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, 1998
[ ] 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 June 30, 1998, there were 763,438 shares of the registrant's Common Stock,
$.10 par value, outstanding.
1
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Network Six, Inc.
Condensed Balance Sheets
June 30, 1998 Dec. 31, 1997
------------- -------------
(unaudited)
Assets
- ------
Current assets:
Cash .................................................................... $ 821,599 $1,291,924
Contract receivables, less allowance for doubtful
accounts of $50,000 at June 30, 1998 and
December 31, 1997 .................................................. 1,578,077 2,011,379
Costs and estimated earnings in excess of billings
on contracts ....................................................... 1,418,662 1,388,515
Other assets ............................................................ 132,190 244,257
---------- ----------
Total current assets ............................................... 3,950,528 4,936,075
---------- ----------
Property and equipment
Computers and equipment ................................................. 513,120 506,484
Furniture and fixtures .................................................. 156,833 167,558
Leasehold improvements .................................................. 20,191 20,191
---------- ----------
690,144 694,233
Accumulated depreciation and amortization .................................... 593,228 627,146
---------- ----------
Net property and equipment ......................................... 96,916 67,087
Deferred taxes ............................................................... 391,475 391,475
Contract receivables and costs in excess of billings
on Hawaii contract ...................................................... 3,459,382 3,459,382
Other assets ................................................................. 408,148 438,084
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$8,306,449 $9,292,103
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---------- ----------
2
June 30, 1998 Dec. 31, 1997
------------- -------------
(unaudited)
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable to bank .................................................. $ -- $ 1,160,000
Current installment of obligations under capital leases ................ 87,531 82,690
Accounts payable ....................................................... 136,480 188,377
Accrued salaries and benefits .......................................... 459,005 449,133
Accrued subcontractor expense .......................................... 776,254 1,352,393
Note payable - short term .............................................. 100,000 163,871
Other accrued expenses ................................................. 380,123 342,465
Billings in excess of costs and estimated earnings on contracts ........ 158,147 155,754
Income taxes payable ................................................... 319,629 13,338
Deferred taxes ......................................................... 545,869 545,869
Preferred stock dividends payable ...................................... 627,430 460,068
----------- -----------
Total current liabilities ......................................... 3,590,469 4,913,958
----------- -----------
Obligations under capital leases, excluding current installments ............ 69,512 104,003
Note payable - long term .................................................... 742,239 742,239
Hawaii Payable .............................................................. 576,483 576,483
----------- -----------
Total Liabilities ................................................. 4,978,704 6,336,683
----------- -----------
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, 1998 and December 31, 1997; 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 763,438 shares at
June 30, 1998 and 734,294 at December 31, 1997 .................... 76,344 73,429
Additional paid-in capital .................................................. 1,757,450 1,670,939
Retained earnings (accumulated deficit) ..................................... (741,722) (1,024,622)
----------- -----------
Total stockholders' equity ........................................ 3,327,746 2,955,420
----------- -----------
Total Liabilities & Stockholders' Equity .......................... $ 8,306,450 $ 9,292,103
----------- -----------
----------- -----------
3
Network Six, Inc.
Condensed Statements of Income
(Unaudited)
Three months Three months Six months Six months
ended 6/30/98 ended 6/30/97 ended 6/30/98 ended 6/30/97
------------- ------------- ------------- -------------
Contract revenue earned ......................... $ 3,253,696 $ 3,431,835 $ 5,475,313 $ 4,846,020
--------------- --------------- -------------- ---------------
Cost of revenue earned .......................... 2,158,529 2,593,348 3,605,184 3,566,488
--------------- --------------- -------------- ---------------
Gross profit ............................... 1,095,167 838,487 1,870,129 1,279,532
Selling, general & administrative expenses ...... 562,467 472,987 1,120,292 999,318
--------------- --------------- -------------- ---------------
Income from operations ..................... 532,700 365,500 749,837 280,214
Other deductions (income)
Interest expense ........................... 10,529 61,979 39,715 112,636
Interest earned ............................ (2,918) (4,797) (53,041) (8,554)
--------------- --------------- -------------- ---------------
Income before income taxes ............ 525,088 308,318 763,163 176,132
Income taxes .................................... 215,290 65,521 312,900 65,521
--------------- --------------- -------------- ---------------
Net income ...................................... $ 309,798 $ 242,797 $ 450,263 $ 110,611
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
Net income per share:
Basic ........................................... $ 0.30 $ 0.27 $ 0.38 $ 0.02
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
Diluted ......................................... $ 0.30 $ 0.26 $ 0.38 $ 0.02
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
Shares used in computing net income per share:
Basic ........................................... 756,176 729,927 752,839 725,559
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
Diluted ......................................... 1,037,956 917,124 1,021,842 725,559
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
Preferred dividends declared .................... $ 84,144 $ 46,747 $ 167,363 $ 92,979
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
4
Network Six, Inc.
Condensed Statements of Cash Flow
(Unaudited)
Six months Six months
ended ended
6/30/98 6/30/97
----------- -----------
Net Income .................................................. $ 450,263 $ 110,611
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 21,285 46,454
Provision for doubtful accounts ................... -- (47,856)
Loss on sale/disposal of fixed assets ............. 6,399 3,212
Changes in operating assets and liabilities:
Contract receivables .............................. 433,302 (1,483,315)
Cost and estimated earnings
in excess of billings on contracts .......... (30,147) 1,248,960
Income taxes receivable ........................... -- 386,036
Other current assets .............................. 112,067 (14,165)
Long term receivables ............................. -- (115,867)
Long term amounts due from Hawaii ................. -- 112,443
Due from officer .................................. -- (57,005)
Other assets ...................................... 29,936 (394,407)
Accounts payable .................................. (51,897) (178,074)
Accrued salaries and benefits ..................... 9,872 (210,396)
Accrued subcontractor exp ......................... (576,139) 1,127,218
Other notes payable ............................... (63,871) (69,987)
Other accrued expenses ............................ 37,658 (48,914)
Accrued restructuring ............................. -- (5,383)
Billings in excess of costs
and estimated earnings on contracts ............. 2,393 26,203
Deferred tax liability ............................ -- (156,508)
Income taxes payable .............................. 306,291 --
----------- -----------
Net cash provided by operating activities ..... 687,412 279,260
----------- -----------
5
Six months Six months
ended ended
6/30/98 6/30/97
----------- -----------
Cash flows from investing activities:
Cash Proceeds from Sale/Disposal of Capital Assets ..... 119 1,525
Capital expenditures ................................... (57,633) (15,219)
----------- -----------
Net cash provided by (used in) investing
activities ...................................... (57,514) (13,694)
----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations ........ (29,649) (31,261)
Net payments on note payable to bank ................... (1,160,000) --
Proceeds from the sale of treasury stock ............... -- 6,047
Proceeds from issuance of common stock ................. 89,426 18,954
----------- -----------
Net cash used in financing activities ............. (1,100,223) (6,260)
----------- -----------
Net increase (decrease) in cash ......................... (470,326) 259,306
Cash at beginning of period ............................. 1,291,924 127,581
----------- -----------
----------- -----------
Cash at end of period ................................... $ 821,599 $ 386,887
----------- -----------
----------- -----------
Supplemental cash flow information: Cash (received) paid
during the period for:
Income taxes ................................ $ 7,460 $ (107,003)
Interest .................................... 39,715 110,026
6
Network Six, Inc.
Notes to Financial Statements
June 30, 1998
(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, 1998, and the statements of income and cash
flows for the three month and six month periods ended June 30, 1998 and
1997, have been included herein. The results of operations for the interim
periods are not necessarily indicative of the results for the full years.
(2) The 1997 earnings per share figures were reclassified to comply with the
Company's December 1997 adoption of SFAS No. 128. Under the new
requirements for calculating basic earnings per share, the dilative effect
of stock options and warrants are excluded.
7
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.
In particular, adverse decisions in on-going material litigation could have a
material adverse effect on the Company's financial condition and operating
results. 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
Effective February 23, 1998, the Nasdaq Stock Market, Inc. ("Nasdaq")
announced new listing requirements for continued inclusion on the Nasdaq
National Market. Nasdaq has provided notice to the Company that the Company does
not meet the new continued listing requirements with respect to the Company's
net tangible assets and the market value of the Company's listed Common Stock.
The Company submitted a plan to Nasdaq to achieve compliance with the new
listing requirements. The Company received notice from Nasdaq in July 1998 that
the Nasdaq has determined that the Company does not meet continued listing
requirements for the Nasdaq National Market and that the Company's Common Stock
may have its listing transferred to The Nasdaq Small Cap Market. The Company has
requested an oral hearing before a Nasdaq listing qualification panel and will
remain on the Nasdaq National Market until the hearing process is concluded. In
any event, there can be no assurance that the Company will be able to stay in
compliance with the new Nasdaq requirements and the inability of the Company to
satisfy such requirements could adversely affect the value of the Company's
stock and/or liquidity. The Company, if de-listed from The Nasdaq National
Market, has the option to seek inclusion of its securities on The Nasdaq
SmallCap Market.
The Company received comments on January 30, 1998 from the Securities
and Exchange Commission regarding the timing of revenue recognition with regard
to the Company's contract with the State of Hawaii during 1996 and whether an
allowance should be taken by the Company against the contract receivable
relating to that contract ($3,459,382 at June 30, 1998). The Company believes
that, although the outcome of the Company's litigation with the State of Hawaii
is uncertain, that it is likely to prevail in the Hawaii litigation and
therefore the Company is not required to take an allowance against that
receivable.
In April 1998, the Company announced the extension of its contract
with the State of Rhode Island, Department of Human Services to support the
InRHODES system. The contract has been extended through June 30, 1999. The
contract extension is valued at approximately $2.8 million. InRHODES is a
comprehensive computer system that integrates data and functions for the Family
Independence Program, Food Stamps, Child Support Enforcement, Medicaid
Eligibility and General Public Assistance programs.
In May 1998, the Company announced a three-month support contract with
the State of Maine, Department of Human Services, for the child welfare system
known as MACWIS that the Company recently
8
developed and implemented followed by a one-year support contract valued at $1.8
million. The $1.8 million contract was recently signed and increased to $1.9
million.
In May 1998 director Dana Gaebe decided not to run for re-election to
the Board of Directors. The Company wishes to thank Mr. Gaebe for his twenty-two
years of service as a Board member.
The Company has conducted a comprehensive review of its internal
computer systems to identify the systems that could be affected by the "Year
2000" issue and is developing an implementation plan to resolve the issue. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather that the year 2000. This could result in a major system
failure or miscalculations. The Company presently believes that, with
modifications to existing software and converting to new software, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. However, if such modifications
and conversions are not completed timely, the Year 2000 may have a material
impact on the operations of the Company.
Results of Operations -- Six Months Ended June 30, 1998 Compared to 1997
Contract revenue increased $629,293 or 13% from $4,846,020 in the six
months ended June 30, 1997 to $5,475,313 in the six months ended June 30, 1998
primarily due to increased work on the Rhode Island Department of Human Services
contract due to welfare reform and increased revenues from the Company's Network
Services Division.
Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, increased $38,696 or 1% from
$3,566,488 in the six months ended June 30, 1997 to $3,605,184 in the six months
ended June 30, 1998 due to the increased utilization of the existing technical
staff and a lower reliance on subcontractor labor which is generally at a
higher cost than the Company's internal staff.
Gross profit increased $590,597 or 46% from $1,279,532 for the six
months ended June 30, 1997 to $1,870,129 for the six months ended June 30, 1998.
Gross profit as a percentage of revenue earned increased from 26.4% for the six
months ended June 30, 1997 to 34.1% for the six months ended June 30, 1998. The
increase in gross profit percentage is due primarily to higher margins on
projects commenced since the beginning of 1998, such as the MACWIS three month
support project and the services contract for MIM Corporation.
Selling, general and administrative (SG&A) expenses increased $120,974
or 12% from $999,318 in the six months ended June 30, 1997 to $1,120,292 in the
six months ended June 30, 1998 due to an increase in marketing and related
expenses. On a percentage of sales basis, SG&A expenses decreased slightly to
20.4% from 20.6%.
Interest expense decreased $72,921 to $39,715, or 65%, from $112,636
due to a lower level of borrowing resulting from the Company's pay off in full
of its bank term loan in January 1998..
As a result, income before income taxes increased $587,031 from
$176,132 for the six months ended June 30, 1997 to $763,163 for the six months
ended June 30, 1998.
Net income increased $339,652 from $110,611 for the six months ended
June 30, 1997 to $450,263 for the six months ended June 30, 1998.
9
Results of Operations -- Three Months Ended June 30, 1998 Compared to 1997
Contract revenue decreased $178,139 or 5% from $3,431,835 in the three
months ended June 30, 1997 to $3,253,696 in the three months ended June 30, 1998
primarily due to less work performed on the Maine Automated Child Welfare
Information System (MACWIS). This was offset by increased work on the Rhode
Island Department of Human Services contract due to welfare reform and increased
revenues from other systems development projects and the Company's Network
Services Division.
Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, decreased $434,819 or 17% from
$2,593,348 in the three months ended June 30, 1997 to $2,158,529 in the three
months ended June 30, 1998 due to the decreased effort to support the lower
level of business.
Gross profit increased $256,680 or 31% from $838,487 for the three
months ended June 30, 1997 to $1,095,167 for the three months ended June 30,
1998. Gross profit as a percentage of revenue earned increased from 24.4% for
the three months ended June 30, 1997 to 33.7% for the three months ended June
30, 1998. The increase in gross profit percentage is due to higher margins on
new projects.
Selling, general and administrative (SG&A) expenses increased $89,480
or 19% from $472,987 in the three months ended June 30, 1997 to $562,467 in the
three months ended June 30, 1998 due to an increase in marketing and related
expenses. On a percentage of sales basis, SG&A expenses increased to 17.3% from
13.8%.
Interest expense decreased $51,450 to $10,529, or 83%, from $61,979 due
to a lower level of borrowing resulting from the Company's pay off in full of
its bank term loan in January 1998.
As a result, income before income taxes increased $216,770 from
$308,318 for the three months ended June 30, 1997 to $525,088 for the three
months ended June 30, 1998.
Net income increased $67,001 from $242,797 for the three months ended
June 30, 1997 to $309,798 for the three months ended June 30, 1998.
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 deliver what the customer requires.
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 continue to tighten up
this timetable, thereby reducing the requirement for additional
10
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
$687,412 and $279,260 in the six months ended June 30, 1998 and 1997,
respectively. Fluctuations in net cash provided by operating activities are
primarily the result of changes in net income, accounts receivable and income
tax receivable, accounts payable and costs and estimated earnings in excess of
billings on contracts due to differences in contract milestones and payment
dates.
On December 31, 1997 the Company signed a $1.5 million line of credit
with a commercial lender (the "Line of Credit"). Accounts receivable from four
of the Company's contracts secure the new Line of Credit. The Company can borrow
up to 80% of the aggregate invoice amounts and is required to repay any
borrowings within 90 days. As of June 30, 1998 the borrowing availability on the
line of credit was $372,946. The interest rate is prime plus five percent on
balances below $1 million and prime plus one and one half percent on balances
over $1 million. The Line of Credit also carries a six- percent annual service
fee on borrowed balances. At June 30, 1998 the 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 1998. This assumes,
however, that there are no materially adverse decisions rendered in the ongoing
litigation with Hawaii, MAXIMUS and CBSI. See Part II Item 1 - Legal
Proceedings. The Company is actively seeking new capital or long term debt to
improve its financial flexibility.
The Company believes that inflation has not had a material impact on
its results of operations to date.
PART 11 -- OTHER INFORMATION
Item 1. Legal Proceedings
In June 1995, the Company began negotiating a significant amendment to
its contract for a child support enforcement ("CSE") system with the State of
Hawaii (the State) when it determined that the total estimated cost to complete
the system would be significantly greater than expected. In March 1996, the
Company received final State and federal government approval for this contract
amendment totaling $4.4 million. As a result of numerous in-depth reviews of
this contract amendment, management determined that remaining contract costs
would exceed the contract value by $440,000, and therefore, accrued this loss in
December 1995.
In June 1996 the Company announced a new subcontract agreement with
Complete Business Solutions, Inc ("CBSI") to expand CBSI's role in the Hawaii
CSE contract. CBSI, at the request of Hawaii, was contracted to lead a detailed
review of the current system under development. Hawaii, in turn, agreed to pay
CBSI $1.2 million from the Company's remaining contract budget when various
milestones were achieved. The Company had a significant role in the detailed
review and had hoped that its results would facilitate the resolution of open
contractual scope issues.
On September 13, 1996, the State of Hawaii terminated its contract with
the Company, effective September 23, 1996, claiming that the Company had failed
to fulfill its obligations under the contract. In response, the Company also
terminated the contract with the State effective September 23, 1996. The Hawaii
contract, originally estimated to be a $20.7 million contract, was increased to
$25.2 million by the State and
11
the Company in March 1996, and was the Company's largest contract at the time.
Prior to termination, approximately $16.5 million of costs had been incurred
towards completion of the contract, and $11 million had been billed and
substantially paid.
On November 12, 1996 the State of Hawaii filed a lawsuit in the Circuit
Court of the First Circuit of the State of Hawaii against the Company and Aetna
Casualty and Surety and Federal Insurance Company for damages due to breach of
contract (the "Hawaii litigation"). Aetna Casualty and Surety and Federal
Insurance Company provided the $10.3 million performance bond on the Company's
contract with the State of Hawaii to develop and install the State's child
support enforcement system. The suit alleges the Company failed to meet
contractual deadlines, provided late, incomplete and/or unsuitable deliverables,
materially breached the contract by never completing the design, the application
programming, and the system test and systems implementation. The State is
seeking an unspecified amount for general damages, consequential and special
damages, liquidated damages, attorneys' fees, reimbursement for the cost of the
suit and interest costs that the court deems just and proper.
The Company vigorously denies the State's allegation and, on January
23, 1997, filed a counter claim against the State alleging that the State has
breached the contract. The Company is seeking $70 million in damages and is
alleging that the State fraudulently induced the Company into designing and
building a system having capabilities and features far beyond the scope of the
Company's contract. The fraudulent inducement was in the form of withholding
payments, improper rejection of work that satisfied the requirements of the
contract and verbal and written abuse of the Company's employees and management.
In addition, Unisys, a vendor providing equipment under the Company's
Hawaii contract, submitted a $896,000 claim against the $10.3 million
performance bond. In February of 1997, the State released all but $1.1 million
of the performance bond; the remainder is intended to cover amounts payable to
Unisys and other subcontractors. In April of 1997, after a detailed review of
their records and discussions with the Company, Unisys agreed to lower their
claim to $859,602 and Aetna Casualty and Surety paid that claim. Lockheed Martin
IMS (Lockheed), which guaranteed the performance bond, reimbursed Aetna for that
claim. In December 1997, the Company reached an agreement with Lockheed to repay
the $859,602 over a five-year period.
On December 13, 1996 CBSI filed a lawsuit in the Superior Court of the
State of Rhode Island for $517,503, which the Company had previously accrued,
plus interest, costs and attorney's fees. The Company disputes the $517,503
owned to CBSI and filed a counterclaim against CBSI on January 13, 1997
alleging, among other things, that CBSI failed to complete its duties required
under the subcontract with the Company in a timely manner, improperly engaged in
negotiations with the State of Hawaii to complete the project, hired and
attempted to hire employees of the Company in violation of its subcontract
agreement with the Company and obtained and utilized confidential information
and proprietary intellectual property inappropriately. Also, the Company alleges
that CBSI owes the Company $482,750 as of December 31, 1996 for which the
Company has not established a reserve for uncollectibility.
On February 3, 1997, the Company filed a third-party complaint ("TPC")
as part of the Hawaii litigation against MAXIMUS Corporation ("MAXIMUS") and
CBSI. MAXIMUS has been the State of Hawaii's contract supervisor and advisor
since the inception of the Hawaii project. The allegations the Company has made
against CBSI in this TPC are substantially similar to the allegations made
against CBSI in the Company's counterclaim to CBSI's December 13, 1996 lawsuit
brought against the Company in Rhode Island. The Company alleged, moreover, that
MAXIMUS is liable to the Company on grounds that: (i) the Company was an
intended third party beneficiary under the contract between the MAXIMUS and
Hawaii; (ii) MAXIMUS tortuously interfered in the contract between the Company
and Hawaii; (iii) MAXIMUS
12
negligently breached duties to the Company and (iv) MAXIMUS aided and abetted
Hawaii in Hawaii's breach of contract. The Company's TPC seeks $60 million in
damages.
Management believes that the Company's claims against the State,
MAXIMUS and CBSI have substantial merit and will vigorously pursue these claims.
There is substantial uncertainty, however, inherent in all litigation. If the
Company were not to prevail in its suit with the State, such a result could have
a material adverse financial effect on the Company and could jeopardize the
Company's ability to continue with its present listing on The Nasdaq National
Market. Management of the Company and its attorneys are unable to predict with
any certainty the ultimate outcome of this litigation, although it is their
belief that a favorable outcome is likely. At June 30, 1998, the Company had
unbilled work-in-process and related receivables from the State and CBSI of
approximately $3.46 million, which exceeds stockholders' equity of approximately
$3.33 million, for which no allowance for uncollectibility has been recorded.
The Company has not accrued for any potential liability to the State, which may
result from this litigation. In addition, the Company has not accrued for any
legal expense to be incurred in connection with this litigation, which could be
significant.
Due to the significant uncertainty created by these events, the Company
ceased recognition of revenue on the Hawaii contract in 1996. An adjustment of
$1.8 million was recorded in the fourth quarter to reverse revenue of $1
million, $400 thousand and $400 thousand previously recognized in the first,
second and third quarters, respectively. In addition, 1996 costs incurred
related to the Hawaii contract of $1.96 million were charged to expense in 1996.
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 20, 1998,
shareholders voted 779,665 shares (including voting preferred stock) as follows:
1) Election of Kenneth C. Kirsch, Nicholas R. Supron and Clifton C.
Dutton 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 .......... 776,205 0 3,460 148,409
Nicholas R. Supron ......... 776,093 0 3,572 148,409
Clifton C. Dutton .......... 776,193 0 3,472 148,409
2) Approval of the reservation of an additional 75,000 shares of the
Company's authorized but unissued stock for employee stock options
which may be granted under the 1993 Incentive Stock Plan.
13
For Against Abstain No Vote
340,170 97,838 6,732 483,334
3) Approval of the reservation of an additional 25,000 shares of the
Company's authorized but unissued stock for the Non-Employee
Director Stock Option Plan.
For Against Abstain No Vote
312,754 119,913 8,908 486,499
4) Approval of the sale of up to 600,000 shares of common stock at a
discount from market price of the common stock in a private
placement.
For Against Abstain No Vote
154,645 278,947 7,683 486,499
5) Approval of the Restricted Stock Plan and the reservation of
100,000 shares of the Company's authorized but unissued common
stock for the plan.
For Against Abstain No Vote
366,162 68,793 6,620 486,499
Item 5. Other Materially Important Events
None
Item 6. Exhibits and Reports on Form 8K
(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 June 22, 1998 was filed by the
Company and included the press release dated June 19, 1998 announcing
recent promotions and new hires of employees.
A current report on Form 8-K, dated May 19, 1998 was filed by the
Company and included the press release dated May 18, 1998, announcing
the Company's new State of Maine support contract.
A current report on Form 8-K, dated May 7, 1998 was filed by the
Company and included the press release dated May 5, 1998, announcing
the Company's results for the quarter ended March 31, 1998. A Statement
of Operations (without notes) for the quarters ended March 31, 1998
and, 1997 was included with the filing. A balance sheet as of March 31,
1998 and December 31, 1997 was also included with the filing.
A current report on Form 8-K, dated April 22, 1998 was filed by the
Company and included the press release dated April 21, 1998, announcing
the Company's extension of the State of Rhode Island support contract.
14
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 28, 1998 By: /s/ Kenneth C. Kirsch
--------------------------
Kenneth C. Kirsch
Chairman, President and
Chief Executive Officer
By: /s/ Dorothy M. Cipolla
--------------------------
Dorothy M. Cipolla
Chief Financial Officer and Treasurer
(principal financial officer)
15