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10KSB\10KSBA96.doc May 21, 1997 3:33 PM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15-
(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended . . . . . . . .
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 1, 1996 to September 30, 1996
Commission File Number 33-25308-D
NETWORK SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in the charter)
Nevada 87-0460247
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
200 North Elm Street
Greensboro, North Carolina 27401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 271-8400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
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 (2) has been subject to such filing requirements for the past 90
days.
Yes X No __
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[X]
The issuer's revenues for the year ended September 30, 1996 (9
months) were $3,294,332
As of January 8, 1997 there were 5,806,176 outstanding shares
of common stock, par value $.001 per share. The aggregate market
value of the voting stock of the registrant held by non-affiliates of
the registrant on January 8, 1997 based on the average bid and ask
price on such date was $697,500.
DOCUMENTS INCORPORATED BY REFERENCE: A more complete statement
of the information required by Part III of Form 10-KSB is incorporated
herein by reference to the registrant's definitive Proxy Statement
relating to its 1996 Annual Meeting of Shareholders which will be
filed with the Commission within 120 days after the end of the
registrant's fiscal year.
Transitional Small Business Disclosure Format: Yes _____ No x
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Part I
<S> <C>
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Matters 8
Part II
Item 5. Market for Common Equity and Related Stockholder Matters 8
Item 6. Management's Discussion and Analysis 9
Item 7. Financial Statements 13
Item 8. Changes in and Disagreements with Accountants on Accounting and 27
Financial Disclosure
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance 27
With Section 16(a) of the Exchange Act.
Item 10. Executive Compensation 29
Item 11. Security Ownership of Certain Beneficial Owners and 30
Management
Item 12. Certain Relationships and Related Transactions 30
Item 13. Exhibits and Reports on Form 8-K 31
</TABLE>
PART I
Item 1.Description of Business
Network Systems International, Inc. (the "Company") is the
predecessor corporation of the former Aqua Australis, Inc. Aqua was
the predecessor corporation of Future Tech, Inc. Future Tech was
initially incorporated under the laws of the State of Nevada on
September 21, 1988. At the time of incorporation, no definitive plans
were in place for the operation of business and therefore the Company
sought to obtain funding from the sale of common stock to its original
shareholders and to the public for purposes of investigating and
acquiring a business opportunity.
In connection with the organization of the Company, some of the
officers and directors paid an aggregate of $6,000 in cash to purchase
a total of 500,000 shares of restricted common stock of the Company at
a sales price of approximately $0.012 per share.
On May 1, 1989, the Company completed a "Blind Pool/Blank
Check" public offering of 507,000 shares at $0.10 per share for a
total public offering price of $50,700, from which the Company
received net proceeds of approximately $44,886, after deducting
underwriter's compensation and other costs of the offering totaling
approximately $5,814. Immediately following the conclusion of the
public offering, the Company had 1,007,000 shares of common stock
issued and outstanding.
On July 26, 1991, the Board of Directors of Future Tech entered
into an Asset Purchase Agreement with Aqua Australis Pty, Ltd.
("AAPL"), which Future Tech's shareholders approved on August 7, 1991.
Pursuant to the Agreement, AAPL transferred to the Company certain
tangible and intangible assets, including test results, marketing
studies and agreements with distributors. As consideration therefor,
the Company agreed to pay to AAPL the principal sum of $1,600,000, by
means of its promissory note (the "Note"), which Note was payable
interest only at the rate of 9.5% per annum, for a term of five years,
at which time the entire balance of principal and accrued but unpaid
interest would be due. The Note was convertible at AAPL's option into
the shares of common stock, $0.001 par value, of the Company, on the
basis of 4,000,000 shares for the total principal of $1,600,000, and
pro rata for any portion thereof. No independent appraisal or
evaluation of the assets transferred to the Company was undertaken by
the Company's prior management. Consequently, there was no way to
determine whether the Company paid fair value for the assets
transferred.
On August 7, 1991, the shareholders also approved an amendment
to the Company's Articles of Incorporation, changing the Company's
name to "Aqua Australis, Inc.". The shareholders also elected a new
board of directors, all of whom were nominated by AAPL. As a
consequence of the Asset Purchase Agreement, the Company became an
affiliate of AAPL. On August 7, 1991, the board of directors approved
the Distributorship Agreement with AAPL, whereunder the Company became
the exclusive distributor of AAPL's products in North America and
Mexico. Under the Agreement the Company would purchase products from
AAPL.
Prior to entering into the Asset Purchase Agreement with the
Company, AAPL sold its bottled water products directly in the U.S.
markets. By January of 1992, the Company determined that there were
no significant sales of the product and discontinued the wholesale
bottled water business. The Company returned the assets purchased
from AAPL and the note payable was canceled.
From January of 1992 until April of 1996 Aqua was essentially
inactive and again sought new business opportunities through either
merger or the purchase of an existing operating 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. and Network Investment Group, Inc.,
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, which split was effective as of the date
the merger was completed. At the same time Network Partners, LLC
transferred certain assets to Network Information Services, Inc.
As a result of the merger, shareholders of Network Information
Services, Inc. and Network Investment Group, Inc. caused the transfer
of all of their shares of common stock in those corporations, which
shares 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. Simultaneously, in exchange for $60,000, North American
Capital Corporation canceled certain of its shares of common stock of
the Company, canceled certain debt and paid certain expenses and
obligations of the Company.
Network Information Services, Inc. was originally incorporated
under the laws of the State of North Carolina on September 9, 1985 and
began its operations as a contract programming firm whose efforts were
primarily focused on providing direct programming services to the
manufacturing industry.
During the first few years of its development, the Company
successfully obtained contract programming orders from various
manufacturing entities throughout the State of North Carolina. Over
the succeeding ten year period, proprietary software (Net(copyright))
was developed and operations expanded with the continuous introduction
of enhanced modules keeping pace with changing environments in
manufacturing processes. Copyrights were obtained for the developed
software packages of the Company and trademarks obtained on the new
"the net collection(trademark)" developed by the Company in 1996.
The Company is a leading developer and marketer of application
software for use in manufacturing and general business applications.
NET's broad product line includes proprietary software for industry
specific use and general manufacturing process application and
utilization. Software modules are in continuous development with
existing modules enhanced monthly for distribution to the Company's
customer base. In addition to the marketing of its proprietary
software, the Company's Client Services Group provides a focused
concentration on customer in-house education at its headquarters' NET
Process Learning Center and customer on-site implementation services.
The Company's operations are currently classified into two
principal industry segments, software licenses with related services
and hardware sales. These segments provide the basis upon which the
Company's revenues are derived. Software sales and related services
are principally conducted within the Company's niche market of
textiles and sewn products while hardware sales are conducted
throughout a broad range of industries.
The Company's operations utilize a full service staff of forty-
six full time associates and a customer base consisting of numerous
major manufacturing giants such as Cone Mills, WestPoint Stevens,
Unifi, Guilford Mills and many others. Current annual sales reflect
an approach toward the $5,000,000 level. Profits are tracked on a
profit center (divisional) basis and are generically derived through
license fees, annual maintenance fees, implementation services,
hardware sales, outsource process services and the Net Process
Learning Center.
The software development and implementation service business is
varied because of the unique qualities of each new development
initiated to meet business/industry specific needs. Although
application can be universal, its specificity is only limited by the
imagination of the developer. Once created, functions can be easily
modified from their generic form in order to meet industry specific
needs. Another unique feature attractive to the software development
and programming industry is the longevity of developed programs which
minimize costs variable post development. Once born, programs have
perpetual longevity and fully maintain their value added marketability
by way of customer service agreements which provide customers with
continuous enhancement of modules. For the manufacturing process
industry, ever changing needs emerge as consumer demands dictate new
innovation and product development. As a result, enhancements of
modules are developed in order to meet the changing needs of the
industry. These module updates not only enhance the value added
nature of the product, but also provides additional profitability to
the developer through cost effective user maintenance programs.
Although NET(COPYRIGHT) was originally designed as an industry
specific product, the Company ultimately restructured the program
design to allow generic application to the process manufacturing
industry in general. The net collection(trademark) now provides
process application through utilization of the Company's individual
modules marketed under the titles: net resourcemanager(trademark);
net customerlink(trademark); net proplan(trademark); net
po+(trademark); net scheduler(trademark); net qctrack(trademark); net
inventory(trademark); net cost(trademark) and net exec(trademark).
Markets now include the general process manufacturing industry as a
whole.
Today, the principal products of the Company include not only
the net collection(trademark); but also full implementation services;
on-site training at a customer facility; in-house training at the
Company's headquarters (The Net Process Learning Center); outsource
process services; customer specific module designs; and equipment
sales and training. Individual modules of the net
collection(trademark) include:
net resourcemanager(trademark)
Resources are the economic basis of industry. Network's
resource manager tracts resource needs for the industry from fiber, to
yarn, to fabric, to sewn products, to labor, to overhead, to work
centers, to machines, to activity centers, to plants, to customers, to
vendors.
net customerlink(trademark)
Customer Link was designed to assist the manufacturing entity
in the enhancement of their customer service processes. Enhancement
is achieved through instant retrieval of information regarding
customer profiles, credit histories, product availability, work in
progress, order status, delivery schedules, sales order allocations
and shipping/distribution analysis.
net proplan(trademark)
Accurately forecasting future needs of the manufacturing unit
in correlation with anticipated order of customers achieves desired
profitability results. Pro plan enables the manufacturer to
constantly adjust lead time offsets, thus, allowing management to
maintain a profitable balance between customer requirements and
manufacturing capabilities through real time visibility of all
resource positions.
net po+(trademark)
PO+ allows the manufacturing unit to build a win-win
relationship with its vendors. By accurately communicating
requirements, understanding capabilities and measuring supplier
performance on product quality, price point breaks, lead time
flexibility and delivery timeliness, manufacturers can better insure
that vendor selection is correct.
net scheduler(trademark)
This program enhances manufacturing productivity through
dynamic utilization of capacity and material resources and the
sequencing of manufacturing order throughout work centers to ensure on-
time deliveries. Scheduler tracts on-line work center line-up which
provides flexibility to accommodate unscheduled main downtime or
material shortage occurrences.
net qctrack(trademark)
Strategic cooperative processing enables 100% up time for
mission critical plant floor applications. QCTrack allows user-
defined event parameter tracking and puts quality measurement programs
to work for the manufacturers. This program is a management tool
which allows management to communicate directly with the plant floor,
creating faster turns as it captures information at its origin.
net inventory(trademark)
Net inventory captures user-defined events to provide real-time
transaction updated to unit and summary inventory positions.
Attribute based inventory access gives each user complete control
based on attributes required to perform their particular tasks. This
allows on-line visibility of infinite product combinations within
multiple warehouses, plants, divisions and corporations, which in turn
supports just-in-time minimum stock inventory strategies.
net cost(trademark)
Resource based costing provides flexibility in cost analysis.
Net cost allows integration of all resources in the Bill of Resources
which gives event based variance analysis capabilities in order to
support decision making in product development, planning and
manufacturing. Profitability is therefore achieved through strategic
utilization of resources.
net exec(trademark)
Net exec utilizes graphical applications to provide executives
with information required to more easily understand the current state
of the manufacturing enterprise. High level recaps facilitate the
decision making process without having to thread through a mountain of
details. This real-time viability translates into timely, effective
and efficient strategic operational decision making on the part of
executive management.
New Products
During the latter part of the fiscal year, the Company added a
new sector to its existing business titled "Outsource Process
Services". This new product line allows smaller companies to lease
space on a dedicated AS/400 computer located on the Company's
headquarters through which the net collection(trademark) can be
utilized without the necessary capital expenditure for an AS/400 by
the smaller company. This leasing arrangement now allows the smaller
company to operate its systems on par with larger and better
capitalized competitors. Although the Company believes that its
Outsource Process Services will increase revenues significantly during
fiscal 1997, there can be no assurance that customer acceptance of the
new product will be as significant as the Company anticipates, or that
such acceptance will be achieved at all.
Additionally, the Company intends to continue its aggressive
approach to module enhancements and the development of a new and
improved third generation software package. Again, however, there can
be no assurances that the Company will not experience difficulties
that could delay or prevent the successful completion, introduction
and marketing of the new software package or that it will adequately
meet the needs of customers. Should, however, the new package prove
successful and achieve widespread acceptance, the Company would
anticipate an increase in revenues from both licensing fees and
services.
Distribution Methods
The principal distribution method for products and services
include: marketing in numerous trade journals and magazines; direct
telemarketing; industry trade shows; direct mail marketing; and
customer and consultant referrals. The Company customer base consists
of small to medium manufacturing companies as well as Fortune 500
companies.
Research and Development
During late 1994 and throughout 1995 the Company initiated
development of a new third generation version of its original
NET(COPYRIGHT) design. Although the Company had anticipated that the
new design would be available for distribution by mid to late 1996,
the product is not yet complete as new modules have been added in
order to further enhance the product prior to launch. The Company
currently believes that the new software will be available during
fiscal year 1997, although there can be no assurance that the Company
will be successful in this regard. During the last two fiscal years
of the Company's operations, the Company has expended in excess of $2
million dollars in the area of research and development and
capitalized software costs of the third generation design and
enhancements to existing products.
Competitive Business Conditions
Competitive business conditions are wide and varied. The
industry as a whole consists of multi-billion dollar giants such as
Microsoft to the small upstart companies attempting to develop single
niche markets. Network Systems International, Inc. is considered
small in terms of current revenues and competes with similar software
and service providers with revenues from 20 to 40 million dollars such
as Effective Management Systems, Inc., Datalogic International, Inc.,
Computer Associates International, Inc. and Fourth Shift Corporation.
These competitors and others have substantially greater financial,
marketing and technological resources than the Company. Therefore,
there can be no assurance that the Company will be able to
successfully compete against these companies. Additionally, because
software development is becoming more universal, a potential
competitor who possesses the necessary knowledge to design a similar
product; train a professional implementation staff and means of
operation, could develop a product utilizing lower price points. If
such product were developed and surpassed the technological process
structure of the Company's product, attention of customers might shift
to the new program, resulting in a precipitous decline in the sales of
the Company's comparable product. The Company believes however, that
the infrastructure it has put in place and its product design has
given it a significant lead over other companies that might attempt to
emulate its product and services business module.
The software industry has been in existence for forty years and
has seen innumerable software developers enter into and leave the
industry over the term. However, rapid changes in new technology in
both the software and hardware industries have allowed only those
willing to adapt to these rapid changes to survive. The new
generation software developers who have successfully made the
transition have done so by way of substantial reinvestment in research
and product design and which have established alliances with major
hardware producers on an international level. The synergy's between
software developers and hardware producers have allowed both to
surpass the hurdles inherent in an advancement of one without the
other. As the industry continues to grow and expand, further
adaptation will be required of those companies who will establish
themselves as industry leaders of the twenty-first century.
Although the Company is not dependent upon one or a few major
customers, the Company does conduct business with customers who might
be deemed significant and from which the Company would suffer a
negative impact upon the loss of such customers.
Governmental Regulations
Currently there are no existing or probable governmental
regulations effecting the Company's business and the Company's
products and services are not affected by compliance with
environmental laws, rules or regulations. Neither is governmental
approval of principal products or services required.
Item 2. Description of Property
The principal location of the Company's property is located in
Greensboro, North Carolina. The Company owns a 26,000 square foot
facility from which principal operations throughout the southeastern
United States are conducted. The property carries a mortgage of
$420,000. Since its purchase in early 1995, the Company has
significantly developed the property and modernized both exterior and
interior portions of the facility. The condition of the property is
considered excellent.
The Company leases a facility in Las Vegas, Nevada from which
much of its administrative and legal functions are conducted. The
Company provides contract services to its subsidiary corporations
through the Nevada facility.
The Company also leases offices at Executive Center Drive in
Greenville, South Carolina. The Greenville facility is utilized by
five associates of the Company who are charged with responsibility for
managing net inventory(trademark) and net qctrack(trademark) from the
net collection(trademark).
Additionally, the Company operates and funds satellite offices
in Clover, South Carolina; Greenville, North Carolina; Matthews, North
Carolina; Wilmington, North Carolina and LaGrange, Georgia.
Item 3. Legal Proceedings
The Company is not currently involved in any legal proceedings
that it believes could have, either individually or in the aggregate,
a material adverse effect on its business or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the third quarter ended September 30, 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock is traded on the NASDAQ (BB) and is
traded under the symbol NESI. The stock began actively trading
subsequent to the reverse triangular merger referenced in Item 1
above. Stock activity since that time has been:
<TABLE>
<CAPTION>
Second Quarter, 1996 Third Quarter, 1996
<S> <C> <C> <C>
High(Ask) Low(Ask) High(Ask) Low(Ask)
5.50 2.75 2.75 2.25
High(Bid) Low(Bid) High(Bid) Low(Bid)
3.625 0.75 1.125 0.50
</TABLE>
Note: The stock began public trading during the second quarter, 1996.
Stock quotes were derived from Nasdaq Trading and Market Services of
OTC Bulletin Board.
As of January, 1997, there were 319 holders of record of common
stock of the Company.
Item 6. Management's Discussion and Analysis
THIS MD&A CONTAINS FORWARD LOOKING INFORMATION. EXCEPT
FOR HISTORICAL MATTERS, THE MATTERS DISCUSSED IN THIS FORM
10-KSB/A CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND
UNCERTAINTIES.
RESULTS OF OPERATIONS
Revenue. Network's annual revenues are stated for the nine-
month period from January 1, 1996 through September 30, 1996 due to a
change in the Company's fiscal year end from December 31 to September
30. Net revenue for the nine-month period was $3,294,332, a 8.4%
increase over the comparable period in 1995. Much of the increase is
as a result of an increase in demand for customer specific designs in
the Company's proprietary software, the net collection(trademark).
The Company's operations are classified into two principal
industry segments for reporting purposes. They are: (1) software
sales with related services and (2) hardware sales. Revenues from
software and services fees amounted to $2,390,943 for the nine month
period ended September 30, 1996 compared to $1,937,876 for the same
period in 1995. This represents an increase of 23% principally due to
increased efforts in the marketing area. In the hardware segment of
the business, revenues for the period ended September 30, 1996
amounted to $903,389 as compared to $1,101,823 for the comparable
period ended September 30, 1996. This represents an 8.19% decrease in
hardware sales principally due to equipment budgetary restraints among
the Company's customer base.
Total operating profits for the period ended September 30, 1996
increased to $516,815 from $112,970 over the comparable period in
1995, a 21.85% increase. This increase is represented by an increase
of software and service fees from $13,820 in the comparable period
ended September 30, 1995 to $106,524 in the current period. Hardware
operating profits increased from $99,150 in 1995 to $106,524 for the
period ended September 30, 1996.
Although operating profits significantly increased, the
increase was materially setoff by the increase in income tax provision
from $0.00 as the Company operated as a Subchapter S corporation in
1995 to $514,700 during the current period.
Cost of Sales and Services. Annual cost of sales and services
as a percentage of revenue decreased in fiscal 1996 to 43.85% from
45.21% over the comparable period in fiscal 1995. This decrease is
attributable to a continued shift of the Company's focus into the
products sector of the Company's business and a decrease in focus on
equipment sales. Since equipment revenues carry a higher percentage
of costs as compared to services, products and licensing fees, costs
of sales and services decrease as an overall percentage of revenues.
Software Development Costs. Software development costs, both
capitalized and expensed as research and development, amounted to
approximately $1,259,000 in fiscal 1996, as compared to approximately
$822,000 in fiscal 1995; a 53 % increase. Of these amounts,
approximately $1,052,000 and $437,000 were capitalized in 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.
Provisions for Income Taxes. Prior to the 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 reported 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 $435,000. This change in status
accounts for over half of the Company's tax rate of 108% for the first
nine months of 1996.
Pro forma amounts assuming a retroactive application of change
in Subchapter S status resulted in annual income for the nine month
fiscal year end 1996 being $310,994 as compared to $74,626 for the
comparable period in 1995. However, tax implications of the change
from a Subchapter S corporation to a C corporation as discussed above,
resulted in a net loss of $40,306 in the nine-month fiscal year 1996
compared to a net gain of $87,326 over the comparable period in 1995.
Although such tax consequences are fully reported in these annual
results, the income taxes are payable over a four-year period.
On a pro forma basis, net income for the period provided
earnings, on a per share basis, of $.05 compared to .01 per share
earnings for the same period in 1995. This per share data has been
computed using the weighted average of the common stock for Network
Systems International, Inc., the former development stage company, for
all periods presented.
Net income before taxes was $474,394 for the nine month fiscal
year end September 30, 1996 compared to a net income before taxes of
$87,326 for the same period in 1995. This significant increase in
income is principally attributable to the Company's efforts to
increase revenues, lower costs of sales and services, and achieving
the point of technological feasibility in some of its software
development.
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 and cash equivalents
totaled approximately $61,758 on September 30, 1996. Cash provided by
operating activities amounted to approximately $1,361,399 for the nine
month year end as compared to $650,274 in the comparable period of
1995. This increase in cash provided by operations is principally due
to additional collections in accounts receivable over the prior period
and increased profits generally.
With revenues for the period ended September 30, 1996 amounting
to $3,294,332 and accounts receivable amounting to $1,106,842, such
receivable accounts for approximately 33.6% of revenues. This large
accounts receivable is principally due to the methods utilized in
contractual commitments between the Company and its customers 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 use of Company
products and are usually restricted by the number of copies, the
number of users and the term. During the period, the average
collection days amounted to 118 days. Additionally, seasonality of
sales in the general textile industry will often cause adjustments in
payment schedules.
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 1997 fiscal year. However, because the
Company believes the level of financial resources is a significant
competitive factor in its industry, it intends to raise additional
capital through debt or equity financing to strengthen its financial
position, facilitate growth, and provide the Company with additional
flexibility to take advantage of business opportunities that may
arise. Therefore, 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 in fiscal year
1997. However, there are no assurances as to the timing or success of
these anticipated offerings.
OTHER MATTERS
Some of the key variables and other qualitative and
quantitative factors which might be deemed necessary to an
understanding and evaluation of the Company's business are as follows:
Outlook and Uncertainties. Although Network does operate its
business on a two-year business plan, forecasts in the business plan
do not guarantee potential future financial performance. While
management is optimistic about long term prospects, the current
business plan is but a future projection based upon past performance.
Therefore, there can be no assurances that the Company will be able to
achieve the projections provided for in its business plan.
Rapid Technological Changes. The computer software industry is
characterized by rapid technological change and uncertainty as to the
impact of emerging software solutions and services to the general
manufacturing process industry.
Long-term Investment Cycle. Developing and localizing software
for the manufacturing process industry is expensive and the investment
in software development often involves a long payback cycle.
Network's plans for fiscal year 1997 include significant investments
in software development and related product opportunities from which
revenues may not be achieved for a number of years. Management
expects total spending for software development in 1997 to increase
over 1996 as the Company anticipates the final development of its
third generation software package.
Prices. Future prices Network is able to obtain for its
software and services may decrease from historical levels depending
upon competitive markets and other cost factors.
Sales and Marketing. Network's plans for 1997 include a
significant investment in its sales and marketing efforts.
Additionally, as a new public entity and subsequent name change, the
Company expects to expand marketing efforts in order to gain name
recognition of its new structure.
Implementation. A significant portion of the Company's income
is derived from software implementation services to its customers.
Increasing implementation demands will require the Company to expand
its programming personnel and associated investment costs in the
training of such personnel. Although the Company believes that
current and projected cash flow will be sufficient to provide
additional personnel, there can be no assurance that the Company could
sustain the cost of additional personnel over the long term without
additional financing resources.
Litigation. Although the Company has not previously been
involved in litigation, total customer satisfaction is not always
achieved and disputes have arisen in the past. As such, there can be
no assurance that litigation will not arise in the future. Should
such litigation occur, the necessary cost to defend such litigation
would negatively impact future earnings of the Company.
Time Delays. Traditionally, the Company experiences a
significant delay between the time a customer is introduced to the
Company's products and services and the final date upon which actual
contracts are signed. Customers will often retain the services of
outside consultants to search the market for available software most
suited to their client's needs and will often require several
demonstrations of the product for the consultant's staff and
ultimately demonstrations with both the consultant and prospective
customer. Time delays in completing these efforts often take up to
twelve months. As a result, it is difficult to build a firm
foundation for predicting revenues over an extended period of time.
Additionally, by the time prospects become customers, time is usually
of the essence and proper predictions for staffing needs must be made
when implementation services are required. Although the Company has
historically achieved a significant measure of success in developing
and accurately predicting ongoing business plans, the known trends,
events and uncertainties of the factors stated above could ultimately
create a negative impact on the overall revenues and profitability of
the Company.
Funding. Primary sources of internal liquidity are generated
through the Company's designated profit centers: software licensing
fees; support and maintenance fees; implementation fees; outsource
process services fees; Net Learning Center fees; and hardware sales.
At the close of the Company's fiscal year end, no source of external
funding was utilized, however, the Board of Directors has indicated a
desire to initiate a private placement and a subsequent secondary
offering of its common stock during fiscal 1997. Whether the private
placement or secondary offering is initiated, or if initiated, is
successful, is uncertain.
Account Closure. The Company's approach to account closure is
to provide customers with its proprietary software for process
manufacturing on a license fee basis; train customer associates on the
proper and practical application of the software to the customers
specific process needs; provide the customer with process correct
hardware to timely meet process applications; and provide maintenance
service through continuous updating of program modules. The Company
also provides a 24 hour "helpline" service to insure a non-disruptive
flow of manufacturing processes once the customer has gone "on-line"
with the net collection program. The Company's hardware division
operates in a partnership arrangement with IBM to provide equipment
for future update application and expansion. An unexpected disruption
in one or more of these procedures could cause a negative impact on
the Company's operating results and profitability.
<TABLE>
Item 7. Financial Statements.
<CAPTION>
INDEX
<S> <C>
Report of independent certified public accountants 14
Consolidated balance sheet 15
Consolidated statement of operations 16
Consolidated statement of cash flow 17
Consolidated statement of changes in stockholders equity 19
Notes to consolidated financial statements 20
Selected Financial Data 26
</TABLE>
PENDER NEWKIRK & COMPANY
Certified Public Accountants
100 South Ashley Drive
Suite 1650
Tampa, Florida 33602
(813) 229-2321
Independent Auditors' Report
Board of Directors and Stockholders
Network Systems International, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheet of Network
Systems International, Inc. and Subsidiaries as of September 30, 1996
and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the nine months then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Network Systems International, Inc. and Subsidiaries as of
September 30, 1996 and the results of its operations and its cash
flows for the nine months then ended in conformity with generally
accepted accounting principles.
We previously issued a report dated November 15, 1996. These
financial statements include additional disclosures found in Note 13,
which the Company believes more fully describe activities in which
they were involved. Certain reclassifications have been made in the
Company's Statement of Operations.
/s/ Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
November 15, 1996 except for Note 13 as to which the date is May 16,
1997
<TABLE>
<CAPTION>
Network Systems International, Inc. and Subsidiaries
Consolidated Balance Sheet
September 30, 1996
<S> <C>
Assets
Current Assets
Cash $ 77,487
Accounts receivable, trade, net of allowance of $187,000 1,106,842
Unbilled accounts receivable 20,012
Accounts receivable, related parties 12,643
Other current assets 22,874
1,239,858
Property and equipment, net of accumulated depreciation 997,900
Other Assets
Software development costs, net of accumulated amortization 1,095,779
Other 26,635
1,122,414
$3,360,172
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable, current portion 99,747
Capital lease obligation, current portion 72,000
Accounts payable, trade 250,500
Other accrued liabilities 74,177
Deferred revenue 135,508
Billings in excess of costs and earnings on
uncompleted contracts 270,700
Total current liabilities 902,632
Long Term Liabilities:
Deferred income taxes 514,700
Notes payable, net of current maturities 389,071
Capital lease obligation, net of current maturities 232,898
Total long term liabilities 1,136,669
Stockholders' Equity
Common Stock; $.001 par value; authorized 100,000,000
shares; issued and outstanding 5,806,176 shares 5,806
Capital in excess of par value 2,137,335
Accumulated Deficit (822,270)
Total stockholders' equity 1,320,871
$3,360,172
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Operations
<CAPTION>
Nine Months Ended September 30
1996 1995
(unaudited)
<S> <C> <C>
Revenue:
Licensing and Servicing revenue $2,390,943 $1,937,876
Equipment revenue 903,389 1,101,823
Total revenue 3,294,332 3,039,699
Operating expenses
Cost of sales and services 1,444,854 1,374,262
Research and development 206,972 385,650
General and administrative 1,125,691 1,166,817
2,777,517 2,926,729
Operating income 516,815 112,970
Other income (expenses)
Interest (41,246) (46,127)
Other income (expense) ( 1,175) 20,483
(42,421) (25,644)
Income before income
tax provision 474,394 87,326
Income tax provision 514,700 0
Net (loss) income $ (40,306) $ 87,326
Pro Forma Amounts (Unaudited)
Assuming
Retroactive Application
Of Change In Subchapter
S Status and Corporate
Recapitalization
Income before income tax
provision 474,394 87,326
Income tax provision 163,400 12,700
Net income $ 310,994 $ 74,626
Primary net income per
common share $ .05 $ .01
Weighted average common 5,777,344 5,756,176
stock outstanding
</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
<CAPTION>
Nine Months Ended September 30
1995
1996 (unaudited)
<S> <C> <C>
Operating activities
Net (loss) income $ (40,306) 87,326
Adjustments to reconcile net (loss) income to net
cash
provided by operating activities:
Depreciation and amortization 520,576 272,675
Loss on marketable securities 13,006 5,177
Loss on sale of property & equipment 2,020
(Increase) decrease in:
Accounts receivable and unbilled 1,049,293 67,151
receivables
Prepaid assets, other receivables, and (13,608) 10,986
other assets
Increase (decrease) in:
Accounts payable and accrued liabilities (914,286) 190,402
Unearned revenue 47,212 18,394
Deferred income taxes 514,700
Billings in excess of costs and earnings on
uncompleted contracts 184,812 (3,857)
Total adjustments 1,401,705 562,948
Net cash provided by operating activities 1,361,399 650,274
Investing activities
Proceeds from the sale of property & equipment 8,500
Acquisition of property and equipment (114,762) (602,713)
Software development (1,052,471) (436,827)
Proceeds on sale of marketable securities 3,083 3,420
Increase in cash surrender value of life insurance (10,086) (6,048)
Net cash (used) by investing activities (1,174,236) (1,033,668)
Financing activities
Payment received from stockholder advances 125,271
Payment on notes payable, long-term debt and
capital leases (80,793) (74,501)
Proceeds from notes payable and long term debt 470,000
Net payments on line of credit (90,641) (27,200)
Dividends paid ___________ (88,560)
Net cash provided (used) by financing activities (171,434) 405,010
Net increase in cash and cash equivalents 15,729 21,616
Cash at January 1 61,758 72,901
Cash at September 30 $ 77,487 $ 94,517
Supplemental disclosures of cash flow information
and noncash investing and financing activities
Cash paid during the period for:
Interest $ 33,446 $ 35,919
</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 current period, the Company issued 50,000 shares of common
stock for future consulting services.
During the current period, the Company acquired computer equipment
totaling $324,932 under capital leases.
Prior to the reverse merger, Network Information Services, Inc.
declared dividends of $53,600. These dividends were offset against
stockholder loans in a non-cash transaction.
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
Nine months ended September 30, 1996
Net Notes
<CAPTION>
Retained Unrealized Receivable
$0.001 Capital in Earnings Loss On From
Number of Par Excess of (Accumulated) Marketable Officers
Shares Value Par Value (Deficit) Securities On Common Total
Stock
Purchases
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 4,783,791 $ 5,783 $ 83,617 $1,393,049 ($11,767) ($53,600) $1,417,082
1995
Dividends (106,533) 53,600 (52,933)
Issuance of common
stock to officer 367,385 367 6,981 7,348
Acquisition of
company 5,756,176 5,756 2,112,385 (140,475) 1,977,666
Recapitalization of (5,151,176) (6,150) (90,598) (1,928,005) (2,024,753)
company
Net realized loss on
marketable securities 11,767 11,767
Common stock issued
for services at
$.50 per share 50,000 50 24,950 25,000
Net loss for the nine
month period ended
September 30, 1996 ___________ ________ _________ (40,306) __________ __________ (40,306)
5,806,176 $ 5,806 $2,137,335 ($822,270) 0 0 $1,310,871
</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 September 30, 1996 and September 30, 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.
2. Summaries of Significant Accounting Policies
Basis of Preparation:
The financial statements as of September 30, 1996 and for the nine
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 nine months ended September 30, 1995
combine the accounts of Network Information Services, Inc., Network
Investment Group, Inc. and Network Partners, LLC and are unaudited.
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 nine month period ended September 30,
1995, (b) the financial position at September 30, 1995 and (c) cash
flows for the nine month period ended September 30, 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 $1,052,471 and $436,827 for the nine month period ended
September 30, 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 $440,482 and $227,370 for the nine month
period ended September 30, 1996 and 1995, respectively, and is
included in cost of sales.
Software development costs at September 30, 1996 consist of the
following:
Software Development Costs $ 1,822,456
Less Accumulated Amortization (726,677)
$ 1,095,779
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 $15,382 and $20,087 for the periods
ended September 30, 1996 and September 30, 1995, respectively. No
amounts were capitalized during the 9 month period ended September 30,
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 and consist of deferred income taxes.
Deferred income taxes are provided for when transactions are reflected
in income for financial reporting purposes in a year other than the
year of their inclusion in taxable income. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Pro forma Presentation:
The consolidated financial statement of operations for the periods
ended September 30, 1996 and 1995 include a pro forma presentation 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.
Earnings Per Share:
As specified by the Securities and Exchange Commission, pro forma tax
and earnings per share data has been provided since the operating
subsidiary was formerly a Subchapter S corporation. 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 presented. 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 September 30,
1996 is summarized as follows:
Earned contract revenue $ 193,300
Less billings to date 464,000
Billings in excess of costs and earnings
on uncompleted contracts $(270,700)
4. Property and Equipment
Property and equipment at September 30, 1996 consist
of the following
Land $ 150,000
Building 300,000
Leasehold improvements 85,350
Furniture and fixtures 91,338
Office equipment 112,664
Computer equipment 222,806
Computer software 28,912
Computer equipment and 324,933
software under capital lease
1,316,003
Less accumulated depreciation
and amortization (284,548)
Accumulated amortization on
computer equipment and
software under capital lease ( 33,555)
$ 997,900
5. Notes Payable
Notes payable at September 30, 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
stockholders $ 19,747
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 48,699
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 420,372
488,818
Less amounts currently due 99,747
$ 389,071
The following is a schedule by year of the principal
payments required on these notes payable and long-
term debts:
1997 $ 99,747
1998 31,344
1999 31,344
2000 326,383
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 September 30
1997 $ 90,432
1998 90,432
1999 90,432
2000 59,995
2001 20,075
Total minimum lease payments 351,366
Less amount representing interest 46,467
Present value of net minimum lease payments $ 304,898
Less current portion 72,000
$ 232,898
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, one of the
Company's subsidiaries Subchapter S status was terminated. After that
date, the financial statements of the Company will provide for the
income tax effect of earnings reported in the financial statements,
including taxes currently due and taxes deferred because of different
accounting methods used for financial and income tax reporting. Prior
to the change in tax status, earnings and losses were included in the
personal tax returns of the stockholders and taxed depending on their
personal tax situations, and the Company did not record an income tax
provision. The change in tax status 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 tax
expense of $435,200.
Net income from operations before income taxes totaled $474,394 for
the nine months ended September 30, 1996. The components of income
tax expense attributable to net income from operations are as follows:
Current tax expense $ 0
Deferred tax expense - non current
Termination of S status 326,400
Operations 188,300
$514,700
The significant temporary differences which gave rise to deferred tax
assets and liabilities as of September 30, 1996 are as follows:
Deferred tax assets
Bad debt revenue $ 187,000
Capital loss carryforward 398,300
Research & development credit 33,300
$ 618,600
Deferred tax liabilities
Software development cost $1,095,800
Book basis of property & equipment
in excess of tax basis 57,500
Change in S status 836,900
$1,990,200
No valuation allowance has been recorded against the deferred tax
assets because recognition of the change in S status should be
sufficient to offset the remaining tax assets.
The difference between the provision of income taxes and the amounts
obtained by applying the statutory U.S. Federal income tax rate to
income before taxes for the nine months ended September 30, 1996 is as
follows:
Tax expense at U.S. statutory rates $ 161,300 34.0%
State and local income tax 35,600 7.5%
Termination of Subchapter S status 326,400 69.0%
Research & development credit (20,500) (4.0%)
Non-deductible expenses and other 11,900 2.0%
$ 514,700 108.5%
9. Major Customer
For the nine month period ended September 30, 1996 and 1995, sales to
two customers amounted to approximately $2,024,500 and $2,186,000,
respectively. The September 30, 1996 accounts receivable balance
included $568,860 due from that customer.
10. Lease Commitments
The following is a schedule by year of future minimum rental payments
required under operating leases that have an initial or remaining
noncancelable lease term in excess of one year as of September 30,
1996:
1997 $48,516
1998 $35,417
1999 $26,058
2000 $ 4,287
Rent expense amounted to $124,995 and $170,025 for the nine months
ended September 30, 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.
12. Subsequent Event
In December 1996 the Company entered into an agreement with an
underwriter to promote the sale of a private placement preferred stock
offering. If successful, the Company expects to raise approximately
one million dollars from the offering.
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 nine months ended September 30.
1996 1995
Revenue of each segment:
Software an Service Fees $2,390,943 $1,937,876
Hardware 903,389 1,101,823
Total Revenue $3,294,332 $3,039,699
Operating Profit (Loss) of each
segment:
Software and Service Fees $ 536,081 $ 13,820
Hardware 106,524 99,150
Corporate (125,790) -
Total Operating Profit (Loss) $ 516,815 $ 112,970
Depreciation and Amortization
Expense
Software and Service Fees $ 519,111 $ 272,154
Hardware 1,465 521
Total Depreciation and
Amortization $ 520,576 $ 272,675
Capital Expenditures of each
segment:
Software and Service Fees $ 114,762 $ 602,713
Hardware - -
Total Capital Expenditures $ 114,762 $ 602,713
Identifiable Assets of each
segment:
Software and Service Fees $3,246,538 $1,798,937
Hardware 69,910 148,117
Corporate 43,724 7,139
Total Assets $3,360,172 $1,954,193
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.
During fiscal years 1994 and 1995 the accounting firm of Jones,
Jensen & Company of Salt Lake City, Utah, audited the books and
records of the Company while it was still considered a development
stage company operating under the name Aqua Australis, Inc. In April,
1996, the new Board of Directors of the Company appointed Pender
Newkirk & Company as the new independent auditors for the newly named
Network Systems International, Inc. The change in accountant did not
result from any disagreements with Jones, Jensen on any matter of
accounting principal or practices, financial statement disclosures or
auditing scope of procedure, but was made effective by the Board of
Directors strictly as a matter of convenience. Additionally, Pender
Newkirk & Company has expressed no adverse remarks in relation to the
financial conclusions of Jones, Jensen as shown in the audits for
fiscal years 1994 and 1995. Jones, Jensen & Company filed a letter
with the SEC dated April 30, 1996 confirming the above and a report of
change was filed by the Company with the SEC.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The directors, executive officers and significant employees of the Company
are:
Name Age Position
Robbie M. Efird (1)(2)(3) 33 Chairman of the Board, Chief Executive Officer
E. W. "Sonny" Miller, 54 Senior Vice President - Marketing/Sales
Jr.(1)(2)
David F. Christian (1)(2) 42 Product Manager, Product Development
James W. Moseley (1)(2) 51 Product Manager, Client Services
William C. Ray (2)(3) 49 Vice President, Administration, General Counsel,
Secretary
Richard R. King 35 Director of Information Technology
Tony A. Lee 34 Product Manager
David A. Maj 37 Product Manager
J. Earl Warrick, Jr. 40 Manager, Hardware Sales
Robbie M. Efird: From 1983 to 1985 Mr. Efird was employed with J. P.
Stevens, Inc. in Greenville, South Carolina. From 1985 to 1986 Mr.
Efird worked in Rocky Mount, North Carolina for Texfi Industries, Inc.
Seeking to utilize his talents as a software developer, Mr. Efird
joined Network Information Services, Inc. in 1986 where he set about
designing and developing proprietary software for the manufacturing
industry. Mr. Efird currently serves as Chairman of the Board,
President and Chief Executive Officer of the Company. Mr. Efird is a
Magna Cum Laude graduate of the De Vry Institute in Atlanta, Georgia
and is participating in graduate studies for his Masters of Business
Administration at the University of North Carolina at Greensboro. Mr.
Efird created the original design module for the Company's proprietary
software in 1986 and has continuously directed development activities
of the Company since that time.
E. W. "Sonny" Miller, Jr.: From 1963 to 1966 Mr. Miller was employed
as the Director of Information Systems for the National Bank of Fort
Benning, Fort Benning, Georgia. In 1966, Mr. Miller took a position
with Fieldcrest Mills, Inc. as its Corporate Systems Manager where he
served until 1968. Thereafter, Mr. Miller was employed as Corporate
Manager of IN Plant Systems for Burlington Industries, Inc. from 1969
until 1971. From 1971 until 1980 Mr. Miller served as Corporate
Systems Manager for Texfi Industries in Greensboro, North Carolina.
In mid 1980 Mr. Miller was appointed Director of Management
Information Systems for Flynt Fabrics, Inc. and thereafter, in 1982,
Mr. Miller held the same position with TiCaro, Inc. until 1985. In
1985 Mr. Miller established Sonny Miller and Associates as a free
lance contract programmer for the manufacturing industry. Later in
the year, Mr. Miller incorporated his business which has since
operated under the name of Network Information Services, Inc. Mr.
Miller currently serves as Senior Vice President of Marketing for the
Company. Mr. Miller is a graduate of the University of Georgia in
Columbia, Georgia and oversees the Company's marketing efforts.
David F. Christian: From 1972 until 1975, Mr. Christian was employed
by Spencer's, a children's clothing manufacturer located in Mount
Airy, North Carolina. Thereafter, from 1975 until 1979, Mr. Christian
served in various management positions for a local restaurant chain in
Greensboro, North Carolina and subsequently held a management position
with Davidson's, a multi-state wholesale distributor of sporting goods
until 1989. From 1989 until 1990 Mr. Christian served as manager of
CEW Imports, located in Winston Salem, North Carolina. In 1990, Mr.
Christian joined the Company and serves as Product Manager for the
Company's net customerlink (net po+). Mr. Christian is a graduate of
the Electronic Computer Programming Institute in Greensboro, North
Carolina.
James W. Moseley: From 1969 until 1987 Mr. Moseley was employed by
Burlington Industries, Inc. as a programmer/analyst through Manager of
Systems and Programming. Mr. Moseley's primary focus at Burlington
was on development and implementation of state of the art
manufacturing systems in its weaving and finishing plants. Working as
a member of Burlington's corporate systems staff, Mr. Moseley served
as a project leader for the development of a new and then
revolutionary tracking system for the company's transportation
division. Mr. Moseley also served the company as a consultant to
various divisions on the development and implementation of MRP11
software packages. From 1987 until 1989 Mr. Moseley represented the
Sara Lee Corporation as their manufacturing systems manager
responsible for the implementation of MRP11 software packages in their
Fuller Brush subsidiary and implementing manufacturing systems for
their Coach Leatherware subsidiary. From 1989 until 1992, Mr. Moseley
was employed by Guilford Mills, Inc. as Automotive Business Unit MIS
Manager responsible for implementing MRP11 software. Mr. Moseley
joined the Company in 1992 and has been responsible for Network's
Client Services Group and assisting in educational development
programs at Network's Process Learning Center. Mr. Moseley currently
serves as Product Manager for the Company's net proplan and net
scheduler. Mr. Moseley holds a BA degree in Mathematics from the
University of North Carolina at Chapel Hill, North Carolina. Mr.
Moseley served as an officer in the United States Navy as a Damage
Control Officer and Programmer/Analyst at the Navy's Commander-in-
Chief, Atlantic Fleet Headquarters.
William C. Ray: From 1972 until 1989 Mr. Ray was engaged in the
private practice of law in Greensboro, North Carolina. In 1989, Mr.
Ray was appointed Vice President, General Counsel and Secretary of
Guilford Mills, Inc., a NYSE Fortune 500 company where he served in
such capacity until 1993. Mr. Ray joined the Company in 1995 and is
currently serving as its Vice President of Administration, General
Counsel and Secretary. Mr. Ray is a graduate of the University of
North Carolina at Chapel Hill, North Carolina and holds a Juris
Doctorate degree from the University of Miami, Miami, Florida. Mr.
Ray has intermittently served as a special consultant to USAID-
Department of State and traveled throughout the African Continent
formalizing joint venture arrangements between African and American
companies.
Richard R. King: Mr. King joined the Company in 1990 and currently
serves as its Director of Information Technology and is responsible
for research and development of new technologies in both software and
hardware areas.
Tony A. Lee: Mr. Lee joined the Company in 1989 and currently serves
as product manager for its inventory control and qctrack, software
programs. Mr. Lee is a graduate of Campbell University with a degree
in Computer Information Services.
David A. Maj: Mr. Maj joined the Company in 1992 and currently serves
as the Company's product manager for the net collection's cost and
resource manager. Mr. Maj has 18 years experience in the
manufacturing process industry as an engineering and information
systems specialist.
J. Earl Warrick, Jr.: Mr. Warrick currently serves as the Company's
Director of Hardware Sales and manages the Company's new Outsource
Process Services. Mr. Warrick joined the Company in 1993 after
previously serving the hardware accounts of numerous nationally
recognized companies.
(1) Currently serves as a member of the Board of Directors and is a
director nominee at the Company's Annual Meeting
scheduled for March 4, 1997.
(2) Currently serves on the Company's Executive Committee
(3) Currently serves on the Company's Audit Committee
<TABLE>
Item 10. Executive Compensation
<CAPTION>
(a) (b) (c) (d) (e)
Other Annual
<S> <C> <C> <C> <C>
Name and Principal Position Year Salary ($) Bonus ($) Compensation($)
Robbie M. Efird<F1> <F2>
Chairman of the Board, Chief Executive Officer 1996 $63,541 None $1,038<F3>
E.W. "Sonny" Miller, Jr.<F1> <F2>
1996 58,500 None $2,125<F3>)
<F1> The salary figures presented represent the
salary compensation of the named executives for
the period May, 1996 through September 30, 1996
since the Company operated as a private company
reporting as a Subchapter S corporation prior to
that time. No other executive officers would
meet the reporting requirements.
<F2> The named executive officers have entered
into long term employment contracts with the
Company for a period of five years with three,
five-year renewable options. The contracts
provide that if the named executive is wrongfully
terminated, then, and in that event, the
Company would provide salary continuation to
the named executive through the term of the
contract.
<F3> Represents the value of estimated
personal use of Company owned vehicles
and the value of disability premiums
paid by the Company under a salary
continuation program.
</TABLE>
<TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
<CAPTION>
(1) (2) (3) (4)
Amount and Nature Percent of
Title of Name and Address of Beneficial Owner of Beneficial Class
Class Owner
<S> <C> <C> <C>
Common Robbie M. Efird 2,184,193 37.62%
200 N. Elm Street
Greensboro, N.C. 27401
Common E.W. "Sonny" Miller, Jr. 1,237,097 21.31%
200 N. Elm Street
Greensboro, N.C. 27401
Common David F. Christian 715,698 12.33%
200 N. Elm Street
Greensboro, N.C. 27401
Common James W. Moseley 475,698 8.19%
200 N. Elm Street
Greensboro, N.C. 27401
Common William C. Ray 367,385 6.33%
200 N. Elm Street
Greensboro, N.C. 27401
All Executive Officers and Directors as a group (8 5,250,176 90.42%
persons)
</TABLE>
Item 12. Certain Relationships and Related Transactions
On June 7, 1996 a Form S-8 was filed with the Securities and
Exchange Commission. The Form S-8 references a contract between
Registrant and a promoter for the issuance of 50,000 shares of
Registrant's common stock, par value $.001 in exchange for certain
services.
During the current period, the Company issued 50,000 shares of its
common stock, $.001 par value, to a promoter to provide professional
services in relation to the promotion of the Company's stock. The
cost of such services are amortized as services are performed.
<TABLE>
Item 13. Exhibits and Reports on Form 8-K
a) Exhibits
The following exhibits are submitted herewith:
<CAPTION>
Number Page #
<C> <C> <C> <S>
3 (ii) "P" Bylaws of the Company. Incorporated by reference to Agreement and Plan of Reverse
Triangular Merger in Form 10-QSB for the period ending March 31, 1996.
10 "P" Employment contracts of officers incorporated
by reference on Form 10-QSB filed May 20,
1996.
11 Statement Re: Computation of per share 33
earnings
13 (i) "P" Form 10-QSB for the period ended March 31,
1996 incorporated by reference
13 (ii) Form 10-QSB for the period ended June 30, 1996
incorporated by reference
16 "P" Letter on change in certifying accountants
filed on Form 8-K/A1 and incorporated by
reference
22 The Company intends to timely submit an annual
report and proxy statement to shareholders
within 120 days after the close of fiscal year
end and hereby incorporates by reference these
published reports to be submitted to
shareholders.
"P" Additionally, a meeting of security holders
was held on March 25, 1996 and April 14, 1996
and incorporated by reference in Form 10-QSB
for the period ended March 31, 1996.
24 "P" A general power of attorney was filed as
Exhibit F of Form 10-QSB for the period ended
March 31, 1996 and is therefore incorporated
by reference.
27 Financial Data Schedule 34
b) Reports on Form 8-K
"P" Form 8-K filed April 30, 1996 with respect to
Change in Control of Registrant, Acquisition
of Assets, Resignation of Registrant's
Directors, including financial statements
"P" Form 8-K/A filed May 22, 1996 with respect to
Pro forma financial information
"P" Form 8-K/A1 filed June 10, 1996 with respect
to certifying accountants including financial
statements
Form 8-K filed September 26, 1996 with respect
to change in fiscal year end. No financial
statements were required to be filed with this
report.
</TABLE>
SIGNATURES
In accordance with the requirements of section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
NETWORK SYSTEMS INTERNATIONAL, INC.
By: /s/ William C. Ray
William C. Ray, Vice President
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Date
/s/ Robbie M. Efird May 20, 1997
Robbie M. Efird
Chairman of the Board, President,
Chief Executive Officer,
Acting Financial Officer and
Director (principal executive
and financial officer)
/s/ E. W. Miller, Jr. May 20, 1997
E. W. Miller, Jr.
Senior Vice President and Director
(executive officer)
/s/ William C. Ray May 20, 1997
William C. Ray
Vice President, Secretary
(executive officer)
/s/ James W. Moseley May 20, 1997
James W. Moseley
Director
/s/ David F. Christian May 20, 1997
David F. Christian
Director
10KSB96\Ex1110Ka.doc
EXHIBIT 11
<TABLE>
Statement Re Computation of Per Share Earnings
<CAPTION>
9 Month Period Ended September 30
1995
Pro Forma - Primary Earnings Per Share 1996 (Unaudited)
<S> <C> <C>
Net Income from Continuing Operations before Income $ 474,394 $ 87,326
Taxes
Pro Forma Income Tax assuming retroactive application of 163,400 12,700
change in Subchapter S status.
Net Income $ 310,994 $ 74,626
Pro Forma - Primary earnings per common share $ $0.05 $ $0.01
Pro Forma Weighted Average Shares Outstanding
(Unaudited)
Shares Outstanding beginning of year 18,003,500
Shares retired in connection to merger (17,497,500)
Outstanding Shares 506,000 506,000
Shares issued in merger 5,250,176 5,250,176
Weighted Shares issued for consulting services 21,168 -
Pro Forma - Weighted average number of shares
outstanding
assuming recapitalization in prior periods 5,777,344 5,756,176
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 77,487
<SECURITIES> 0
<RECEIVABLES> 1,293,842
<ALLOWANCES> (187,000)
<INVENTORY> 0
<CURRENT-ASSETS> 55,529
<PP&E> 1,316,003
<DEPRECIATION> (318,103)
<TOTAL-ASSETS> 3,360,172
<CURRENT-LIABILITIES> 902,632
<BONDS> 0
0
0
<COMMON> 5,806
<OTHER-SE> 1,315,065
<TOTAL-LIABILITY-AND-EQUITY> 3,360,172
<SALES> 3,294,332
<TOTAL-REVENUES> 3,294,332
<CGS> 1,444,854
<TOTAL-COSTS> 1,444,854
<OTHER-EXPENSES> 1,333,838
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,246
<INCOME-PRETAX> 474,394
<INCOME-TAX> 514,700
<INCOME-CONTINUING> (40,306)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,306)
<EPS-PRIMARY> .05<F1>
<EPS-DILUTED> 0
<FN>
<F1>INDICATES PRO FORMA
</FN>
</TABLE>
