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, 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 7,803,154 shares of the Registrant's $.001 par
value common stock and 3,505 shares of Registrants $.001 par
value preferred stock outstanding as of December 31, 1999.
Transitional Small Business Format (check one) Yes __ No X
NETWORK SYSTEMS INTERNATIONAL, INC.
Contents
Part I - Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet 3
Consolidated Statements of Operations
Three months ended December 31, 1999 and 1998 4
Consolidated Statement of Changes in Stockholders'
Equity 5
Consolidated Statements of Cash Flow
Three months ended December 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
<TABLE>
Item 1. Financial Statements
Network Systems International, Inc. and Subsidiary
Consolidated Balance Sheet
(Unaudited)
<CAPTION>
December 31, 1999
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 62,178
Accounts receivable, trade, net of allowance
of $450,000 3,761,004
Accounts receivable, related parties 125,478
Income tax receivable 384,748
Deferred income taxes 214,631
Other current assets 100,965
Total current assets 4,649,004
Property and equipment, net of accumulated
depreciation and amortization 1,246,538
Intangible assets, net of accumulated amortization
of $431,676 5,738,126
Other 357,257
Total assets $11,990,925
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 1,129,944
Notes payable, current 35,000
Capital lease obligations, current 68,000
Other accrued liabilities 462,277
Unearned revenue 1,495,577
Revolving credit agreement, current 185,000
Total current liabilities 3,375,798
Long Term Liabilities:
Revolving credit agreement, net of current
maturities 3,000,000
Deferred income taxes 504,092
Notes payable, net of current maturities 280,702
Capital lease obligations, net of current
maturities 12,248
Total long term liabilities 3,797,042
Common stock subject to redemption 1,896,000
Stockholders' Equity:
Preferred Stock; $.001 par value; authorized
12,500 shares; issued and outstanding 3,505,
liquidation preference of $350,500 4
Common Stock; $.001 par value; authorized
100,000,000 shares; issued and outstanding
7,803,154 7,803
Capital in excess of par value 3,693,744
Less common stock subject to redemption (1,896,000)
Retained earnings 1,116,534
Total stockholders' equity 2,922,085
Total liabilities and stockholders' equity $11,990,925
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended December 31,
1999 1998
<S> <C> <C>
Revenue:
Licensing revenue $ 11,928 $ 709,205
Servicing revenue 1,680,642 1,401,607
Equipment revenue 665,084 1,222,875
Total revenue 2,357,654 3,333,687
Operating expenses:
Cost of licensing 91,224 11,435
Cost of services 1,251,688 660,739
Cost of equipment 530,371 1,031,618
Research and development 259,145 80,000
Sales, general and administrative 1,102,866 763,589
Amortization of excess of cost
over net assets acquired 131,745 -
Gain on sale of fixed asset (2,777) -
Total operating expenses 3,364,262 2,547,381
Operating income (loss) (1,006,608) 786,306
Other income (expenses)
Interest, net (89,501) 8,805
Income (loss) before income tax
provision (benefit) (1,096,109) 795,111
Income tax provision (benefit) (393,621) 307,032
Net income (loss) $ (702,488) $ 488,079
Dividends on preferred shares 8,949 15,061
Net income (loss) applicable to
common shares (711,437) 473,018
Earnings (loss) per common share,
basic and diluted $ (.09) $ .06
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
Three Months Ended December 31, 1999
(Unaudited)
<CAPTION>
Number Number Capital in Retained
of of Excess of Earnings
Shares Shares Par Value
$.001 Par $.001 Par Common Stock Total
Value Value Subject to
Redemption
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
Oct.1,
1999 7,776,854 3,906 $3,531,426 $1,827,971
$7,777 4 $(1,896,000) $3,471,178
Conversion
of
Preferred
Stock 20,050 (401) (20) -
20 - - -
Compen-
sation
related
to grant
of stock
options - - 85,938 -
- - - 85,938
Compen-
sation
related
to put
of stock
options - - 41,250 -
- - - 41,250
Compen-
sation
related
to common
stock
issued
to board
of
directors 6,250 - 35,150 -
6 - - 35,156
Dividends
on preferred
stock - - - (8,949)
- - - (8,949)
Net loss
for the
3 months
ended
December 31,
1999 - - - (702,488)
- - - (702,488)
Balance
December 31,
1999 $7,803,154 3,505 $3,693,744 $1,116,534
$7,803 $4 $(1,896,000) $2,922,085
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiary
Consolidated Statements of Cash Flow
(Unaudited)
<CAPTION>
Thee Months Ended
December 31,
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(702,488) $488,079
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 254,850 47,146
Non-cash compensation expense 142,188 -
Provision for bad debts - 265,427
Gain on sale of property and
equipment (2,777) -
Increase in cash surrender
value of life insurance (23,461) (140,056)
Change in operating assets and
liabilities:
Accounts receivable (895,612) (737,594)
Other current assets 126,968 (19,061)
Income taxes 448,021 328,200
Accounts payable and other
accrued liabilities 31,351 37,497
Unearned revenue 882,584 (92,882)
Deferred income taxes (121,642) (46,168)
Total adjustments 842,470 (357,491)
Net cash provided by operating
activities 139,982 130,588
INVESTING ACTIVITIES
Acquisition of property and equipment (45,699) (82,897)
Proceeds from sale of property and
equipment 262,000 -
Payment received on note
receivable - 7,321
Net cash provided by (used in)
investing activities 216,301 (75,576)
FINANCING ACTIVITIES
Payment on notes payable and
capital lease obligations (33,444) (27,636)
Payment on revolving credit
agreement (315,000) -
Dividends paid (8,949) (15,061)
Net cash used in financing
activities (357,393) (42,697)
Net (decrease) increase in cash and
cash equivalents (1,110) 12,315
Cash and cash equivalents at October 1: 63,288 1,228,894
Cash and cash equivalents at December 31: 62,178 1,241,209
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 84,260 $ 10,234
Taxes $ - $ 25,000
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
Network Systems International, Inc. and Subsidiary
Notes to Consolidated Financial Statements
A. Organization and Basis of Preparation
Organization
Network Systems International, Inc. (the "Company"), a
Nevada corporation, is a vertical market company that is the
developer of the net collection(TM) and Primac software
systems. These products are suites of supply chain
management and enterprise-wide software products for the
textile, apparel, home furnishing, and printing industries.
The Company offers hardware products as well as consulting
and implementation services that provide a solution to its
customer's technology needs.
The Company and its wholly owned subsidiary Vercom Software
Inc. ("Vercom") employ approximately 105 full-time
associates. The Company is headquartered in Greensboro,
North Carolina with offices in Dallas, Texas and Duncan,
South Carolina. All intercompany transactions have been
eliminated in consolidation.
The Company's common stock trades on the NASDAQ SmallCap
Exchange under the symbol NESI.
Basis of Preparation:
The financial statements consolidate the accounts of Network
Systems International, Inc. and its wholly owned subsidiary,
Vercom Software Inc.
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 January 13, 2000. 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 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
to the current year presentation.
B. Summaries of Significant Accounting Policies
Cash and Cash Equivalents:
The Company considers cash and all highly liquid investments
with an original or remaining maturity of less than three
months at the date of purchase to be cash equivalents.
Substantially all of its cash and cash equivalents are in
the custody of three major financial institutions.
Fair Value of Financial Instruments:
The carrying values of cash and cash equivalents, accounts
receivable, accounts payable, and other accrued liabilities
approximate fair value as of December 31, 1999 and 1998.
Carrying values of notes payable and capital lease
obligations approximate the fair values because their
interest rates are similar to interest rates currently
available to the Company for similar notes payable and
capital lease obligations. The revolving credit agreement
carrying amount approximates fair value because this
financial instrument bears interest at a variable rate
consistent for loans with similar maturities and credit
qualities.
Property and Equipment:
Property and equipment are stated at cost. Depreciation is
computed for financial reporting purposes principally using
the straight-line method over the estimated useful lives of
the assets, ranging from 3 to 39 years. Equipment under
capital leases is stated at the present value of minimum
lease payments and is amortized over the shorter of the
lease term or estimated useful life of the asset.
Intangibles:
Intangibles include the excess of purchase price over fair
value of tangible net assets acquired and is represented by
goodwill amortized over 10 years, customer base amortized
over 10 years, assembled work force amortized over 5 years,
and purchased software amortized over 5 years. The Company
assesses the recoverability of these intangible assets by
determining whether the amortization of the intangibles
balances over their remaining lives can be recovered through
undiscounted future operating cash flows of the acquired
operation. The assessment of the recoverability of
intangibles will be impacted if estimated future operating
cash flows are not achieved. Recoverability of intangible
assets is measured by a comparison of the carrying amount to
future net cash flows expected to be generated. If
intangibles are considered to be impaired, the Company would
recognize this impairment measured by the amount by which
the carrying amount exceeds the fair value.
Preferred Stock:
At December 31, 1999 the Company had 3,505
shares outstanding, respectively, of its Series A
Convertible Preferred Stock ("Series A"). This issue has a
stated liquidation preference value of $100 per share
redeemable at the Company's option, has no voting rights,
and each preferred stock is convertible to 50 shares of the
Company's common stock. Dividends on the Series A are
payable monthly in cash at a rate of 12% of the original
issue.
Purchased Software:
The Company amortizes purchased software over a 5-year
period. Amortization expense of purchased software amounted
to $70,000 for the three months ended December 31, 1999 and
is included in cost of licensing .
Recoverability of purchased software is measured by a
comparison of the carrying amount to future net cash flows
expected to be generated. If purchased software is
considered to be impaired, the Company would recognize this
impairment measured by the amount by which the carrying
amount exceeds the fair value.
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 is derived from the sale of software licenses,
hardware, and software services.
In arrangements where multiple elements exist, revenue is
allocated to each element of the arrangement based on the
relative fair values of the elements, which is established
by the price charged when the respective element is sold
separately. 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 license fees and hardware is recognized when
persuasive evidence of an agreement exists, delivery of the
product has occurred, the fee is fixed or determinable and
collectibility is probable.
Maintenance agreements generally call for the Company to
provide technical support and unspecified software upgrades
to customers. Revenue on maintenance agreements 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 charged on an
hourly basis and is recognized as the services are
performed.
Accounts receivable include amounts due from customers for
which revenue has been recognized. Unearned revenue
consists of amounts collected from customers for maintenance
agreements that have not met the criteria for revenue
recognition.
Research and Development:
Research and development is expensed as incurred. Research
and development costs amounted to $259,145 and $80,000 for
the three months ended December 31, 1999 and 1998,
respectively.
Income Taxes:
The Company accounts for income taxes under the provisions
of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
the liability method is used in accounting for income taxes
and deferred tax assets and liabilities are determined based
on differences between the financial reporting and tax bases
of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those
temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the
period that includes the enactment date.
Stock Option Plans:
The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations, in accounting for its fixed
plan stock options. As such, compensation expense would be
recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price.
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
C. Earnings Per Share:
The consolidated financial statements presents earnings
(loss) per common share, basic and diluted, 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.
The following data shows the amounts used in computing
earnings (loss) per share and the effect on income (loss)
and the weighted average number of shares of the potential
dilution from the exercise or conversion of securities into
common stock.
Three months ended December 31,
1999 1998
Net income (loss) $ (702,488) $ 488,079
Less preferred stock dividends (8,949) (15,061)
Income (loss) applicable to
common shares (711,437) 473,018
Preferred stock dividends - 15,061
Income (loss) applicable to
common shares after assumed
conversion of dilutive securities (711,437) 488,079
Weighted average number of common
shares used in basic EPS 7,783,484 7,665,257
Effect of dilutive convertible
preferred stock - 310,997
Weighted average number of common
shares and dilutive potential
common shares used in diluted EPS 7,783,484 7,976,254
The Company has 748,000 options and 3,505 shares of
preferred stock that were antidilutive and are not included
in the earnings per share calculation for the quarter ended
December 31, 1999. In addition, common stock subject to
redemption could be dilutive if the current stock price is
below the put price. At December 31, 1999, common stock
subject to redemption was antidilutive.
D. Major Customers
For the three months ended December 31, 1999, sales to two
customers amounted to approximately $685,000. For the three
months ended December 31, 1998, sales to one customer
amounted to approximately $1,845,000. The December 31, 1999
and 1998 accounts receivable balances from these customers
were approximately $840,470 and $2,273,000, respectively.
E. Recent Accounting Pronouncements
The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement
of Position 98-9 ("SOP 98-9") "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions. SOP 98-9 amends paragraphs 11 and 12 of SOP
97-2 to require revenue recognition using the "residual
method" when certain vendor-specific objective evidence is
met. This SOP is effective for fiscal years beginning
after March 15, 1999. The Company has adopted the
provisions of SOP 98-9 during the fiscal quarter ended
December 31, 1999 and the financial statements have not been
impacted due to this adoption.
F. Segment Information
The Company's operations involve the design and development
of integrated software solutions for Enterprise Resource
Management ("ERP") and supply chain management for the
process manufacturing industry. The Company also offers
hardware products and technical consulting and
implementation services providing a complete solution to its
customer's technology needs.
The Company conducts business primarily in the United
States. The Company's management uses an internal
management accounting system to make financial decisions and
allocate resources based on the revenues and operating
income (loss) before interest, amortization of certain
intangibles acquired and income taxes from these reports.
Based on the criteria set forth in SFAS No. 131, the Company
has three reportable segments: software licensing, technical
consulting and implementation services, and hardware product
sales.
In addition to the aforementioned operating segments, the
sales and marketing, research and development, and
administrative groups are allocated to the operating
segments and are included in the operating profit (loss)
reported below.
The Company's management does not identify or allocate
assets by operating segment, nor does management evaluate
each segment based on these criteria. Operating segments do
not sell products to each other, and accordingly, there are
no inter-segment revenues to be reported. The Company does
not allocate interest, amortization of certain intangibles
acquired or income taxes to operating segments. The
accounting policies for segment reporting are the same as
for the Company as a whole (see "Significant Accounting
Policies").
The following is a summary of segment information for the
three-month period ended December 31, 1999 and 1998:
1999 1998
Revenues:
Software licensing $ 11,928 $ 709,205
Services 1,680,642 1,401,607
Hardware 665,084 1,222,875
Total $ 2,357,654 3,333,687
Operating profit (loss):
Software licensing $ (614,157) $ 426,873
Services (232,766) 282,715
Hardware (30,717) 76,718
Total $ (877,640) $ 786,306
Reconciliation to net income
Interest, net $ (89,501) $ 8,805
Amortization of excess cost
over net assets acquired (131,745) -
Gain on sale of fixed assets 2,777 -
Income tax (provision)
benefit 393,621 (307,032)
Net income $ (702,488) 488,079
Depreciation and amortization of $123,105 for 1999 and
$47,146 for 1998 have been allocated to the segment
information above.
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, business concentration risks
within the textile and printing industries, business
combinations, and other risks. The Company's actual
consolidated financial results during 2000, and beyond,
could differ materially from those expressed in any forward
looking statements made by, or on behalf of, the Company.
The Company undertakes no obligation to publicly revise
these forward-looking statements to reflect events and
circumstances that arise after the date hereof.
RESULTS OF OPERATIONS
Results of the Company's newly acquired subsidiary, Vercom
Software Inc., are included in the financial statements
since its June 16, 1999 acquisition date.
The Company has reclassified certain costs to more
accurately reflect the proper classification of these costs.
All periods presented reflect these reclassifications.
Revenue. Net revenue for the three-month period was
$2,357,654, a 29% decrease from the comparable period in
1998. This decrease is a result of decreased licensing and
hardware revenues. Software license revenues decreased
between periods as a result of a slowdown in demand for
software products like those offered by the Company. In
addition, hardware revenues are directly impacted by a
slowdown in software licensing as most new customers require
system upgrades. Management believes this slowdown is a
result of increased focus by companies in ensuring that
their existing systems were compliant with requirements
related to the Year 2000, which appears to have resulted in
a postponement in purchasing decisions.
The Company's operations are classified into three principal
segments for reporting purposes. They are: (1) software
licensing sales, (2) consulting and implementation services
and (3) hardware sales. Revenues from licensing software
amounted to $11,928 for the three-month period ended
December 31, 1999 compared to $709,205 for the same period
in 1998. This decrease management feels is due in large
part to customers concerns related to the Year 2000 problem
as described above. Service revenues increased from
$1,401,607 in 1998 to $1,680,642 in 1999 representing an
increase of 20%. The increase in service revenues was
primarily related to the inclusion of service revenue of
Vercom in 1999 of $517,549. In the hardware segment of the
business, revenues for the period ended December 31, 1999
totaled $665,084 as compared to $1,222,875 for the
comparable period ended December 31, 1998. This reduction is
related to the reduction in software licenses to new
customers and the postponement of purchases related to
businesses that focused on the readiness of their existing
hardware and software systems for Year 2000.
Cost of Licensing, Services and Equipment. Cost of software
licensing consists of the costs of software reproductions
and delivery, media, packaging, documentation and other
related costs and the amortization of purchased software.
Costs associated to licensing amounted to $91,224 in 1999
compared to $11,435 in 1998. The increase is attributable
to the amortization of purchased software from the
acquisition of Vercom amounting to $70,000 for the three-
month period ended December 31, 1999. Cost of services
increased to $1,251,688 or 75% of service revenues in 1999
from $660,739 or 47% in 1998. The primary increases in cost
of services were the addition of Vercom, which has a lower
margin percentage of servicing revenue compared to the
Company in the prior year. Cost of equipment as a percent
to revenue was 80% or $530,371 in 1999 compared to 84% or
$1,031,618 in 1998. The overriding factor for the decrease
is the inclusion of equipment sales at Vercom, which carry a
higher margin percentage.
Sales, General and Administrative. Sales, general and
administrative expense for the three-month period ended
December 31, 1999 was $1,102,866 compared to $763,589 for
the same period ended in 1998. The increase in sales,
general and administrative expenses were directly related to
the inclusion of sales, general and administrative expenses
of Vercom amounting to $290,688 subsequent to the
acquisition date. In addition the company incurred
approximately $142,000 in non-cash compensation in 1999.
After taking the aforementioned items into consideration,
sales, general and administrative expenses decreased by
approximately $93,000 as compared to the same period in
1998.
Research and Development Costs. Research and development
costs amounted to $259,145 in fiscal year ended 1999, as
compared to $80,000 in fiscal 1998. The primary increase of
approximately $200,000 is due to the inclusion of research
and development expenses incurred by Vercom for the
development of the Company's Powerbuilder products.
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 (benefit) for the three-month
period ended December 31, 1999 and 1998 was $(393,621) and
$307,032, respectively. The effective tax rate for the
three-month period ended September 30, 1999 and 1998 was
(36%) and 39%, respectively.
Liquidity and Capital Resources. Cash and Cash Equivalents
were $62,178, representing a decrease of $1,179,031 from
the same period ended December 31, 1998. The decrease is
primarily due to the acquisition of Vercom in which the
Company utilized cash from operations and a revolving credit
arrangement with a bank. The revolver has the following
declining availability: $4.0 million through March 30, 2000;
$3.5 million through June 30, 2000; and $3.0 million through
June 30, 2001. Notwithstanding the above, the aggregate
amount outstanding under the loan shall not exceed 80% of
eligible accounts receivable plus the following dollar
amounts for the for the following effective periods: January
1 - February 29, 2000, $800,000; March 1 - March 31, 2000,
$700,000;April 1 - April 30, 2000, $600,000; May 1- May 31,
2000, $500,000; June 1, 2000 and thereafter, $400,000. The
revolver includes financial covenants that impose
restrictions with respect to the maintenance of 1)
Consolidated Cash Flow to Consolidated Funded Debt and 2)
Consolidated Liabilities to Consolidated Tangible Net Worth
which is applicable beginning March 31, 2000. The Company
was in compliance with the applicable covenant at December
31, 1999. The Company's principle sources of liquidity are
funds generated by operations and bank borrowings. The
Company believes these sources will be adequate to support
its normal operations for the foreseeable future.
Quarterly Results. Net income (loss) for the three-month
period December 31, 1999 and 1998 was $(702,488) and
$488,079, respectively. On a per share basis, earnings
(loss) were $(.09) and $.06 for the three-months ended
December 31, 1999 and 1998, respectively. The decrease in
earnings was directly impacted by a reduction in software
license and hardware revenues and increases sales, general
and administrative expenses as discussed above.
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 Financial Accounting Standards Board issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB
Statement No. 133" deferring the effective date to all
fiscal quarters of all fiscal years beginning after June 15,
2000. The Company's current policy is not to
enter into any derivative instruments or hedging activities.
The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement
of Position 98-9 ("SOP 98-9") "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions. SOP 98-9 amends paragraphs 11 and 12 of SOP
97-2 to require revenue recognition using the "residual
method" when certain vendor-specific objective evidence is
met. This SOP is effective for fiscal years beginning
after March 15, 1999.
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:
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 and/or additional competition could negatively
impact the Company's future performance.
Long-term Investment Cycle. Developing software is
expensive and the investment in software development often
involves a long payback cycle. The Company plans to
continue to make significant investments in software
development. Expenditure of funds for research and
development may not generate anticipated revenues in the
event the final product developed does not meet market
expectations and acceptance.
Sales Cycle. Traditionally, the Company experiences a
significant period between the time a customer is introduced
to the Company's products and services and the final date
upon which actual contracts are signed. The period to
complete these efforts often takes up to twelve months or
longer. 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 well in advance
of the time implementation services are required. The
uncertainties stated above could ultimately create a
negative impact on the overall revenues and profitability of
the Company
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
predominately with companies in the textiles, apparel, home
fashions, and printing industries. A downturn in these
industries could cause a negative impact on the Company's
operating results.
Year 2000 Issues. The Company continues to actively
address the business issues associated with the expected
impact of the Year 2000 ("Y2K") on proprietary software,
information technology systems, and non-information
technology systems (i.e., embedded technology) both
internally and in relation to the Company's external
customers and suppliers. Factors involved in assessing such
business issues include the evaluation and testing of the
Company's proprietary software; evaluating, upgrading, and
testing of the Company's internal systems; and assessing the
compliance of significant customers and vendors as well as
monitoring their continued compliance.
The Company created a Y2K Committee for the purpose of
directing the Company's compliance efforts and identifying
and addressing the impact of non-compliance on information
technology systems and non-information technology systems.
A testing plan was developed and implemented against the
Company's proprietary software. The Company tested the date
sensitive code within the proprietary software and has
determined the tested code to be Y2K compliant or made
necessary revisions as necessary. In addition, an inventory
of all the Company's equipment containing date sensitive
embedded technology has been completed in which all
equipment has been either tested and/or deemed to be Y2K
compliant. At the present time, the Company believes it has
completed the necessary proprietary software, internal
software, and hardware implementation required for Y2K
compliance. The Company does not believe any material
exposures or contingencies exist with respect to its
proprietary or internal systems.
The Company has requested assurances from its major
suppliers and business partners that they will be Y2K
compliant so that there will be no disruption of their
products or services. Where appropriate, contingency plans
and alternative suppliers have been investigated.
Presently, the Company is not aware of any material
exposures or contingencies as the result of Y2K compliance
of its significant vendors or business partners, if a
significant vendor or business partner should become non-
compliant there can be no assurance such an event will not
have a material adverse effect on the Company's consolidated
financial position, results of operations and cash flows.
The Company believes the actions it has taken will minimize
these risks and believes it has taken responsible steps to
prevent any major disruptions.
The Company believes the actions it has taken with regard to
Y2K issues have minimized Y2K related capital costs and
expenses incurred to date and estimates that it has already
incurred its Y2K compliance expenditures. The Company did
not have any Y2K expenditures for internal information
technology systems or its proprietary software in the three-
months ended December 31, 1999. The Company does not
anticipate any expenditures in 2000 relating to Y2K
compliance.
The Company has taken what it believes as the appropriate
steps to prevent Y2K related compliance issues, however,
there can be no assurance that some unknown or unanticipated
event could occur causing a Y2K compliance issue for the
Company or its business partners.
General. 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
global economy, 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.
Part II
Item 1. Legal Proceedings
The Company is currently a party in a contract dispute in
which the plaintiff, "Canton Financial Services
Corporation", is seeking damages from the Company for an
alleged breach of contract. The Company contends that there
was no contract between the parties. The case is currently
in the Circuit Court for Hillsborough County, Florida. The
Company is defending the allegations and may exert
counterclaims against the plaintiff. The plaintiff is
seeking 355,000 shares of the Company's stock and the
potential damage claim is not definite, as the total damages
if the plaintiff is successful depend on the stock price and
the date on which the damages, if any, are determined.
Management, however, believes the case is without merit and
does not believe the outcome will have a material adverse
effect on the Company's consolidated financial position.
However, under a worst case scenario, if the Company is
found in breach of contract, then the damages could have a
material adverse effect on the Company's consolidated
financial position or results of operations.
The Company is currently involved in other routine legal
proceedings that are incidental to the business. In the
opinion of management, these other routine proceedings will
not have a material adverse effect on the Company's
financial position or overall trends in results of
operations.
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 13, 2000 announcing 1999 earnings, one-
time charges, and results of a change in the application of
an accounting standard.
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: 02/11/00 /s/ Robbie M. Efird
Robbie M. Efird, Chief Executive Officer
Date: 02/11/00 /s/ Michael T. Spohn
Michael T. Spohn, Chief Financial Officer
EXHIBIT INDEX
Exhibit
(11) Schedule of Computation of Net Income Per Share (Unaudited)
(27) Financial Data Schedule
Three Months Ended
December 31,
Primary 1999 1998
Net income $ (702,488) $ 488,079
Less - preferred stock
dividends (8,949) (15,061)
Net income applicable for common shares $ (711,437) $ 473,018
Weighted average number of common shares
outstanding during the year 7,783,484 7,665,257
Basic income per common share $ (.09) $ .06
Fully Diluted
Net income applicable for common share $ (711,437) $ 473,018
Add - dividends on
convertible preferred stock - 15,061
Net income for fully diluted
net income per share (711,437) $ 488,079
Weighted average number of shares used in
calculating primary income per common
share 7,783,484 7,665,257
Assuming conversion of convertible
preferred stock and stock options
(weighted average) - 310,997
Weighted average number of common
shares outstanding as adjusted 7,783,484 7,976,254
Fully diluted earnings per
common share $ (.09) $ .06
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<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 62,178
<SECURITIES> 0
<RECEIVABLES> 4,211,004
<ALLOWANCES> (450,000)
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<CGS> 1,873,283
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