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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 of 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2001
[ ] Transition report pursuant to section 13 of 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________________ to
___________________________
Commission File No. 0-21038
NETWORK SIX, INC.
(Exact name of registrant as specified in its charter)
Rhode Island 05-0366090
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
475 Kilvert Street, Warwick, Rhode Island 02886
(Address of principal executive offices, including zip code)
(401) 732-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No ________-.
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As of June 30, 2001 there were 817,591 shares of the registrant's Common Stock,
$.10 par value, outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETWORK SIX, INC.
CONDENSED BALANCE SHEETS
June 30, 2001 Dec. 31, 2000
---------------------- ---------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $1,121,322 $1,650,959
Short term investments 859,387 1,803,387
Contract receivables, less allowance for doubtful accounts of
$49,000 at June 30, 2001 and December 31, 2000 1,344,970 1,094,142
Costs and estimated earnings in excess of
billings on contract 676,455 843,021
Deferred taxes 135,479 268,177
Other current assets 94,391 46,127
-------------- -------------
Total current assets 4,232,004 5,705,813
--------------- --------------
Property and equipment:
Computers and equipment 649,309 639,258
Furniture and fixtures 162,526 162,606
Leasehold improvements 20,191 20,190
--------------- --------------
832,026 822,054
Less: accumulated depreciation and amortization 695,399 659,097
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Net property and equipment 136,627 162,957
Deferred taxes 59,555 79,701
Other assets 27,451 47,007
--------------- --------------
Total assets $4,455,637 $5,995,478
============== =============
2
June 30, 2001 Dec. 31, 2000
---------------------- ---------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt:
Vendors $100,000 $100,000
Others 231,635 354,018
Accounts payable 83,993 31,023
Accrued salaries and benefits 302,088 389,158
Other accrued expenses 99,078 93,021
Billings in excess of costs and
estimated earnings on contracts -- 19,048
Preferred stock dividends payable 81,027 1,473,612
------------ ------------
Total current liabilities 897,821 2,459,880
------------ ------------
Long-term debt, less current portion:
Vendors 442,239 442,239
Others 237,630 416,618
------------ ------------
Total Liabilities 1,577,690 3,318,737
------------ ------------
Stockholders' equity:
Series A convertible preferred stock,
$3.50 par value. Authorized 857,142.85 shares; issued and outstanding
714,285.71 shares at June 30, 2001 and December 31, 2000; liquidation of
$3.50 per share plus unpaid and accumulated dividends 2,235,674 2,235,674
Common stock, $.10 par value. Authorized 4,000,000 shares; issued 825,684
shares at June 30, 2001 and December 31, 2000 82,568 82,568
Additional paid-in capital 1,941,318 1,947,767
Treasury stock recorded at cost, 8,093 shares at June 30, 2001
and 8,693 shares at December 31, 2000 (32,511) (44,360)
Retained earnings (accumulated deficit) (1,349,102) (1,544,908)
------------ ------------
Total stockholders' equity 2,877,947 2,676,741
------------ ------------
Total Liabilities & Stockholders' Equity $4,455,637 $5,995,478
============ ============
3
NETWORK SIX, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED 6/30/01 ENDED 6/30/00 ENDED 6/30/01 ENDED 6/30/00
------------- ------------- ------------- -------------
Contract revenue earned $3,112,898 $3,004,373 $6,059,851 $5,860,411
Cost of revenue earned 2,000,294 1,959,713 3,893,202 3,743,242
------------- ------------ ------------- -------------
Gross profit 1,112,604 1,044,660 2,166,649 2,117,169
Selling, general & administrative
expenses 875,982 804,998 1,584,548 1,535,820
------------- ------------ ------------- -------------
Income from operations 236,622 239,662 582,101 581,349
Other deductions (income)
Interest expense 21,723 42,217 47,954 79,603
Interest earned (38,103) (34,882) (86,649) (70,216)
------------- ------------ ------------- -------------
Income before income taxes 253,002 232,327 620,796 571,962
Provision for income taxes 103,754 95,253 254,579 234,504
------------- ------------ ------------- -------------
Net income $149,248 $137,074 $366,217 $337,458
============= ============ ============= =============
Net income per share:
Basic $0.08 $0.06 $0.24 $0.21
============= ============ ============= =============
Diluted $0.08 $0.06 $0.24 $0.21
============= ============ ============= =============
Shares used in computing net income per
share:
Basic 817,191 819,284 816,041 807,621
============= ============ ============= =============
Diluted 817,191 819,284 816,041 807,621
============= ============ ============= =============
Preferred dividends declared $81,027 $87,260 $170,411 $171,404
============= ============ ============= =============
4
NETWORK SIX, INC.
CONDENSED STATEMENTS OF CASH FLOW
(UNAUDITED)
Six months Six months
ended ended
6/30/01 6/30/00
Net Income $ 366,217 $ 337,458
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 45,391 45,404
Deferred tax assets 152,844 254,650
Loss on sale/disposal of fixed assets 8 1,306
Changes in operating assets and liabilities:
Contract receivables (250,828) (395,625)
Cost and estimated earnings
in excess of billings on contracts 166,566 46,255
Income taxes receivable -- 150,640
Other current assets (48,264) 38,082
Other assets 19,556 37,714
Accounts payable 52,970 (117,741)
Accrued salaries and benefits (87,070) (85,944)
Other accrued expenses 6,057 34,984
Billings in excess of costs
and estimated earnings on contracts (19,048) (24,619)
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Net cash provided by operating activities 404,399 322,564
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5
Six months Six months
ended ended
6/30/01 6/30/00
--------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (19,069) (42,344)
Proceeds from maturities of short-term investments 944,000
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Net cash provided (used in) investing activities 924,931 (42,344)
-------------- ------------
Cash flows from financing activities:
Principal payments on capital lease obligations -- (8,132)
Payments on long term debt (301,371) (298,989)
Payment of preferred stock dividends (1,562,996)
Proceeds from issuance of common stock -- 61,991
Sales (purchases) of treasury stock 5,400 (14,255)
-------------- ------------
Net cash (used in) financing activities (1,858,967) (259,385)
-------------- ------------
Net increase (decrease) in cash (529,637) 20,835
Cash at beginning of period 1,650,959 2,453,935
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Cash at end of period $ 1,121,322 $ 2,474,770
================ ============
Supplemental cash flow information:
Cash (received) paid during the period for:
-------------- ------------
Income taxes $ 121,881 $ (176,880)
============== ============
Interest $ 28,205 $ 2,982
================ ============
6
NETWORK SIX, INC.
Notes to Financial Statements
June 30, 2001
(Unaudited)
(1) Basis of Presentation
The interim financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant
to SEC rules and regulations; nevertheless, management believes that the
disclosures herein are adequate to make the information presented not
misleading. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Form 10K
and Proxy Statement. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the financial position of the Company as of June 30, 2001, and
the statements of income and cash flows for the six month periods ended
June 30, 2001 and 2000, have been included herein. The results of
operations for the interim periods are not necessarily indicative of the
results for the full years.
(2) Under the requirements in Statement of Financial Accounting Standards
(SFAS) No. 128 for calculating basic earnings per share, the dilutive
effect of stock options and warrants are excluded.
(3) Recent Developments
On June 6, 2001, the Company entered into an agreement and plan of
merger with TRW Inc. and NSI Systems Inc., a wholly-owned subsidiary of
TRW, pursuant to which NSI Systems will merge with and into the
Company, with the Company continuing as the surviving corporation. The
consummation of the merger transaction depends on a number of
conditions precedent as described in the merger agreement, including
approval by a majority of the Company's outstanding common stock.
Holders of approximately 43% of the Company's outstanding common stock
and preferred stock (which votes with the common stock on an
as-converted basis) have already entered into voting agreements with
TRW to approve the merger transaction. A special meeting of the
Company's shareholders has been scheduled for August 16, 2001 to
consider and vote upon the adoption and approval of the merger. If the
merger is approved by the required majority vote, holders of the
Company's common stock will be entitled to receive $3.60 per share in
cash, without interest, for each share of Company common stock held by
them. Upon consummation of the merger, all shares of the Company's
common stock will be cancelled and the Company will become a
wholly-owned subsidiary of TRW.
A copy of the merger agreement is included as Appendix A to the
Company's proxy statement that was filed with the Securities and
Exchange Commission by the Company on July 19, 2001 in connection with
the merger. The Company's stockholders are encouraged to read the
proxy statement and merger agreement in their entirety. Shareholders
will be able to obtain a copy of the proxy statement and any
amendments and other relevant documents filed with the Commission at
its website, www.sec.gov. The Company expects to begin mailing the
proxy statement on or about July 23, 2001 to each shareholder of
record on June 29, 2001. More information regarding the special
meeting can be found in the proxy statement.
Also on June 6, 2001, TRW and NSI Systems entered into a purchase and
sale and voting agreement with Saugatuck Capital Company Limited
Partnership III, the holder of all of the outstanding shares of the
Company's Series A Convertible Preferred Stock pursuant to which
Saugatuck will sell its shares of preferred stock to NSI Systems for
a purchase price of $2,500,000 payable in the form of a promissory
note immediately prior to the consummation of the merger transaction
described above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements reflecting the
Company's expectations or beliefs concerning future events that could materially
affect Company performance in the future. All forward-looking statements are
subject to the risks and uncertainties inherent with predictions and forecasts.
They are necessarily speculative statements, and unforeseen factors, such as
competitive pressures, litigation and regulatory and state funding changes could
cause results to differ materially from any that may be expected. Actual results
and events may therefore differ significantly from those discussed in
forward-looking statements. Moreover, forward-looking statements are made in the
context of information available as of the date stated, and the Company
undertakes no obligation to update or revise such statements to reflect new
circumstances or unanticipated events as they occur.
7
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2001, COMPARED TO 2000
Contract revenue increased $108,525 or 4% from $3,004,373 in the three
months ended June 30, 2000 to $3,112,898 in the three months ended June 30, 2001
primarily due to increased billings on the State of Rhode Island Department of
Human Services maintenance and support contract known as InRHODES ("InRHODES").
This revenue was partially offset by lower contract revenues from the State of
Maine Department of Human Services maintenance and support contract known as
MACWIS ("MACWIS") and certain private sector accounts.
Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, increased $40,581 or 2% from
$1,959,713 in the three months ended June 30, 2000 to $2,000,294 in the three
months ended June 30, 2001 due to costs related to increased contract revenues.
Gross profit increased $67,944 or 7%, from $1,044,660 for the three
months ended June 30, 2000 to $1,112,604 for the three months ended June 30,
2001. Gross profit as a percentage of revenue earned was 35% for the three
months ended June 30, 2000 and 36% for the three months ended June 30, 2001.
Selling, general and administrative ("SG&A") expenses increased
$70,984, or 9%, from $804,998 in the three months ended June 30, 2000 to
$875,982 in the three months ended June 30, 2001. Our increased expenses were
the result of incurring approximately $255,000 in expenses exploring strategic
options for Network Six which were significantly offset by a decrease in
marketing and business development staff and activities as a result of our
strategy to re-focus our efforts primarily on the state government health and
human services market. Without the expenses related to exploring strategic
options, our earnings per share would have been $.27 per share for the three
months ended June 30, 2001 instead of $.08 per share.
Interest expense decreased $20,494, or 49%, from $42,217 for the three
months ended June 30, 2000 to $21,723 for the three months ended June 30, 2001
primarily due to a reduction in long-term debt.
Interest income increased $3,221, or 9%, from $34,882, for the three
months ended June 30, 2000 to $38,103 for the three months ended June 30, 2001
due to higher average balances of cash and short term investments.
Income before income taxes increased $20,675, or 9%, from $232,327 for
the three months ended June 30, 2000 to $253,002 for the six months ended June
30, 2001 primarily due to increased contract revenues.
Net income increased $12,174, or 9%, from $137,074 for the three months
ended June 30, 2000 to $149,248 for the three months ended June 30, 2001.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO 2000
Contract revenue increased $199,440 or 3% from $5,860,411 in the six
months ended June 30, 2000 to $6,059,851 in the six months ended June 30, 2001
primarily due to increased billings on the State of Rhode Island Department of
Human Services maintenance and support contract known as InRHODES ("InRHODES").
This revenue was partially offset by lower contract revenues from the State of
Maine Department of Human Services maintenance and support contract known as
MACWIS ("MACWIS") and certain private sector accounts.
Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, increased $149,960 or 4% from
$3,743,242 in the six months ended June 30, 2000 to $3,893,202 in the six months
ended June 30, 2001 due to costs related to increased contract revenues.
Gross profit increased $49,480 or 2%, from $2,117,169 for the six
months ended June 30, 2000 to $2,166,649 for the six months ended June 30, 2001.
Gross profit as a percentage of revenue earned was 36% for the six month periods
ended June 30, 2000 and June 30, 2001.
Selling, general and administrative ("SG&A") expenses increased
$48,728, or 3%, from $1,535,820 in the six months ended June 30, 2000 to
$1,584,548 in the six months ended June 30, 2001. The increased expenses were
the result of the Company incurring approximately $375,000 in expenses
exploring strategic options for the Company which were significantly offset
by a decrease in expenses relating to marketing and business development
staff and activities as a result of the Company's strategy to re-focus its
efforts primarily on the state government health and human services market.
Without the expenses related to exploring strategic options, the Company's
earnings per share would have been $0.51 for the six months ended June 30,
2001 instead of $.24 per share.
Interest expense decreased $31,649, or 40%, from $79,603 for the six
months ended June 30, 2000 to $47,954 for the six months ended June 30, 2001
primarily due to a reduction in long-term debt.
Interest income increased $16,433, or 23%, from $70,216, for the six
months ended June 30, 2000 to $86,649 for the six months ended June 30, 2001 due
to increased cash and short term investments.
8
Income before income taxes increased $48,834, or 9%, from $571,962 for
the six months ended June 30, 2000 to $620,796 for the six months ended June 30,
2001 primarily due to lower interest expense and increased interest income.
Net income increased $28,759, or 9%, from $337,458 for the six months
ended June 30, 2000 to $366,217 for the six months ended June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
In order to finance bid preparation costs and to obtain sufficient
collateral to support performance bonds required by some customers, the Company
has, in the past, entered into joint ventures with other firms with greater
financial resources when bidding for contracts. The Company continues to expand
this practice prospectively as well as pursue more time and material contracts
than it had historically pursued. Time and materials contracts generally do not
require performance bonds and almost always involve less risk to meet customer
requirements.
The Company has historically not received its first contract progress
payments until approximately three to six months after contract award, which
itself was as much as 12 months after proposal preparation commences. The
Company was therefore required to fund substantial costs well before the receipt
of related income, including marketing and proposal costs and the cost of a
performance bond.
The Company has funded its operations through cash flows from
operations, bank borrowings, borrowings from venture partners, and private
placements of equity securities. Net cash provided by operating activities was
$404,398 and $322,564 for the six months ended June 30, 2001 and 2000,
respectively.
Fluctuations in net cash provided by operating activities are primarily
the result of changes in net income, accounts receivable, accounts payable,
accrued salaries and benefits, and costs and estimated earnings in excess of
billings on contracts due to differences in contract milestones and payment
dates.
On September 21, 1998 the Company entered into two five-year term
loans, each for $250,000. One lender was the Small Business Loan Fund
Corporation, ("SBLFC"), a subsidiary of the Rhode Island Economic Development
Corporation. The other lender was the Business Development Corporation of Rhode
Island ("BDC"). The SBLFC loan carries an annual interest rate of 9.5% and must
be repaid over five years. The BDC loan carries an annual interest rate of
10.25%, and an annual deferred fee of $5,000, and must be paid back over five
years. Both term loans are secured by substantially all the assets of the
Company, subordinated to the revolving line of credit with the commercial bank.
The BDC was also issued five-year warrants to purchase 11,500 unregistered
shares of the Company's Common Stock at a price of $4.50 per share. The warrants
expire on September 20, 2003. The fair value of the warrants was estimated by
the Company to be $36,806 using the Black-Scholes model and is being amortized
ratably over the exercise period. Such amount is included in other non-current
assets on the accompanying balance sheet.
On November 15, 1999, the Company entered into a revolving line of
credit with a commercial bank. This $1 million revolving line of credit is
secured by all of the assets of the Company. The Company can borrow up to 80% of
certain qualified accounts receivable at an interest rate of prime plus 1/4%. On
June 30, 2001, the revolving line of credit had an outstanding balance of zero.
On May 8, 2001 the Company's Board of Directors authorized the payment
of the accrued but unpaid dividend as of March 31, 2001 to Saugatuck Capital
Company Limited Partnership III ("Saugatuck"), the Company's preferred
shareholder, subject to the execution and delivery of a definitive merger
agreement with TRW. On June 8, 2001 the Company paid $1,562,996, the accrued
dividend as of March 31, 2001, to Saugatuck.
9
The Company believes that cash flow generated by operations will be
sufficient to fund continuing operations through the end of 2001. The Company
believes that inflation has not had a material impact on its results of
operations to date.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
There are no recently issued financial accounting standards that impact
the Company's financial statements.
10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
None
ITEM 6. EXHIBITS AND REPORTS
(a) None
(b) The following reports on Form 8-K have been filed during the quarter for
which this report is filed.
A current report on Form 8-K, dated April 27, 2001 was filed by the
Company and included a press release dated April 26, 2001 announcing the
Company's results for the three months ended March 31, 2001. A Statement of
Operations (without notes) for the quarters ended March 31, 2001 and 2000 was
included with the filing. A Balance Sheet as of March 31, 2001 and December 31,
2000 was also included with the filing.
A current report on Form 8-K, dated June 13, 2001 was filed by the
Company and included a press release dated June 7, 2001 announcing that the
Company had signed a definitive agreement to be acquired by TRW Inc. The
Agreement and Plan of Merger, dated June 6, 2001 was also included with the
filing.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Network Six, Inc.
Date: July 19, 2001 By: /s/ Kenneth C. Kirsch
---------------------------------------------
Kenneth C. Kirsch
Chairman, President and
Chief Executive Officer
By: /s/ James J. Ferry
---------------------------------------------
James J. Ferry
Vice President of Finance and Administration,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
12