UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934.
For the quarterly period ended March 31, 1999
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)
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 7,680,504 shares of the Registrant's $.001 par
value common stock and 5,725 shares of Registrants $.001 par
value preferred stock outstanding as of March 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 March 31, 1999 and 1998 4
Six months ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flow
Six months ended March 31, 1999 and 1998 6
Consolidated Statement of Changes in Stockholders' Equity 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
<TABLE>
Item 1. Financial Statements
Network Systems International, Inc. and Subsidiaries
Consolidated Balance Sheet
March 31, 1999
(Unaudited)
<CAPTION>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,101,164
Accounts receivable, trade, net of
allowance of $588,000 3,709,785
Contracts receivable, net of allowance
of $62,000 1,427,046
Accounts receivable, related parties 112,691
Note receivable, current 30,000
Other current assets 92,699
Total current assets 6,473,385
Property and equipment, net of accumulated
depreciation 1,433,451
Other Assets:
Note receivable, net of current portion 101,472
Software development costs, net of
accumulated amortization 1,646,957
Other 316,214
Total other assets 2,064,643
Total assets $ 9,971,479
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 1,439,932
Notes payable, current 35,000
Capital lease obligation, current 88,000
Other accrued liabilities 53,230
Income taxes payable 88,376
Unearned revenue 438,996
Total current liabilities 2,143,534
Long Term Liabilities:
Deferred income taxes 470,000
Notes payable, net of current maturities 306,403
Capital lease obligation, net of
current maturities 65,198
Total long term liabilities 841,601
Stockholders' Equity:
Preferred Stock; $.001 par value;
authorized 12,500 shares;
issued and outstanding 5,725 shares 6
Common Stock; $.001 par value;
authorized 100,000,000
shares; issued and outstanding 7,680,504 shares 7,681
Capital in excess of par value 3,292,143
Retained earnings 3,686,514
Total stockholders' equity 6,986,344
Total liabilities and stockholders' equity $ 9,971,479
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended March 31,
1999 1998
<S> <C> <C>
Revenue:
Licensing and servicing revenue $ 2,364,729 $ 1,482,170
Equipment revenue 1,484,317 1,714,749
Total revenue 3,849,046 3,196,919
Operating expenses:
Cost of sales and services 2,167,853 2,253,357
Research and development 123,528 142,830
Sales, general and administrative 468,212 240,530
Total operating expenses 2,759,593 2,636,717
Operating income 1,089,453 560,202
Other income (expenses)
Interest, net 8,925 13,940
Other, net 513 15,008
Total other income 9,438 28,948
Income before income tax provision 1,098,891 589,150
Income tax provision 407,300 189,600
Net income $ 691,591 $ 399,550
Dividends on preferred shares 14,281 25,364
Net income for primary income per common share 677,310 374,186
Earnings per common share $ .09 $ .05
Earnings per common share- $ .09 $ .05
Assuming dilution
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Six Months Ended March 31,
1999 1998
<S> <C> <C>
Revenue:
Licensing and servicing revenue $ 4,475,541 $ 3,841,372
Equipment revenue 2,707,192 2,584,343
Total revenue 7,182,733 6,425,715
Operating expenses:
Cost of sales and services 3,811,238 3,715,306
Research and development 203,528 215,575
Sales, general and administrative 1,166,605 679,723
Total operating expenses 5,181,371 4,610,604
Operating income 2,001,362 1,815,111
Other income (expenses)
Interest, net 17,730 13,729
Other, net 981 15,008
Total other income 18,711 28,737
Income before income tax provision 2,020,073 1,843,848
Income tax provision 763,500 655,500
Net income $ 1,256,573 $ 1,188,348
Dividends on preferred shares 29,343 54,901
Net income for primary income per
common shere 1,227,230 1,133,447
Earnings per common share $ .16 $ .16
Earnings per common share-
Assuming dilution $ .16 $ .15
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
<CAPTION>
Six Months Ended March 31,
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,256,573 $ 1,188,348
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 857,479 818,556
Promotional fees paid with stock - 72,000
Provision for bad debts 369,620 179,752
Change in operating assets and liabilities
Accounts receivable and contracts (1,719,678) (1,272,872)
receivable
Prepaid assets, other receivables,
and other assets (51,200) 271,033
Income tax accrual 108,001 288,040
Accounts payable and accrued
liabilities 463,224 787,010
Unearned revenue 108,518 166,753
Deferred income taxes 3,000 (159,800)
Total adjustments 138,964 1,150,472
Net cash provided by operating activities 1,395,537 2,338,820
INVESTING ACTIVITIES
Acquisition of property and equipment (329,722) (312,392)
Software development capitalized (988,496) (562,050)
Issuance of note receivable - (200,000)
Payment received on note receivable 9,801 213,456
Increase in cash surrender value
of life insurance (166,302) (22,473)
Net cash (used in) investing activities (1,474,719) (883,459)
FINANCING ACTIVITIES
Payment on notes payable and capital lease
obligations (19,205) (48,986)
Dividends paid (29,343) (54,901)
Net cash (used in) financing activities (48,548) (103,887)
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (127,730) 1,351,474
CASH AND CASH EQUIVALENTS AT OCTOBER 1: 1,228,894 491,413
CASH AND CASH EQUIVALENTS AT MARCH 31: $ 1,101,164 $ 1,842,887
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION AND NONCASH INVESTING AND
FINANCING ACTIVITIES
Cash paid during the period for:
Interest $ 16,616 $ 26,700
Taxes 652,500 468,660
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
Six Months ended March 31, 1999
(Unaudited)
<CAPTION>
Common Stock Preferred Stock
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
Oct. 1, 1998 7,661,754 $7,662 6,100 $ 6 $3,292,162 $2,459,284 $5,759,114
Conversion
of preferred
stock 18,750 19 (375) - (19) - -
Dividends on
preferred
stock - - - - - (29,343) (29,343)
Net Income
for the
three months
ended
March 31, 1999 - - - - - 1,256,573 1,256,573
Balance
Mar. 31,1999 7,680,504 $7,681 5,725 $ 6 $3,292,143 $3,686,514 $6,986,344
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 72 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, FL.
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.
Certain prior year amounts have been reclassified to conform
with the current year presentation.
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 $988,496 and $562,050
for the six months ended March 31, 1999 and 1998, respectively.
Amortization of capitalized computer software development costs begins
when the products are available for general release to customers, and is
computed on a straight line basis over the economic life. The Company has
estimated that the useful economic life of its products is two years.
Amortization expense of capitalized software cost amounts to $765,333 and
$711,664 for the six months ended March 31, 1999 and 1998, respectively, and
is included in cost of sales.
Revenue Recognition:
The Company's revenue is recognized in accordance with the American
Institute of Certified Public Accountants Statement of Position Number 97-2
"Software Revenue Recognition". Revenue consists of primarily the following:
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 six months ended March 31, 1999, 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 updates
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.
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
March 31,
1999 1998
Net income $ 691,591 $ 399,550
Less preferred stock dividends (14,281) (25,364)
Income available to common
stockholders used in basic EPS 677,310 374,186
Preferred stock dividends 14,281 25,364
Income available to common
stockholders after assumed
conversion of dilutive securities 691,591 399,550
Weighted average number of common
shares used in basic EPS 7,678,444 7,380,416
Effect of dilutive convertible
preferred stock 288,310 548,838
Weighted average number of common
shares and dilutive potential
common stock used in diluted EPS 7,966,754 7,929,254
Six months ended
March 31,
1999 1998
Net income $1,256,573 1,188,348
Less preferred stock dividends (29,343) (54,901)
Income available to common
stockholders used in basic EPS 1,227,230 1,133,447
Preferred stock dividends 29,343 54,901
Income available to common
stockholders after assumed
conversion of dilutive securities 1,256,573 1,188,348
Weighted average number of common
shares used in basic EPS 7,671,850 7,322,946
Effect of dilutive convertible
preferred stock 294,904 582,510
Weighted average number of common
shares and dilutive potential
common stock used in diluted EPS 7,966,754 7,905,456
C. Note Payable
On January 21, 1999, the Company refinanced the mortgage on
its corporate office building. 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,
with which the Company was in compliance at March 31, 1999.
Aggregate maturities of note payable as of March 31, 1999
were as follows: 1999 - $35,000; 2000 - $35,000; 2001 -
$35,000; 2002 - $35,000; 2003 - $35,000; thereafter -
$166,403.
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 March
31, 1999, there were no amounts outstanding.
D. Major Customer
For the three months ended March 31, 1999, sales to one
customer amounted to approximately $2,439,000. For the
three months ended March 31, 1998, sales to four customers
amounted to approximately $1,764,000. For the six months
ended March 31, 1999, sales to one customer amounted to
approximately $4,284,000. For the six months ended March
31, 1998, sales to three customers amounted to approximately
$3,172,000. The March 31, 1999 and 1998 accounts receivable
balances from these customers include approximately
$2,813,000 and $1,256,000 respectively. Subsequent
collections of the March 31, 1999 accounts receivable
balance have been approximately $802,000 for the one
customer.
E. Executive Employment Agreement
On April 16, 1999 the Company entered into an employment
agreement with an executive of the Company. Among other
things, the agreement provides the executive a stock option
arrangement of 500,000 shares of the Company's stock to be
purchased at $1 and vest equally over a four-year period.
The fair market value of the Company's stock at the date of
the agreement was $3.75. Beginning in the quarter ended June 30,
1999, the Company will recognize a non-cash compensation
expense of $343,750 per year recognized ratably each quarter for the
next four years based on this agreement.
F. Employee Incentive Stock Option Agreements
Effective April 13, 1999, the Company granted 201,000 shares
in incentive stock options to its employees under the
Company's qualified Incentive Stock Option Plan. Under the
terms of the plan, the employees will vest equally over a
four-year period, as long as they remain employed with the
Company, and have the right to purchase the Company's stock
at $4.00 per share, the fair market value at April 13, 1999.
G. Subsequent Events
On April 27, 1999, the Company signed a letter of intent to
acquire all of the capital stock of Vercom Software, Inc. a
Texas based Corporation. Consummation of the pending
acquisition is subject to ongoing due diligence. The
Company believes that should the proposed acquisition
ultimately be consummated, the net results of operations
would be positively effected.
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, intellectual property
rights, material customers, the Company's business
concentration risks 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
March 31, 1999 was $3,849,046. This revenue represents a
20.4% increase over the Company's revenues for the three-
month comparable period in 1998. For the six-month period
ended March 31, 1999, revenues were $7,182,733 as compared
to $6,425,715 for the same six-month period in fiscal 1998,
an 11.8% increase.
In the area of licensing and servicing revenues, the Company
experienced an increase of approximately 60% to $2,364,729
at the March 31, 1999 quarter end as compared to $1,482,170
in the same period ending 1998. During the six-month period,
licensing and servicing revenues increased approximately 17%
from $3,841,372 in fiscal 1998 to $4,475,541 in 1999. This
increase is attributable to servicing revenue increasing by
47% over the same period in 1998 due to increased billable
development. Additionally, the increase was due to an
upgrading of independent software products to the Company's
integrated net collection and the addition of professional
service staff to service the expansion of the Company's
installed base of the net collection(tm). Software licensing
revenue continues to lag behind 1998 by approximately 12%
due to a weaker software market in general. The Company,
however, feels the slow down will be short lived as the
potential software market is able to expand spending on new
automation since the majority of Year 2000 expenditures have
been made.
Hardware revenue for the three-month period ended March 31,
1999 was $1,484,317 as compared to $1,714,749 or a 14%
decrease over the same period in 1998. For the six-month
period ended March 31, 1998, hardware revenues increased
approximately 5% from $2,584,343 in fiscal 1998 to
$2,707,192 in 1999. This modest increase in hardware
revenue is directly attributable to customer upgrades and
increased demand for radio frequency technology. Hardware
revenues, however, will continue to be directly
proportionate to software licensing as the Company typically
sells the majority of hardware technology to its customers
within a few months of signing a licensing agreement.
Licensing and service revenue amounted to 62% of total
revenues for the Company compared to hardware revenues of
38% for the quarter ended March 31, 1999 and for the six-
months ended March 31, 1999
Cost of Sales and Services. In the current quarter, the
Company reclassified certain costs historically allocated in
sales, general and administrative costs to cost of sales and
services. The Company believes this reclassification more
accurately states cost of sales and services as incurred in
operations of the Company. Cost of sales and services
amounted to $2,167,853 or 56% of total revenue during the
quarter ended March 31, 1999 as compared to $2,253,357 or
70% of total revenue for the comparable period in fiscal
1998. During the six-month period, cost of sales and
services was $3,811,238 or 53% of total revenue in March
1999 compared to $3,715,306 or 58% in 1998. Hardware
technologies carry a higher percentage of cost (96% and 90%
of hardware revenue) as compared to software licensing and
servicing (31% and 48% of software and service revenue) for
the quarter ended March 31, 1999 and 1998. For the six-
month period ended March 31, 1999 and 1998, hardware
technology cost to revenues was 91% and 93% as compared
to software licensing and servicing of 30% and 34%.
Hardware technologies profit margins range varies based on
vendor discounts, commissions, and customer price point
demands. Software and services margins vary due to the
sales of software license that carry a higher margin. This is evident
for software margins for the quarter ended March 31, 1999 verses 1998
as the quarter ended 1999 has approximately $500,000 more in software
license revenue than 1998.
Software Development Costs. Software development costs
capitalized amounted to approximately $487,000 and $227,000
for the quarters ended March 31, 1999 and 1998,
respectively. During the six-month period, software
development costs capitalized amounted to approximately
$988,000 in fiscal 1999 as compared to $562,000 in 1998.
The increase is attributable to new development of products,
technologies, and enhancements to the net collection(tm). It
is anticipated that the Company will continue software
development at the current rate 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. In the current quarter,
the Company reclassified certain costs historically
allocated in sales, general and administrative costs to cost
of sales and services. The Company believes this
reclassification more accurately states cost of sales and
services as incurred in operations of the Company. Sales,
general and administrative expenses were 12% of revenue for
the quarter ended March 31, 1999 as compared to 8% in the
comparable period 1998. During the six-month period ended
March 31, 1999 sales, general and administrative expense
were 16% compared to 11% for 1998. The percentage
increases are directly attributable to increases in sales,
general and administrative salaries for new personnel and an
increase in the write-off of uncollectible trade accounts.
Provisions for Income Taxes. The income tax provision for
the six-months ended March 31, 1999 and March 31, 1998 was
$763,500 and $655,500, respectively. This represents an
effective tax rate of 38% and 36%, for the same periods.
Quarterly Results. Net income for the three months ended
March 31, 1999 and 1998 was $677,310 and $374,186
respectively. For the six-month period, net income was
$1,227,230 in fiscal 1999 and $1,133,447 for 1998. On a per
share basis, earnings were $.09 and .05 for the three months
ended March 31, 1999 and 1998, respectively. Per share
earnings are $.16 for the six-months ending March 31, 1999
in comparison to $.16 for the six-months ending March 31,
1998.
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 $1,101,164 in cash
and cash equivalents.
Long term cash requirements, other than normal operating
expenses, are anticipated for development of new software
products and enhancement 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 an extended payment schedule for
its customers that does not exceed twelve months.
Recent Accounting Pronouncements:
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 gain
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 products that
address technological and market developments. Major changes
in technology 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 or may not generate anticipated revenues in
the event the final product developed 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 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 absorb 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. However, 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
refund of fees paid for licensing, services, and equipment
purchases. The matter is currently pending arbitration.
The Company intends to vigorously defend the allegations and
assert certain counter claims against the customer.
Management believes that this dispute will ultimately be
resolved such that it will 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 result.
Year 2000 Issues. 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.
Like many other companies, the Year 2000 computer issue
creates risks for the Company. If internal systems did 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 organized a comprehensive
compliance committee to conduct a detailed analysis of its
products to assure it compliance and assure its computer
systems for the Year 2000. The Company has made changes
to its internal systems to insure compliance and will
continue to test these systems throughout 1999.
Additionally, the Company believes that its current products
are compliant, however, the Company continually assesses
capability of its products sold to customers to handle Year
2000. However, there can be no absolute assurance that the
Company's products contain and will contain all features and
functionality considered necessary by customers to be Year
2000 compliant.
The Company refers to "Year 2000 Compliance" to mean that
the net collection(tm) will function and operate in accordance
with the program specifications and will provide the
required output and will process data in accordance with the
system specifications and logic during the Year 2000 and
thereafter. The functions, calculations and other computing
processes of the net collection(tm) perform in a consistent
manner regardless of the date in time on which the processes
are actually performed, and regardless of the date on which
data was input into the product, whether before, on or after
January 1, 2000 and whether or not the dates are affected by
leap years. The net collection(tm) accepts, calculates,
compares, sorts, extracts, sequences, and otherwise
processes date inputs and date values, and returns date
values in a consistent manner regardless of the dates used,
whether before, on or after January 1, 2000.
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.
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
refund of fees paid for licensing, services, and equipment
purchases. The matter is currently pending arbitration.
The Company intends to vigorously defend the allegations and
assert certain counter claims against the customer.
Management believes that this dispute will ultimately be
resolved such that it will 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:
(11) Schedule of Computation of Net Income Per Common Share
(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.
2. Form 8-K filed with the Securities and Exchange
Commission April 14, 1999 announcing the hiring of
Christopher Baker as President and Chief Operating Officer.
This Form 8-K is incorporated by reference.
3. Form 8-K filed with the Securities and Exchange
Commission May 12, 1999 announcing the signing of a letter
of intent with a privately held Dallas, Texas based company.
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: 05/17/1999 /s/ Robbie M. Efird
Robbie M. Efird, Chief Executive Officer
Date: 05/17/1999 /s/ Michael T. Spohn
Michael T. Spohn, Chief Financial Officer
EXHIBIT INDEX
Exhibit Page
(11) Schedule of Computation of Net Income Per Share (Unaudited) 17
(27) Financial Data Schedule 18
Six Months Ended March 31,
Primary 1999 1998
Net income $ 1,256,573 $ 1,188,348
Less - preferred stock
dividends (29,343) (54,901)
Net income for primary income per Common Share $ 1,227,230 $ 1,133,447
Weighted average number of Common Shares
outstanding during the year 7,671,850 7,322,946
Primary income per Common Share $ .16 $ .16
Fully Diluted
Net income for primary income per Common Share $ 1,227,230 $ 1,133,447
Add - dividends on convertible preferred stock 29,343 54,901
Net income for fully diluted net
income per share $ 1,256,573 $ 1,188,348
Weighted average number of shares used in
calculating primary income per common share 7,671,850 7,322,946
Assuming conversion of convertible preferred
stock (weighted average) 294,904 582,510
Weighted average number of common shares
outstanding as adjusted 7,966,754 7,905,456
Fully diluted earnings per common share $ .16 $ .15
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,101,164
<SECURITIES> 0
<RECEIVABLES> 5,786,831
<ALLOWANCES> (650,000)
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<CURRENT-ASSETS> 6,473,385
<PP&E> 2,198,730
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<OTHER-SE> 6,978,657
<TOTAL-LIABILITY-AND-EQUITY> 9,971,479
<SALES> 7,182,733
<TOTAL-REVENUES> 7,182,733
<CGS> 3,811,238
<TOTAL-COSTS> 5,181,371
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<INCOME-TAX> 763,500
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