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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(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, 2000
[ ] Transition report pursuant to section 13 of 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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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, 2000 there were 825,534 shares of the registrant's Common Stock,
$.10 par value, outstanding.
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETWORK SIX, INC.
CONDENSED BALANCE SHEETS
ASSETS June 30, 2000 Dec. 31, 1999
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Current assets: (unaudited)
Cash $ 2,474,770 $ 2,453,935
Contract receivables, less allowance for
doubtful accounts of $49,000 at June 30,
2000 and December 31, 1999 1,937,142 1,561,255
Costs and estimated earnings in excess of
billings on contract 713,636 759,891
Refundable taxes on income 150,640
Deferred taxes 32,433 287,083
Other current assets 113,851 151,933
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Total current assets 5,271,832 5,364,737
Property and equipment
Computers and equipment 621,045 590,124
Furniture and fixtures 162,606 162,606
Leasehold improvements 20,191 20,191
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803,842 772,921
Less: accum. depreciation and amortization 613,302 578,015
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Net property and equipment 190,540 194,906
Deferred taxes 513,795 513,795
Other assets 49,037 86,750
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Total assets $ 6,025,204 $ 6,160,188
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June 30, 2000 Dec. 31, 1999
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LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Current liabilities:
Current installment of obligations
under capital leases - $ 8,132
Current portion of long-term debt:
Vendors $ 100,000 100,000
Others 351,522 349,141
Accounts payable 84,454 202,195
Accrued salaries and benefits 422,249 508,193
Other accrued expenses 134,765 99,781
Billings in excess of costs and
estimated earnings on contracts 80,101 124,458
Preferred stock dividends payable 1,290,873 1,119,468
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Total current liabilities 2,463,964 2,511,368
Long-term debt, less current portion:
Vendors 542,239 542,239
Others 474,266 775,636
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Total Liabilities 3,480,469 3,829,243
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, 2000 and December 31,
1999; 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 825,534 shares
at June 30, 2000 and 794,306 at
December 31, 1999 82,553 79,430
Additional paid-in capital 1,947,520 1,888,652
Treasury stock recorded at cost, 11,163 shares
at June 30, 2000 and 8,081 shares at
December 31, 1999 (42,434) (28,179)
Retained earnings (accumulated deficit) (1,678,578) (1,844,632)
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Total stockholders' equity 2,544,735 2,330,945
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Total Liabilities & Stockholders' Equity $ 6,025,204 $ 6,160,188
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NETWORK SIX, INC.
Condensed Statements of Income
(Unaudited)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED 6/30/00 ENDED 6/30/99 ENDED 6/30/00 ENDED 6/30/99
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Contract revenue earned $ 3,004,373 $ 2,550,370 $ 5,860,411 $ 5,238,770
Cost of revenue earned 1,959,713 1,565,228 3,743,242 3,139,753
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Gross profit 1,044,660 985,142 2,117,169 2,099,017
Selling, general & administrative expenses 804,998 694,439 1,535,820 1,356,359
Litigation settlement (note 3) - 3,176,665 - 3,176,665
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Income (loss) from operations 239,662 (2,885,962) 581,349 (2,434,007)
Other deductions (income)
Interest expense 42,217 29,408 79,603 59,364
Interest earned (34,882) (17,770) (70,216) (31,698)
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Income (loss) before income taxes 232,327 (2,897,600) 571,962 (2,461,673)
Provision (credit) for income taxes 95,253 (1,185,362) 234,504 (1,006,631)
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Net income (loss) $ 137,074 ($1,712,238) $ 337,458 ($1,455,042)
=============== =============== =============== ===============
Net income (loss) per share:
Basic $ 0.06 ($2.27) $ 0.21 ($2.06)
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Diluted $ 0.06 ($2.27) $ 0.21 ($2.06)
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Shares used in computing net income (loss) per share:
Basic 819,284 788,573 807,621 781,774
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Diluted 819,284 788,573 807,621 781,774
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Preferred dividends declared $ 87,260 $ 79,469 $ 171,404 $ 158,065
=============== =============== =============== ===============
NETWORK SIX, INC.
Condensed Statement of Cash Flows
(Unaudited)
Six months Six months
ended ended
6/30/00 6/30/99
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Net Income (loss) $ 337,458 $(1,455,042)
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 45,404 40,230
Litigation settlement, excluding cash received - 3,476,665
Loss on sale/disposal of fixed assets 1,306 704
Provision (credit) for deferred taxes - (1,273,851)
Changes in operating assets and liabilities:
Contract receivables (395,625) (121,188)
Cost and estimated earnings
in excess of billings on contracts 46,255 351,496
Income taxes receivable 150,640 -
Other current assets 38,082 (33,654)
Deferred tax assets 254,650 -
Other assets 37,714 78,136
Accounts payable (117,741) 138,638
Accrued salaries and benefits (85,944) (158,370)
Accrued subcontractor exp. 47,380 (16,792)
Other accrued expenses (12,396) 94,903
Billings in excess of costs
and estimated earnings on contracts (24,619) 15,378
Income taxes payable - (780,066)
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Net cash provided by operating activities 322,564 357,187
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Cash flows from investing activities:
Cash proceeds from sale/disposal of capital assets - 350
Capital expenditures (42,344) (102,376)
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Net cash used in investing activities (42,344) (102,026)
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Six months Six months
ended ended
6/30/00 6/30/99
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Cash flows from financing activities:
Principal payments on capital lease obligations (8,132) (35,044)
Payments on long term debt (298,989) (302,108)
Proceeds from issuance of common stock 61,991 92,658
Purchases of treasury stock (14,255) (1,699)
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Net cash (used in) financing activities (259,385) (246,193)
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Net increase in cash 20,835 8,968
Cash at beginning of period 2,453,935 1,442,035
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Cash at end of period $ 2,474,770 $ 1,451,003
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Supplemental cash flow information:
Cash paid during the period for:
Income taxes paid (received) $ (176,880) $ 943,786
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Interest 2,982 31,552
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NETWORK SIX, INC.
Notes to Financial Statements
June 30, 2000
(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, 2000, and the statements of income and cash
flows for the six month periods ended June 30, 2000 and 1999, 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) Litigation Settlement
On May 11, 1999 the Company announced it had entered into a settlement
agreement with the State of Hawaii and Complete Business Solutions, Inc.
("CBSI"). See Item 1 - Legal Proceedings.
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 results 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.
GENERAL
In July 2000, the Company announced that the State of Maine had extended
the Company's contract to support and enhance the MACWIS child welfare system
for another year. The value of the contract is approximately $1.7 million.
YEAR 2000 DISCLOSURE
The "Year 2000 Issue" is the result of the use of two digits instead of
four to define the applicable year. The Company has completed its Year 2000
program by testing and upgrading (when necessary) all software and hardware. At
the time of filing of this 10-Q, the Company has not experienced, or anticipates
experiencing, any significant problems internally or externally to its
operations. Although the Company believes it has completed this upgrade program
successfully, there can be no assurance that this program will continue to be
successful in remediating the impact of the "Year 2000 Issue".
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO 1999
Contract revenue increased $621,641 or 12% from $5,238,770 in the six
months ended June 30, 1999 to $5,860,411 in the six months ended June 30, 2000,
primarily due to the addition of the State of Rhode Island, Department of
Children, Youth and Families maintenance and support contract known as RICHIST
("RICHIST") in February, 2000.
Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, increased $603,489 or 19% from
$3,139,753 in the six months ended June 30, 1999 to $3,743,242 in the six months
ended June 30, 2000 due to increased contract revenues and startup costs
associated with the RICHIST contract.
Gross profit increased $18,152 or 1%, from $2,099,017 for the six months
ended June 30, 1999 to $2,117,169 for the six months ended June 30, 2000. Gross
profit as a percentage of revenue earned decreased from 40% for the six months
ended June 30, 1999 to 36% for the six months ended June 30, 2000. The decrease
in gross profit percentage is due to higher costs relating to the RICHIST
contract.
Selling, general and administrative ("SG&A") expenses increased $179,461,
or 13%, from $1,356,359 in the six months ended June 30, 1999 to $1,535,820 in
the six months ended June 30, 2000, due to an increase in marketing and business
development staff and related activities related to the Company's strategy to
grow the private sector business. On a percentage of revenues basis, SG&A
expenses were 26% both for the six months ended June 30, 1999 and 2000.
The litigation settlement, consisting of (1) the write-off of Hawaii
related receivables, work in process and liabilities, (2) the present value of
the payment due to Hawaii and (3) a $300,000 payment from CBSI, is $3,176,665.
See Item 1 - Legal Proceedings and Note 3 to the Financial Statements. This
settlement was reflected in the Statement of Income for 1999.
Interest expense increased $20,239 to $79,603, or 34%, from $59,364 due to
imputed interest on the settlement obligation with the State of Hawaii. See
Item 1 - Legal Proceedings.
Income before income taxes increased $3,033,635 from a loss of $2,461,673
for the six months ended June 30, 1999 to net income of $571,962 for the six
months ended June 30, 2000 primarily due to the one-time Hawaii settlement
charge in 1999 and the other factors described above.
Net income increased $1,792,500 from a net loss of $1,455,042 for the six
months ended June 30, 2000 to net income of $337,458 for the six months ended
June 30, 2000.
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 expects to continue
and expand this practice prospectively as well as to pursue more time and
material contracts than it has 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. Prospectively, the Company expects to tighten up this
timetable, thereby reducing the requirement for additional working capital.
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 $322,564 and
$357,187 for the six months ended June 30, 2000 and 1999 respectively.
Fluctuations in net cash provided by operating activities are primarily the
result of changes in net income, accounts receivable, accounts payable, costs
and estimated earnings in excess of billings on contracts due to differences in
contract milestones and payment dates, as well as income tax payments.
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. 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 noncurrent
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 and the security interest of the commercial
bank is superior to that of SBLFC and BDC. The Company can borrow up to 80% of
certain qualified accounts receivable at an interest rate of prime plus 1/4 %.
On June 30, 2000, the revolving line of credit had an outstanding balance of
zero.
The Company believes that cash flow generated by operations will be
sufficient to fund continuing operations through the end of 2000. 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of June 30, 2000, the Company was not involved in any litigation.
On November 12, 1996, the State of Hawaii filed a lawsuit against the
Company and Aetna Casualty and Surety and Federal Insurance Company for damages
due to an alleged breach of a child support enforcement (CSE) contract between
the Company and the State of Hawaii. The Company denied the State's allegation
and filed a counter-clam alleging the State breached the contract. In
addition, on December 13, 1996, Complete Business Solutions, Inc. ("CBSI") filed
a lawsuit against the Company seeking damages relating to CBSI's subcontract
with the Company to the Hawaii CSE contract. The Company disputed CBSI's claims
and filed a number of counterclaims. On February 3, 1997, the Company filed a
third-party complaint against MAXIMUS Corporation, Hawaii's contract supervisor
and advisor on the Hawaii CSE contract, alleging, among other things, that
MAXIMUS tortiously interfered in that contract. On May 11, 1999, the Company
reached a settlement agreement to end its lawsuits with the State of Hawaii
and CBSI. Per the settlement, the Company agreed to pay the State of Hawaii $1
million over four years and received $300,000 from CBSI. As of the date of this
filing, the Company has paid $500,000. The settlement resulted in a one-time
charge to pre-tax earnings during the period ending June 30, 1999 of $3.1
million ($1.9 after-tax ). On October 29, 1999, MAXIMUS agreed to pay the
Company $50,000 in exchange for dismissal of the Company's third-party
complaint.
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 24, 2000, shareholders
voted 877,649 shares (including voting preferred stock) as follows:
1) Election of Kenneth C. Kirsch, Donna J. Guido, Henry N. Huta and
Edward J. Braks as Directors to serve until the next annual meeting of
the stockholders or until their successors are elected and qualified.
FOR AGAINST ABSTAIN NO VOTE
Kenneth C. Kirsch 868,686 0 8,963 86,543
Donna J. Guido 868,686 0 8,963 86,543
Henry N. Huta 868,686 0 8,963 86,543
Edward J. Braks 868,686 0 8,963 86,543
2) Amendment of the Company's Articles of Incorporation to change the
name of the Corporation to such name as the Board of Directors deems
appropriate.
FOR AGAINST ABSTAIN NO VOTE
856,764 17,739 3,146 86,543
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
In May 15, 2000, Dr. Samara Navarro, formerly Vice President of
Governmental Services, left the Company to pursue other interests.
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 25, 2000 was filed by the Company
and included the press release dated April 25, 2000 announcing the Company's
results for the three months ended March 31, 2000. A Statement of Operations
(without notes) for the quarters ended March 31, 2000, and 1999 was included
with the filing. A Balance Sheet as of March 31, 2000 and March 31, 1999 was
also included with the filing.
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 27, 2000 By: /s/ Kenneth C. Kirsch
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Kenneth C. Kirsch
Chairman, President and
Chief Executive Officer
By: /s/ James J. Ferry
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James J. Ferry
Vice President of Finance and Administration,
Chief Financial Officer and Treasurer
(principal financial officer)