d:\sec\10q1q98.doc
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934.
For the quarterly period ended December 31, 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)
(336) 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 7,313,804 shares of the Registrant's .001 par value common
stock and 12,309 shares of Registrant $.001 par value preferred stock
outstanding as of February 4, 1998.
Transitional Small Business Format (check one) Yes __ No X
NETWORK SYSTEMS INTERNATIONAL, INC.
Contents
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet 3
Consolidated Statements of Operations
Three months ended December 31, 1997 4
and 1996
Consolidated Statements of Cash Flow
Three months ended December 31, 1997 5
and 1996
Consolidated Statement of Changes in 6
Stockholders' Equity
Notes to Consolidated Financial 7
Statements
Item 2. Management's Discussion and Analysis
of
Financial Condition and Results of 15
Operations
Part II
Item 2. Changes in Securities 17
Item 4. Submission of Matters to Vote of 17
Security Holders
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
<TABLE>
PART I. FINANCIAL STATEMENTS
<CAPTION>
Network Systems International, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1997
(Unaudited)
<S> <C>
Assets
Current Assets
Cash $1,459,550
Accounts receivable, trade, net of allowance of $578,630 2,171,046
Unbilled accounts receivable 45,000
Notes receivable, current portion 172,500
Costs and estimated earnings in excess of billings 210,070
Accounts receivable, related parties 108,040
Other current assets 9,640
Total Current Assets 4,175,846
Property and equipment, net of accumulated depreciation 966,270
Other Assets
Notes receivable, net of current portion 137,453
Software development costs, net of accumulated amortization 1,568,738
Other 73,076
1,779,267
$6,921,383
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable, current portion 31,000
Capital lease obligation, current portion 83,000
Accounts payable, trade 588,872
Other accrued liabilities 30,271
Income taxes payable 470,470
Deferred revenue 220,022
Total current liabilities 1,423,565
Long Term Liabilities:
Deferred income taxes 538,200
Notes payable, net of current maturities 347,580
Capital lease obligation, net of current maturities 139,340
Total long term liabilities 1,025,120
Stockholders' Equity
Preferred Stock; $.001 par value; authorized 12,500 shares;
issued and outstanding 12,309 shares 12
Common Stock; $.001 par value; authorized 100,000,000
shares; issued and outstanding 7,313,804 shares 7,314
Capital in excess of par value 3,124,504
Retained Earnings 1,340,868
Total stockholders' equity 4,472,698
$6,921,383
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
<CAPTION>
Three Months Ended December 31
1997 1996
<S> <C> <C>
Revenue:
Licensing and servicing revenue $ 2,359,202 $ 1,029,637
Equipment revenue 869,594 403,226
Total revenue $ 3,228,796 1,432,863
Operating expenses
Cost of sales and services 1,214,047 647,215
Research and development 72,745 89,749
General and administrative 687,095 234,416
1,973,887 971,380
Operating income 1,254,909 461,483
Other income (expenses)
Interest, Net (211) (16,838)
Other income (expense) ____________ 174
(211) (16,664)
Income before income
tax provision 1,254,698 444,819
Income tax provision 465,900 144,000
Net income 788,798 $ 300,819
Earnings per common share $ .10 $ .04
Earnings per common share -
assuming dilution $ .10 $ .04
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<TABLE>
NETWORK SYSTEMS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<CAPTION>
Three Months Ended December 31
1997 1996
<S> <C> <C>
Operating activities
Net income $ 788,798 $ 300,819
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 400,198 286,927
Promotional fees paid with stock 72,000
(Increase) in:
Accounts receivable and unbilled (549,955) (650,864)
receivables
Prepaid assets, other receivables, and 67,333 (1,104)
other assets
Increase (decrease) in:
Bank overdraft (131,382)
Accounts payable and accrued liabilities 366,122 381,615
Income tax payable 470,400 53,577
Unearned revenue (40,963) 41,875
Deferred income taxes (63,100) 90,338
Billings in excess of costs and earnings
on __________ (252,460)
uncompleted contracts
Total adjustments 722,653 (50,096)
Net cash provided by operating activities 1,511,451 250,723
Investing activities
Deposit on equipment (30,000)
Acquisition of property and equipment (12,020) (40,150)
Software development (335,518) (390,488)
Issuance of Note Receivable (200,000)
Payment received on Note Receivable 58,899
Increase in cash surrender value of life insurance (2,526) (3,522)
Net cash (used) by investing activities (491,165) (464,160)
Financing activities
Payment on notes payable, long-term debt and
capital leases (22,612) (35,873)
Dividends paid (29,537)
Net proceeds on line of credit ___________ 175,387
Net cash (used) provided by financing activities (52,149) 139,514
Net increase (decrease) in cash 968,137 (73,923)
Cash at October 1 491,413 77,487
Cash at December 31 $1,459,550 $ 3,564
Supplemental disclosures of cash flow information
and noncash investing and financing activities
Cash paid during the period for:
Interest $ 14,400 $ 17,567
</TABLE>
During the quarter ended December 31, 1997, the Company issued 56,250
shares of its common stock recorded at $132,000 as payment for
promotional expenditures of which $72,000 was recorded during the
current quarter and $60,000 during the prior year.
The accompanying notes are an integral part of the financial
statements.
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
Three months ended December 31, 1997
<CAPTION>
Common Stock Preferred Stock
___________________ __________________
______ _____
$0.001 Capital in
Number of Par $0.001 Excess of Retained
Shares Value # of Par Par Value Earnings Total
Shares Value
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 7,257,554 $ 7,258 12,309 $ 12 $2,992,560 $ 581,607 $3,581,437
30, 1997
Issuance of 56,250 56 131,944 132,000
common stock
Net income for
the three
month period 788,798 788,798
ended December
31, 1997
Dividends on _________ _______ _______ _______ __________ (29,537) (29,537)
preferred stock
Balance December 7,313,804 $ 7,314 12,309 $ 12 $3,124,504 $1,340,868 $4,472,698
31, 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 Three Months Ended December 31, 1997 and December 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 6,562,720 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 November of 1996, the Company set aside 625,000 shares of its
unissued common stock to be awarded to key employees of the Company at
a later date.
In December 1996 the Company entered into an agreement with an
underwriter to promote the sale of 15,625 shares of preferred stock in
a private placement stock offering. The Company sold 12,309 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. Through December 31, 1997, the promoter earned 56,250
shares valued at $132,000 under the terms of this agreement.
On January 12, 1998 the Board of Directors authorized a five for four
split on the outstanding common and preferred stock of the Company for
stockholders of record as of January 16, 1998. All references in the
accompanying financial statements to the number of shares have been
restated to reflect this transaction.
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.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary for a fair statement of (a) the
results of operations for the three-month periods ended December 31,
1997 and 1996, (b) the financial position at December 31, 1997, and
(c) cash flows for the three-month periods ended December 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 Corporations 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 3-5
capital lease
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 $335,518 and $390,488 for the three month period
ended December 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 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 amounted to $358,573 and $240,494 for the three month
period ended December 31, 1997 and 1996, respectively, and is included
in cost of sales.
Software development costs at December 31, 1997 consist of the
following:
Software Development Costs 3,036,339
Less Accumulated Amortization (1,467,601)
1,568,738
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 $13,922 and $30,489 for the periods
ended December 31, 1997 and December 31, 1996, respectively. No
material amounts were capitalized during the three month period ended
December 31, 1997 and 1996, respectively.
Income Tax:
Prior to the merger on April 22, 1996, the principal operating
subsidiary of the Company (NIS) was treated as an S corporation for
tax purposes. As such, income and deductions attributable to NIS were
reported by its shareholders, and no tax expense or liability was
recorded by the Company up until such date. Activities of the Company
and its other subsidiary prior to that date did not give rise to a
material liability for income taxes. Beginning in April, 1996, income
taxes are provided for transactions reported in the financial
statements.
Deferred income taxes are provided for when transactions are reflected
in income for financial reporting purposes in a year other than the
year of their inclusion in taxable income. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Earnings Per Share:
During the period ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 (SFAS 28),
"Earnings Per Share". This statement requires dual presentation of
basic and diluted earnings per share (EPS) for complex capital
structures on the face of the income statement. Basic EPS is computed
by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution from the exercise or conversion of
securities into common stock. The December 31, 1996 earnings per
share is restated to give effect to the application of SFAS 128 and
does not differ from EPS as previously reported under APB Opinion No.
15 "Earnings Per Share".
3. Accounts Receivable, Related Parties.
Accounts Receivable from related parties at December 31, 1997, consist
of amount 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. Notes Receivable
Notes Receivable at December 31, 1997 consists of the following:
Notes receivable, 60 monthly principle and interest
payments of $3,563 until September 1, 2002, $ 159,953
remaining balance due at that time, secured by work
in progress, inventory, accounts receivable and
personal property
Notes receivable, four monthly principle and $ 150,000
interest payments of $51,600 until March 1, 1998,
unsecured.
$ 309,953
Less amounts shown as current $ 172,500
$ 137,453
5. Uncompleted Contracts
Information with respect to uncompleted contracts at December 31, 1997
is summarized as follows:
Earned contract revenue 658,700
Less billings to date 448,000
Costs and estimated earnings in excess of billings 210,070
6. Property and Equipment
Property and equipment at December 31, 1997 consist of the following:
Land 150,000
Building 300,000
Leasehold improvements 100,043
Furniture and fixtures 122,728
Office equipment 99,258
Computer equipment 346,606
Computer software 62,452
Computer equipment and software under capital lease 324,931
1,506,018
Less accumulated depreciation and amortization (389,259)
Accumulated amortization on computer equipment and
software (150,489)
under capital lease
$ 966,270
7. Notes Payable
Notes payable at December 31, 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 guaranteed by certain stockholders $ 378,580
Less amounts currently due 31,000
$ 347,580
The following is a schedule by year of the principal payments required
on this note payable as of December 31, 1997:
1998 $ 31,000
1999 $ 31,000
2000 $ 316,580
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 on certain officers.
Additionally, the line is personally guaranteed by certain
stockholders. At December 31, 1997, there were no amounts outstanding
on this line of credit.
8. Obligations Under Capital Leases
The Company has capitalized rental obligations under three leases of
software and equipment. The obligations, which mature in 2000 and
2001, represent the total present value of future rental payments
discounted at the interest rates implicit in the leases. Future
minimum lease payments under the capital leases are:
Period Ending December 31
1998 97,968
1999 90,432
2000 42,871
2001 16,425
Total minimum lease payments 247,696
Less amount representing interest 25,356
Present value of net minimum lease payments 222,340
Less current portion 83,000
$139,340
9. Retirement Benefit Plan
Effective January 1, 1993, the Company established a retirement plan
which allows participants to make contributions by salary reduction
under Section 401(k) of the Internal Revenue Code. The Company did
not make matching contributions to the plan during 1997 or 1996.
10. Income Taxes
As a result of the reverse acquisition on April 22, 1996, the
Subchapter S status of one of the Company's subsidiaries was
terminated. After that date, the financial statements of the Company
provide for the income tax effect of earnings reported in the
financial statements, including taxes currently due and taxes deferred
because of different accounting methods used for financial and income
tax reporting. Prior to the change in tax status, earnings and losses
were included in the personal tax returns of the stockholders and
taxed depending on their personal tax situations and the Company did
not record an income tax provision. The change in tax status
necessitated the recognition of the cumulative deferred income
existing as of the date of the termination of the S status which
resulted in a one-time charge to deferred tax expense of $435,200.
Net income from operations before income taxes totaled $1,254,698 and
$444,819 for the quarters ended December 31, 1997 and 1996,
respectively. The provision for income taxes for the quarter ended
December 31, 1997 and 1996 consists of the following components:
1997 1996
Current tax expense $560,700 $107,400
Deferred tax expense (63,100) 65,800
Credit for research and development (31,700) (29,200)
activities
$465,900 $144,000
The significant temporary differences which gave rise to deferred tax
assets and liabilities as of December 31, 1997 are as follows:
1997 1996
Deferred tax asset
Bad debt revenue $ 578,600 $ 199,600
Deferred tax liabilities
Software development cost 1,568,700 1,245,800
Book basis of property &
equipment 104,400 71,200
in excess of tax basis
Change in tax status 318,300 553,900
$1,991,400 $1,870,900
As of December 31, 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 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 quarter ended December 31, 1997 is as
follows:
1997 1996
Tax expense at U.S. $426,600 34.0% $ 151,200 34.0%
statutory rates
State and local income 50,500 4.0% 5,600 1.3%
tax
Non-deductible expense 9,700 0.8% - -
and other
Credit for increasing (20,900) (1.7%) (12,800) (2.9%)
research activities
$465,900 37.1% $ 144,000 32.4%
11. Earnings Per Share
The following data shows the amounts used in computing earnings per
share and the effect on income and the weighted average number of
shares of dilutive potential common stock.
1997 1996
Net income $ 788,798 $ 300,819
Less preferred stock dividends (29,537) 0
Income available to common stockholders $ 759,261 $ 300,819
used in basic EPS
Preferred stock dividends 29,537 0
Income available to common stockholders
after assumed $ 788,798 $ 300,819
conversion of dilutive securities
Weighted average number of common shares
used in basic EPS 7,266,891 7,257,720
Effect of dilutive convertible preferred 615,438 0
stock
Weighted average number of common shares
and 7,882,329 7,257,720
dilutive potential common stock used
in diluted EPS
12. Major Customer
For the three month period ended December 31, 1997, sales to two
customers amounted to approximately $2,124,000. For the three month
period ended December 31, 1996, sales to four customers amounted to
approximately $833,000. At December 31, 1997 and 1996 accounts
receivable balance included $1,125,442 and $1,390,991 due from those
customers, respectfully.
13. Lease Commitments
The following is a schedule by year of future minimum rental payments
required under operating leases that have an initial or remaining
noncancelable lease term in excess of one year as of December 31,
1997:
1998 61,502
1999 39,727
2000 8,952
2001 3,667
2002 1,222
Rent expense amounted to $15,681 and $9,658 for the three months ended
December 31, 1997 and 1996, respectively.
14. Commitments
The Company entered into 20 year employment agreements with five of
its officers calling for annual salaries totaling no less than
$195,000.
15. 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.
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 quarter
ended December 31:
<TABLE>
1997 1996
<CAPTION>
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 $2,359,202 $869,594 - $3,228,796 $1,029,637 $403,226 - $1,432,863
customers
Interest 3,502 - 10,687 14,189 429 - 429
revenue
Interest 14,400 - - 14,400 17,267 - - 17,267
expense
Depreciation
and 399,742 456 - 400,198 286,438 489 - 286,927
amortization
Segment 1,333,681 (5,313) (73,459) 1,254,909 485,067 58,951 (55,535) 461,483
profit
Segment 5,612,416 280,573 1,028,394 6,921,383 3,866,423 208,964 51,063 4,115,450
assets
Expenditures
for 12,020 - - 12,020 40,150 - - 40,150
segment
assets
</TABLE>
______________________________________________________________
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
_____________________________________________________________
This MD&A Contains Some Forward Looking Information. Except for
historical data, the matters discussed in this form 10-QSB 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-QSB, 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 statements made
by, or on behalf of, Network.
Results of Operations
Revenue. Total revenue for the period ended December 31, 1997 was
$3,228,796 compared to $1,432,863 for the equivalent period in 1996.
This represents a net increase in revenues of 125%. This increase is
directly attributable to an increase in software licensing and
services revenues as the manufacturing process industry readies itself
for millennium issues relating to currently utilized software
programs.
Software licensing and service revenues contributed 73 % of gross
revenues of the Company and hardware sales 27 % for the quarter ended
December 31, 1997.
The Company intends to continue to provide period upgrades to its
software packages during the balance of the fiscal year. During the
first quarter, 1998, the Company issued a major release to its
software package to its customers who were eligible to receive the
enhancement. This release incorporated major portions of the proposed
third generation software package as previously reported. However,
even with the releases provided, 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 as a
percentage of revenue decreased in the first quarter of fiscal 1998 to
38% from 45% in the first quarter of the prior fiscal year. This
decrease is attributable to a shift of the Company's focus into
software licensing and a resultant decrease in equipment sales as a
percent of total sales. Since equipment revenues carry a higher
percentage of costs as compared to software licensing fees, an
anticipated decrease in cost of sales and services was achieved.
Included in cost of sales and services is $358,573 of amortized
software costs.
Software Development Costs. Software development costs, both
capitalized and expensed as research and development, amounted to
approximately $408,000 for the three months ended December 31, 1997,
as compared to approximately $480,000 for the three months ended
December 31, 1996; a 15% decrease. Of these amounts, approximately
$336,000 and $390,000 were capitalized for the three months ended
December 31, 1997 and 1996, respectively. Less software development
costs were capitalized in 1997 versus 1996 since there was a
completion of a major release which had been under development for
some time. However, the Company would anticipate that research and
development expenses will overall, increase in 1998 due to the
Company's continuing efforts to improve its software package
offerings. Additionally, the Company intends to continue recruiting
and hiring experienced software developers and to consider the
acquisition of complementary software technologies. However, there
can be no assurances that the Company will achieve these goals.
General and Administrative. General and administrative expenses were
approximately 21% of revenue in the first quarter of 1998 as compared
to 16.4% in the same quarter of 1997. This increase in general and
administrative expenses is principally due to the Company's
intensified focus on stock promotion activities, increases in
associate salaries and year end bonuses.
Quarterly Results. Net income for the three month period ended
December 31, 1997 was $788,798 compared to $300,819 for the same
quarter 1996, a 162% increase.
Net income before income taxes was $1,254,698 in the quarter ended
December 31, 1997 compared to net income before income taxes of
$444,819 for the comparable period ended December 31, 1996. This
increase is primarily due to the addition of several new customers
during the period.
During the period ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 (SFAS 28),
"Earnings Per Share". This statement requires dual presentation of
basic and diluted earnings per share (EPS) for complex capital
structures on the face of the income statement. Basic EPS is computed
by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution from the exercise or conversion of
securities into common stock. The December 31, 1996 earnings per
share is restated to give effect to the application of SFAS 128 and
does not differ from EPS as previously reported under APB Opinion No.
15 "Earnings Per Share".
On a per share basis, earnings were $.10 for the three months ended
December 31, 1997 as compared to $.04 for the comparable period of
1996. This per share data has been computed using the weighted
average of the common stock outstanding for Network Systems
International, Inc., the former development stage company, for all
periods presented.
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 $1,459,550 on December
31, 1997. Cash provided by operating activities amounted to
approximately $1,511,500 for the three months ended December 31, 1997
compared to $250,700 in the comparable period of 1996. This increase
in cash provided by operations is principally due to additional
collections of accounts receivables and additional software licensing
and servicing revenues over the prior period.
Long term cash requirements, other than normal operating expenses, are
anticipated for development of new software products and enhancements
of existing products; financing anticipated growth; adding additional
personnel; and the possible acquisition of software products or
technologies complimentary to the Company's business. The Company
believes that its existing cash, cash equivalents, available lines of
credit and anticipated cash generated from continuing operations will
be sufficient to satisfy its currently anticipated cash requirements
for the 1998 fiscal year. Additionally, the Company anticipates
increasing its cash availability by way of a secondary offering of its
stock by calendar year end. However, there are no assurances as to the
timing or success of this anticipated offering.
Part II
Item 2. Changes in Securities
On January 12, 1998 the Board of Directors authorized a five for four
split on the outstanding common and preferred stock of the Company for
stockholders of record as of January 16, 1998.
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. Through December 31, 1997, the promoter earned 56,250
shares valued at $132,000 under the terms of this agreement.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
first quarter ended December 31, 1997.
Item 6 Exhibits and Reports on Form 8-K
(a)Exhibits included herewith are:
(11) Statement re: computation of per share earnings
(27) Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
NETWORK SYSTEMS INTERNATIONAL, INC.
Date: 2/5/98 /s/ Robbie M. Efird
Robbie M. Efird, President
and acting as CFO
Date: 2/5/98 /s/ William C. Ray
William C. Ray, Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 1,459,550
<SECURITIES> 0
<RECEIVABLES> 2,749,676
<ALLOWANCES> (578,630)
<INVENTORY> 0
<CURRENT-ASSETS> 4,175,846
<PP&E> 966,270
<DEPRECIATION> (539,748)
<TOTAL-ASSETS> 6,921,383
<CURRENT-LIABILITIES> 1,423,565
<BONDS> 0
0
12
<COMMON> 7,314
<OTHER-SE> 4,465,372
<TOTAL-LIABILITY-AND-EQUITY> 6,921,383
<SALES> 3,228,796
<TOTAL-REVENUES> 3,228,796
<CGS> 1,214,047
<TOTAL-COSTS> 759,840
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 211
<INCOME-PRETAX> 1,254,698
<INCOME-TAX> 465,900
<INCOME-CONTINUING> 788,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 788,798
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
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d\sec\Ex111Q98.doc
Exhibit 11
Schedule of Computation of Net Income Per Share (unaudited)
Period Ended December 31,
1997 1996
Basic
Net income 788,798 300,819
Less - preferred stock dividends (29,537) 0
Net income for basic income per Common
Share 759,261 300,819
Weighted average number of
Common Shares outstanding
during the year 7,266,891 7,257,720
Basic income per Common Share .10 .04
Diluted
Net income for basic income
per Common Share 759,261 300,819
Add - dividends on convertible
preferred stock 29,537 0
Net income for diluted
net income per share 788,798 300,819
Weighted average number of
shares used in calculating
basic income per
common share 7,266,891 7,257,720
Assuming conversion of
convertible preferred stock
(weighted average) 615,438 0
Weighted average number of
common shares outstanding
as adjusted 7,882,329 7,257,720
Diluted earnings per
common share .10 .04
