4
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .... to... .
Commission File Number 0-22991 CUSIP NUMBER 64121L 10 3
NETWORK SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in the charter)
Nevada 87-0460247
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
200 North Elm Street, Greensboro, North Carolina, 27401
(Address of principal executive offices, Including zip code)
Registrant's telephone number, including area code: (336) 271-8400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
None None
Securities registered pursuant Common Stock, $.001 par value
to Section 12(g) of the Act: (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-B 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, 1998 was $12,804,921.
As of December 22, 1998 there were 7,671,254 outstanding shares of common
stock, par value $.001 per share. The aggregate market value of the common
stock of the registrant held by non-affiliates of the registrant on
December 22,1998 based on the average bid and ask price on such date was
$4,939,354.
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
1998 AnnualMeeting 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 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Matters 7
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters 7
Item 6. Management's Discussion and Analysis 9
Item 7. Financial Statements 14
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 31
Item 11. Security Ownership of Certain Beneficial Owners
and Management 32
Item 12. Certain Relationships and Related
Transactions 33
Item 13. Exhibits and Reports on Form 8-K 33
PART I
Item 1. Description of Business
On April 22, 1996, Network Systems International, Inc. (the
"Company") was the survivor corporation in 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. The newly formed company is now
the parent company of three wholly owned subsidiary
corporations: Network Information Services, Inc. and
Network Investment Group, Inc., both North Carolina
corporations.
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 (NET(c)) 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 net
collectionT" software developed by the Company in 1996.
The Company is a leading developer and marketer of Enterprise Resource
Planning (ERP) software for use in manufacturing and general
business applications. NET's broad product line includes
proprietary software for sales forecasting/budgeting, sales order processing,
purchasing, planning, manufacturing and distribution management. 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 Customer
Relations 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
fifty-eight full time associates and a customer base
consisting of numerous major manufacturing giants such as
WestPoint Stevens, Pillowtex Corporation and many
others. Current annual sales approach the $13,000,000 level.
Profits are tracked on a profit center (segment) basis and are
generically derived through software license fees, annual maintenance fees,
implementation services, hardware sales, 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 variable costs 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 process
manufacturing 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.
Although NET(c) 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 products marketed under the titles: net
ResourceManager(tm); net CustomerLink(tm); net ProPlan(tm); net Po+(tm);
net Scheduler(tm); net EventTracker(tm); net InventoryProcessor(tm);
net CostConstruction(tm) and net Exec(tm). Markets now include
the general process manufacturing industry as a whole.
Overview of Business Segments
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); customer specific module designs; and
equipment sales and training. Individual products of the net
collection(tm) include:
net ResourceManager(tm)
net ResourceManager(tm) is the foundation product within the
net collection. net Resource Manager(tm) enables an organization to
finitely define all product resources, process resources, overhead
resources and labor resources required in the manufacturing process.
net CostConstruction(tm)
net CostConstruction(tm) is the product within the net collection(tm)
responsible for building cost structures. net CostConstruction(tm)
integrates with net ResourceManager(tm) enabling the entry of up to
eight plant-based costs for all purchased products, labor resources, and
overhead cost elements. These independent costs are summed immediately
during the building of the bill of resources, giving the product development
staff immediate cost for products and "what if" cost for existing resources.
net CustomerLink(tm)
net CustomerLink(tm) is the sales order processing product within the net
collection(tm). net CustomerLink(tm) is built to process volumes of orders
with minimal human intervention. The customer profile, customer product
translation tables, price lists, credit rules, standard shipping instructions,
invoicing defaults, and accounts receivable posting rules provide data to the
appropriate order management process, thus facilitating the order
fulfillment function.
net ProPlan(tm)
net ProPlan(tm) is the product within the net collection(tm) responsible
for building time-phased resource plans. net ProPlan integrates with all
products within the net collection(tm) to answer the following questions:
What are we going to make? What resources are required to make it? What do
we have? What do we need? When do we need it?
net PO+(tm)
net PO+(tm) is the purchase order management product within the
net collection(tm). net PO+(tm) enables an organization to consolidate
all divisional and plant purchasing requirements into one system. Multiple
supporting tables enable the user to build standard data that will default
into the various business functions expediting the purchasing process. The
vendor profile accepts traditional input such as name, address, and contact.
It also defines barcode expectations, remit to addresses, 1099 information,
currency unit of measures, invoice considerations, and accounts payable
general ledger codes. The system also affords the user the opportunity to
maintain a vendor product code cross-reference and associated price list.
net Scheduler(tm)
net Scheduler(tm) is the product within the net collection(tm) responsible for
manufacturing order management. net Scheduler(tm) provides visibility of the
entire manufacturing environment allowing the user community to enhance
manufacturing productivity through dynamic utilization of capacity and
material resources. The system is built utilizing control numbers referred
to as manufacturing orders. A manufacturing order may be created on demand
to build a stock position, or created as a make-to-order for a specific
customer, or created from net ProPlan(tm) to satisfy an aggregate demand.
net EventTracker(tm)
net EventTracker(tm)is the product within the net collection(tm) responsible
for building a data warehouse of specific events that occur.
net EventTracker(tm) supports system generated events (like manufacturing
order starts and stops) as well as user defined events to alert the plant
floor manufacturing associates with specific product run instructions and
quality tracking measurement requirements. Certain events impact summary
perpetual inventory.
net InventoryProcessor(tm)
net InventoryProcessor(tm) manages unit level stock inventories as well
as perpetual summary inventories. net InventoryProcessor(tm) receives
inventory event requests primarily from net PO+(tm), net CustomerLink(tm),
net Scheduler(tm), and net Distribution Handler(tm)in early 1999 to receive
inventory against open orders; allocate available inventory to sales orders,
issue direct material to manufacturing orders; handle customer and work-
in-process returns; re-pack non-consumed inventory; transfer inventory to
off-site locations; and ship inventory to customers.
net Exec(tm)
Net Exec(tm) is the product within the net collection(tm) responsible for
accounting transaction management as well as executive information
analysis. net Exec(tm)enables the user to classify all products within
net ResourceManager(tm)into financial categories and subcategories. The system
then harvests all financial events (sales, purchase order receipts, invoices,
etc.) and places the results in an executive accounting data warehouse. The
data warehouse is detailed but available for summarization by category and
subcategory. Information in the data warehouse may be formatted based
on user requirements and exported to third party general ledger environments
with any frequency. Standard structures are established for sales/accounts
receivable and purchasing/accounts payable.
net Exec(tm) has a graphical representation model built using the data
warehouse, depicting week-to-date, month-to-date, quarter-to-date, and
year-to-date sales matrices by customer, salesperson, category, subcategory,
market segment, merchandising class, and product. The system summarizes
sales and cost incurred, calculating gross and net margins. The net Exec(tm)
data warehouse is also available for multi-dimensional reporting, utilizing
third-party spreadsheet tools or query products
New Products
The Company intends to continue its aggressive approach to
module enhancements of its software package. In addition
to others, new products such as net DistributionHandler(tm),
which manages all distribution and warehouse management
functions, are intended to be introduced early in fiscal
year 1999. 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 software 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 the last two fiscal years, the Company has expended
in excess of $3.6 million dollars in the area of research
and development and capitalized software costs for new
product design and enhancements to existing products. It is
anticipated that the Company will continue to reinvest in
research and product design in a continued effort to enhance
its existing suite of 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 have financial
resources, 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 have established
alliances with major hardware producers on an international level.
The synergy 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 affecting 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 $355,000.
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
facility is considered both suitable and adequate for the Company.
Currently, new offices are being added to the facility in order to
accommodate an anticipated increase in development personnel.
Additionally, the Company owns a small facility in Florida through which
various marketing activities are conducted. This facility is considered
adequate for the Company's current and future needs.
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 eight
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 currently and will continue to be involved in routine
legal proceedings that are incidental to the business. In the opinion
of management, including internal counsel, these routine proceedings
will not have a material adverse effect on the Company's financial
position or overall trends in results of operations.
On December 16, 1998 the Company received written correspondence on
behalf of a former customer demanding a prorata refund of fees paid
for licensing, services, and equipment purchases. Should the contractual
issues of the dispute ultimately be submitted to arbitration, the Company
would intend to vigorously defend the allegation and assert certain
counter claims against the customer. Management believes, however,
that under a worse case scenario this dispute would not result in a material
adverse effect on the company's consolidated financial position.
The estimate of the potential impact on the Company's financial position
or overall results of operations for the above legal proceedings could change
in the future.
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, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock is traded on the NASDAQ Small Cap under the
symbol NESI. The stock initially traded on the Over-the-Counter (BB) market
until July 10, 1998 when the Company was officially approved for listing
on NASDAQ. Stock activity, prior to July 10, 1998, is reflected below
as inter-dealer prices, without retail mark-up, mark-down on conversion and
may not represent actual transactions:
First Quarter, 1998 Second Quarter, 1998
High (Ask) Low (Ask) High (Ask) Low (Ask)
$ 10.50 $ 6.25 $ 9.00 $ 5.25
High (Bid) Low (Bid) High (Bid) Low (Bid)
$ 9.00 $ 4.75 $ 8.625 $ 5.00
Third Quarter, 1998 Fourth Quarter(2),1998
High (Ask) Low (Ask) High Low
$ 8.50 $ 5.125 $ 6.75 $ 3.00
High (Bid) Low (Bid)
$ 8.25 $ 4.75
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.
(2) The Company stock was approved for listing on the NASDAQ
Small Cap on July 10, 1998, therefore, High and Low sales
prices are used for fourth quarter reporting
As of December 22, 1998, there were 595 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
CONTAIN 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 may
contain forward looking statements that involve risk and uncertainties,
including without limitations, continued acceptance of the Company's
products and services, increased levels of competition, new products
and technological changes, the Company's dependency on financing third
party suppliers and intellectual property rights, and other risks.
The Company's actual consolidated financial results during 1999, and beyond,
could differ materially from those expressed in any forward looking
statements made by, or on behalf of, the Company.
RESULTS OF OPERATIONS
Revenue. Network's annual revenues are stated for the twelve-month period
from October 1, 1997 through September 30, 1998. Net revenue for the period
was $12,804,921, a 63.5% increase over the comparable period in 1997. 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), an
increased customer base due to upgrading of independent software products to
the Company's integrated package, and an increase in customer base due to
Year 2000 compliance concerns in the process manufacturing industry.
In addition, equipment revenues surged due to customer upgrades of hardware,
radio frequency technology, and the concerns over rapidly approacing Year 2000
issues.
The Company's operations are classified into two principal industry segments
for reporting purposes. They are: (1)software licensing sales with related
services and (2)hardware sales. Revenues from licensing software and
services fees amounted to $7,240,935 for the twelve month period ended
September 30, 1998 compared to $5,108,192 for the same period in 1997.
This represents an increase of 41.7% principally due to increased efforts
in customer specific designs; increased emphasis on marketing the net
collection(tm) and an increase in business due to Year 2000 compliance
concerns in the process manufacturing industry. In the hardware segment of
the business, revenues for the period ended September 30, 1998 amounted
to $5,563,986 as compared to $2,722,652 for the comparable period ended
September 30, 1997. This represents a 104.3% increase in hardware sales
principally due to additional equipment acquisition by customers in an
effort to better address their equipment needs as well as the
increased demand for radio frequency technology.
Net income for the period ended September 30, 1998 increased to $1,967,078
from $1,476,346 over the comparable period in 1997, an 33.2% increase.
Cost of Sales and Services. Annual cost of sales and services as a
percentage of revenue increased in fiscal 1998 to 54.3% from 46.9% over
the comparable period in fiscal 1997. This increase is attributable to
7.8% decrease in profit margin on equipment sales due to vendor discounts,
commission, customer price point demands. Additionally, the Company
experienced increased wage demands due to Year 2000 compliance concerns in
retaining and hiring quality personnel.
General and Administrative. General and administrative expense for the
year ended September 30, 1998 was $2,490,815 or 19.4% of sales compared
to $1,670,163 or 21.3% of sales for the year ended September 30, 1997.
The increase in general and administrative expenses is contributed to
increased hiring costs and promotion expense for the sale of the Company's
preferred stock in a private placement offering.
Software Development Costs. Software development costs, both capitalized
and expensed as research and development, amounted to $1,753,358 in
fiscal 1998, as compared to $1,913,816 in fiscal 1997; a 6.9% decrease.
Of these amounts, $1,301,276 and $1,648,350 were capitalized in 1998
and 1997, respectively. More software development costs were capitalized
in 1997 versus 1998 since technological feasibility of more products was
achieved in fiscal year 1997. It is anticipated that the Company will
experience an increase in software development costs both capitalized and
expensed, as its efforts to accommodate specific customer needs escalates.
Additionally, the Company intends to continue recruiting and hiring
additional software programmers for research and development purposes and to
consider additional complementary software technologies. Whether or not the
Company will successfully achieve thes goals cannot be assured since
competition to hire programmers appears to be at an all time high and new
technologies are uncertain.
Provisions for Income Taxes. Income taxes are provided for transactions
reported in the financial statements and consist of taxes currently due,
plus deferred income taxes. The income tax provision for the year ended
September 30, 1998 and 1997 was $1,001,800 and $694,700, respectively.
The effective tax rate for the year ended September 30 1998 and 1997
was 33.8% and 32.2%, respectively.
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. Lastly, the software industry may well
experience a downturn in overall business activities as customer demands for
products and services are lessened after Year 2000 compliance has been
achieved.
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
$1,228,894 on September 30, 1998. Cash provided by operating activities
amounted to $2,649,826 for the year end as compared to $1,843,968 in the
comparable period of 1997. This increase in cash provided by operations
is principally due to increases in completion of uncompleted contracts over
the prior period and increased profits generally as demands for Year 2000
compliance matters are aggressively being addressed in the overall
process manufacturing industry.
With revenues for the period ended September 30, 1998 amounting to
$12,804,921 and accounts receivable amounting to $3,119,493, such accounts
receivable for approximately 24% of revenues. Hardware equipment receivables
make up $1,356,008 or 43.5% and software services are $1,763,485 or 56.5%
of the accounts receivable balance. This large accounts receivable is
principally due to the methods utilized in contractual commitments between
the Company and its customers and seasonality of sales in the general textile
industry will often cause adjustments in payment schedules. During the
period, the average collection days amounted to 59 days as compared to
64 days in the prior period. Contracts receivable for software licenses
amounted to $667,280 at September 30, 1998. 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.
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 1999 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. However, there are no assurances as to the timing or success of
such financing, if made at all. If such financing is not obtained, the
Company's future performance could be negatively impacted.
OTHER MATTERS
Some of the key variables and other qualitative and quantitative factors
which might be deemed necessary to an understanding and valuation 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.
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 process manufacturing
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
process manufacturing industry is expensive and the investment in software
development often involves a long payback cycle. Network's plans for
fiscal year 1999 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 1999 to increase over 1998. 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 business plan for 1999 includes a significant
investment in its sales and marketing efforts. Additionally, 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. There can be no assurances that the expenditure of these funds will
ultimately achieve anticipated goals set.
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 in today's highly competitive
market, there can be no assurance that the Company could sustain the cost of
additional personnel over the long term without additional financing
resources.
Litigation. The Company is currently and will continue to be involved in
routine legal proceedings that are incidental to the business. In the opinion
of management, including internal counsel, these routine proceedings will not
have a material adverse effect on the Company's financial position
or overall trends in results of operations. As such, there can be no
assurance that litigation will arise or will not in the future. Should such
litigation occur, the necessary cost to defend such litigation would
negatively impact future earnings of the Company.
On December 16, 1998 the Company received written correspondence on behalf of
a former customer demanding a prorata refund of fees paid for licensing,
services, and equipment purchases. Should the contractual issues of the
dispute ultimately be submitted to arbitration, the Company would intend to
vigorously defend the allegation and assert certain counter claims against
the customer. Management believes however that under a worse case scenario
this dispute would not result in a material adverse effect on the
Company's consolidated financial position.
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; 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 . Whether the secondary offering is initiated, or if
initiated, is successful, is uncertain. Additionally, the costs associated
with such offering may tend to negatively impact the Company's anticipated
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 and others
to provide equipment for future update application and expansion. An unexpected
disruption in one or more of these procedures could cause anegative 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.
Loss of Significant Personnel. The success of the Company depends heavily
on the abilities of CEO in connection with the day-to-day operations of the
Company and the successful development of new software modules. There can
be no assurance that the CEO will be available or that a suitable replacement
will be found in the event of his untimely death or disability. The loss of
the CEO would adversely affect the Company's operations.
Year 2000 Issues. Like many other companies, the year 2000 computer issue
creates risks for Network Systems International, Inc. If internal systems
do not correctly recognize date information when the year changes to 2000,
there could be an adverse impact on the Company's financial position. The
Company has organized a comprehensive compliance committee to conduct a
detailed analysis of its products and prepare its computer systems for the
Year 2000. Network's plan is to have changes to critical systems completed
by the first quarter of 1999 to allow time for testing throughout 1999.
Additionally, the Company is assessing the capability of its software sold to
customers to handle Year 2000 and has a plan in place to address product
issues during fiscal year 1999. Management expects that the costs of the
Year 2000 testing will not have a material effect on the Company's financial
position. Network is also contacting critical suppliers, such as our
hardware vendors, to determine that the suppliers operations and the products
and services they provide are Year 2000 capable or their progress towards
Year 2000 capability. There can be no assurance that another company's
failure to ensure Year 2000 capability would not have an adverse effect
on the Company.
Year 2000 compliance issues are currently a grave concern throughout the
software industry as a whole. From a legal context, no case law has yet
been established that enables the industry to definitively address issues
before they arrive. As such, the uncertainties in this area are
significant and potentially devastating. Although the Company has fully
established an internal Year 2000 compliance committee to conduct a
detailed analysis of its products and believes that its products are fully
compliant, there can be no assurance that some unknown and unanticipated
negative event will not occur. Additionally, Year 2000 compliance issues are
relatively new to the industry. How Year 2000 law will ultimately address
liabilities for software sold prior to the time Year 2000 issues became
known is uncertain and unclear. Should the courts ultimately establish a
rule of law under some "should have known" theory and places liability on
software vendors, such ruling would have an immediate and substantially
negative impact on the operations and financial stability of the
Company.
Item 7. Financial Statements.
INDEX
Page #
Report of independent certified public accountants 15
Consolidated balance sheet 16
Consolidated statements of income 17
Consolidated statements of cash flow 18
Consolidated statement of changes in stockholders' equity 19
Notes to consolidated financial statements 20
Selected Financial Data 26
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, 1998 and the related consolidated
statements of income, changes in stockholders' equity, and
cash flows for the years ended September 30, 1998 and
September 30, 1997. 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, 1998 and the
results of its operations and its cash flows for the years
ended September 30, 1998 and September 30, 1997, in
conformity with generally accepted accounting principles.
/s/ Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
November 20 , 1998
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Balance Sheet
September 30, 1998
<CAPTION>
<S> <C>
Assets
Current Assets
Cash $ 1,228,894
Accounts receivable, trade, net of
allowance of $400,000 3,119,493
Contracts receivable, net of allowance
of $100,000 667,280
Note receivable, current 30,000
Accounts receivable, related parties 112,804
Income tax receivable 19,625
Other current assets 56,411
Total Current Assets 5,234,507
Property and equipment, net of accumulated
depreciation 1,195,876
Other Assets
Note receivable, net of current 111,273
Software development costs, net of
accumulated amortization 1,423,794
Other 134,887
Total Other Assets 1,669,954
Total Assets $ 8,100,337
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable, current $ 31,000
Capital lease obligation, current 83,000
Accounts payable, trade 1,004,583
Other accrued liabilities 25,356
Deferred revenue 330,478
Total current liabilities 1,474,417
Long Term Liabilities:
Deferred income taxes 467,000
Notes payable, net of current
maturities 323,649
Capital lease obligation, net of
current maturities 76,157
Total long term liabilities 866,806
Stockholders' Equity
Preferred Stock; $.001 par value;
authorized 12,500 shares; issued
and outstanding 6,100 shares 6
Common Stock; $.001 par value;
authorized 100,000,000 shares;
issued and outstanding 7,661,754
shares 7,662
Capital in excess of par value 3,292,162
Retained earnings 2,459,284
Total stockholders' equity 5,759,114
Total liabilities and stockholders' equity $ 8,100,337
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statements of Income
<CAPTION>
Years Ended September 30
1998 1997
<S> <C> <C>
Revenue:
Licensing and servicing revenue $ 7,240,935 $ 5,108,192
Equipment revenue 5,563,986 2,722,652
Total revenue 12,804,921 7,830,844
Operating expenses:
Cost of sales and services 6,948,331 3,675,511
Research and development 452,082 265,466
General and administrative 2,490,815 1,670,163
9,891,228 5,611,140
Operating income 2,913,693 2,219,704
Other income (expenses)
Interest, net 39,537 (63,998)
Other, net 15,648 15,340
55,185 (48,658)
Income before income tax provision 2,968,878 2,171,046
Income tax provision 1,001,800 694,700
Net income $ 1,967,078 $ 1,476,346
Earnings per common share $ .25 $ .19
Earnings per common share-
assuming dilution $ .25 $ .19
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
<CAPTION>
Years Ended September 30
1998 1997
<S> <C> <C>
Operating activities
Net income $ 1,967,078 $ 1,476,346
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 1,643,830 1,332,356
Promotional fees paid with stock 240,000 -
Provision for bad debts 460,106 510,976
Change in operating assets and
liabilities:
Accounts receivable and
contracts receivable (2,580,788) (1,070,225)
Prepaid assets, other
receivables, and other
assets 16,427 (144,530)
Income tax receivable (19,625) -
Accounts payable and accrued
liabilities 777,535 (12,274)
Unearned revenue 69,493 125,477
Deferred income taxes (134,300) 86,600
Net billings over (under)
costs of uncompleted
contracts 210,070 (460,758)
Total adjustments 682,748 367,622
Net cash provided by operating
activities 2,649,826 1,843,968
Investing activities
Acquisition of property and
equipment (374,555) (177,995)
Software development (1,301,276) (1,648,350)
Issuance of Note Receivable (200,000) (168,852)
Payment received on Note Receivable 227,579 -
Increase in cash surrender value
of life insurance (64,966) (48,881)
Net cash (used in) investing
activities (1,713,218) (2,044,078)
Financing activities
Payment on notes payable, long-
term debt and capital leases (109,726) (150,437)
Net proceeds from issuance of
preferred stock - 856,689
Dividends paid (89,401) (72,469)
Net borrowings (payments) on line
of credit - (19,747)
Net cash (used in) provided by
financing activities (199,127) 614,036
Net increase in cash 737,481 413,926
Cash at October 1 491,413 77,487
Cash at September 30 $ 1,228,894 $ 491,413
Supplemental disclosures of cash flow
information and noncash investing and
financing activities
Cash paid during the period for:
Interest $ 46,101 $ 63,998
Taxes $ 1,104,681 $ 668,084
During 1998, the Company issued 93,750 shares of its common stock recorded
at $300,000 as payment for promotional expenditures of which $240,000 was
recorded as expense during 1998 and $60,000 during fiscal 1997.
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
Year ended September 30, 1998
<CAPTION>
Common Stock Preferred Stock
______________ _________________
Capital
Number $.001 Number $.001 in excess
of Par Of Par of Par Retained
shares Value Shares Value Value Earnings Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
October 1,
1997 7,257,554 $7,258 12,309 $12 $2,992,560 $ 581,607 $3,581,437
Issuance of
common
stock 93,750 94 - - 299,906 - 300,000
Conversion
preferred
stock 310,450 310 (6,209) (6) (304) - -
Dividends
on
preferred
stock - - - - - (89,401) (89,401)
Net Income
for the year
ended
September 30,
1998 - - - - - 1,967,078 1,967,078
Balance
September
30, 1998 7,661,754 $ 7,622 6,100 $ 6 $3,292,162 $2,459,284 $5,759,114
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
Network Systems International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and September 30, 1997
1. Background Information
Network Systems International, Inc. (the Company), was incorporated
on September 21, 1988 in the State of Nevada.
On April 22, 1996, the Company completed a 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.
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 (subsequently adjusted to 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 software, 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 58 full-time associates, headquarted in Greensboro,
North Carolina and has satellite offices in Greenville, S.C.,
Wilmington, N.C., Matthews, N.C., Apollo Beach, FL, and Florence, S.C.
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. The
corporate headquarters of NIG are located in Greensboro, North Carolina
and operates in cooperation with its supply partners, IBM Corporation,
REAL Applications, Ltd., TEKLOGIX and PERLE Systems.
The Company changed their year end from December 31 to September 30
in mid 1996.
In November of 1996, the Company set aside 625,000 shares of its unissued
common stock to be awarded to key associates 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 or upon call by the Company. 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. The
promoter has earned 93,750 shares of common stock under the terms of the
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.
On July 10, 1998 the Company was officially approved for listing on NASDAQ
and the Company's common stock began trading on NASDAQ Small Cap under the
symbol NESI on that 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 amounts
reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates.
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. Depreciation
is computed for financial reporting purposes principally by use of the
straight-line method over the following useful lives: buildings 39 years,
leasehold improvements 7-39 years, furniture, fixtures and office equipment
5-7 years, computer software 3-5 years. Depreciation expense for the years
ended September 30, 1998 and 1997 amounted to $174,555 and $180,020,
respectively.
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 $1,301,276 and $1,648,350 for the years ended
September 30, 1998 and 1997, 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 Company has estimated
that the useful economic life of its products is two years. Amortization
expense of capitalized software cost amounts to $1,469,275 and $1,152,337
for the years ended September 30, 1998 and 1997, respectively, and is
included in cost of sales.
Software development costs at September 30, 1998 consist of
the following:
Software Development Costs $ 4,002,097
Less Accumulated Amortization (2,578,303)
$ 1,423,794
Revenue Recognition:
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 revisions 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.
The Company's principal financial instrument subject to potential
concentration of credit risk is accounts receivable which are unsecured.
The company provides an allowance for doubtful accounts equal to estimated
losses expected to be incurred in the collection of accounts receivable.
The Company has adopted the American Institute of Certified Public
Accountants 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.
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 approximately $64,000 and $89,000 for the years ended
September 30, 1998 and 1997, respectively. Advertising costs of
approximately $22,000 and $26,000 were capitalized during the year ended
September 30, 1998 and 1997, respectively.
Income Tax:
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes."
Earnings Per Share:
The consolidated financial statements are presented in accordance with
Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings Per Share". Basic earnings per share is computed using the
weighted average number of common shares outstanding during the period.
Diluted earnings per share reflect the potential dilution from the
exercise or conversion of securities into common stock. All earnings per
share amounts for all periods presented have been restated to give
effect to the application of SFAS 128.
Reclassification:
Certain prior year amounts have been reclassified to conform
with the current year presentation.
3. Accounts Receivable, Related Parties.
Accounts Receivable from related parties at September 30,
1998, 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. Note Receivable
Note receivable at September 30, 1998 consists of the
following:
Note receivable, 60 monthly principle and
interest collections of $3,563 until
September 1, 2002, remaining balance due
at that time, secured by work in progress,
inventory, accounts receivable and
personal property $ 141,273
Less current maturities 30,000
$ 111,273
5. Property and Equipment
Property and equipment at September 30, 1998
consists of the following:
Land $ 190,000
Building 500,000
Leasehold improvements 122,215
Furniture and fixtures 136,362
Office equipment 133,771
Computer equipment and software 461,274
Computer equipment and software under 324,931
capital lease
1,868,553
Less accumulated depreciation (469,114)
Less accumulated amortization on
computer equipment and software
under capital lease (203,563)
$1,195,876
6. Note Payable
Note payable at September 30, 1998 consist of
the following:
Mortgage note payable:
Monthly principal payments of $2,612 plus
interest at the prime rate plus 0.25%
through February 2000 with the remaining
balance due March 2000; collateralized by
building; personally guaranteed by certain
stockholders $ 354,649
Less current maturities 31,000
$ 323,649
Aggregate maturities of note payable as of September 30, 1998
were as follows: 1999 - $31,000; 2000 - $323,649.
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 and equipment.
Additionally, the line is personally guaranteed by certain stockholders.
At September 30, 1998, there were no amounts outstanding.
7. Commitments
Leases
The Company has capitalized rental obligations under three leases of
software and equipment. The obligations, which mature in fiscal 2000
and 2001, represent the total present value of future rental payments
discounted at the interest rates implicit in the leases. Future minimum
lease payments under the capital leases are:
Period Ending September 30
1999 $ 90,000
2000 64,000
2001 23,000
Total minimum lease payments 177,000
Less amount representing interest 17,843
Present value of net minimum lease
payments 159,157
Less current portion 83,000
$ 76,157
Health Insurance Plan
The Company maintains a self-insurance program for that portion of
health care costs not covered by insurance. The Company is liable for
claims up to $10,000 per individual annually and aggregate claims
of approximately $100,000 annually. Self insurance costs are
accrued based upon the aggregate of the liability for reported claims and
an estimated liability for claims incurred but not reported. The Company
has accrued approximately $4,000 for this liability at September 30, 1998.
Employment Agreements
The Company entered into 20 year employment agreements with five of its
officers calling for annual salaries totaling no less than $195,000.00.
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 of approximately $17,000 and $9,700 for the year
ended September 30, 1998 and 1997, respectively
9. Income Taxes
The provision for income taxes for the years ended September
30, consists of the following components:
1998 1997
Current tax expense $ 1,272,300 $ 792,200
Deferred tax (benefit)
expense (134,300) 53,300
Credit for research and
development activities (136,200 (150,800)
$ 1,001,800 $ 694,700
The significant temporary differences which gave rise to
deferred tax assets and liabilities as of September 30, 1998
are as follows:
1998
Deferred tax asset
Bad debts $ 500,000
Deferred tax liabilities
Software development cost 1,423,800
Book basis of property &
equipment in excess of tax basis 124,400
Change in tax status 181,900
$1,730,100
As of September 30, 1998, the Company has federal loss carryforwards
totaling $37,500 that may be offset against future federal taxable income.
If not used, the carryforward will expire as follows:
Fiscal Year Operating
losses
2009 $ 29,700
2010 7,800
$ 37,500
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.
<TABLE>
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, 1998 and 1997 are as follows:
<CAPTION>
1998 1997
<S> <C> <C> <C> <C>
Tax expense at U.S.
statutory rates $ 1,009,400 34.0% $ 733,300 34.0%
State and local
income tax 58,700 2.0% 55,000 2.6%
Non-deductible
expense and other 23,600 0.8% 6,600 0.3%
Research &
development credit (89,900) (3.0%) (100,200) (4.7%)
$ 1,001,800 33.8% $ 694,700 32.2%
</TABLE>
10. Earnings Per Share
<TABLE>
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.
<CAPTION>
1998 1997
<S> <C> <C>
Net income $ 1,967,078 $ 1,476,346
Less preferred stock dividends (89,401) (72,469)
Income available to common
stockholders used in basic EPS 1,877,677 1,403,877
Preferred stock dividends 89,401 72,469
Income available to common
stockholders after assumed
conversion of dilutive securities 1,967,078 1,476,346
Weighted average number of common
shares used in basic EPS 7,447,705 7,257,720
Effect of dilutive convertible
preferred stock 470,196 410,396
Weighted average number of common
shares and dilutive potential
common stock used in diluted EPS 7,917,901 7,668,089
</TABLE>
11. Major Customer
For the years ended September 30, 1998 and 1997, sales to three customers
amounted to approximately $5,255,000 and $3,526,000, respectively.
The September 30, 1998 accounts receivable balances included approximately
$1,116,000 due from those customers.
12. 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, 1998:
1999 $30,000
2000 8,000
2001 4,000
2002 2,000
Rent expense amounted to $73,000 and $54,000 for the periods ended
September 30, 1998 and 1997, respectively.
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'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.
<TABLE>
The following is a summary of segment information for the
years ended September 30:
<CAPTION>
1998 1997
Software Software
and Corporate and Corporate
Service Service
Fees Fees
Hardware Total Hardware Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
from
external
customers $7,240,935 - $5,108,192 -
$5,563,986 $12,804,921 $2,755,652 $7,830,844
Interest
revenue 22,267 63,371 1,579 12,281
- 85,638 - 13,860
Interest
expense 46,101 - 63,998 -
- 46,101 - 63,998
Deprecia-
tion and
amortiza-
tion 1,642,006 - 1,330,402 -
1,824 1,643,830 1,954 1,332,356
Segment
profit 2,972,941 (310,792) 2,231,918 (352,131)
251,544 2,913,693 339,917 2,219,704
Expend-
itures
for
segment
assets 1,675,831 - 1,826,345 -
- 1,675,831 - 1,826,345
</TABLE>
The following is a summary of identifiable assets for each segment as
of September 30:
1998 1997
Software Software
And And
Service Service
Fees Corporate Fees Corporate
Hardware Total Hardware Total
$5,045,583 $1,690,337 $4,670,337 $572,616
$1,364,381 $8,100,337 $136,704 $5,379,657
Note 14. Year 2000 (unaudited)
Like many other companies, the year 2000 computer issue creates risks
for Network Systems International, Inc. Subsidiaries. If internal systems
do not correctly recognize date information when the year changes to 2000,
there could be an adverse impact on the Company's financial position.
The Company has organized a comprehensive compliance committee to conduct a
detailed analysis of its products and prepare its computer systems for the
Year 2000. Network's plan is to have changes to critical systems completed
by the first quarter of 1999 to allow time for testing throughout 1999.
Additionally, the Company is assessing the capability of its software sold
to customers to handle Year 2000 and has a plan in place to address product
issues during fiscal year 1999. Management expects that the costs of the
Year 2000 testing will not have a material effect on the Company's
financial position. Network is also contacting critical suppliers, such
as our hardware vendors, to determine that the suppliers operations and the
products and services they provide are Year 2000 capable or their progress
towards Year 2000 capability. There can be no assurance that another
company's failure to ensure Year 2000 capability would not have an adverse
effect on the Company.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
Compliance With Section 16(a) of the Exchange Act.
<TABLE>
The directors, executive officers and significant employees
of the Company are:
<CAPTION>
Name Age Position Director
Since
<S> <C> <C> <C>
Robbie M. Efird 35 Chairman of the Board, 1996
(1)(2)(4) Chief Executive Officer
E.W."Sonny" 56 Senior Vice President - 1996
Miller, Jr Marketing/Sales, Director
(1)(2)
David F. 44 Director of Product 1996
Christian Development, Director
(1)(2)
James W. 53 Director Customer 1996
Moseley Relations, Director
(1)(2)
David P. 50 Director 1996
Reynolds
(1)(3)(4)
Rick 35 Director 1996
Tuberosa
(1)(3)
Richard 37 Director of Product 1997
R.King Development, Director
(1)(2)
William C. 52 Vice President, Secretary,
Ray General Counsel
(2)(3)(4)
Michael T. 30 Chief Financial Officer
Spohn(2)
Tony A. Lee 35 Manager Business Systems
Peter Klopman(2) 51 Director Customer Relations
J. Earl Warrick, 42 Director of Hardware Sales
Jr.
<FN>
<FN1>
(1) Currently serves as a member of the Board of Director
</FN>
<FN2>
(2) Currently serves on the Company's Executive Committee
</FN>
<FN3>
(3) Currently serves on the Company's Audit Committee
</FN>
<FN>
(4) Currently serves on the Company's Compensation
Committee
</FN>
</TABLE>
Each officer of the Company is elected by the Board of
Directors to hold office until its first Board meeting after
the Annual meeting of Stockholders succeeding his election.
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 attended the Masters in
Business Administration program at the University of North Carolina in
Greensboro, North Carolina. Mr. Efird created the original
design for the Company's proprietary software in 1986 and has
continuously directed the software development activities and operations
protocol 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 attended the University
of Georgia in Columbus, 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 Product Development. 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, 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.
Michael T. Spohn: From 1993 until June 1998 Mr. Spohn was an audit manager
with BDO Seidman, LLP, a national accounting and consulting organization
and a member firm of BDO International. Mr. Spohn specialized in the audit
of private and publicly traded companies while at BDO. Mr. Spohn received
his Bachelor of Science in Finance from the University of North
Carolina at Greensboro and holds a Bachelor of Science in Accounting from
High Point University.
Richard R. King: Mr. King joined the Company in 1990 and currently serves as
its Director of Product Development and is responsible for research and
development of new technologies in both software and hardware areas. Mr. King
received his Bachelor of Science in Business Administration from Appalachian
State University.
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.
Peter Klopman: Most of Mr. Klopman's 20-year career with Burlington
Industries included managing manufacturing plants in three divisions. His
broad range of textile experience encompasses yarn forming systems, weaving,
dyeing and finishing. In his last assignment, Mr. Klopman was instrumental
in leading Burlington's vision of world class manufacturing through JIT (Just-
In-Time). He is a former member of APICS (American Production and Inventory
Control Society) and their Textile and Apparel Significant Industry Group. He
has presented professional seminars on Inventory Control Management and Shop
Floor Motivation to APICS at the national, regional and local levels; National
Association of Accountants/National Convention; NCSU Industrial Extension
Service; Elon College's Martha and Spencer Love School of Business and
Alamance Community College. Mr. Klopman spent five years consulting in the
textile industry before joining Network Systems International, Inc. three
years ago. Mr. Klopman graduated with Bachelor of Arts in English from
St. Andrews College in Laurinburg, North Carolina.
J. Earl Warrick, Jr.: Mr. Warrick currently serves as the Company's
Director of Hardware Sales. Mr. Warrick joined the Company in 1993 after
previously serving the hardware accounts of numerous nationally
recognized companies. Mr. Warrick holds a Bachelor of Science in Business
Administration with a concentration in Management.
Item 10. Executive Compensation
(a) (b) (c) (d) (e)
Other Annual
Name and Principal Year Salary Bonus($) Compensation($)
Position
Robbie M. Efird (1)(2)
Chairman of the Board,
Chief Executive Officer 1998 $150,000 $5,718 $3,220
1997 152,500 None 2,493
1996 63,541(4) None 1,038
E.W. "Sonny Miller, Jr.
(1)(2)
Director, Vice President
Marketing 1998 120,000 1,324 10,421
1997 100,000 None 4,419
1996 58,500(4) None 2,125
(1) The salary figures presented represent the salary
compensation of the named executives for the period October
1, 1997 through September 30, 1998. 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.
Item 11. Security Ownership of Certain Beneficial
Owners and Management.
(1) (2) (3) (4)
Name and Address of Amount and Percent
Title of Beneficial Owner Nature of of
Class Beneficial Class
Owner
Common Robbie M. Efird (1)2,723,991 35.55%
200 N. Elm Street
Greensboro, N.C. 27401
Common E.W."Sonny" Miller, 1,540,371 20.11%
200 N. Elm Street
Greensboro, N.C. 27401
Common David F. Christian 894,622 11.68%
200 N. Elm Street
Greensboro, N.C. 27401
Common James W. Moseley 594,622 7.76%
200 N. Elm Street
Greensboro, N.C. 27401
Common William C. Ray 350,481 4.58%
200 N. Elm Street
Greensboro, N.C. 27401
Common Richard R. King 139,353 1.81%
200 N. Elm Street
Greensboro, N.C. 27401
Common Tony A. Lee 99,138 1.29%
200 N. Elm Street
Greensboro, N.C. 27401
Common Rick Tuberosa (2)93,750 1.23%
Common J. Earl Warrick, Jr. 72,000 0.93%
Common Peter Klopman 702 0.00%
Common David P. Reynolds 23 0.00%
Common Michael T. Spohn - 0.00%
All Executive Officers and Directors 6,509,053 84.94%
as a group (12 persons)
(1) Mr. Efird beneficially holds 12,500 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 56,250 shares of Registrant's
common stock, par value $.001 in exchange for certain services.
On September 25, 1998 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 37,500 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
The following exhibits are submitted herewith:
Number Page #
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 35
13 The Registrant's Annual Report on Form
10-KSB for the fiscal year ended
September 30, 1997, filed December 30,
1997 and incorporated by reference
13 Form 10-QSB for the quarter ended December
31, 1997 filed February 6, 1998 and
incorporated by reference
13 Form 10-QSB for the period ended March
31, 1998 filed May 14, 1998 and incorporated
by reference
13 Form 10-QSB for the period ended June 30, 1998
filed August 7, 1998 and incorporated by
reference
22 Proxy statement filed January 28, 1998
and incorporated by reference
27 Financial Data Schedule 36
b) Reports on Form 8-K
On July 23, 1998 a Form 8-K was filed with the Securities and Exchange
Commission. The Form 8-K references the Company's approval for listing
on the NASDAQ Small Cap effective July 10, 1998.
On July 23, 1998 a Form 8-K was filed with the Securities and Exchange
Commission. The Form 8-K references the Company's termination of merger
negotiations with Innovative Control Concepts, Inc.
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 29, 1998
Robbie M. Efird
Chairman of the Board, President,
Chief Executive Officer, and
Director (principal executive)
/s/ E. W. Miller, Jr. December 29, 1998
E. W. Miller, Jr.
Senior Vice President and Director
/s/ William C. Ray December 29, 1998
William C. Ray
Vice President, Secretary
/s/ Michael T. Spohn December 29, 1998
Michael T. Spohn
Chief Financial Officer
/s/ James W. Moseley December 29 1998
James W. Moseley
Director
/s/ David F. Christian December 29, 1998
David F. Christian
Director
/s/ David P. Reynolds December 29, 1998
David P. Reynolds
Director
/s/ Rick Tuberosa December 29, 1998
Rick Tuberosa
Director
/s/ Richard R. King December 29, 1998
Richard R. King
Director
Exhibit 11
<TABLE>
Schedule of Computation of Net Income Per Share (Unaudited)
<CAPTION>
Year Ended September 30,
Primary 1998 1997
<S> <C> <C>
Net income $1,967,078 $1,476,346
Less - preferred stock
dividends (89,401) (72,469)
Net income for primary income
per Common Share $1,877,677 $1,403,877
Weighted average number of
Common Shares outstanding
during the year 7,447,705 7,257,720
Primary income per Common $ .25 $ .19
Share
Fully Diluted
Net income for primary income
per Common Share $1,877,677 $1,403,877
Add - dividends on
convertible preferred stock 89,401 72,469
Net income for fully diluted
net income per share $1,967,078 $1,476,346
Weighted average number of
shares used in calculating
primary income per common
share 7,447,705 7,257,720
Assuming conversion of
convertible preferred stock
(weighted average) 470,196 410,369
Weighted average number of
common shares outstanding
as adjusted 7,917,901 7,668,089
Fully diluted earnings per
common share $ .25 $ .19
</TABLE>
<TABLE> <S> <C>
<ARTICLE>5
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,228,894
<SECURITIES> 0
<RECEIVABLES> 4,286,773
<ALLOWANCES> (500,000)
<INVENTORY> 0
<CURRENT-ASSETS> 5,234,507
<PP&E> 1,868,553
<DEPRECIATION> (672,677)
<TOTAL-ASSETS> 8,100,337
<CURRENT-LIABILITIES> 1,474,417
<BONDS> 0
0
6
<COMMON> 7,662
<OTHER-SE> 5,751,446
<TOTAL-LIABILITY-AND-EQUITY> 8,100,337
<SALES> 12,804,921
<TOTAL-REVENUES> 12,804,921
<CGS> 6,948,331
<TOTAL-COSTS> 9,891,228
<OTHER-EXPENSES> 15,648
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,537
<INCOME-PRETAX> 2,968,878
<INCOME-TAX> 1,001,800
<INCOME-CONTINUING> 1,967,078
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,967,078
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
