accompanying notes are an integral part of the consolidated financial
statements.
<page4>
<TABLE>
NETWORK SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited)
<CAPTION>
Six Months Ended June 30,
1996 1995
<S> <C> <C>
Operating activities
Net loss $ (58,700) ($385,182)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 298,153 181,718
(Increase) decrease in
Accounts receivable and unbilled receivables 1,018,024 313,267
Prepaid assets, other receivables,
and other assets 5,609 133,064
Increase (decrease) in:
Accounts payable and accrued liabilities (1,001,239) 244,250
Unearned revenue 14,018 24,871
Income tax payable and deferred income taxes 753,300
Billings in excess of costs and earnings on
uncompleted contracts 30,752 104,201
Total adjustments 1,118,617 981,371
Net cash provided by operating activities 1,059,917 596,189
Investing activities
Acquisition of property and equipment (23,445) (585,171)
Software development (687,189) (291,218)
Proceeds on sale of marketable securities 8,597
Increase in cash surrender value of life insurance (1,143) (4,032)
Net cash used by investing activities (711,777) (871,824)
Financing activities
Payment on notes payable, long-term debt and
capital leases (71,122) (41,960)
Proceeds from notes payable and long-term debt 470,000
Net payments on line of credit (110,388) (39,903)
Dividends paid (88,560)
Net cash provided (used) by financing activities (181,510) 299,577
Net increase in cash and cash equivalents 166,630 23,942
Cash and cash equivalents at January 1 61,758 72,901
Cash and cash equivalents at June 30 $ 228,388 $ 96,843
Supplemental disclosures of cash flow information
and noncash investing and financing activities
Cash paid (received) during the year for:
Interest $ 26,443 $ 25,569
</TABLE>
In April of 1996 the stockholders of Network Information Services, Inc. and
Network Investment Group, Inc. exchanged all of their common shares of stock
for controlling interest in Network Systems International, Inc.
(formerly Aqua Australis, Inc.)
During the year the Company issued 50,000 shares of common stock for future
consulting services.
During the first quarter the Company acquired computer equipment totaling
$232,540 under capital leases.
The accompanying notes are an integral part of the consolidated financial
statements.
<page5>
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (unaudited)
<CAPTION>
Capital Net Notes
in Retained Unrealized Receivable
Number 0.001 Excess Earnings Loss On From Officers
of Par of Par (Accumulated) Marketable On Common
Shares Value Value (Deficit) Securities Stock Purchases Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1995 4,783,791 $5,783 $ 83,617 $1,393,049 ($11,767) ($53,600) $1,417,082
Distribution of
stockholder
loans (53,600) 53,600 0
Issuance of common
stock to
office for note 367,385 367 6,981 (7,348) 0
receivable
Acquisition of
company 5,756,176 5,756 2,112,385 (140,475) 1,977,666
Recapitalization of
company (5,151,176) (6,150) (90,598) (1,928,005) (2,024,753)
Unrealized loss on
marketable
securities (72) (72)
Common stock issued
for services at $.50
per share 50,000 50 24,950 25,000
Net loss for the six
month period ended ________ ______ _______ (58,700) ________ _______ (58,700)
June 30, 1996
5,806,176 $5,806 $2,137,335 ($787,731) ($11,839) ($7,348) $1,336,223
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<page6>
Network Systems International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
For the Six and Three Months Ended June 30, 1996 and June 30, 1995
1. Background Information
Network Systems International, Inc. (the Company), formerly Aqua
Australis, Inc., was incorporated on September 21, 1988 in the
state of Nevada. This corporation was considered a development
stage company whose principal business activity was to seek
potential business ventures and assets which would warrant
involvement or purchase by the Company.
On April 21, 1996, the Company completed a reverse triangular
merger whereby two of its wholly owned subsidiary corporations
merged with two North Carolina corporations, with the North
Carolina corporations being the surviving corporations in the
merger. Immediately thereafter, the Company, with the approval
of its shareholders, caused its corporate charter to be amended
to change its name to Network Systems International, Inc. The
newly named company is now the parent company of two wholly owned
subsidiary corporations: Network Information Services, Inc.
(NIS) and Network Investment Group, Inc.(NIG), both North
Carolina corporations. Immediately prior to the merger, the
shareholders of the Company also approved a two for one reverse
split of all issued and outstanding shares of the Company's
common stock with a $.001 par value and Network Partners, LLC
effectively merged into NIS. All per share data has been
retroactively restated to show the effects of the two for one
reverse split. In addition, immediately prior to the merger, the
then controlling stockholders of the Company turned in
approximately 17.5 million shares of the Company which were then
canceled.
As a result of the merger, accounted for as a reverse acquisition
which is similar to the purchase method of accounting,
shareholders of NIS and NIG caused the transfer of all of their
shares of common stock in the companies, which had a total assets
value of approximately $3,800,000, to the Company in exchange for
5,250,176 shares of common stock of the Company.
NIS was incorporated under the laws of the state of North
Carolina in 1985 and develops, licenses, and supports software
products primarily for the textile, sewn products and process
manufacturing industries. Operations are concentrated in North
and South Carolina, however, NIS has clients throughout the east
coast of the United States. It employs approximately 50 full-
time employees. The corporate headquarters is located in
Greensboro, North Carolina.
NIG was incorporated under the laws of North Carolina in April
1993 and sells computer hardware to manufacturing industries.
Operations are concentrated in North Carolina and South Carolina,
however, it has clients throughout the east coast of the United
States. The corporate headquarters is located in Greensboro,
North Carolina.
<page7>
2. Summaries of Significant Accounting Policies
Basis of Preparation:
The financial statements as of June 30, 1996 and for the three
and six month period then ended Consolidate the Accounts of
Network Systems International, Inc., Network Information Services
and Network Investment Group. The financial statements for the
three and six months ended June 30, 1995 combine the accounts of
Network Information Services, Inc., Network Investment Group,
Inc. and Network Partners, LLC.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary for a fair statement of
(a) the results of operations for the three month and six months
periods ended June 30, 1996 and 1995, (b) the financial position
at June 30, 1996, and (c) cash flows for the six month periods
ended June 30, 1996 and 1995, have been made.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Financial Instruments:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade
receivables. The Company performs on-going credit evaluations of
its customers' financial condition.
Marketable Securities:
Marketable securities are accounted for as available for sale
securities and are reported at estimated fair value, with the
unrealized gains and losses reported as a separate component of
stockholders' equity.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is
calculated by the declining-balance and straight-line methods
over the estimated useful lives of the assets, ranging generally
from 5 to 39.5 years. Additions to and major improvements of
property and equipment are capitalized. Maintenance and repair
expenditures are charged to expense as incurred. As property is
sold or retired, the applicable cost and accumulated depreciation
are eliminated from the accounts and any gain or loss is
recorded. For income tax purposes, the Company uses accelerated
methods of depreciation for certain assets.
<page8>
2. Summaries of Significant Accounting Policies (continued)
Software Development Cost:
The Company capitalizes internally generated software development
costs in compliance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased, or Otherwise Marketed." The Company
capitalizes the direct costs and allocated overhead associated
with the development of software products. Initial costs are
charged to operations as research and development prior to the
development of a detailed program design or a working model.
Costs incurred subsequent to the product release are charged to
operations. Capitalization of computer software development
costs begins upon the establishment of technological feasibility
for the product. Capitalized software development costs amounted
to $687,189, and $291,218 for the six month period ended June 30,
1996 and 1995, respectively. The Company capitalized software
development cost of $406,318 and $145,621 for the 3 month period
ended June 30, 1996 and June 30, 1995, respectively.
Amortization of capitalized computer software development costs
begins when the products are available for general release to
customers, and is computed on a product-by-product basis as the
greater of 1) the ratio of current gross revenues for a product
to the total of current and anticipated future gross revenues for
the product or 2) the straight-line method over the remaining
estimated economic life of the product. The Companies have
estimated that the useful economic life of its products is two
years. Amortization expense of capitalized software cost amounts
to $247,908 and $151,580 for the six month period ended June 30,
1996 and 1995, respectively, and is included in cost of sales.
Amortization expense for the 3 month periods ended June 30, 1996
and 1995 totaled $175,824 and $75,790, respectively.
Revenue:
The Company generates several types of revenue which are
accounted for as follows:
Revenue from the sale of software licenses is recognized after
shipment and fulfillment of all major obligations under the terms
of the licensing agreements. The licensing agreements are
typically for the use of company products and are usually
restricted by the number of copies, the number of users, and the
term.
Revenue from "time and materials" contracts are recognized when
the services are performed. Services performed which have been
authorized but may not be currently billable are classified as
unbilled accounts receivable.
Revenues from fixed price contracts are recognized using the
percentage-of-completion method, measured by direct hours.
Contract costs include direct labor combined with allocations of
operational overhead and other direct costs. Provisions for
estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance,
job conditions, and estimated profitability may result in
revisions to costs and revenue and are recognized in the period
in which the revisions are determined.
<page9>
2. Summaries of Significant Accounting Policies (continued)
Support agreements generally call for the Company to provide
technical support and certain software updates to customers.
Revenue on support and software update rights is recognized
ratably over the term of the support agreement.
The Company provides consulting and educational services to its
customers. Revenue from such services is generally recognized as
the services are performed.
Hardware revenue is recognized when the product is shipped to the
customer.
Income Tax:
Prior to the merger on April 21, 1996, the principal operating
subsidiary of the Company (NIS) was treated as an S corporation
for tax purposes. As such, income and deductions attributable to
NIS were reported by its shareholders, and no tax expense or
liability was recorded by the Company up until such date.
Activities of the Company and its other subsidiary prior to that
date did not give rise to a material liability for income taxes.
Beginning in April, 1996, income taxes are provided for
transactions reported in the financial statements and consist of
taxes currently due plus deferred income taxes.
Deferred income taxes are provided for when transactions are
reflected in income for financial reporting purposes in a year
other than the year of their inclusion in taxable income.
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.
Earnings Per Share:
Primary net earnings per common share are computed using the
weighted average number of shares outstanding of the Company
during the periods presented.
3. Marketable Securities
Marketable securities consist of common stocks and mutual funds
and are classified as "available-for-sale". Accordingly,
unrealized gains and losses are excluded from earnings and
reported in a separate component of stockholders' equity.
Realized gains or losses are computed based on specific
identification of the securities sold.
Cost and unrealized loss on investments in securities as of June
30, 1996 are summarized as follows:
Unrealized
Market Cost Loss
Common stock and mutual $4,220 $16,059 $11,839
funds
<page10>
4. Uncompleted Contracts
Information with respect to uncompleted contracts at June 30,
1996 is summarized as follows:
Estimated contract revenue $1,117,960
Less billings to date 1,224,388
$ <106,428>
Billings in excess of costs and estimated earnings $ <116,640>
Cost in excess of billings and estimated earnings 10,212
$ <106,428>
5. Property and Equipment
Property and equipment at June 30, 1996 consist of the following:
Land $ 150,000
Building 300,000
Leasehold improvements 79,487
Furniture and fixtures 77,747
Office equipment 87,735
Computer equipment 393,338
Computer software 59,105
1,147,412
Less accumulated depreciation and amortization <288,541>
$ 858,871
6. Notes Payable
Notes payable at June 30, 1996 consist of:
Bank note payable:
interest at prime plus 1.0%; monthly
payments of $4,729; due July 1, 1997; collateralized
by accounts receivable, equipment, and a
$200,000 life insurance policy $ 61,183
Mortgage note payable:
interest at prime plus 0.25%;
monthly principal payments of $2,612 plus interest;
balloon payment due March 10, 2000; collateralized
by building; personally guaranteed by certain stockholders 433,432
494,615
Less amounts currently due 84,500
410,115
<page11>
In addition, the Company has an unused $250,000 line of credit
that is collateralized by accounts receivable and bears interest
at prime plus .5%
The following is a schedule by year of the principal payments
required on these notes payable and long-term debts:
1996 $ 84,500
1997 40,057
1998 31,344
1999 31,344
2000 and thereafter $307,370
7. Retirement Benefit Plan
Effective January 1, 1993, the Company established a retirement
plan which allows participants to make contributions by salary
reduction under Section 401(k) of the Internal Revenue Code. The
Company did not make matching contributions to the plan during
1996 or 1995.
8. Income Taxes
Net income from continuing operations before income taxes totaled
$694,600 for the six months ended June 30, 1996. The components
of income tax expense attributable to net income from continuing
operations are as follows:
Current tax expense $ 5,500
Termination of subchapter S status
Current 101,100
Non Current 287,600
388,700
Deferred Tax Expense
Non Current 359,100
$753,300
As a result of the reverse acquisition on April 21, 1996, one of
the Company's subsidiaries subchapter S status was terminated.
After that date, the financial statements of the Company will
provide for the income tax effect of earnings reported in the
financial statements, including taxes currently due and taxes
deferred because of different accounting methods used for
financial and income tax reporting. Prior to the change in tax
status, earnings and losses were included in the personal tax
returns of the stockholders and taxed depending on their personal
tax situations, and the company did not record an income tax
provision. The change in tax status resulted in a one time
payable over a four year period to the Internal Revenue Service
of approximately $389,000.
The significant temporary differences giving rise to deferred tax
liabilities consist principally of the accounting methods used
for software development costs. This difference resulted in a
$359,100 deferred tax liability. <page12>
The difference between the provision of income taxes and the
amounts obtained by applying the statutory U.S. Federal income
tax rate to income before taxes for the six months ended June 30,
1996 is as follows:
Tax expense at U.S. statutory rates $236,200 34%
State and local income taxes 34,700 5%
Termination of Subchapter S status 450,700 65%
Non deductible expenses and other 31,700 4%
$753,300 108%
9. Major Customer
For the six month period ended June 30, 1996 and 1995, sales to a
single customer amounted to approximately $960,000, and $541,000,
respectively. The 6/30/96 accounts receivable balance included
$455,528 due from that customer.
10. Lease Commitments
The following is a schedule by year of future minimum rental
payments required under operating leases that have an initial or
remaining noncancelable lease term in excess of one year as of
6/30/96:
1996 $ 30,535
1997 $ 39,544
1998 $ 35,416
1999 $ 21,382
2000 $ 3,673
Rent expense amounted to $67,126 and $78,079 for the six month
ended June 30, 1996 and 1995, respectively. Rent expense
amounted to $35,058 and $60,733 for the 3 month period ended June
30, 1996 and 1995.
<page13>
11. Obligations Under Capital Leases
The Company has capitalized rental obligations under leases of
software and equipment. The obligations, which mature in 2000,
represent the total present value of future rental payments
discounted at the interest rates implicit in the leases. Future
minimum lease payments under the capital leases are:
Period Ending
June 30
1997 $ 74,243
1998 68,532
1999 68,532
2000 55,228
Total minimum lease payments 266,535
Less amount representing interest 38,957
Present value of net minimum lease payments $ 227,578
Less current portion 50,306
$ 177,272
12. Commitments
The Company entered into 20 year employment agreements with five
of its officers calling for annual salaries aggregating $195,000.
<page14>
_________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
_________________________________________________________________
This MD&A Contains Some Forward Looking Information
Results of Operations
Revenue. Network's second quarter revenues amounted to
approximately $603,000, a 19% decrease compared to the second
quarter of the prior year. This decrease resulted from a
decision by management to initiate services of contracts during
the first quarter which were originally slated to begin during
the current quarter. Additionally, the decrease is attributable
to the Company's failure to close anticipated business prior to
second quarter end.
Software sales contributed 26% of the net revenues of the
Company; implementation services 61% and hardware sales 13% for
the quarter ended 6/30/96.
Revenues for the six months ended 6/30/96 increased 61% to
approximately $2,642,000 over the prior year comparable period.
This growth in revenue was attributable to a transfer of Company
associates into the services sector of the Company's business.
This shift in personnel provided associates with the opportunity
to enhance their expertise in the services sector and to provide
customers with a more rapid response in the delivery of service
solutions.
The Company intends to continue to provide periodic upgrades to
its software packages during the balance of the year. During
second quarter, 1996, the Company issued an upgrade to its
software package to its customers who were eligible to receive
the enhancement. Additionally, the Company currently intends to
introduce a third generation version of its original software
package during the calendar year 1996. However, there are no
assurances that the Company will not experience difficulties that
could delay or prevent the successful completion, introduction
and marketing of the new program, its product enhancements or
that they will adequately meet the requirements of either the
marketplace or achieve market acceptance. In addition, the
Company's revenues in future periods could be adversely affected
by a significant change in general manufacturing environments or
as it relates to their desire to computerize the manufacturing
process.
Cost of Sales and Services. Cost of sales and services as a
percentage of revenue decreased in the second quarter of fiscal
1996 to 30% from 45% in the second quarter of the prior fiscal
year. This decrease is attributable to a shift of the Company's
focus into the services sector of the Company's business and a
resultant decrease in its' focus on equipment sales. Since
equipment revenues carry a higher percentage of costs as compared
to services and licensing fees, an anticipated decrease in cost
of sales and services was achieved.
<page15>
Costs of sales and service as a percentage of revenue decreased
in the six month period ended 6/30/96 to 42% from 59% in the
comparable period of the prior year. This decrease is
attributable to a management decision to restructure associate
assignments on the basis of product specific teams. This
restructuring proved to provide better associate efficiencies in
terms of necessary time allocations to specific accounts.
Additionally, second quarter equipment product mix provided
higher margins as compared to the equivalent period in 1995.
Research and Development. Research and development expenses as a
percentage of revenues for the second quarter of 1996 decreased
to 14% from 18% in the second quarter of the prior fiscal year.
Expenses for the six months ended 6/30/96 decreased to 4% of
revenue from 16% for the comparable period in the prior year.
These decreases were principally attributable to the Company's
personnel assignment strategies which temporarily reduced the
number of associates assigned to research and development and
reallocated their expertise to product delivery and services.
This reassignment strategy became necessary as a result of the
Company's increase in product diversity. It is currently
anticipated that research and development expenses will
significantly increase over current levels prior to fiscal year
end.
The Company would anticipate that research and development
expenses will, overall, increase in 1996 due to the Company's
continuing efforts to launch its third generation software
package. Additionally, the Company intends to continue
recruiting and hiring experienced software developers and to
consider the acquisition of complementary software technologies.
However, there can be no assurances that the Company will achieve
these goals.
General and Administrative. General and administrative expenses
were 49% of revenue in the second quarter of 1996 as compared to
52% in the same quarter of 1995. This decrease in general and
administrative expenses is principally due to the Company's
assignment of associates to product specific teams and the
temporary utilization of certain personnel for assistance in
upgrading the Company's headquarters during the comparable period
in 1995.
General and Administrative expenses were 27% of revenue in the
six months ended 6/30/96 as compared to 47% in the comparable
period of 1995. This decrease is principally due to assignment
of certain personnel to plan and oversee the construction and
development of the Net Process Learning Center and its associated
costs.
Provisions for Income Taxes. Prior to the merger on April 21,
1996 the principal operating subsidiary of the Company (NIS) was
treated as a subchapter S corporation for tax purposes. As such
income and deductions attributable to NIS were reported by its
shareholders and no tax expense or liability was recorded by the
Company up until such date. Activities of the Company and its
other subsidiary prior to April 21, 1996 did not give rise to a
material liability for income taxes and therefore no taxes were
recorded prior to the second quarter of 1996. Income taxes are
provided for transactions reported in the financial statements
beginning on April 21, 1996, and consist of taxes currently due
plus deferred income taxes. The change in tax status resulted in
a one time charge of approximately $451,000. This change in
status accounts for over half of the Company's tax rate of 108%
for the first six months of 1996.
<page16>
Quarterly Results. Net loss amounted to $731,567 for the second
quarter ended 6/30/96 as compared to a loss of $117,696 for the
second quarter of last year. This increase in loss is directly
attributable to the Company's large tax provision as a result of
the Company's termination of the S status. Although fully
reported this period, the income taxes are payable over four
years.
Net loss amounted to $58,700 for the six months ended 6/30/96 as
compared to a loss of $385,182 for the same period in 1995. This
decrease is due to an increase in sales of services by the
Company while maintaining the costs associated with such sales.
On a per share basis, earnings were $.00 for the six months ended
6/30/96 as compared to a loss of $.02 for the comparable period
of 1995. This per share data has been computed using the
weighted average of the common stock outstanding for Network
Systems International, Inc., the former development stage
company, for all periods presented versus the 5,806,176 shares
outstanding as of 6/30/96.
Net income before income taxes was $21,733 in the second quarter
of 1996 compared to a net loss before income taxes of $117,696 in
the second quarter of the prior year. This increase in profit is
principally attributable to the Company's efforts to reduce all
operating expenses and lower costs of sales and services.
Net income before income taxes for the six months ended June 30,
1996 amounted to $694,600 compared to a net loss of $385,182 in
the comparable period of the prior year. This increase in profit
is principally attributable to large increases in sales during
the first quarter of 1996 and the Company's efforts to reduce all
operating expenses and costs of sales and services.
The Company believes that in the future its results may reflect
quarterly fluctuations resulting from such factors as order
deferrals in anticipation of new product releases, delays in the
release of new products, a slower growth rate in the overall
manufacturing industry or adverse general economic and
manufacturing conditions in the industries in which the Company
does business. Rapid technological change and the Company's
ability to develop and market products that successfully adapt to
that change may also have an impact on the results of operations.
Further, increased competition in the design and distribution of
manufacturing software products could also negatively impact the
Company's results of operations.
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.
<page17>
Liquidity and Capital Resources. Cash and cash equivalents
totaled approximately $228,000 on June 30, 1996. Cash provided
by operating activities amounted to approximately $1,060,000 for
the six months ended 6/30/96 compared to $596,000 in the
comparable period of 1995. This increase in cash provided by
operations is principally due to profits generated during the
current period as compared to a loss from operations in the prior
period.
Long term cash requirements, other than normal operating
expenses, are anticipated for development of new software
products and enhancements of existing products; financing
anticipated growth; adding additional personnel; and the possible
acquisition of software products or technologies complimentary to
the Company's business. The Company believes that its existing
cash, cash equivalents, available lines of credit and anticipated
cash generated from continuing operations will be sufficient to
satisfy its currently anticipated cash requirements for the 1996
fiscal year. Additionally, the Company anticipates increasing
its cash availability by way of a private placement of some of
its shares of common stock and a secondary offering of its stock
by calendar year end. However, there are no assurances as to the
timing or success of these anticipated offerings.
<page 18>
Part II
_________________________________________________________________
Item 4. Submission of Matters to a Vote of Security Holders
_________________________________________________________________
All matters submitted to a vote of security holders during the
period covered by this report has been previously reported by the
Company in its Form 10-QSB for the period ending March 31, 1996
and filed with the Securities and Exchange Commission on May 20,
1996. Exhibits contained therein set forth the details of all
matters submitted to a vote of security holders, therefore,
specific reference is made thereto.
_________________________________________________________________
Item 5. Other Matters
_________________________________________________________________
(1) On June 7, 1996 the Company filed a Form S-8 registration
statement with the Securities and Exchange Commission for the
issuance of 50,000 shares of common stock of the Company to the
Renno Group, Inc., a Florida corporation pursuant to a services
agreement approved by the Board of Directors of the Company. On
June 28, 1996 a stock certificate for the 50,000 shares was
issued.
(2) Although the Company previously believed that it would
acquire a sufficient asset level by the end of its second quarter
to qualify for its submission of an application for NASDAQ Small
Cap Market status, such asset level was not achieved due to the
failure of the Company to close pending business prior to the end
of the quarter. Therefore, application for NASDAQ Small Cap
Market status is currently held in abeyance until such time as
the Company increases its asset base to the levels required.
<page19>
_________________________________________________________________
Item 6 Exhibits and Reports on Form 8-K
_________________________________________________________________
(a)Exhibits included herewith and incorporated by reference are:
(2) Plan of acquisition, reorganization, arrangement,
liquid, or succession
(10) Material contracts
(16) Letter on change in certifying accountants
(22) Published report regarding matters submitted to vote
(24) Power of attorney
(b) Reports on Form 8-K
Reports filed and incorporated by reference are:
1. Form 8-K
On May 8, 1996 a Form 8-K was filed with the Securities and
Exchange Commission. The items reported on the 8-K were as
follows:
1. Changes in Control of Registrant
2. Acquisition or Disposition of Assets
3. Changes in Registrant's Certifying Accountant
4. Resignation of Registrant's Directors
5. Financial Statements and Exhibits
2. Form 8-K/A
A Form 8-K/A was filed with the Securities and Exchange
Commission on May 22, 1996. The item reported was:
Financial Statements and exhibits
3. Form 8-K/A1
On June 10, 1996, the registrant filed an 8-K/A1, including
exhibits, with the Securities and Exchange Commission. Items
reported were:
Item 4 Changes in Registrant's Certifying Accountants
Item 7 Resignation of Registrant's Directors
Exhibits:
Combined Financial Statements
Letter from Jones, Jensen & Company
<page20>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
NETWORK SYSTEMS INTERNATIONAL, INC.
Date: 8/13/96 _/s/ Robbie M. Efird_______________
Robbie M. Efird, President
and acting as CFO
Date: 8/13/96 _/s/ William C. Ray________________
William C. Ray, Vice President
<page 21>
EXHIBIT INDEX
Exhibit Page
Exhibit 2 23
Exhibit 10 24
Exhibit 16 25
Exhibit 22 26
Exhibit 24 27
(All Exhibits Listed Herein Are Incorporated By Reference)
<page22>
Exhibit 2
On May 20, 1996 a Form 10-QSB was filed with the Securities
and Exchange Commission attaching a copy of an "Agreement and
Plan of Reverse Triangular Merger" which described in detail
Registrant's plan of acquisition, reorganization, arrangement,
liquidation, or succession. This Form 10-QSB is incorporated by
reference.
<page 23>
Exhibit 10
On June 7, 1996 a Form S-8 was filed with the Securities and
Exchange Commission. The Form S-8 references a contract between
Registrant and The Renno Group, Inc. for the issuance of 50,000
shares of Registrant's common stock, par value .001 in exchange
for certain services. The Form S-8 is incorporated by reference.
<page24>
Exhibit 16
On June 10, 1996 a Form 8-K/A1 was filed with the Securities
and Exchange Commission attaching a letter on change in
certifying accountant. This Form 8-K/A1 is incorporated by
reference.
<page25>
Exhibit 22
On May 20, 1996 a Form 10-QSB was filed with the Securities
and Exchange Commission including a published report regarding
matters submitted to vote of security holders. These reports
were in the form of a special meeting of shareholders as listed
as Exhibit C of the Form 10-QSB and Report of Inspector of
Elections and listed as Exhibit D of the Form 10-QSB. This Form
10-QSB is incorporated by reference.
<page26>
Exhibit 24
On May 20, 1996 a Form 10-QSB was filed with the Securities
and Exchange Commission wherein a general power of attorney was
attached as Exhibit F thereto. This Form 10-QSB is incorporated
by reference.
<page27>
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