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d:\sec\10Q2Q97.doc 3:51 PM May 15, 1997
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934.
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _____, 19__, to _____, 19__.
Commission File Number: 33-25308-D
CUSIP NUMBER 64121L 10 3
NETWORK SYSTEMS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Charter)
Nevada 87-0460247
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
200 North Elm Street, Greensboro, North Carolina 27401
(Address of Principal Executive Offices, Including Zip Code)
(910) 271-8400
(Registrant's Telephone Number, Including Area Code)
AQUA AUSTRALIS, INC.
1901 East University, Suite 200, Mesa, AZ 85023
(Former Name, Former Address and Former Fiscal Year, if Changed)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and has been subject to such filing requirements for the past 90 days.
X YES ___ NO
There were 5,806,176 shares of the Registrant's $.001 par value common
stock and 9,847 shares of Registrants $.001 par value preferred stock
outstanding as of May 15, 1997.
Transitional Small Business Format (check one) Yes __ No X
NETWORK SYSTEMS INTERNATIONAL, INC.
Contents
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet 3
Consolidated Statements of Operations
Three and Six months ended
March 31, 1997 and 1996 4
Consolidated Statements of Cash Flow
Six months ended March 31, 1997 and 1996 5
Consolidated Statement of Changes
in Stockholders' Equity 6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-17
Part II
Item 4. Submission of Matters to a Vote
of Security Holders 18
Item 5. Other matters 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
<TABLE>
PART I. FINANCIAL STATEMENTS
<CAPTION>
Network Systems International, Inc. and Subsidiaries
Consolidated Balance Sheet
March 31, 1997
(Unaudited)
<S> <C>
Assets
Current Assets
Cash $ 633,748
Accounts receivable, trade, net of allowance of $269,700 1,754,659
Cost and estimated earnings in excess of billings
uncompleted contracts 40,800
Other current assets 50,423
2,479,630
Property and equipment, net of accumulated depreciation 950,543
Other Assets
Software development costs, net of accumulated amortization 1,341,179
Other 89,118
1,430,297
$ 4,860,470
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable, current portion $ 51,000
Capital lease obligation, current portion 62,000
Accounts payable, trade 493,328
Other accrued liabilities 98,662
Income taxes payable 202,115
Deferred revenue 204,848
Total current liabilities 1,111,953
Long Term Liabilities:
Deferred income taxes 570,700
Notes payable, net of current maturities 375,818
Capital lease obligation, net of current maturities 202,252
Total long term liabilities 1,148,770
Stockholders' Equity
Preferred Stock; $.001 par value; authorized 12,500 shares;
issued and outstanding 7,870 shares 8
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 2,822,017
Accumulated Deficit (228,084)
Total stockholders' equity 2,599,747
$ 4,860,470
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Operations (Unaudited)
<CAPTION>
Three Months Ended March 31 Six Months Ended March 31
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue:
Licensing and servicing $1,343,021 $1,316,245 $2,372,658 $2,442,972
revenue
Equipment revenue 561,730 723,037 964,956 1,985,644
Total revenue 1,904,751 2,039,282 3,337,614 4,428,616
Operating expenses
Cost of sales and services 905,970 921,422 1,553,185 2,194,540
Research and development 71,487 26,388 161,236 154,937
General and administrative 438,123 413,810 672,539 827,569
1,415,580 1,361,620 2,386,960 3,177,046
Operating income 489,171 677,662 950,654 1,251,570
Other income (expenses)
Interest (23,873) (11,970) (40,711) (17,673)
Other income (expense) 2,848 7,175 3,022 (21,653)
(21,025) (4,795) (37,689) (39,326)
Income before income
tax provision 468,146 672,867 912,965 1,212,244
Income tax provision 160,000 0 304,000 0
Net income $ 308,146 $ 672,867 $ 608,965 $1,212,244
Primary net income per
common share $ .05 $ .10
Weighted average common shares
outstanding, Primary 5,806,176 5,806,176
Fully diluted net income per
common share $ .05 $ .10
Weighted average common
shares outstanding assuming
fully diluted 6,058,670 5,931,036
Pro Forma Amounts Assuming
Retroactive Application of
Change In Subchapter
S Status and Corporate
Recapitalization
Income before income tax $ 672,867 $1,212,244
provision
Income tax provision 238,100 448,700
Net income $ 434,767 $ 763,544
Primary net income per
common share $ .07 $ .13
Weighted average common
stock outstanding 5,756,176 5,756,176
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<TABLE>
NETWORK SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
<CAPTION>
Six Months Ended March 31
1997 1996
<S> <C> <C>
Operating activities
Net income $ 608,965 $1,212,244
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 607,538 221,356
Loss on marketable securities 4,223
(Increase) in:
Accounts receivable and unbilled (647,817) (1,425,906)
receivables
Other assets and costs and estimated
earnings (29,033) (34,932)
in excess of billings on uncompleted
contracts
Increase (decrease) in:
Accounts payable and accrued liabilities 259,903 346,326
Income tax payable 202,115
Unearned revenue 69,340 (19,883)
Deferred income taxes 56,000
Billings in excess of costs and earnings
on (270,700) 40,463
uncompleted contracts
Total adjustments 247,346 (868,353)
Net cash provided by operating activities 856,311 343,891
Investing activities
Deposit on equipment (50,000)
Acquisition of property and equipment (43,267) (37,209)
Software development (762,314) (426,479)
Proceeds on sale of marketable securities 3,557
Purchase of marketable securities (3,540)
Increase in cash surrender value of life insurance (19,144) (3,157)
Net cash (used) by investing activities (874,725) (466,830)
Financing activities
Net proceeds from issuance of preferred stock 684,690
Dividends paid on preferred stock (7,369)
Payment received from stockholder advances 700
Payment on notes payable, long-term debt and
capital leases (82,899) (24,391)
Net (payments) proceeds on line of credit (19,747) 121,604
Net cash provided by financing activities 574,675 97,913
Net increase (decrease) in cash 556,261 (25,026)
Cash at October 1 77,487 94,517
Cash at March 31 $ 633,748 $ 69,491
Supplemental disclosures of cash flow information
and noncash investing and financing activities
Cash paid during the period for:
Interest $ 40,711 $ 17,673
Taxes $ 45,800
</TABLE>
In April of 1996 the stockholders of Network Information Services, Inc.
and Network Investment Group, Inc. exchanged all of their common shares
of stock for controlling interest in Network Systems International, Inc.
(formerly Aqua Australis, Inc.)
During the first quarter of 1996, the Company acquired computer
equipment totaling $232,540 under capital leases.
In March of 1997, the Company declared dividends on preferred
stock in the amount of $7,410.
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
Six months ended March 31, 1997 (Unaudited)
<CAPTION>
Common Stock Preferred Stock
Capital Retained
$0.001 Number $0.001 in Excess Earnings
Number of Par Of Par of (Accumulated
Shares Value Shares Value Par Value ) Total
(Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 5,806,176 $ 5,806 $2,137,335 $(822,270) $1,320,871
1996
Issuance of preferred
stock,
net of offering 7,870 $ 8 684,682 684,690
expenses
of $102,310
Dividends on (14,779) (14,779)
preferred stock
Net income for the
six
month period ended 608,965 608,965
March 31, 1997
Balance March 31, 5,806,176 $ 5,806 7,870 $ 8 $2,822,017 $(228,084) $2,599,747
1997
</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 Six Months Ended March 31, 1997 and March 31, 1996 (Unaudited)
1. Background Information
Network Systems International, Inc. (the Company), formerly Aqua
Australis, Inc., was incorporated on September 21, 1988 in the state
of Nevada. This corporation was considered a development stage
company whose principal business activity was to seek potential
business ventures and assets which would warrant involvement or
purchase by the Company.
On April 22, 1996, the Company completed a reverse triangular merger
whereby two of its wholly owned subsidiary corporations merged with
two North Carolina corporations, with the North Carolina corporations
being the surviving corporations in the merger. Immediately
thereafter, the Company, with the approval of its shareholders, caused
its corporate charter to be amended to change its name to Network
Systems International, Inc. The newly named company is now the parent
company of two wholly owned subsidiary corporations: Network
Information Services, Inc. (NIS) and Network Investment Group, Inc.
(NIG), both North Carolina corporations. Immediately prior to the
merger, the shareholders of the Company also approved a two for one
reverse split of all issued and outstanding shares of the Company's
common stock with a $.001 par value and Network Partners, LLC
effectively merged into NIS. All per share data has been
retroactively restated to show the effects of the two for one reverse
split. In addition, immediately prior to the merger, the then
controlling stockholders of the Company turned in approximately 17.5
million shares of the Company which were then canceled.
As a result of the merger, accounted for as a reverse acquisition
which is similar to the purchase method of accounting, shareholders of
NIS and NIG caused the transfer of all of their shares of common stock
in the companies, which had a total assets value of approximately
$3,800,000, to the Company in exchange for 5,250,176 shares of common
stock of the Company.
NIS was incorporated under the laws of the state of North Carolina on
September 9, 1985 and develops, licenses, and supports software
products primarily for the textile, sewn products and process
manufacturing industries. Operations are concentrated in North and
South Carolina, however, NIS has clients throughout the east coast of
the United States. It employs approximately 50 full-time employees.
The corporate headquarters is located in Greensboro, North Carolina.
NIG was incorporated under the laws of North Carolina on April 7, 1993
and sells computer hardware to manufacturing industries. Operations
are concentrated in North Carolina and South Carolina, however, it has
clients throughout the east coast of the United States. The corporate
headquarters is located in Greensboro, North Carolina.
The Company changed their year end from December 31 to September 30 in
1996.
In December 1996 the Company entered into an agreement with an
underwriter to promote the sale of 12,500 shares of preferred stock in
a private placement stock offering. The Company sold 7,870 shares of
Series A preferred stock at a purchase price of $100 per share as of
March 31, 1997. Each share of preferred stock will receive 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 the preferred stock shall be 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 $684,690 as of March 31, 1997 for this private
placement offering which is net of offering expenses of $102,310.
2. Summaries of Significant Accounting Policies
Basis of Preparation:
The financial statements as of March 31, 1997 and for the three and
six month periods then ended Consolidate the Accounts of Network
Systems International, Inc. and its wholly owned subsidiaries Network
Information Services, Inc. and Network Investment Group, Inc. The
financial statements for the three and six months ended March 31, 1996
combine the accounts of Network Information Services, Inc., Network
Investment Group, Inc. and Network Partners, LLC.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary for a fair statement of (a) the
results of operations for the three and six-month periods ended March
31, 1997 and 1996, (b) the financial position at March 31, 1997, and
(c) cash flows for the six-month periods ended March 31, 1997 and
1996, have been made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Financial Instruments:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables.
The Company performs on-going credit evaluations of its customers'
financial condition.
Cash deposits with one institution are in excess of The Federal
Deposit Insurance Corporation's average limit of $100,000.
Property and Equipment:
Property and equipment are recorded at cost. Additions to and major
improvements of property and equipment are capitalized. Maintenance
and repair expenditures are charged to expense as incurred. As
property is sold or retired, the applicable cost and accumulated
depreciation are eliminated from the accounts and any gain or loss is
recorded. Depreciation and amortization are calculated using the
double declining balance and straight line methods based upon the
assets estimated useful lives as follows:
Building 39
Leasehold improvements 7- 39
Furniture and fixtures 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. 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 $762,314 and $426,479 for the six month period ended March
31, 1997 and 1996, respectively. The Company capitalized software
development costs of $371,826 and $280,871 for the three month period
ended March 31, 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 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 $516,914 and $341,444 for the six month
period ended March 31, 1997 and 1996, respectively, and is included in
cost of sales. Amortization expense for the three month periods ended
March 31, 1997 and 1996 totaled $276,420 and $102,084, respectively.
Software development costs at March 31, 1997 consist of the following:
Software Development Costs $2,397,270
Less Accumulated Amortization 1,056,091
$1,341,179
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 $50,684 and $15,382 for the six month
periods ended March 31, 1997 and 1996, respectively. Advertising
expense for the three month periods ended March 31, 1997 and 1996
totaled $20,195 and $15,382, respectively. Advertising costs of
$13,264 were capitalized during the six month period ended March 31,
1997. No amounts were capitalized during the six month period ended
March 31, 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 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 six
and three months ended March 31, 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 $14,779. The number of shares used in the
computations of fully diluted earnings per share were 6,058,670 and
5,931,036 for the six and three months ended March 31, 1997,
respectively. Fully diluted earnings per share are not presented for
the periods ended March 31, 1996 because no preferred stock was issued
during these periods.
In February 1997, the Financial Accounting Standards Board issued FASB
# 128 "Earnings Per Share". This statement specifies the Computation,
Presentation, and Disclosure requirements for earnings per share, and
is effective for financial statements ending after December 15, 1997.
The Company's current period primary and fully diluted earning per
share would not be affected by the new statement.
Pro forma Presentation:
The consolidated financial statement of operations for the three month
and six month periods ended March 31, 1996 includes a pro forma
presentation, as specified by the Securities and Exchange Commission,
for income taxes which would have been recorded had the operating
subsidiary been a C corporation, based on the tax laws in effect
during those periods.
Pro forma earnings per share have been calculated to include the
adjustment for income taxes had the operating subsidiary been a C
corporation during the periods ended March 31, 1996. Weighted average
number of shares outstanding have been calculated to reflect the
number of equivalent shares received by the acquiring company during
the reverse acquisition.
3. Uncompleted Contracts
Information with respect to uncompleted contracts at March 31, 1997 is
summarized as follows:
Earned contract revenue $ 548,800
Less billings to date 508,000
Cost and estimated earnings in excess of
billings on uncompleted contracts $ 40,800
4. Property and Equipment
Property and equipment at March 31, 1997 consist of the following
Land $ 150,000
Building 300,000
Leasehold improvements 89,426
Furniture and fixtures 118,435
Office equipment 93,364
Computer equipment 231,095
Computer software 52,017
Computer equipment and software under 324,933
capital lease
1,359,270
Less accumulated depreciation and
amortization (324,575)
Accumulated amortization on computer
equipment and software
under capital lease (84,152)
$ 950,543
5. Notes Payable
Notes payable at March 31, 1997 consist of:
Bank note payable:
interest at prime plus 1.0%; monthly
payments of
$4,729; due July 1, 1997;
collateralized by accounts
receivable, equipment, and a $200,000
life insurance
policy; personally guaranteed by
certain stockholders $ 22,118
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 404,700
426,818
Less amounts currently due 51,000
$ 375,818
The Company has available a $250,000 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 March 31,
1997, there was no amount 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 March 31
1998 $ 51,000
1999 31,344
2000 31,344
2001 313,130
$426,818
6. Obligations Under Capital Leases
The Company has capitalized rental obligations under three leases of
software and equipment. The obligations, which mature in 2001 and
2002, represent the total present value of future rental payments
discounted at the interest rates implicit in the leases. Future
minimum lease payments under the capital leases are:
Period Ending March 31
1998 $ 77,185
1999 91,373
2000 89,490
2001 31,440
2002 10,950
Total minimum lease payments 300,438
Less amount representing interest 36,186
Present value of net minimum lease payments 264,252
Less current portion 62,000
$ 202,252
7. Retirement Benefit Plan
Effective January 1, 1993, the Company established a retirement plan
which allows participants to make contributions by salary reduction
under Section 401(k) of the Internal Revenue Code. The Company made
matching contributions to the plan totaling $1,416 for the three and
six month periods ended March 31, 1997. No contributions were made to
the plan for the three and six month periods ended March 31, 1996.
8. Income Taxes
As a result of the reverse acquisition on April 22, 1996, the
Subchapter S status of one of the Company's subsidiaries was
terminated. After that date, the financial statements of the Company
provide for the income tax effect of earnings reported in the
financial statements, including taxes currently due and taxes deferred
because of different accounting methods used for financial and income
tax reporting. Prior to the change in tax status, earnings and losses
were included in the personal tax returns of the stockholders and
taxed depending on their personal tax situations and the Company did
not record an income tax provision. The change in tax status
necessitated the recognition of the cumulative deferred income
existing as of the date of the termination of the S status which
resulted in a one-time charge to deferred tax expense of $435,200.
Net income from operations before income taxes totaled $912,965 for
the six months ended March 31, 1997. The provision for income taxes
for the six months ended March 31, 1997 consist of the following
components:
Current tax expense $ 302,500
Deferred tax expense 40,700
Research and development credit (39,200)
$ 304,000
The significant temporary differences which gave rise to deferred tax
assets and liabilities as of March 31, 1997 are as follows:
Deferred tax asset
Bad debt revenue $ 269,700
Deferred tax liabilities
Software development cost $1,341,200
Book basis of property & equipment
in excess of tax basis 81,600
Change in tax status 454,800
$1,877,600
The Company has loss carryforwards totaling $113,800 that may be
offset against future taxable income and research and development
credit totaling $17,700 that may be offset against future federal
income taxes. If not used, the carryforwards will expire as follows:
Operating losses Research & development
credits
2003 $ 56,700 -
2009 49,300 -
2010 7,800 -
2011 - -
2012 - $17,700
$113,800 $17,700
No valuation allowance has been recorded against the deferred tax
assets or operating loss or tax credit carryforwards because
recognition of the cumulative deferred income arising from the change
in tax status should be sufficient to offset the remaining tax assets.
The difference between the provision for income taxes and the amounts
obtained by applying the statutory U.S. Federal income tax rate to
income before taxes for the six months ended March 31, 1997 is as
follows:
Tax expense at U.S. statutory rates $310,400 34.0%
State and local income tax 21,300 2.3%
Research & development credit and other (27,000) (3.0%)
$304,000 33.3%
9. Major Customer
For the three month period ended March 31, 1997, sales to three
customers amounted to approximately $906,000. For the three month
period ended March 31, 1996, sales to two customers amounted to
approximately $1,163,000.
For the six month period ended March 31, 1997, sales to three
customers amounted to approximately $1,588,000. For the six month
period ended March 31, 1996, sales to two customers amounted to
approximately $2,423,000.
10. Self Insurance Plan
The Company has a medical health benefit self-insurance plan for
substantially all of its employees. The Company is reinsured for
claims which exceed $6,000 per participant and has an annual aggregate
limit of approximately $64,000.
11. Lease Commitments
The following is a schedule by year of future minimum rental payments
required under operating leases that have an initial or remaining
noncancelable lease term in excess of one year as of March 31, 1997:
Period Ending March 31
1998 $ 56,034
1999 52,434
2000 27,624
2001 612
$136,704
Rent expense amounted to $21,781 and $84,822 for the six months ended
March 31, 1997 and 1996, respectively. Rent expense amounted to
$12,123 and $32,068 for the three months ended March 31, 1997 and
1996, respectively.
12. Commitments
The Company entered into 20 year employment agreements with five of
its officers calling for annual salaries totaling no less than
$195,000.
13. Segment Information
The Company's operations are classified into two principal industry
segments: Hardware sales and sales of software licenses and related
service fees. The following is a summary of segment information for
the periods ending:
<TABLE>
<CAPTION>
Three Months Ended March 31 Six Months Ended March 31
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue of each segment:
Software and Service Fees $1,343,021 $1,316,245 $2,372,658 $2,442,972
Hardware 561,730 723,037 964,956 1,985,644
Total Revenue $1,904,751 $2,039,282 $3,337,614 $4,428,616
Operating Profit (Loss) of
each segment:
Software and Service Fees 605,644 762,069 1,063,711 1,197,755
Hardware (19,615) (12,884) 39,336 141,657
Corporate (96,858) (71,523) (152,393) (87,842)
Total Operating Profit (Loss) 489,171 677,662 950,654 1,251,570
Depreciation and Amortization
expense of each segment
Software and Service Fees 320,123 124,963 606,561 220,379
Hardware 488 488 977 977
Total Depreciation
and Amortization 320,611 125,451 607,538 221,356
Capital Expenditures of
each segment:
Software and Service Fees 23,117 20,668 93,267 37,209
Hardware 0 0 0 0
Total Capital Expenditures 23,117 20,668 93,267 37,209
</TABLE>
<TABLE>
<CAPTION>
March 31 March 31
1997 1996
<S> <C> <C>
Identifiable Assets of each segment:
Software and Service Fees $3,842,210 $3,454,492
Hardware 414,163 380,541
Corporate 604,097 30,695
Total Assets $4,860,470 $3,865,728
</TABLE>
____________________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
__________________________________________________________________
This MD&A Contains Some Forward Looking Information
Results of Operations
Revenue. Although Network's second quarter licensing and servicing
revenues increased from $1,316,245 to $1,343,021 during the second
period 1997 over the comparable period in 1996, an approximate 2%
increase, these revenues have decreased for the six months ended March
31, 1996 from $2,442,972 to $2,372,658, a 3% decline. The decrease in
revenues resulted from the Company's shift in product identification
accounting and utilization of personnel for its continuing efforts to
develop a third generation version of its software package.
The Company's total second quarter revenues decreased approximately
7%, from $2,039,282 in the previous quarter to $1,904,751 in the
current quarter and from $4,428,616 for the six months ended March 31,
1997 to $3,337,614 for the six months ended March 31, 1996, a 25%
decline. This decrease resulted from the sale of approximately one
million dollars of hardware to a single customer during the comparable
period in December of 1995.
Licensing and service revenues were 70.5% of the total revenues for
the quarter and 71.1% for the first six months of the year. Hardware
sales were 29.5% of total revenues for the quarter and 28.9% for the
first six months of the year.
The Company continued its development efforts toward completion of a
third generation software package during the period. However, the
Company continues to caution that there can be no assurances that the
Company will not experience difficulties that could delay or prevent
the successful completion of the product, its introduction, marketing,
enhancements or that the new version will adequately meet the needs of
the marketplace or achieve market acceptance. Additionally, niche
markets that the Company traditionally serves could experience a
significant economic downturn. In that event, the Company's revenues
would be adversely affected.
Cost of Sales and Services. Cost of sales and services amounted to
$905,970 during the second quarter of fiscal 1997 as compared to
$921,422 for the comparable period in fiscal 1996. Cost of sales and
services for the first six months of the year amounted to $1,553,185
as compared to $2,194,540 for the comparable 1996 period. The
decreases in Cost of sales are primarily attributable to the decreases
in hardware sales for the periods. Hardware sales carry a higher
percentage of costs than do Licensing and service fees.
Software Development Costs. Software development costs, both
capitalized and expensed as research and development amounted to
approximately $443,000 and $923,000 for the three and six month
periods ended March 31, 1997, as compared to approximately $307,000
and $581,000 for the three and six month periods ended March 31, 1996.
This represents an increase of 44.3% for the quarter and a 58.9%
increase for the six month period. This increase is primarily
attributable to the Company's continued commitment to develop new and
improved software modules. Of these amounts, approximately $372,000
and $281,000 were capitalized for the quarters ended March 31, 1997
and 1996, respectively. Approximately $762,000 and $426,000 were
capitalized for the six months ended March 31, 1997 and 1996
respectively. More software development costs were capitalized in the
comparable periods 1997 versus 1996 since technological feasibility of
more products was achieved. Research and development costs increased
to approximately $71,000 from $26,000 in the current quarter versus
the prior year quarter and to approximately $161,000 for the six month
period ended March 31, 1997 from $155,000 for the six months ended
March 31, 1996. It is anticipated that the Company will continue to
experience an increase in software development costs both capitalized
and expensed, as its efforts to complete a third generation version of
its software package gains momentum. Additionally, the Company
intends to continue recruiting and hiring additional software
programmers and to consider additional complementary software
technologies. Whether or not the Company will successfully achieve
these goals cannot be assured since competition to hire programmers
appears to be at an all time high and new technologies are uncertain.
General and Administrative. General and administrative expenses were
23% of revenue in the second quarter of fiscal 1997 as compared to 20%
in the comparable period 1996. For the six months ended March 31,
1997 general and administrative expenses were 20% of revenue and 19%
in the comparable period in the prior year. The increase in the
current periods are attributable to additional expenses associated
with the Company operating as a public Company as opposed to its
status as a privately held company over the comparable period.
Provisions for Income Taxes. Prior to the Company's merger on April
22, 1996 the principal operating subsidiary of the Company, Network
Information Services, Inc. (NIS), was treated as a Subchapter S
corporation for tax purposes. As such income and deductions
attributable to NIS were reported by its shareholders and no tax
expense or liability was recorded by the Company up until such date.
Activities of the Company and its other subsidiary prior to April 22,
1996 did not give rise to a material liability for income taxes and
therefore no taxes were recorded prior to the second quarter of 1996.
Income taxes are provided for transactions reported in the financial
statements beginning on April 22, 1996, and consist of taxes currently
due plus deferred income taxes. The change in tax status resulted in
a one time charge of approximately $435,000.
Quarterly Results. Net income for the three and six month periods
ended March 31, 1997 were $308,146 and $608,965 respectively.
Assuming a retroactive change in Subchapter S status, pro forma net
income for the comparable period ended March 31, 1996 amounted to
$434,767 and $763,544. These decreases in Net income are attributable
to utilization of Company personnel in the research and development
area as opposed to utilization of such personnel in the Company's
service sector and a failure to close anticipated business prior to
the end of the current quarter. Additionally, the decrease in net
income for the six month period ended March 31, 1997 versus the
comparable prior period is partly attributable to the sale of
approximately one million dollars of hardware to a single customer in
December of 1995.
On a per share basis, earnings were $.05 and $.10 for the three and
six months ended March 31, 1997. These per share amounts are down
from the pro forma net income per common share amounts of $.07 and
$.13 for the three and six month periods ended March 31, 1996 for the
reasons explained above.
The Company believes that in the future its results may reflect
quarterly fluctuations resulting from such factors as order deferrals
in anticipation of new product releases, delays in the release of new
products, a slower growth rate in the overall manufacturing industry
or adverse general economic and manufacturing conditions in the
industries in which the Company does business. Rapid technological
change and the Company's ability to develop and market products that
successfully adapt to that change may also have an impact on the
results of operations. Further, increased competition in the design
and distribution of manufacturing software products could also
negatively impact the Company's results of operations.
Due to the factors stated above, the Company's future earnings and
stock price may be subject to significant volatility, particularly on
a quarterly basis. Any shortfall in revenues or earnings from levels
expected by securities analysts could have an immediate and
significant adverse effect on the trading price of the Company's
stock.
Liquidity and Capital Resources. Cash totaled $633,748 on March 31,
1997. Cash provided by operating activities amounted to approximately
$856,311 for the six months ended March 31, 1997 compared to $343,891
in the comparable period of 1996. This increase in cash provided by
operations is principally due to additional collections of accounts
receivables over the prior period. Overall cash increase is directly
attributable to the Company's private placement preferred stock
offering.
Long term cash requirements, other than normal operating expenses, are
anticipated for development of new software products and enhancements
of existing products; financing anticipated growth; adding additional
personnel; and the possible acquisition of software products or
technologies complimentary to the Company's business. The Company
believes that its existing cash, cash equivalents, available lines of
credit and anticipated cash generated from continuing operations will
be sufficient to satisfy its currently anticipated cash requirements
for the 1997 fiscal year.
Historically, accounts receivable for the Company have been generally
high due to a number of factors. A primary contributor is the nature
of how the Company's customer base pays for the software licensing fee
of the Company's product. The Company records revenues from software
license fees after shipment of the product and the fulfillment of all
major obligations under the terms of the licensing agreement.
Typically, software licenses range from $100,000 to $300,000.
Therefore, the Company sets most of its customers up on a payment
schedule. The payment schedules have resulted in a slow turnaround
time in the collection of receivables. Additionally, the textile
industry as a whole tends to experience flat periods which make it
difficult to fully fund major management information systems projects.
For the six month period ended March 31, 1997, the average collection
days on accounts receivables was 84.5 days compared to 61.2 days for
the comparable period in fiscal year 1996. This increase in
collection days is attributable to the Company setting customers up on
payment schedules and slow economic periods of the textile industry.
As a result of the above, the Company monitors its accounts receivable
closely and attempts to make adequate provisions for potentially
uncollectable receivables.
Part II
___________________________________________________________________
Item 4. Submission of Matters to a Vote of Security Holders
___________________________________________________________________
These matters were submitted for a vote of security holders at the
Company's annual meeting of stockholders held on March 4, 1997. The
matters voted upon were:
Election of Directors
Nominee Votes Votes
Cast For Cast Against Elected
Robbie M. Efird 5,262,120 0 Yes
E.W. "Sonny" Miller, Jr. 5,262,120 0 Yes
David F. Christian 5,262,120 0 Yes
James W. Moseley 5,262,120 0 Yes
David P. Reynolds 5,262,120 0 Yes
Rick Tuberosa 5,262,120 0 Yes
Ratification of Selection of Independent Auditors
The Board of Directors of the Company selected Pender Newkirk &
Company to continue as its independent auditors for the fiscal year
ending September 30, 1997. The number of votes cast in favor of the
proposal to ratify the selection of Pender Newkirk & Company as
independent auditors was 5,261,682 and the number of votes cast
against the ratification was 0.
Incentive Bonus Plan
The Board of Directors of the Company resolved that 500,000 shares of
the Company's common stock, par value $.001, should be set aside for
purposes of establishing an incentive bonus plan for key employees of
the Company. The number of votes cast in favor of the proposal was
5,261,463 and the number of votes cast against the proposal was 200.
Proxy materials were mailed to all security holders pursuant to
Regulation 14A of the Act and there was no solicitation in opposition
to director nominees. Reference is made to the proxy materials
submitted to the Securities and Exchange Commission via electronic
mail on January 28, 1997.
_________________________________________________________________
Item 5. Other Matters
_________________________________________________________________
(1) On December 12, 1996 the Company initiated the process of issuing
a private placement of 12,500 shares of Series A Preferred Stock. The
Preferred Stock was subsequently issued during the current period.
The stock was issued on a best efforts basis at $100 per share, .001
par value, 12% cumulative dividend payable monthly and a conversion
feature after 12 months at $2.00 per common share. As of the close of
the quarter ended March 31, 1997, the net amount of the preferred
shares sold was $684,690. Reference is made to the Form D and
Confidential Private Placement Memorandum filed with the Securities
and Exchange Commission on January 11, 1997 for specific details of
the offering.
(2) As reported in previous filings, the Company is desirous of making
application for NASDAQ Small Cap Market status. Although the Company
has met current asset and equity levels to make application under
current rules, the trading price of its stock has not met the $3.00
minimum trading requirements. Additionally, the Company understands
that current consideration is being given to increasing both the asset
and equity requirements before application can be made. If this
change occurs, the Company's current asset levels would not meet the
proposed requirements.
__________________________________________________________________
Item 6 Exhibits and Reports on Form 8-K
__________________________________________________________________
(a)Exhibits included herewith are:
(11) Schedule of Computation of Net Income Per Share
(27) Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
NETWORK SYSTEMS INTERNATIONAL, INC.
Date: 5/15/97 /s/ Robbie M. Efird
Robbie M. Efird, President
and acting as CFO
Date: 5/15/97 /s/ William C. Ray
William C. Ray, Vice President
EXHIBIT INDEX
Exhibit Page
(11) Schedule of Computation of Net Income Per Share 22
(27) Financial Data Schedule 23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 633,748
<SECURITIES> 0
<RECEIVABLES> 2,024,359
<ALLOWANCES> (269,700)
<INVENTORY> 0
<CURRENT-ASSETS> 2,479,630
<PP&E> 1,359,270
<DEPRECIATION> (408,727)
<TOTAL-ASSETS> 4,860,470
<CURRENT-LIABILITIES> 1,111,953
<BONDS> 0
0
8
<COMMON> 5,806
<OTHER-SE> 2,593,933
<TOTAL-LIABILITY-AND-EQUITY> 4,860,470
<SALES> 3,337,614
<TOTAL-REVENUES> 3,337,614
<CGS> 1,553,185
<TOTAL-COSTS> 833,775
<OTHER-EXPENSES> (3,022)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,711
<INCOME-PRETAX> 912,965
<INCOME-TAX> 304,000
<INCOME-CONTINUING> 608,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 608,965
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
d\sec\Exh112Q.doc
<TABLE>
Exhibit 11
Schedule of Computation of Net Income Per Share
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31
1997 1996 1997 1996
Primary
<S> <C> <C> <C> <C>
Net income 308,146 608,965
Less - preferred stock dividends (14,779) (14,779)
Net income for primary income
per Common Share 293,367 594,186
Weighted average number of
Common Shares outstanding
during the year 5,806,176 5,806,176
Primary income per Common Share .05 .10
Fully Diluted
Net income for primary income
per Common Share 293,367 594,186
Add - dividends on convertible
preferred stock 14,779 14,779
Net income for fully diluted
net income per share 308,146 608,965
Weighted average number of
shares used in calculating
primary income per 5,806,176 5,806,176
common share
Assuming conversion of
convertible preferred stock
(weighted average) 252,494 124,860
Weighted average number of
common shares outstanding
as adjusted 6,058,670 5,931,036
Fully diluted earnings per
common share .05 .10
Pro forma - Primary Earnings
Per Share
Net income from continuing
operations before income
taxes 672,867 1,214,244
Pro forma Income Tax assuming
retroactive application of
change in subchapter S status 238,100 498,700
Net Income 434,767 763,544
Pro Forma Weighted Average
Shares Outstanding (Unaudited) 5,756,176 5,756,176
Primary Income per Common Share .07 .13
</TABLE>
