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d:\sec\10KSB97.doc
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15-(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . . . . . . .
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 (Zip Code)
offices)
Registrant's telephone number, (336) 271-8400
including area code:
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, 1997 were
$7,830,844.
As of December 24, 1997 there were 5,851,176 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 December 24, 1997 based
on the average bid and ask price on such date was $5,613,017.
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 1997 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 OF CONTENTS
Part I
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
Part III
Item 9. Directors, Executive Officers,
Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act. 28
Item 10. Executive Compensation 30
Item 11. Security Ownership of Certain
Beneficial Owners and Management 31
Item 12. Certain Relationships and Related
Transactions 31
Item 13. Exhibits and Reports on Form 8-K 32
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 $60,000 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 ("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 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 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 a 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,
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. ("NIS") 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, NIS successfully
obtained contract programming orders from various manufacturing
entities throughout the State of North Carolina. Over the succeeding
ten year period, proprietary software (Netc) 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(TM)" 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 quarterly 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: hardware sales, and the sale of software licenses
and related services. 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,
Pillowtex, Guilford Mills and many others. Current annual sales
reflect an approach toward the $8,000,000 level. Profits are tracked
on a profit center (segment) 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 NETc 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(TM) now provides process application through
utilization of the Company's individual modules marketed under the
titles: net resourcemanager(TM); net customerlink(TM); net proplan(TM); net
po+(TM); net scheduler(TM); net qctrack(TM); net inventory(TM); net cost(TM)
and net exec(TM). Markets now include the general process
manufacturing industry as a whole.
Today, the principal products of the Company include not only the net
collection(TM); 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(TM) include:
net resourcemanager(TM)
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(TM)
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(TM)
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+(TM)
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(TM)
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(TM)
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(TM)
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(TM)
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(TM)
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 1996 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(TM) 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. Current utilization of the Outsource Process Services
product is limited to an experimental base which will ultimately judge
the viability of the product from a marketing prospective. Although
the Company believes that its Outsource Process Services will
ultimately increase revenues, 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 final development of a new and improved
third generation software package. The new package is currently
scheduled to be fully launched by December 31, 1997. 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 1997 the Company initiated development
of and developed a new third generation version of its original NETc
design. The Company has had under development what has previously
been referred to as a "new third generation software package" for the
past two years. In late 1997, management of the Company made the
strategic decision to market the newly developed product as an "add-
on" to its current suite of products, the net collection(TM). This
decision was made, in part, due to customer concerns over the
prospects of potentially delaying ongoing implementation and its
ultimate effect on Year 2000 timing issues. During the last fiscal
years of the Company's operations, the Company has expended in excess
of $3 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
$389,000. 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 specific customer sites in the surrounding area.
Additionally, the Company operates and funds satellite offices in
Clover, South Carolina; Greenville, North Carolina; Matthews, North
Carolina; and Wilmington, North Carolina.
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
fourth quarter ended September 30, 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock is traded over-the-counter (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 reflected below as
inter-dealer prices, without retail mark-up, mark-down on conversion
and may not represent actual transactions:
First Quarter(1), 1997 Second Quarter, 1997
High(Ask) Low(Ask) High(Ask) Low(Ask)
$2.25 $2.25 $2.25 $1.25
High(Bid) Low(Bid) High(Bid) Low(Bid)
$0.375 $0.375 $1.00 $0.375
Third Quarter, 1997 Fourth Quarter, 1997
High(Ask) Low(Ask) High(Ask) Low(Ask)
$2.50 $1.375 $8.50 $2.1875
High(Bid) Low(Bid) High(Bid) Low(Bid)
$2.25 $1.00 $7.75 $1.875
(1) The Company's fiscal year-end was changed to September 30,
therefore, what would have otherwise been reported as fourth quarter
is changed to first quarter, 1997.
Note: Stock quotes were derived from Nasdaq Trading and Market
Services of OTC Bulletin Board.
As of December 24, 1997, there were 301 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 DATA, THE MATTERS DISCUSSED IN THIS FORM
10-KSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND
UNCERTAINTIES.
Network would caution readers that in addition to the important
factors described elsewhere in the Form 10-KSB, the following
important factors, among others, sometimes have affected, and in the
future could affect, the Company's actual results and could cause the
Company's actual consolidated results during 1998, and beyond, to
differ materially from those expressed in any forward looking
statements made by, or on behalf of, Network.
RESULTS OF OPERATIONS
Revenue. Network's annual revenues are stated for the twelve-month
period from October 1, 1996 through September 30, 1997. Net revenue
for the period was $7,830,844, a 30.69% increase over the comparable
period in 1996. 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(TM) and added business due to customer
concerns over rapidly aliening Year 2000 issues.
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 $5,108,192 for the twelve month period ended
September 30, 1997 compared to $3,825,843 for the same period in 1996.
This represents an increase of 33.52% principally due to increased
efforts in the marketing area. In the hardware segment of the
business, revenues for the period ended September 30, 1997 amounted to
$2,722,652 as compared to $2,165,996 for the comparable period ended
September 30, 1997. This represents a 25.70% increase in hardware
sales principally due to additional equipment acquisition by customers
in an effort to better address their Year 2000 equipment needs.
Net income for the period ended September 30, 1997 increased to
$1,476,346 from $807,244 over the comparable period in 1996, an 82.89%
increase. When pro forma taxes are taken into account, the increase
is almost 90%. This increase in operating profits is directly
attributable to an increase in revenues.
Cost of Sales and Services. Annual cost of sales and services as a
percentage of revenue increased in fiscal 1997 to 46.9% from 45.3%
over the comparable period in fiscal 1996. This increase is
attributable to a continued shift of the Company's focus into the
software products sector of the Company's business and a decreased
focus on equipment sales.
Software Development Costs. Software development costs, both
capitalized and expensed as research and development, amounted to
$1,913,816 in fiscal 1997, as compared to $1,533,613 in fiscal 1996; a
25% increase. Of these amounts, $1,648,350 and $1,198,092 were
capitalized in 1997 and 1996, respectively. More software development
costs were capitalized in 1997 versus 1996 since technological
feasibility of more products was achieved in fiscal year 1997.
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 fiscal year end
1996 being $778,544. Net income on a per share basis was $.24 for the
year ended September 30, 1997, as compared to $.13 on a pro forma
basis for the comparable period in 1996, an 85% increase. Fully
diluted earnings per share were also $.24 for the year ended September
30, 1997 when the convertible preferred stock is taken into account.
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,
a loss of significant associates to competition or adverse general
economic and manufacturing conditions in the industries in which the
Company does business. Rapid technological change and the Company's
ability to develop and market products that successfully adapt to that
change may also have an impact on the results of operations. Further,
increased competition in the design and distribution of manufacturing
software products could also negatively impact the Company's results
of operations.
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
$491,413 on September 30, 1997. Cash provided by operating activities
amounted to $1,843,968 for the year end as compared to $1,401,500 in
the comparable period of 1996. 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, 1997 amounting to
$7,830,844 and accounts receivable amounting to $1,621,091, such
receivable accounts for approximately 21% 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 64 days as compared to 46 days in the
prior period. 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 1998 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 offering and/or a secondary offering of its common
stock in fiscal year 1998. However, there are no assurances as to the
timing or success of such anticipated offering, if such offerings are
made at all.
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 and risks associated therewith
are as follows:
Outlook and Uncertainties. Although Network operates its business on
a three-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 or achieve continued
growth demonstrated in past performance records.
Software Development. The Company has had under development what has
previously been referred to as a "new third generation software
package" for the past two years. In late 1997, management of the
Company made the strategic decision to market the newly developed
product as an "add-on" to its current suite of products, the net
collection(TM). This decision was made, in part, due to customer
concerns over the prospects of potentially delaying ongoing
implementation and its ultimate effect on Year 2000 timing issues.
Although this decision could potentially result in lower than
previously anticipated profit margins, management of the Company
opinionated that overall customer satisfaction was paramount over the
long term.
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. Major changes and/or additional
competition could negatively impact the Company's future performance.
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 1998 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 1998 to increase over 1997.
Expenditure of funds for research and development may prove to be ill
spent in the event the final product achieved does not meet market
expectations and acceptance.
Prices. Future prices Network is able to obtain for its software and
services may decrease from historical levels depending upon
competitive markets, customer demand and other unknown and unforeseen
factors.
Sales and Marketing. Network's plans for 1998 include a significant
investment in its sales and marketing efforts. Additionally, as a new
public entity and subsequent name change, the Company expects to
continue to expand marketing efforts in order to gain name recognition
of its corporate identify and in the promotion of its common stock.
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. During
fiscal 1997, a limited private placement was utilized, however, the
Board of Directors has indicated a desire to initiate a subsequent
second private placement and/or secondary offering of its common stock
during fiscal 1998. Whether the secondary offering is initiated, or
if initiated, is successful, is uncertain. Additionally, the costs
associated with such offering may well tend to negatively impact the
Company's cash flow needs.
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 customers 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(TM) 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.
Material Customers. The Company could potentially face the risks
related to loss of material customers. Such loss of customers would
have an immediate negative impact on the profitability of the Company.
Legal Matters. Although the Company does not have any pending claims
and is not aware of any threatened legal action, any such claim or
legal actions in the future could have a material and adverse effect
on the operations of the Company and a resultant decline in the value
and marketability of its stock.
Item 7. Financial Statements.
INDEX
Page #
Report of independent certified public accountants 14
Consolidated balance sheet 15
Consolidated statements of operations 16
Consolidated statements of cash flow 17
Consolidated statement of changes in stockholders'
equity 19
Notes to consolidated financial statements 20
Selected Financial Data 27
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, 1997
and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years ended September 30,
1997 and September 30, 1996. 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, 1997 and the results of its operations and its cash
flows for the years ended September 30, 1997 and September 30, 1996,
in conformity with generally accepted accounting principles.
/s/ Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
November 14, 1997
Network Systems International, Inc. and Subsidiaries
Consolidated Balance Sheet
September 30, 1997
<TABLE>
<CAPTION>
Assets
Current Assets
<S> <C>
Cash $ 491,413
Accounts receivable, trade, net of allowance of $451,986 1,621,091
Unbilled accounts receivable 45,000
Accounts receivable, related parties 111,570
Other current assets 74,953
Costs and estimated earnings in excess of billings 210,070
Total Current Assets 2,554,097
Property and equipment, net of accumulated depreciation 995,875
Other Assets
Notes receivable 168,852
Software development costs, net of accumulated amortization 1,591,793
Other 69,040
1,829,685
$5,379,657
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable, current portion 31,000
Capital lease obligation, current portion 75,000
Bank overdraft 131,382
Accounts payable, trade 102,887
Other accrued liabilities 78,134
Deferred revenue 260,985
Total current liabilities 679,388
Long Term Liabilities:
Deferred income taxes 601,300
Notes payable, net of current maturities 358,028
Capital lease obligation, net of current maturities 159,504
Total long term liabilities 1,118,832
Stockholders' Equity
Preferred Stock; $.001 par value; authorized 12,500 shares; 10
issued and outstanding 9847 shares
Common Stock; $.001 par value; authorized 100,000,000
shares; issued and outstanding 5,806,176 shares 5,806
Capital in excess of par value 2,994,014
Retained earnings 581,607
Total stockholders' equity 3,581,437
$5,379,657
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Network Systems International, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended September 30
1997 1996
<S> <C> <C>
Revenue:
Licensing and Servicing revenue $5,108,192 $3,825,843
Equipment revenue 2,722,652 2,165,996
Total revenue 7,830,844 5,991,839
Operating expenses
Cost of sales and services 3,675,511 2,717,972
Research and development 265,466 335,521
General and administrative 1,670,163 1,539,450
5,611,140 4,592,943
Operating income 2,219,704 1,398,896
Other income (expenses)
Interest (63,998) (46,949)
Other income (expense) 15,340 (30,003)
(48,658) (76,952)
Income before income 2,171,046 1,321,944
tax provision
Income tax provision 694,700 514,700
Net income $1,476,346 $ 807,244
Primary net income per
common share $ .24
Weighted average common shares 5,806,176
outstanding, Primary
Fully diluted net income per $ .24
common share
Weighted average common shares 6,134,471
outstanding assuming fully
diluted
Pro Forma Amounts Assuming
Retroactive Application of
Change In SubChapter S Status
and Corporate Recapitalization
(unaudited)
Income before income tax $1,321,944
provision
Income tax provision 543,400
Net income $ 778,544
Primary net income per $ .13
common share
Weighted average common 5,772,023
stock outstanding, Primary
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
NETWORK SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended September 30
1997 1996
<S> <C> <C>
Operating activities
Net income $ 1,476,346 $ 807,244
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,332,356 616,481
Loss on marketable securities 17,229
(Increase) decrease in:
Accounts receivable and unbilled (559,249) (678,403)
receivables
Prepaid assets, other receivables, and (144,530) (24,213)
other assets
Costs and estimated earnings in excess of
billings (190,058)
Increase (decrease) in:
Bank overdraft 131,382
Accounts payable and accrued liabilities (143,656) 54,792
Unearned revenue 125,477 52,009
Deferred income taxes 86,600 514,700
Billings in excess of costs and earnings (270,700) 41,661
Total adjustments 367,622 594,256
Net cash provided by operating activities 1,843,968 1,401,500
Investing activities
Issuance of notes receivable (168,852)
Acquisition of property and equipment (177,995) (131,303)
Software development (1,648,350) (1,198,079)
Proceeds on sale of marketable securities 6,640
Purchase of marketable securities (3,540)
Increase in cash surrender value of life insurance (48,881) (12,102)
Net cash (used) by investing activities (2,044,078) (1,338,384)
Financing activities
Payment on notes payable, long-term debt and
capital leases (150,437) (87,083)
Net proceeds from issuance of preferred stock 856,689
Net (payments on) proceeds from line of credit (19,747) 6,937
Dividends paid (72,469) ___________
Net cash provided (used) by financing activities 614,036 (80,146)
Net increase (decrease) in cash 413,926 (17,030)
Cash at October 1 77,487 94,517
Cash at September 30 $ 491,413 $ 77,487
</TABLE>
The accompanying notes are an integral part of
the financial statements.
Supplemental disclosures of cash flow information
and noncash investing and financing activities
Cash paid during the period for:
Interest $ 63,998 $ 48,987
Taxes $668,084 0
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 fiscal year 1996, the Company acquired computer equipment
totaling $232,540 under capital leases.
The accompanying notes are an integral part of the
financial statements.
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Year ended September 30, 1997
Common Stock Preferred Stock
___________________ __________________
Retained
Earnings
$0.001 $0.001 Capital in (Accumulated
Number of Par # of Par Excess of )
Shares Value Shares Value Par Value (Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance October
1, 1996 5,806,176 $ 5,806 0 $ 0 $2,137,335 $ (822,270) $1,320,871
Dividends
Issuance of
preferred stock.
net of offering
expenses
of $128,011 9,847 $ 10 856,679 856,689
Dividends on
preferred stock (72,469) (72,469)
Net income for
the year
ended September
30, 1997 _________ _______ _______ _______ __________ 1,476,346 1,476,346
Balance September
30, 1997 5,806,176 $ 5,806 9,847 $ 10 $2,994,014 $ 581,607 $3,581,437
</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 Years Ended September 30, 1997 and September 30, 1996
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.
On July 16, 1997, the Company entered into a six-month agreement with
a director of the Company to promote its stock. In exchange for the
promoters efforts the Company agreed to issue common stock for
services rendered if the common stock achieved certain minimum bid
price levels. At September 30, 1997, the promoter earned 25,000
shares valued at $60,000 under the terms of this agreement.
Additionally, subsequent to year end the promoter earned an additional
20,000 shares.
In November of 1996, the Company set aside 500,000 shares of its
unissued common stock to be awarded to key employees of the Company at
a later date.
2. Summaries of Significant Accounting Policies
Basis of Preparation:
The financial statements consolidate the accounts of Network Systems
International, Inc. and its wholly owned subsidiaries Network
Information Services, Inc. and Network Investment Group, Inc.
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 7
Office equipment 5-7
Computer equipment 5-7
Computer software 3-5
Computer software equipment under capital lease 3-5
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. Capitalization of computer
software development costs begins upon the establishment of technical
feasibility for the product. Costs incurred subsequent to the product
release are charged to operations. Capitalized software development
costs amounted to $1,648,350 and $1,198,092 for the years ended
September 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 $1,152,337 and $550,282 for the years ended
September 30, 1997 and 1996, respectively, and is included in cost of
sales.
Software development costs at September 30, 1997 consist of the
following:
Software Development Costs $ 2,700,821
Less Accumulated Amortization (1,109,028)
$ 1,591,793
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.
In October, 1997, the American Institute of Certified Public
Accountants issued Statement of Position Number 97-2 "Software Revenue
Recognition". This statement provides recognition and measurement
guidance in accounting for revenue from selling, leasing or licensing
of software and is effective for transactions entered into in fiscal
years beginning after December 15, 1997. In the opinion of
management, the adoption of this new statement will not have a
material effect on the Company's financial statements.
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 $89,306 and $65,693 for the years
ended September 30, 1997 and 1996, respectively. Advertising costs of
$25,673 were capitalized during the year ended September 30, 1997. No
amounts were capitalized during the year ended September 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 year
ended September 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 $72,469 during the year ended September 30, 1997.
The number of shares used in the computation of fully diluted earnings
per share was 6,134,471 for the year ended September 30, 1997.
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 period
ended September 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 for the full year, 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 for the full year ended September 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. Accounts Receivable, Related Parties.
Accounts Receivable from related parties at September 30, 1997,
consist of amounts due from three (3) shareholders of the Company that
bear interest at five percent, are due on demand, and collateralized
by their common stock in the Company.
4. Uncompleted Contracts
Information with respect to uncompleted contracts at September 30,
1997 is summarized as follows:
Earned contract revenue $ 658,070
Less billings to date 448,000
Cost and estimated earnings in excess of
billings on uncompleted contracts $ 210,070
5. Property and Equipment
Property and equipment at September 30, 1997 consist of the
following:
Land $ 150,000
Building 300,000
Leasehold improvements 100,042
Furniture and fixtures 122,574
Office equipment 95,593
Computer equipment 343,903
Computer software 56,952
Computer equipment and software under capital 324,933
lease
1,493,997
Less Accumulated depreciation and amortization (365,325)
Accumulated amortization on computer equipment
and software under capital lease (132,797)
$ 995,875
6. Notes Payable
Notes payable at September 30, 1997 consist of the
following:
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 389,028
guaranteed by certain stockholders
389,028
Less amounts currently due 31,000
$ 358,028
The Company has available a $300,000 bank line of credit to provide
additional short-term working capital. This line of credit is at
prime plus .5% and is collateralized by accounts receivable, equipment
and a $200,000 life insurance policy. Additionally, the line is
personally guaranteed by certain stockholders. At September 30, 1997,
there was no amounts outstanding on this line of credit.
The following is a schedule by year of the principal payments
required on these notes payable and long-term debts:
Period Ending September 30
1998 $ 31,344
1999 31,344
2000 $ 326,340
7. 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 September 30
1998 $ 90,432
1999 90,432
2000 59,995
2001 21,900
Total minimum lease payments 262,759
Less amount representing interest 28,255
Present value of net minimum lease payments 234,504
Less current portion 75,000
$ 159,504
8. 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 $9,656 for the year ended
September 30, 1997. No contributions were made to the plan for the
year ended September 30, 1996.
9. 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 $2,171,046 and
$1,321,944 for the years ended September 30, 1997 and 1996,
respectively. The provision for income taxes for the years ended
September 30, 1997 and 1996 consist of the following components:
1997 1996
Current tax expense $ 792,200 0
Deferred tax expense 53,300 $ 548,000
Research and development credit (150,800) (33,300)
$ 694,700 $ 514,700
The significant temporary differences which gave rise to deferred tax
assets and liabilities as of September 30, 1997 are as follows:
Deferred tax asset
Bad debt revenue $ 452,000
Deferred tax liabilities
Software development cost 1,591,800
Book basis of property & equipment
in excess of tax basis 105,900
Change in tax status 363,800
$2,061,500
As of September 30, 1997, the Company has federal loss carryforwards
totaling $77,700 that may be offset against future federal taxable
income. If not used, the carryforward will expire as follows:
Operating
losses
2003 $ 20,600
2009 49,300
2010 7,800
2011 -
2012 -
$ 77,700
No valuation allowance has been recorded against the deferred tax
assets or operating loss carryforwards because recognition of the
cumulative deferred income arising from deferred software development
costs 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 years ended September 30, 1997 and 1996
are as follows:
1997 1996
Tax expense at U.S. $733,300 34.0% $449,500 34.0%
statutory rates
State and local 55,000 2.6% 66,600 5.0%
income tax
Non-deductible 6,600 0.3% 19,100 1.5%
expense and other
Research & (100,200) (4.7%) (20,500) (1.6%)
development credit
$694,700 32.2% $514,700 38.9%
10. Major Customer
For the years ended September 30, 1997 and 1996, sales to three and
two customers in the software segment amounted to approximately
$3,525,600 and $3,346,600, respectively. The September 30, 1997
accounts receivable balances included $363,725 due from those
customers.
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 September 30,
1997:
1998 $59,634
1999 $43,077
2000 $11,376
Rent expense amounted to $53,550 and $178,347 for the periods ended
September 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
In June 1997, the Financial Accounting Standards Board issued FASB
#131 "Disclosures about Segments of an Enterprise and Related
Information". This statement establishes standards for the way that
public companies report information about operating segments in annual
financial statements and is required for periods beginning after
December 15, 1997; however earlier application is encouraged.
The Company has elected to adopt this statement for the year ended
September 30, 1997.
The Company's operations are classified into two principal industry
segments: Hardware sales and sales of Software Licenses and related
service fees.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies except
that general and administrative expenses are recognized and measured
on the ratio of salaries of the segment to total salaries.
All intercompany transactions are eliminated for financial reporting
purposes.
The Company's reportable segments are strategic business units that
offer different product of services. They are managed separately
because each business requires different technology and marketing
strategies.
The following is a summary of segment information for
the years ended September 30:
<TABLE>
<CAPTION>
1997 1996
Software Software
and and
Service Hardware Corporate Total Service Hardware Corporate Total
Fees Fees
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $5,108,192 $2,755,652 - $7,830,844 $3,517,670 $2,165,996 - $5,682,666
Interest revenue 1,579 - 12,281 13,860 8,192 584 8,776
Interest expense 63,998 - - 63,998 46,949 - - 46,949
Depreciation and
amortization 1,330,402 1,954 - 1,332,356 614,714 1,767 - 616,481
Segment profit 2,231,918 339,917 (352,131) 2,219,704 1,279,940 261,065 (142,109) 1,398,896
Segment assets 4,670,337 136,704 572,616 5,379,657 3,246,538 69,910 43,724 3,360,172
Expenditures for
segment assets 1,826,345 - - 1,826,345 1,329,382 1,329,382
</TABLE>
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:
<TABLE>
<CAPTION>
Name Age Position Director
Since
<S> <C> <C> <C>
Robbie M. Efird (1)(2)(3) 34 Chairman of the Board, Chief Executive 1996
Officer
E. W. "Sonny" Miller, Jr. 55 Senior Vice President - Marketing/Sales, 1996
(1)(2) Director
David F. Christian (1)(2) 43 Director Business Systems, Director 1996
James W. Moseley (1)(2) 52 Director Customer Relations, Director 1996
David P. Reynolds(1)(2)(3) 49 Director 1996
Rick Tuberosa(1)(3) 34 Director 1996
William C. Ray (2)(3) 51 Vice President Administration, General
Counsel, Secretary
Richard R. King 36 Director Manufacturing Execution Systems;
Director Nominee
Tony A. Lee 35 Manager Business Systems
</TABLE>
(1) Currently serves as a member of the Board of Directors
and is a director nominee at the Company's Annual Meeting
scheduled for February 20, 1998.
(2) Currently serves on the Company's Executive Committee
(3) Currently serves on the Company's Audit Committee
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 1961 to 1966 Mr. Miller was employed
as the Director of Information Systems for the National Bank of Fort
Benning, Fort Benning, Georgia. In 1964, Mr. Miller took a position
with Fieldcrest Mills, Inc. as its Corporate Systems Coordinator where
he served until 1968. Thereafter, Mr. Miller was employed as
Corporate Manager of In Plant Systems for Burlington Industries, Inc.
from 1968 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 Services for Flynt Fabrics, Inc. and thereafter, in 1982,
Mr. Miller held the same position with TiCaro, Inc. until 1985. In
early 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 Director and Senior Vice President of Sales
and Marketing for the Company. Mr. Miller is a graduate of the
University of Georgia in Columbia, Georgia and oversees the Company's
sales and 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 Director of Business
Systems. 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 Director of Customer Relations. 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 Manufacturing Execution Systems 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 a manager of business systems. Mr. Lee is a graduate of Campbell
University with a degree in Computer Information Services.
David P. Reynolds: Mr. Reynolds served as President of the automotive
group with Collins & Aikman from 1973 until 1991 and thereafter as
President of worldwide automotive operations and Senior Vice President
of corporate affairs for Guilford Mills, Inc. from 1991 through 1993.
Since that time, Mr. Reynolds has owned and operated an independent
consulting service providing management and manufacturing advisory
reports to Boards of Directors of major manufacturing entities and to
IBM's customer focus groups.
Rick Tuberosa: From 1989 to present, Mr. Tuberosa has been employed
by Palm State Equities, Inc. He currently serves as President, CEO
and Chairman of the Board. Prior to 1989, Mr. Tuberosa represented
E.F.Hutton, Shearson Lehman Hutton, Raymond James Financial and First
Investors Corporation. Mr. Tuberosa has extensive knowledge of the
financial markets. In 1996 Mr. Tuberosa was selected as an Honored
Member of the Cambridge Who's Who Registry of Business Leaders.
Item 10. Executive Compensation
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Other Annual
Name and Principal Position Year Salary ($) Bonus Compensation
($) ($)
<S> <C> <C> <C> <C>
Robbie M. Efird(1) (2)
Chairman of the Board, Chief Executive 1997 $152,500 None $2,493.34(3)
Officer
Acting CFO
1996 63,541(4) None 1,038(3)
1995 N/A(5) N/A N/A
E.W. "Sonny" Miller, Jr.(1) (2) 1997 100,000 None 4,418.76(3)
Director, Vice President Marketing
1996 58,500 None $2,125(3)
1995 N/A(5) N/A N/A
</TABLE>
(1) The salary figures presented represent the salary
compensation of the named executives for the period
October 1, 1996 through September 30, 1997 since
the Company changed its fiscal year end. No other
executive officers would meet the reporting requirements.
(2) 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.
(3) 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.
(4) 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.
(5) No information provided since the Company was a
SubChapter S corporation at the time.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Amount and Nature Percent
Title of Name and Address of Beneficial Owner of Beneficial of
Class Owner Class
<S> <C> <C> <C>
Common Robbie M. Efird 2,179,293(1) 37.24%
200 N. Elm Street
Greensboro, N.C. 27401
Common E.W. "Sonny" Miller, Jr. 1,237,097 21.14%
200 N. Elm Street
Greensboro, N.C. 27401
Common David F. Christian 715,698 12.23%
200 N. Elm Street
Greensboro, N.C. 27401
Common James W. Moseley 475,698 8.13%
200 N. Elm Street
Greensboro, N.C. 27401
Common William C. Ray 332,385 5.68%
200 N. Elm Street
Greensboro, N.C. 27401
Common Richard R. King 111,483 1.90%
Common Tony A. Lee 79,311 1.36%
Common Rick Tuberosa 45,000(2) 0.77%
Common David P. Reynolds 5,000 0.09%
All Executive Officers and Directors
as a group (9 persons) 5,180,965 88.54%
</TABLE>
(1) Mr. Efird beneficially holds 10,100 shares of common
stock of the Company on behalf of his minor son.
(2) Mr. Tuberosa is the owner-operator and majority
shareholder of Palm State Equities, Inc. and holds
the stock as beneficial owner of such shares.
Item 12. Certain Relationships and Related Transactions
On December 16, 1997 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 45,000 shares of
Registrant's common stock, par value $.001 in exchange for certain
services.
Item 13. Exhibits and Reports on Form 8-K
a) Exhibits
<TABLE>
<CAPTION>
The following exhibits are submitted herewith:
Number Page #
<S> <C> <C> <C>
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 earnings 34
13 The Registrant's Annual Report on Form 10-KSB for the fiscal
year
ended September 30, 1996, filed January 28, 1997 and
incorporated by
reference
13 The Registrant's Annual Report on Form 10-KSB/A for the fiscal
year ended September 30, 1996, filed May 21, 1997 and
incorporated
by reference
13 Form 10-QSB for the quarter ended December 31, 1996 filed
February 14, 1997 and incorporated by reference
13 Form 10-QSB for the period ended March 31, 1997 filed May 15,
1997 and incorporated by reference
13 Form 10-QSB for the period ended June 30, 1997 filed August 8,
1997 and incorporated by reference
16 "P" Letter on change in certifying accountants filed June 10, 1996
on Form 8-K/A1 and incorporated by reference
22 Proxy statement filed January 28, 1997 and incorporated by
reference
27 Financial Data Schedule 35
</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/ Robbie M. Efird
Robbie M. Efird, President, Chief Executive Officer
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 December 30, 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. December 30, 1997
E. W. Miller, Jr.
Senior Vice President and Director
(executive officer)
/s/ William C. Ray December 30, 1997
William C. Ray
Vice President, Secretary
(executive officer)
/s/ James W. Moseley December 30, 1997
James W. Moseley
Director
/s/ David F. Christian December 30, 1997
David F. Christian
Director
/s/ David P. Reynolds December 30, 1997
David P. Reynolds
Director
/s/ Rick Tuberosa December 30, 1997
Rick Tuberosa
Director
d\sec\Exh11K97.doc
<TABLE>
<CAPTION>
Exhibit 11
Schedule of Computation of Net Income Per Share (Unaudited)
Year Ended September 30,
1997 1996
Primary
<S> <C> <C>
Net income $1,476,346
Less - preferred stock dividends (72,469)
Net income for primary income per Common Share
$1,403,877
Weighted average number of
Common Shares outstanding
during the year 5,806,176
Primary income per Common Share $ .24
Fully Diluted
Net income for primary income
per Common Share $1,403,877
Add - dividends on convertible
preferred stock 72,469
Net income for fully diluted
net income per share $1,476,346
Weighted average number of
shares used in calculating
primary income per 5,806,176
common share
Assuming conversion of
convertible preferred stock
(weighted average) 328,295
Weighted average number of
common shares outstanding
as adjusted 6,134,471
Fully diluted earnings per
common share $ .24
Pro forma - Primary Earnings
Per Share (Unaudited)
Net income before income taxes $1,321,944
Pro forma Income Tax assuming
retroactive application of
change in SubChapter S status 543,400
Net Income $ 778,544
Pro Forma Weighted Average
Shares Outstanding 5,772,023
Primary Income per Common Share $ .13
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 491,413
<SECURITIES> 0
<RECEIVABLES> 2,073,077
<ALLOWANCES> (451,986)
<INVENTORY> 0
<CURRENT-ASSETS> 2,554,097
<PP&E> 995,875
<DEPRECIATION> (498,092)
<TOTAL-ASSETS> 5,379,657
<CURRENT-LIABILITIES> 679,388
<BONDS> 0
0
10
<COMMON> 5,806
<OTHER-SE> 3,575,621
<TOTAL-LIABILITY-AND-EQUITY> 5,379,657
<SALES> 7,830,844
<TOTAL-REVENUES> 7,830,844
<CGS> 3,675,511
<TOTAL-COSTS> 1,935,629
<OTHER-EXPENSES> (15,340)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,998
<INCOME-PRETAX> 2,171,046
<INCOME-TAX> 694,700
<INCOME-CONTINUING> 1,476,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,476,346
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
