<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
----------------------
(Mark One)
/x/ Quarterly report pursuant to section 13 of 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 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 June 30, 1996, there were 2,884,937 shares of the registrant's Common
Stock, $.10 par value, outstanding.
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
NETWORK SIX, INC.
Condensed Balance Sheets
<CAPTION>
June 30, 1996 Dec. 31, 1995
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash ........................................................ $ 631,822 $ 1,205,652
Contract receivables, less allowance for
doubtful accounts of $50,000 at
June 30, 1996 and December 31, 1995....................... 2,032,190 3,078,267
Costs and estimated earnings in excess of
billings on contracts..................................... 7,964,001 7,227,747
Income taxes receivable...................................... 1,187,955 1,747,824
Other assets................................................. 218,384 283,499
Due from officer............................................. 16,978 63,779
----------- -----------
Total current assets...................................... 12,051,330 13,606,768
----------- -----------
Property and equipment
Computers and equipment...................................... 966,992 1,377,098
Furniture and fixtures....................................... 228,284 246,339
Leasehold improvements....................................... 20,191 116,808
----------- -----------
1,215,467 1,740,245
Less: accumulated depreciation and
amortization......................................... 830,259 1,181,249
----------- -----------
Net property and equipment................................ 385,208 558,996
Deferred taxes.................................................. 236,955 271,360
Other assets.................................................... 317,311 508,149
----------- -----------
$12,990,804 $14,945,274
=========== ===========
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current installment of obligations under capital
leases .............................................. $ 139,158 $ 168,640
Notes payable to bank.................................... 3,680,000 5,000,000
Trade accounts payable................................... 2,050,535 1,696,999
Accrued salaries and benefits............................ 320,662 442,663
Accrued subcontractor expense............................ 254,843 421,857
Accrued restructuring.................................... 228,458 517,680
Other accrued expenses................................... 304,289 618,869
Billings in excess of costs and estimated
earnings on contracts................................ 35,112 386,799
Deferred taxes........................................... 685,502 745,619
Preferred stock dividends payable........................ 140,240 47,260
----------- -----------
Total current liabilities............................ 7,838,799 10,046,386
----------- -----------
Obligations under capital leases, excluding current
installments............................................. 205,004 254,393
----------- -----------
Total Liabilities.................................... 8,043,803 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 June 30, 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 2,884,937 shares
at June 30, 1996 and 2,860,695 shares at
December 31, 1995.................................... 288,494 286,070
Additional paid-in capital............................... 1,437,048 1,389,218
Retained earnings........................................ 991,832 739,580
Treasury stock, 14,992 common shares at
June 30, 1996 and December 31, 1995, at
cost................................................. (6,047) (6,047)
----------- -----------
Total stockholders' equity........................... 4,947,001 4,644,495
----------- -----------
$12,990,804 $14,945,274
=========== ===========
</TABLE>
3
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NETWORK SIX, INC.
<TABLE>
Condensed Statements of Income
(Unaudited)
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED 06/30/96 ENDED 06/30/95 ENDED 06/30/96 ENDED 06/30/95
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Contract revenue earned.............................. $2,579,934 $6,045,177 $6,266,763 $12,715,490
Cost of revenue earned............................... 1,826,237 4,831,868 4,346,651 9,096,448
---------- ---------- ---------- -----------
Gross profit..................................... 753,697 1,213,309 1,920,112 3,619,042
Selling, general, & administrative expenses.......... 462,073 992,077 1,171,553 2,364,590
---------- ---------- ---------- -----------
Income from operations........................... 291,624 221,232 748,559 1,254,452
Other deductions (income)
Interest Expense................................. 120,328 79,560 221,328 143,477
Interest Earned.................................. (19,655) (3,146) (60,333) (5,835)
---------- ---------- ---------- -----------
Income before income taxes....................... 190,951 144,818 587,564 1,116,810
Income taxes......................................... 78,290 59,375 242,332 457,982
---------- ---------- ---------- -----------
NET INCOME........................................... $ 112,661 $ 85,443 $ 345,232 $ 658,918
---------- ---------- ---------- -----------
Per share information:
Net income used in fully diluted calculation..... 112,661 85,443 345,232 958,918
Less preferred dividend.......................... 46,747 46,747 92,980 92,980
---------- ---------- ---------- -----------
Net income used in primary per share
calculation............................. 65,914 38,696 252,252 565,928
---------- ---------- ---------- -----------
Net income per share:
Primary:
Net income................................... $ 0.02 $ 0.01 $ 0.09 $ 0.20
---------- ---------- ---------- -----------
Fully diluted:
Net income................................... $ 0.03 $ 0.02 $ 0.10 $ 0.19
---------- ---------- ---------- -----------
Shares used in computing net income per share:
Primary.......................................... 2,912,615 2,846,218 2,880,287 2,833,642
Fully Diluted.................................... 3,627,521 3,557,020 3,594,897 3,557,020
</TABLE>
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NETWORK SIX, INC.
<TABLE>
Condensed Statements of Cash Flow
(Unaudited)
<CAPTION>
Six months Six months
ended ended
6/30/96 6/30/95
---------- ----------
<S> <C> <C>
Cash Flows from operating activities:
Net income............................................................ $ 345,232 $ 658,918
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization.................................. 176,098 147,584
(Increase) decrease in contract receivables.................... 1,046,077 (128,394)
(Increase) decrease in other current assets.................... 65,116 (31,550)
Increase in costs and estimated earnings in excess
of billings.................................................... (736,254) (3,958,076)
Decrease in income taxes receivable............................ 559,869 194,032
Increase (decrease) in billings in excess of costs and
estimated earnings on contracts................................ (351,687) 336,766
Decrease in long term receivables.............................. 35,596 ---
Increase in trade accounts payable............................. 353,536 61,453
(Increase) decrease in accrued expenses........................ (892,817) 170,964
Increase in other assets....................................... 155,242 33,724
Decrease in due from officer................................... 46,801 ---
Increase in income taxes payable............................... --- 78,171
Decrease in deferred tax assets................................ 34,405 10,665
Increase (decrease) in deferred tax liability.................. (60,117) 257,228
----------- -----------
Net cash provided by (used in) operating
activities..................................................... 777,097 (2,659,750)
----------- -----------
Cash flows from investment activities:
Capital expenditures.............................................. (2,310) (418,626)
----------- -----------
Net cash used in investing activities.......................... (2,310) (418,626)
----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of common stock........................ 50,254 345,000
Proceeds from the sale of treasury stock.......................... --- ---
Proceeds from (payments on) notes payable to bank................. (1,320,000) 2,550,000
Principal payments on capital lease obligations................... (78,871) (67,115)
Payment of dividends.............................................. --- (140,240)
----------- -----------
Net cash provided by (used in) financing
activities............................................ (1,348,617) 2,687,645
----------- -----------
Net decrease in cash.................................................. (573,830) (390,731)
Cash at beginning of the period....................................... 1,205,652 822,286
----------- -----------
Cash at end of period................................................. $ 631,822 $ 431,555
=========== ===========
Supplemental cash flow information:
Cash paid during the year for:
Income taxes.................................................. $ 81,000 $ 408,903
Interest...................................................... 237,471 122,022
Supplemental disclosure of non-cash investing activities:
Acquisition of assets through capital lease obligations .... --- 214,400
=========== ===========
</TABLE>
5
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NETWORK SIX, INC.
Notes to Financial Statements
June 30, 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 June 30, 1996, and
the statements of income and cash flows for the six month periods ended
June 30, 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
In April the Company announced the intent, by an unnamed state, to
negotiate a systems integration contract to construct and install a child
welfare system for $6.3 million. The contract is still under negotiation.
In May the Company announced a $1.6 million contract with the State
of Rhode Island Department of Health to provide a centralized data management,
tracking and communications system which will link their databases called the
Rhode Island Children's Access Program or "RICAP". The project was started in
May and is expected to be completed by February of 1997. There will then be a
one year warranty with the complete project wrapping up in February of 1998.
In June the Company announced a new subcontract agreement with
Complete Business Solutions, Inc (CBSI), a privately held company who has been a
subcontractor to NSI on the Hawaii and other contracts, to expand their role in
the Hawaii Child Support Enforcement contract. CBSI is leading a detailed review
of the current system under development. Hawaii has agreed to pay CBSI $1.2
million from the Company's remaining contract budget when various milestones are
achieved. The Company has have a significant role in the detailed review and is
hopeful that its results will facilitate the resolution of open contractual
scope issues.
In July the Company announced a $2.6 million contract with the State
of Rhode Island to support the InRHODES automated system within the Department
of Human Services. The contract became effective July 1, 1996 and is for one
year with options to renew for two consecutive years at the election of the
State.
In July the Company announced that the Child Support Enforcement
system that they developed and installed for the State of West Virginia had
become only the sixth system to be federally certified, in the entire
United States.
Results of Operations - Six Months Ended June 30, 1996 Compared to 1995
Contract revenue decreased $6,448,728 or 51% from $12,715,491 in the
six months ended June 30, 1995 to $6,266,763 in the six months ended June 30,
1996 primarily due to the completion of the Maine FAMIS, West Virginia OSCAR,
Nebraska subcontract projects, and the substantial completion of the Idaho CSE
and the Virgin Island VIPERS projects. Also, the level of activity and revenue
recognition on the Hawaii contract is much less than one year ago because the
Company has reduced its effort pending completion of the detailed review of the
contract led by CBSI.
Cost of revenue earned, consisting of direct employee labor, direct
contract expense and
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subcontracting expense, decreased $4,749,797 or 52% from $9,096,448 in the six
months ended June 30, 1995 to $4,346,651 in the six months ended June 30, 1996
due to the decreased effort to support the lower level of business and the lower
reliance on subcontractor labor.
Gross profit decreased $1,698,930 or 47% from $3,619,043 for the six
months ended June 30, 1995 to $1,820,112 for the six months ended June 30, 1995.
Gross profit as a percentage of revenue earned increased from 28.5% for the six
months ended June 30, 1995 to 30.6% for the six months ended June 30, 1996. The
increase in gross profit margins is primarily due improved margins on newer
contracts started in 1996, relatively more time and materials contracts and
to lower margins historically on the Hawaii contract.
Selling, general and administrative expenses decreased $1,193,037 or
51% from $2,364,590 in the six months ended June 30, 1995 to $1,171,553 in the
six months ended June 30, 1996 primarily due to the reduction in personnel
announced in December 1995.
As a result of the foregoing, income before income taxes decreased
$529,246, or 47% from $1,116,810 for the six months ended June 30, 1995 to
$587,564 for the six months ended June 30, 1996.
Net income decreased $313,596, or 48% from $658,828 for the six months
ended June 30, 1995 to $345,232 for the six months ended June 30, 1996.
Results of Operations - Three Months Ended June 30, 1996 Compared to 1995
Contract revenue decreased $3,465,243 or 57% from $6,045,177 in the
three months ended June 30, 1995 to $2,579,934 in the three months ended June
30, 1996 primarily due to the substantial completion of the Idaho CSE, Virgin
Island VIPERS and the West Virginia Oscar 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 the current estimate to complete the contract. While the
negotiations are ongoing, 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 $3,005,630 or 62% from
$4,831,867 in the three months ended June 30, 1995 to $1,826,237 in the three
months ended June 30, 1996 due to the decreased effort to support the lower
level of business and the lower reliance on subcontractor labor.
Gross profit decreased $459,612 or 38% from $1,213,309 for the three
months ended June 30, 1995 to $753,697 for the three months ended June 30, 1995.
Gross profit as a percentage of revenue earned increased from 20.1% for the
three months ended June 30, 1995 to 29.2% for the three months ended June 30,
1996. The increase in gross profit margins is primarily due to improved margins
on newer contracts started in 1996, relatively more time and materials contracts
and lower
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margins historically on the Hawaii contract.
Selling, general and administrative expenses decreased $530,004 or 53%
from $992,077 in the three months ended June 30, 1995 to $462,073 in the three
months ended June 30, 1996 due to the reduction in personnel announced in
December 1995.
Net income increased $27,218 or 32% from $85,443 for the three months
ended June 30, 1995 to $112,661 for the three months ended June 30, 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.
The Company has historically not received its first contract progress
payments on fixed price contracts 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 is taking steps to
tighten up this timetable, thereby reducing the requirement for additional
working capital. For example, NSI is breaking up proposed deliverables into
smaller components which allow it to reach a payment milestone earlier than was
previously possible. NSI is also attempting to hold its customers to their
contractual commitments regarding payment terms, generally thirty days after
invoicing.
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 $777,097 and ($2,659,750) in
the six months ended June 30, 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 remaining balance will be used to
pay down the line but may be readvanced based on availability. The prime rate
was 8.25% at June 30, 1996. The Company's obligations under the facility are
secured by substantially all of the assets of the Company. The agreement
provides that the
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Company may not pay any dividends on its capital stock without the consent of
the bank, and it requires the Company to meet certain
financial covenants.
In May and June, the Company did not meet the pay down schedule in the
Revolving Line of Credit. Although waivers received from the bank have expired,
a new Line of Credit agreement is under negotiation, and the Company anticipates
being able to conclude a mutually satisfactory arrangement soon. Should the
Company be unable, however, to satisfy the bank with respect to further pay
downs, the bank could declare the $3,850,000 Revolving Line of Credit in default
and exercise its remedies under the agreement.
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
At the Annual Meeting of Shareholders held on June 12, 1996,
shareholders voted 2,998,586 shares (including voting preferred stock) in favor
of:
(1) The election of Dana H. Gaebe, Kenneth C. Kirsch, Nicholas R.
Supron and James J. Trainer as Directors to serve until the next
annual meeting of the stockholders or until their successors are
elected and qualified.
<TABLE>
<CAPTION>
For Against Abstain No Vote
--- ------- ------- -------
<S> <C> <C> <C> <C>
Dana H. Gaebe 2,941,625 -0- 55,711 576,930
Kenneth C. Kirsch 2,941,625 -0- 55,939 576,930
Nicholas R. Supron 2,941,625 -0- 55,711 576,930
James J. Trainor 2,941,625 -0- 55,711 576,930
</TABLE>
(2) Approval of the reservation of an additional 200,000 shares of the
Company's authorized but unissued stock for employee stock options
which may be granted under the 1993 Incentive Stock Option Plan.
<TABLE>
<S> <C> <C> <C> <C>
1,456,274 150,222 30,372 575,677
</TABLE>
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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.
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: August 13, 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)
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 631,822
<SECURITIES> 0
<RECEIVABLES> 2,082,190
<ALLOWANCES> 50,000
<INVENTORY> 0
<CURRENT-ASSETS> 12,051,330
<PP&E> 1,215,467
<DEPRECIATION> 830,259
<TOTAL-ASSETS> 12,990,804
<CURRENT-LIABILITIES> 7,838,799
<BONDS> 0
<COMMON> 288,494
0
2,235,674
<OTHER-SE> 2,422,833
<TOTAL-LIABILITY-AND-EQUITY> 12,990,804
<SALES> 6,266,763
<TOTAL-REVENUES> 6,266,763
<CGS> 4,346,651
<TOTAL-COSTS> 5,518,204
<OTHER-EXPENSES> (60,333)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 221,328
<INCOME-PRETAX> 587,564
<INCOME-TAX> 242,332
<INCOME-CONTINUING> 242,332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 345,232
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.1
</TABLE>
