<PAGE> 1
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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
March 31, 1996
[ ] 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 05-036-6090
(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 March 31, 1996, there were 2,865,373 shares of the registrant's Common
Stock, $.10 par value, outstanding.
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PART 1 - FINANCIAL INFORMATION
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
<CAPTION>
NETWORK SIX, INC.
Condensed Balance Sheets
March 31, 1996 Dec. 31, 1995
-------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash .................................... $ 938,266 $ 1,205,652
Contract receivables, less allowance for
doubtful accounts of $50,000 at
March 31, 1996 and December 31, 1995 2,270,469 3,078,267
Costs and estimated earnings in excess of
billings on contracts ............... 7,646,376 7,227,747
Income taxes receivable ................. 1,263,920 1,747,824
Other assets ............................ 253,198 283,499
Due from officer ........................ 49,699 63,779
----------- -----------
Total current assets ................ 12,421,928 13,606,768
----------- -----------
Property and equipment
Computers and equipment ................. 1,379,408 1,377,098
Furniture and fixtures .................. 246,339 246,339
Leasehold improvements .................. 116,808 116,808
----------- -----------
1,742,555 1,740,245
Less: accumulated depreciation and
amortization ................... 1,261,253 1,181,249
----------- -----------
Net property and equipment .......... 481,302 558,996
Deferred taxes ............................... 227,726 271,360
Other assets ................................. 502,947 508,149
----------- -----------
$13,633,903 $14,945,274
=========== ===========
</TABLE>
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<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current installments of obligations under capital
leases ..................................... $ 157,212 $ 168,640
Notes payable to bank ........................... 3,850,000 5,000,000
Trade accounts payable .......................... 1,872,481 1,696,999
Accrued salaries and benefits ................... 478,102 442,663
Accrued subcontractor expense ................... 213,183 421,857
Accrued restructuring ........................... 290,597 517,680
Other accrued expenses .......................... 714,233 618,869
Billings in excess of costs and estimated
earnings on contracts ..................... 138,502 386,799
Deferred taxes .................................. 754,447 745,619
Preferred stock dividends payable ............... 93,493 47,260
----------- -----------
Total current liabilities .................. 8,562,250 10,046,386
----------- -----------
Obligations under capital leases, excluding current
installments .................................... 228,541 254,393
----------- -----------
Total Liabilities .......................... 8,790,791 10,300,779
----------- -----------
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $3.50 par
value. Authorized 857,142.85 shares;
issued and outstanding 714,285.71 shares
at March 31, 1996 and December 31,
1995; 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 2,865,373 shares
at March 31, 1996 and 2,860,695 shares at
December 31, 1995 ........................... 286,537 286,070
Additional paid-in capital ....................... 1,401,030 1,389,218
Retained earnings ................................ 925,918 739,580
Treasury stock, 14,992 common shares at
March 31, 1996 and December 31, 1995, at
cost ........................................ (6,047) (6,047)
----------- -----------
Total stockholders' equity .................. 4,843,112 4,644,495
----------- -----------
$13,633,903 $14,945,274
----------- -----------
</TABLE>
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NETWORK SIX, INC.
<TABLE>
Condensed Statements of Income
(Unaudited)
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED 03/31/96 ENDED 03/31/95
-------------- --------------
<S> <C> <C>
Contract revenue earned ...................... $3,686,829 $6,670,313
Cost of revenue earned ....................... 2,520,413 4,264,581
---------- ----------
Gross profit ............................. 1,116,415 2,405,733
Selling, general, and administrative expenses 709,480 1,372,513
---------- ----------
Income from operations ................... 456,936 1,033,220
Other deductions (income)
Interest expense ......................... 101,000 63,917
Interest earned .......................... (40,678) (2,689)
---------- ----------
Income before income taxes ............. 396,614 971,992
Income taxes ................................. 164,043 398,517
---------- ----------
Net income ................................... $ 232,571 $ 573,475
---------- ----------
Per share information:
Net income ............................... $ 232,571 $ 573,475
Less preferred dividend .................. 46,233 46,233
---------- ----------
Net income used in primary per share
calculation ............................ $ 186,338 $ 527,242
Net income per share:
Primary .................................. $ 0.07 $ 0.19
Fully diluted ............................ $ 0.07 $ 0.16
Shares used in computing net income per share:
Primary .................................. 2,848,821 2,821,066
Fully Diluted ............................ 3,563,107 3,533,664
</TABLE>
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NETWORK SIX, INC.
<TABLE>
Condensed Statements of Cash Flow
(Unaudited)
<CAPTION>
Three months Three months
ended ended
3/31/96 3/31/95
------------ ------------
<S> <C> <C>
Cash Flows from operating activities:
Net income ................................................ $ 232,571 $ 573,465
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization .................... 80,003 76,896
(Increase) decrease in contract receivables ...... 807,798 (155,371)
(Increase) decrease in other current assets ...... 30,301 (8,769)
Increase in costs and estimated earnings in
excess of billings ............................... (418,629) (3,021,410)
Decrease in income taxes receivable .............. 483,904 75,291
Increase (decrease) in billings in excess of costs
and estimated earnings on contracts .............. (248,297) 1,157,825
Decrease in long term receivables ................ 17,798 --
Increase in trade accounts payable ............... 175,482 225,490
Decrease in accrued expenses ..................... (304,952) (83,856)
Increase in other assets ......................... (12,595) (26,226)
Decrease in due from officer ..................... 14,080 --
Increase in income taxes payable ................. -- 102,086
Decrease in deferred tax assets .................. 43,634 24,386
Increase in deferred tax liability ............... 8,828 99,149
----------- -----------
Net cash provided by (used in) operating
activities ....................................... 909,926 (961,044)
----------- -----------
Cash flows from investment activities:
Capital expenditures ................................. (2,310) (323,282)
Net cash used in investing activities ............ (2,310) (323,282)
----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of common stock ........... 12,279 123,750
Proceeds from the sale of treasury stock ............. -- --
Proceeds from (payments on) notes payable to bank .... (1,150,000) 650,000
Principal payments on capital lease obligations ...... (37,281) (25,757)
Payment of dividends ................................. -- (47,260)
----------- -----------
Net cash provided by (used in) financing
activities .............................. (1,175,002) 700,733
----------- -----------
Net decrease in cash ...................................... (267,386) (583,593)
Cash at beginning of the period ........................... 1,205,652 822,286
----------- -----------
Cash at end of period ..................................... $ 938,266 $ 283,693
=========== ===========
Supplemental cash flow information:
Cash paid during the year for:
Income taxes ..................................... $ -- $ 97,557
Interest ......................................... 125,406 49,542
=========== ===========
</TABLE>
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NETWORK SIX, INC.
Notes to Financial Statements
March 31, 1996
(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 March 31, 1996, and
the statements of income and cash flows for the three month periods
ended March 31, 1996 and 1995, have been included herein. The results of
operations for the interim periods are not necessarily indicative of the
results for the full years.
(2) Reclassifications
Certain 1995 balances have been reclassified to conform to the 1996
presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Mr. Kenneth C. Kirsch was named Chairman of the Board in February 1996 and
Chief Executive Officer in April 1996.
The State of Idaho awarded the Company a $975,000 support contract in March
1996.
Mr. Roland Ferland and Mr. Owen S. Crihfield resigned from the Board of
Directors in April 1996. Mr. Nicholas R. Supron was elected to the Board of
Directors in April 1996.
In February and March of 1996, the Company received final approval from the
State of Hawaii and the Federal government, respectively, for a contract
amendment totaling 4.4 million.
Results of Operations - Three Months Ended March 31, 1996 Compared to 1995
Contract revenue decreased $2,983,485 or 45% from $6,670,313 in the three
months ended March 31, 1995 to $3,686,829 in the three months ended March 31,
1996 primarily due to the completion of the West Virginia Oscar, Nebraska
subcontract and the Maine FAMIS projects. Also, the level of activity and
revenue recognition on the Hawaii contract is much less than one year ago. The
Company is continuing to negotiate with the State of Hawaii to establish a
definitive plan for the completion of the project while attempting to contain
costs within current estimates. While the negotiations have continued, the
Company has substantially reduced its level of effort.
Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, decreased $2,014,168 or 47% from
$4,264,581 in the three months ended March 31, 1995 to $2,520,413 in the three
months ended March 31, 1996 due to the decreased effort to support the lower
level of business and the lower reliance on subcontractor labor.
Gross profit decreased $1,289,318 or 54% from $2,405,733 for the three
months ended March 31, 1995 to $1,116,415 for the three months ended March 31,
1996. Gross profit as a percentage of revenue earned decreased from 36.1% for
the three months ended March 31, 1995 to 30.3% for the three months ended March
31, 1996. The reduction in gross profit margins is primarily due to higher than
anticipated costs to complete the Hawaii KEIKI contract.
Selling, general and administrative expenses decreased $663,033 or 48% from
$1,372,513 in the three months ended March 31, 1995 to $709,480 in the three
months ended March 31, 1996 due to the reduction in personnel announced in
December 1995.
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As a result of the foregoing, income before income taxes decreased
$234,474, or 59% from $971,982 for the three months ended March 31, 1995 to
$396,614 for the three months ended March 31, 1996.
Net income decreased $340,904, or 59% from $573,475 for the three months
ended March 31, 1995 to $232,571 for the three months ended March 31, 1996.
Liquidity and Capital Resources
In order to finance bid preparation costs and to obtain sufficient
collateral to support performance bonds required by some state government
agencies, 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. Nonetheless the Company
has in place a non collateralized bond arrangement with a major insurance
company which provides availability for bonding up to $50 million in contract
value. The insurance company reserves the right to consider bond requests on a
bond by bond basis.
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, and private placements of equity securities. Net cash provided
by (used in) operating activities was $909,926 and ($961,044) in the three
months ended March 31, 1996 and 1995 respectively. Fluctuations in net cash
provided by (used in) operating activities are primarily the result of changes
in net income, contract and income tax receivables, accounts payable and costs
and estimated earnings in excess of billings on contracts due to differences in
contract milestones and payment dates.
In December 1995, the Company's $6,000,000 Revolving Line of Credit with
Citizens Trust Company expired and was replaced by a demand note. On April 1,
1996 a new $3,850,000 Revolving Line of Credit was approved and closed on April
10, 1996. The Company is required to reduce outstanding borrowings under the
Revolving Line of Credit to the following limits: May 30, 1996 - $2,950,000,
June 30, 1996 - $2,450,000, November 30, 1996 - $2,050,000 and December 31, 1996
- - $900,000. The arrangement limits outstanding borrowings to the aggregate of
80% of accounts receivable plus 25% of costs and estimated earnings in excess of
billings on contracts. Amounts outstanding under the Revolving Line of Credit
accrue interest at an annual rate of prime plus two percent on the first
$2,000,000 and 16% of the remaining $1,850,000. The difference between prime
plus two percent and 16% is deferred interest and is due on January 15, 1997. In
addition, 70% of the income tax refunds receivable at December 31, 1995 must be
used to pay down the line permanently and the
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remaining balance will be used to pay down the line but maybe readvanced based
on availability. The prime rate was 8.25% at March 31, 1996. The Company's
obligations under the facility are secured by substantially all of the assets of
the Company. The agreement provides that the Company may not pay any dividends
on its capital stock without the consent of the bank. In addition, the agreement
requires the Company to meet certain financial covenants.
Although the Company believes that cash flow generated by operations will
be sufficient to fund continuing operations and required payments on the
Revolving Line of Credit through the end of 1996, this assumes continued and
timely progress payments by the State of Hawaii. There can be no assurance that
the Company will arrive at an agreement with Hawaii concerning payments and that
these payments will be sufficient. The Company is actively seeking new capital
to be assured of its ability to continue as a going concern.
PART 11 - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not subject to any pending or, to its knowledge, threatened
material legal actions or proceedings.
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) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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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: May 14, 1996 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)
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 938,266
<SECURITIES> 0
<RECEIVABLES> 2,320,469
<ALLOWANCES> 50,000
<INVENTORY> 0
<CURRENT-ASSETS> 12,421,928
<PP&E> 1,742,555
<DEPRECIATION> 1,261,253
<TOTAL-ASSETS> 13,633,903
<CURRENT-LIABILITIES> 8,562,250
<BONDS> 0
<COMMON> 286,537
0
2,235,674
<OTHER-SE> 2,320,901
<TOTAL-LIABILITY-AND-EQUITY> 13,633,903
<SALES> 3,686,829
<TOTAL-REVENUES> 3,686,829
<CGS> 2,520,413
<TOTAL-COSTS> 3,229,893
<OTHER-EXPENSES> (40,678)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,000
<INCOME-PRETAX> 396,614
<INCOME-TAX> 164,043
<INCOME-CONTINUING> 232,571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 232,571
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
