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d:\sec\10Q3Q97.doc 4:19 PM 8/8/97
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, 1997
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 and 9,847 shares of Registrants $.001 par value preferred stock
outstanding as of August 5, 1997.
Transitional Small Business Format (check one) Yes __ No X
<TABLE>
NETWORK SYSTEMS INTERNATIONAL, INC.
Contents
<S> <C>
Part I - Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheet 3
Consolidated Statements of Operations
Three and Nine months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flow
Nine months ended June 30, 1997 and 1996 5
Consolidated Statement of Changes in Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Part II
Item 5. Other matters 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
</TABLE>
<TABLE>
<CAPTION>
PART I. FINANCIAL STATEMENTS
Network Systems International, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 1997
(Unaudited)
<S> <C>
Assets
Current Assets
Cash $ 545,837
Accounts receivable, trade, net of allowance of $229,700 2,462,075
Accounts receivable, related party 109,120
Cost and estimated earnings in excess of billings
uncompleted contracts 212,155
Other current assets 49,908
Total current assets 3,379,095
Property and equipment, net of accumulated depreciation 916,115
Other Assets
Software development costs, net of accumulated amortization 1,442,963
Other 140,473
1,583,436
$ 5,878,646
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable, current portion $ 122,197
Capital lease obligation, current portion 68,000
Accounts payable, trade 714,512
Other accrued liabilities 30,374
Income taxes payable 212,901
Deferred revenue 208,874
Total current liabilities 1,356,858
Long Term Liabilities:
Deferred income taxes 590,690
Notes payable, net of current maturities 365,212
Capital lease obligation, net of current maturities 178,516
Total long term liabilities 1,134,418
Stockholders' Equity
Preferred Stock; $.001 par value; authorized 12,500 shares;
issued and outstanding 9,847 shares 10
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 2,994,014
Retained earnings 387,540
Total stockholders' equity 3,387,370
$ 5,878,646
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<TABLE>
<CAPTION>
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Operations (Unaudited)
Three Months Ended June 30 Nine Months Ended June 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue:
Licensing and servicing $ 1,400,567 $ 522,489 $ 3,773,225 $ 2,965,461
revenue
Equipment revenue 1,572,619 80,592 2,537,575 2,066,236
Total revenue 2,973,186 603,081 6,310,800 5,031,697
Operating expenses
Cost of sales and services 1,659,309 180,211 3,212,494 2,374,751
Research and development 49,375 87,410 210,611 242,347
General and administrative 318,971 294,499 991,510 1,122,068
2,027,655 562,120 4,414,615 3,739,166
Operating income 945,531 40,961 1,896,185 1,292,531
Other income (expenses)
Interest (11,633) (22,662) (52,344) (40,355)
Other income (expense) 6,872 3,434 9,894 (18,219)
(4,761) (19,228) (42,450) (58,554)
Income before income
tax provision 940,770 21,733 1,853,735 1,233,977
Income tax provision 297,000 753,300 601,000 753,300
Net income (loss) $ 643,770 $ (731,567) $ 1,252,735 $ 480,677
Primary net income (loss) per
common share $ .11 $ (.13) $ .21 $ .08
Weighted average common shares
outstanding, Primary 5,806,176 5,769,912 5,806,176 5,760,755
Fully diluted net income per
common share $ .10 $ .21
Weighted average common
shares outstanding assuming
fully diluted 6,275,211 6,045,761
Pro Forma Amounts Assuming
Retroactive Application of
Change In Subchapter
S Status and Corporate
Recapitalization
Income before income tax $ 21,733 $ 1,233,977
provision
Income tax provision 8,200 456,900
Net income $ 13,533 $ 777,077
Primary net income per
common share $ .00 $ .13
Weighted average common
stock outstanding 5,769,912 5,760,755
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<TABLE>
<CAPTION>
NETWORK SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
Nine Months Ended June 30
1997 1996
<S> <C> <C>
Operating activities
Net income $ 1,252,735 $ 480,677
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 978,500 394,058
Loss on marketable securities 4,223
(Increase) decrease in:
Accounts receivable and unbilled (1,355,233) (401,499)
receivables
Costs and estimated earnings in excess of
billings on uncompleted contracts (192,143)
Other assets (20,591) (4,996)
Increase (decrease) in:
Accounts payable and accrued liabilities 410,337 (32,161)
Income tax payable 212,901
Unearned revenue 73,366 18,815
Deferred income taxes 75,990 753,300
Billings in excess of costs and earnings
on (270,700) (112,399)
uncompleted contracts
Total adjustments (87,573) 619,341
Net cash provided by operating activities 1,165,162 1,100,018
Investing activities
Deposit on equipment (90,000)
Acquisition of property and equipment (53,367) (39,969)
Software development (1,190,532) (832,797)
Increase in cash surrender value of life insurance (30,281) (3,159)
Net cash (used) by investing activities (1,364,180) (875,925)
Financing activities
Net proceeds from issuance of preferred stock 856,689
Dividends paid on preferred stock (33,053)
Net payments (to) from related parties (96,477) 700
Payment on notes payable, long-term debt and
capital leases (93,289) (78,112)
Net proceeds (payments) on line of credit 33,498 (12,810)
Net cash provided (used) by financing activities 667,368 (90,222)
Net increase In cash 468,350 133,871
Cash at October 1 77,487 94,517
Cash at June 30 $ 545,837 $ 228,388
Supplemental disclosures of cash flow information
and noncash investing and financing activities
Cash paid during the period for:
Interest $ 52,344 $ 41,984
Taxes $ 308,700 0
</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 first quarter of 1996, the Company acquired
computer equipment totaling $232,540 under capital leases.
In June of 1997, the Company declared dividends on
preferred stock in the amount of $9,872.
The accompanying notes are an integral
part of the financial statements.
<TABLE>
<CAPTION>
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
Nine months ended June 30, 1997 (Unaudited)
Common Stock Preferred Stock
Capital (Deficit)
$0.001 Number $0.001 in Excess Retained
Number of Par Of Par of Earnings
Shares Value Shares Value Par Value (Accumulated Total
)
<S> > <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 5,806,176 $5,806 $2,137,335 $ (822,270) $1,320,871
1996
Issuance of preferred
stock,
net of offering 9,847 $ 10 856,679 856,689
expenses
of $128,011
Dividends on (42,925) (42,925)
preferred stock
Net income for the
nine
month period ended _________ ______ _____ ____ __________ 1,252,735 1,252,735
June 30, 1997
Balance June 30, 1997 5,806,176 $5,806 9,847 $ 10 $2,994,014 $ 387,540 $3,387,370
</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 Nine Months Ended June 30, 1997 and June 30, 1996 (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, 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 shareholders of the Company turned in approximately 17.5
million shares of common stock of the Company which were then
canceled.
As a result of the merger, accounted for as a reverse acquisition
similar to the purchase method of accounting, shareholders of NIS and
NIG transferred 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.
Its corporate headquarters are located in Greensboro, North Carolina.
NIG was incorporated under the laws of the State 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. Its corporate headquarters are 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 12,500 shares of preferred stock in
a private placement stock offering. The Company sold 9,847 shares of
Series A preferred stock at a purchase price of $100 per share. Each
share of preferred stock receives an annual cumulative dividend of
$12, payable monthly, and is convertible into 50 shares of common
stock at the holders discretion. Upon liquidation of the Company, the
holders of this preferred stock are entitled to receive $100 per
share, plus an amount equal to all dividends accrued and unpaid to the
date of final distribution. The preferred stock is redeemable for
cash at the option of the Company at any time after January 12, 1998
based on a sliding payment scale over time. Holders of the preferred
stock have no voting privileges.
The Company raised $856,689 in connection with this private placement
offering which is net of offering expenses of $128,011.
2. Summaries of Significant Accounting Policies
Basis of Preparation:
The financial statements as of June 30, 1997 and 1996 and for the
three and nine month periods then ended Consolidate the Accounts of
Network Systems International, Inc. and its wholly owned subsidiaries
Network Information Services, Inc. and Network Investment Group, Inc.
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 and nine-month periods ended June
30, 1997 and 1996, (b) the financial position at June 30, 1997, and
(c) cash flows for the nine-month periods ended June 30, 1997 and
1996, 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.
Cash deposits with one institution are in excess of The Federal
Deposit Insurance Corporation's average limit of $100,000.
Property and Equipment:
Property and equipment are recorded at cost. 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. Depreciation and amortization are calculated using the
double declining balance and straight line methods based upon the
assets estimated useful lives as follows:
Building 39
Leasehold improvements 7-39
Furniture and fixtures 07
Office equipment 5-07
Computer equipment 5-07
Computer software 3-05
Computer software equipment under
capital lease 3-05
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 $1,190,532 and $832,797 for the nine months period ended
June 30, 1997 and 1996, respectively. The Company capitalized
software development costs of $428,218 and $406,318 for the three
months period ended June 30, 1997 and 1996, 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 (a) the
ratio of current gross revenues for a product to the total of current
and anticipated future gross revenues for the product, or (b) 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 $843,348 and $323,698 for the nine month
period ended June 30, 1997 and 1996, respectively, and is included in
cost of sales. Amortization expense for the three month periods ended
June 30, 1997 and 1996 totaled $326,434 and $145,824, respectively.
Software development costs at June 30, 1997 consist of the following:
Software Development Costs $2,243,003
Less Accumulated Amortization 800,040
$1,442,963
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 $72,694 and $14,948 for the nine month
periods ended June 30, 1997 and 1996, respectively. Advertising
expense for the three month periods ended June 30, 1997 and 1996
totaled $22,010 and $0, respectively. Advertising costs of $25,673
were capitalized during the nine month period ended June 30, 1997. No
amounts were capitalized during the nine month period ended June 30,
1996.
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 (NIG) 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 amounts are computed based on the
weighted average number of shares outstanding, 5,806,176 for the nine
and three months ended June 30, 1997. Fully diluted earnings per
share amounts are based on an increased number of shares that would be
outstanding assuming conversion of the preferred stock as of the date
of its issuance. Net income has been adjusted for the dividends on
the preferred stock of $42,925 and $28,146 during the nine and three
months ended June 30, 1997, respectively. The number of shares used
in the computations of fully diluted earnings per share were 6,045,761
and 6,275,211 for the nine and three months ended June 30, 1997,
respectively. Fully diluted earnings per share are not presented for
the periods ended June 30, 1996 because no preferred stock was issued
during these periods.
In February 1997, the Financial Accounting Standards Board issued FASB
# 128 "Earnings Per Share". This statement specifies the Computation,
Presentation, and Disclosure requirements for earnings per share, and
is effective for financial statements ending after December 15, 1997.
The Company's current period primary and fully diluted earning per
share would not be affected by the new statement.
Pro forma Presentation:
The consolidated financial statement of operations for the periods
ended June 30, 1996 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 June 30, 1996. 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 June 30, 1997 is
summarized as follows:
Earned contract revenue $ 720,155
Less billings to date 508,000
Cost and estimated earnings
in excess of billings on
uncompleted contracts $ 212,155
4. Property and Equipment
Property and equipment at June 30, 1997
consist of the following:
Land $ 150,000
Building 300,000
Leasehold improvements 91,615
Furniture and fixtures 122,574
Office equipment 94,164
Computer equipment 232,512
Computer software 53,672
Computer equipment and software
under capital lease 324,933
1,369,370
Less accumulated depreciation
and amortization (344,780)
Accumulated amortization on
computer equipment and
software under capital lease (108,475)
$ 916,115
5. Notes Payable
Notes payable at June 30, 1997 consist
of the following:
Bank line of credit:
$300,000 maximum line; interest
payable monthly at prime
plus .5%; principal due
February 21, 1998, collateralized by
accounts receivable, equipment, and
a $200,000 life insurance policy;
personally guaranteed by certain
stockholders $ 82,197
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 8,348
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 396,864
487,409
Less amounts currently due 122,197
$ 365,212
The following is a schedule by year
of the principal payments required on
these notes payable and long-term debts:
Period Ending June 30
1998 $ 122,197
1999 31,344
2000 $ 333,868
6. Obligations Under Capital Leases
The Company has capitalized rental obligations under three leases of
software and equipment. The obligations, which mature in 2001 and
2002, 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
1998 $ 82,896
1999 90,432
2000 77,128
2001 21,900
2002 5,475
Total minimum lease payments 277,831
Less amount representing interest 31,315
Present value of net minimum lease payments 246,516
Less current portion 68,000
$ 178,516
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 made
matching contributions to the plan totaling $4,297 and $5,713 for the
three and nine month periods ended June 30, 1997 respectively. No
contributions were made to the plan for the three and nine month
periods ended June 30, 1996.
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 $1,853,735 for
the nine months ended June 30, 1997. The provision for income taxes
for the nine months ended June 30, 1997 consist of the following
components:
Current tax expense $ 642,300
Deferred tax expense 76,000
Research and development credit (117,300)
$ 601,000
The significant temporary differences which gave rise to deferred tax
assets and liabilities as of June 30, 1997 are as follows:
Deferred tax asset
Bad debt revenue $ 229,700
Deferred tax liabilities
Software development cost 1,443,000
Book basis of property & equipment
in excess of tax basis 70,900
Change in tax status 409,300
$1,923,200
As of 9/30/96, the Company has federal loss carryforwards totaling
$150,200 that may be offset against future federal taxable income and
federal research and development credit totaling $35,400 that may be
offset against future federal income taxes. If not used, the
carryforwards will expire as follows:
Operating Research & development
losses credits
2003 $ 93,100
2009 49,300
2010 7,800
2011 -
2012 - $ 35,400
$ 150,200 $ 35,400
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 nine months ended June 30, 1997 is as
follows:
Tax expense at U.S.
statutory rates $ 629,100 34.0%
State and local income tax 43,000 2.3%
Research & development
credit and other (71,100) (3.8%)
$ 601,000 32.5%
9. Major Customer
For the three month period ended June 30, 1997, sales to two customers
amounted to approximately $1,435,700. For the three month period
ended June 30, 1996, sales to three customers amounted to
approximately $371,400.
For the nine month period ended June 30, 1997, sales to three
customers amounted to approximately $2,749,600. For the nine month
period ended June 30, 1996, sales to two customers amounted to
approximately $2,642,000.
10. Self Insurance Plan
The Company has a medical health benefit self-insurance plan for
substantially all of its employees. The Company is reinsured for
claims which exceed $6,000 per participant and has an annual aggregate
limit of approximately $64,000.
11. 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 June 30, 1997:
Period Ending June 30
1998 $ 54,234
1999 50,095
2000 17,468
$ 121,797
Rent expense amounted to $37,512 and $119,880 for the nine months
ended June 30, 1997 and 1996, respectively. Rent expense amounted to
$15,731 and $35,058 for the three months ended June 30, 1997 and 1996,
respectively.
12. Commitments
The Company entered into 20 year employment agreements with five of
its officers calling for annual salaries totaling no less than
$195,000.
13. Segment Information
The Company's operations are classified into two principal
industry segments: Hardware sales and sales of software
licenses and related service fees. The following is a
summary of segment information for the periods ending:
<TABLE>
<CAPTION>
Three Months Ended June 30 Nine Months Ended June 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue of each segment:
Software and Service Fees $ 1,400,567 $ 522,489 $ 3,773,225 $2,965,461
Hardware 1,572,619 80,592 2,537,575 2,066,236
Total Revenue $ 2,973,186 $ 603,081 $ 6,310,800 $5,031,697
Operating Profit (Loss) of
each segment:
Software and Service Fees $ 721,798 $ (24,096) $ 1,785,509 $1,173,659
Hardware 286,363 156,585 325,699 298,242
Corporate (62,630) (91,528) (215,023) (179,370)
Total Operating Profit (Loss) $ 945,531 $ 40,961 $ 1,896,185 $1,292,531
Depreciation and Amortization
expense of each segment
Software and Service Fees $ 370,473 $ 172,213 $ 977,034 $ 392,592
Hardware 489 489 1,466 1,466
Total Depreciation
and Amortization $ 370,962 $ 172,702 $ 978,500 $ 394,058
Capital Expenditures of
each segment:
Software and Service Fees $ 50,100 $ 2,777 $ 143,367 $ 39,969
Hardware 0 0 0 0
Total Capital Expenditures $ 50,100 $ 2,777 $ 143,367 $ 39,969
</TABLE>
<TABLE>
<CAPTION>
June 30 June 30
1997 1996
<S> <C> <C>
Identifiable Assets of each segment:
Software and Service Fees $4,651,729 $3,153,848
Hardware 658,686 46,075
Corporate 568,231 31,680
Total Assets $5,878,646 $3,231,603
</TABLE>
__________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
__________________________________________________________________
This MD&A Contains Forward Looking Information
Results of Operations
Revenue. Network's third quarter licensing and servicing revenues
increased from $522,489 to $1,400,567 over the comparable three months
ended June 30, 1996 and June 30, 1997, respectively. This represents
a 168% increase over the comparable period. For the nine months
period ended June 30, 1997, total licensing and servicing revenues
increased from $2,965,461 to $3,773,225, over the comparable period
ended June 30, 1996, a 27% increase. These increases are principally
due to the closure of pending contracts and an increased focus in
software marketing efforts.
The Company's total third quarter revenues increased from $603,081 for
the three months period ended June 30, 1996 to $2,973,186 for the
three months period ended June 30, 1997. This represents an increase
of 393% over the comparable period. For the nine months period ended
June 30, 1997, revenues increased from $5,031,697 to $6,310,800 over
the comparable period in 1996. This represents an increase of 25%.
This increase in total revenues is principally attributable to an
increase in hardware sales during the current period of approximately
$1,492,027 over the comparable period in 1996.
Licensing and services revenues were 47% of total revenues for the
quarter and 60% for the nine months period ending June 30, 1997.
Hardware sales were 53% of total revenues for the period and 40% for
the first nine months of the current year.
The Company continued its efforts toward completion of a third
generation software package during the current period. Development is
now near completion and the Company would intend to finalize
completion prior to the end of fiscal 1997. Assuming completion, the
Company would intend to present the new product for general market
distribution within thirty days thereafter. However, the Company
continues to caution that there can be no assurances that the Company
will not experience difficulties that could delay or prevent the
successful completion of the product, its introduction, marketing,
enhancements or that the new version will adequately meet the needs of
the marketplace or achieve market acceptance. Additionally, niche
markets that the Company traditionally serves could experience a
significant economic downturn. In that event, the Company's revenues
would be adversely affected.
Cost of Sales and Services. Cost of sales and services amounted to
$1,659,309 during the third quarter of fiscal 1997 as compared to
$180,211 for the comparable period in fiscal 1996. Cost of sales and
services for the first nine months of the year amounted to $3,212,494
as compared to $2,374,751 for the comparable 1996 period. These
increases in costs of sales are attributable to increases in hardware
sales over the comparable periods. Hardware sales carry a
significantly higher percentage of costs than do licensing and
services.
Software Development Costs. Software development costs, both
capitalized and expensed, amounted to $1,401,143 and $1,075,141 for
the nine month periods ended June 30, 1997 and 1996, respectively.
Software development costs, capitalized and expensed for the three
month periods ended June 30, 1997 and 1996, respectively, were
$477,593 and $493,728. This represents an approximate 3% decrease
over the comparable quarter and an approximate increase of 30% over
the comparable nine month period. The quarterly decrease is
attributable to the near completion of the Company's third generation
software package. Of these amounts, approximately $1,190,532 and
$832,797 were capitalized for the nine month periods ended June 30,
1997 and 1996, respectively and $428,218 and $406,318 for the three
month periods ended June 30, 1997 and 1996, respectively. More
software development costs have been capitalized during the nine month
period in fiscal year 1997 since technological feasibility of more
products was achieved than over the comparable nine month period in
fiscal year 1996. Upon full launch of the Company's third generation
software package, currently scheduled for late August, 1997, it is
anticipated that efforts toward the development of a fourth generation
software package will be initiated. If such efforts are indeed
initiated, it is anticipated that the cost of research and development
will increase proportionately. The Company continues to caution,
however, that there can be no assurances that either the introduction
of its third generation software package or the development of a
fourth generation package will be accepted in the marketplace or that
general market conditions will not adversely affect the introduction
of these products. Additionally, competition in the hiring of
programmers continues to remain high as salaries of programmers are
gaining momentum toward escalation. Therefore, whether the Company
will ultimately achieve its stated goals cannot be assured.
General and Administrative. General and administrative expenses were
approximately 10.7% of revenues in the third quarter of fiscal 1997 as
compared to approximately 48.8% over the comparable period in fiscal
1996. For the nine months ended June 30, 1997, general and
administrative expenses were 15.7% of revenues as compared to 22.2%
for the nine month period ended June 30, 1996. The decrease in the
current period is directly attributable to the significant increase in
total revenues without corresponding increases in general and
administrative expenses.
Provisions for Income Taxes. Prior to the Company's merger on April
22, 1996 the principal operating subsidiary of the Company, Network
Information Services, Inc. (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 22,
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 22, 1996, and consist of taxes currently
due plus deferred income taxes. The change in tax status resulted in
a one time charge of approximately $435,200.
Quarterly Results. Net income for the three and nine month periods
ended June 30, 1997 were $643,770 and $1,252,735, respectively.
Assuming a retroactive change in Subchapter S status, pro forma net
income for the comparable periods ended June 30, 1996 amounted to
$13,533 and $777,077, respectively. These increases are directly
attributable to an increase in revenues and a decrease in the cost of
sales in the hardware area.
On a per share basis, earnings were $.11 and $.21 for the three and
nine months ended June 30, 1997. This compares to a pro forma primary
net income per common share of $.00 and $.13 for the three and nine
month periods ending June 30, 1996.
The Company believes that its quarterly results may fluctuate in the
future as a result of 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. Additionally, the Company would
anticipate a slower business environment in the fourth quarter due to
traditional shipment slow downs during such period in the industries
in which the Company's products are primarily focused. Further, rapid
technological change and the Company's ability to develop and market
new products that successfully adapt to such change may have an
adverse impact on the Company's overall operations. Lastly, 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 security analysts could have an immediate and significant
adverse effect on the trading price of the Company's stock.
Liquidity and Capital Resources. Cash totaled $545,837 on June 30,
1997. Cash provided by operating activities amounted to approximately
$1,165,162 for the nine months ended June 30, 1997 compared to
$1,100,018 in the comparable period of 1996. This increase in cash
from operations is due to overall increase in profitability. Overall
cash increase is directly attributable to the Company's private
placement preferred stock offering.
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 balance of the 1997 fiscal year.
Historically, accounts receivable for the Company have been generally
high due to a number of factors. A primary contributor is the nature
of how the Company's customer base pays for the software licensing fee
of the Company's product. The Company records revenues from software
license fees after shipment of the product and the fulfillment of all
major obligations under the terms of the licensing agreement.
Typically, software licenses range from $100,000 to $300,000.
Therefore, the Company establishes a payment schedule for most of its
customers. These payment schedules have resulted in a slow turnaround
time in the collection of receivables. Additionally, the textile
industry as a whole tends to experience flat periods which make it
difficult to fully fund major management information systems projects.
For the nine month period ended June 30, 1997, the average collection
days on accounts receivables was 77.2 days compared to 82.2 days for
the comparable period in fiscal year 1996. This decrease in
collection days is attributable to the Company's continued focus on
account receivable collections.
As a result of the Company's belief that its current average in
collection days is unacceptable, the Company monitors its accounts
receivable closely and attempts to make adequate provisions for
potentially uncollectable receivables.
Part II
_______________________________________________________________
Item 5. Other Matters
_______________________________________________________________
(1) On December 12, 1996 the Company initiated the process of issuing
a private placement of 12,500 shares of Series A Preferred Stock. The
Preferred Stock was subsequently issued during the current period.
The stock was issued on a best efforts basis at $100 per share, $.001
par value, with a 12% cumulative dividend payable monthly and a
conversion feature after 12 months at $2.00 per common share. As of
the close of the quarter ended June 30, 1997, the net amount of the
preferred shares sold was $856,689. Reference is made to the Form D
and Confidential Private Placement Memorandum filed with the
Securities and Exchange Commission on January 11, 1997 for specific
details of the offering.
(2) The Company's common stock began trading above the $3.00 level on
July 22, 1997 and has remained above such level since that time.
Assuming the common stock continues to trade above $3.00 for 30
consecutive days and further assuming that NASDAQ does not change
current listing requirements, the Company intends to file for Small
Cap status during the fourth quarter of fiscal 1997.
______________________________________________________________
Item 6 Exhibits and Reports on Form 8-K
______________________________________________________________
(a)Exhibits included herewith are:
(11) Schedule of Computation of Net Income Per Share
(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: 8/8/97 /s/ Robbie M. Efird
Robbie M. Efird, President
and acting as CFO
Date: 8/8/97 /s/ William C. Ray
William C. Ray, Vice President
EXHIBIT INDEX
Exhibit Page
(11) Schedule of Computation of Net Income Per Share 24
(27) Financial Data Schedule 25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 545,837
<SECURITIES> 0
<RECEIVABLES> 2,691,775
<ALLOWANCES> (229,700)
<INVENTORY> 0
<CURRENT-ASSETS> 3,379,095
<PP&E> 1,369,370
<DEPRECIATION> (453,255)
<TOTAL-ASSETS> 5,878,646
<CURRENT-LIABILITIES> 1,356,858
<BONDS> 0
0
10
<COMMON> 5,806
<OTHER-SE> 3,381,554
<TOTAL-LIABILITY-AND-EQUITY> 5,878,646
<SALES> 6,310,800
<TOTAL-REVENUES> 6,310,800
<CGS> 3,212,494
<TOTAL-COSTS> 1,202,121
<OTHER-EXPENSES> (9,894)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,344
<INCOME-PRETAX> 1,853,735
<INCOME-TAX> 601,000
<INCOME-CONTINUING> 1,252,735
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,252,735
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
d\sec\Exh113Q.doc
<TABLE>
<CAPTION>
Exhibit 11
Schedule of Computation of Net Income (Loss) Per Share (unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
1997 1996 1997 1996
Primary
<S> <C> <C> <C> <C>
Net income (loss) 643,770 (731,567) 1,252,735 480,677
Less - preferred stock dividends (28,146) 0 (42,925) 0
Net income (loss) for primary
income per Common Share 615,724 (731,567) 1,209,810 480,677
Weighted average number of
Common Shares outstanding
during the year 5,806,176 5,769,912 5,806,176 5,760,755
Primary income (loss) per
Common Share .11 (.13) .21 .08
Fully Diluted
Net income for primary income
per Common Share 615,724 1,209,810
Add - dividends on convertible
preferred stock 28,146 42,925
Net income for fully diluted
net income per share 643,870 1,252,735
Weighted average number of
shares used in calculating
primary income per 5,806,176 5,806,176
common share
Assuming conversion of
convertible preferred stock
(weighted average) 469,035 239,585
Weighted average number of
common shares outstanding
as adjusted 6,275,211 6,045,761
Fully diluted earnings per
common share .10 .21
Pro forma - Primary Earnings
Per Share
Net income from continuing
operations before income
taxes 21,733 1,233,977
Pro forma Income Tax assuming
retroactive application of
change in subchapter S status 8,200 456,900
Net Income 13,533 777,077
Pro Forma Weighted Average
Shares Outstanding (Unaudited) 5,769,912 5,760,755
Primary Income per Common Share .00 .13
</TABLE>
