10-Q 1 a2054503z10-q.txt FORM 10-Q -------------------------------------------------------------------------------- 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, 2001 [ ] 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, 2001 there were 817,591 shares of the registrant's Common Stock, $.10 par value, outstanding. -------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NETWORK SIX, INC. CONDENSED BALANCE SHEETS

~~PART~~June ~~I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NETWORK SIX~~30, ~~INC. CONDENSED BALANCE SHEETS Mar. 31,~~ 2001 Dec. 31, 2000 ~~ASSETS (unaudited)~~ ---------------------- --------------------- (unaudited) ASSETS Current assets: Cash $and 2cash equivalents $1,~~215~~121,~~173~~322 $ 1,650,959 Short term investments 1859,~~237,~~387 1,803,387 Contract receivables, less allowance for doubtful accounts of $49,000 at ~~March~~June 3130, 2001 and December 31, 2000 1,~~408~~344,~~075~~970 1,094,142 Costs and estimated earnings in excess of billings on ~~contracts~~contract ~~791~~676,~~721~~455 843,021 Deferred taxes ~~128~~135,~~014~~479 268,177 Other current assets ~~126~~94,~~619~~391 46,127 ---------------- --------------- Total current assets 54,~~906~~232,~~989~~004 5,705,813 ---------------- --------------- Property and equipment: Computers and equipment ~~636~~649,~~474~~309 639,258 Furniture and fixtures 162,~~606~~526 162,606 Leasehold improvements 20,191 20,190 ---------------- --------------- ~~819~~832,~~271~~026 822,054 Less: ~~accum.~~accumulated depreciation and amortization ~~673~~695,~~624~~399 659,097 ---------------- --------------- Net property and equipment ~~145~~136,~~647~~627 162,957 Deferred taxes 59,555 79,701 Other assets 3527,~~161~~451 47,007 ---------------- --------------- Total ~~Assets~~assets $ 6,147,352 $ 5,995,478 ================ =============== 2 Mar. 31, 2001 Dec. 31, 2000 (unaudited) ---------------- --------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt: Vendors $ 100,000 $ 100,000 Others 355,311 354,018 Accounts payable 85,407 31,023 Accrued salaries and benefits 267,831 389,158 Other accrued expenses 134,047 93,021 Billings in excess of costs and estimated earnings on contracts - 19,048 Preferred stock dividends payable 1,562,996 1,473,612 ---------------- --------------- Total current liabilities 2,505,592 2,459,880 ---------------- --------------- Long-term debt, less current portion: Vendors 442,239 442,239 Others 389,795 416,618 ---------------- --------------- Total Liabilities 3,337,626 3,318,737 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, 2001 and December 31, 2000; 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~~455,~~000~~637 shares; issued 825,684 shares at March 31, 2001 and 825,684 at December 31, 2000 82,568 82,568 Additional paid-in capital 1,941,318 1,947,767 Treasury stock recorded at cost 8,693 shares at March 31, 2001 and 11,843 shares at December 31, 2000 (32,511) (44,360) Retained earnings (accumulated deficit) (1,417,323) (1,544,908) ---------------- --------------- Total stockholders' equity 2,809,726 2,676,741 ---------------- --------------- Total Liabilities & Stockholders' Equity $ ~~6,147,352 $~~ 5,995,478 ================ =============== 3 NETWORK SIX, INC. CONDENSED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS THREE MONTHS ENDED 3/31/01 ENDED 3/31/00 ---------------- --------------- Contract revenue earned $ 2,946,953 $ 2,856,038 Cost of revenue earned 1,892,908 1,783,529 ---------------- --------------- Gross profit 1,054,045 1,072,509 Selling, general & administrative expenses 708,566 730,822 ---------------- --------------- Income from operations 345,479 341,687 ---------------- --------------- Other deductions (income) Interest expense 26,231 37,386 Interest earned (48,546) (35,334) ---------------- --------------- Income before income taxes 367,794 339,635 Income taxes 150,825 139,251 ---------------- --------------- Net income $ 216,969 $ 200,384 ================ =============== Net income per share: Basic $ 0.16 $ 0.15 ================ =============== Diluted $ 0.16 $ 0.15 ================ =============== Shares used in computing net income per share: Basic 814,891 795,725 ================ =============== Diluted 814,891 795,725 ================ =============== Preferred dividends $ 89,384 $ 84,144 ================ =============== 4 NETWORK SIX, INC. CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED) Three months Three months ended ended 3/31/01 3/31/00 ---------------- --------------- Net Income $ 216,969 $ 200,384 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,117 22,445 Changes in operating assets and liabilities: Contract receivables (313,933) 460,442 Cost and estimated earnings in excess of billings on contracts 51,300 (429,737) Income taxes receivable - (4,080) Other current assets (80,492) 4,033 Deferred tax assets 160,309 139,250 Other assets 11,846 21,817 Accounts payable 54,384 (91,473) Accrued salaries and benefits (121,327) (165,454) Other accrued expenses 41,026 39,827 Billings in excess of costs and estimated earnings on contracts (19,048) (31,051) ---------------- --------------- Net cash provided by operating activities 24,151 166,403 ---------------- --------------- 5 Three months Three months ended ended 3/31/01 3/31/00 ---------------- --------------- Cash flows from investing activities: Purchases of property and equipment (5,807) (30,677) Proceeds from maturities of short-term investments 566,000 - ---------------- --------------- Net cash provided (used in) investing activities 560,193 (30,677) ---------------- --------------- Cash flows from financing activities: Principal payments on capital lease obligations - (8,132) Payments on long term debt (25,530) (24,353) Proceeds from issuance of common stock - 6,151 Sales (purchases) of treasury stock 5,400 (14,255) ---------------- --------------- Net cash (used in) financing activities (20,130) (40,589) ---------------- --------------- Net increase in cash 564,214 95,137 Cash at beginning of period 1,650,959 2,453,935 ---------------- --------------- Cash at end of period $ 2,215,173 $ 2,549,072 ================ =============== Supplemental cash flow information: Cash paid during the period for: Income taxes $ 10,912 $ - Interest 14,385 21,073 ================ ===============

3 NETWORK SIX, INC. CONDENSED STATEMENTS OF INCOME (UNAUDITED)

4 NETWORK SIX, INC. CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED)

6 NETWORK SIX, INC. Notes to Financial Statements June 30, 2001 (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, 2001, and the statements of income and cash flows for the six month periods ended June 30, 2001 and 2000, 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) Recent Developments On June 6, 2001, the Company entered into an agreement and plan of merger with TRW Inc. and NSI Systems Inc., a wholly-owned subsidiary of TRW, pursuant to which NSI Systems will merge with and into the Company, with the Company continuing as the surviving corporation. The consummation of the merger transaction depends on a number of conditions precedent as described in the merger agreement, including approval by a majority of the Company's outstanding common stock. Holders of approximately 43% of the Company's outstanding common stock and preferred stock (which votes with the common stock on an as-converted basis) have already entered into voting agreements with TRW to approve the merger transaction. A special meeting of the Company's shareholders has been scheduled for August 16, 2001 to consider and vote upon the adoption and approval of the merger. If the merger is approved by the required majority vote, holders of the Company's common stock will be entitled to receive $3.60 per share in cash, without interest, for each share of Company common stock held by them. Upon consummation of the merger, all shares of the Company's common stock will be cancelled and the Company will become a wholly-owned subsidiary of TRW. A copy of the merger agreement is included as Appendix A to the Company's proxy statement that was filed with the Securities and Exchange Commission by the Company on July 19, 2001 in connection with the merger. The Company's stockholders are encouraged to read the proxy statement and merger agreement in their entirety. Shareholders will be able to obtain a copy of the proxy statement and any amendments and other relevant documents filed with the Commission at its website, www.sec.gov. The Company expects to begin mailing the proxy statement on or about July 23, 2001 to each shareholder of record on June 29, 2001. More information regarding the special meeting can be found in the proxy statement. Also on June 6, 2001, TRW and NSI Systems entered into a purchase and sale and voting agreement with Saugatuck Capital Company Limited Partnership III, the holder of all of the outstanding shares of the Company's Series A Convertible Preferred Stock pursuant to which Saugatuck will sell its shares of preferred stock to NSI Systems for a purchase price of $2,500,000 payable in the form of a promissory note immediately prior to the consummation of the merger transaction described above. 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. 7 RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2001, COMPARED TO 2000 Contract revenue increased $108,525 or 4% from $3,004,373 in the three months ended June 30, 2000 to $3,112,898 in the three months ended June 30, 2001 primarily due to increased billings on the State of Rhode Island Department of Human Services maintenance and support contract known as InRHODES ("InRHODES"). This revenue was partially offset by lower contract revenues from the State of Maine Department of Human Services maintenance and support contract known as MACWIS ("MACWIS") and certain private sector accounts. Cost of revenue earned, consisting of direct employee labor, direct contract expense and subcontracting expense, increased $40,581 or 2% from $1,959,713 in the three months ended June 30, 2000 to $2,000,294 in the three months ended June 30, 2001 due to costs related to increased contract revenues. Gross profit increased $67,944 or 7%, from $1,044,660 for the three months ended June 30, 2000 to $1,112,604 for the three months ended June 30, 2001. Gross profit as a percentage of revenue earned was 35% for the three months ended June 30, 2000 and 36% for the three months ended June 30, 2001. Selling, general and administrative ("SG&A") expenses increased $70,984, or 9%, from $804,998 in the three months ended June 30, 2000 to $875,982 in the three months ended June 30, 2001. Our increased expenses were the result of incurring approximately $255,000 in expenses exploring strategic options for Network Six which were significantly offset by a decrease in marketing and business development staff and activities as a result of our strategy to re-focus our efforts primarily on the state government health and human services market. Without the expenses related to exploring strategic options, our earnings per share would have been $.27 per share for the three months ended June 30, 2001 instead of $.08 per share. Interest expense decreased $20,494, or 49%, from $42,217 for the three months ended June 30, 2000 to $21,723 for the three months ended June 30, 2001 primarily due to a reduction in long-term debt. Interest income increased $3,221, or 9%, from $34,882, for the three months ended June 30, 2000 to $38,103 for the three months ended June 30, 2001 due to higher average balances of cash and short term investments. Income before income taxes increased $20,675, or 9%, from $232,327 for the three months ended June 30, 2000 to $253,002 for the six months ended June 30, 2001 primarily due to increased contract revenues. Net income increased $12,174, or 9%, from $137,074 for the three months ended June 30, 2000 to $149,248 for the three months ended June 30, 2001. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO 2000 Contract revenue increased $199,440 or 3% from $5,860,411 in the six months ended June 30, 2000 to $6,059,851 in the six months ended June 30, 2001 primarily due to increased billings on the State of Rhode Island Department of Human Services maintenance and support contract known as InRHODES ("InRHODES"). This revenue was partially offset by lower contract revenues from the State of Maine Department of Human Services maintenance and support contract known as MACWIS ("MACWIS") and certain private sector accounts. Cost of revenue earned, consisting of direct employee labor, direct contract expense and subcontracting expense, increased $149,960 or 4% from $3,743,242 in the six months ended June 30, 2000 to $3,893,202 in the six months ended June 30, 2001 due to costs related to increased contract revenues. Gross profit increased $49,480 or 2%, from $2,117,169 for the six months ended June 30, 2000 to $2,166,649 for the six months ended June 30, 2001. Gross profit as a percentage of revenue earned was 36% for the six month periods ended June 30, 2000 and June 30, 2001. Selling, general and administrative ("SG&A") expenses increased $48,728, or 3%, from $1,535,820 in the six months ended June 30, 2000 to $1,584,548 in the six months ended June 30, 2001. The increased expenses were the result of the Company incurring approximately $375,000 in expenses exploring strategic options for the Company which were significantly offset by a decrease in expenses relating to marketing and business development staff and activities as a result of the Company's strategy to re-focus its efforts primarily on the state government health and human services market. Without the expenses related to exploring strategic options, the Company's earnings per share would have been $0.51 for the six months ended June 30, 2001 instead of $.24 per share. Interest expense decreased $31,649, or 40%, from $79,603 for the six months ended June 30, 2000 to $47,954 for the six months ended June 30, 2001 primarily due to a reduction in long-term debt. Interest income increased $16,433, or 23%, from $70,216, for the six months ended June 30, 2000 to $86,649 for the six months ended June 30, 2001 due to increased cash and short term investments. 8 Income before income taxes increased $48,834, or 9%, from $571,962 for the six months ended June 30, 2000 to $620,796 for the six months ended June 30, 2001 primarily due to lower interest expense and increased interest income. Net income increased $28,759, or 9%, from $337,458 for the six months ended June 30, 2000 to $366,217 for the six months ended June 30, 2001. 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 continues to expand this practice prospectively as well as pursue more time and material contracts than it had 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. 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 $404,398 and $322,564 for the six months ended June 30, 2001 and 2000, respectively. Fluctuations in net cash provided by operating activities are primarily the result of changes in net income, accounts receivable, accounts payable, accrued salaries and benefits, and costs and estimated earnings in excess of billings on contracts due to differences in contract milestones and payment dates. 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, subordinated to the revolving line of credit with the commercial bank. 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 non-current 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. The Company can borrow up to 80% of certain qualified accounts receivable at an interest rate of prime plus 1/4%. On June 30, 2001, the revolving line of credit had an outstanding balance of zero. On May 8, 2001 the Company's Board of Directors authorized the payment of the accrued but unpaid dividend as of March 31, 2001 to Saugatuck Capital Company Limited Partnership III ("Saugatuck"), the Company's preferred shareholder, subject to the execution and delivery of a definitive merger agreement with TRW. On June 8, 2001 the Company paid $1,562,996, the accrued dividend as of March 31, 2001, to Saugatuck. 9 The Company believes that cash flow generated by operations will be sufficient to fund continuing operations through the end of 2001. The Company believes that inflation has not had a material impact on its results of operations to date. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS There are no recently issued financial accounting standards that impact the Company's financial statements. 10 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. 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. A current report on Form 8-K, dated April 27, 2001 was filed by the Company and included a press release dated April 26, 2001 announcing the Company's results for the three months ended March 31, 2001. A Statement of Operations (without notes) for the quarters ended March 31, 2001 and 2000 was included with the filing. A Balance Sheet as of March 31, 2001 and December 31, 2000 was also included with the filing. A current report on Form 8-K, dated June 13, 2001 was filed by the Company and included a press release dated June 7, 2001 announcing that the Company had signed a definitive agreement to be acquired by TRW Inc. The Agreement and Plan of Merger, dated June 6, 2001 was also included with the filing. 11 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 19, 2001 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 and Accounting Officer) 12

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