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10Q1Q97.doc
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934.
For the quarterly period ended December
31, 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 February 13, 1997.
Transitional Small Business Format (check one) Yes __ No X
NETWORK SYSTEMS INTERNATIONAL, INC.
Contents
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet 3
Consolidated Statements of Operations
Three months ended December 31, 1996 and 1995 4
Consolidated Statements of Cash Flow
Three months ended December 31, 1996 and 1995 5
Consolidated Statement of Changes in Stockholder's
Equity 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Part II
Item 4. Submission of Matters to Vote of Security Holders 16
Item 5. Other matters 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
PART I. FINANCIAL STATEMENTS
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1996
(Unaudited)
<CAPTION>
<S> <C>
Assets
Current Assets
Cash $ 3,564
Accounts receivable, trade, net of allowance of $121,594 1,777,718
Accounts receivable, related parties 13,139
Other current assets 30,110
1,824,531
Property and equipment, net of accumulated depreciation 991,617
Other Assets
Software development costs, net of accumulated amortization 1,245,774
Other 53,528
1,299,302
$4,115,450
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable, current portion $ 275,134
Capital lease obligation, current portion 72,000
Accounts payable, trade 622,897
Other accrued liabilities 83,395
Income taxes payable 53,577
Deferred revenue 177,383
Billings in excess of costs and earnings on
uncompleted contracts 18,240
Total current liabilities 1,302,626
Long Term Liabilities:
Deferred income taxes 605,038
Notes payable, net of current maturities 370,714
Capital lease obligation, net of current maturities 215,382
Total long term liabilities 1,191,134
Stockholders' Equity
Preferred Stock; $.001 par value; authorized 12,500 shares;
issued and outstanding 0 shares
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 (521,451)
Total stockholders' equity 1,621,690
$4,115,450
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Operations (Unaudited)
<CAPTION>
Three Months Ended December 31
1996 1995
<S> <C> <C>
Revenue:
Licensing revenue $ 982,537 $ 632,769
Equipment revenue 403,226 1,262,607
Servicing revenue 47,100 493,958
Total revenue 1,432,863 2,389,334
Operating expenses
Cost of sales and services 647,215 1,273,118
Research and development 89,749 128,549
General and administrative 234,416 413,759
971,380 1,815,426
Operating income 461,483 573,908
Other income (expenses)
Interest (16,838) (5,703)
Other income (expense) 174 (28,828)
(16,664) (34,531)
Income before income
tax provision 444,819 539,377
Income tax provision 144,000 0
Net income $ 300,819 $ 539,377
Primary net income per
common share $ .05
Weighted average common
stock outstanding 5,806,176
Pro Forma Amounts Assuming
Retroactive Application of
Change In Subchapter S
Status and Corporate
Recapitalization
Income before income tax provision $ 539,377
Income tax provision 210,600
Net income $ 328,777
Primary net income per
common share $ .06
Weighted average common
stock outstanding 5,756,176
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<TABLE>
NETWORK SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<CAPTION>
Three Months Ended December 31
1996 1995
<S> <C> <C>
Operating activities
Net income 300,819 539,377
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 286,927 95,905
Loss on marketable securities 4,223
(Increase) in:
Accounts receivable and unbilled (650,864) (1,419,523)
receivables
Prepaid assets, other receivables, and (1,104) (10,605)
other assets
Increase (decrease) in:
Accounts payable and accrued liabilities 381,615 969,078
Income tax payable 53,577
Unearned revenue 41,875 4,797
Deferred income taxes 90,338
Billings in excess of costs and earnings
on (252,460) (143,151)
uncompleted contracts
Total adjustments (50,096) (499,276)
Net cash provided by operating activities 250,723 40,101
Investing activities
Deposit on equipment (30,000)
Acquisition of property and equipment (40,150) (16,541)
Software development (390,488) (145,608)
Proceeds on sale of marketable securities 3,557
Purchase of marketable securities (3,540)
Increase in cash surrender value of life insurance (3,522) (2,016)
Net cash (used) by investing activities (464,160) (164,148)
Financing activities
Payment received from stockholder advances 700
Payment on notes payable, long-term debt and
capital leases (35,873) (6,990)
Net proceeds on line of credit 175,387 97,578
Net cash provided by financing activities 139,514 91,288
Net (decrease) in cash (73,923) (32,759)
Cash at October 1 77,487 94,517
Cash at December 31 $ 3,564 $ 61,758
Supplemental disclosures of cash flow information
and noncash investing and financing activities
Cash paid during the period for:
Interest $ 17,567 $ 15,541
</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.)
The accompanying notes are an integral part of the
financial statements.
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
Three months ended December 31, 1996
<CAPTION>
Retained
$0.001 Capital in Earnings
Number of Par Excess of (Accumulat
Shares Value Par Value ed) Total
(Deficit)
<S> <C> <C> <C> <C> <C>
Balance September 30, 1996 5,806,176 $ 5,806 $2,137,335 $(822,270) $1,320,871
Net income for the three
month 300,819 300,819
period ended December 31,
1996
5,806,176 $ 5,806 $2,137,335 $(521,451) $1,621,690
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
Network Systems International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
For the Three Months Ended December 31, 1996 and December 31, 1995
(Unaudited)
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 22, 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 on
September 9, 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 on April 7, 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.
The Company changed their year end from December 31 to September 30 in
1996.
In December 1996 the Company entered into an agreement with an
underwriter to promote the sale of a private placement preferred stock
offering. The Company plans to sell 12,500 shares of Series A
preferred stock at a purchase price of $100 per share. Each share of
preferred stock will receive an annual dividend of $12 per share. The
preferred stock is convertible into 50 shares of the Company's common
stock at a conversion price of $2.00 per share, subject to the outcome
of certain events. As of February 13, 1997 the Company has raised
approximately $508,515 under the private placement offering.
2. Summaries of Significant Accounting Policies
Basis of Preparation:
The financial statements as of December 31, 1996 and for the three
month period then ended Consolidate the Accounts of Network Systems
International, Inc. and its wholly owned subsidiaries Network
Information Services, Inc. and Network Investment Group, Inc. The
financial statements for the three months ended December 31, 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 periods ended December 31,
1996 and 1995, (b) the financial position at December 31, 1996, and
(c) cash flows for the three-month periods ended December 31, 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.
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.
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 technical
feasibility for the product. Capitalized software development costs
amounted to $390,488 and $145,608 for the three month period ended
December 31, 1996 and 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 $240,494 and $75,790 for the three month
period ended December 31, 1996 and 1995, respectively, and is included
in cost of sales.
Software development costs at December 31, 1996 consist of the
following:
Software Development Costs $ 2,212,945
Less Accumulated Amortization (967,171)
$ 1,245,774
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 which may result in revisions to costs and revenue are
recognized in the period in which the revenues are determined.
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.
Advertising Costs:
Advertising costs, except for costs associated with direct response
advertising, are charged to operations when incurred. The costs of
direct response advertising are capitalized and amortized over the
period during which future benefits are expected to be received.
Advertising expense amounted to $30,489 and $-0- for the periods ended
December 31, 1996 and December 31, 1995, respectively. No material
amounts were capitalized during the 3 month period ended December 31,
1996 and 1995, respectively.
Income Tax:
Prior to the merger on April 22, 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.
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 earnings per common share are computed using the weighted
average number of shares outstanding of the Company for the period
ended December 31, 1996.
Pro forma Presentation:
The consolidated financial statement of operations for the 3 month
period ended December 31, 1995 includes a pro forma presentation, as
specified by the Securities and Exchange Commission, for income taxes
which would have been recorded had the operating subsidiary been a C
corporation, based on the tax laws in effect during those periods.
Pro forma earnings per share have been calculated to include the
adjustment for income taxes had the operating subsidiary been a C
corporation during the periods ended December 31, 1995. Weighted
average number of shares outstanding have been calculated to reflect
the number of equivalent shares received by the acquiring company
during the reverse acquisition.
3. Uncompleted Contracts
Information with respect to uncompleted contracts at December 31, 1996
is summarized as follows:
Earned contract revenue $ 429,760
Less billings to date 448,000
Billings in excess of costs and
earnings on uncompleted contracts $ (18,240)
4. Property and Equipment
Property and equipment at December 31, 1996
consist of the following
Land $ 150,000
Building 300,000
Leasehold improvements 89,426
Furniture and fixtures 118,229
Office equipment 93,364
Computer equipment 229,507
Computer software 50,693
Computer equipment and software under
capital lease 324,933
1,356,152
Less accumulated depreciation and
amortization (304,706)
Accumulated amortization on computer
equipment and software ( 59,829)
under capital lease
$ 991,617
5. Notes Payable
Notes payable at December 31, 1996 consist of:
Bank line of credit:
$250,000 maximum line; interest payable
monthly at prime plus .5%; principal due
February 26, 1997; collateralized
by accounts receivable, equipment, and
a $200,000 life insurance policy;
personally guaranteed by certain $ 195,134
stockholders
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; personally guaranteed by certain
stockholders 35,566
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 415,148
645,848
Less amounts currently due 275,134
$ 370,714
The following is a schedule by year of the principal
payments required on these notes payable and long-term debts:
1997 $275,134
1998 31,344
1999 31,344
2000 308,026
6. Obligations Under Capital Leases
The Company has capitalized rental obligations under three leases of
software and equipment. The obligations, which mature in 2000 and
2001, 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 December 31
1997 $ 92,197
1998 90,432
1999 90,432
2000 42,812
2001 14,600
Total minimum lease payments 330,473
Less amount representing interest 43,091
Present value of net minimum lease payments $ 287,382
Less current portion 72,000
$ 215,382
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
As a result of the reverse acquisition on April 22, 1996, the
Subchapter S status of one of the Company's subsidiaries was
terminated. After that date, the financial statements of the Company
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
necessitated the recognition of the cumulative deferred income
existing as of the date of the termination of the S status which
resulted in a one-time charge to deferred tax expense of $435,200.
Net income from operations before income taxes totaled $444,819 for
the three months ended December 31, 1996. The provision for income
taxes from continuing operations consist of the following components:
Current tax expense $ 107,400
Deferred tax expense 65,800
Research and development credit (29,200)
$ 144,000
The significant temporary differences which gave rise to deferred tax
assets and liabilities as of December 31, 1996 are as follows:
Deferred tax asset
Bad debt revenue $ 199,600
Deferred tax liabilities
Software development cost $1,245,800
Book basis of property & equipment
in excess of tax basis 71,200
Change in tax status 553,900
$1,870,900
The Company has loss carryforwards totaling $149,900 that may be
offset against future taxable income and research and development
credit totaling $26,600 that may be offset against future federal
income taxes. If not used, the carryforwards will expire as follows:
Research & development
Operating losses credits
2003 $ 92,800 -
2009 49,300 -
2010 7,800 -
2011 - 6,300
2012 - $20,300
$149,900 $26,600
No valuation allowance has been recorded against the deferred tax
assets or operating loss or tax credit carryforwards because
recognition of the cumulative deferred income arising from the change
in tax status should be sufficient to offset the remaining tax assets.
The difference between the provision for income taxes and the amounts
obtained by applying the statutory U.S. Federal income tax rate to
income before taxes for the three months ended December 31, 1996 is as
follows:
Tax expense at U.S. statutory rates $ 151,200 34.0%
State and local income tax 5,600 1.3%
Research & development credit and
other (12,800) (2.9%)
$ 144,000 32.4%
9. Major Customer
For the three month period ended December 31, 1996, sales to four
customers amounted to approximately $833,000. For the three month
period ended December 31, 1995, sales to two customers amounted to
approximately $1,488,000.
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 December 31,
1996:
1997 $44,986
1998 $35,417
1999 $19,032
2000 $ 2,449
Rent expense amounted to $9,658 and $52,754 for the three months ended
December 31, 1996 and 1995, respectively.
11. Commitments
The Company entered into 20 year employment agreements with five of
its officers calling for annual salaries totaling no less than
$195,000.
____________________________________________________________________
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. Although Network's first quarter software sales increased
from $632,769 to $982,577 during first period 1996 over the comparable
period 1995, a 55% increase, the Company's total first quarter
revenues decreased 40% to $1,432,863 compared to the first quarter of
the prior year. This decrease resulted from the sale of approximately
one million dollars of hardware to a single customer during the
comparable period in 1995.
Software sales contributed 68.6% of the net revenues of the Company;
implementation services 3.3% and hardware sales 28.1% for the quarter
ended 12/31/96.
The Company intends to continue to provide periodic upgrades to its
software packages during the balance of the year. During first
quarter, 1997, 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 1997. 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 first quarter of fiscal 1997 to
45% from 53% in the first quarter of the prior fiscal year. This
decrease is attributable to a shift of the Company's focus into
software licensing and a resultant decrease in equipment sales. Since
equipment revenues carry a higher percentage of costs as compared to
software licensing fees, an anticipated decrease in cost of sales and
services was achieved. Included in cost of sales and services is
$240,494 of amortized software costs.
Software Development Costs. Software development costs, both
capitalized and expensed as research and development, amounted to
approximately $480,000 for the three months ended 12/31/96, as
compared to approximately $274,000 for the three months ended
12/31/95; a 75% increase. Of these amounts, approximately $390,000
and $146,000 were capitalized for the three months ended December 31,
1996 and 1995, respectively. More software development costs were
capitalized in 1996 versus 1995 since technological feasibility of
more products was achieved in fiscal year 1996. This increase is
principally attributable to the Company's continued commitment to
develop new and improved software modules. The Company would
anticipate that research and development expenses will overall,
increase in 1997 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
16.4% of revenue in the first quarter of 1997 as compared to 17.3% in
the same quarter of 1996. This decrease in general and administrative
expenses is principally due to the Company's assignment of certain
associates out of the administrative area into more product focused
issues of the Company's business.
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 $435,000.
Quarterly Results. Net income for the three month period ended
12/31/96 was $300,819. Assuming a retroactive application of change
in Subchapter S status, pro forma net income for the comparable period
ended 12/31/95 amounted to $328,777. This decrease is directly
attributable to the sale of approximately one million dollars of
hardware to a single customer during the 1995 period.
On a per share basis, earnings were $.05 for the three months ended
12/31/96 as compared to pro forma $.06 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
12/31/96.
Net income before income taxes was $444,819 in the quarter ended
December 31, 1996 compared to an income before income taxes of
$539,377 for the comparable period ended 12/31/95. This decrease is
primarily due to the sale of approximately one million dollars of
hardware to a single customer during the period in 1995.
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.
Liquidity and Capital Resources. Cash totaled $3,564 on December 31,
1996. Cash provided by operating activities amounted to approximately
$250,700 for the three months ended 12/31/96 compared to $40,100 in
the comparable period of 1995. This increase in cash provided by
operations is principally due to additional collections of accounts
receivables over 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.
As previously stated, current sales of preferred stock in a private
placement offering as of February 13, 1997 amounted to a net cash
position of $508,515. Assuming the balance of the private placement
offering is successful, the total net cash to be received by the
Company will amount to $1,087,500. The Company will pay a $12.00 per
share dividend on each share of preferred stock until, (1) the
preferred shareholder exercises the right to convert the preferred
shares to common stock of the Company at a conversion rate of $2.00
per share, or (2) the Company exercises its right to call the shares
on the basis of a declining premium from $3.00 to $0 over the nine
month period beginning February 12, 1998.
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-KSB for the period ending September 30, 1996 and filed
with the Securities and Exchange Commission on January 10, 1997.
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 December 12, 1996 the Company initiated a plan to issue up to
$1,250,000 in Series A Convertible Preferred Stock in a private
placement offering. Palm State Equities, Inc. will act as underwriter
in the offering which anticipates that the offering will be completed
by the close of the Company's second quarter ending March 31, 1997.
(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.
_______________________________________________________________________
Item 6 Exhibits and Reports on Form 8-K
_______________________________________________________________________
(a)Exhibits included herewith are:
(3)(i) Articles of Incorporation
(4) Investments defining the rights of holders including
indentures
(27) Financial Data Schedule
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: 2/14/97 /s/ Robbie M. Efird
Robbie M. Efird, President
and acting as CFO
Date: 2/14/97 /s/ William C. Ray
William C. Ray, Vice President
EXHIBIT INDEX
Exhibit Page
(3)(i) 20
(4) 26
(27) 29
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 3,564
<SECURITIES> 0
<RECEIVABLES> 1,899,312
<ALLOWANCES> (121,594)
<INVENTORY> 0
<CURRENT-ASSETS> 1,824,531
<PP&E> 1,356,152
<DEPRECIATION> (364,535)
<TOTAL-ASSETS> 4,115,450
<CURRENT-LIABILITIES> 1,302,626
<BONDS> 0
0
0
<COMMON> 5,806
<OTHER-SE> 1,615,884
<TOTAL-LIABILITY-AND-EQUITY> 4,115,450
<SALES> 1,432,863
<TOTAL-REVENUES> 1,432,863
<CGS> 647,215
<TOTAL-COSTS> 971,380
<OTHER-EXPENSES> (174)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,838
<INCOME-PRETAX> 444,819
<INCOME-TAX> 144,000
<INCOME-CONTINUING> 300,819
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 300,819
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
FILED in the office of the Secretary of State of the
STATE OF NEVADA - September 21, 1988
1
Articles.doc
Exhibit (3)(i)
Articles of Incorporation
ARTICLES OF INCORPORATION
OF
NETWORK SYSTEMS INTERNATIONAL, INC.
We, the undersigned, having this day associated ourselves
together for the purpose of forming a corporation under and by virtue
of the laws of the State of Nevada, hereby adopt the following
Articles of Incorporation:
ARTICLE I
NAME
The name of the Corporation is Network Systems International, Inc.,
(the "Corporation").
ARTICLE II
DURATION
The duration of the Corporation shall be perpetual.
ARTICLE III
PURPOSES
The Corporation is organized and authorized to pursue any
lawful purpose or purposes including, but not limited to, making a
blind pool public offering of securities and to acquire, consolidate,
merger with or into, or be acquired by, another business entity.
The Corporation shall further have all powers specified in
Sections 78.060, 78.065 and 78.070 of the Nevada Revised Statutes, and
any amendments thereto.
ARTICLE IV
AUTHORIZED SHARES
The Corporation shall have the authority to issue one hundred
million (100,000,000) shares of common stock with a par value of $.001
per share and twelve thousand five hundred (12,500) shares of Series A
convertible Preferred shares with a par value of $.001 per share. All
common stock of the Corporation shall be fully paid and shall not be
liable to any further call or assessment.
ARTICLE V
SHAREHOLDER RIGHTS
No shareholder of the Corporation shall, because of his
ownership of the shares, have any preemptive or other rights to
purchase, subscribe for, or take all or part of any shares or all or
part of any notes, debentures, bonds or securities convertible into or
carrying options for warrants to purchase shares of the Corporation
issued, optioned or sold by it after its incorporation. Such shares
may be sold or disposed of by the Corporation pursuant to resolution
of its Board of Directors to such persons and upon such terms as may,
to such Board of Directors, seem proper without first offering such
shares or securities or any part thereof to existing shareholders.
VI
VOTING OF SHARES
Each outstanding share of the common stock of the Corporation
shall be entitled to one vote on each matter submitted to a vote at a
meeting of the shareholders, each shareholder being entitled to vote
his shares in person or by proxy executed in writing by such
shareholder or by his duly authorized attorney-in-fact. At each
selection of directors, each shareholder entitled to vote at such
election shall have the right to vote in person or by proxy the number
of shares owned by him for as many persons as there are directors to
be elected and for whose election he has a right to vote, but the
shareholder shall have no right whatsoever to accumulate his votes
with regard to such election.
VII
OFFICE AND AGENT
The address of the initial registered office of the Corporation
is 1 East 1st Street, Reno, Washoe County, Nevada, and the name of the
Corporation's initial registered agent at such address is Corporation
Trust Company of Nevada.
VIII
BOARD OF DIRECTORS
The management of the affairs, property and interest of the
Corporation shall be vested in a Board of Directors.
(a) The number of Directors constituting the initial board
shall be three (3) in number, provided, however, that the number of
directors may be changed from time to time by a provision of the
Bylaws, but in no event shall the number of directors be less than
three (3) nor more than ten (10).
The following shall be the names and addresses of the persons
who are to serve as directors until the first annual meeting of the
shareholders, or until their successors shall be elected and
qualified:
Al Wadsworth 1080 South 1080 East
Springville, Utah 84663
Betty Wadsworth 376 Edwards Avenue
Shelley, Idaho 83274
Clifford Wadsworth 376 Edwards Avenue
Shelley, Idaho 83274
ARTICLE IX
INCORPORATORS
The name and address of each incorporator is as follows:
Ronald L. Poulton 9 Exchange place, Suite 200
Salt Lake City, Utah 84111
Al Wadsworth 1080 South 1080 East
Springville, Utah 84663
David R. Blaisdell 51 East 400 South, Suite 200
Salt Lake City, Utah 84111
ARTICLE X
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall indemnify any and all persons who may
serve at any time as directors or officers or who at the request of
the Board of Directors of the Corporation may serve or at any time
have served as directors or officers of another corporation in which
the Corporation at such time owned or may own shares of stock or of
which it was or may be a creditor, and their respective heirs,
administrators, successors, and assignees, against any and all
expenses, including amounts paid upon judgments, counsel fees and
amounts paid in settlement (before or after suit is commenced),
actually and necessarily incurred by such persons in connection with
the defense or settlement of any claim, action, suit or proceeding in
which they, or any of them are made parties, or a party, or which may
be asserted against them or any of them, by reason of being or having
been directors or officers of a director or officer of the
Corporation, or such other corporation, except in relation to matters
as to which any such director or officer or former director or officer
or person shall be adjudged in any action, suit or proceeding to be
liable for his own negligence or misconduct in the performance of his
duty. Such indemnification shall be in addition to any other rights
to which those indemnified may be entitled under any law, bylaw,
agreement, vote of shareholders or otherwise.
ARTICLE XI
CONTRACTS
No contract or transaction entered into by the Corporation
shall be affected by the fact that any director, officer, employee or
shareholder of the Corporation may in any way be interested in or
connected with any party to such contract or transaction, provided
that this interest be first disclosed or have been known to the Board
of Directors or by a majority of such members thereof and that the
contract or transaction be approved by a majority of the directors or
shareholders present at the meeting where such contract or transaction
is authorized or confirmed; nor shall any director or shareholder be
incapacitated from having his vote be counted in determining the
existence of the quorum at any meeting of the Board of Directors or
shareholders which shall authorize any such contract or transaction
and any interested director or shareholder may vote thereat to
authorize any such contract or transaction.
IN WITNESS WHEREOF, the undersigned being the incorporators,
execute these Articles of Incorporation and certify to the truth of
the facts herein stated this 12th day of September, 1988.
/s/ Ronald L. Poulton
Ronald L. Poulton
/s/ Al Wadsworth
Al Wadsworth
/s/ David R. Blaisdell
David R. Blaisdell
STATE OF UTAH )
) ss.
COUNTY OF SALT LAKE )
We, the undersigned, being first duly sworn on oath, depose and
say that: We are the incorporators hereinbefore named; we have read
the foregoing Articles of Incorporation and know the contents thereof
and the same are true of our own knowledge, except as to matters
therein stated upon information and belief, and as to those, we
believe them to be true.
/s/ Ronald L. Poulton
Ronald L. Poulton
/s/ Al Wadsworth
Al Wadsworth
/s/ David R. Blaisdell
David R. Blaisdell
On the 12th day of September, 1988, personally appeared before
me, RONALD L. POULTON, AL WADSWORTH and DAVID R. BLAISDELL, signers of
the Articles of Incorporation, who duly acknowledged to me that they
executed the same.
/s/ Joan Loudon
NOTARY PUBLIC
Residing in Salt Lake County
My commission expires 4/1/89
(SEAL)
EXHIBIT (4)
PREFERRED STOCK CERTIFICATE
INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA (top middle of
certificate)
[Preferred Stock Number] (Far left side of certificate)
PREFERRED STOCK
Network Systems International, Inc. logo (Middle of certificate)
[Number of Shares] (Far right side of certificate)
CUSIP 64121L 20 2
SEE REVERSE SIDE FOR CERTAIN
DEFINITIONS AND NOTICE OF
DENIAL AND PREEMPTIVE RIGHTS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES, PAR VALUE $.001 EACH, OF THE
SERIES A PREFERRED STOCK OF
NETWORK SYSTEMS INTERNATIONAL, INC.
a corporation organized under the laws of the State of Nevada,
transferable on the books of the Corporation by the holder in
person or by duly authorized attorney upon surrender of this
Certificate endorsed. This Certificate and the shares
represented hereby are subject to all the terms, conditions and
limitations of the Articles of Incorporation and Bylaws of the
Corporation and all amendments thereto. This certificate is not
valid unless countersigned and registered by the Transfer Agent
and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signature of its duly authorized officers.
Dated:
SECRETARY Corporate Seal
PRESIDENT
(This information is on the right side of the front of the certificate)
Countersigned and Registered:
American Stock Transfer & Trust Company
(New York, New York)
Transfer Agent and Registrar
By:
Authorized Signature
NETWORK SYSTEMS INTERNATIONAL, INC.
The Articles of Incorporation of the Corporation on file in the office
of the Secretary of State of Nevada set forth (a) the aggregate number
of shares and the par value of each class of capital shares that the
Corporation is authorized to issue, together with the designations,
preferences, limitations and relative rights of each such class; (b) a
statement of the authority vested in the Board of Directors to
establish series and to fix and determine the variations in the
relative rights and preferences between any such series of the
Preferred Stock so established; (c) a denial of preemptive rights of
the shareholders to acquire additional unissued or treasury shares of
the Corporation; and (d) a denial of cumulative voting at any meeting
of the shareholders for electing directors. The Corporation will
furnish a copy of such statement to the record holder of this
certificate without charge upon written request to the Corporation at
its registered office.
The following abbreviations, when used in the inscription on
the face of this certificate, shall be construed as though they were
written out in full according to applicable laws or regulations.
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT . . . . . Custodian . . .. . . . . . . . . . . .
(Cust) (Minor)
under Uniform Gifts to Minors
Act . . . . . . . . . . . . . . . . . . . . . .
(State)
Additional abbreviations may also be used though not in the
above list
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
For value received ______ hereby sell, assign and transfer unto
(PLEASE PRINT OR TYPE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE
______________________________________________________________________
____________________________________ Shares
of the preferred stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint
______________________________________________________________________
______________ Attorney
to transfer the said stock on the books of the within-named
Corporation with full power of substitution in the premises.
Dated ___________________________
NOTICE:
THE SIGNATURE(S) TO THIS X ______________________
ASSIGNMENT MUST CORRESPOND (SIGNATURE)
WITH THE NAME(S) AS WRITTEN X
UPON THE FACE OF THE ___________________________
CERTIFICATE IN EVERY (SIGNATURE)
PARTICULAR WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE
WHATEVER
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN "ELIGIBLE
GUARANTOR INSTITUTION" AS DEFINED
IN RULE 17Ad-15 UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
SIGNATURE(S) GUARANTEED BY:
THE BOARD OF DIRECTORS OF NETWORK SYSTEMS INTERNATIONAL, INC. HAS THE
AUTHORITY TO ISSUE SHARES OF CAPITAL STOCK IN ONE OR MORE CLASSES OR
SERIES AND TO FIX AND DETERMINE THE DESIGNATIONS, PREFERENCES,
LIMITATIONS, AND RELATIVE RIGHTS OF EACH SUCH CLASS OR SERIES OF
CAPITAL STOCK SO ISSUED. A STATEMENT OF ALL THE DESIGNATIONS,
PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS OF EACH SUCH CLASS OR
SERIES OF CAPITAL STOCK, TO THE EXTENT THEY HAVE BEEN FIXED AND
DETERMINED BY THE BOARD OF DIRECTORS, SET FORTH IN THE ARTICLES OF
INCORPORATION ON FILE IN THE OFFICE OF THE SECRETARY OF STATE OF THE
STATE OF NEVADA. A COPY OF SUCH STATEMENT WILL BE FURNISHED TO THE
RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST
TO NETWORK SYSTEMS INTERNATIONAL, INC. AT ITS PRINCIPAL PLACE OF
BUSINESS OR REGISTERED OFFICE.
