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, 2000
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 March 31, 2000.
Transitional Small Business Format (check one) Yes __ No X
NETWORK SYSTEMS INTERNATIONAL, INC.
Contents
Part I - Financial Information Page
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet 3
Consolidated Statements of Operations
Three months ended March 31, 2000 and 1999 4
Six months ended March 31, 2000 and 1999 5
Consolidated Statement of Changes in
Stockholders'Equity 6
Consolidated Statements of Cash Flow
Six months ended March 31, 2000 and 1999 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 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
Item 1. Financial Statements
<TABLE>
Network Systems International, Inc. and Subsidiary
Consolidated Balance Sheet
(Unaudited)
<CAPTION>
March 31, 2000
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 22,611
Accounts receivable, trade, net of allowance
of $675,000 2,586,131
Accounts receivable, related parties 128,491
Income tax receivable 455,872
Deferred income taxes 298,708
Other current assets 150,561
Total current assets 3,642,374
Property and equipment, net of accumulated
depreciation and amortization 1,250,971
Intangible assets, net of accumulated amortization
of $633,421 5,536,381
Other 353,405
Total assets $10,783,131
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 784,687
Note payable 307,013
Capital lease obligations 63,497
Other accrued liabilities 437,569
Unearned revenue 1,434,653
Revolving credit agreement 3,235,000
Total current liabilities 6,262,419
Deferred income taxes 323,648
Common stock subject to redemption 1,812,600
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 3,820,932
Common stock subject to redemption (1,812,600)
Retained earnings 368,325
Total stockholders' equity $2,384,464
Total liabilities and stockholders' equity 10,783,131
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 March 31,
2000 1999
<S> <C> <C>
Revenue:
Licensing revenue $ 108,379 $ 647,982
Servicing revenue 2,069,104 1,716,747
Equipment revenue 477,652 1,484,317
Total revenue 2,655,135 3,849,046
Operating expenses:
Cost of licensing 92,797 11,528
Cost of services 1,188,086 649,122
Cost of equipment 428,040 1,431,309
Research and development 365,078 123,528
Sales, general and administrative 1,449,771 640,684
Amortization of excess of cost
over net assets acquired 131,745 -
Total operating expenses 3,655,517 2,856,171
Operating income (loss) (1,000,382) 992,875
Other income (expenses)
Interest, net (75,129) 8,925
Income (loss) before income tax
provision (benefit) (1,075,511) 1,001,800
Income tax provision (benefit) (335,645) 369,434
Net income (loss) $ (739,866) 632,366
Dividends on preferred shares 8,343 14,281
Net income (loss) applicable to common shares (748,209) 618,085
Earnings (loss) per common share,
basic and diluted $ (.10) $ .08
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>
Six Months Ended March 31,
2000 1999
<S> <C> <C>
Revenue:
Licensing revenue $ 120,307 $ 1,358,187
Servicing revenue 3,749,746 3,117,354
Equipment revenue 1,142,736 2,707,192
Total revenue 5,012,789 7,182,733
Operating expenses:
Cost of licensing 184,021 22,963
Cost of services 2,439,774 1,212,271
Cost of equipment 958,411 2,462,927
Research and development 624,223 203,528
Sales, general and administrative 2,552,637 1,501,863
Amortization of excess of cost
over net assets acquired 263,490 -
Gain on sale of fixed asset (2,777) -
Total operating expenses 7,019,779 5,403,552
Operating income (loss) (2,006,990) 1,779,181
Other income (expenses)
Interest, net (164,630) 17,730
Income (loss) before income tax
provision (benefit) (2,171,620) 1,796,911
Income tax provision (benefit) (729,266) 676,466
Net income (loss) $(1,442,354) 1,120,445
Dividends on preferred shares 17,292 29,343
Net income (loss) applicable to
common shares (1,459,646) 1,091,102
Earnings (loss) per common share, $ (.19) .14
basic and diluted
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
Six Months Ended March 31, 2000
(Unaudited)
<CAPTION>
Common Stock Preferred Stock
Number Number Capital in Retained
of of excess of Earnings
shares shares Par Value
$.001 $.001 Common Total
Par Par stock
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
Conver-
sion
of
Pre-
ferred
Stock 20,050 (401) (20) -
20 - - -
Compen-
sation
related
to
grant
of
stock
options - - 171,876 -
- - - 171,876
Compen-
sation
related
to
put
options - - 82,500 -
- - - 82,500
Compen-
sation
related
to
common
stock
issued
to
board
of
direc-
tors 6,250 - 35,150 -
6 - - 35,156
Divi-
dends
on
pre-
ferred
stock - - - (17,292)
- - - (17,292)
Expir-
ation of
put
options
of common
stock
subject
to
redemp-
tion - - - -
- - 83,400 83,400
Net loss
for
the six
months
ended
Mar. 31,
2000 - - - (1,442,354)
- - - (1,442,354)
Balance
Mar. 31,
2000 7,803,154 3,505 $3,820,932 $368,325
$7,803 $4 $(1,812,600) $2,384,464
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>
Six Months Ended March 31,
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,442,354) $1,120,445
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 497,801 92,146
Non-cash compensation expense 284,376 -
Provision for bad debts 406,785 369,620
Gain on sale of property and equipment (2,777) -
Increase in cash surrender
value of life insurance (23,461) (166,302)
Change in operating assets and
liabilities:
Accounts receivable (127,524) (1,719,678)
Other current assets 78,212 (41,399)
Income taxes 376,897 20,966
Accounts payable and other
accrued liabilities (353,615) 463,224
Unearned revenue 821,660 108,518
Deferred income taxes (386,163) 3,000
Total adjustments 1,572,191 (869,905)
Net cash provided by operating activities 129,837 250,540
INVESTING ACTIVITIES
Acquisition of property and equipment (91,338) (329,722)
Proceeds from sale of property and equipment 262,000 -
Net cash provided by (used in)
investing activities 170,662 (329,722)
FINANCING ACTIVITIES
Payment on notes payable and
capital lease obligations (58,884) (19,205)
Payment on revolving credit
agreement (265,000) -
Dividends paid (17,292) (29,343)
Net cash used in financing activities (341,176) (48,548)
Net decrease in cash and cash
equivalents (40,677) (127,730)
Cash and cash equivalents at October 1: 63,288 1,228,894
Cash and cash equivalents at March 31: 22,611 1,101,164
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 138,665 $ 16,616
Taxes $ - 652,500
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
Network Systems International, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
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 91 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.
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. 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.
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.
B. 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 March 31,
2000 1999
Net income (loss) $ (739,866) $ 632,366
Less preferred stock dividends (8,343) (14,281)
Income (loss) applicable to common shares (748,209) 618,085
Preferred stock dividends - 14,281
Income (loss) applicable to
common shares after assumed
conversion of dilutive securities (748,209) 632,366
Weighted average number of common
shares used in basic EPS 7,803,154 7,678,444
Effect of dilutive convertible
preferred stock - 288,310
Weighted average number of common
shares and dilutive potential
common shares used in diluted EPS 7,803,154 7,966,754
Six months ended
March 31,
2000 1999
Net income (loss) $(1,442,354) $1,120,445
Less preferred stock dividends (17,292) (29,343)
Income (loss) applicable to
common shares (1,459,646) 1,091,102
Preferred stock dividends - 29,343
Income (loss) applicable to
common shares after assumed
conversion of dilutive securities (1,459,646) 1,120,445
Weighted average number of common
shares used in basic EPS 7,795,786 7,671,850
Effect of dilutive convertible
preferred stock - 294,904
Weighted average number of common
shares and dilutive potential
common shares used in diluted EPS 7,795,786 7,966,754
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 and
period ended March 31, 2000. In addition, common stock
subject to redemption could be dilutive if the current stock
price is below the put price.
C. Revolving Credit Agreement, Note Payable and Liquidity
At March 31, 2000, the Company was in default under certain material
provisions of the Revolving Credit Agreement including the financial
covenants related to (1) Consolidated Cash Flow to Consolidated Funded
Debt and (2) Consolidated Liabilities to Consolidated Tangible Net Worth.
As a result, the debt under this agreement has been shown as a current
liability in the balance sheet. The Company is currently in discussions
with its bank to amend the terms of the revolving credit agreement to address
the defaults of the financial covenants and material provisions of the
agreement. As of the filing, the bank has not exercised its right under the
default provisions of the agreement. In addition to the discussions with its
current lender, the Company is exploring financing alternatives with other
lenders.
Note payable has been classified as a current liability due
to the cross default provision of the Revolving Credit
Agreement as discussed above.
D. Major Customers
For the three months ended March 31, 2000 and 1999, sales to
one customer amounted to approximately $915,000 and
$2,439,000, respectively. For the six months ended March
31, 2000 and 1999, sales to one customer amounted to
approximately $1,358,000 and $4,284,000, respectively. The
March 31, 2000 and 1999 accounts receivable balances from
these customers were approximately $726,000 and $2,813,000,
respectively.
E. Legal Proceedings
The Company is currently a party in a lawsuit 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 damages are not definite, as the total damages, if the plaintiff
is successful, depend on the stock price and the date on which the resulting
damages, if any, are determined. Management believes the case is without
merit, but, if the Company is found in breach of contract, the damages could
have a material adverse effect on the Company.
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.
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
six-month period ended March 31, 2000 and 1999:
2000 1999
Revenues:
Software licensing $ 120,307 $ 1,358,187
Services 3,749,746 3,117,354
Hardware 1,142,736 2,707,192
Total $ 5,012,789 $ 7,182,733
Operating profit (loss):
Software licensing $(1,326,096) $ 756,230
Services (221,610) 1,003,966
Hardware (198,571) 18,985
Total $(1,746,277) 1,779,181
Reconciliation to net income (loss)
Interest, net $ (164,630) $ 17,730
Amortization of excess cost
over net assets acquired (263,490) -
Gain on sale of fixed assets 2,777 -
Income tax (provision) benefit 729,266 (676,466)
Net income (loss) $(1,442,354) $ 1,120,445
Depreciation and amortization of $497,801 for 2000 and $92,146 for 1999
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
limitation, 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.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Revenue. Net revenue for the three-month period ended March
31, 2000 was $2,655,135, a 31% decrease from the comparable
period in 1999. For the six-month period ended March 31,
2000, revenues were $5,012,789 as compared to $7,182,733 for
the same six month period in fiscal 1999, a 30% decrease.
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 the unique conditions created by the Y2K
phenomenon resulted in increased focus by companies ensuring
that their existing systems were compliant with requirements
related to the Year 2000, which directly resulted in a
postponement in purchasing decisions well into fiscal 2000.
The Company's operations are classified into three principal
segments for reporting purposes. They are: (1) software
licensing revenue, (2) consulting and implementation
services and (3) hardware sales. Revenues from licensing
software amounted to $108,379 for the three-month period
ended March 31, 2000 compared to $647,982 for the same
period in 1999. During the six-month period ended March
31, 2000 and 1999, licensing revenue decreased to $120,307
from $1,358,187, respectively. Though licensing revenue
increased slightly during the Company's second fiscal
quarter 2000 compared to the first fiscal quarter, the
Company licensing is slow to rebound to the prior year
levels due to the post Year 2000 purchasing decisions from
the Company's current prospects. For the three months ended
March 31, service revenues increased from $1,716,747 in 1999
to $2,069,104 in 2000 representing an increase of 21%. For
the six months ended March 31, 2000 and 1999, the increase
was 20% from $3,117,354 to $3,749,746. The increase in
service revenues was directly related to the inclusion of
service revenue from Vercom in fiscal 2000 of $1,005,039. Without
Vercom, service revenues declined approximately $400,000
from prior year levels due to the significant decrease
in software sales resulting in decreased service
implementation revenue. In the hardware segment of the
business, revenues for the three-month period
ended March 31, 2000 totaled $477,652 as compared to
$1,484,317 for the comparable period ended March 31, 1999.
For the six-month period ended March 31, 2000 and 1999,
hardware revenues amounted to $1,142,736 and $2,707,192,
respectively. The decrease is primarily 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. Current fiscal year hardware revenue
is being derived from hardware accessories which complement
the base systems which run the Company's products compared
to entire base system sales in the prior year to new and
existing customers.
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.
For the three-month period ended March 31, 2000 costs associated
to licensing amounted to $92,797 in 2000 compared to $11,528
in 1999. The costs associated with the six-month period
ended March 31, 2000 and 1999 were $184,021 and $22,963,
respectively. 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
March 31, 2000 and $140,000 for the six-month period ended
March 31, 2000. Cost of services increased to $1,188,086 or
57% of service revenues for the three months ended March 31,
2000 compared to $649,122 or 38% in 1999. For the six-month
period ended March 31, 2000 cost of services increased to
$2,439,774 or 65% of service revenue compared with
$1,212,271 and 39% in 1999. The primary increases in cost
of services was the addition of Vercom, which has a lower
percentage of servicing revenue compared to the Company in
the prior year. In addition, the progressive decrease in
cost of services percentage for fiscal 2000 is related to
the Company reducing personnel costs during the first
calendar quarter. Cost of equipment as a percent to revenue
was 90% or $428,040 in 2000 compared to 96% or $1,431,309 in
1999 for the three-month period ended March 31. For the six-
month period ended March 31, 2000 and 1999, cost of
equipment percentage was 84% and 91%. The overriding factor
for the increase in profit margin is the inclusion of
equipment sales at Vercom, which carry a higher profit
margin percentage.
Sales, General and Administrative. Sales, general and
administrative expense for the three-month period ended
March 31, 2000 was $1,449,771 compared to $640,684 for the
same period ended in 1999. The six-month period ended March
31, 2000 and 1999 was $2,552,637 and $1,501,863. The
increase in sales, general and administrative expenses for
the periods was directly related to the inclusion of sales,
general and administrative expenses of Vercom amounting to
$574,284 for the six-month period and $283,596 for the three-
month period subsequent to the acquisition date. In
addition, the Company incurs approximately $142,000 in non-
cash compensation each quarter in fiscal 2000 not charged in
fiscal 1999. After taking the aforementioned items into
consideration, sales, general and administrative expenses
increased by approximately $192,000 for the six-month period
ended March 31, 2000 as compared to the same period in 1999
and $383,000 for the three-month period ended March 31, 2000
as compared to 1999. The increase is attributable to the
addition of personnel on the sales and marketing team as
well as the Company's decision to increase its allowance for doubtful
accounts higher than the prior year. The increase in this
allowance was precipitated by the bankruptcy filing of one
of the Company's larger customers.
Research and Development Costs. Research and development
costs amounted to $365,078 for the three-month period ended
March 31, 2000 compared to $123,528 in 1999 or a $241,550
increase. For the six months ended March 31, 2000 and
1999, research and development cost increased $420,695 to
$624,223 from $203,528, respectively. The primary increase
is due to the inclusion of research and development expenses
incurred by Vercom for the development of the Company's
Powerbuilder products. In March of the current quarter
2000, the Company elected to defer the development of these
products until a later date. Management expects that future quarters
research and development expenses will be significantly reduced from the
current levels.
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 March 31, 2000 and 1999 was $(335,645) and
$369,434, respectively. For the six-month period ended
March 31, 2000 and 1999 the income tax provision (benefit)
was $(729,266) and $676,466, respectively. The effective
tax rate for the three and six month periods ended March
31,were (31%) and (34%) in 2000, respectively, and 37% and
38% in 1999, respectively.
Liquidity and Capital Resources. Cash and Cash Equivalents
were $22,611, representing a decrease of $1,078,553 from
the same period ended March 31, 1999. The decrease is
primarily due to the acquisition of Vercom in which the
Company utilized cash from operations and its revolving credit
agreement with a bank. Currently, the Company is in
default under certain of the material provisions of the revolving
credit agreement, including the financial covenants related to
(1) Consolidated Cash Flow to Consolidated Funded Debt, (2)Consolidated
Liabilities to Consolidated Tangible Net Worth. Until the Company
can renegotiate its current revolving credit agreement or secure
refinancing with another lender, the Company's principle sources of
liquidity are funds generated by operations. These matters, along
with the slowdown in software license sales, raise doubt about
the ability of the Company to continue as a going concern.
Quarterly Results. Net income (loss) for the three-month
period ended March 31, 2000 and 1999 was $(739,866) and
$632,366, respectively. For the six months ended March 31,
2000 and 1999, net income (loss) was $(1,442,354) and
1,120,445, respectively. On a per share basis, earnings
(loss) were $(.10) and $.08 for the three-months ended March
31, 2000 and 1999, respectively. For the six months ended
March 31, 2000 and 1999 earnings (loss) per share amounted
to $(.19) and .14, respectively. The decrease in earnings
was directly impacted by a reduction in software license and
hardware revenues and increases in 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. Due to the Company's limited use of derivative financial instruments,
adoption of Statement 133 is not expected to have a significant
effect on the Company's consolidated results of operations , financial
position, or cash flows.
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.
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. Prior to December 31, 1999, the Company
took what it believes as the appropriate steps to prevent
Y2K related compliance issues with its proprietary software
and internal software and systems. As of March 31, 2000,
the Company is not aware of any Y2K related occurrences with
its proprietary software or internal software and systems
that have or may have caused some unknown or unanticipated
event related to Y2K compliance 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, it appears that the ERP software industry segment
has experience a slowdown in overall business activities as
customer demands for products and services have 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 lawsuit 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 damages are 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 believes the case is
without merit, but, if the Company is found in breach of contract,
the damages could have a material adverse effect on the Company.
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: 05/15/00 /s/ Robbie M. Efird
Robbie M. Efird, Chief Executive Officer
Date: 05/15/00 /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
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> Mar-31-2000
<CASH> 22,611
<SECURITIES> 0
<RECEIVABLES> 3,261,131
<ALLOWANCES> (675,000)
<INVENTORY> 0
<CURRENT-ASSETS> 3,642,374
<PP&E> 2,248,797
<DEPRECIATION> (997,826)
<TOTAL-ASSETS> 10,783,131
<CURRENT-LIABILITIES> 6,262,419
<BONDS> 0
0
4
<COMMON> 7,803
<OTHER-SE> 2,376,657
<TOTAL-LIABILITY-AND-EQUITY> 10,783,131
<SALES> 5,012,789
<TOTAL-REVENUES> 5,012,789
<CGS> 3,582,206
<TOTAL-COSTS> 7,019,779
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 164,630
<INCOME-PRETAX> (2,171,620)
<INCOME-TAX> (729,266)
<INCOME-CONTINUING> (1,442,354)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,442,354)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
Three Months Ended March 31,
Primary 2000 1999
Net income (loss) $ (739,866) $ 632,366
Less - preferred stock
dividends (8,343) (14,281)
Net income (loss) applicable
for common shares $ (748,209) $ 618,085
Weighted average number of
common shares outstanding
during the year 7,803,154 7,678,444
Basic income (loss) per
common share $ (.10) $ .08
Fully Diluted
Net income (loss) applicable
for common share $(748,209) $ 618,085
Add - dividends on
convertible preferred stock - 14,281
Net income (loss) for fully
diluted net income per share $(748,209) $ 632,366
Weighted average number of
shares used in calculating
primary income (loss) per
common share 7,803,154 7,678,444
Assuming conversion of
convertible preferred stock
and stock options (weighted
average) - 288,310
Weighted average number of
common shares outstanding
as adjusted 7,803,154 7,966,754
Fully diluted earnings (loss)
per common share $ (.10) $ .08
Six Months Ended March 31,
Primary 2000 1999
Net income (loss) $(1,442,354) $1,120,445
Less - preferred stock
dividends (17,292) (29,343)
Net income (loss) applicable
for common shares $(1,459,646) $ 1,091,102
Weighted average number of
common shares outstanding
during the year 7,795,786 7,671,850
Basic income (loss) per
common share $ (.19) $ .14
Fully Diluted
Net income (loss) applicable
for common share $ (1,459,646) $ 1,091,102
Add - dividends on
convertible preferred stock - 29,343
Net income (loss) for fully
diluted net income per share $(1,459,646) $ 1,120,445
Weighted average number of
shares used in calculating
primary income (loss) per
common share 7,795,786 7,671,850
Assuming conversion of
convertible preferred stock
and stock options (weighted
average) - 294,904
Weighted average number of
common shares outstanding
as adjusted 7,795,786 7,966,754
Fully diluted earnings (loss)
per common share $ (.19) $ .14
