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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 September 30, 2000
[ ] 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 .
--- ---
As of September 30, 2000 there were 825,684 shares of the registrant's Common
Stock, $.10 par value, outstanding.
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1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETWORK SIX, INC.
CONDENSED BALANCE SHEETS
ASSETS Sep. 30, 2000 Dec. 31, 1999
---------------- ---------------
Current assets: (unaudited)
Cash and cash equivalents $ 3,173,767 $ 2,453,935
Contract receivables, less allowance for
doubtful accounts of $49,000 at September 30,
2000 and December 31, 1999 1,389,746 1,561,255
Costs and estimated earnings in excess of
billings on contract 698,159 759,891
Refundable taxes on income - 150,640
Deferred taxes - 287,083
Other current assets 91,965 151,933
---------------- ---------------
Total current assets 5,353,637 5,364,737
Property and equipment:
Computers and equipment 632,178 590,124
Furniture and fixtures 162,606 162,606
Leasehold improvements 20,191 20,191
---------------- ---------------
814,975 772,921
Less: accum. depreciation and amortization 636,326 578,015
---------------- ---------------
Net property and equipment 178,649 194,906
Deferred taxes 479,096 513,795
Other assets 35,889 86,750
---------------- ---------------
Total assets $ 6,047,271 $ 6,160,188
================ ===============
2
Sep. 30, 2000 Dec. 31, 1999
---------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Current liabilities:
Current portion of long-term debt:
Vendors $ 100,000 $ 100,000
Others 352,756 349,141
Accounts payable 96,959 202,195
Accrued salaries and benefits 409,504 508,193
Other accrued expenses 111,004 107,913
Billings in excess of costs and
estimated earnings on contracts 55,056 124,458
Preferred stock dividends payable 1,382,242 1,119,468
---------------- ---------------
Total current liabilities 2,507,521 2,511,368
Long-term debt, less current portion:
Vendors 542,239 542,239
Others 443,105 775,636
---------------- ---------------
Total Liabilities 3,492,865 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 September 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 825,684 shares
at September 30, 2000 and 794,306 at
December 31, 1999 82,568 79,430
Additional paid-in capital 1,947,767 1,888,652
Treasury stock recorded at cost, 11,163 shares
at September 30, 2000 and 8,081 shares at
December 31, 1999 (42,434) (28,179)
Retained earnings (accumulated deficit) (1,669,169) (1,844,632)
---------------- ---------------
Total stockholders' equity 2,554,406 2,330,945
---------------- ---------------
Total Liabilities & Stockholders' Equity $ 6,047,271 $ 6,160,188
================ ===============
3
NETWORK SIX, INC.
Condensed Statements of Income
(Unaudited)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED 9/30/00 ENDED 9/30/99 ENDED 9/30/00 ENDED 9/30/99
--------------- --------------- --------------- ---------------
Contract revenue earned $ 2,619,519 $ 2,575,192 $ 8,479,930 $ 7,813,958
Cost of revenue earned 1,759,561 1,632,648 5,502,803 4,772,396
--------------- --------------- --------------- ---------------
Gross profit 859,958 942,544 2,977,127 3,041,562
Selling, general & administrative expenses 707,231 655,048 2,243,051 2,011,408
Litigation settlement (note 3) - - - 3,176,665
--------------- --------------- --------------- ---------------
Income (loss) from operations 152,727 287,496 734,076 (2,146,511)
Other deductions (income)
Interest expense 29,465 60,147 109,068 119,512
Interest earned (44,648) (26,426) (114,864) (58,124)
--------------- --------------- --------------- ---------------
Income (loss) before income taxes 167,910 253,775 739,872 (2,207,899)
Provision (credit) for income taxes 67,131 104,048 301,635 (902,584)
--------------- --------------- --------------- ---------------
Net income (loss) $ 100,779 $ 149,727 $ 438,237 ($1,305,315)
=============== =============== =============== ===============
Net income (loss) per share:
Basic $ 0.01 $ 0.09 $ 0.22 ($1.97)
=============== =============== =============== ===============
Diluted $ 0.01 $ 0.09 $ 0.22 ($1.97)
=============== =============== =============== ===============
Shares used in computing net income (loss) per share:
Basic 825,584 792,881 813,609 785,476
=============== =============== =============== ===============
Diluted 825,584 792,881 813,609 785,476
=============== =============== =============== ===============
Preferred dividends declared $ 91,369 $ 81,918 $ 262,773 $ 239,983
=============== =============== =============== ===============
4
NETWORK SIX, INC.
Condensed Statement of Cash Flows
(Unaudited)
Nine months Nine months
ended ended
9/30/00 9/30/99
------------- -------------
Net Income (loss) $ 438,237 $ (1,305,315)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 68,428 62,109
Provision for doubful accounts (19,175)
Litigation settlement, excluding cash received - 3,476,665
Loss on sale/disposal of fixed assets 1,306 704
Provision (credit) for deferred taxes 321,782 (380,304)
Changes in operating assets and liabilities:
Contract receivables 171,509 427,880
Cost and estimated earnings
in excess of billings on contracts 61,732 403,901
Income taxes receivable 150,640 -
Refundable taxes on income - (686,000)
Other current assets 59,968 (15,387)
Deferred tax assets - -
Other assets 50,861 326,076
Accounts payable (105,236) 22,189
Accrued salaries and benefits (98,689) (6,054)
Accrued subcontractor exp. 127 (797)
Other accrued expenses 11,096 (29,059)
Billings in excess of costs
and estimated earnings on contracts (69,402) (13,094)
Income taxes payable - (780,066)
------------- -------------
Net cash provided by operating activities 1,062,359 1,484,273
------------- -------------
Cash flows from investing activities:
Cash proceeds from sale/disposal of capital assets - 350
Capital expenditures (53,477) (95,551)
------------- -------------
Net cash used in investing activities (53,477) (95,201)
------------- -------------
5
Nine months Nine months
ended ended
9/30/00 9/30/99
------------- -------------
Cash flows from financing activities:
Principal payments on capital lease obligations (8,132) (62,352)
Payments on long term debt (328,916) (323,623)
Proceeds from issuance of common stock 62,253 92,832
Purchases of treasury stock (14,255) (3,245)
------------- -------------
Net cash used in financing activities (289,050) (296,388)
------------- -------------
Net increase in cash and cash equivalents 719,832 1,092,684
Cash and cash equivalents at beginning of period 2,453,935 1,442,035
------------- -------------
Cash and cash equivalents at end of period $ 3,173,767 $ 2,534,719
============= =============
Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes $ (176,880) $ 943,786
============= =============
Interest 2,451 31,552
============= =============
6
NETWORK SIX, INC.
Notes to Financial Statements
September 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 September 30, 2000, and the statements of income and
cash flows for the nine month periods ended September 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 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.
In July 2000 the Company announced an agreement to market Orgamation
Technologies, Inc.'s proprietary child care provider solution.
7
In September 2000, the Company announced that the State of Rhode Island,
Department of Administration, had extended the Company's contract to support and
enhance the State's InRHODES computer system for another year. The value of the
contract is approximately $5.5 million.
In September 2000, the Company announced its entry into the Allaire
Corporation's Alliance Partner program.
In October 2000, the Company announced that the State of Rhode Island had
extended the Company's contract to support and enhance the RICHIST child welfare
system for another year commencing in February, 2001. The value of the contract
is approximately $1.6 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 - NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO 1999
Contract revenue increased $665,972 or 9% from $7,813,958 in the nine
months ended September 30, 1999 to $8,459,930 in the nine months ended September
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. This revenue was partially offset by
lower contract revenue from certain private sector accounts.
Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, increased $730,407 or 15% from
$4,772,396 in the nine months ended September 30, 1999 to $5,502,803 in the nine
months ended September 30, 2000 due to increased contract revenues and startup
costs associated with the RICHIST contract.
Gross profit decreased $64,435 or 2%, from $3,041,562 for the nine months
ended September 30, 1999 to $2,977,127 for the nine months ended September 30,
2000. Gross profit as a percentage of revenue earned decreased from 39% for the
nine months ended September 30, 1999 to 35% for the nine months ended September
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 $231,643,
or 12%, from $2,011,408 in the nine months ended September 30, 1999 to
$2,243,051 in the nine months ended September 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 nine months ended September
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 decreased $10,444 to $109,068, or 9%, from $119,512 due to
a reduction in long term debt.
8
Income before income taxes increased $2,947,771 from a loss of $2,207,899
for the nine months ended September 30, 1999 to income of $739,872 for the nine
months ended September 30, 2000 primarily due to the one-time Hawaii settlement
charge in 1999 and the other factors described above.
Net income increased $1,743,552 from a net loss of $1,305,315 for the nine
months ended September 30, 1999 to net income of $438,237 for the nine months
ended September 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 $1,062,359 and
$1,484,273 for the nine months ended September 30, 2000 and 1999, respectively.
Fluctuations in net cash provided by operating activities are primarily the
result of changes in net income, contract receivables, 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
September 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.
9
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 September 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) which included the write-off of Hawaii related
receivables, work in process and liabilities. 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
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.
10
A current report on Form 8-K, dated July 12, 2000 was filed by the Company
and included the press release dated July 5, 2000 announcing the extension of
the Maine MACWIS support contract.
A current report on Form 8-K, dated July 20, 2000 was filed by the Company
and included the press release dated July 19, 2000 announcing an agreement to
market Orgamation Technologies, Inc.'s proprietary child care provider solution.
A current report on Form 8-K, dated July 28, 2000 was filed by the Company
and included the press release dated July 27, 2000 announcing the Company's
results for the three months ended June 30, 2000. A Statement of Operations
(without notes) for the quarters ended June 30, 2000, and 1999 was included with
the filing. A Balance Sheet as of June 30, 2000 and December 31, 1999 was also
included with the filing.
A current report on Form 8-K, dated September 18, 2000 was filed by the
Company and included the press release dated September 14, 2000 announcing the
extension of the Rhode Island InRHODES support contract.
A current report on Form 8-K, dated September 27, 2000 was filed by the
Company and included the press release dated September 24, 2000 announcing the
Company's entry into the Allaire Alliance Partner program.
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: October 27, 2000 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 officer)
11