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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15-(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
Commission File Number 0-22991 CUSIP NUMBER 64121L 10 3
NETWORK SYSTEMS INTERNATIONAL, INC.
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(Exact name of registrant as specified in the charter)
Nevada 87-0460247
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(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
6413 CONGRESS AVENUE, SUITE 230, BOCA RATON, FL 33487
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (561) 988-2334
200 NORTH ELM STREET, GREENSBORO, NORTH CAROLINA, 27401
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(Former address of principal executive offices, including zip code)
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value
(Title of Class)
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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 contained in this form, and no disclosure will be 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. [ ]
The issuer's revenues for the year ended September 30, 2000 were None.
----
As of November 30, 2000 there were 10,254,671 shares of common stock
outstanding, par value $.001 per share. The aggregate market value of the
common stock of the registrant, held by non-affiliates of the registrant, on
November 30, 2000, based on the closing sales price reported on NASDAQ on such
date, was $16,726,806.
DOCUMENTS INCORPORATED BY REFERENCE: No documents are incorporated by
reference into this Report except those Exhibits so incorporated as set forth
in the Exhibit index.
Transitional Small Business Disclosure Format: Yes No X
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TABLE OF CONTENTS
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PART I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Matters 7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 8
Item 6. Management's Discussion and Analysis 9
Item 7. Financial Statements 11
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure 26
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act. 26
Item 10. Executive Compensation 28
Item 11. Security Ownership of Certain Beneficial Owners and Management 31
Item 12. Certain Relationships and Related Transactions 31
Item 13. Exhibits and Reports on Form 8-K 33
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
Originally incorporated in 1985, as Network Information Services, Inc.,
Network Systems International, Inc. (the "Company" or "NESI"), a Nevada
corporation, 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.
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.
Effective September 30, 2000, the Company completed the sale of all operating
lines of business to its management group as discussed under Discontinued
Operations below.
On November 10, 2000, NESI completed the acquisition of 100% of the issued and
outstanding common stock of InterLAN Communications, Inc.
("InterLAN")(http://www.interlancom.com), incorporated in Virginia on August
19, 1995, in exchange for $150,000 in cash, 250,000 shares of the common stock
of NESI and promissory notes in the amount of $150,000.
InterLAN is a provider of data communications and networking infrastructure
solutions and consulting for business, government and education. InterLAN
specializes in Remote Access including VPN (Virtual Private Networking), Wide
Area and Local Area technologies to include Fiber Optic and Gigabit. The
product line includes High Speed Switches, Routers, VPN Gateways, Servers and
Workstations. InterLAN's products assist in the transmission of data, voice,
and Internet information.
DISCONTINUED OPERATIONS
On July 10, 2000, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with a group of investors (the "Investors").
Subject to the terms and conditions of the Stock Purchase Agreement, the
Company issued 1,666,667 new, restricted shares of the Company's common stock
at $0.60 per share to the Investors in a private placement organized by
Millennium Holdings Group, Inc. ("Millennium"). The sale under the Stock
Purchase Agreement was subject to the satisfaction of the following
conditions, which are discussed in more detail below: (i) certain of the
Company's current management shareholders ("Management Shareholders") must
agree to sell 2,700,000 shares of the Company's common stock to accredited
investors arranged by Millennium, (ii) Management Shareholders must grant the
Company a put option giving the Company the right to require the Management
Shareholders to purchase substantially all of the assets associated with the
Company's
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current business for $3,000,000, (iii) all of the Company's current directors,
except Robbie Efird, must resign and a designated representative of the
Initial Investors must be appointed to replace the former directors effective
as of the closing date of the stock sale, and (iv) the Company must receive
the consent of its current revolving credit lender, Wachovia Bank, N.A.
("Wachovia") to the terms of the Stock Purchase Agreement. All of these
conditions were met and the sale under the Stock Purchase Agreement closed on
July 25, 2000.
As a condition to the Investors' obligations pursuant to the terms of the
Stock Purchase Agreement, four of the Company's management shareholders,
Robbie M. Efird, E. W. "Sonny" Miller, Jr., David F. Christian and James W.
Moseley (collectively, the "Selling Shareholders") entered into Stock Purchase
Agreements dated July 10, 2000 (the "Investment Agreements") to collectively
sell 2,700,000 shares to Herbert Tabin, a managing partner with Millennium,
for $1,500,000 ($0.56 per share).
As a further condition to the Investors' obligations under the Stock Purchase
Agreement, the Selling Shareholders granted the Company a put option, expiring
forty-five (45) days after the closing date, giving the Company the right to
require the Selling Shareholders to purchase, pursuant to a Stock Purchase
Agreement, substantially all of the Company's operating assets and liabilities
(the "Company Assets") and substantially all of the operating assets and
liabilities of Vercom Software, Inc., a wholly-owned subsidiary corporation of
the Company ("Vercom") (the "Vercom Assets")(the Company Assets and the Vercom
Assets shall collectively be referred to as the "Assets") for $3,000,000. The
Assets include all of the operating assets related to the Company's business
as conducted at that time. During this 45-day period, the Company will
determine the value of the Assets and evaluate whether it is in the best
interests of the Company and its shareholders for the Company to sell the
Assets to the Selling Shareholders at the put price, to sell the Assets to a
third party, to retain the Assets or to take other appropriate action.
In order to facilitate the Company's potential exercise of the put option, the
Company contributed the Company Assets to a recently formed wholly owned
subsidiary corporation, Network Systems International of North Carolina, Inc.
on July 20, 2000. As part of this process, the Company assigned its rights and
obligations under substantially all of its current agreements (including its
software license agreements, service agreements and employment agreements) to
Network Systems International of North Carolina, Inc., a wholly owned
subsidiary of the Company.
In order to satisfy a condition to the Investors' obligations under the Stock
Purchase Agreement, all of the Company's officers and directors resigned.
Herbert Tabin was appointed to the Company's Board of Directors and named
President as of the closing date.
Effective September 30, 2000, the Company elected to exercise the put option
and require the Selling Shareholders to purchase the Assets for $3,000,000.
The Selling Shareholders made an initial cash payment of $1,500,000 to the
Company and delivered a non-recourse promissory note in the principal amount
of $1,500,000, payable in one hundred twenty (120) days, for the remaining
purchase price. The Selling Shareholders pledged all of their remaining
2,925,856 shares of the Company's common stock (the "Pledged Shares") as
security for the payment of the promissory note. The Company's right to
exercise the put option was conditioned upon the Company using $2,000,000 of
the sales price received for the Assets to reduce the obligation under the
revolving credit arrangement with Wachovia. The Company used $1,250,000 from
the Selling Shareholders' initial cash payment to reduce the outstanding
indebtedness to $750,000. As a further condition to the Company's right to
exercise the put option, the Company agreed to change its name on its
corporate charter, to discontinue the use of the name "Network Systems
International" and to transfer all rights to the name "Network Systems
International" to the Selling Shareholders. The Company has announced plans to
change its name to OnSpan Networking, Inc.
Subsequent to September 30, 2000, Millennium sold the pledged shares to
accredited investors on behalf of the Selling Shareholders for $1,500,000, or
$0.513 per share, and remitted the proceeds to the Company. The Company then
paid the remaining balance of the note payable.
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PURCHASE OF INTERLAN
On November 10, 2000, NESI completed the acquisition of 100% of the issued and
outstanding common stock of InterLAN, in exchange for $150,000 in cash,
250,000 shares of the common stock of NESI and promissory notes in the amount
of $150,000.
InterLAN is a provider of data communications and networking infrastructure
solutions and consulting for business, government and education. InterLAN
specializes in Remote Access including VPN (Virtual Private Networking), Wide
Area and Local Area technologies to include Fiber Optic and Gigabit. The
product line includes High Speed Switches, Routers, VPN Gateways, Servers and
Workstations. InterLAN's products assist in the transmission of data, voice,
and Internet information.
(b) BUSINESS OF ISSUER
The following discussion of the business of the Company is limited to the new
business of InterLAN and does not include the segment of the business that was
sold.
PRODUCTS AND MARKETS
The advent of the Internet has dramatically increased business and consumer
demand for high speed, reliable access to data resulting in considerable
stress on existing communication networks. As a provider of data
communications and networking infrastructure solutions and consulting for
business, government and education InterLAN specializes in Remote Access
including VPN (Virtual Private Networking), Wide Area and Local Area
technologies to include Fiber Optic and Gigabit. The product line includes
High Speed Switches, Routers, VPN Gateways, Servers and Workstations. InterLAN
offers products from ADC, Adtran, APC, Lucent, AVAYA, Cisco Systems, Compaq,
D-Link, RSA, Nortel Networks and Intel. InterLAN's staff members are certified
as: Cisco Premier, Intel/Shiva Premier, Compaq SMB, D-Link Diamond and as a
Sonic WALL Gold Partner. InterLAN has provided design, consulting, product and
maintenance services to national and international companies and organizations
such as Sprint, Global One, The United States Securities and Exchange
Commission, CLC - Computer Learning Center, The United States Department of
Labor, The United States Army, GTE, Software AG and the Federal Aviation
Administration.
SALES AND MARKETING
InterLAN currently markets its products through product line specific direct
sales. In support of the selling effort, the Company conducts marketing
programs intended to position and promote its products within the
communication industry. Marketing personnel may coordinate the Company's
participation in trade shows and design and implement our advertising efforts.
INDUSTRY BACKGROUND
The growth of the Internet, increasing volumes of data traffic across
internets and intranets have fueled the demand for more network capacity
within the data and optical telecommunications industry caused by factors such
as: - the escalating use of the Internet, electronic mail, facsimile
transmission, electronic transaction processing, video conferencing, remote
access telecommuting and local and wide area networking. This increased
network utilization creates transmission bottlenecks on heavily used routes
that were originally designed for significantly less traffic. In response to
demand, telecommunications service providers have been deploying new data
systems and upgrading existing fiber optic systems to increase the capacity of
their networks. Given the faster speed of light signals in fiber optic
networks and their
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immunity from electromagnetic interference, fiber optic systems have become
the preferred solution for increasing network capacity. Today, fiber optic
cable is the primary medium for long-haul telecommunications and is replacing
copper in the shorter distance metropolitan markets. No longer purely
telephone or voice traffic, networks today are carrying an increasing volume
of data traffic - traffic generated by computers that process and send
information far more quickly and in much larger quantities than voice-centric
networks were designed for. With this carriers and equipment suppliers are
currently seeking more efficient ways to handle this traffic.
COPYRIGHT AND TRADEMARK STATUS
InterLAN regards any service marks, trademarks, trade secrets and similar
intellectual property as critical to its success and relies on trademark,
copyright and patent law, trade secret protection and confidentiality and/or
license agreements with its employees, customers, partners and others to
protect its proprietary rights. InterLAN anticipates the registration of its
trademarks and service marks in the U.S. and internationally, and intends to
apply for the registration of certain of its trademarks and service. Effective
trademark, service mark, copyright, patent and trade secret protection may not
be available in every country in which InterLAN products and services are made
available online. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
COMPETITION
The market for networking equipment is extremely competitive. Competition in
the networking market is based on varying combinations of price,
functionality, engineering capability, scalability and the ability of the
system solution to meet customers' requirements. A small number of very large
companies have substantial financial, marketing, manufacturing and
intellectual property resources. In addition, these companies have
substantially greater resources to develop or acquire new technologies than
the Company does. InterLAN sells items that compete directly with product
offerings of some of these companies. As such, InterLAN represents a very
small but potential threat to these companies. The Company expects continued
aggressive tactics from many of these competitors, including: - substantial
price discounting; and other marketing efforts; - "one-stop shopping" appeals;
and customer financing assistance. These tactics can be particularly effective
in a highly concentrated customer base such as InterLAN's. The Company's
competitors are under increasing pressure to deliver their services at the
lowest possible cost. This pressure may result in pricing for optical
networking systems becoming a more important factor in customer decisions,
which may favor larger competitors that can spread the effect of price
discounts in their optical networking product lines across a larger array of
products and services and across a larger customer base than the Company's.
The inability of the Company to compete successfully against its competitors
would harm the Company's business. These customers could reduce their
purchases from the Company, which could in turn have a material adverse
effect. New competitors may also emerge to compete with existing products as
well as any future products. There has been an increase in funding for new
companies focused on the development of new products for the optical
networking market. These companies may achieve commercial availability of
their products more quickly due to the narrow and exclusive focus of their
efforts.
EMPLOYEES
InterLAN presently operates with a staff of 9 people, 8 of whom are full-time
employees and 1 of whom is a commission only sales representative. Based on
need, additional persons will attempt to be hired initially as independent
contractors or on a per diem basis and thereafter converted to full time
employees on an as needed basis. InterLAN believes that there is an adequate
supply of qualified people available to fill the need for additional support
staff.
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MAJOR CUSTOMERS
InterLAN's major customers during the year ended September 30, 2000, included
Computer Learning Centers, Sprint, SAGA Software, Global One, Verizon and
ALPA.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently shares office space with Millennium for its corporate
headquarters at no charge.
InterLAN currently leases its corporate office, located at 131 Elden Street,
Herndon, Virginia. The space, which comprises approximately 3,000 square feet,
is under lease through Januay 1, 2003 at an annual rental of $48,612 and is
adequate for current needs.
ITEM 3. LEGAL PROCEEDINGS
Canton Financial Services Corporation vs. Network Systems International, Inc.,
a Nevada corporation, Network Information Services, Inc., a North Carolina
corporation, Network Investment Group, Inc., a North Carolina corporation, and
Network Partners, L.L.C., a North Carolina limited liability corporation;
Hillsborough County Circuit Court Case No. 98-00657, Hillsborough County,
Florida - 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 Plaintiff is contending
that the Company owes Plaintiff a fee because it located an entity with which
the Company merged. The Company is vigorously defending the case. The Company
contends that it did not have a contract with the Plaintiff, and that it did
not ratify the actions of the Renno Group, which did enter into a Consulting
Agreement with the Plaintiff. The Company did have a contract with the Renno
Group. The Plaintiff contends that it is entitled to between 340,000 shares
and 600,000 shares of the Company's common stock. The amount of the
Plaintiff's claim in dollars is difficult to quantify because it would depend
upon the date the shares are valued. The Company also contends that the
Plaintiff is estopped from pursuing its claim, because the Plaintiff took the
position in another lawsuit that Renno alone was responsible for paying it
under the Consulting Agreement.
The Company attempted without success to settle the case. The Company is now
defending the case vigorously.
There is still outstanding discovery from the Plaintiff. Trial may be set for
Spring 2001. The likelihood of an unfavorable outcome is unknown. The Company
has strong defenses, but it is possible that there will be an unfavorable
outcome. It is impossible to precisely quantify the maximum potential loss to
the Company, as any potential loss would depend upon the valuation date of the
stock.
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, depending upon the period or amount of settlement, if any,
potentially could have a material effect on overall trends in results of
operations.
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, 2000.
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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.
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First Quarter 2000 Second Quarter 2000
High Low High Low
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$ 9.81 $ 3.50 $ 4.13 $ 2.50
Third Quarter 2000 Fourth Quarter 2000
High Low High Low
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$ 2.90 $ 0.63 $ 3.00 $ 1.00
First Quarter 1999 Second Quarter 1999
High Low High Low
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$ 6.50 $ 2.38 $ 6.25 $ 5.00
Third Quarter 1999 Fourth Quarter 1999
High Low High Low
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$ 5.50 $ 3.50 $ 5.63 $ 3.56
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HOLDERS
As of November 30, 2000, there were approximately 319 holders of record of the
common stock of the Company, an undetermined number of which represent more
than one individual participant in securities positions with the Company.
DIVIDENDS
The Company has never paid cash dividends on its common stock, and intends to
utilize current resources to expand its operations. Therefore, it is not
anticipated that cash dividends will be paid on the Company's common stock in
the foreseeable future.
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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.
This annual report on Form 10-KSB includes or incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. You can identify these
forward-looking statements by the use of the words "believes", "anticipates",
"plans", "expects", "may", "will", "would", "intends", "estimates" and other
similar expressions, whether in the negative or affirmative. We cannot
guarantee that we actually will achieve the plans, intentions or expectations
disclosed in the forward-looking statements made. We have included important
factors in the cautionary statements below that we believe could cause actual
results to differ materially from the forward-looking statements contained
herein. The forward-looking statements do not reflect the potential impact of
any future acquisitions, mergers or dispositions. We do not assume any
obligation to update any forward-looking statement contained herein.
Effective September 30, 2000, the Company completed the sale of all operating
lines of business to its management group as discussed under Discontinued
Operations in Item 1. Accordingly, the following discussion will deal with the
Company's Plan of Operation, including its completed acquisition of InterLAN
Communications, Inc.
INCOME TAXES - Income taxes are provided for transactions reported in the
financial statements and are allocated between continuing and discontinued
operations. Under the Stock Purchase Agreement, the parties agreed that any
federal tax benefits related to the discontinued operations losses shall
belong to the discontinued operation.
NOTE PAYABLE - In connection with the Stock Purchase Agreement and transactions
discussed in Note 9, the Company entered into an Assignment and Assumption
Agreement with the Company's lender whereby the Company committed to remit
$3,000,000 of the proceeds from the transactions to the lender in exchange for a
release from any further liability under a revolving credit agreement assigned
to the discontinued operations. At September 30, 2000, the Company was in
default under certain material provisions of the revolving credit agreement,
including the financial covenants related to (1) consolidated cash flow to
consolidated funded debt and (2) consolidated liabilities to consolidated
tangible net worth. As a result, the debt under this agreement has been shown as
a current liability in the accompanying balance sheet. By September 30, 2000,
the Company had made payments totaling $2,250,000 to the lender, leaving a
remaining balance of $750,000. Subsequent to September 30, 2000, the remaining
balance of the note was paid and, accordingly, the defaults were cured. The
Company shall be fully and completely released and discharged of all of its
obligations with the lender on April 11, 2001, including any guaranty of
$400,000 of debt assigned to the discontinued operation.
PLAN OF OPERATION - Because of the nature of the fiber optics and data and
optical communications industry, we have sought and intend to continue to seek
acquisitions and alliances that will: (i) add key technologies that can
leverage our businesses, (ii) broaden our product offerings, and (iii) expand
marketing opportunities. In November 2000, we acquired interLAN and expect to
continue to pursue other potential acquisitions.
On November 10, 2000, NESI completed the acquisition of 100% of the issued and
outstanding common stock of InterLAN Communications, Inc.
("InterLAN")(http://www.interlancom.com), in exchange for $150,000 in cash,
250,000 shares of the common stock of NESI and promissory notes in the amount
of $150,000.
InterLAN is a provider of data communications and networking infrastructure
solutions and consulting for business, government and education. InterLAN
specializes in Remote Access including VPN (Virtual
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Private Networking), Wide Area and Local Area technologies to include Fiber
Optic and Gigabit. The product line includes High Speed Switches, Routers, VPN
Gateways, Servers and Workstations. InterLAN's products assist in the
transmission of data, voice, and Internet information. InterLAN offers
products from ADC, Adtran, APC, Lucent, AVAYA, Cisco Systems, Compaq, D-Link,
RSA, Nortel Networks and Intel. InterLAN's staff members are certified as:
Cisco Premier, Intel/Shiva Premier, Compaq SMB, D-Link Diamond and as a Sonic
WALL Gold Partner. InterLAN has provided design, consulting, product and
maintenance services to national and international companies and organizations
such as Sprint, Global One, The United States Securities and Exchange
Commission, CLC - Computer Learning Center, The United States Department of
Labor, The United States Army, GTE, Software AG. and the Federal Aviation
Administration.
The Company has adequate cash resources to meet its current needs. However,
with the planned additional acquisitions, additional financial resources will
be required. The Company expects to obtain sufficient working capital to
accomplish its near-term objectives through sale of its unregistered common
stock in a private placement. In the event the Company is unable to raise
sufficient capital to complete its business plan, it may be required to delay
implementation. Any significant delay in implementation of its business plan
in an industry characterized by technological change could result in the loss
of any edge they might have in the development of new technology.
ACCOUNTING DEVELOPMENTS - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133 (SFAS No.
133), "Accounting for Derivative Instruments and Hedging Activities," which
was amended by Statement of Financial Accounting Standards No. 138. This
statement standardized the accounting for derivative instruments by requiring
that an entity recognize the items as assets and liabilities in the statement
of financial position and measure them at fair value. SFAS No. 133 was to
become effective for fiscal years beginning after June 15, 1999; however, in
June 1999, Statement of Financial Accounting Standards No. 137 was issued
extending the effective date to June 15, 2000. The Company adopted this
statement on October 1, 2000 and the effect of the adoption will not have a
material impact on its results of operations or financial position.
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ITEM 7. FINANCIAL STATEMENTS.
INDEX
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Independent auditors' report 12
Balance sheet 13
Statements of operations 14
Statement of changes in stockholders' equity 15
Statements of cash flows 16
Notes to financial statements 17
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Network Systems International, Inc.
We have audited the accompanying balance sheet of Network Systems
International, Inc. as of September 30, 2000 and the related statements of
operations, changes in stockholders' equity and cash flows for the years ended
September 30, 2000 and 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Network Systems
International, Inc. as of September 30, 2000, and the results of its
operations and its cash flows for the years ended September 30, 2000 and 1999
in conformity with accounting principles generally accepted in the United
States of America.
KPMG LLP
Greensboro, North Carolina
/s/ KPMG LLP
January 12, 2001
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NETWORK SYSTEMS INTERNATIONAL, INC.
BALANCE SHEET
Year ended September 30, 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 750,000
Notes receivable 1,500,000
Income taxes receivable 106,417
---------------
Total current assets 2,356,417
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Total assets $ 2,356,417
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 750,000
Accounts payable 81,000
Amounts due to purchasers of discontinued operations 106,417
---------------
Total current liabilities 937,417
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.001 par value; authorized 12,500 shares; issued and
outstanding 3,268 shares; liquidation preference $326,800 3
Common stock; $.001 par value; authorized 100,000,000 shares; issued
and outstanding 9,989,171 shares 9,989
Additional paid-in capital 6,410,620
Retained deficit (5,001,612)
---------------
Total stockholders' equity 1,419,000
---------------
Total liabilities and stockholders' equity $ 2,356,417
===============
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The accompanying notes are an integral part of the financial statements.
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NETWORK SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Years ended September 30, 2000 and 1999
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2000 1999
<S> <C> <C>
Selling, general and administrative expenses $ 81,000 $ -
--------------- -------------
Loss from continuing operations before income taxes (81,000) -
Income tax benefit (27,540)
--------------- -------------
Loss from continuing operations (53,460) -
Discontinued operations:
Earnings (loss) from operations of discontinued operations less
applicable income taxes (benefit) of $(1,762,184) and $73,549 (8,495,293) 286,295
Gain on disposal of discontinued operations, less
applicable income taxes of $1,242,342 1,751,891 -
--------------- -------------
Net earnings (loss) from discontinued operations (6,743,402) 286,295
--------------- -------------
Net earnings (loss) (6,796,862) 286,295
Dividends on preferred shares 32,721 48,813
--------------- -------------
Net earnings (loss) applicable to common shares $ (6,829,583) $ 237,482
=============== =============
Earnings (loss) per common share, basic and diluted:
Net loss from continuing operations $ (0.01) $ (0.01)
Net earnings (loss) from discontinued operations $ (0.83) $ 0.04
--------------- -------------
Net earnings (loss) $ (0.84) $ 0.03
=============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE> 15
NETWORK SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balance October 1, 1998 6,100 $ 6 7,661,754 $ 7,662
Conversion of preferred
stock (2,194) (2) 112,600 112
Compensation related to
board of directors - - 2,500 3
Compensation related to
grant of stock options - - - -
Compensation related to
put options - - - -
Dividends on preferred
stock - - - -
Common stock subject to
redemption - - - -
Expiration of put options of
common stock subject to
redemption - - - -
Net income for the year
ended September 30, 1999 - - - -
---------- ------------- -------------- -------------
Balance September 30, 1999 3,906 $ 4 7,776,854 $ 7,777
Conversion of preferred (638) (1) 31,900 32
stock
Expiration of put options
of common stock subject
to redemption - - - -
Compensation related to
board of directors - - 13,750 13
Compensation related to
put options - - - -
Compensation related to
grant of stock options - - - -
Exercise of stock option - - 500,000 500
Issuance of restricted
common stock - - 1,666,667 1,667
Dividends on preferred
stock - - - -
Net loss for the year ended
September 30, 2000 - - - -
---------- ------------- -------------- -------------
Balance September 30, 2000 3,268 $ 3 9,989,171 $ 9,989
========== ============= ============== =============
</TABLE>
<TABLE>
<CAPTION>
Common
Capital in stock Retained
excess of subject to Earnings
Par Value redemption (Deficit) Total
<S> <C> <C> <C> <C>
Balance October 1, 1998 $ 3,292,162 $ - $ 1,590,489 $ 4,890,319
Conversion of preferred
stock (110) - - -
Compensation related to
board of directors 12,497 - - 12,500
Compensation related to
grant of stock options 171,877 - - 171,877
Compensation related to
put options 55,000 - - 55,000
Dividends on preferred
stock - - (48,813) (48,813)
Common stock subject to
redemption - (2,000,000) - (2,000,000)
Expiration of put options of
common stock subject to
redemption - 104,000 - 104,000
Net income for the year
ended September 30, 1999 - - 286,295 286,295
-------------- ------------------- ---------------- --------------
Balance September 30, 1999 $ 3,531,426 $ (1,896,000) $ 1,827,971 $ 3,471,178
Conversion of preferred (31) - - -
stock
Expiration of put options
of common stock subject
to redemption - 1,896,000 - 1,896,000
Compensation related to
board of directors 45,455 - - 45,468
Compensation related to
put options 96,250 - - 96,250
Compensation related to
grant of stock options 1,239,687 - - 1,239,687
Exercise of stock option 499,500 - - 500,000
Issuance of restricted
common stock 998,333 - - 1,000,000
Dividends on preferred
stock - - (32,721) (32,721)
Net loss for the year ended
September 30, 2000 - - (6,796,862) (6,796,862)
-------------- ------------------- ---------------- --------------
Balance September 30, 2000 $ 6,410,620 $ - $ (5,001,612) $ 1,419,000
============== =================== ================ ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE> 16
NETWORK SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Years ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (6,796,862) $ 286,295
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
Loss (earnings) from discontinued operations, net of taxes 8,495,293 (286,295)
Gain from sale of discontinued operations, net of taxes (1,751,891) -
Tax benefit attributable to continuing operations (27,540) -
Changes in income taxes receivable (106,417) -
Changes in accounts payable 81,000 -
Changes in amounts due to purchasers of discontinued operations 106,417 -
--------------- -------------
Net cash flows used in operating activities - -
Cash flows from investing activities:
Net proceeds from sale of discontinued operations 1,500,000 -
--------------- -------------
Net cash provided by investing activities 1,500,000 -
Cash flows from financing activities:
Principal payments on note payable (2,250,000) -
Proceeds from issuance of restricted common stock 1,000,000 -
Proceeds from exercise of stock option 500,000 -
--------------- -------------
Net cash used by financing activities (750,000) -
Net increase in cash from continuing operations 750,000 -
Cash and cash equivalents at beginning of year, from continuing operations - -
--------------- -------------
Cash and cash equivalents at end of year $ 750,000 $ -
=============== =============
Supplemental cash flow information (continuing operations):
Interest paid $ - $ -
Income taxes paid $ - $ -
Supplemental schedule of non-cash investing and financing activities
(continuing operations):
Notes receivable received as partial payment from sale of discontinued operations $ 1,500,000 $ -
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE> 17
NETWORK SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
1. BACKGROUND INFORMATION
Network Systems International, Inc. (the "Company" or "NESI"), a Nevada
corporation, is a holding company as of September 30, 2000. Until the sale of
its operations completed on September 30, 2000, it was a vertical market
company that was the developer of the net collection(TM) and Primac software
systems. These products are suites of supply chain management and
enterprise-wide software products for the textile, apparel, home furnishing,
and printing industries. The Company offered hardware products as well as
consulting and implementation services in order to provide a solution to its
customer's technology needs.
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
NASDAQ Small Cap under the symbol NESI.
Effective September 30, 2000, the Company completed the sale of all operating
lines of business to its former management group as discussed under
Discontinued Operations in Note 9.
On November 10, 2000, NESI completed the acquisition of 100% of the issued and
outstanding common stock of InterLAN Communications, Inc.
("InterLAN")(http://www.interlancom.com), a Virginia corporation, in exchange
for $150,000 in cash, 250,000 shares of the common stock of NESI and
promissory notes in the amount of $150,000.
InterLAN is a provider of data communications and networking infrastructure
solutions and consulting for business, government and education. InterLAN
specializes in Remote Access including VPN (Virtual Private Networking), Wide
Area and Local Area technologies to include Fiber Optic and Gigabit. The
product line includes High Speed Switches, Routers, VPN Gateways, Servers and
Workstations. InterLAN's products assist in the transmission of data, voice,
and Internet information.
2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION:
The financial statements include the accounts of Network Systems
International, Inc. and the discontinued operations of Network Systems
International of North Carolina, Inc. and 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. All of its cash and cash equivalents are in the custody of
one major financial institution.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying values of cash and cash equivalents, notes receivable, income
taxes receivable, accounts payable, amounts due to purchasers of discontinued
operations and note payable approximate fair value as of September 30, 2000
because of the short maturity of these instruments.
PREFERRED STOCK:
At September 30, 2000 the Company had 3,268 shares outstanding 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 share is convertible to 50 shares of the
17
<PAGE> 18
Company's common stock. Dividends on the Series A are payable monthly in cash
at a rate of 12% of the original issue.
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 stock
option plan. 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 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.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities," which was amended by Statement
of Financial Accounting Standards No. 138. This statement standardized the
accounting for derivative instruments by requiring that an entity recognize
the items as assets and liabilities in the statement of financial position and
measure them at fair value. SFAS No. 133 was to become effective for fiscal
years beginning after June 15, 1999; however, in June 1999, Statement of
Financial Accounting Standards No. 137 was issued extending the effective date
to June 15, 2000. The Company adopted this statement on October 1, 2000 and
the effect of the adoption will not have a material impact on its results of
operations or financial position.
RECLASSIFICATION:
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. NOTE PAYABLE
In connection with the Stock Purchase Agreement and transactions discussed in
Note 9, the Company entered into an Assignment and Assumption Agreement with
the Company's lender whereby the Company committed to remit $3,000,000 of the
proceeds from the transactions to the lender in exchange for a release from
any further liability under a revolving credit agreement assigned to the
discontinued operations. At September 30, 2000, the Company was in default
under certain material provisions of the revolving credit agreement, including
the financial covenants related to (1) consolidated cash flow to consolidated
funded debt and (2) consolidated liabilities to consolidated tangible net
worth. As a result, the debt under this agreement has been shown as a current
liability in the accompanying balance sheet. By September 30,
18
<PAGE> 19
2000, the Company had made payments totaling $2,250,000 to the lender, leaving a
remaining balance of $750,000. Subsequent to September 30, 2000, the remaining
balance of the note was paid and, accordingly, the defaults were cured. The
Company shall be fully and completely released and discharged of all of its
obligations with the lender on April 11, 2001, including any guaranty of
$400,000 of debt assigned to the discontinued operation.
4. COMMITMENTS
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 had
the right to put 10,000 shares of restricted Company stock owned by the
consultant back to the Company each quarter. The Company had the obligation to
purchase those shares for four dollars per share upon notification by the
consultant. The consultant, however, could elect to sell the quarterly
allotment on the open market relieving the Company of its obligation to
purchase the shares. The consultant could have elected to extend the term of
the Company's obligation an additional eight years or until a total of 500,000
shares had been sold to the Company and/or on the open market. During the year
ended September 30, 1999, the Consultant placed 26,000 shares in the open
market, and as of September 30, 1999, 474,000 common shares were still subject
to redemption. As a result of this agreement, $1,896,000 of common stock was
recorded as common stock subject to redemption in the Company's balance sheet
at September 30, 1999. The redemption agreement was terminated on May 1, 2000
when the Company entered into a two-year employment agreement with the
consultant, which was included in the discontinued operations discussed in
note 9, and, accordingly, the common stock subject to redemption was
reclassified to stockholders' equity. During the years ended September 30,
2000 and 1999, the Company recognized non-cash compensation expense of $96,250
and $55,000, respectively.
5. EMPLOYEE BENEFIT PLANS
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 provided 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 option became fully vested with the change of control
and was exercised on September 1, 2000. 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 and during the year ended September 30, 2000, the
remaining compensation expense in the amount of $1,203,124 was recognized
since the option became fully vested during the year.
CONSULTANT OPTION AGREEMENT
On August 25, 2000, the Company granted an option to a consultant of the
Company in exchange for services rendered to the Company. The agreement
provided the consultant with a stock option for 25,000 shares of the Company's
common stock to be purchased at $.60 per share. The option is fully vested and
expires in three years if not exercised. The Company recognized a non-cash
compensation expense of $36,563 during the year ended September 30, 2000.
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 is 500,000 of shares authorized but unissued. As of September 30,
2000, none of the 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 option
19
<PAGE> 20
activity, all of which are exercisable as a result of the change in control,
at prices ranging from $4.00 to $5.00 per share, at September 30, 2000:
<TABLE>
<CAPTION>
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 September 30, 1999 252,000 248,000 $ 4.16
--------- ---------- ----
Granted - - -
Exercised - - -
Cancelled 22,000 (22,000) 4.00
--------- ---------- ----
Balance at September 30, 2000 274,000 226,000 $ 4.18
========= ========== ====
</TABLE>
The employee option grants provide that the option will be cancelled sixty
days after an employee leaves employment with the Company. As a result of the
transactions discussed in Note 9, Discontinued Operations, the remaining
options outstanding at September 30, 2000 were cancelled on November 29, 2000,
as all employees left employment with the Company effective September 30,
2000.
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 for the two years ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C>
Actual net earnings (loss) $ (6,796,862) $ 286,295
Pro forma net loss $ (6,870,767) $ (23,045)
Pro forma basic net earnings (loss) per share $(0.85) $ 0.00
Pro forma diluted net loss per share $(0.85) $ (0.00)
</TABLE>
Under SFAS 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model. At September 30, 1999,
the following weighted average assumptions were used: risk-free interest rate
of 5.8%, no expected dividends, a volatility factor of 87.3%, and a weighted
average expected life of the options of 5 years. There were no option grants
during the year ended September 30, 2000.
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
20
<PAGE> 21
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.
6. INCOME TAXES
The provision for income taxes for the years ended September 30, consists of
the following components:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Continuing operations:
Federal:
Current $ (27,540) $ -
Deferred - -
------------- --------------
$ (27,540) $ -
============= ==============
Discontinued operations:
Federal:
Current $ (116,873) $ 290,453
Deferred (394,258) (133,299)
------------- --------------
(511,131) 157,154
------------- --------------
State:
Current 8,134 28,130
Deferred (16,845) (111,735)
------------- --------------
(8,711) (83,605)
------------- --------------
$ (519,842) $ 73,549
============= ==============
</TABLE>
Three are no differences between income taxes from continuing operations
computed at the federal statutory rate and the provision for income taxes.
The significant temporary difference that gives rise to a deferred tax asset
as of September 30, 2000 is as follows:
<TABLE>
<CAPTION>
2000
<S> <C>
Deferred tax asset:
Federal research and development credit carryforwards $ 161,052
-------
Total deferred tax asset 161,052
Less valuation allowance 161,052
-------
Net deferred tax asset $ -
=======
</TABLE>
The net change in the total valuation allowance for the year ended September
30, 2000 was an increase of $161,052. A valuation allowance was not recorded
against the deferred tax assets at September 30, 1999.
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 projected future taxable income and tax planning strategies in
making this assessment.
At September 30, 2000, the Company has federal research and development credit
carryforwards of $161,052 to offset future federal income taxes.
21
<PAGE> 22
7. EARNINGS PER SHARE
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.
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Loss from continuing operations $ (53,460) $ -
Less preferred stock dividends 32,721 48,813
------- --------
Loss available to common shareholders used in basic
and diluted EPS (85,731) (48,813)
------ ------
Earnings (loss) from discontinued operations available to common
shareholders used in basic and diluted EPS $ (6,743,402) $ 286,295
========= =======
Weighted average number of common shares used in basic
and diluted EPS 8,167,253 7,718,419
--------- ---------
</TABLE>
At September 30, 2000 and 1999, all common stock equivalents were antidilutive
and are not included in the earnings per share calculations. The Company has
251,000 and 748,000 options to purchase common shares and 3,268 and 3,906 shares
of preferred stock that were antidilutive and are not included in the earnings
per share calculations for 2000 and 1999, respectively. At September 30, 1999
common stock subject to redemption was antidilutive.
8. LEGAL PROCEEDINGS
Canton Financial Services Corporation vs. Network Systems International, Inc.,
a Nevada corporation, Network Information Services, Inc., a North Carolina
corporation, Network Investment Group, Inc., a North Carolina corporation, and
Network Partners, L.L.C., a North Carolina limited liability corporation;
Hillsborough County Circuit Court Case No. 98-00657, Hillsborough County,
Florida - 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 Plaintiff is contending
that the Company owes Plaintiff a fee because it located an entity with which
the Company merged. The Company is vigorously defending the case. The Company
contends that it did not have a contract with the Plaintiff, and that it did
not ratify the actions of the Renno Group, which did enter into a Consulting
Agreement with the Plaintiff. The Company did have a contract with the Renno
Group. The Plaintiff contends that it is entitled to between 340,000 shares
and 600,000 shares of the Company's common stock. The amount of the
Plaintiff's claim in dollars is difficult to quantify because it would depend
upon the date the shares are valued. The Company also contends that the
Plaintiff is estopped from pursuing its claim, because the Plaintiff took the
position in another lawsuit that Renno alone was responsible for paying it
under the Consulting Agreement.
The Company attempted without success to settle the case. The Company is now
defending the case vigorously.
There is still outstanding discovery from the Plaintiff. Trial may be set for
Spring 2001. The likelihood of an unfavorable outcome is unknown. The Company
has strong defenses, but it is possible that there will be an unfavorable
outcome. It is impossible to precisely quantify the maximum potential loss to
the Company, as any potential loss would depend upon the valuation date of the
stock.
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
22
<PAGE> 23
Company's financial position or, depending upon the period or amount of
settlement, if any, potentially could have a material effect on overall trends
in results of operations.
9. DISCONTINUED OPERATIONS
On July 10, 2000, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with a group of investors (the "Investors").
Subject to the terms and conditions of the Stock Purchase Agreement, the
Company issued 1,666,667 new, restricted shares of the Company's common stock
at $0.60 per share to the Investors in a private placement organized by
Millennium Holdings Group, Inc. ("Millennium"). The sale under the Stock
Purchase Agreement was subject to the satisfaction of the following
conditions, which are discussed in more detail below: (i) certain of the
Company's current management shareholders ("Management Shareholders") must
agree to sell 2,700,000 shares of the Company's common stock to accredited
investors arranged by Millennium, (ii) Management Shareholders must grant the
Company a put option giving the Company the right to require the Management
Shareholders to purchase substantially all of the assets associated with the
Company's current business for $3,000,000, (iii) all of the Company's current
directors, except Robbie Efird, must resign and a designated representative of
the Initial Investors must be appointed to replace the former directors
effective as of the closing date of the stock sale, and (iv) the Company must
receive the consent of its current revolving credit lender, Wachovia Bank,
N.A. ("Wachovia") to the terms of the Stock Purchase Agreement. All of these
conditions were met and the sale under the Stock Purchase Agreement closed on
July 25, 2000.
As a condition to the Investors' obligations pursuant to the terms of the
Stock Purchase Agreement, four of the Company's management shareholders,
Robbie M. Efird, E. W. "Sonny" Miller, Jr., David F. Christian and James W.
Moseley (collectively, the "Selling Shareholders") entered into Stock Purchase
Agreements dated July 10, 2000 (the "Investment Agreements") to collectively
sell 2,700,000 shares to Herbert Tabin, a managing partner with Millennium,
for $1,500,000 ($0.56 per share).
As a further condition to the Investors' obligations under the Stock Purchase
Agreement, the Selling Shareholders granted the Company a put option, expiring
forty-five (45) days after the closing date, giving the Company the right to
require the Selling Shareholders to purchase, pursuant to a Stock Purchase
Agreement, substantially all of the Company's operating assets and liabilities
(the "Company Assets") and substantially all of the operating assets and
liabilities of Vercom Software, Inc., a wholly-owned subsidiary corporation of
the Company ("Vercom") (the "Vercom Assets")(the Company Assets and the Vercom
Assets shall collectively be referred to as the "Assets") for $3,000,000. The
Assets include all of the operating assets related to the Company's business
as conducted at that time. During this 45-day period, the Company will
determine the value of the Assets and evaluate whether it is in the best
interests of the Company and its shareholders for the Company to sell the
Assets to the Selling Shareholders at the put price, to sell the Assets to a
third party, to retain the Assets or to take other appropriate action.
In order to facilitate the Company's potential exercise of the put option, the
Company contributed the Company Assets to a recently formed wholly owned
subsidiary corporation, Network Systems International of North Carolina, Inc.
on July 20, 2000. As part of this process, the Company assigned its rights and
obligations under substantially all of its current agreements (including its
software license agreements, service agreements and employment agreements) to
Network Systems International of North Carolina, Inc., a wholly owned
subsidiary of the Company.
In order to satisfy a condition to the Investors' obligations under the Stock
Purchase Agreement, all of the Company's officers and directors resigned.
Herbert Tabin was appointed to the Company's Board of Directors and named
President as of the closing date.
Effective September 30, 2000, the Company elected to exercise the put option
and require the Selling Shareholders to purchase the Assets for $3,000,000.
The Selling Shareholders made an initial cash
23
<PAGE> 24
payment of $1,500,000 to the Company and delivered a non-recourse promissory
note in the principal amount of $1,500,000, payable in one hundred twenty
(120) days, for the remaining purchase price. The Selling Shareholders pledged
all of their remaining 2,925,856 shares of the Company's common stock (the
"Pledged Shares") as security for the payment of the promissory note. The
Company's right to exercise the put option was conditioned upon the Company
using $2,000,000 of the sales price received for the Assets to reduce the
obligation under the revolving credit arrangement with Wachovia. The Company
used $1,250,000 from the Selling Shareholders' initial cash payment to reduce
the outstanding indebtedness to $750,000. As a further condition to the
Company's right to exercise the put option, the Company agreed to change its
name on its corporate charter, to discontinue the use of the name "Network
Systems International" and to transfer all rights to the name "Network Systems
International" to the Selling Shareholders. The Company has announced plans to
change its name to OnSpan Networking, Inc.
Subsequent to September 30, 2000, Millennium sold the pledged shares to
accredited investors on behalf of the Selling Shareholders for $1,500,000, or
$0.513 per share, and remitted the proceeds to the Company. The Company then
paid the remaining balance of the note payable.
The operating results of discontinued operations are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net sales $ 8,124,487 $14,249,657
Earnings (loss) before provision for income taxes $(10,257,477) $ 359,844
Income tax expense (benefit) (1,762,184) 73,549
------------ -----------
(8,495,293) 286,295
------------ -----------
Gain on disposal of discontinued operations 2,994,233 -
Income tax expense 1,242,342 -
------------ -----------
1,751,891 -
------------ -----------
Earnings (loss) from discontinued operations $ (6,743,402) $ 286,295
============ ===========
</TABLE>
10. SUBSEQUENT EVENT (UNAUDITED)
On November 10, 2000, NESI completed acquisition of 100% of the issued and
outstanding common stock of InterLAN, in exchange for $150,000 in cash,
250,000 shares of the restricted common stock of NESI, with a discounted value
of $337,500, and promissory notes in the amount of $150,000.
InterLAN is a provider of data communications and networking infrastructure
solutions and consulting for business, government and education. InterLAN
specializes in Remote Access including VPN (Virtual Private Networking), Wide
Area and Local Area technologies to include Fiber Optic and Gigabit. The
product line includes High Speed Switches, Routers, VPN Gateways, Servers and
Workstations. InterLAN's products assist in the transmission of data, voice,
and Internet information.
24
<PAGE> 25
The transaction is accounted for using the purchase method of accounting, with
the assets and liabilities of InterLAN being recorded at fair values. The
transaction resulted in goodwill in the amount of $388,208, which will be
amortized over ten years. Unaudited pro forma results of operations for the
years ended September 30, 2000 and 1999, as if the acquisition had occurred as
of the beginning of each year, follow. The pro forma results include estimates
and assumptions which management believes are reasonable. However, pro forma
results are not necessarily indicative of the results that would have occurred
if the business combination had been in effect on the dates indicated, or
which may result in the future. The purchase price allocation is a preliminary
estimate and the actual amounts could differ from this estimate.
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Sales $ 4,484,031 $2,462,555
=========== ==========
Net earnings (loss) from continuing operations $ 47,833 $ (13,347)
Net earnings (loss) from discontinued operations (6,743,402) 286,295
----------- ----------
Net earnings (loss) $(6,695,569) $ 272,948
Dividends on preferred shares 32,721 48,813
----------- ----------
Net earnings (loss) applicable to common shares $(6,728,290) $ 224,135
=========== ==========
Earnings (loss) per common share, basic and diluted:
Net earnings (loss) from continuing operations $ .00 $ (.01)
Net earnings (loss) from discontinued operations (.80) .04
--- ---
$ (.80) $ .03
=== ===
</TABLE>
25
<PAGE> 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
The following table sets forth the names, ages and current positions with the
Company held by the Directors, Executive Officers and Significant Employees,
together with the date such positions were assumed. There is no immediate
family relationship between or among any of the Directors, Executive Officers
or Significant Employees, except Ms. Dermer is the sister-in-law of Mr. Tabin,
and the Company is not aware of any arrangement or understanding between any
Director or Executive Officer and any other person pursuant to which he was
elected to his current position.
<TABLE>
<CAPTION>
Position or Office Date First
Name Age With the Company Elected
<S> <C> <C> <C>
Herbert Tabin 33 President/CEO/Director Jul 2000
Marissa Dermer 32 Treasurer/CFO/Director Sep 2000
G. Anthony Munno 39 Director Nov 2000
Thomas Cerami 26 Director Aug 2000
</TABLE>
HERBERT TABIN is a Director of the Company and is currently the President and
CEO. Mr. Tabin was the Chief Operating Officer and founder of publicly traded
Evolve One, Inc., formerly International Internet, Inc., and had served as its
Vice President until December 2000. Mr. Tabin has been a Director of Evolve
One, Inc. since February 1998. Mr. Tabin is also currently vice president of
Millennium Holdings Group, Inc. a private Florida based venture capital firm.
Mr. Tabin has been Vice President with Millennium Holdings since 1996. In
February 1999, Mr. Tabin became President of Interactive Golf Marketing a
publicly traded company that became WowStores.com. In August 1999, Mr. Tabin
resigned as President of WowStores.com. Previously, Mr. Tabin was a Vice
President of Marketing with LBI Group, Inc., a merchant banking and venture
capital group from April 1995 to December 1996. From September 1993 to March
1995 Mr. Tabin was a vice president with HBL Associates a financial relations
firm in New York City. From 1989 to August 1993 Mr. Tabin was employed with
the American Stock Exchange and Three Long Island based Stock Brokerage firms.
Mr. Tabin received a Bachelor of Science in Business Economics from the State
University of New York At Oneonta in 1989. In March 2000, the State University
of New York At Oneonta named their campuses largest computer lab, the Tabin
Computer Lab.
MARISSA DERMER is a Director of the Company and is currently the Chief
Financial Officer. From September 1997 to April 2000, Ms. Dermer was an
assistant controller with Mitchell Hutchins Asset Management, Inc., the mutual
fund advisory group of Paine Webber Inc. Prior to her employment with Paine
Webber, Ms. Dermer was a manager of David Berdon and Company LLP, a leading
public accounting firm headquartered in New York City from 1990 to 1997. Ms.
Dermer graduated in 1990 from the State University of New York at Albany with
a degree in Business/Accounting.
26
<PAGE> 27
G. ANTHONY MUNNO is a Director of the Company. Mr. Munno was the founder,
President and CEO of interLAN Communications, Inc. a privately held Virginia
based data communications and networking company. From March 1990 to August
1995 Mr. Munno was a Director of Sales for Microcom Incorporated, a publicly
traded manufacturer of modems and other wide area networking products. Mr.
Munno was instrumental in Microcom's surge in revenue growth from 1992 through
1995. From October 1988 to March 1990, Mr. Munno held the position of Major
Business Opportunities, Manager of Systems, and Tests for Government
Technology Services Inc. (GTSI) a publicly traded systems provider to
government and education. From January 1987 to October 1988, Mr. Munno was
employed as a Product Specialist for SMS Data Products Group of Virginia.
Prior to his civilian career, Mr. Munno attended the City College of Chicago
and was a member of the US Army for seven years where he was awarded the
Meritorious Service Medal twice while a member of the US Army Signal Corps.
THOMAS CERAMI is a Director of the Company and is currently the Vice President
of Professional Services at IceWeb Communications formerly American Computer
Systems, Inc. (ACS). Prior to his employment with ACS, Mr. Cerami served as a
New Business Development Manager at STMS a Vienna, Virginia, based company
which was subsequently acquired by publicly traded Dulles, Virginia based Dunn
Computer Corporation a leading supplier of e-business platforms and network
infrastructure solutions. During his employment at Dunn Computer, Mr. Cerami
was the lead engineer for the Washington Metropolitan Area Transit Authority
Y2k Project, the United States Department of Agriculture Exchange Migration
and the Blue Cross Blue Shield Help Desk. Mr. Cerami is currently attending
George Mason University.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT:
During the fiscal year ended September 30, 2000, Mr. Tabin, Ms. Dermer and Mr.
Cerami each omitted filing their respective Form 3's to report when they
became reporting persons. Mr. Tabin omitted filing Form 4 when he acquired
the Company's common stock but did file Schedule 13D. Mr. Tabin, Ms. Dermer
and Mr. Cerami have filed Form 5's with the SEC for the fiscal year ended
September 30, 2000.
27
<PAGE> 28
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the cash compensation of the Company's chief
executive officer and each officer whose total cash compensation exceeded
$100,000, for the three fiscal years ended September 30, 2000.
SUMMARY COMPENSATION TABLE - ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Other annual
Name and principal position Year Salary Bonus compensation(1)
--------------------------- ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Herbert Tabin 2000 N/A N/A N/A
Chairman of the Board 1999 N/A N/A N/A
and Chief Executive Officer 1998 N/A N/A N/A
since July 25, 2000
Robbie M. Efird 2000 $183,333 0 $7,626
Chairman of the Board 1999 $167,456 0 $6,970
and Chief Executive Officer 1998 $150,000 $5,718 $3,220
until July 25, 2000
Christopher N. Baker 2000 $183,333 0 $24,208
President and Chief 1999 $138,505 0 $60,996
Operating Officer 1998 N/A N/A N/A
until July 25, 2000
</TABLE>
(1) Represents the value of estimated personal use of Company owned
vehicles, relocation expenses and the value of disability insurance
premiums paid by the Company under a salary continuation program.
SUMMARY COMPENSATION TABLE - LONG-TERM COMPENSATION
<TABLE>
<CAPTION>
Securities
Underlying
Options/
Name and principal position Year SAR's (#)
--------------------------- ---- ---------
<S> <C> <C>
Herbert Tabin 2000 N/A
Chairman of the Board 1999 N/A
and Chief Executive Officer 1998 N/A
since July 25, 2000
Robbie M. Efird 2000 N/A
Chairman of the Board 1999 N/A
and Chief Executive Officer 1998 N/A
until July 25, 2000
Christopher N. Baker 2000 N/A
President and Chief 1999 500,000
Operating Officer 1998 N/A
until July 25, 2000
</TABLE>
In April 1999, the Board of Directors of the Company adopted, subject to
stockholder approval, the Company's Long-Term Stock Incentive Plan (the "Stock
Incentive Plan"). The purposes of the Stock
28
<PAGE> 29
Incentive Plan are to closely associate the interests of the key associates
(management and certain other employees) of the Company and its adopting
subsidiaries with the stockholders by reinforcing the relationship between
participants' rewards and stockholder gains, to provide key associates with an
equity ownership in the Company commensurate with Company performance, as
reflected in increased stockholder value, to maintain competitive compensation
levels, and to provide an incentive to key associates for continuous
employment with the Company.
Under the Stock Incentive Plan, the Company may grant (i) incentive stock
options intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and (ii) options that are not qualified as
incentive stock options ("nonqualified stock options").
Executive officers, management and other employees of the Company capable of
making a substantial contribution to the success of the Company are eligible
to participate in the Stock Incentive Plan.
The Stock Incentive Plan is administered by a Committee consisting of three
members appointed by the Board of Directors of the Company (the "Committee").
The Committee, in its sole discretion, has the authority to: (i) designate the
key associates or classes of key associates eligible to participate in the
Stock Incentive Plan; (ii) to grant awards provided in the Stock Incentive
Plan in the form and amount determined by the Committee; (iii) to impose such
limitations, restrictions and conditions upon any such award as the Committee
shall deem appropriate; and (iv) to interpret the Stock Incentive Plan.
The maximum aggregate number of shares of Common Stock available for issuance
under the Stock Incentive Plan is 500,000 shares. The shares of Common Stock
available for issuance under the Stock Incentive Plan are subject to
adjustment for any stock dividend or distribution, recapitalization, merger,
consolidation, split-up, combination, exchange of shares or the like. Shares
issued may consist in whole or in part of authorized but unissued shares or
treasury shares. Shares tendered by a participant as payment for shares issued
upon exercise of an option shall be available for issuance under the Stock
Incentive Plan. Any shares of Common Stock subject to an option, which for any
reason is terminated unexercised or expires shall again be available for
issuance under the Stock Incentive Plan.
Subject to the provisions of the Stock Incentive Plan, the Committee may award
incentive stock options and nonqualified stock options and determine the
number of shares to be covered by each option, the option price therefor and
the conditions and limitations applicable to the exercises of the option. Each
option shall be exercisable at such times and subject to such terms and
conditions as the Committee may specify in the applicable award or thereafter.
Incentive stock options granted under the Stock Incentive Plan are intended to
qualify as such under section 422 of the Code. No incentive stock option
granted under the Stock Incentive Plan may be exercisable more than ten years
from the date of grant.
The option price per share for nonqualified stock options and incentive stock
options must at least equal the fair market value of the Common Stock on the
date the option is granted.
Each option shall be evidenced by a written stock option agreement, in such
form as the Committee may from time to time determine, executed by the Company
and the grantee, stating the number of shares of Common Stock subject to the
option.
The Committee may at any time and from time to time terminate or modify or
amend the Stock Incentive Plan in any respect, except that without stockholder
approval the Committee may not (i) increase the maximum number of shares of
Common Stock which may be issued under the Stock Incentive Plan, (ii) extend
the period during which any award may be granted or exercised, (iii) extend
the term of the Stock Incentive Plan, or (iv) change the associates/employees
or group of associates/employees eligible to receive incentive stock options.
29
<PAGE> 30
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent of
Securities total options/
Underlying SARs granted Exercise
Options/ to employees or base
SARs granted in fiscal price Expiration
Name (#) year ($/Sh) date
<S> <C> <C> <C> <C>
Herbert Tabin 0 0 - -
Robbie M. Efird 0 0 - -
Christopher N. Baker 0 0 - -
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
Number of securities unexercised
underlying unexercised in-the-money
Shares options/SARs at options/SARs
acquired FY-end (#) at FY-end ($)
on Value Exercisable/ Exercisable/
Name exercise (#) realized ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Herbert Tabin 0 0 0 0
Robbie M. Efird 0 0 0 0
Christopher N. Baker 500,000 $1,468,750 0 0
</TABLE>
There were no long-term incentive plan awards during fiscal year 2000.
The former Directors of the Company were granted 13,750 shares of the common
stock of the Company for their services during fiscal year 2000. The Company
does not have a formal Director compensation policy.
The Company does not have an employment agreement with its current CEO, Mr.
Herbert Tabin.
The Company has not formed new audit and compensation committees.
30
<PAGE> 31
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table indicates all persons who, as of November 30, 2000, the
most recent practicable date, are known by the Company to own beneficially
more than 5% of any class of the Company's voting securities and all Directors
of the Company and all Officers who are not Directors of the Company, as a
group. As of November 30, 2000, there were 10,254,671 shares of the Company's
common stock outstanding. Percent of class assumes all options have been
exercised.
<TABLE>
<CAPTION>
Name and address Amount and Nature
Title of Beneficial of Beneficial % of
of class Owner Owner Class
<S> <C> <C>
Common Herbert Tabin 2,800,000(1) 26.96%
6413 Congress Ave, Ste 230
Boca Raton, FL 33487
Common Marissa Dermer 30,000(1) 0.29%
6413 Congress Ave, Ste 230
Boca Raton, FL 33487
Common G. Anthony Munno 120,535 1.16%
131 Elden Street
Herndon, VA
Common Thomas Cerami 0 0.00%
14155 G Sullyfield Circle
Chantilly, VA 20151
Common All directors and executive officers 2,950,535 28.41%
As a group (four persons)
</TABLE>
(1) Includes an option granted to Mr. Tabin on October 23, 2000 for
100,000 shares with an exercise price of $1.13 per share, the NASDAQ
closing price for the stock on that date. Includes an option granted
to Ms. Dermer on October 23, 2000 for 30,000 shares with an exercise
price of $1.13 per share, the NASDAQ closing price for the stock on
that date. The options were granted by the Board of Directors in lieu
of current compensation agreements.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 10, 2000, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with a group of investors (the "Investors").
Subject to the terms and conditions of the Stock Purchase Agreement, the
Company issued 1,666,667 new, restricted shares of the Company's common stock
at $0.60 per share to the Investors in a private placement organized by
Millennium Holdings Group, Inc. ("Millennium"). The sale under the Stock
Purchase Agreement was subject to the satisfaction of the following
conditions, which are discussed in more detail below: (i) certain of the
Company's current management shareholders ("Management Shareholders") must
agree to sell 2,700,000 shares of the Company's common stock to accredited
investors arranged by Millennium, (ii) Management Shareholders must grant the
Company a put option giving the Company the right to require the Management
Shareholders to purchase substantially all of the assets associated with the
Company's current business for $3,000,000, (iii) all of the Company's current
directors, except Robbie Efird, must resign and a designated representative of
the Initial Investors must be appointed to replace the former directors
effective as of the closing date of the stock sale, and (iv) the Company must
receive the consent of its current revolving credit lender, Wachovia Bank,
N.A. ("Wachovia") to the terms of the Stock Purchase
31
<PAGE> 32
Agreement. All of these conditions were met and the sale under the Stock
Purchase Agreement closed on July 25, 2000.
As a condition to the Investors' obligations pursuant to the terms of the
Stock Purchase Agreement, four of the Company's management shareholders,
Robbie M. Efird, E. W. "Sonny" Miller, Jr., David F. Christian and James W.
Moseley (collectively, the "Selling Shareholders") entered into Stock Purchase
Agreements dated July 10, 2000 (the "Investment Agreements") to collectively
sell 2,700,000 shares to Herbert Tabin, a managing partner with Millennium,
for $1,500,000 ($0.56 per share).
As a further condition to the Investors' obligations under the Stock Purchase
Agreement, the Selling Shareholders granted the Company a put option, expiring
forty-five (45) days after the closing date, giving the Company the right to
require the Selling Shareholders to purchase, pursuant to a Stock Purchase
Agreement, substantially all of the Company's operating assets and liabilities
(the "Company Assets") and substantially all of the operating assets and
liabilities of Vercom Software, Inc., a wholly-owned subsidiary corporation of
the Company ("Vercom") (the "Vercom Assets")(the Company Assets and the Vercom
Assets shall collectively be referred to as the "Assets") for $3,000,000. The
Assets include all of the operating assets related to the Company's business
as conducted at that time. During this 45-day period, the Company will
determine the value of the Assets and evaluate whether it is in the best
interests of the Company and its shareholders for the Company to sell the
Assets to the Selling Shareholders at the put price, to sell the Assets to a
third party, to retain the Assets or to take other appropriate action.
In order to facilitate the Company's potential exercise of the put option, the
Company contributed the Company Assets to a recently formed wholly owned
subsidiary corporation, Network Systems International of North Carolina, Inc.
on July 20, 2000. As part of this process, the Company assigned its rights and
obligations under substantially all of its current agreements (including its
software license agreements, service agreements and employment agreements) to
Network Systems International of North Carolina, Inc., a wholly owned
subsidiary of the Company.
In order to satisfy a condition to the Investors' obligations under the Stock
Purchase Agreement, all of the Company's officers and directors resigned.
Herbert Tabin was appointed to the Company's Board of Directors and named
President as of the closing date.
Effective September 30, 2000, the Company elected to exercise the put option
and require the Selling Shareholders to purchase the Assets for $3,000,000.
The Selling Shareholders made an initial cash payment of $1,500,000 to the
Company and delivered a non-recourse promissory note in the principal amount
of $1,500,000, payable in one hundred twenty (120) days, for the remaining
purchase price. The Selling Shareholders pledged all of their remaining
2,925,856 shares of the Company's common stock (the "Pledged Shares") as
security for the payment of the promissory note. The Company's right to
exercise the put option was conditioned upon the Company using $2,000,000 of
the sales price received for the Assets to reduce the obligation under the
revolving credit arrangement with Wachovia. The Company used $1,250,000 from
the Selling Shareholders' initial cash payment to reduce the outstanding
indebtedness to $750,000. As a further condition to the Company's right to
exercise the put option, the Company agreed to change its name on its
corporate charter, to discontinue the use of the name "Network Systems
International" and to transfer all rights to the name "Network Systems
International" to the Selling Shareholders. The Company has announced plans to
change its name to OnSpan Networking, Inc.
Subsequent to September 30, 2000, Millennium sold the pledged shares to
accredited investors on behalf of the Selling Shareholders for $1,500,000, or
$0.513 per share, and remitted the proceeds to the Company. The Company then
paid the remaining balance of the note payable.
32
<PAGE> 33
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
The following exhibits are submitted herewith:
<TABLE>
<CAPTION>
Number Page #
------- ------
<S> <C>
11 Statement Re: Computation of per share earnings incorporated
In financial statements
27 Financial Data Schedule 35
</TABLE>
b) Reports on Form 8-K
1. Form 8-K filed with the Securities and Exchange Commission July 10,
2000 announcing the sale of common stock by the management
shareholders.
2. Form 8-K filed with the Securities and Exchange Commission October
17, 2000 announcing the exercise of the Company's option to require
the former management shareholders to acquire their two operating
subsidiaries, Network Systems International of North Carolina, Inc.
and Vercom Software, Inc., for $3,000,000.
3. Form 8-K filed with the Securities and Exchange Commission November
22, 2000 announcing the purchase of InterLAN Communications, Inc.
33
<PAGE> 34
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.
Date NETWORK SYSTEMS INTERNATIONAL, INC.
January 10, 2001 By: /s/ Herbert Tabin
Herbert Tabin, Chief Executive Officer
January 10, 2001 By: /s/ Marissa Dermer
Marissa Dermer, Chief Financial 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.
<TABLE>
<CAPTION>
SIGNATURES DATE
---------- ----
<S> <C>
/s/ Herbert Tabin January 10, 2001
Herbert Tabin
Chairman of the Board,
President, Chief Executive
Officer, and Director
(principal executive)
/s/ Marissa Dermer
Marissa Dermer
Treasurer, Chief Financial Officer and Director January 10, 2001
/s/ Thomas Cerami
Thomas Cerami
Director January 10, 2001
/s/ G. Anthony Munno
G. Anthony Munno
Director January 10, 2001
</TABLE>
34
