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, 1998
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: 0-22991
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 Number)
Incorporation or Organization)
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 7,668,004 shares of the Registrant's $.001 par
value common stock and 5,975 shares of Registrants $.001 par
value preferred stock outstanding as of December 31, 1998.
Transitional Small Business Format (check one) Yes __ No X
NETWORK SYSTEMS INTERNATIONAL, INC.
Contents
Part I - Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheet 3
Consolidated Statements of Income
Three months ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flow
Three months ended December 31, 1998 and 1997 5
Consolidated Statement of Changes in Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
Exhibit Index 16
Item 1. Financial Statements
Network Systems International, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1998
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,241,209
Accounts receivable, trade, net of allowance of $538,000 3,240,360
Contracts receivable, net of allowance of $62,000 1,018,580
Accounts receivable, related parties 112,734
Note receivable, current 30,000
Other current assets 75,442
Total current assets 5,718,325
Property and equipment, net of accumulated depreciation 1,231,627
Other Assets:
Note receivable, net of current portion 103,952
Software development costs, net of accumulated amortization 1,549,866
Other 275,043
Total other assets 1,928,861
Total assets $ 8,878,813
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 1,012,272
Notes payable, current 35,000
Capital lease obligation, current 83,000
Other accrued liabilities 55,164
Income taxes payable 308,575
Unearned revenue 237,596
Total current liabilities 1,731,607
Long Term Liabilities:
Deferred income taxes 470,000
Notes payable, net of current maturities 311,813
Capital lease obligation, net of current maturities 56,357
Total long term liabilities 838,170
Stockholders' Equity:
Preferred Stock; $.001 par value; authorized 12,500 shares;
issued and outstanding 5,975 shares 6
Common Stock; $.001 par value; authorized 100,000,000
shares; issued and outstanding 7,668,004 shares 7,668
Capital in excess of par value 3,292,156
Retained earnings 3,009,206
Total stockholders' equity 6,309,036
Total liabilities and stockholders' equity $ 8,878,813
The accompanying notes are an integral part of the
consolidated financial statements.
Network Systems International, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended December 31,
1998 1997
Revenue:
Licensing and servicing revenue $ 2,110,812 $ 2,359,202
Equipment revenue 1,222,875 869,594
Total revenue 3,333,687 3,228,796
Operating expenses:
Cost of sales and services 1,540,182 1,332,638
Research and development 80,000 72,745
General and administrative 801,596 568,504
Total Operating expenses 2,421,778 1,973,887
Operating income 911,909 1,254,909
Other income (expenses)
Interest, net 8,805 (211)
Other, net 469 -
Total other income (expenses) 9,274 (211)
Income before income tax provision 921,183 1,254,698
Income tax provision 356,200 465,900
Net income $ 564,983 $ 788,798
Dividends on preferred shares 15,061 29,537
Net income for primary income
per common share 549,922 759,261
Earnings per common share $ .07 $ .10
Earnings per common share-
Assuming dilution $ .07 $ .10
The accompanying notes are an integral part of the
consolidated financial statements.
Network Systems International, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
Three Months Ended December 31,
1998 1997
OPERATING ACTIVITIES
Net income $ 564,983 $ 788,798
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 422,694 400,198
Promotional fees paid with stock - 72,000
Provision for bad debts 265,427 126,643
Change in operating assets and
liabilities:
Accounts receivable and
contracts receivable (737,594) (676,598)
Prepaid assets, other
receivables, and other assets (19,061) 67,333
Income tax accrual 328,200 470,400
Accounts payable and accrued
liabilities 37,497 234,740
Unearned revenue (92,882) (40,963)
Deferred income taxes 3,000 (63,100)
Net billings over (under)
costs of uncompleted contracts - 132,000
Total adjustments 207,281 722,653
Net cash provided by operating 772,264 1,511,451
activities
INVESTING ACTIVITIES
Acquisition of property and equipment (82,897) (12,020)
Software development capitalized (501,620) (335,518)
Issuance of note receivable - (200,000)
Payment received on note receivable 7,321 58,899
Increase in cash surrender value
of life insurance (140,056) (2,526)
Net cash (used in) investing
activities (717,252) (491,165)
FINANCING ACTIVITIES
Payment on notes payable and
capital lease obligations (27,636) (22,612)
Dividends paid (15,061) (29,537)
Net cash (used in) financing
activities (42,697) (52,149)
NET INCREASE IN CASH AND CASH
EQUIVALENTS 12,315 968,137
CASH AND CASH EQUIVALENTS AT
OCTOBER 1: 1,228,894 491,413
CASH AND CASH EQUIVALENTS AT
DECEMBER 31: $ 1,241,209 $ 1,459,550
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION AND NONCASH INVESTING AND
FINANCING ACTIVITIES
Cash paid during the period for:
Interest $ 10,234 $ 14,400
Taxes $ 25,000 $ -
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 quarter ended
December 31, 1997 and $60,000 during fiscal 1996.
The accompanying notes are an integral part of the
consolidated financial statements.
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
Three Months ended December 31, 1998
(Unaudited)
<TABLE>
<C>
Common Stock Preferred Stock
Number $.001 Number $.001 Capital in
of Par of Par Excess of Retained
Shares Value Shares Value Par Value Earnings Total
<C> <C> <C> <C> <C> <C> <C>
<S>
Balance
October 1,
1998 7,661,754 $7,662 6,100 $ 6 $3,292,162 $2,459,284 $5,757,114
Conversion
of preferred
stock 6,250 6 (125) - (6) - -
Dividends on
preferred
stock - - - - - (15,061) (15,061)
Net Income
for the three
months ended
December 31,
1998 - - - - - 564,983 564,983
Balance
December
31, 1998 7,668,004 $7,668 5,975 $ 6 $3,292,156 $3,009,206 $6,309,036
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
Network Systems International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
A. Organization and Basis of Presentation
Network Systems International, Inc. (the "Company"), a
Nevada corporation, is the developer of the net collection(tm);
the premier suite of enterprise-wide software products for
complex manufacturers emphasizing sales order processing,
Enterprise Resource Planning ("ERP"), manufacturing
execution and distribution management. The Company closes
the loop as a turn-key software solution integrator by
providing hardware technology consulting and implementation
services to its customer base.
The Company and its three wholly owned subsidiaries: Network
Information Services, Inc. ("NIS"), Network Investment
Group, Inc. ("NIG"), and Network Systems International, Inc.
of North Carolina ("NESI-NC") employs approximately 65 full-
time associates. The Company is headquartered in
Greensboro, North Carolina and has satellite sales and
customer service offices in Greenville, S.C., Florence, S.C,
Wilmington, N.C., Matthews, N.C., and Apollo Beach, F.L.
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.
Basis of Preparation:
The financial statements consolidate the accounts of Network
Systems International, Inc. and its wholly owned
subsidiaries Network Information Services, Inc., Network
Investment Group, Inc. and Network Systems International,
Inc. of North Carolina.
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.
The interim financial information included herein is
unaudited. Certain information and footnote disclosures
normally included in the financial statements have been
condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC), although
the Company believes that the disclosures made are adequate
to make the information presented not misleading. These
consolidated financial statements should be read in
conjunction with the consolidated financial statements and
related notes contained in the Company's Form 10-KSB filed
with the SEC on December 29, 1998. Other than indicated
herein, there have been no significant changes from the
financial data published in those reports. In the opinion
of management, such unaudited information reflects all
adjustments, consisting only of normal recurring accruals
and other adjustments, necessary for a fair presentation of
the unaudited information.
Results for interim periods are not necessarily indicative
of results expected for the full year.
B. Significant Accounting Policies
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 $501,620 and $335,518
for the three months ended December 31, 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 $375,548 and $358,573
for the three months ended December 31, 1998 and 1997,
respectively, and is included in cost of sales.
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.
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 that may result
in revisions to costs and revisions, are recognized in
the period in which the revenues are determined.
For the three months ended December 31, 1998, there
were no revenues from fixed priced contracts.
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 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. The adoption of SOP
97-2 did not significantly affect the Company's results of
operations.
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 preferred stock
into common stock.
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.
Three months ended
December 31,
1998 1997
Net income $ 564,983 $ 788,798
Less preferred stock dividends (15,061) (29,537)
Income available to common
stockholders used in basic EPS 549,922 759,261
Preferred stock dividends 15,061 29,537
Income available to common
stockholders after assumed
conversion of dilutive securities 564,983 788,798
Weighted average number of common
shares used in basic EPS 7,665,257 7,266,891
Effect of dilutive convertible
preferred stock 310,997 615,438
Weighted average number of common
shares and dilutive potential
common stock used in diluted EPS 7,976,254 7,882,329
C. Note Payable
On January 21, 1999, the Company refinanced the building
mortgage note payable. Monthly principal payments on the
new note are $2,896 plus interest at a fixed rate of 7.53%
through January 2009. The building and substantially all
equipment collateralize the note. The note agreement
contains a covenant with respect to consolidated cash flow.
Aggregate maturities of note payable as of December 31, 1998
were as follows: 1999 - $35,000; 2000 - $35,000; 2001 -
$35,000; 2002 - $35,000; 2003 - $35,000; thereafter -
$171,813.
As of January 21, 1999, the Company has available a
$1,000,000 bank line of credit to provide additional short-
term working capital. Borrowings under this line of credit
bear interest at prime minus .125% and collateralized
substantially by all the assets of the Company. At December
31, 1998, there were no amounts outstanding.
D. Major Customer
For the three months ended December 31, 1998, sales to one
customer amounted to approximately $1,845,000. For the
three months ended December 31, 1997, sales to two customers
amounted to approximately $2,124,000. The December 31, 1998
and 1997 accounts receivable balances from these customers
include approximately $2,273,000 and $1,125,000,
respectively. Subsequent collections of the December 31,
1998 accounts receivable balance have been approximately
$1,828,000 for the one customer.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD LOOKING INFORMATION
THIS MD&A CONTAINS FORWARD LOOKING INFORMATION. EXCEPT FOR
HISTORICAL DATA, THE MATTERS DISCUSSED IN THIS FORM 10-QSB
CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND
UNCERTAINTIES.
The Company would caution readers that in addition to the
important factors described elsewhere in this Form 10-QSB,
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, material customers, the Company's business
concentration risk within the textile industry, 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. Total revenue for the three-month period ended
December 31, 1998 was $3,333,687. This revenue represents a
3.2% increase over the Company's revenues for the three-
month comparable period in 1997.
In the area of licensing and servicing revenues, the Company
experienced a decrease of approximately 10% to $2,110,812 at
the December 31, 1998 quarter end as compared to $2,359,202
in the same period ending 1997. This decrease is
attributable to aggressive pricing on license contracts
signed for the three months ended December 31, 1998 as
compared to 1997, in order to create a larger market share
for the Company's integrated net collection(tm). However,
servicing revenue increased by 46% over the same period in
1997 due to increased development and upgrading of
independent software products to the Company's integrated
net collection(tm) and the addition of professional service
staff to service the expansion of the Company's installed
base of the net collection(tm).
Hardware revenue for the three-month period ended December
31, 1998 was $1,222,875 as compared to $869,594 or a 41%
increase over the same period in 1997. This increase in
hardware revenue is directly attributable to customer
upgrades, additional hardware purchased for facility
expansions, increased demand for radio frequency technology,
expansion of the Company's installed base, and the concerns
over rapidly approaching Year 2000 issues.
Licensing and service revenues contributed 63% of total
revenues of the Company and hardware revenues 37% for the
quarter ended December 31, 1998.
Cost of Sales and Services. Cost of sales and services
amounted to $1,540,182 or 46% of total revenue during the
first quarter of fiscal 1998 as compared to $1,332,638 and
41% of total revenue for the comparable period in fiscal
1997. The increases in cost of sales and services are
primarily attributable to the increases in hardware sales
for the periods. Hardware technologies carry a higher
percentage of cost (85% of revenue) as compared to software
licensing and servicing (26% of revenue) for the quarter
ended December 31, 1998. Hardware technologies profit
margins range varies based on vendor discounts, commissions,
and customer price point demands. Additionally, the
Company's cost of services increased for the quarter ended
December 31, 1998 (26%) as compared to the same period ended
1997 (21%) primarily due to increased wage requirements and
up front training and education costs.
Software Development Costs. Software development costs
capitalized amounted to approximately $502,000 and $336,000
for the quarters ended December 31, 1998 and 1997,
respectively. The increase is attributable to increased
developed of products, technologies, and enhancements to the
net collection(tm). It is anticipated that the Company will
continue to experience an increase in software development
costs both capitalized and expensed, as its continual
efforts to accommodate customer and market needs for the net
collection(tm) development. Additionally, the Company intends
to continue recruiting and hiring additional software
programmers and to consider additional complementary
software technologies. Whether or not the Company will
successfully achieve these goals cannot be assured since
competition to hire programmers appears to be at an all time
high and new technologies are uncertain.
Sales, General and Administrative. Sales, general and
administrative expenses were 24% of revenue in the third
quarter of fiscal 1998 as compared to 18% in the comparable
period 1997. The percentage increases are directly
attributable to increases in the Company's sales personnel
and additional hiring costs.
Provisions for Income Taxes. The income tax provision for
the three months ended December 31, 1998 and December 31,
1997 was $356,200 and $465,900, respectively. This
represents an effective tax rate of 39% and 37%,
respectively.
Quarterly Results. Net income for the three months ended
December 31, 1998 was $564,983 and $788,798 respectively.
On a per share basis, earnings were $.07 for the three
months ended December 31, 1998. These per share amounts are
down from the net income per common share amounts of $.10
for the three month period ended December 31, 1997.
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.
Liquidity and Capital Resources. The Company funded its
activities entirely from cash generated from operations.
The Company ended its first quarter with $1,241,209 in cash
and cash equivalents.
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 companies and products or
technologies complimentary to the Company's business. The
Company believes the level of financial resources is a
significant competitive factor in its industry. The Company
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 further performance could be
negatively impacted.
Historically, accounts receivable for the Company has been
generally high due to a number of factors. A primary
contributor is the nature of how the Company's customer base
pays for the software licensing fee of the Company's
product. The Company records revenues from software license
fees after an executed contract and shipment of the product.
The Company then often establishes a payment schedule for
its customers of no more than a twelve month period.
Additionally, the textile industry as a whole tends to
experience flat periods which make it difficult to fully
fund major management information systems projects.
E. Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (`SFAS")
No. 130, "Reporting Comprehensive Income." This Statement
establishes standards for reporting comprehensive income and
its components in consolidated financial statements. The
Statement was effective for fiscal years beginning after
December 15, 1997. The Company adopted the provisions of
SFAS No. 130 in the 1998 and there are no reportable items
to disclose relating to this provision.
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This Statement
requires publicly owned companies to report certain
financial information about operating segments, as well as
certain information about those operating segment's products
and services, the geographic areas in which they operate,
and their major customers. The Statement was effective for
fiscal years beginning after December 15, 1997. The Company
adopted the provisions of SFAS No. 131 during fiscal year
ended 1998.
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement establishes
accounting and reporting standards for derivative
instruments and hedging activities. The Statement is
effective for fiscal years beginning after June 15, 1999.
The Company's current policy is not to enter into any
derivative instruments or hedging activities.
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 the Company 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.
The Company's success will depend upon its ability to
enhance its current products and develop new ones that
address technological and market developments. 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. The Company'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 the Company 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. The Company'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 identity 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 and Development. A portion of the Company's
income is derived from software implementation and
developmental 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 is incidental to
the business. In the opinion of management, including in-
house counsel, these routine proceedings will not have a
material adverse effect on the Company's financial position
or overall results of operations. There can be no assurance
that significant litigation will not arise in the future.
Should such litigation occur, the necessary cost to defend
such litigation could 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
intends to vigorously defend the allegations 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.
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) products. 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 a
negative impact on the Company's operating results and
profitability.
Material Customers. The Company could potentially face the
risks related to loss of material customers. Such loss of
customers would have an immediate negative impact on the
profitability of the Company.
Business Concentration Risk. The Company develops
enterprise-wide software products for complex manufacturers
to be utilized in all process manufacturing industries.
However, the Company's current customer base is
predominantly with companies in the textiles, apparel,
hosiery, and home fashions industries. These industries as
a whole tend to experience flat periods making it difficult
for textile companies to fund major management information
systems projects. Such flat periods could cause a negative
impact on the Company's operating results
Loss of Significant Personnel. The success of the Company
depends heavily on the abilities of its Chief Executive
Officer 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 a suitable
replacement could be found in the event of his untimely
death or disability. The Company maintains a key-man life
insurance policy on the CEO to aid in finding a suitable
replacement.
Year 2000 Issues. Like many other companies, the year 2000
computer issue creates risks for the Company. 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. The Company's plan is to have changes
to its critical systems completed by the first quarter of
1999 to allow time for testing throughout 1999.
Additionally, the Company believes that its current products
are compliant, however, the Company is assessing the
capability of its products sold to customers to handle Year
2000. However, there can be no assurance that the Company's
products contain and will contain all features and
functionality considered necessary by customers to be Year
2000 compliant. In addition, certain current and past
customers of the Company may still be running earlier
versions of the Company's products that are not Year 2000
compliant.
The Company is also contacting critical suppliers of
hardware and software to determine that the suppliers
operations and the products and services they provide are
Year 2000 capable. There can be no assurance that another
company's failure to ensure Year 2000 capability would not
have an adverse effect on the Company.
To date, the Company has incurred limited expenses
associated with its Year 2000 efforts in connection with
both internal systems and products, which are immaterial to
the Company's financial position. Management expects that
the future costs of the Year 2000 assessment will not have a
material effect on the Company's financial position.
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.
Part II
Item 1. 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 in-house
counsel, these routine proceedings will not have a material
adverse effect on the Company's financial position or
overall 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
intends to vigorously defend the allegations 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits included herewith are:
(27) Financial Data Schedule
(b) Reports on Form 8-K
1. Form 8-K filed with the Securities and Exchange
Commission January 26, 1999 announcing the appointment of
KPMG LLP as the Company's independent accountants to audit
the Company's financial statements for the year-ended
September 30, 1999. This Form 8-K is incorporated by
reference.
SIGNATURES
In accordance with the requirements of the Securities
and Exchange Act, the registrant has caused this report to
be signed on its behalf by the undersigned, thereto duly
authorized.
NETWORK SYSTEMS INTERNATIONAL, INC.
Date: 02/16/1999 /s/ Robbie M. Efird
Robbie M. Efird, President and
Chief Executive Officer
Date: 02/16/1999 /s/ Michael T. Spohn
Michael T. Spohn, Chief Financial Officer
EXHIBIT INDEX
Exhibit Page
(27) Financial Data Schedule 17
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
Exhibit 27
Financial Data Schedule
PERIOD-TYPE 3-MOS
FISCAL-YEAR-END SEP-30-1998
PERIOD-END DEC-30-1998
CASH 1,241,209
SECURITIES 0
RECEIVABLES 4,858,940
ALLOWANCES (600,000)
INVENTORY 0
CURRENT-ASSETS 5,718,325
PP&E 1,951,441
DEPRECIATION (719,814)
TOTAL-ASSETS 8,878,813
CURRENT-LIABILITIES 1,731,607
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED 6
COMMON 7,668
OTHER-SE 6,301,362
TOTAL-LIABILITY-AND- 8,878,813
EQUITY
SALES 3,333,687
TOTAL-REVENUES 3,333,687
CGS 1,540,182
TOTAL-COSTS 2,421,778
OTHER-EXPENSE 9,274
LOSS-PROVISION 0
INTEREST-EXPENSE 10,234
INCOME-PRETAX 921,183
INCOME-TAX 356,200
INCOME-CONINUING 564,983
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 564,983
EPS-PRIMARY 0.07
EPS-DILUTED 0.07
</TABLE>
