UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15-(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . .to. . . . . ..
Commission File Number 0-22991 CUSIP NUMBER 64121L 10 3
NETWORK SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in the charter)
Nevada 87-0460247
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
200 North Elm Street, Greensboro, North Carolina, 27401
(Address of principal executive offices, Including zip code)
Registrant's telephone number, including area code: 336) 271-8400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
None None
Securities registered pursuant to Common Stock, $.001 par value
Section 12(g) of the Act: (Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No __
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained in
this form, and no disclosure will contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the year ended September 30, 1999
were $14,249,657.
As of December 17, 1999 there were 7,789,404 outstanding
shares of common stock, par value $.001 per share. The
aggregate market value of the common stock of the registrant
held by non-affiliates of the registrant on December 17,
1999 based on the average bid and ask price on such date was
$ 9,439,362.
DOCUMENTS INCORPORATED BY REFERENCE: A more complete
statement of the information required by Part III of Form 10-
KSB is incorporated herein by reference to the registrant's
definitive Proxy Statement relating to its 2000 Annual
Meeting of Shareholders which will be filed with the
Commission within 120 days after the end of the registrant's
fiscal year.
Transitional Small Business Disclosure Format: Yes __ No x
TABLE OF CONTENTS
Part I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of
Security Matters 9
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters 10
Item 6. Management's Discussion and Analysis 11
Item 7. Financial Statements 16
Part III
Item 9. Directors, Executive Officers,
Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act. 35
Item 10. Executive Compensation 35
Item 11. Security Ownership of Certain
Beneficial Owners and Management 35
Item 12. Certain Relationships and Related
Transactions 35
Item 13. Exhibits and Reports on Form 8-K 36
Part I
Item 1. Description of Business
Originally incorporated in 1985 as Network Information
Services, Inc., Network Systems International, Inc. (the
"Company"), was the surviving corporation of a reverse
merger completed in April 1996. The Company became a
publicly traded entity in connection with the re-
organization. In July 1998, the Company was approved for
listing on the NASDAQ SmallCap Exchange under the symbol
NESI.
During the first few years of its development, the Company
obtained contract programming orders from various
manufacturing entities throughout the State of North
Carolina. Over the succeeding ten-year period, the Company
developed proprietary software and expanded operations with
the introduction of product enhancements designed to keep
pace with changing environments in manufacturing processes.
The Company is a developer and marketer of Enterprise
Resource Planning ("ERP") and Supply Chain Management
software solutions. The Company created the net collection(tm),
a suite of enterprise-wide software products for textile,
home furnishings and apparel manufacturers and began
marketing the product in 1995. The net collection(tm)
emphasizes sales order processing, ERP, supply chain
management, manufacturing execution and distribution
controls. These products are marketed through an in-house
sales force concentrating on Companies in its target market
throughout the United States. In addition to the marketing
of its proprietary software, the Company also delivers
consulting and implementation from its services group and
hardware sales support department. The services group
provides customization, implementation and training.
Hardware revenues are principally generated from the sale of
IBM and Teklogix products.
In June 1999, the Company completed the acquisition of all
of the issued and outstanding capital stock of Vercom
Software, Inc. ("Vercom"), a company based in Dallas, Texas.
Vercom offers a specialized software solution for the
complex requirements of the printing industry. Originally
formed in 1981, Vercom completed development of their
Printing Industry Management and Control System ("PRIMAC")
in 1988. The PRIMAC System consists of the base PRIMAC
module, which controls systems, sets system-wide flags and
options, sets levels of integration and handles security
definitions, and approximately 20 other modules. In
addition to many customized features, PRIMAC's modules
provide inventory control, job costing, job estimating,
production scheduling, order processing, and shop floor data
collection for single and multi-plant printers.
The Company's strategy focuses on understanding the
operating environment of the firms in its target markets.
The Company not only provides industry specific software
designed to meet its customers' unique needs, but its
service group enables the customer to have a smoother, more
efficient implementation. The Company's knowledge of its
customers' businesses and many of their competitors'
businesses should provide the Company with an advantage over
many of its competitors who provide generalized software to
all manufacturing industries.
The Company's operations utilize a staff of approximately
105 full time associates headquartered in Greensboro, North
Carolina with additional offices in Dallas, Texas; Tampa,
Florida; and Duncan, South Carolina.
Overview of Software Products
Net Collection(tm)
The net collection(tm) includes proprietary software for sales
forecasting, budgeting, sales order processing, planning,
purchasing, manufacturing and distribution. The Company
strives to continuously develop its software products and to
enhance its existing products as necessary for distribution
to the customer base. Each product within the net
collection(tm) may be implemented as a component in an
integrated enterprise-wide solution or independently to
satisfy a specific business function. The application
infrastructure supports multiple corporations, divisions,
facilities, and activity centers with the ability to
independently configure decision logic based on unique entry
requirements.
The software suite may run on a single centralized IBM
AS/400 server or have mission critical functions networked
on distributed AS/400's. The database is DB2/400 which is
an open database architecture enabling data porting to and
from open database complaint environments. The user
interface options include graphical Microsoft Windows PC
based or traditional text based screens. The product has
multiple plant based applications where the processing is
off-loaded to a PC with data originating on the IBM AS/400,
exported to the PC, and then distributed back to the IBM
AS/400 to be aggregated within the centralized database.
The product also offers portable data collection
capabilities utilizing radio-frequency devices updating the
relational database real-time as bar codes are scanned.
This technology is utilized in warehousing and plant floor
application where efficiency and real time information
gathering is imperative.
The net collection(tm) is an enterprise-wide suite of software
products that includes fourteen independent yet integrated
products segmented into five distinct functional
categories. Following are the categories and the specific
products.
Sales Order Processing and Demand Management
net Sales Forecaster(tm) Matrix forecasts by customer,
salesperson, and product with balance-forward quantities
demonstrating period-to-date performance.
net Customer Link(tm) Managing all sales order processing
functions with immediate customer service response capability.
Resource Planning and Cost Analysis
net Resource Manager(tm) The foundation product uniquely
defining materials and processes and their relationships.
net Cost Construction(tm) Resource standard costs, built
up activity costs, budget preparation, and variance
analysis.
net ProPlan(tm) Time phased resource plans for materials
and processes with capacity constraint smoothing
capabilities.
net Messenger(tm) User-defined triggers and alerts for
immediate distribution of system detected business warnings
or messages.
Supply Chain Management and Manufacturing Execution
net PO+(tm) Enterprise-wide management of all procurement
activities including receipts matching and vendor invoice
processing.
net Scheduler(tm) Control the manufacturing environment
with complete raw materials management, machine finite
scheduling, and percent return yields.
net Event Tracker(tm) Dynamic communication with the
manufacturing floor defining operations procedures expected
while warehousing actual performance data for immediate
review and trend analysis.
net Earnings Monitor(tm) Time and attendance tracking as
well as calculating associate incentive-based gross payroll
earnings.
net Maintenance Controller(tm) Schedule preventive
machine maintenance and track historical activity.
Distribution Center Controls
net Inventory Processor(tm) Manages unit level stock
inventories as well as perpetual summary inventories,
dynamically updated with inventory impact triggers.
net Distribution Handler(tm) Manages all distribution and
warehouse functions from materials receiving, locating,
cycle counting, pick plan creation, load verification,
finalize shipment with appropriate paperwork, advanced
shipment notice creation with immediate interface to
invoicing.
Executive Information Analysis and Reporting
net Exec(tm) Accounting transaction management and
executive information analysis emphasizing production and
sales trends.
PRIMAC SYSTEM
PRIMAC is a real-time, on-line, multi-user system, providing
concurrent access to over 1,000 simultaneous users on
multiple hardware platforms. The system is typically run in
one of two environments: local area network connected to a
UNIX server or a client-server workstation connected to a
UNIX or NT server. As a nested relational data base, data
is accessible by all users as deemed necessary. PRIMAC
modules may be licensed, installed and automatically
integrated. Due to the variable length storage algorithms
present in the relational database, it is common for the
PRIMAC system to require as little as half the disk storage
and memory of more traditional data base and flat file
systems.
The PRIMAC system runs in a full client server environment
and operates on a nested relational database. Management
hopes that PRIMAC will provide full system integration and
the flexibility and capability to meet future system
requirements. PRIMAC is available on a variety of UNIX or
NT servers and is fully compliant with Open Systems concepts
that include full structured query language and open
database connectivity compatibility. The Open Systems
compliance and compatibility should allow Vercom's clients
the opportunity to devote internal staff to develop in-house
reporting functions, add supplemental applications, and
serve as trainers and support staff.
The PRIMAC system consists of the base PRIMAC module that
controls systems, sets system-wide flags and options, sets
levels of integration and handles security definitions.
There are 19 additional modules that may be individually
selected by the client to customize PRIMAC to their specific
needs. The following is an overview of PRIMAC's fully-
integrated modules.
PRIMAC Explorer (EXP) - An omnibus inquiry module that
spans all of PRIMAC is the first PowerBuilder module using
SQL and ODBC to retrieve data from PRIMAC files. Windows
compliant, it provides intuitive, point-and-click and drill-
down inquiries into all PRIMAC modules.
Graphical User Interface (SB client) - This PC-based
software operates in PC's running Windows and provides a
Windows "look and feel" to all PRIMAC screens, with a great
deal of mouse control and "windowing" to allow multiple
views into PRIMAC to be open at the same time.
Executive Analyst (EAS) - This PowerBuilder 4GL based
module runs in native Windows. It provides graphical views
summarizing PRIMAC data and is designed for executives and
variance views, financial views, vendor performance, and
inventory management.
Job Estimating System (JES) - The JES is a complete
sheet and web estimating system. It also provides the
routing and time plan to the schedule, material requirements
and job details to the Job Information System/Job Jacket.
The system also handles web, multi-web, and sheetfed
presses, plus all preparation, bindery and shipping areas.
It is user definable to fit unique operations.
Quickplan for Estimating (QKPLAN) - Computer generated
estimating front end to develop detailed estimates quickly
and allows less experienced estimators to develop routine
estimates following rules developed by senior estimators.
PRIMAC users can define one or more scripts (input screens)
to capture job specifications for different product lines.
Job Costing System (JCS) - Provides job entry, job
costing, standards files, production reporting, work in
process tracking, efficiency reporting, spoilage reporting,
job billing, job shipping, estimate to actual, and estimate
to standard reporting.
Shop Floor Data Collection (SFDC) - Time, labor and
material cost transaction collection from plant floor via
barcode devices. Feeds data real-time to JCS. Direct
machine interface allow system to collect production counts
directly from machine counters- presses, folders, collators,
saddle switchers, perfect binders, etc.
Job Information System (JIS) - Adds user definable job
jacket/ticket/docket, full cloning ability, version
tracking, and on-line view of ticket. Pulls data from
estimate, job and optionally finished goods item file.
Production Scheduling/Job Tracking - This is a newly
developed PowerBuilder module which utilizes Windows and
Graphical user Interfaces. Management anticipates that the
module will allow the scheduling and tracking of jobs with
the capability to evaluate the accessibility of materials,
timeliness of critical events and job flow through either
single or multiple plants. The user can determine the
status of a job (late, waiting, early), the jobs position(s)
in the plant, and the projected completion time. Time is
scalable (days, shift, hours, minutes) throughout the
system.
Shop Floor Information System - Another new
PowerBuilder module, this system allows for touch-screen
technology on the production floor providing shop floor data
collection, direct machine interface, and job status/job
ticket display and utilization at the production floor
level.
Printing Equipment Real Time Transactions (PERT) -
Uses capability of SFDC to collect real-time production data
from presses, folders, stitchers, binders, scales, etc., and
feeds them to JCS and PSS via SFDC.
Distribution Reporting System (DRS) - For complex
version control, distribution lists, skid and carton
labeling. Developed for the free standing insert and direct
mail markets.
Inventory Control System (ICS) - Inventory management
system for stock paper, ink, plates, film, and maintenance
parts. Include item file and finished goods inventory
management. Includes Barcode Inventory System (BIS), which
uses Intermec laser guns and bar coded roll and skid numbers
to track paper and other raw materials throughout the plant.
Purchase Order System (OPS) - Purchasing system for
stock items, and outside job or service specific purchase
orders.
General Ledger System (GLS) - Includes Financial
Reporting System (FRS).
Accounts Receivable System (ARS) -Account management,
aging, cash receipts, and credit control.
Accounts Payable System (APS) - Vouchers, paying aging,
and disbursement approval.
Fixed Asset System (FAS) - Asset management including
depreciation.
Extended Payroll System (EPS) - Handles Union payroll
situations and includes time and attendance reporting. Can
provide time files to external payroll systems.
Sales Analysis Systems (SAS) - Profitability and value-
added analysis for both jobs and orders. Reports actual
sales versus projections/forecasts by customer, sales
person, and product line.
Product Development
The software industry as a whole continues to undergo rapid
technological change requiring a continuous high level of
enhancement of existing products and development of new
products. Since the Company's products are developed
internally, the Company has committed to the creation of new
products and intends to continue the enhancement of existing
products.
The Company's future financial performance will depend, in
part, on the successful development, completion, and
introduction of new software products, and of enhanced
versions of existing products, and customer acceptance of
those products. In the future, there is no assurance that
the Company will not encounter difficulties that could delay
or prevent the successful development of, or marketing of,
new products and/or enhancements of existing products.
There also can be no assurance that such products will yield
positive results or that such results can be obtained on a
timely basis without the expenditure of substantial funds.
During the years ended September 30, 1999 and 1998, the
Company incurred $587,652 and $452,082,
respectively, on product development and enhancement
activities, representing approximately 4% of net revenues in
each of these periods.
Product Protection
The Company regards its software as proprietary and attempts
to protect it with trade secret laws, internal nondisclosure
safeguards, as well as restrictions on disclosure and
transferability that are incorporated into its software
license agreements. The Company licenses its software
products to customers rather than transferring title.
Despite these restrictions, it may be possible for
competitors or users to copy aspects of the Company's
products or to obtain information which the Company regards
as trade secrets. Computer software generally can be
patented only with difficulty, and existing copyright laws
afford only limited practical protection. Policing
unauthorized use of such a broadly disseminated product as
computer software is difficult, and software piracy can be
expected to be a persistent problem for the software
industry. However, because of the rapid pace of
technological change in its industry, such protections are
less significant than factors such as knowledge, ability,
and experience of the Company's employees, frequent product
enhancement, and the timeliness and quality of Company
support services.
Professional Consulting Services
The Company provides implementation assistance, product
support, and technical software development. The Company
desires that the implementation project managers should be
experienced in our software products as well as in the
respective manufacturing industry. The Company wants
project managers to have work experience managing multiple
plants, and highly sophisticated projects. The Company's
product support associates are responsible for quality
control, product documentation, help desk management, and
product release notification.
The Company's technical software development teams are
responsible for development of the net collection(tm) and
PRIMAC as well as any special customer driven software
projects. The Company trains its technical professionals to
be experienced in IBM technologies including the AS/400 and
RS/6000 operating systems, RPG programming language, and the
DB2/400 open compliant environments. The technical staff is
also experienced in Teklogix and Intermec radio-frequency
technologies used in business applications where portable
data collection is a requirement. The Company also has
technical staff experienced in personal computer
technologies including Microsoft NT, Microsoft Windows,
Visual Basic, Powerbuilder, Microsoft SQL, and various
networking technologies.
Competition
The software market is highly competitive and has been
subject to rapid change, which is expected to continue. The
Company's competitors include many independent software
vendors that have financial, marketing, and technological
resources far in excess of those of the Company. The
Company's competitors include Oracle, SAP, People Soft, and
JOMAR.
Major Customers
For the years ended September 30, sales to one customer were
52% of revenue or approximately $7,422,000 in 1999 and two
customers were 18% and 23% of revenue or approximately
$5,255,000 in 1998. The September 30, 1999 and 1998
accounts receivable balances included approximately $476,000
and $1,116,000 due from these customers. The Company's
customers are concentrated in the textile and printing
industries located in the United States.
Item 2. Description of Property
The principal location of the Company's property is located
in Greensboro, North Carolina. The Company owns a 26,000
square foot facility from which principal operations are
conducted. The property carries a mortgage of $324,000,
which should be paid in full by January 2009. Since its
purchase in early 1995, the Company has developed the
property and modernized both exterior and interior portions
of the facility. The condition of the property is
considered excellent. The facility is considered both
suitable and adequate for the Company.
Additionally, the Company owns a facility in Florida
through which various marketing activities are conducted.
This facility is considered adequate for the Company's
current and future needs.
The Company leases offices in Dallas, Texas from which the
majority of the Company's subsidiary Vercom Software, Inc.
operates. Forty associates utilize this facility. The
Company also leases offices in Duncan, South Carolina. The
Duncan facility is utilized by eight associates of the
Company.
Item 3. Legal Proceedings
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.
On June 17, 1999, the Company agreed to pay a former
customer $500,000 for full settlement of a dispute over fees
paid for licensing and servicing. The settlement payments
are to be paid out over a period of nine months with a final
payment due March 31, 2000. The Company has recorded the
entire settlement in the current year to sales, general and
administrative expense.
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.
The estimate of the potential impact on the Company's
financial position or overall results of operations for the
above legal proceedings could change in the future.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders
during the fourth quarter ended September 30, 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters
The Company's common stock is traded on the NASDAQ Small Cap
Market under the symbol NESI. The stock initially traded
on the Over-the -Counter (BB) market until July 10, 1998
when the Company was officially approved for listing on
NASDAQ. Stock activity, prior to July 10, 1998 is reflected
below as inter-dealer prices, without retail mark-up, mark-
down or commission and may not represent actual
transactions:
First Quarter 1999 Second Quarter 1999
High Low High Low
$ 6.50 $ 2.38 $ 6.25 $ 5.00
Third Quarter 1999 Fourth Quarter 1999
High Low High Low
$ 5.50 $ 3.50 $ 5.63 $ 3.56
First Quarter 1998 Second Quarter 1998
High (Ask) Low (Ask) High (Ask) Low (Ask)
$ 10.50 $ 6.25 $ 9.00 $ 5.25
High (Bid) Low (Bid) High (Bid) Low (Bid)
$ 9.00 $ 4.75 $ 8.625 $ 5.00
Third Quarter 1998 Fourth Quarter(1) 1998
High (Ask) Low (Ask) High Low
$ 8.50 $ 5.125 $ 6.75 $ 3.00
High (Bid) Low (Bid)
$ 8.25 $ 4.75
(1) The Company stock was approved for listing on the
NASDAQ Small Cap on July 10, 1998; therefore, NASDAQ High
and Low sales prices are used for fourth quarter reporting
in 1998
As of December 17, 1999, there were approximately 1,553
holders of record and beneficial holders of common stock of
the Company. The Company has never paid cash dividends on
its common stock and anticipates it will continue to retain
earnings for use in the growth and operations of its
business.
Item 6. Management's Discussion and Analysis or Plan of
Operation
FORWARD LOOKING INFORMATION
THIS MD&A CONTAINS FORWARD LOOKING INFORMATION. EXCEPT FOR
HISTORICAL DATA, THE MATTERS DISCUSSED IN THIS FORM 10-KSB
CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND
UNCERTAINTIES.
The Company would caution readers that in addition to the
important factors described elsewhere in this Form 10-KSB,
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 fiscal year 2000, and
beyond, could differ materially from those expressed in any
forward looking statements made by, or on behalf of, the
Company.
RESULTS OF OPERATIONS
Results of the Company's newly acquired subsidiary, Vercom
Software, Inc. ("Vercom"), 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. The Company's annual revenues are stated for the
twelve-month period from October 1, 1998 through September
30, 1999. Net revenue for the period was $14,249,657, an
11.3% increase over the comparable period in 1998. The
increase is a result of increased service revenues and the
inclusion of revenues from Vercom subsequent to the
Company's acquisition of Vercom. Software license revenues
decreased between years as a result in a slowdown in demand
for software products like those offered by the Company.
Management believes this slowdown is a result of increased
focus by companies in ensuring that their existing systems
are 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 $1,760,528 for the twelve month period ended
September 30, 1999 compared to $2,421,963 for the same
period in 1998. This represents a decrease of 27.3%, which
management feels is due in large part to customers concerns
related to the Year 2000 problem as described above.
Service revenues increased from $4,818,972 in 1998 to
$6,834,016 in 1999 representing an increase of 41.8%.
The increase in service revenues was
primarily a result of a rise in the demand for consulting
and product enhancement services on previously implemented
software and an increase in the level of support provided to
customers to assist in the timely implementation of the
Company's products. In the hardware segment of the
business, revenues for the period ended September 30, 1999
totaled $5,655,113 as compared to $5,563,986 for the
comparable period ended September 30, 1999. While hardware
revenues remained relatively flat between years, a decrease
occurred in the fourth quarter of 1999 of 68.5% compared to
the same period in 1998. Management feels that reduction in
the fourth quarter of 1999 is related to the reduction in
software licenses to new customers and the postponement of
purchases related to businesses focusing 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 $159,963 or 9.1%
of licensing revenues in 1999 compared to $47,390 or 2.0% of
revenues in 1998. The increase is
attributable to the amortization of purchased software in
1999 from the acquisition of Vercom. Cost of services
increased to $3,676,731 or 53.8% of service revenues in 1999
from $2,374,486 or 49.3%. The primary
increase in cost of services is the addition of Vercom,
which has a lower margin percentage per servicing revenue
compared to the Company in the prior year. Cost of
equipment as a percent to revenue was 87.6% or $4,951,813 in
1999 compared to 93.3% or $5,192,368 in 1998.
The overriding factor for the decrease is the mix
of equipment sales at Vercom, which carry a higher margin
percentage.
Sales, General and Administrative. Sales, general and
administrative expense for the year ended September 30, 1999
was $4,006,796 or 28.1% of revenues compared to $1,641,253
or 12.8% of revenues for the year ended September 30, 1998.
The increase in sales, general and administrative expenses
during 1999 include one-time charges of $500,000 for a
settlement of a dispute with a former customer and $80,000
for other miscellaneous expenses not incurred in 1998. The
increase in 1999 expenditures is also related to the
inclusion of sales, general and administrative expenses of
Vercom amounting to $659,472 subsequent to the acquisition
date. In addition the company incurred approximately
$275,000 in non-cash compensation. Additionally,
the rise in 1999 expenses is due to the addition
of personnel in management, sales and marketing,
and additional sales and marketing expenditures
in anticipation of future growth of the Company.
Research and Development Costs. Research and development
costs amounted to $887,652 in fiscal year ended 1999, as
compared to $452,082 in fiscal 1998. During the third
quarter, the Company wrote off $300,000 of purchased in-
process research and development in connection with the
acquisition of Vercom because the development of the
technology associated had not yet reached technological
feasibility at the time of acquisition. The remaining
portion of the increase in 1999 is largely due to the
inclusion of these expenses incurred by Vercom subsequent to
the acquisition.
Provisions for Income Taxes. Income taxes are provided for
transactions reported in the financial statements and
consist of taxes currently due, plus deferred income taxes.
The income tax provision for the years ended September 30,
1999 and 1998 was $73,549 and $1,067,800, respectively.
The effective tax rate for the years ended September 30,
1999 and 1998 was 17.7% and 34.0%, respectively. The
primary factors for the decrease in the 1999 effective tax
rate are associated with the Company's research and
development credit compared to the federal statutory rate.
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.
Liquidity and Capital Resources. Cash and Cash Equivalents
were $63,288, representing a decrease of $1,165,606 for the
year ended September 30, 1999. 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 subject to 80% of eligible accounts
receivable plus an additional dollar amount as defined:
$4.0 million through March 30, 2000; $3.5 million through
June 30, 2000; and $3.0 million through June 30, 2001.
Revolving Credit Agreement. On June 16, 1999,
the Company, in conjunction with the acquisition
of Vercom Software, Inc., entered into a $4,500,000 revolving credit
agreement with a bank which provided funds to finance the acquisition
(see Note 3) and working capital needs. As of September 30, 1999, the
Company had $3,500,000 outstanding on this revolving credit agreement.
The credit agreement provides for interest at the monthly LIBOR Index
plus 2.50% to 3.50% based on the Company's Consolidated Cash Flow/
Consolidated Funded Debt ratio. The weighted average interest rate for the
year ended September 30, 1999 was 8.24%. The revolver has the following
declining: $4.0 million through March 31, 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 the
eligible accounts receivable plus the following dollar amounts for the
following effective periods: January 1 - January 31, 2000, $800,000;
February 1 - 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 is collateralized by
substantially all of the assets of the Company. The term of this agreement is
for two years ending June 30, 2001 at which time all unpaid principal and
interest is due. 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
beginning March 31, 2000. The Company
and the bank revised the revolving credit agreement during
1999 in order to set realistic financial covenants not
anticipated at inception. The Company was in compliance
with the applicable covenant at September 30, 1999, after
the aforementioned revision. 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.
Annual Results. Net income for the year ended September 30,
1999 and 1998 was $286,295 and $2,069,077, respectively. On
a per share basis, earnings were $.03 and $.27 for the years
ended September 30, 1999 and 1998, respectively. The
decrease in earnings is partially related to the one-time
charges the Company incurred during the third quarter as
described in the sales, general and administrative and
research and development notes above.
Without the one-time charges, the Company's earnings per
share would have been (tax adjusted) $ .11 for the year
ended September 30, 1999. Earnings were also negatively impacted
by a reduction in software license and hardware revenues in the fourth
quarter as discussed above in Sales, General and Administrative.
Prior Year Restatement
Pursuant to FASB Statement No. 86 Computer Software to be
Sold, Leased, or Otherwise Marketed ("FASB No. 86") cost
incurred internally in creating a computer software product
shall be charged to expense when incurred as research and
development until technological feasibility has been
established for the product. Technological feasibility is
established upon completion of a detailed program design or,
in its absence, completion of a working model. Thereafter,
all software production costs shall be capitalized and
subsequently reported at the lower of unamortized costs or
net realizable value.
Prior to 1999, the Company capitalized certain cost incurred
internally in creating computer software products. The
Company's new auditors, KPMG L.L.P., have advised the Company that
it is appropriate to expense its in-house development
costs based upon the documentation required by FASB No. 86
to support the achievement of technological feasibility for
its computer software products under either of the two
aforementioned methods and the Company concurred. As a result,
software development
costs and related deferred income tax liabilities have been
reduced by $1,423,794 and $555,000, respectively, as of
September 30, 1998, net income has been increased by
$101,999, net of income taxes of $66,000, for the year ended
September 30, 1998 and retained earnings has been reduced by
$ 970,793, as of September 30, 1997.
The Financial Statements included in Item 7 of this Form
10KSB, reflect this change in accounting for the year ended
September 30, 1998. The Company's Form 8-K, filed on
January 13, 2000, which is incorporated by reference herein,
includes information relating to the effect of this change
in accounting for the fiscal quarters ended December 31,
1998, March 31, 1999 and June 30, 1999.
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 subsequently 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 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 has 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 when the new century begins. Where
appropriate, contingency plans and alternative suppliers are
investigated. Although the Company is presently not aware
of any material exposures or contingencies related to the
Y2K compliance efforts of its significant vendors or
business partners, if a significant vendor or business
partner should be 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 a majority of the Y2K compliance expenditures. The
Y2K expenditures related to the Company's efforts to analyze
the Company's proprietary software can not be determined as the
Company does not track the internal costs incurred for this
Y2K project, and such costs are principally the related
payroll costs for its developers and internal consultants.
Total Y2K expenditures for internal information technology
systems in 1999 were approximately $50,000 for an upgrade of
the Company's primary AS400 and ancillary software products.
This amount excludes funds invested in the purchase of
personal computers and the implementation of other computer
system upgrades. 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.
Item 7. Financial Statements.
INDEX
Page #
Independent auditors' report 15
Consolidated balance sheet 16
Consolidated statements of income 17
Consolidated statement of changes in stockholders' equity 18
Consolidated statements of cash flow 19
Notes to consolidated financial statements 20
Independent Auditors' Report
The Board of Directors
Network Systems International, Inc.
We have audited the accompanying consolidated balance sheet
of Network Systems International, Inc. and Subsidiary as of
September 30, 1999 and the related consolidated statements
of income, changes in stockholders' equity and cash flows
for the year then ended. These consolidated financial
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Network Systems International,
Inc. and Subsidiary as of September 30, 1999, and the
results of their operations and their cash flows for the
year then ended in conformity with generally accepted
accounting principles.
KPMG LLP
Greensboro, North Carolina
/s/ KPMG LLP
January 7, 2000
<TABLE>
Network Systems International, Inc. and Subsidiary
Consolidated Balance Sheets
<CAPTION>
1998
Unaudited
September 30, 1999 (Note 15)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 63,288 $ 1,228,894
Accounts receivable, trade, net of
allowance of $450,000 and $500,000 2,865,392 3,786,773
Accounts receivable, related parties 125,478 112,804
Income tax receivable 832,769 19,625
Deferred income taxes 214,631 123,767
Other current assets 232,642 86,411
Total current assets 4,334,200 5,358,274
Property and equipment, net of accumulated
depreciation and amortization 1,513,167 1,195,876
Intangible assets, net of accumulated
amortization of $229,931 5,939,872 -
Other 329,087 246,160
Total other assets 6,268,959 246,160
Total assets $12,116,326 $ 6,800,310
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 1,160,846 $ 1,004,583
Notes payable, current 35,000 31,000
Capital lease obligations, current 68,000 83,000
Other accrued liabilities 420,181 25,357
Unearned revenue 612,993 330,478
Revolving credit agreement, current 500,000 -
Total current liabilities 2,797,020 1,474,418
Long Term Liabilities:
Revolving credit agreement, net of
current maturities 3,000,000 -
Deferred income taxes 625,734 35,767
Notes payable, net of current
maturities 289,391 323,649
Capital lease obligations, net of
current maturities 37,003 76,157
Total long term liabilities 3,952,128 435,573
Common stock subject to redemption 1,896,000 -
Stockholders' Equity:
Preferred Stock; $.001 par value;
authorized 12,500 shares; issued
and outstanding 3,906 and 6,100,
liquidation preference of
$390,600 and $610,000 4 6
Common Stock; $.001 par value;
authorized 100,000,000
shares; issued and outstanding
7,776,854 and 7,661,754 7,777 7,662
Capital in excess of par value 3,531,426 3,292,162
Less common stock subject to redemption (1,896,000) -
Retained earnings 1,827,971 1,590,489
Total stockholders' equity 3,471,178 4,890,319
Total liabilities and stockholders' equity $12,116,326 $6,800,310
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiary
Consolidated Statements of Income
<CAPTION>
Years ended September 30,
1998
Unaudited
1999 (Note 15)
<S> <C> <C>
Revenue:
Licensing revenue $ 1,760,528 $ 2,421,963
Servicing revenue 6,834,016 4,818,972
Equipment revenue 5,655,113 5,563,986
Total revenue 14,249,657 12,804,921
Operating expenses:
Cost of licensing 159,963 47,390
Cost of services 3,676,731 2,374,488
Cost of equipment 4,951,813 5,192,368
Research and development 887,652 452,082
Sales, general and administrative 4,006,796 1,641,253
Amortization of excess of cost
over net assets acquired 148,264 -
Total operating expenses 13,831,219 9,707,581
Operating income 418,438 3,097,340
Other income (expenses)
Interest, net (58,594) 39,537
Income before income tax provision 359,844 3,136,877
Income tax provision 73,549 1,067,800
Net income $ 286,295 $ 2,069,077
Dividends on preferred shares 48,813 89,401
Net income applicable to common 237,482 1,979,676
Earnings per common share, basic $ .03 $ .27
Earnings per common share, diluted $ .03 $ .26
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
Years ended September 30, 1999 and (1998 Unaudited - Note 15)
<CAPTION>
Common Stock Preferred Stock
Common
Capital stock Accum-
.001 in subject ulated
Number .001 Number par excess to re- (Deficit)
of par of val- of par demp- retained
Shares value shares ue value tion earnings Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
Oct 1,
1997 as
prev-
iously
report-
ed 7,257,554 $7,258 12,309 $12 $2,992,560 $ - $581,607 $3,581,437
Adjust-
ments
for re-
state-
ment - - - - - - (970,794) (970,794)
Balance
Oct 1,
1997,
restat-
ed
(Note
15) 7,257,554 7,258 12,309 $12 $2,992,560 $ - (389,187) $2,610,643
Issu-
ance
of
common
stock 93,750 94 - - 299,906 - - 300,000
Con-
version
of pre-
ferred
stock 310,450 310 (6,209) (6) (304) - - -
Div-
idends
on pre-
ferred
stock - - - - - - (89,401) (89,401)
Net
income
for the
year
ended
Sept 30,
1998 - - - - - - 2,069,077 2,069,077
Balance
Oct 1,
1998 7,661,754 $7,662 6,100 $6$3,292,162 $ - $1,590,489 $4,890,319
Conver-
sion of
prefer-
red
stock 112,600 112 (2,194) (2) (110) - - -
Compen-
sation
related
to board
of dir-
ectors 2,500 3 - - 12,497 - - 12,500
Compen-
sation
related
to
grant
of stock
options - - - - 171,877 - - 171,877
Compen-
sation
related
to put
options - - - - 55,000 - - 55,000
Dividends
on pre-
ferred
stock - - - - - - (48,813) (48,813)
Common
stock
subject
to
redemp-
tion - - - - - (2,000,000) - (2,000,000)
Expira-
tion of
put
options
of common
stock
subject
to re-
demption - - - - - 104,000 - 104,000
Net income
for the
year ended
Sept. 30,
1999 - - - - - - 286,295 286,295
Balance
Sept. 30,
1999 7,776,854 $7,777 3,906 $4 $3,531,426 $(1,896,000) $1,827,971 $3,471,178
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended Sept. 30,
1998
Unaudited
1999 (Note 15)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 286,295 $ 2,069,077
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 472,446 174,555
Promotional fees paid with stock - 240,000
Compensation expense on stock options 219,532 -
Compensation expense on put options 55,000 -
Provision for bad debts 571,520 460,106
Increase in cash surrender
value of life insurance (93,842) (64,966)
Change in operating assets and
liabilities:
Accounts receivable 1,667,635 (2,370,718)
Other current assets (131,410) 16,427
Income tax receivable (813,144) (19,625)
Accounts payable and accrued
liabilities 24,508 777,535
Unearned revenue (195,611) 69,493
Deferred income taxes (245,034) (68,300)
Total adjustments 1,531,600 (785,493)
Net cash provided by operating activities 1,817,895 1,283,584
INVESTING ACTIVITIES
Acquisition of property and equipment (411,612) (374,555)
Proceeds from the sale of Vercom
equity investments 743,176 -
Issuance of note receivable - (200,000)
Payment received on note receivable - 227,579
Acquisition of Vercom Software,Inc.
net of cash acquired of $154,594 (6,645,406) -
Net cash used in investing activities (6,313,842) (346,976)
FINANCING ACTIVITIES
Payment on notes payable and
capital lease obligations (120,846) (109,726)
Proceeds from revolving credit
agreement 3,500,000 -
Dividends paid (48,813) (89,401)
Net cash provided by (used in)
financing activities 3,330,341 (199,127)
Net (decrease) increase in cash and
cash equivalents (1,165,606) 737,481
Cash and cash equivalents at beginning
of year: 1,228,894 491,413
Cash and cash equivalents at end of year: 63,288 1,228,894
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 130,519 $ 46,998
Taxes $ 1,131,727 $ 1,104,681
NONCASH INVESTING AND FINANCING
ACTIVITIES
Capital lease obligation incurred
for purchase of equipment $ 36,434 $ -
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
Network Systems International, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1999 and (1998 Unaudited - Note 15)
1. Background Information
Network Systems International, Inc. (the "Company"), a
Nevada corporation, is a vertical market company that is the
developer of the net collectionT 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 which hopefully provides 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; Tampa, Florida;
and Duncan, South Carolina. All intercompany transactions
have been eliminated in consolidation.
On July 10, 1998 the Company's stock was officially approved
for listing on the NASDAQ small cap market and the Company's
common stock began trading on the NASDAQ SmallCap Exchange under the
symbol NESI.
2. Summaries of Significant Accounting Policies
Basis of Preparation:
The financial statements consolidate the accounts of Network
Systems International, Inc. and its wholly owned subsidiary,
Vercom Software Inc.
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 September 30, 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 are stated at the present value of minimum
lease payments and are 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 September 30, 1999 and 1998 the Company had 3,906 and
6,100 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:
As part of the Vercom acquisition, discussed in Note 3, the
Company recorded $1,400,000 in software development costs.
The Company amortizes purchased software over a 5-year
period. Amortization expense of purchased software amounted
to $81,667 for the year ended September 30, 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.
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. Deferred
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 $887,652 and $452,082 in
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.
Earnings Per Share:
The consolidated financial statements are presented in
accordance with Statement of Financial Accounting Standards
No. 128 ("SFAS 128"), "Earnings Per Share". Basic earnings
per share is computed using the weighted average number of
common shares outstanding during the period. Diluted
earnings per share reflect the potential dilution from the
exercise or conversion of securities into common stock.
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.
Segment Information:
The Company reports business segments in accordance with
Statement of Financial Accounting Standards No. 131 ("SFAS
131") "Disclosures about Segments of an Enterprise and
Related Information." Under SFAS 131 the Company is
required to use the "management" approach to reporting its
segments. The management approach designates that the
internal organization that is used by management for making
operation decisions and assessing performance as the source
of the Company's segments. The adoption of SFAS 131 had no
impact on the Company's net income, balance sheet, or
stockholders' equity.
Recent Accounting Pronouncement:
For fiscal 1999, the Company adopted the Financial
Accounting Standards Board SFAS No.130 "Reporting
Comprehensive Income" effective for 1999. Under SFAS No.
130 the Company is required to report comprehensive income,
which includes the Company's net income, as well as changes
in equity from other sources. For the Company, net income
is the same as comprehensive income as there is no
comprehensive income in 1999 or 1998.
Reclassification:
Certain prior year amounts have been reclassified to conform
with the current year presentation.
3. Business Combination
On June 16, 1999, the Company acquired all of the
outstanding capital stock of Vercom Software, Inc.
("Vercom"), a vertical market company offering a specialized
software solution for the requirements of the printing
industry for $6.8 million in cash including direct costs of
acquisition of $120,000. The breakdown of the purchase
price is as follows: $3.3 million gross tangible assets,
$6.9 million gross tangible liabilities, $4.8 million for
intangible assets, and $.30 million for purchased in process
research and development costs. The Company funded this
acquisition through cash provided by operating activities
and bank borrowings.
The acquisition of Vercom has been accounted for by the
purchase method of accounting in accordance with APB 25
"Business Combinations" and, accordingly, the results of
operations of Vercom for the period from June 17, 1999 to
September 30, 1999 are included in the accompanying
consolidated financial statements. Assets acquired and
liabilities assumed have been recorded at their estimated
fair values. In addition, approximately $300,000 of the
purchase price was allocated to purchased in-process
research and development, which was charged to Research and
Development expense for the year ended September 30, 1999.
The excess cost over the estimated fair value of tangible
net assets acquired was $4.8 million. The $4.8 million is
allocated and amortized on a straight-line basis over its
estimated useful life as follows: assembled workforce - $.5
million for 5 years, existing customer base $1.3 million for
10 years, and goodwill - $3.0 million for 10 years.
The following unaudited pro forma information presents the
results of operations of the Company as if the acquisition
had taken place on October 1, 1998 and 1997.
Year ended Year ended
9/30/99 9/30/98
Revenues $ 17,724,056 $ 18,230,256
Net earnings $ 464,109 $ 2,757,332
Earnings per share $ .06 $ .36
These pro forma results of operations have been prepared for
comparative purposes only and do not purport to be
indicative of the results of operations which actually would
have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
4. Accounts Receivable, Related Parties.
Accounts Receivable from related parties at September 30,
1999 and 1998, consist of amounts due from three (3)
shareholders of the Company that bear interest at five
percent, are due on demand, and collateralized by their
common stock in the Company.
5. Property and Equipment
Property and equipment at September 30,
consists of the following: Lives 1999 1998
Land - $ 190,000 $ 190,000
Building 39 500,000 500,000
Leasehold improvements 7 to 39 353,371 122,215
Furniture and fixtures 5 to 7 275,873 136,362
Office equipment 3 to 7 150,465 133,771
Computer equipment and software 3 to 5 958,650 786,205
2,428,35 1,868,553
Less accumulated depreciation
and amortization (915,192) (672,677)
$1,513,167 $1,195,876
Equipment recorded under capital lease obligations is
$361,365 and $324,931, respectively, and related accumulated
amortization is $290,597 and $203,563, respectively, at
September 30, 1999 and 1998.
6. Long Term Debt
Note Payable
Note payable at September 30, consists of
the following: 1999 1998
Mortgage note payable:
Principal payments are due monthly,
for a total amount of $35,000
annually at fixed rate of 7.53%
through January 2009;
collateralized by building and
equipment with a net book value of
$414,413. $ 324,391 $354,649
Less current maturities 35,000 31,000
$ 289,391 323,649
Aggregate maturities of note payable subsequent to September 30, 1999 were
as follows: 2000 - $35,000; 2001 - $35,000; 2002 - $35,000; 2003 - $35,000;
2004 - $35,000; thereafter - $149,391.
Revolving Credit Agreement
On June 16, 1999, the Company, in conjunction with the
acquisition of Vercom Software, Inc., entered into a
$4,500,000 revolving credit agreement with a bank which
provided funds to finance the acquisition (see Note 3) and
working capital needs. As of September 30, 1999, the
Company had $3,500,000 outstanding on this revolving credit
agreement. The credit agreement provides for interest at
the monthly LIBOR Index plus 2.50% to 3.50% based on the
Company's Consolidated Cash Flow/Consolidated Funded Debt
ratio. The weighted average interest rate for the year
ended September 30, 1999 was 8.24%. The revolver has the
following declining availability: $4.0 million
through March 31, 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 following effective periods: January 1 - January 31,
2000, $800,000; February 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 is
collateralized by substantially all
of the assets of the Company. The term of this agreement
is for two years ending June 30, 2001 at which time all
unpaid principal and interest is due. 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 beginning March 31, 2000. The Company and
the bank revised the revolving credit agreement during 1999
in order to set realistic financial covenants not
anticipated at inception. The Company was in compliance
with the applicable covenant at September 30, 1999, after
the aforementioned revision.
7. Commitments
Leases
The Company has capitalized rental obligations under three
leases of software and equipment. The obligations, which
mature in fiscal 2000 and 2001, represent the total present
value of future rental payments discounted at the interest
rates implicit in the leases. Future minimum lease payments
under the capital leases are:
Year ending September 30:
2000 $ 75,000
2001 35,000
Total minimum lease payments 110,000
Less amount representing interest 4,997
Present value of net minimum lease payments 105,003
Less current portion 68,000
$ 37,003
Common Stock Subject to Redemption:
On June 1, 1999, the Company entered into a five year
consulting agreement with a former officer of the Company.
Among other things, the consultant has the right to put
10,000 shares of restricted Company stock owned by the
consultant back to the Company each quarter. The Company
has the obligation to purchase those shares for four dollars
per share upon notification by the consultant. The
consultant, however, can elect to sell the quarterly
allotment on the open market relieving the Company of its
obligation to purchase the shares. The consultant may elect
to extend the term of the Company's obligation an additional
eight years or until a total of 500,000 shares have been
sold to the Company and/or on the open market. During the
year ended September 30, 1999, the Consultant has placed
26,000 shares in the open market, and as of September 30,
1999, 474,000 common shares are still subject to redemption.
As a result of this agreement, $1,896,000 of common stock
has been recorded as common stock subject to redemption in
the Company's balance sheet.
During the year ended September 30, 1999, the Company
recognized a non-cash compensation expense of approximately
$55,000.
8. Employee Benefit Plans
Retirement Benefit Plans
The Company sponsors defined contribution retirement plans
that allow participants to make contributions by salary
reduction under Section 401(k) of the Internal Revenue Code.
An employee may elect to contribute up to a maximum of 15%
of pretax earnings into the plan. The Company makes a
matching contribution in an amount of 3% to 6% of the
employee contribution. The Company made matching
contributions to the plan of approximately $31,000 and
$17,000 for the years ended September 30, 1999 and 1998,
respectively.
Executive Employment Agreement
On April 15, 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 and
expire over a ten year period. The fair market value of the
Company's stock at the date of the agreement was $3.75.
During the year ended September 30, 1999, the Company
recognized a non-cash compensation expense of approximately
$172,000. The Company will recognize this non-cash
compensation expense ratably each quarter for the next four
years based on this agreement. The weighted average
exercise price of these options is $1.00 with a weighted
average remaining contractual life of 9.45 years. These
options are currently not exercisable since the first year
of vesting has not been completed.
Employee Incentive Stock Option Agreements
During 1999, the Company adopted the Network Systems
International, Inc. "1999 Long Term Stock Incentive Plan.
The maximum number of shares available under the plan of
500,000 have been reserved from shares authorized but unissued.
As of September 30, 1999, none of these
shares authorized under the plan have been issued.
Under the terms of the plan, the options will vest
equally over a four-year period and expire after
10 years, as long as the employees remain employed with the
Company. The following is a summary of options activity:
<TABLE>
Options Outstanding
Options Available Weighted Average
for Grant Options Exercise Price
<S> <C> <C> <C>
Balance at inception
(April 13, 1999) 500,000 - $ -
Granted (280,000) 280,000 4.14
Exercised - - -
Cancelled 32,000 (32,000) 4.00
Balance at
September30, 1999 252,000 248,000 $ 4.16
</TABLE>
The following table summarizes information concerning
outstanding options at September 30, 1999:
Options Outstanding
Weighted Average
Range of Remaining Weighted Average
Exercise Number Contractual Life Exercise Price
Prices Outstanding (in Years) per Share
$4.00 - 5.00 248,000 9.45 4.16
5.00
At September 30, 1999, there were no outstanding options
exercisable.
SFAS No. 123 "Accounting for Stock Based Compensation"
("SFAS 123"), requires the Company to disclose pro forma
information regarding option grants made to its employees.
SFAS 123 specifies certain valuation techniques that produce
estimated compensation charges that are included in the pro
forma results below. These amounts have not been reflected
in the Company's Statement of Operations, because Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," specifies that no compensation charge arises
when the price of the employees' stock options equal the
market value of the underlying stock at the grant date, as
in the case of options granted to the Company's employees.
SFAS No. 123 pro forma numbers are as follows:
Year ended September, 30 1999
Actual net income $ 286,295
Pro forma net income (23,045)
Pro forma basic net income per share (0.0)
Pro forma diluted net income per share (0.0)
Under SFAS 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average
assumptions: risk-free interest rate of 5.8%, no expected
dividends, a volatility factor of 87.3%, and an
expected life of the options of 5 years.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of
highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock
options have characteristics significantly different from
those of traded options, and because changes in the
subjective input assumptions can materially affect the fair
value estimate, in management's opinion the existing models
do not necessarily provide a reliable single measure of the
fair value of the Company's options.
9. Income Taxes
<TABLE>
The provision for income taxes for the years ended September
30, consists of the following components:
<CAPTION>
1999 1998
<S> <C> <C>
Federal:
Current $ 290,453 $ 1,016,199
Deferred (133,299) (52,440)
157,154 963,759
State:
Current 28,130 119,901
Deferred (111,735) (15,860)
(83,605) 104,041
$ 73,549 $ 1,067,800
</TABLE>
<TABLE>
The items accounting for the difference between income taxes
computed at the federal statutory rate and the provision for
income tax follow:
<CAPTION>
1999 1998
<S> <C> <C>
Federal statutory rate 122,347 1,066,538
Effect of:
State taxes, net of federal benefit (55,179) 68,667
Research and development credit (237,000) (89,900)
Non deductible purchased in-process
research 0and development 102,000 -
Goodwill amortization 50,410 -
Non-deductible life insurance 41,528 -
Other, net 49,443 22,495
73,549 1,067,800
</TABLE>
<TABLE>
The significant temporary differences that give rise to
deferred tax assets and liabilities as of September 30, 1999
are as follows:
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets
Allowance for doubtful accounts $ 175,500 $ 195,000
Accrued vacation 39,131 -
Deferred compensation 67,032 -
State net operating loss
carryforwards 34,639 12,756
State research and development
credit carryforwards 42,321 -
Total deferred tax assets 358,623 207,756
Deferred tax liabilities
Software development costs 514,150 -
Book basis of property and
equipment in excess of tax basis 96,610 48,523
Other, net 158,966 71,233
Total deferred tax liabilities 769,726 119,756
Net deferred tax (liabilities) assets $(411,103) $ 88,000
1999 1998
Included in the balance sheet:
Deferred tax assets - current $ 214,631 $123,767
Deferred tax liabilities - non-current (625,734) (35,767)
Net deferred tax liabilities $(411,103) 88,000
</TABLE>
Federal and state deferred tax assets are $227,497 and
$131,126, respectively, in 1999 and $170,256 and $37,500,
respectively, in 1998. Federal and state deferred tax
liabilities are $567,335 and $58,120, respectively in 1999
and $96,781 and $ 22,975 respectively, in 1998.
No valuation allowance has been recorded against the
deferred tax assets at September 30, 1999 and 1998 because
management believes it is more likely than not the Company
will realize the benefits of these deductible differences.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income
during the periods in which those temporary differences
become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable
income and projections for future taxable income over the
periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company
will realize the benefits of these deductible differences.
The amount of deferred tax assets considered realizable,
however, could be reduced in the future if estimates of
future taxable income during the carryforward period is
reduced.
At September 30, 1999, the Company has state net operating
loss carryforwards of $462,000 which are available to offset
future state taxable income and state research and
development credit carryforwards of $42,321 to offset future
state income taxes.
10. Earnings Per Share
<TABLE>
The following data shows the amounts used in computing
earnings per share and the effect on income and the weighted
average number of shares of dilutive potential common stock.
<CAPTION>
1999 1998
<S> <C> <C>
Net income $ 286,295 $ 2,069,077
Less preferred stock dividends (48,813) (89,401)
Income available to common
stockholders used in basic EPS 237,482 1,979,676
Preferred stock dividends 0 89,401
Income available to common
stockholders after assumed
conversion of dilutive securities 237,482 2,069,077
Weighted average number of common
shares used in basic EPS 7,718,419 7,447,705
Effect of dilutive stock options 100,840 -
Effect of dilutive convertible
preferred stock 0 470,196
Weighted average number of common
shares and dilutive potential
common stock used in diluted EPS 7,819,259 7,917,901
</TABLE>
The Company has 30,000 options and 3,906 shares of preferred stock
that were antidilutive and
are not included in the earnings per share calculation for
1999. In addition, common stock subject to redemption could
be antidilutive if the current stock price is below the put
price. At September 30, 1999 common stock subject to
redemption was antidilutive.
11. Major Customers
For the years ended September 30, sales to one customer
were 52% of revenue or approximately $7,422,000 in 1999 and
two customers were 18% and 23% of revenue or approximately
$5,255,000 in 1998. The September 30, 1999 and 1998
accounts receivable balances included approximately $476,000
and $1,116,000 due from these customers. The Company's
customers are concentrated in the textile and printing
industries located in the United States.
12. Lease Commitments
The following is a schedule by year of future minimum rental
payments required under operating leases that have an
initial or remaining noncancelable lease term in excess of
one year as of September 30, 1999:
2000 $ 246,000
2001 241,000
2002 130,000
2003 46,000
2004 35,000
Rent expense amounted to $163,000 and $73,000 for the
periods ended September 30, 1999 and 1998, respectively.
13. 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, acquired intangibles 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").
<TABLE>
The following is a summary of segment information for the
years ended September 30, 1999 and 1998:
<CAPTION>
1999 1998
<S> <C> <C>
Revenues:
Software licensing $ 1,760,528 $ 2,421,963
Services 6,834,016 4,818,972
Hardware 5,655,113 5,563,986
Total $ 14,249,657 $ 12,804,921
Operating profit (loss):
Software licensing $ (289,094) $ 1,512,498
Services 753,700 1,459,220
Hardware 102,096 125,622
Total $ 566,702 $ 3,097,340
Reconciliation to net income
Interest, net $ (58,594) $ 39,537
Amortization of excess
cost over net assets
acquired (148,264) -
Income taxes (73,549) (1,067,800)
Net income $ 286,295 $ 2,069,077
</TABLE>
Purchased in-process research and development costs related
to the acquisition of Vercom Software, Inc. of $300,000 is
included in software licensing. Depreciation and
amortization of $324,182 for 1999 and $174,555 for 1998 have been
allocated to the segment information above.
14. Legal Proceedings
On June 17, 1999, the Company agreed to pay a former
customer $500,000 for full settlement of a dispute over fees
paid for licensing and servicing. The settlement payments
are to be paid out over a period of nine months with a final
payment due March 31, 2000. The Company has recorded the
entire settlement in the current year to sales, general and
administrative expense.
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.
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.
15. Prior Year Restatement (Unaudited)
The financial statements were previously audited by other
auditors whose report thereon dated November 20, 1998
expressed an unqualified opinion on those statements before
restatement described below.
Pursuant to FASB Statement No. 86 Computer Software to be
Sold, Leased, or Otherwise Marketed ("FASB No. 86") cost
incurred internally in creating a computer software product
shall be charged to expense when incurred as research and
development until technological feasibility has been
established for the product. Technological feasibility is
established upon completion of a detailed program design or,
in its absence, completion of a working model. Thereafter,
all software production costs shall be capitalized and
subsequently reported at the lower of unamortized costs or
net realizable value.
Prior to 1999, the Company capitalized certain costs incurred
internally in creating computer software products. During
1999, the Company determined that it does not have
sufficient documentation required by FASB No. 86 to support
the achievement of technological feasibility for its
computer software products under either the two
aforementioned methods. As a result, software development
costs and related deferred income tax liabilities have been
reduced by $1,423,794 and $555,000, respectively, as of
September 30, 1998, net income has been increased by
$101,999, net of income taxes of $66,000, for the year ended
September 30, 1998 and retained earnings has been reduced by
$ 970,794, as of September 30, 1997.
The following table details the adjustment to net income for
each of the periods restated:
<TABLE>
<CAPTION>
Net income Net income
as previously as restated
reported
<S> <C> <C>
Year ended September 30, 1998 $ 1,967,078 $ 2,069,077
Earnings per share - basic $ .25 $ .27
- dilutive $ .25 $ .26
Quarter ended December 31, 1998 $ 564,983 $ 488,079
Earnings per share - basic $ .07 $ .06
- dilutive $ .07 $ .06
Quarter ended March 31, 1999 $ 691,591 $ 632,366
Earnings per share - basic $ .09 $ .08 - dilutive .09 .08
Quarter ended June 30, 1999 $ (248,036) $ (233,468)
Earnings per share - basic $ (.03) $ (.03)
- dilutive $ (.03) $ (.03)
</TABLE>
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
On January 19, 1999, the Board of Directors of the Company
approved the appointment of KPMG LLP, Greensboro, North
Carolina, as the Company's independent accountants to audit
the Company's financial statements for the year-ended
September 30, 1999. This action was filed on a Form 8-K to
the Securities and Exchange Commission on January 26, 1999.
There were no disagreements with the past accountants at the
time of engagement with KPMG.
PART III
Item 9. Directors and Executive Officers of the Registrant
Information with respect to this Item may be found in the
section captioned "Nominees for Elections as Directors"
appearing in the proxy statement to be delivered to
stockholders in connection with the annual meeting of
stockholders to be March 1, 2000. Such information is
incorporated herein by reference.
Item 10. Executive Compensation
Information with respect to this Item may be found in the
section captioned "Executive Compensation" appearing in the
proxy statement to be delivered to stockholders in
connection with the annual meeting of stockholders to be
March 1, 2000. Such information is incorporated
herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this Item may be found in the
section captioned "Security Ownership of Certain Beneficial
Owners and Management" appearing in the proxy statement to
be delivered to stockholders in connection with the annual
meeting of stockholders to be March 1, 2000. Such
information is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information with respect to this Item may be found in the
section captioned "Executive Compensation" appearing in the
proxy statement to be delivered to stockholders in
connection with the annual meeting of stockholders to be
March 1, 2000. Such information is incorporated
herein by reference.
Item 13. Exhibits and Reports on Form 8-K
a) Exhibits
The following exhibits are submitted herewith:
Number Page #
3 (ii) "P" Bylaws of the Company. Incorporated by
reference to Agreement and Plan of Reverse
Triangular Merger in Form 10-QSB for the
period ending March 31, 1996.
10 "P" Employment contracts of officers incorporated
by reference on Form 10-QSB filed May 20, 1996.
11 Statement Re: Computation of per share earnings
incorporated in financial statements
21 Subsidiaries of the registrant
22 Proxy statement filed January 28, 1999 and
incorporated by reference 39
27 Financial Data Schedule 40
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.
4. Form 8-K filed with the Securities and Exchange
Commission June 30, 1999 announcing the acquisition of
Vercom Software, Inc. This Form 8-K is incorporated by
reference.
5. Form 8-K/A filed with the Securities and Exchange
Commission August 30, 1999 providing financial information
related to the acquisition of Vercom Software, Inc.
6. Form 8-K filed with the Securities and Exchange
Commission January 13 2000 announcing 1999 earnings, one-
time charges, and results of an change in the application of
an accounting standard.
SIGNATURES
In accordance with the requirements of section 13 or 15(d)
of the Securities Exchange Act of 1934, the Registrant
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NETWORK SYSTEMS INTERNATIONAL, INC.
By: /s/ Robbie M. Efird
Robbie M. Efird, Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the
dates indicated.
Signatures Date
/s/ Robbie M. Efird January 13, 2000
Robbie M. Efird
Chairman of the Board,
Chief Executive Officer, and
Director (principal executive)
/s/ Christopher N. Baker January 13, 2000
Christopher N. Baker
President, Chief Operating Officer
and Director
/s/ Michael T. Spohn January 13, 2000
Michael T. Spohn
Chief Financial Officer, Secretary
and Director
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 63,288
<SECURITIES> 0
<RECEIVABLES> 3,315,392
<ALLOWANCES> (450,000)
<INVENTORY> 0
<CURRENT-ASSETS> 4,334,200
<PP&E> 2,428,359
<DEPRECIATION> (915,192)
<TOTAL-ASSETS> 12,116,326
<CURRENT-LIABILITIES> 2,797,020
<BONDS> 0
0
4
<COMMON> 7,777
<OTHER-SE> 3,463,397
<TOTAL-LIABILITY-AND-EQUITY> 12,116,326
<SALES> 14,249,657
<TOTAL-REVENUES> 14,249,657
<CGS> 8,788,507
<TOTAL-COSTS> 13,831,219
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,594
<INCOME-PRETAX> 359,844
<INCOME-TAX> 73,549
<INCOME-CONTINUING> 286,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 286,295
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
Subsidiaries of the registrant
1. The Company has one wholly owned subsidiary Vercom
Software, Inc
