<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number 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
incorporation or organization) Identification Number)
475 Kilvert Street
Warwick, Rhode Island 02886
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 732-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10
par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's Common Stock held by non-
affiliates of the registrant as of February 28, 1997 (computed by reference to
the closing price of such stock on the NASDAQ/ National Market System) was
$1,622,682.
As of February 28, 1997, there were 721,192 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
-------- ------------------
Portions of the registrant's definitive Proxy
Statement regarding the 1997 Annual
Meeting of Stockholders Part III
================================================================================
1
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NETWORK SIX, INC.
Form 10-K
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Item Page
- ---- ----
Part I
<C> <S> <C>
1 Business........................................................ 3
2 Properties...................................................... 10
3 Legal Proceedings............................................... 10
4 Submission of Matters to a Vote of Security Holders............. 11
Part II
5 Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 11
6 Selected Financial Data......................................... 12
7 Management's Discussion and Analysis of Financial Condition and
Results of Operation.......................................... 13
8 Financial Statements and Supplementary Data..................... 20
9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................ 20
Part III
10 Directors and Executive Officers of the Registrant............. 20
11 Executive Compensation.......................................... 20
12 Security Ownership of Certain Beneficial Owners and Management.. 21
13 Certain Relationships and Related Transactions.................. 21
Part IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 21
Signatures.................................................... 24
</TABLE>
2
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PART I
ITEM 1. BUSINESS.
GENERAL
Network Six, Inc. (formerly Network Solutions, Inc.), is a provider of
systems integration and consulting services to state government human services
agencies. The Company is currently in the process of developing and installing
computerized management information systems for human services agencies in
Idaho, Rhode Island, West Virginia, and the Government of the U.S. Virgin
Islands as the prime contractor. Incorporated in 1976 under the name National
E-F-T, Inc., the Company has since 1988 focused on providing its services to
state government human services agencies, and substantially all of its revenues
are currently derived from contracts with such agencies.
The Company is incorporated under the laws of Rhode Island, and its
principal executive offices are located at 475 Kilvert Street, Warwick, Rhode
Island 02886, telephone number (401) 732-9000.
INDUSTRY
Rapid improvements in price and performance of computer and communications
equipment in the last 20 years, coupled with the growth of sophisticated,
powerful software, have resulted in a substantial increase in the number of
organizations that use computer-based information systems and in the scope of
such systems. The proliferation of both products and suppliers of products has
not only expanded the scope of tasks that can be performed by information
systems, it has also increased the complexity of such systems.
Information systems typically include computer hardware (mainframe,
minicomputers, and workstations), software (both custom and packaged), and
communications equipment. Effective operation of information systems depends
not only on having proper equipment and software, but also on having well
trained and skilled personnel.
The pace and magnitude of technological change have been so great that it
has been difficult for in-house data processing staffs to remain abreast of
developments. As a result, business and government organizations are
increasingly retaining third-party vendors employing skilled information
technology professionals to define, develop, and install complex custom
information systems and to provide applications software and comprehensive
solutions to their information systems needs. Such organizations are also
turning to such third-party vendors to provide information technology services
in order to reduce their investments in technology and personnel.
STATE GOVERNMENT HUMAN SERVICES AGENCY MARKET
State government human services agencies provide services to a large
percentage of the population and maintain extensive records. They are among the
organizations that most need the services of outside providers of information
technology services to assist in upgrading and maintaining their information
systems. Many state agencies' information systems are obsolete and have limited
data-interfacing capabilities. Many state governments are in fiscal crisis,
requiring their human services agencies to become more productive and perform
enhanced functions with fewer personnel.
3
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Human services agencies have large and burdensome caseloads. One in four
children in the United States lives in a single parent household. The Clinton
Administration has identified welfare reform as a major initiative that could
have a significant impact on human services delivery by government agencies.
Unmarried mothers in some inner city areas deliver 80% of all babies. The
number of families receiving Aid to Families with Dependent Children (AFDC)
through the third generation is increasing and has been referred to by Senator
Daniel Patrick Moynihan as "the permanent underclass."
State human services agencies have had a growing need to increase the
capacity and enhance the capabilities of their information systems as the
federal government, which in most cases provides a substantial portion of the
funding of the programs that the states administer, has required detailed
standardized reporting of program data, elimination of errors, and more
responsive management.
Over time, the federal government has assisted the states by providing
financial assistance for information systems that could be broken down into six
major areas: (i) the Child Support Enforcement (CSE) program; (ii) the welfare
programs of AFDC and food stamps that have been combined into Family Assistance
Management Information Systems (FAMIS); (iii) the Jobs Opportunities and Basic
Skills (JOBS) program; (iv) the Medicaid and experimental managed care programs;
(v) the Child Welfare program; and (vi) other programs, including Electronic
Benefit Transfer (EBT), automated program policy systems, and out sourcing and
privatization of human services agency functions. These programs are
administered at the federal level by the U.S. Department of Health and Human
Services (HHS), with the exception of the food stamp program which is
administered by the Food Nutrition Service of the U.S. Department of Agriculture
(USDA).
Child Support Enforcement. The federal Child Support Enforcement program
was established in 1975 in response to the increasing failure of many parents to
provide financial support to their children. The purpose of the CSE program is
to help strengthen families and reduce welfare dependency by placing the
responsibility for supporting children on the parents rather than the
government. State governments are generally required to locate absent parents,
establish paternity if necessary, obtain judicial support orders, and collect
the support payments required by those orders.
The Child Support Enforcement Amendments of 1984 mandated that state CSE
systems, in order to receive matching federal funding, must meet certain federal
functional requirements covering case initiation, case management, database
linkage, financial management, enforcement, security, privacy, and reporting. A
state's automated system must, among other things: (i) maintain identifying
information on individuals on whom support obligations are sought; (ii) maintain
data necessary to meet federal reporting requirements; (iii) collect and
distribute both intrastate and interstate support payments; (iv) maintain
accounts receivable on all amounts owed, collected, and distributed; (v) provide
management information on all cases from initial referral or application through
collection and enforcement; and (vi) provide security to prevent unauthorized
access to the data in the system. The Family Support Act of 1988, effective
October 1992, mandated enhanced functional requirements for state CSE systems,
including requiring automated systems to be able to interface electronically
with other systems, such as the state's welfare, driver and vehicle
registration, and Medicaid systems.
Welfare. The automated information system requirements of two distinct
federal-state programs - AFDC and Food Stamps - are usually combined at the
state level, sometimes under the name FAMIS or "Family Assistance Management
Information System." Under the AFDC program, originally established by the
Social Security Act of 1935, cash welfare payments are provided to needy
children who have been deprived of parental support or care and certain others
in the household of the child. State governments
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are required to define "need," set their own benefit levels, establish (within
federal limitations) income and resource limits, and administer the program or
supervise its administration. As with the CSE program, the federal government
reimburses part of the states' cost to develop an AFDC system and part of the
cost of operating these systems.
The Food Stamp Program is designed to improve the nutrition of low-income
households and is also administered by state welfare agencies under the
supervision of USDA. Benefits are generally provided in the form of food stamp
coupons and are funded by the federal government, which reimburses part of the
cost of establishing an automated system and part of the cost of operating an
automated food stamp program.
JOBS. Beginning October 1, 1990, all states have been required to have a
Job Opportunities and Basic Skills Training Program. The program is designed to
help needy families with children to avoid long-term welfare receipt by
providing education, training, job placement, and other supportive services
including child care.
Medicaid and Managed Care. Medicaid is a federal-state matching
entitlement program providing reimbursement for the cost of medical care to low-
income individuals who are aged, blind, disabled, or members of families with
dependent children, and to certain other pregnant women and children. Within
broad federal guidelines, each state designs and administers its own program.
Eligibility systems and claims processing systems are automated by states to
handle this program, which is typically the largest line item in a state budget.
Federal assistance is also available on a waiver basis for managed care
experiments for Medicaid recipients and similar populations.
Child Welfare. In November 1993 Congress created a funding authority for
Statewide Automated Child Welfare Information Systems (SACWIS) that provides
federal funds at a 75% rate for the creation of information systems for fiscal
years 1994, 1995, 1996 and 1997. Also in December 1993, the Administration for
Children and Families of HHS published the final rules for the implementation of
the section of the Social Security Act of 1935 that requires the collection of
adoption and foster care data. The federal government has thus provided both
the carrot, by reimbursing states up to 75% of the cost of the development of
information systems; and the stick, by requiring states to report certain child
welfare data, that should encourage most states to build SACWIS by 1997.
Other Human Services Programs. State human services agencies have
initiated a number of additional programs, some of which have involved the use
of federal funds. These programs include: (i) communications kiosks and voice
response systems to inform and educate citizens about human services programs
and to answer specific inquiries; (ii) privatization and out sourcing of various
human services functions such as child support collections; (iii) automated
policy systems to eliminate the volumes of federal and state regulations that
must be referred to by social workers; (iv) Electronic Benefit Transfer (EBT)
systems that involve the transfer of food stamp benefits and payments via
electronic networks that may utilize debit cards or smart cards in conjunction
with automated teller machines or point of sale devices.
Federal Funding. Federal Financial Participation (FFP) is the term used
for federal funds that are provided to states to assist in delivering human
services or for establishing automated systems to assist in such delivery. From
time to time Congress will increase FFP percentages for a limited time in an
attempt to motivate states to automate or upgrade certain systems. The
following is a table of FFP percentages for state automation by selected program
as of December 31, 1996:
5
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<TABLE>
<CAPTION>
Projected End Date
Program FFP% Of Current FFP%
- ------- ------- -------------------
<S> <C> <C>
AFDC................................... 50% None
Food Stamps............................ 50% None
CSE.................................... 90% September 30, 1997*
JOBS................................... 50% None
Medicaid............................... 50-90% None
Medicaid/Managed Care.................. 50-90% Varies
Child Welfare.......................... 75% September 30, 1997
Other Human............................
Services Systems....................... Varies Varies
*Declines to 66%, except for certain
welfare reform initiatives, which would be
eligible for 80% FFP
</TABLE>
The above FFP% are subject to change depending on the final outcome of the
continuing budget negotiations between the Congress and the President of the
United States.
CONTRACTS AND SERVICES PROVIDED
The Company's contracts with state human services agencies have covered
four basic types of projects: (i) the transfer of an entire automated
information system currently in use by another state, which involves the
development of substantial modifications to that system and installation of the
modified system; (ii) the development of an entirely new system; (iii) the
development and installation of enhancements to an agency's existing system; and
(iv) providing support services with respect to an existing system. The
following table sets forth information as of December 31, 1996 relating to the
Company's significant contracts to date with state human services agencies:
<TABLE>
<CAPTION>
State Program Area Project Contract Date Status
- ------------------ -------------- -------------------- ------------- --------------------
<S> <C> <C> <C> <C>
Rhode Island FAMIS transfer system May 1988 complete
Rhode Island CSE transfer system June 1989 complete
Rhode Island FAMIS/CSE support services July 1990 complete
Rhode Island JOBS develop new system April 1991 complete
West Virginia CSE transfer system April 1992 complete
Nevada FAMIS/CSE/ transfer system as July 1992 complete
JOBS asubcontractor to
IBM/ISSC
</TABLE>
6
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<TABLE>
<CAPTION>
State Program Area Project Contract Date Status
- ------------------ -------------- -------------------- ------------- --------------------
<S> <C> <C> <C> <C>
Rhode Island Medicaid transfer system March 1993 in process
Eligibility
Idaho CSE transfer system March 1993 complete
Hawaii CSE transfer system August 1993 terminated
Rhode Island FAMIS/CSE support services October 1993 complete
West Virginia CSE support services July 1994 pending final
certification
Maine FAMIS transfer system December 1994 Phase I - completed
Phase II - canceled
U.S. Virgin CSE transfer system December 1994 in process
Islands
Idaho CSE support services May 1995 in process
Massachusetts CSE transfer system as June 1995 complete
a subcontractor to
Andersen Consulting
Washington State CSE support services December 1995 complete
Louisiana Child Welfare package software March 1995 complete
with
customization
Rhode Island FAMIS/CSE support services July 1995 in process
Rhode Island Dept of Health develop new system May 1996 in process
</TABLE>
Contract Process. Because most human services agency contracts involve
federal funding, they originate with a federally required Advanced Planning
Document (APD) submitted by the state agency to the federal government for
approval. The federal government reviews APDs to ensure that the system
proposed by the agency incorporates minimum functional requirements and will
otherwise meet federal, state, and user needs in a cost effective manner.
Following approval of the APD, the state agency prepares a request for proposals
(RFP) from private industry for software services and for equipment, or
hardware, by which the system will operate. Each RFP, which is also subject to
approval by the federal government, is usually divided into two parts, one
soliciting technical proposals and the other soliciting price proposals. There
may be separate RFP's for hardware and software or the RFP may be a "bundled"
bid that includes both hardware and software.
RFPs essentially define the procuring agency's functional requirements, and
proposals submitted in response thereto by the Company and its competitors are
extensive, detailed descriptions of the
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manner in which the system proposed would satisfy those requirements and the
experience and qualifications of those who would design and implement the
system. The Company's cost of preparing such proposals ranges between $50,000
and $150,000, and the Company has submitted proposals both as a prime contractor
and as a subcontractor to others. Contracts are usually awarded on the basis of
a combination of technical considerations and price, although price can be the
determinative factor as between technically acceptable proposals. Contract award
generally occurs approximately 12 months after issuance of the RFP.
Services. The Company's contracts with state agencies are usually fixed
price agreements, except for support services which are time and materials
contracts, and typically involve most or all of the following services provided
by the Company:
. customizing and modifying an existing system to be transferred or
designing a new system;
. writing computer programs;
. installing the system;
. converting data from computer or manual files;
. testing the system;
. training personnel to operate the system;
. providing computers and related equipment; and
. managing the system.
The services provided in performing a contract are not technically complex,
but require emphasis on carefully defining the needs of the staffs of the
agencies that administer the human services programs involved and adapting
existing technology to satisfy those needs. Change orders and enhancements
under existing contracts are also usually performed on a fixed-price basis and
may result in substantial additions to the base contract price. Contract
performance generally occurs over a period of 24 to 36 months.
Federal Certification. When system development and installation is
complete, the contracting state agency is generally required to obtain federal
certification that the system meets federal requirements. There are no fixed
time requirements for obtaining certification, and certification of the systems
installed by the Company has generally been received between 6 and 12 months
following completion of installation. As an incentive to obtain such approval,
many state agencies require the contractor to provide a performance bond,
ranging from 10% to 50% of the contract price, to be released upon completion of
the warranty period or upon certification. Total-systems contracts also often
provide for a warranty period following completion of the contract.
Following certification of a newly installed system, it is not unusual for
state agencies to contract for support services. Services provided under
support contracts are usually paid for on the basis of an hourly rate plus
expenses with an overall limitation. The Company estimates that automated
information systems currently being installed have a useful technological life
of five years and that the systems require revisions every year to keep up with
changing legislation, regulation, and needs of the human services agency users.
Termination. As with government contracts generally, the Company's
contracts with state human services agencies may be terminated upon relatively
short notice, with no obligation upon the agency other than to reimburse the
Company for its costs of performance through the date of termination. Such
contracts also generally impose substantial penalties for default such as
failure to obtain federal certification of the completed system.
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COMPETITION
The Company's business is highly competitive. The Company's competitors
for state human services agency contracts include firms, such as Andersen
Consulting, UNISYS, Lockheed Martin Information Management Systems, IBM/ISSC,
SHL SystemsHouse (now part of MCI), EDS, American Management Systems, BDM
International and Deloitte & Touche, with substantially greater financial,
technical, and marketing resources than those of the Company. The Company
believes, however, that no single contractor is dominant in its market and that
the primary competitive factors are reputation, capability and resources,
experience with similar systems, quality and reliability of service, and price.
With respect to other State agencies, there are numerous companies that
provide software and system development and information technology services.
None, however, dominate the market. The network services market, is relatively
young and has many companies competing for various business opportunities.
BACKLOG
Substantially all of the Company's revenues are derived from work to be
performed under contracts of expected duration exceeding one year. Such
contracts may be terminated on relatively short notice and may be subject
to/contingent upon state or federal funding. The Company does not believe that
contracts for work outstanding at any particular time provide a meaningful
indication of future revenue. At December 31, 1996, the Company had the
following contracts to provide services which, if fully performed, would result
in the revenues shown:
<TABLE>
<CAPTION>
Amount Recognized as
Contract Revenues Earned Backlog
Contract Title Contract Amount/(2)/ Through 12/31/96 As of 12/31/96/(1)/
- ------------------------------- -------------------- ---------------- -------------------
<S> <C> <C> <C>
Rhode Island
Medicaid Eligibility........ 3,515,600 3,486,398 29,202
Rhode Island CSE............... 2,498,400 2,217,472 280,928
Rhode Island Support........... 3,315,127 1,153,246 2,161,881
St. Thomas, VI, CSE............ 5,662,662 5,481,184 181,478
West Virginia Support.......... 2,741,945 2,716,690 25,255
Idaho Support.................. 3,599,900 3,206,044 393,856
Rhode Island Dept. of Health... 1,580,416 927,372 653,044
----------- ----------- ----------
Totals $22,914,050 $19,188,406 $3,725,644
=========== =========== ==========
</TABLE>
/(1)/The Company expects that substantially all of its backlog at
December 31, 1996 will be realized by the end of 1997. There can be no
assurance, however, that the Company will ultimately realize all of these
revenues from such contracts. See Note 10 to Financial Statements regarding
concentration of revenue.
/(2)/Contract amounts for certain of the above contracts have been
adjusted to reflect change orders for enhancements or additional functionality.
EMPLOYEES
The Company believes that its future success will depend in large part upon
its continued ability to hire and
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retain qualified employees, particularly project managers. There can be no
assurance that the Company will be successful in attracting and retaining
sufficient numbers of qualified personnel to conduct its business in the future.
As of December 31, 1996, the Company had approximately 75 employees. None
of the Company's employees is represented by a labor union. The Company
believes its relations with its employees are good. During December 1995 the
Company announced a staff reduction plan of 30-35 positions. In January 1996, 31
positions were eliminated. In February 1996, 11 more positions were eliminated
as part of the Company's downsizing effort intended to bring expenses more in
line with revenues.
ITEM 2. PROPERTIES.
The Company's principal offices are located in Warwick, Rhode Island,
approximately 12 miles from Providence. The Company leases approximately 9,500
square feet of office space at this location under a lease with an average
annual cost including utilities of approximately $178,000 that expires on
October 31, 2000. The Company believes that these offices are adequate for its
current needs.
ITEM 3. LEGAL PROCEEDINGS.
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 KEIKI child
enforcement system. The suit alleges the Company failed to meet contractual
deadlines, provided late, incomplete and/or unsuitable deliverables, and
materially breached the contract by never completing the design, the application
programming, and the system test and systems implementation. The State is
seeking general damages, consequential and special damages, liquidated damages,
attorneys' fees, the cost of the suit and interest costs that the court deems
just and proper all in an unspecified amount.
The Company vigorously denies the State's allegations and, on January 23,
1997 filed a counter claim against the State alleging that the State breached
the Company's contract. The Company is seeking $70 million in damages and is
alleging that the State had fraudulently induced the Company into designing and
building a system having capabilities and extraordinary features far beyond the
scope of the Company's contract and industry standards. The fraudulent
inducement was in the form of withholding payments, improper rejection of work
that satisfies the requirements of the contract and verbal and written abuse of
the Company's employees and management.
In addition, Unisys, vendor providing equipment under the Company's Hawaii
contract, has submitted a $896,000 claim against the $10.3 million performance
bond. In February 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.
On December 13, 1996 Complete Business Solutions, Inc. (CBSI), a
subcontractor on the Hawaii contract, filed a lawsuit against the Company 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 owed 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 inappropriately. Also, the Company alleges that CBSI
owes the Company $482,750 as of December 31, 1996 for which the Company has not
established any reserve for uncollectibility.
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On February 3, 1997, the Company filed a third-party complaint ("TPC") in
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 tortiously interfered in the contract between the Company and Hawaii;
(iii) MAXIMUS negligently breached duties to the Company and (iv) MAXIMUS aided
and abetted Hawaii in Hawaii's breach of contract. The Company 's complaint
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 substantially 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 effect on the Company and jeopardize the Company's ability
to continue as going concern. Management of the Company and its attorneys are
unable to predict with any certainty the ultimate outcome of this litigation,
including the probability that this litigation will have a negative impact on
the Company or the dollar amount of the potential impact. At December 31, 1996,
the Company had unbilled work-in-process and related receivables from the State
and CBSI of approximately $3.5 million, which exceeds stockholders' equity of
approximately $2.7 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the NASDAQ National Market
System under the symbol "NWSS." Prior to August 2, 1993, the Common Stock was
traded in the over-the-counter market under the same symbol.
The following table sets forth the high and low sales prices of the
Company's Common Stock as reported on the NASDAQ National Market System. The
prices have been adjusted to reflect the one-for-four reverse stock split which
occurred on December 11, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter.......................... $50.00 $33.00
Second Quarter......................... 44.00 31.00
Third Quarter.......................... 38.00 20.00
Fourth Quarter......................... 26.00 11.52
1996
First Quarter.......................... $15.50 $ 6.00
Second Quarter......................... 15.50 7.25
Third Quarter.......................... 11.50 4.00
Fourth Quarter......................... 6.50 .63
</TABLE>
As of December 31, 1996 there were 347 holders of record of the Common
Stock, representing approximately 477 beneficial owners. The last reported sale
price for the Common Stock, as reported on the NASDAQ National Market System on
February 28, 1997 was $2.25 per share.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock since its
formation. It presently intends to retain its earnings for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
The Company's Articles of Incorporation prohibit the payment of dividends on the
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Common Stock if dividends required to be paid on the Company's Series A
Convertible Preferred Stock are in arrears. In addition, the Company's current
Revolving Line of Credit facility restricts the payment of dividends on both
Common and Preferred Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are qualified by reference to, and
should be read in conjunction with, the Company's Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operation" contained elsewhere in or incorporated by reference in
this Form 10-K. The selected financial data for each of the five years in the
period ended December 31, 1996 are derived from the Company's audited financial
statements.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996(1)
---------- ---------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Contract revenue earned........... $6,750,994 $14,570,469 $21,210,878 $20,985,012 $ 7,344,380
Cost of revenues earned........... 3,702,537 9,206,879 13,768,838 19,299,944 7,359,649
---------- ----------- ----------- ----------- -------------
Gross profit...................... 3,048,457 5,363,590 7,442,040 1,685,068 (15,269)
Selling, general and
administrative expense....... 2,139,464 3,030,977 3,700,789 4,369,260 2,240,073
Research & development expense.... --- --- --- 185,235 ---
Restructuring expense............. --- --- --- 537,221 (119,436)
Income (loss) from
operations................... 908,993 2,332,613 3,741,251 (3,406,648) (2,135,906)
Income (loss) before income
taxes........................ 884,797 2,322,061 3,574,612 (3,792,521) (2,533,368)
Net income (loss)................. 601,664 1,395,718 2,109,020 (2,427,440) (1,758,345)
Net income (loss) per share
Primary...................... $ 0.89 $ 1.75 $ 2.74 $ (3.68) $ (2.71)
Fully diluted................ 0.89 1.61 2.39 (3.68) (2.71)
Shared used in computing net income
(loss) per share
Primary...................... 640,098 688,489 702,445 709,748 719,317
Fully diluted................ 669,860 867,503 883,184 709,748 719,317
BALANCE SHEET DATA:
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1992 1993 1994 1995 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital................... $3,006,129 $ 4,137,440 $ 6,266,622 ($2,056,001) ($1,073,671)
Hawaii............................ --- 958,517 3,691,048 5,616,383 3,571,824
Total assets...................... 4,322,402 9,285,090 11,930,399 14,945,273 8,273,564
Long-term obligations............. --- --- 158,038 254,393 235,479
Total stockholders' equity........ 3,362,976 4,602,337 6,914,434 4,644,494 2,748,777
</TABLE>
(1) No revenue has been recognized on the Hawaii contract in 1996. See
Management's Discussion and Analysis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following analysis of the financial conditions and results of operations
of the Company should be read in conjunction with the Company's Financial
Statements and Notes thereto included elsewhere in or incorporated by reference
in this Form 10-K.
OVERVIEW
12
<PAGE>
The Company was incorporated in 1976 as National E-F-T, Inc. Initially the
Company provided consulting services with respect to electronic funds transfer
and electronic data interchange systems. In 1983 the Company changed its name
to Network Solutions, Inc. and on February 1, 1994 to Network Six, Inc. By
1983, the Company had changed its focus to that of a regional provider of
systems development and contract computer programming services. Since 1988, the
Company has focused its efforts on providing its services to state government
human services agencies, although until early 1992 it continued some sales
efforts in the commercial market for systems development. The Company
discontinued marketing efforts in the New England commercial market in early
1992 in order to concentrate on the government human services agency market.
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 April 1996 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. In March 1997 the Company announced that it had
signed the contract with the State of Maine, Department of Human Services.
In May 1996 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 the State's databases into
the Rhode Island Children's Access Program or "RICAP". The project was started
in May 1996 and is expected to be completed by May 1997. There will then be a
one year warranty with the complete project wrapping up in April 1998. During
the warranty phase the Company will provide two full time resources. In March
1997 the Company received a $332,000 change order to this contract increasing
its value to $1.9 million.
In July 1996 the Company announced a $2.6 million time and materials 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 December 1996 the Company received a $745,000 amendment to
the contract, thereby increasing its value to $3.3 million.
In July 1996 the Company announced that the OSCAR child support enforcement
system that it had developed and installed for the State of West Virginia had
become only the sixth system to be federally certified in the entire United
States.
In December 1996 the Company announced a one-for-four reverse stock split.
This was done in order to satisfy the requirements for continued listing on the
NASDAQ market. As a result of the reverse split, the Company had 721,192 shares
outstanding as of December 31, 1996.
In January 1997 the Company announced that it had been selected as an
approved vendor with the State of Arizona, Department of Administration, to
provide data processing, management and consulting services. The Company was
one of several vendors selected in a competitive procurement process from a very
large field to provide Arizona services. The exact value of the contract and
scope of
13
<PAGE>
services are undetermined at this time.
Also in January 1997 the Company announced the formation of a Network
Services Division. The new division, based in Warwick, RI, will provide system
administration, consulting, design, implementation and support services in the
LAN, WAN, Internet/intranet and remote communications technology areas. The
decision to create this division was based on the current and future market
demand. Although the division is new, the Company has considerable experience in
these areas, having worked most recently on remote cellular communications, Web
page development, LAN/WAN development and legacy system/LAN integration
projects. The Division currently has several customers, all relatively small.
In March 1997 the Company announced the resignation of Mr. James J. Trainor
from the Board of Directors. Mr. Clifton C. Dutton was elected to the Board of
Directors in March 1997.
STATE OF HAWAII CONTRACT STATUS
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 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 the Company in February 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
14
<PAGE>
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 extraordinary features far beyond the
scope of the Company's contract and industry standards. The fraudulent
inducement in the form of withholding payments, improper rejection of work that
satisfies the requirements of the contract and verbal and written abuse of the
Company's employees and management.
In addition, Unisys, a Company subcontractor under the Company's Hawaii
contract, has submitted a $896,000 claim against the $10.3 million performance
bond. In February 1997 all but $1.1 million of the performance bond was released
by the State of Hawai, the remainder of which is intended to cover accounts
payable to Unisys and other subcontractors.
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 dispute is 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
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") in
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 tortiously interfered in the contract between the Company and Hawaii;
(iii) MAXIMUS negligently breached duties to the Company and (iv) MAXIMUS aided
and abetted Hawaii in Hawaii's breach of contract. The Company's complaint 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 effect on the Company and jeopardize the Company's ability to
continue as a going concern. Management of the Company and its attorneys are
unable to predict with any certainty the ultimate outcome of this litigation,
including the probability that this litigation will have a negative impact on
the Company or the dollar amount of the potential impact. At December 31, 1996,
the Company had unbilled work-in-process and related receivables from the State
and CBSI of
15
<PAGE>
approximately $3.5 million, which exceeds stockholders' equity of approximately
$2.7 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 to 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 in the first, second and
third quarters, respectively. In addition, costs incurred related to the Hawaii
contract of $1.96 million in 1996 have been charged to expense.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated, information derived
from the Company's Financial Statements expressed as a percentage of the
Company's contract revenue earned:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1993 1994 1995 1996
------ ------ ------- --------
<S> <C> <C> <C> <C>
Contract revenue earned.................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue earned..................... 63.2% 64.9% 92.0% 100.2%
Gross profit............................... 36.8% 35.1% 8.0% (0.2)%
Selling and administrative expenses........ 20.8% 17.5% 20.8% 30.5%
Research and development expense........... 0% 0% 0.9% 0%
Restructuring.............................. 0% 0% 2.6% (1.6%)
Income before income taxes................. 15.9% 16.9% (18.1%) (34.5%)
Net income (loss).......................... 9.6% 9.9% (11.6%) (23.9%)
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Contract revenue earned decreased $13,640,632, or 65.0%, from $20,985,012
in the year ended December 31, 1995 to $7,344,380 in the year ended December 31,
1996, primarily due to the completion of the Maine FAMIS and the West Virginia
CSE (OSCAR) projects and the substantial completion of the Idaho CSE and the
Virgin Islands CSE (VIPERS) projects. In 1995, revenue recognized on the Hawaii
contract totaled $6.1 million. Also, in 1996, due to the developments with the
Hawaii contract discussed above and the uncertainties they created, the
Company ceased recognition of revenue on the Hawaii contract and recorded an
adjustment of $1.8 million in the fourth quarter to reverse revenues of $1
million, $400 thousand and $400 thousand previously recognized in the first,
second and third quarters, respectively.
Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, decreased $11,940,295, or 61.9%,
from $19,299,944 in 1995 to $7,359,649 in 1996 due to the decreased effort to
support the lower level of business and the lower reliance on subcontractor
labor. Cost of revenue earned as a percentage of contract revenue earned
increased from 92.0% in 1995 to 100.2% in 1996 due to approximately $1.96
million of Hawaii costs for which there were no corresponding revenues
recognized.
Gross profit decreased $1,700,337, or 100.9% from $1,685,068 in 1995 to
($15,269) in 1996. Gross profit as a percentage of revenue earned decreased
from 9% in 1995 to (0.2)% in 1996. This is due to sales of hardware to Virgin
Islands, Hawaii and Rhode Island RICAP projects which are at lower margins than
profit earned on labor contracts and no corresponding revenue on Hawaii costs of
approximately $1.96 million.
Selling, general and administrative expenses decreased $2,129,187, or
48.7%, from $4,369,260 in 1995 to $2,240,073 in 1996. Selling, general and
administrative expenses as a percentage of contract revenue earned increased
from 20.8% in 1995 to 30.5% in 1996 primarily due no Hawaii revenue being
recognized offset by the effect of the cost reductions implemented in early 1996
which were recorded as restructuring charges in 1995.
Restructuring charges decreased $656,657 or 122.2% from $537,221 in 1995 to
($119,436) in 1996.
16
<PAGE>
The Company accrued $268,000 for payroll and related payroll taxes, $250,000 for
excess office space and miscellaneous charges in 1995. The credit in 1996 of
($119,436) is the result of the Company renegotiating the lease for its office
space and being released from its commitment for unnecessary space.
As a result of the foregoing, loss before income taxes, decreased
$1,259,153, or 33.2%, from a loss of $3,792,521 for 1995 to a loss of
$2,533,368 for 1996. Loss before income taxes, as a percentage of contract
revenue earned increased from 18.1% in 1995 to 34.5% in 1996.
Net loss decreased $669,095, from net loss of $2,427,440 in 1995 to a net
loss of $1,758,345 in 1996. Net loss as a percentage of contract revenue earned
increased from 11.6% in 1995 to 23.9% in 1996 primarily due no revenue being
recognized on the Hawaii contract. The Company recorded income tax benefit for
federal and state income taxes for 1995 and 1996 in the amount of $1,365,081 and
$775,023, respectively. The Company's effective tax rate was 36% for 1995 and
31% for 1996. The Company is not able to carry back losses for state income tax
returns and has established a $134,000 reserve against future tax benefits which
reduces the effective rate for 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Contract revenue earned decreased $225,866, or 1.1%, from $21,210,878 in
the year ended December 31, 1994 to $20,985,012 in the year ended December 31,
1995, despite the fact that the Company performed substantially more work, and
hence recognized more revenue, during 1995 under its contracts with the States
of Idaho, Maine and the U.S. Virgin Islands. This increase in work performed
and revenue recognized on these contracts was offset by significant increases in
contract costs on the Hawaii contract which the Company determined were not
recoverable through additional billings or contract amendments, resulting in
significantly less revenue recognized on the Hawaii contract in 1995 than 1994.
Cost of revenue earned increased $5,531,106, or 40.2%, from $13,768,838 in
1994 to $19,299,944 in 1995 due to an increase in contract work performed and
greater use of subcontractors at higher costs and the sales of approximately $3
million of computer hardware to two of the Company's customers included in
contract revenue. The 1995 cost of revenue also includes approximately $440,000
for the estimated gross loss to complete the Hawaii contract. Cost of revenue
earned as a percentage of contract revenue earned increased from 64.9% in 1994
to 92.0% in 1995 due to significant cost overruns on the Hawaii contract and
the sales of computer hardware which are generally at lower margins.
Selling, general and administrative expenses increased $668,471, or 18.1%,
from $3,700,789 in 1994 to $4,369,260 in 1995. Selling, general and
administrative expenses as a percentage of contract revenue earned increased
from 17.5% in 1994 to 20.8% in 1995 primarily due to the Company's largely
unsuccessful proposal efforts to win new contracts as well as the decrease in
contract revenue earned as discussed above. Many of the Company's highly
talented and capable technical personnel, therefore, were neither generating nor
earning contract revenue for an extended period of time.
Restructuring charges of approximately $537,000 were expensed in 1995. The
charge accrues $268,000 for payroll and related payroll taxes, $250,000 for
excess office space and changes include miscellaneous charges. All of these
costs are expected to be paid in 1996 except for $122,000 of rent expense, which
will be paid in 1997.
As a result of the foregoing, income (loss) before income taxes, decreased
$7,367,124, or 206.1%, from an income of $3,574,612 for the year ended December
31, 1994 to a loss of ($3,792,512) for the year ended December 31, 1995.
Income (loss) before income taxes, as a percentage of contract revenue earned
17
<PAGE>
decreased from 16.9% in 1994 to (18.1%) in 1995.
Net income decreased $4,536,460, from net income of $2,109,020 in 1994 to a
net loss of ($2,427,440) in 1995. Net income (loss) as a percentage of contract
revenue earned decreased from 9.9% in 1994 to (11.6%) in 1995 primarily due to
the additional costs incurred on the Hawaii contract. The Company recorded
income tax expense (benefit) for federal and state income taxes for 1994 and
1995 in the amount of $1,465,592 and ($1,365,081), respectively. The Company's
effective tax rate was 41% for 1994 and (36%) for 1995. The Company is not able
to carry back losses for state income tax returns which reduces the effective
rate when tax effecting the losses.
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 until approximately three to six months after contract award, which
itself was as much as 12 months after proposal preparation commences. The
Company was therefore required to fund substantial costs well before the receipt
of related income, including marketing and proposal costs and the cost of a
performance bond. Prospectively, the Company expects to tighten up this
timetable, thereby reducing the requirement for additional working capital.
The Company has funded its operations through cash flows from operations,
bank borrowings, borrowings from venture partners, and private placements of
equity securities. Net cash provided by (used in) operating activities was
$2,253,037, ($2,732,814), and $653,746 in the years ended December 31, 1996,
1995, and 1994 respectively. Fluctuations in net cash provided by (used in)
operating activities are primarily the result of changes in net income, contract
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.
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. In April 1996
a new $3,850,000 Revolving Line of Credit was approved . The Company was
required to reduce outstanding borrowings under the Revolving Line of Credit to
the following levels: April 12, 1996 - $3,850,000, 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 limited outstanding borrowings to the aggregate of
80% of eligible accounts receivable plus 25% of costs and estimated earnings in
excess of billings on contracts. Amounts outstanding under the Revolving Line
of Credit accrued interest at an annual rate of prime plus two percent on the
first $2,000,000 and 16% on the excess balance. The difference between prime
plus two percent and 16% was deferred interest, due January 31, 1997. In
addition, 70% of the income tax refunds receivable at December 31, 1995 was to
be used to pay down the line permanently and the remaining balance would be used
to pay down the line but could be readvanced based on availability. The prime
rate was 8.25% at December 31, 1996. The Company's obligations under the
facility were secured by substantially all of the assets of the Company. The
agreement provided that the Company may not pay any dividends on its capital
stock without the consent of the bank. In addition, the agreement required the
Company to meet certain financial covenants.
18
<PAGE>
In May and June of 1996, the Company did not meet the pay down schedule in
the Revolving Line of Credit. In September 1996 the Company paid down the line
by $1.2 million using proceeds from an income tax refund. Also, a new
$2,133,768 Revolving Line of Credit was approved by the bank in September. The
Company, under this agreement, was required to reduce outstanding borrowings to
the following limits: October 31, 1996 - $2,083,768, November 30, 1996 -
$1,883,768 and December 31, 1996 - $1,658,768. In addition, 100% of the income
tax refunds at December 31, 1995 were to be used to pay down the line
permanently. The remaining terms of the agreement remained the same as the
April 1996 agreement.
In the third quarter of 1996 and at the end of the year, the Company
violated various covenants requiring the Company to maintain certain financial
ratios and in December 1996 failed to make the required $225,000 pay down. The
Revolving Line of Credit reverted to a demand note. A new Revolving Line of
Credit agreement is under negotiation. As of March 31, 1997 the outstanding
balance is $1.8 million.
Although the Company believes that cash flow generated by operations will
be sufficient to fund continuing operations through the end of 1997, this
assumes that a mutually agreeable Revolving Line of Credit can be negotiated and
that there are no materially adverse decisions rendered in the ongoing
litigation with Hawaii. See "State of Hawaii Contract Status". There can be no
assurance that the Company will arrive at an agreement with the bank concerning
payments. If no agreement is reached with the bank, the Company will continue to
be in default. The Company is actively seeking new capital to be assured of its
ability to continue as a going concern.
Management intends to continue to vigorously defend the Company in its
litigation with the State of Hawaii and MAXIMUS and CBSI. Concurrently,
management intends to negotiate a fair and reasonable agreement with its bank.
Management intends to continue its efforts to strengthen its balance sheet and ,
if either necessary or desirable, develop and implement a major recapitalization
plan for the Company. Management intends to aggressively seek new business.
The Company believes that inflation has not had a material impact on its
results of operations to date.
CHANGES IN ACCOUNTING STANDARDS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
The Statement encourages, but does not require, a fair value based method of
accounting for stock-based compensation plans. SFAS No. 123 allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method prescribed by APB Opinion No. 25. For those entities electing to
use the intrinsic value based method, SFAS No. 123 requires pro forma
disclosures of net income and earnings per share computed as if the fair value
based method had been applied. The Company intends to continue to account for
stock-based compensation costs under APB Opinion No. 25 and has provided the
additional required disclosures relating to 1995 and 1996 stock options in its
1996 financial statements.
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. This statement also requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
carrying value or fair value less costs to sell. Adoption of the statement had
no impact on the Company's financial statements.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is contained on pages F-2 to F-21 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The information required by Item 10 is contained in the Company's 1997
Proxy Statement and is incorporated herein by reference. Such Proxy Statement
will be filed with the Securities and Exchange Commission not later than 120
days after the Company's fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is contained in the Company's 1997
Proxy Statement and is incorporated herein by reference. Such Proxy Statement
will be filed with the Securities and Exchange Commission not later than 120
days after the Company's fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is contained in the Company's 1997
Proxy Statement and is incorporated herein by reference. Such Proxy Statement
will be filed with the Securities and Exchange Commission not later than 120
days after the Company's fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is contained in the Company's 1997
Proxy Statement and is incorporated herein by reference. Such Proxy Statement
will be filed with the Securities and Exchange Commission not later than 120
days after the Company's fiscal year end.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) (1) LIST OF FINANCIAL STATEMENTS.
The following financial statements and notes thereto of the Company and
Independent Auditors' Report thereon are included on pages F-2 to F-21 of this
report:
Independent Auditors' Report of KPMG Peat Marwick LLP
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the Years Ended December 31, 1996, 1995,
and 1994
Statements of Stockholders' Equity for the Years Ended December 31,
1996, 1995, and 1994
20
<PAGE>
Statements of Cash Flows for the Years Ended December 31, 1996, 1995
and 1994
Notes to Financial Statements
(2) LIST OF FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted because they are either not applicable
or not required, or the required information is provided in the financial
statements or notes thereto.
(3) LIST OF EXHIBITS.
Exhibit
Number Exhibit
------ -------
3.1 Articles of Incorporation of the Company, as amended
(incorporated by reference from the Company's Form
10, File No. 0-21038)
3.2 Bylaws of the Company as amended (incorporated by reference
from the Company's Form 10, File No. 0-21038)
10.1 Stock Purchase Agreement dated October 29, 1992 between
the Company and Saugatuck Capital Company Limited
Partnership III (incorporated by reference from the Company
Form 10, exhibit 10.7, File No. 0-21038)
10.2 Registration Rights Agreement dated October 29, 1992 between
the Company and Saugatuck Capital Company Limited Partnership III
(incorporated by reference from the Company's Form 10, exhibit 10.8,
File No. 0-21038)
10.3 Incentive Stock Option Plan (incorporated by reference from the
Company's Form 10, exhibit 10.9, File No. 0-21038)
10.4 Deferred Compensation Agreement between the Company and Mr.
Robert E. Radican (incorporated by reference from the Company's
Form 10-K, exhibit 10.10, for the fiscal year ended December 31, 1994)
10.5 1993 Employee Stock Purchase Plan (incorporated by reference from
the Company's Form 10-K, exhibit 10.12, for the fiscal year ended
December 31, 1994)
10.6 Contract dated March 1993 between the Company and the State of Rhode
Island Department of Human Services re Medical Assistance Eligibility
system transfer (incorporated by reference from the Company's Form 10-
K, exhibit 10.13, for the fiscal year ended December 31, 1993)
10.7 Contract dated March 1, 1993 between the Company and the State of
Idaho Department of Health and Welfare re CSE system transfer
(incorporated by reference from
21
<PAGE>
the Company's Form 10-K, exhibit 10.14, for the fiscal year ended
December 31, 1993)
10.8 Contract dated August 24, 1993 between the Company and the State of
Hawaii Child Support Enforcement Agency re CSE system development as
amended(incorporated by reference from the Company's Form 10-K,
exhibit 10.15, for the fiscal year ended December 31, 1993)
10.9 Credit Agreement dated December 16, 1994 between the Company and
Citizens Trust Company, as amended, (incorporated by reference from
the Company's Form 10-K, exhibit 10.17, for the fiscal year ended
December 31, 1994)
10.10 1993 Incentive Stock Option Plan (incorporated by reference from the
Company's Form 10-K, exhibit 10.18, for the fiscal year ended
December 31, 1993)
10.11 Contract dated November 10, 1994, between the Company and the
Government of the Virgin Islands re CSE transfer system
(incorporated by reference from the Company's Form 10-K, exhibit
10.21, for the fiscal year ended December 31, 1994)
10.12 Non-employee Director Stock Option Plan
10.13 Contract dated May 1996 between the Company and the State of Rhode
Island Department of Health re RICAP system
10.14 Contract dated July 1996 between the Company and the State of Rhode
Island Department of Human Services re support services
10.15 Contract dated May 1996 between the Company
and Complete Business Solutions, Inc.
re walk through agreement
10.16 Employment Agreement between the Company and Mr.
Kenneth C. Kirsch dated January 1, 1997
22.1 List of Subsidiaries (incorporated by reference from the Company's
Form 10, File No. 0-21038)
23 Consent of KPMG Peat Marwick LLP
(B) REPORTS ON FORM 8-K.
No Current Reports on Form 8-K were filed during the fourth quarter
of 1996.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned on the 15th day of April 1997.
NETWORK SIX, INC.
By: /s/ Kenneth C. Kirsch
-----------------------------
Kenneth C. Kirsch
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Kenneth C. Kirsch Chairman of the Board, President, April 15, 1997
- --------------------- and Chief Executive Officer
Kenneth C. Kirsch (Principal Executive Officer)
/s/ Dorothy M. Cipolla Chief Financial Officer, and April 15, 1997
- ---------------------- Treasurer (Principal Financial
Dorothy M. Cipolla and Accounting Officer)
/s/ Dana H. Gaebe Director April 15, 1997
- ----------------------
Dana H. Gaebe
/s/ Nicholas R. Supron Director April 15, 1997
- ----------------------
Nicholas R. Supron
/s/ Clifton C. Dutton Director April 15, 1997
- ----------------------
Clifton C. Dutton
23
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULES
NETWORK SIX, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report of KPMG Peat Marwick LLP............................................. F-2
Balance Sheets as of December 31, 1996 and 1995 .................................................. F-3
Statements of Operations for the Years Ended December 31, 1996, 1995, and 1994.................... F-5
Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995, and 1994.......... F-6
Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994.................... F-7
Notes to Financial Statements..................................................................... F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Network Six, Inc.:
We have audited the accompanying balance sheets of Network Six, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Network Six, Inc. at December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the years in the three year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
The accompanying 1996 and 1995 financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed more fully in
note 12 to the financial statements, in 1996 the State or Hawaii terminated its
significant system implementation contract with the Company and filed a lawsuit
against the Company seeking an unspecified amount for damages due to alleged
breach of contract, including alleged failure to complete the design,
application programming, system test, and system implementation. In January
1997, the Company filed a counterclaim alleging that the State had fraudulently
induced the Company into designing and building a system having capabilities and
features beyond the scope of the contract. Management of the Company and its
attorneys are unable to predict with any certainty the ultimate outcome of this
litigation, including the probability that this litigation will have a
material adverse impact on the Company's financial position. At December 31,
1996, the Company had unbilled work-in-progress and related receivables from the
State of Hawaii of approximately $3.5 million, which exceeded the Company's
stockholders' equity of approximately $2.7 million, and for which no allowance
for uncollectibility has been recorded. Additionally, the Company has not
accrued for any liability to the State which may result from this litigation.
Also, the Company is involved in other litigation related to the Hawaii contract
as discussed in note 12, has suffered recurring losses and its bank financing
agreement has expired. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans regarding
these uncertainties are also described in note 12. The 1996 and 1995 financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
/s/ KPMG Peat Marwick LLP
Providence, Rhode Island
March 28, 1997
F-2
<PAGE>
NETWORK SIX, INC.
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets (note 4) 1996 1995
- --------------- ----- ----
<S> <C> <C>
Current Assets:
Cash $ 127,581 $ 1,205,652
Contract receivables, less allowance for doubtful accounts
of $97,856 in 1996 and $50,000 in 1995 (note 2) 1,528,757 1,476,554
Costs and estimated earnings in excess of billings on
contracts (note 3) 1,864,939 3,213,077
Income tax receivable (note 6) 516,046 1,747,824
Other assets 158,976 283,499
Due from officer - 63,779
----------- -----------
Total current assets 4,196,298 7,990,385
----------- -----------
Property and equipment (note 5):
Computers and equipment 620,042 1,377,098
Furniture and fixtures 194,878 246,339
Leasehold improvements 20,191 116,808
----------- -----------
835,111 1,740,245
Less accumulated depreciation and amortization 696,596 1,181,249
----------- -----------
Net property and equipment 138,515 558,996
Contract receivables and costs in excess of billings
on Hawaii contract (notes 2,3 and 12) 3,571,824 5,616,383
Deferred taxes (note 6) 190,624 271,360
Other assets 151,462 508,149
----------- -----------
$ 8,273,564 $14,945,273
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
NETWORK SIX, INC.
Balance Sheets
December 31, 1996 and 1995, continued
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1996 1995
- ------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Note payable to bank, due on demand (note 4) $ 1,800,000 $ 5,000,000
Current installments of obligations under capital leases (note 5) 70,190 168,640
Accounts payable 1,732,332 1,696,999
Accrued salaries and benefits 470,767 442,663
Accrued subcontractor expense 22,244 421,857
Accrued restructuring (note 11) 5,383 517,680
Note payable - short term (note 7) 143,646 -
Other accrued expenses 508,194 618,869
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 3) 31,771 386,799
Deferred taxes (note 6) 270,021 745,619
Preferred stock dividends payable 234,760 47,260
----------- -----------
Total current liabilities 5,289,308 10,046,386
Obligations under capital leases,
excluding current installments (Note 5) 171,608 254,393
Note payable - long term (note 7) 63,871 -
----------- -----------
Total liabilities 5,524,787 10,300,779
Stockholders' equity (note 8):
Series A convertible preferred stock, $3.50 par value.
Authorized 857,142.85 shares; issued and outstanding
714,285.71 shares in 1996 and 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 721,192 shares in 1996 and 715,174
shares in 1995 72,119 71,517
Additional paid-in capital 1,653,296 1,603,770
Retained earnings (accumulated deficit) (1,206,265) 739,580
Treasury stock, 3,748 common shares at cost (6,047) (6,047)
----------- -----------
Total stockholders' equity 2,748,777 4,644,494
Commitments (note 5, 9, 12)
Other information (notes 10 through 11)
$ 8,273,564 $14,945,273
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
NETWORK SIX, INC.
Statements of Operations
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Contract revenue earned $ 7,344,380 $ 20,985,012 $21,210,878
Cost of revenue earned 7,359,649 19,299,944 13,768,838
------------ ------------ -----------
Gross profit (15,269) 1,685,068 7,442,040
Selling, general and administrative expenses 2,240,073 4,369,260 3,700,789
Research & development expense - 185,235 -
Restructuring (note 11) (119,436) 537,221 -
------------ ------------ -----------
Income (loss) from operations (2,135,906) (3,406,648) 3,741,251
Other deductions (income):
Interest expense 435,925 396,286 175,464
Interest income (38,463) (10,413) (8,825)
------------ ------------ -----------
Income (loss) before income taxes: (2,533,368) (3,792,521) 3,574,612
Income tax expense (benefit) (note 6) (775,023) (1,365,081) 1,465,592
------------ ------------ -----------
Net income (loss) ($1,758,345) ($2,427,440) $ 2,109,020
============ ============ ===========
Net income (loss) per share:
Primary earnings per share ($2.71) ($3.68) $ 2.74
============ ============ ===========
Fully diluted/earnings per share ($2.71) ($3.68) $ 2.39
============ ============ ===========
Shares used in computing net income (loss) per share:
Primary 719,317 709,748 702,445
============ ============ ===========
Fully diluted 719,317 709,748 883,184
============ ============ ===========
Preferred dividends declared $187,500 $187,500 $187,500
============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
NETWORK SIX, INC.
Statements of Stockholders' Equity
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Series A Retained
Convertible Additional Earnings Total
Preferred Common Paid-in (Accumulated Treasury Stockholders'
Stock Stock Capital Deficit) Stock Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993: $2,235,674 $68,222 $ 888,491 $ 1,433,000 ($23,050) $ 4,602,337
Net Income: - - - 2,109,020 - 2,109,020
Dividends declared on preferred stock,
7.5% share: - - - (187,500) - (187,500)
Shares issued in connection with
exercise of options: - 1,678 333,649 - - 335,327
Sale of 45,000 treasury shares: - - 38,247 - 17,003 55,250
---------------------------------------------------------------------------------
Balance at December 31, 1994: 2,235,674 69,900 1,260,387 3,354,520 (6,047) 6,914,434
Net Loss: - - - (2,427,440) - (2,427,440)
Dividends declared on preferred stock,
7.5% share: - - - (187,500) - (187,500)
Shares issued in connection with
exercise of options: - 1,175 342,057 - - 343,232
Shares issued in connection with
exercise of warrants: - 442 1,326 - - 1,768
---------------------------------------------------------------------------------
Balance at December 31, 1995: 2,235,674 71,517 1,603,770 739,580 (6,047) 4,644,494
Net Loss: - - - (1,758,345) - (1,758,345)
Dividends declared on preferred stock,
7.5% share: - - - (187,500) - (187,500)
Shares issued in connection with
exercise of options: - 490 37,485 - - 37,975
Shares issued in connection with
employee stock purchase plan: - 112 12,041 - - 12,153
---------------------------------------------------------------------------------
Balance at December 31, 1996: $2,235,674 $72,119 $1,653,296 ($1,206,265) ($6,047) $ 2,748,777
=================================================================================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
NETWORK SIX, INC.
Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Income (loss): (1,758,345) (2,427,440) 2,109,020
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 337,460 400,904 226,781
Provision for doubtful accounts 47,856 - -
Loss on sale/disposal of fixed assets 60,487 - -
(Increase) decrease in contract receivables (100,059) 364,203 (518,852)
Decrease (Increase) in cost and estimated earnings in
excess of billings on contracts 1,348,139 1,360,086 (1,279,434)
Decrease (increase) in income taxes receivable 1,231,778 (1,672,533) (75,291)
(Increase) decrease in other current assets 105,186 (32,019) (27,366)
(Increase) decrease in deferred tax asset 80,735 (216,999) (10,431)
(Increase) decrease in due from officer 63,779 (4,654) (59,125)
(Increase) decrease in Contract receivables and costs in excess
of billings on Hawaii Contract 2,139,198 (2,019,974) (2,732,531)
(Increase) decrease in other assets 256,547 (37,582) 41,686
Increase (decrease) in accounts payable 35,333 1,175,280 (104,081)
Increase (decrease) in accrued salaries and benefits 28,104 236,332 (49,412)
Increase (decrease) in accrued profit sharing - (602,922) 171,028
Increase (decrease) in accrued subcontractor expense (399,613) (223,878) 53,040
Increase in other notes payable 207,517 - -
Increase (decrease) in other accrued expenses (110,675) 163,004 145,901
Increase (decrease) in accrued restructuring (512,297) 517,680 -
Increase (decrease) in billings in excess of costs and estimated
earnings on contracts (355,028) 164,049 222,750
(Decrease) in income taxes payable - - (269,805)
Increase (decrease) in deferred tax liability (475,598) 123,644 251,000
-------------------------------------------
Net cash (used in) operating activities 2,230,503 (2,732,814) 653,746
Cash flows from investing activities
Capital expenditures - (383,808) (121,790)
-------------------------------------------
Net cash provided by (used in)
investing activities - (383,808) (121,790)
(Continued)
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
NETWORK SIX, INC.
Statements of Cash Flows, Continued
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from financing activities
Principal payments on capital lease obligation (181,235) (107,512) (101,443)
Net proceeds from (payments on) from note payable to bank (3,200,000) 3,450,000 (250,000)
Proceeds from issuance of common stock 50,128 345,000 335,327
Proceeds from sales of treasury stock - - 55,250
Payment of dividends - (187,500) (187,500)
---------- --------- ---------
Net cash provided by (used in) financing activities (3,331,108) 3,499,988 (148,366)
Net (decrease) increase in cash (1,078,071) 383,366 383,590
Cash at beginning of year 1,205,652 822,286 439,696
---------- --------- ---------
Cash at end of year 127,581 1,205,652 822,286
========== ========= =========
Supplemental cash flow information.
Cash paid (received) during the year for:
Income taxes (2,086,198) 307,453 1,570,118
Interest 399,182 372,484 164,012
Supplemental disclosure of non-cash investing activities
Acquisition of assets through capital lease obligations - 318,106 385,453
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1996 and 1995
(I) Summary of Significant Accounting Policies
(a) Description of Business
Network Six, Inc. (the "Company"), formerly Network Solutions, Inc., is
a provider of computer-related consulting services to state
governments. Founded in 1976, the Company focuses on providing its
services to state government human services agencies. Currently,
substantially all of its revenues are derived from contracts with such
agencies. Services are provided under time and materials contracts and
fixed price contracts. Under these contracts, which are awarded as a
result of formal competitive-bidding processes, the Company provides a
range of information technology services, consisting primarily of
systems integration, system design, software development, hardware
planning and hardware planning and procurement, and personnel training.
(b) Revenue Recognition
Revenues from services provided under fixed-price and modified fixed-
price contracts are recognized on the percentage-of-completion method,
measured by the percentage of costs incurred to date to estimated total
costs for each contract. This method is used because management
considers costs incurred to be the best available measure of progress
on these contracts. Revenues from time and materials contracts are
recognized on the basis of costs incurred during the period plus the
related fee earned.
Cost of revenues earned include all direct material and labor costs and
those indirect costs related to contract performance. Selling, general,
and administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the period in
which such losses are determined. Changes in job performance, job
conditions and estimated profitability including those arising from
contract penalty provisions and final contract settlements, may result
in revisions to costs and income and are recognized in the period in
which the revisions are determined.
Costs and estimated earnings in excess of billings on uncompleted
contracts, represents revenues recognized in excess of amounts billed.
Billings in excess of costs and estimated earnings on uncompleted
contracts, represents billings in excess of revenues recognized. For
fixed price contracts, costs and estimated earnings are billed upon
customer approval of the Company's attaining various phases of
completion set forth in each contract. Retainage is billed upon
customer approval on contract completion. Costs and earnings on time
and material contracts are billed when time is expended and material
costs are incurred.
The Company also recognizes revenue from the sale of hardware to
various customers. Revenue and related costs for these sales are
recorded when the customer accepts delivery and installation of the
hardware.
In the state government systems integration industry, it is common
practice to negotiate change orders to existing contracts in progress
due to the custom nature of systems integration projects. In addition,
such change orders generally must be submitted to the federal
government for approval because a portion of state systems integration
projects are federally funded. Over the Company's history, it has
successfully negotiated and received federal approval of numerous
contract change orders. However, the frequent need for change orders in
the systems integration business and the inherent uncertainties in
obtaining state and federal approval of change orders is a significant
risk which could have a material impact to the Company.
F-9
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1996 and 1995
(c) Other Assets
Other assets consist of employee receivables, both current and long term
portions, lease receivables, sales tax refund receivable, prepaid
insurance, and security deposits.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated
useful life of the asset.
The estimated useful lives of property and equipment and leasehold
improvements are:
Leasehold improvements 30 months
Computers and equipment 3 years
Furniture and fixtures 5 years
When the Company determines that certain property, plant and equipment is
impaired, a loss for impairment is recorded for the excess of the carrying
value over the fair market value of the asset. Fair value is determined by
independent appraisal, if an active market exists for the related asset.
Otherwise, fair value is estimated through forecasts of expected cash
flows.
(e) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date.
(f) Earnings Per Share
Earnings per share is computed by dividing net income (loss), after
deducting dividends on Series A convertible preferred stock by the weighted
average number of common shares and common stock equivalents outstanding
during the period, and in the case of fully diluted earnings per share
assuming the conversion of the convertible preferred stock. Common stock
equivalents include stock options and warrants. For 1996 and 1995, the
stock purchase warrants, options, and convertible preferred stock have not
been included in the computation of earnings per share, since the effect
would be anti-dilutive.
(g) Financial Instruments
Financial Instruments consist of cash, contract accounts receivable, leases
receivable, accounts payable, lease obligations and notes payable. The
carrying value of these financial instruments approximate their fair value,
except for the financial instruments related to the Hawaii contract for
which fair value cannot be determined due to the circumstances discussed in
note 12.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. As discussed in (b), significant estimates
include estimated costs to complete under the percentage of completion
method of accounting. Actual results could differ
F-10
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1996 and 1995
from those estimates.
(i) Reclassifications
Certain 1994 and 1995 balances have been reclassified to conform
to the 1996 presentation.
(j) Recent Accounting Pronouncements
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The Statement encourages, but does not
require, a fair value based method of accounting for stock-based
compensation plans. SFAS No. 123 allows an entity to continue to
measure compensation cost for those plans using the intrinsic value
based method prescribed by APB Opinion No. 25. For those entities
electing to use the intrinsic value based method, SFAS No. 123
requires pro forma disclosures of net income and earnings per share
computed as if the fair value based method had been applied. The
Company intends to continue to account for stock-based compensation
costs under APB Opinion No. 25 and has provided the additional
required disclosures relating to 1995 and 1996 stock options in note 8
to the financial statements.
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.
121"). This statement requires that long-lived assets and certain
intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. This
statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of
carrying value or fair value less costs to sell. Adoption of the
statement had no impact on the Company's financial statement.
(2) Contract Receivables
<TABLE>
<CAPTION>
Contract receivables billed at December 31 consist of: 1996 1995
---- ----
<S> <C> <C>
Time and materials and completed fixed price contracts $1,339,864 $1,262,324
Fixed price contracts in progress 286,749 264,230
---------- ----------
1,626,613 1,526,554
Less allowance for doubtful accounts 97,856 50,000
---------- ----------
$1,528,757 $1,476,554
========== ==========
</TABLE>
At December 31, 1996 and 1995, $571,286 and $1,601,713, respectively,
was collectable from Hawaii and CBSI, a subcontractor to the Company on the
Hawaii contract. This amount has been reclassified to a long term asset and is
included in Contract receivables and costs in excess of billings on Hawaii
contract due to the litigation discussed in note 12.
F-11
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1996 and 1995
(3) Costs and Estimated Earnings on Contracts
<TABLE>
<CAPTION>
Costs and estimated earnings on contracts at
December 31 consist of: 1996 1995
---- ----
<S> <C> <C>
Beginning balance: $ 2,826,278 $ 7,582,545
Costs incurred: 7,359,649 19,299,944
Estimated Earnings: (15,269) 1,685,068
----------- -----------
10,170,658 28,567,557
Less: billings 8,337,490 21,726,609
reclassification of Hawaii to long term assets - 4,014,670
----------- -----------
$ 1,833,168 $ 2,826,278
=========== ===========
Included in the accompanying balance sheets under the
following captions: 1996 1995
----------- -----------
Costs and estimated earnings in excess of billings on contracts: $ 1,864,939 $ 3,213,077
Billings in excess of costs and estimated earnings on contracts: (31,771) (386,799)
----------- -----------
$ 1,833,168 $ 2,826,278
=========== ===========
Costs and estimated earnings on contracts at December 31
are expected to be billed and collected as follows:
1996 1995
----------- -----------
Within one year: $ 1,833,168 $ 1,945,686
Within two years: - 880,592
----------- -----------
$ 1,833,168 $ 2,826,278
=========== ===========
</TABLE>
Amounts to be billed and collected within two years represent retainage on
services provided. The Company's contracts are generally two or three years in
duration; therefore, retainage is classified as a current asset to match the
Company's normal operating cycle. At December 31, 1996 and 1995, $2,925,238
and $4,014,670, respectively, was related to the Hawaii contract. This amount
has been reclassified to long term assets due to the litigation discussed in
Note 12 and is included in Contract receivables and costs in excess of billings
on Hawaii contract.
(4) Note Payable to Bank
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. In April
1996 a new $3,850,000 Revolving Line of Credit was approved . The Company
was required to reduce outstanding borrowings under the Revolving Line of
Credit to the following levels: April 12, 1996 - $3,850,000, 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 limited outstanding
borrowings to the aggregate of 80% of eligible accounts receivable plus 25%
of costs and estimated earnings in excess of billings on contracts.
F-12
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1996 and 1995
Amounts outstanding under the Revolving Line of Credit accrued interest at
an annual rate of prime plus two percent on the first $2,000,000 and 16% on
the excess balance. The difference between prime plus two percent and 16%
was deferred interest, due January 31, 1997. In addition, 70% of the income
tax refunds receivable at December 31, 1995 was to be used to pay down the
line permanently and the remaining balance would be used to pay down the
line but could be readvanced based on availability. The prime rate was 8.25%
at December 31, 1996. The Company's obligations under the facility were
secured by substantially all of the assets of the Company. The agreement
provided that the Company may not pay any dividends on its capital stock
without the consent of the bank. In addition, the agreement required the
Company to meet certain financial covenants.
In May and June of 1996, the Company did not meet the pay down schedule in
the Revolving Line of Credit. In September 1996 the Company paid down the
line by $1.2 million using proceeds from an income tax refund. Also, a new
$2,133,768 Revolving Line of Credit was approved by the bank in September
1996. The Company, under this agreement, was required to reduce outstanding
borrowings to the following limits: October 31, 1996 -$2,083,768, November
30, 1996 -$1,883,768 and December 31, 1996 - $1,658,768. In addition, 100%
of the income tax refunds at December 31, 1995 were to be used to pay down
the line permanently. The remaining terms of the agreement, including
covenants, remained the same as the April 1996 agreement.
In the third quarter of 1996 and at the end of the year, the Company
violated various covenants requiring the Company to maintain certain
financial ratios and in December 1996 failed to make the required $225,000
pay down. The Revolving Line of Credit reverted to a demand note. A new
Revolving Line of Credit agreement is under negotiation.
(5) Leases
The Company leases office space and equipment under several capital and
operating leases expiring at various times through 2000. Rent expense
including utilities for the years ended December 31, 1996, 1995 and 1994
under operating leases was approximately $431,000, $780,000, and $610,000,
respectively. Future rental obligations, under both capital and operating
leases, as of December 31, 1996 for the remainder of the lease terms are as
follows:
<TABLE>
<CAPTION>
Capital Lease Operating Leases
<S> <C> <C>
1997 $ 92,680 $182,477
1998 83,436 174,047
1999 83,436 166,445
2000 32,585 138,703
2001 - -
-------- --------
Total Lease Payments: $292,137 $661,672
Amount representing interest: 50,339
-------- ========
Net Present value of payments 241,798
Less current portion 70,190
--------
Long term portion $171,608
========
</TABLE>
$75,301 of the net present value of payments is related to the Hawaii contract
and has been reclassified to Contract receivables and costs in excess of
billings on Hawaii contract, the remainder is classified in other assets.
The Company subleased a portion of its leased office space to a customer in
1995 and 1994. Rental income earned in these years was approximately $27,000
and $48,000, respectively. The sublease agreement expired in 1995.
At December 31, 1996, the gross amount of computer equipment and related
accumulated amortization under the capital leases discussed above was as
follows:
<TABLE>
<S> <C>
Computer equipment $ 15,784
Less accumulated amortization (13,154)
-----------
$ 2,630
===========
</TABLE>
F-13
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1996 and 1995
During 1995, the Company leased various computer equipment from its vendors,
then in turn leased those assets to two of its customers. The Company's lease
obligation is included above. The lease to the customers is accounted for as a
sales type lease. Consequently, the Company recognized a gross profit of
approximately $2,492 and $27,000 on these leases in 1996 and 1995 respectively.
Over the life of these leases the Company will recognize approximately $107,000
of lease interest income. Approximately $31,464 and $26,000 of lease interest
income was recognized in 1996 and 1995 respectively and is included in contract
revenue in the statement of operations.
Future minimum lease payments to be received are as follows:
<TABLE>
<S> <C>
1997 $ 90,530
1998 90,530
1999 90,530
2000 26,366
2001 -
----------
$ 297,956
Amount representing interest 50,116
----------
Net Present value of payments 247,840
Less current portion 66,053
----------
Long term portion $ 181,787
==========
</TABLE>
(6) Income Taxes
The components of income tax expense (benefit) for the years ended December 31,
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current taxes:
Federal: ($380,161) ($1,171,725) $ 923,413
State: - (100,000) 301,560
---------- ----------- ----------
Sub Total: ($380,161) (1,271,725) 1,224,973
--------- ----------- ----------
Deferred taxes:
Federal (314,651) (61,988) 181,353
State: ( 80,211) (31,368) 59,216
---------- ----------- ----------
Sub Total: (394,862) (93,356) 240,569
---------- ----------- ----------
Total: ($775,023) ($1,365,081) $1,465,592
========= =========== ==========
</TABLE>
Actual Income tax expense (benefit) for the years ended December 31, differed
from the amounts computed by applying the U.S. federal income tax rate of 34
percent to pretax income (loss) from operations as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) ($861,345) ($1,289,454) $1,215,368
Increase in income tax expense (benefit) resulting from
State and local taxes, net of federal income tax benefit (52,939) (86,703) 238,145
Change in beginning of the year balance of the
valuation allowance for deferred tax asset,
allocated to income tax expense 134,000 - -
Other, net 5,261 11,076 12,079
--------- ----------- ----------
Total income tax expense (benefit) ($775,023) ($1,365,081) $1,465,592
========= =========== ==========
Effective tax rate (31%) (36%) 41%
</TABLE>
F-14
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements, Continued
December 31, 1996 and 1995
Deferred tax assets and liabilities at December 31 are comprised of the
following:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 38,438 $ 20,300
Deferred compensation 78,943 144,502
Restructuring - 146,030
Unamortized retainage, due to change in tax reporting 48,818 75,689
Property, plant and equipment depreciation 138,897 76,090
Non-Deductible loss on contract 58,236 60,194
Vacation Expense 30,643 -
Contingent liability 200,380 -
Health Insurance 24,068 -
Net operating loss carry forward 27,552 -
Alternative minimum tax credit carryover 56,420 -
-------- --------
Total gross deferred tax assets 702,395 522,805
Less valuation allowance: 134,000 -
-------- --------
Net deferred tax asset 568,395 522,805
-------- --------
Deferred tax liabilities:
Retainage, due to deferral for tax reporting 638,576 963,062
Other 9,216 34,002
-------- --------
Total gross deferred tax liabilities 647,792 997,062
-------- --------
Net deferred tax liability: $ 79,397 $474,257
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The recognition of deferred
tax assets as of December 31, 1996 is supported by the fact that the
Company has sufficient reversals of temporary differences to support the
recognition of the deferred tax assets.
(7) Note Payable
On December 12, 1996 the Company restructured a $218,901 accounts payable
with CPL Worldgroup ("CPL") to an eighteen month unsecured note payable.
CPL is a subcontractor to the Company, that continues to provide services
to the Company. The note carries a 9.25% interest, with monthly payments
of $13,071, due on the first of the month, through June of 1998. If all
note payments are made on time and all future invoices are paid within
thirty days, $50,036 of the balance will be forgiven. Assuming all payments
are made when due the note will be paid off in February 1998.
F-15
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements, Continued
December 31, 1996 and 1995
(8) Stockholders' Equity
(a) Common Stock
On December 11, 1996 the Company implemented a one-for-four reverse
split of its common stock. This was done in order to satisfy the
requirements for continued listing on the NASDAQ National Market. Such
stock split has been reflected throughout the financial statements.
(b) Preferred Stock
On October 29, 1992, the Company issued 714,285.71 shares of its Series
A Convertible Preferred Stock at its par value of $3.50 per share.
Proceeds from the issuance were $2,500,000. Costs of issuance were
$264,326, and were netted against the proceeds of the offering. This
stock had a redemption provision which was exercisable at the option of
the shareholder for $3.50. On March 10, 1993, an amendment to the
original Stock Purchase Agreement dated October 29, 1992 was signed.
The effective date of the amendment was October 29, 1992 and the
agreement removed the redemption option and increased the dividend rate
to the preferred stockholders beginning on October 1, 1997 as noted
below.
In addition, the Preferred shareholders have a right and option to
require the Company to buy back the preferred shares at a price of
$5.60 per share upon a greater than fifty percent change in the
ownership of the Company's common stock. Also, the Company has the
right and option, anytime after October 30, 1997, to purchase no less
than all of the preferred shares at the liquidation value of $3.50 per
share plus any accrued and unpaid dividends.
Each share of Preferred Stock may be converted at any time into Common
Stock, on a four-for-one share basis and the holders of Preferred Stock
are entitled to one vote per four shares on all matters on which
stockholders are entitled to vote, including the election of Directors.
So long as there are at least 238,071 shares of Preferred Stock
outstanding, the holders thereof are entitled as a class to elect one
member of the Board of Directors. The affirmative vote of a majority of
the issued and outstanding shares of Preferred Stock is required: (i)
for the issuance of a class of equity securities with dividend rights
superior to the Preferred Stock; (ii) for the Company to engage in any
transaction that would materially impair the rights of the Preferred
Stock; (iii) for the Company to declare, pay or otherwise distribute
any dividends except out of retained earnings of the Company; (iv) to
increase or decrease the size of the Company's Board of Directors (v)
or to issue Common Stock or rights to purchase Common Stock to
officers, employees, directors or consultants of the Company if the
total number of shares held by such persons would exceed 10% of the
issued and outstanding shares of Common Stock after giving effect to
such issuance.
Until September 30, 1997, the holders of Preferred Stock are entitled
to receive dividends at the rate of 7.5% per share per annum payable
quarterly in arrears commencing on December 31, 1992. Effective October
1, 1997, the dividend rate becomes the prime rate of interest as of the
first business day following the end of the quarter, plus five (5)
percent. The Company is required to pay such dividends before any
dividends may be declared or paid for any of the Common Stock. In the
event the Company shall be in arrears in whole or in part with respect
to at least three quarterly dividend payments due to holders of
Preferred Stock, such holders voting as a class are entitled to elect
two members of the Board of Directors. Accrued and unpaid dividends as
of December 31, 1996 were $234,760.
(c) Common Stock Warrants
Warrants to purchase 3,750 shares of the Company's Common Stock at an
exercise price ranging from $12.00 -$18.00 per share were authorized
and issued April 14, 1995. At December 31, 1995 all of these warrants
remain outstanding and are exercisable until April 14, 2000.
Warrants to purchase 10,000 shares of the Company's Common Stock at an
exercise price of $16.00 per share were authorized and issued in 1993.
At December 31, 1995 all of these warrants remain outstanding and
F-16
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1996 and 1995
are exercisable until November 23, 2003.
(d) Stock Option Plan
The Company's Board of Directors and stockholders adopted the Company's
Incentive Stock Option Plans (the "Stock Option Plans") on April 1,
1993 and April 25, 1984, respectively. Options granted under the Stock
Option Plans are intended to qualify as incentive options under Section
422A of the Internal Revenue Code of 1986, as amended. The Board of
Directors administers the Stock Option Plans.
Subject to certain limitations, the Board of Directors has authority to
determine the exercise prices, vesting schedules and terms of the
options. Outstanding options were priced at market or at an amount
above market, on the day of issuance, vest either immediately or over a
three year period and have a ten year life. The maximum term of any
option outstanding is ten years.
The exercise price of options granted pursuant to the Stock Option
Plans may not be less than the fair market value of the Common Stock on
the date of grant. The exercise price of options granted to any
participants who own stock possessing more than 10% of the total
combined voting power of all classes of outstanding stock of the
Company must be at least equal to 110% of the fair market value of the
Common Stock on the date of grant. Any options granted to such
participants must expire within ten years from the date of grant. Stock
options under the Stock Option Plans are not transferable, except by
estate succession.
The Company applies APB Opinion 25 and related interpretations in
accounting for these plans. Accordingly, no compensation cost has been
recognized. Had compensation cost been determined pursuant to SFAS No.
123, the Company's net loss and net loss per share would have been
adjusted to the pro forma amounts indicated in the table below. The
effects on pro forma net loss obtained from applying SFAS No. 123 may
not be representative of the effects on reported net income (loss) for
future years.
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C> <C>
Net loss As Reported ($1,758,345) ($2,427,440)
Pro Forma ( 1,807,185) ( 2,881,698)
Net loss As Reported ($2.71) ($3.68)
per Share Pro Forma ( 2.77) ( 4.32)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1996 and 1995
respectively; no dividend yield; expected volatility of 66.6% and
47.5%; risk-free interest rate of 6.048% and 5.9%; and expected lives
of five and three years. The weighted-average fair value of options
granted during 1996 and 1995 was $0.91 and $2.58, respectively.
A summary of the status of the Company's stock option plan as of
December 31 1996, 1995 and 1994 and changes during the years ended on
those dates is presented below:
F-17
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
---------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 41,281 $28.62 25,250 $40.10 37,250 $17.10
Granted 152,550 4.32 41,781 28.78 12,500 51.00
Canceled (81,950) 15.76 (13,000) 26.62 - -
Exercised (4,900) 7.75 (11,750) 29.36 (24,500) 10.64
Forfeited (14,131) 24.93 (1,000) 30.00 - -
------- ------ -------
Outstanding at end of year 92,850 1.71 41,281 28.62 25,250 40.10
======= ====== =======
Exercisable at year end 55,700 1.86 41,281 28.62 25,250 40.10
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Number Outstanding Weighted Average Number Exercisable
Exercise Prices At December 31, 1996 Remaining Contractual Life At December 31, 1996
--------------- -------------------- -------------------------- --------------------
<S> <C> <C> <C>
$ 2.00 39,750 9.9 39,750
1.50 53,100 9.9 15,950
</TABLE>
At December 31, 1996, 1995, and 1994 , common shares reserved for issuance
under these plans were 125,000. In March 1995, the Board of Directors
reserved 25,000 common shares for non-employee director options. Each
director will be awarded 1,250 options, each year in January, for a maximum
of 5,000 options per director.
(9) Commitments
The Company has a profit sharing plan under which all full-time employees
with at least one year of service with the Company are eligible to
participate. The Board of Directors administers the profit sharing plan
and establishes the formula for each year's distributions. Distributions
for each calendar year are made in the following year to eligible employees
who were employed for the full previous calendar year. Profit sharing plan
expense for the years ended December 31, 1996, 1995 and 1994 was $0, $0,
and $602,922, respectively.
The Company sponsors a 401(k) Plan Trust in which all employees are
eligible to participate. Participants can contribute up to 20% of total
compensation subject to annual Internal Revenue Service dollar limitation.
The plan provides for a Company match of 10%, up to 5% of the participant
contributions. This matching provision was discontinued in 1996. The
Company paid matching funds of $27,294 in 1995.
Pursuant to a consulting agreement and a deferred compensation agreement
with the former Chairman, the Company agreed to pay $48,000 per year for a
fixed number of consulting hours, and also fund $60,000 per year to a non-
qualified deferred compensation plan. The original term for both agreements
was seven years. Effective September 1995, the consulting agreement was
amended to eliminate the required consulting payments of $48,000 per year.
The payments to the deferred compensation agreement will remain at $60,000
per year through the end of 2001. Accordingly, in the third quarter of
1995, the Company was required to record a liability and a related expense
of approximately $245,000 for the present value of the deferred
compensation payments, which will be paid at $5,000 per month through the
end of 2001.
F-18
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1996 and 1995
(10) Concentration of Revenue
During 1996, 1995 and 1994 the Company had the following sales from
customers whose individual sales exceeded 10% of the Company's total
sales:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Rhode Island DHS $2,399,170 $ 2,882,898 $
Virgin Islands 1,026,195 4,087,519 -
Hawaii - 6,096,162 6,824,946
RI Dept of Health 927,372 - -
West Virginia - - 3,764,670
---------- ----------- -----------
$4,352,737 $13,066,579 $10,589,616
========== =========== ===========
</TABLE>
(11) Restructuring
In December 1995 as a result of the decrease in the Company's backlog,
management approved a plan of reorganization of the Company in an
effort to reduce expenses and operate more efficiently while still
maintaining a firm commitment to deliver high quality services. Under
the plan, the Company had targeted a reduction in work force of
approximately 30 to 35 positions through an involuntary separation
plan. These positions were from the technical, administrative and
middle management levels. Estimated salaries, related payroll taxes and
other costs associated with these reductions amounted to approximately
$537,000, of which approximately $20,000 was paid in 1995, and has been
included as a restructure charge in the accompanying statement of
operations for 1995. In 1996 42 positions were eliminated. In 1996 the
Company renegotiated the facilities lease and returned unneeded space
to the landlord. Approximately ($119,000) has been included as a
reversal of a restructure charge in the accompanying statement of
operations for 1996. An analysis of the restructure accrual is as
follows:
<TABLE>
<CAPTION>
1995 1996
Balance Paid in 1996 Adjustment Balance
------- ------------- ----------- -------
<S> <C> <C> <C> <C>
Salaries & benefits 248,839 (259,629) 16,173 5,383
Rental space 268,841 (133,232) (135,609) -
------- -------- -------- -------
517,680 (392,861) (119,436) 5,383
</TABLE>
(12) Significant Uncertainties
In June 1993, the Company entered into a fixed price contract with the
State of Hawaii (the State) for the transfer of a Child Support
Enforcement System to the State of Hawaii. In June 1995, the Company
began negotiating a significant amendment to its contract with the
State when it determined that the total estimated cost to complete the
system would be significantly greater than expected. In the first
Quarter of 1996, the Company received final state and federal approval
for this contract amendment totaling an incremental $4.4 million.
However, at December 31, 1995, as a result of in-depth reviews of this
contract, management determined that contract costs continue to
increase and expected to realize a gross loss on the entire contract of
approximately $440,000, which was recorded in December 1995. While at
December 31, 1995 management of the Company believed that the actual
costs to complete this contract would be within its latest cost
estimates, due to uncertainties inherent in the estimation process and
in the Company's latest negotiations to reach a final definitive plan
for the completion of the contract, it was management's position that
these estimates could need further revision.
In 1996, the Company continued in its attempts to negotiate a final
definitive plan with the State and at the end of the first quarter of
1996, it furloughed substantially all of its technical employees in
Hawaii while it continued its negotiations on site with key management
and administrative personnel. In conjunction with these negotiations,
the State requested that the Company hire Complete Business.
F-19
<PAGE>
NETWORK SIX, INC
Notes to Financial Statements
December 31, 1996 and 1995
Solutions, Inc. (CBSI) to conduct a detailed review of the system to
facilitate the resolution of open contractor scope issues. On
September 13, 1996, the State of Hawaii terminated its contract with the
Company,and therefore CBSI's contract was automatically terminated,
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.
On November 12, 1996, the State filed a lawsuit against the Company and its
bonding companies, Aetna Casualty and Surety (Aetna) and Federal Insurance
Company for damages due to breach of contract. The suit alleges that the
Company failed to meet contractual deadlines, provided late, incomplete
and/or unsuitable deliverables, and materially breached the contract by
never completing the design, the application programming, 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 lawsuit and interest costs
that the court deems just and proper.
In late 1996, Unisys, a vendor providing equipment to the Company on the
Hawaii contract, submitted an $896,000 claim against the $10.3 million
performance bond posted on behalf of Hawaii to ensure the Company's
performance on the contract.
On January 23, 1997, the Company filed a counterclaim against the State
alleging that the State had fraudulently induced the Company into designing
and building a system having capabilities and extraordinary features far
beyond the scope of the contract and industry standards. The Company is
seeking damages of $70 million together with prejudgement interest, costs
and attorneys' fees.
On December 13, 1996 Complete Business Solutions, Inc. (CBSI), a
subcontractor on the Hawaii contract, filed a lawsuit against the Company
in the Superior Court of the State of Rhode Island for $517,503 which the
Company has accrued, plus interest, costs and attorney's fees. The Company
disputes the $517,503 owed 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 related to the detailed review of
the system 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 inappropriately. Also, the Company alleges that CBSI owes the
Company $482,750 as of December 31, 1996 for which the Company has not
established any reserve for uncollectibility.
In February 1997, the State of Hawaii released Aetna from all but $1.1
million of the performance bond. In addition Hawaii hired Lockheed/Martin
IMS, the guarantor of the Aetna bond, to complete the KEIKI system,
incorporating changes to comply with the recent welfare reform legislation,
for approximately $19 million.
On February 3, 1997, the Company filed a third-party complaint ("TPC") in
the Hawaii litigation against MAXIMUS Corporation ("MAXIMUS") and CBSI.
MAXIMUS has been the State of Hawaii's supervisor and advisor on the
contract 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 a intended third party beneficiary under the
contract between MAXIMUS and Hawaii; (ii) MAXIMUS tortiously interfered in
the contract between the Company and Hawaii; (iii) MAXIMUS negligently
breached duties to the Company and (iv) MAXIMUS aided and abetted Hawaii in
Hawaii's breach of contract. The Company's complaint seeks $60 million in
damages.
Management of the Company and its attorneys are unable to predict
with any certainty the ultimate outcome of this litigation, including
the probability that this litigation will have a negative impact on the
Company or the dollar amount of the potential impact. At December 31,
1996, the Company had unbilled work-in-process and related receivables from
the State and CBSI of approximately $3.5 million, which exceeds
stockholders' equity of
F-20
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1996 and 1995
approximately $2.8 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 expenses 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 recorded in the first,
second and third quarters, respectively. In addition, costs incurred
related to the Hawaii contract of $1.96 million in 1996 have been charged
to expense.
For fiscal 1995, the Company realized a net loss of $1.5 million from
operations substantially as a result of the Hawaii contract as discussed
above. Also contributing to the net loss for fiscal 1995 was an estimated
$537,000 of costs for a plan of restructuring which the Company announced
in December 1995 to address the downsizing of its business and decrease of
profitability. Net cash used in its operations in 1995 was $2.3 million. In
fiscal 1996, despite the implementation of its restructuring plan, the
Company realized a net loss of $1.8 million and realized a net decrease in
cash of approximately $1.1 million. In addition, the Company is continuing
in its efforts to pay down its bank financing facility pursuant to terms
that are periodically renegotiated with the bank. At January 31, 1997, the
Company's agreement with the bank had expired and was payable on demand.
Finally, the Company has an obligation to one of its vendors on the Hawaii
contract for a aggregate amount of $896,000 which will be settled by the
Company's bonding agent but will then be payable by the Company to the
bonding agent. The Company intends to negotiate with its bonding agent
regarding the terms for repayment of this amount which is included in
accounts payable on the balance sheet.
The uncertainty involved with the litigation discussed above and the
potential for a material adverse outcome to the Company, combined with the
recurring operating losses and an expired bank financing agreement
discussed above raise substantial doubt about the Company's ability to
continue as a going concern.
Management intends to continue to defend the Company vigorously in its
litigation with the State of Hawaii and pursue its litigation with MAXIMUS
and CBSI. Concurrently, management intends to negotiate a fair and
reasonable agreement with the bank. Management will continue its
efforts to strengthen the balance sheet and , if either necessary or
desirable, develop and implement a major recapitalization plan for the
Company while it aggressively seek new business.
F-21
<PAGE>
SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT
----------------------------------------------------------------
Date: September 27, 1996
This Second Amendment of the Second Amended and Restated Credit Agreement
is made by and between Network Six, Inc., a Rhode Island corporation with a
principal place of business at 475 Kilvert Street, Warwick, Rhode Island 02886
(the "Borrower") and Citizens Trust Company, a trust company organized under the
laws of the State of Rhode Island, having its principal place of business at One
Citizens Plaza, Providence, Rhode Island 02903 (the "Lender"). Each capitalized
term used herein but not expressly defined herein shall have the respective
meanings assigned thereto in that certain Second Amended and Restated Credit
Agreement by and between the Borrower and the Lender dated as of December 16,
1994, as amended by letter agreements dated November 13, 1995 and December 15,
1995 and that certain Amendment to Second Amended and Restated Credit Agreement
dated April 10, 1996 (the "First Amendment") (collectively, as further amended,
the "Credit Agreement").
W I T N E S S E T H
-------------------
1. The following definitions included within Section 1.1 of the Credit
Agreement are amended to read as follows:
(a) "Closing Date" means the date on which all the conditions
------------
precedent set forth in the Credit Agreement and this Amendment have been
satisfied.
<PAGE>
(b) "Credit Note" means the Amended and Restated Credit Note A dated
-----------
April 10, 1996 in the original face amount of $2,000,000.00, and Second
Amended and Restated Credit Note B of dated September 27, 1996 in the
amount of $333,768.00 made by the Borrower, payable to the order of the
Lender.
(c) "Notes" means Credit Note A and Credit Note B and any one or more
of them."
2. Section 2.1.1 of the Credit Agreement shall be amended to
read as follows:
"2.1.1 Credit Loans. Provided that no Default or Event of Default
------------
has occurred, Lender, subject to the terms and conditions contained in this
Agreement, shall make Credit Loans to Borrower from time to time after
receipt by Lender from time to time before the Credit Termination Date of a
Request from Borrower in accordance with Article 3, during the period
---------
Commencing on the Closing Date and ending on the Business Day immediately
preceding the Credit Termination Date, in an aggregate principal amount
outstanding not to exceed at any one time the lesser of (i) the Borrowing
Base and (ii) the following:
<TABLE>
<CAPTION>
<S> <C>
(A) September 27, 1996 $2,133,768.00
(B) October 31, 1996 $2,083,768.00
(C) November 30, 1996 $1,883,768.00
(D) December 31, 1996 $1,658,768.00
</TABLE>
-2-
<PAGE>
Either the presentation to Lender of a check drawn by Borrower against one of
the accounts described on Exhibit H (a "Check Request"), or receipt by Lender of
---------
a written request in the form of Exhibit C fully completed shall be deemed a
---------
Request. Upon receipt of a Request, and subject to the terms and condition of
this Agreement, Lender shall make Credit Loans to Borrower in such amounts as
are necessary to Cover the amount of said Requests, and such proceeds shall be
transferred to the account(s) Corresponding to those upon which said Check
Requests were presented. The Credit Loans shall be evidenced by the Credit Note
(completed and duly executed by Borrower in accordance with this Agreement),
delivered to Lender on the Closing Date in accordance with Article 3, in the
---------
principal amount equal to the amount of the Credit Commitment. The Credit
Commitment, and any obligations of Lender to make Credit Loans to Borrower
pursuant to the terms hereof shall terminate the Business Day immediately
preceding the Credit Termination Date.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE FINANCING DOCUMENTS,
THE OUTSTANDING PRINCIPAL BALANCE OF THE CREDIT LOANS AND ALL ACCRUED INTEREST
AND FEES THEREON SHALL BE DUE AND PAYABLE ON THE EARLIER OF THE CREDIT
TERMINATION DATE AND THE EXERCISE OF ANY OF LENDER'S REMEDIES UNDER SECTION 7."
3. Section 5.1.16 of the Agreement shall be amended to read as
follows:
Section 5.1.16 Hawaii Contract. (a) Keep Lender informed and submit
---------------
to Lender promptly any and all material Correspondence, agreements,
amendments, transcripts,
-3-
<PAGE>
conversations and such other documents concerning the "Hawaii
Contract". As used herein the Hawaii Contract shall mean and refer to
Contract 36064 between Borrower and the State of Hawaii.
(b) With reference to those Certain payments (the "Walk-through
Receivables") pertaining to the so-called walk-through phase of the
Hawaii Contract, the Borrower represents that CBSI has agreed to
undertake and complete this phase of the contract so long as it may
receive payment directly from the State of Hawaii. Both the Borrower and
CBSI acknowledge and agree that the Lender has a valid existing first
security interest in all accounts receivable including the so-called
"Walk-through Receivables". The Lender shall agree that provided that
there shall have not occurred a Default or an Event of Default, and
subject to receipt by the Lender of additional security in an amount and
of a nature acceptable to the Lender in its discretion, CBSI may directly
receive payment of the Walk-through Receivables. The Borrower and CBSI
shall each represent an warrant to the Lender the specific tasks to be
performed under this contract phase and shall keep a separate record of
billings and collections thereunder. CBSI shall agree to immediately
repay the Lender any amounts CBSI may receive from the State of Hawaii
other than designated "Walk-through Receivables."
(c) The Borrower further acknowledges that the Walk-through
Receivables and Earned but Unbilled Revenue related
-4-
<PAGE>
to the walk-through phase of the Hawaii Contract shall be excluded from
the Borrowing Base calculation. The foregoing notwithstanding, valid and
undisputed Receivables and Earned but Unbilled Revenue due to the Borrower
from CBSI for time and material provided under the walk-through phase may
be included in the Borrowing Base calculation.
4. Section 5.3 of the Credit Agreement is hereby amended by adding the
following Section 5.3.14
5.3.14 The Borrower shall provide to the Lender on a weekly basis, on
Monday of each week, an accounts receivable aging, summary of Earned but
Unbilled Revenue and a Borrowing Base Certificate as of the immediately
preceding Friday. The summary of Earned but Unbilled Revenue is a fixed
number based upon the prior months closing balance of this account. The
monthly updated figure for Earned but Unbilled Revenue shall be due within
ten days of the close of the previous month.
5. Borrower agrees that any proceeds received from any federal or state
income tax refund and/or receivable shall be paid directly to Lender. The
refund/receivable shall be applied by Lender as an additional permanent
principal reduction of the maximum Credit Commitment. The Permanent Reduction is
an additional and unscheduled reduction of the maximum Credit Commitment and is
in addition to and not in substitution of any permanent principal paydown as
required to reduce the maximum Credit Commitment by the dates outlined in
Section 2.1.1, above. The Borrower shall be required to reduce the principal
balance of
-5-
<PAGE>
the Credit Loans to the levels outlined in Section 2.1.1 without regard to any
payment under this Paragraph 5.
6. Notwithstanding any provision in this Amendment, the Credit
Agreement or any Note, or in any instrument securing the Notes, the total
liability for payments legally regarded as interest shall not exceed the maximum
limits imposed by applicable law, and any payment of same in excess of the
amount allowed thereby shall, as of the date of such payment, automatically be
deemed to have been applied to the payment of the principal indebtedness
evidenced hereby, or, if same has been fully repaid, shall be repaid to Borrower
upon demand. Any notation or record of Lender with respect to such required
application which is inconsistent with the provisions of this paragraph shall be
disregarded for all purposes and shall not be binding upon either Borrower or
Lender.
7. The Borrower hereby restates and reaffirms all terms and conditions
contained in the Credit Agreement, as modified hereby, including all affirmative
and negative covenants set forth therein, as if made as of the date hereof.
8. There is no basis nor set of facts on which any amount (or any
portion thereof) owed by the Borrower to Lender (including any under the Notes)
could be reduced, offset, waived or forgiven; nor is there any claim,
counterclaim, or defense (or) other right, remedy, or basis having a similar
effect) available to the Borrower with respect to the Notes or any other
liability of the Borrower to
-6-
<PAGE>
Lender; nor is there any basis on which the terms and conditions of any
indebtedness of the Borrower to Lender could be claimed to be or is other than
as stated on the written instruments which evidence such indebtedness.
9. As further consideration or the Lender agreeing to the restructuring
contemplated herein, the Borrower agrees to revise the exercise price of the
Warrant Shares granted to the Lender pursuant to that certain Warrants to
Purchase Common Stock of Network Solutions, Inc. dated November 23, 1993, from
$10.00 per share to $4.00 per share. The documents effecting this repricing
shall be prepared by counsel to the Borrower and shall be in form and substance
satisfactory to the Lender and the Lender's counsel.
10. The Borrower shall pay on demand all costs and expense of Lender in
connection with the preparation, execution, and delivery of this Agreement and
of any other documents and agreements between the Borrower and Lender, whether
now existing or hereafter arising, and all other expenses which may be incurred
by Lender in preparing or amending this Agreement and all other agreements,
instruments, and documents related thereto, or otherwise incurred with respect
to the Liabilities. The Borrower specifically authorizes Lender to pay all such
fees and expenses and at Lender's discretion, without notice, to add such fees
and expenses to any loan which the Borrower may have with Lender or to charge
the same to any account of the Borrower with Lender.
11. The Borrower respectively releases and forever discharges Lender and
all and singular Lender's affiliates, agents employees, officers, and directors
(hereinafter, collectively, and each individually, the "Released Parties") of,
to, and from any
-7-
<PAGE>
claim or cause of action existing as of the date hereof which the Borrower has
or to which the Borrower becomes entitled against any of the Released Parties,
whether such claim or cause of action is known, unknown, absolute, contingent,
liquidated, or unliquidated. It is the intention of the Borrower that the
release effected hereby be construed broadly in favor of the Released Parties
and that it include, without limitation, any claim or cause of action on account
of, in respect to, or arising out of the Notes, and/or the relationship of the
Borrower with Lender.
12. The Borrower shall indemnify, defend, and hold the Lender and any
employee, officer, or agent of the Lender (each, an "Indemnified Person")
harmless of and from any claim brought or threatened against any Indemnified
Person by the Borrower, any guarantor or endorser of the Liabilities, or any
other Person (as well as from attorneys' reasonable fees and expenses in
connection therewith) on account of the Lender's relationship with the Borrower
or any other guarantor or endorser of the Liabilities (each of which may be
defended, compromised, settled, or pursued by the Indemnified Person with
counsel of the Lender's selection, but at the expense of the Borrower) other
than any claim as to which a final determination is made in a judicial
proceeding (in which the Lender and any other Indemnified Person has had an
opportunity to be heard), which determination include a specific finding that
the Indemnified Person seeking indemnification had acted in a grossly negligent
manner or in actual bad faith.
-8-
<PAGE>
13. Except as modified hereby all terms and conditions of the Credit
Agreement shall remain in full force and affect.
It is intended that this Amendment take affect as a sealed instrument.
Witness: NETWORK SIX, INC.
/s/ Lisa M. Gough By: /s/ Dorothy M. Cipolla
------------------------------- --------------------------------
Name: Dorothy M. Cipolla
CITIZENS TRUST COMPANY
/s/ Lisa M. Gough By: /s/ Patrick C. Joyce
------------------------------- --------------------------------
Name: Patrick C. Joyce
STATE OF RHODE ISLAND
Providence , ss. September 27, 1996
-----------
Then personally appeared the above named Dorothy M. Cipolla, the
------------------
Treasurer of Network Six, Inc. and acknowledged the foregoing to be
---------
the free act and deed of Network Six, Inc., before me,
/s/ Lisa M. Gough
--------------------------------
Notary Public
My Commission Expires: 7-6-98
-9-
<PAGE>
STATE OF RHODE ISLAND
Providence , ss. September 27, 1996
-----------
Then personally appeared the above named Patrick Joyce, the Vice
------------- ----
President of Citizens Trust Company and acknowledged the foregoing to
---------
be the free act and deed of Citizens Trust Company, before me,
/s/ Lisa M. Gough
--------------------------------
Notary Public
My Commission Expires: 7-6-98
-10-
<PAGE>
SECOND AMENDED AND RESTATED CREDIT NOTE B
-----------------------------------------
$333,768.00 Providence, Rhode Island
September 27, 1996
This Amended and Restated Credit Note is made by Network Six,
Inc. (f/k/a Network Solutions, Inc.), a Rhode Island corporation (the
"Borrower"), payable to Citizens Trust Company, a trust company
organized and existing under the laws of the State of Rhode Island,
with head offices at One Citizens Plaza, Providence, Rhode Island
02903 (the "Lender").
RECITALS
The Borrower has previously executed and delivered to the Lender
that certain credit note dated November 23, 1993 in the original
principal amount of $1,800,000.00, as amended by a First Note
Modification Agreement dated December 16, 1994 (as amended the "Note")
The Borrower requested the Lender, and the Lender agreed to amend
and restate the Note, by the execution of the Amended and Restated
Credit Note A and the Amended and Restated Credit Note B each dated as
of April 10, 1996.
The Borrower has requested the Lender, and the Lender has agreed,
subject to the terms and conditions set forth herein, to amend and
restate Amended and Restated Credit Note B by the execution of this
Note.
NOW, THEREFORE, in consideration of the premises and subject to
satisfaction of the terms and conditions set forth herein, the parties
hereby agree to amend and restate Amended and Restated Credit Note B
as follows:
FOR VALUE RECEIVED, the Borrower promises to pay to the Lender in
accordance with the Credit Agreement (defined below), the lesser of
(i) Three Hundred Thirty Three Thousand Seven Hundred Sixty Eight and
00/100 Dollars ($333,768.00), or (ii) the aggregate unpaid principal
amount of all Credit Loans made by Lender to Borrower attributable to
Credit Note B pursuant to that certain Second Amended and Restated
Credit Agreement dated December 16, 1994, as amended by letter
agreements dated November 13, 1995 and December 15, 1995 and as
further amended by an Amendment to Second Amended and Restated Credit
Agreement dated April 10, 1996, and a Second Amendment to Second
Amended and Restated Credit Agreement of even date by and among
Borrower and Lender, as further amended from time to time hereafter
(the "Credit Agreement").
Borrower shall make principal payments from time to time to
Lender in such amounts as may be necessary, if any, so as to
<PAGE>
cause the outstanding principal amount of this Note and the
outstanding principal balance of Credit Note A to at all times be
below the Credit Commitment then, in effect. Borrower shall pay in
full all unpaid principal, interest, fees and other amounts due under
this Note and/or under the Credit Agreement on the Credit Termination
Date, or on such earlier date as said principal, interest, fees and
other amounts may become due and payable in full pursuant to the
Credit Agreement.
Borrower promises to pay to the order of Lender interest before
and after maturity on the principal amount of this Note outstanding
from time to time from the date hereof until payment in full of all
principal, due under this Note, payable monthly in arrears on the last
Business Day of each month, commencing September 30, 1996, all in
accordance with the Credit Agreement. Interest shall accrue and be due
and payable under this Note at the rates set forth in the Credit
Agreement.
This Note is Credit Note B referred to in, and is entitled to the
benefits of, the Credit Agreement. The applicable terms and
provisions of the Credit Agreement are incorporated herein by
reference as if fully set forth herein. Each capitalized term used in
this Note and not expressly defined in this Note shall have the
meaning ascribed to such term in the Credit Agreement. The Credit
Agreement, among other things, contains provisions for acceleration of
the maturity of this Note upon the happening of certain stated events
and also for prepayments on account of principal of this Note prior to
the maturity of this Note upon the terms and conditions specified in
the Credit Agreement.
This Note is secured by the Security Documents.
If this Note shall not be paid when due and shall be placed by
the holder hereof in the hands of an attorney for collection, through
legal proceedings or otherwise, Borrower will pay reasonable
attorneys' fees to the holder hereof together with reasonable costs
and expenses of collection.
All interest and fees payable under or in connection with this
Note shall be computed on the basis of the actual number of days
elapsed using a 360-day year.
All provisions of this Note and any other agreements between
Borrower and Lender are expressly subject to the condition that in no
event, whether by reason of acceleration of maturity of the
Indebtedness evidenced by this Note or otherwise, shall the amount
paid or agreed to be paid to Lender which is deemed interest under
applicable law exceed the maximum permitted rate of interest under
applicable law (the "Maximum Permitted Rate"), which shall mean the
law in effect on the date of this Note, except that if there is a
change in such law which results in a higher Maximum Permitted Rate,
then this Note shall be governed by such amended law from and after
its effective date. In the
-2-
<PAGE>
event that fulfillment of any provision of this Note, or the Credit
Agreement or any document, instrument or agreement providing security
for this Note results in the rate of interest charged hereunder being
in excess of the Maximum Permitted Rate, the obligation to be
fulfilled shall automatically be reduced to eliminate such excess. If,
notwithstanding the foregoing, Lender receives an amount which under
applicable law would cause the interest rate hereunder to exceed the
Maximum Permitted Rate, the portion thereof which would be excessive
shall automatically be deemed a prepayment of and be applied to the
unpaid principal balance of this Note to the extent of then
outstanding Loans and not a payment of interest and to the extent said
excessive portion exceeds the outstanding principal amount of Loans,
said excessive portion shall be repaid to Borrower.
Borrower expressly waives presentment, notice of acceleration and
intent to accelerate, demand for payment and protest and notice of
protest of non-payment.
This Note shall for all purposes be governed by and construed in
accordance with the local laws of the State of Rhode Island.
Executed as a sealed instrument as of the date first above
written.
In the presence of: NETWORK SIX, INC.
By: /s/ Lisa M. Gough By: /s/ Dorothy M. Cipolla
------------------------- --------------------------
-3-
<PAGE>
NETWORK SIX INC.
------- --- ---
CERTIFICATE OF SECRETARY
I, Dorothy M. Cipolla, do certify that I am the duly elected,
qualified and acting Secretary of Network Six, Inc.. a Rhode Island
corporation, and that on September 12, 1996, the Board of Directors of
the corporation approved the repricing of the warrants originally
issued to Citizens Trust Company on November 23, 1993 from an exercise
price of $10.00 per share to $4.00 per share in consideration for the
restructuring of the corporation's credit agreement with said Citizens
Trust Company.
IN WITNESS WHEREOF, I have executed this Certificate of Secretary
on the 27 day of September, 1996.
/s/ Dorothy M. Cipolla
------------------------
Secretary
<PAGE>
NETWORK SIX, INC.
-----------------
CERTIFICATE OF SECRETARY
------------------------
I, Dorothy M. Cipolla, do hereby certify that I am the duly
elected, qualified and acting Secretary of Network Six, Inc, (the
"Corporation"), a Rhode Island corporation, and that on September 12,
1996, the Board of Directors of the Corporation approved the following
resolutions:
RESOLVED: That the Corporation is hereby authorized to borrow from
Citizens Trust Company (the "Lender") the aggregate
principal amount of up to $2,333,768.00 and, in
connection therewith to execute, deliver and perform (a)
a Second Amendment to Second Amended and Restated Credit
Agreement between the Corporation and Lender pursuant to
which the Lender will lend to the Corporation up to
$2,333,768.00 (the "Credit Agreement") and (b) a Second
Amended and Restated Credit Note B (the "Note").
RESOLVED: That the Chairman, President or Treasurer of the
Corporation be, and each of them acting alone hereby is
authorized to execute in the name and deliver on behalf
of the Corporation one or more counterparts of the Credit
Agreement and the Note to be in form and substance as may
be approved by the officer executing the same, his or her
execution thereof to be deemed conclusive evidence of
such approval and of his or her authority hereunder.
RESOLVED: That the several officers of the Corporation be and each
of them acting alone hereby is authorized to execute such
instruments and take such other actions in the name and
on behalf of the Corporation as they or any one of them
may deem necessary or appropriate to carry out the terms
of the Credit Agreement and the Note, including without
limitation, the execution, acknowledgment and delivery of
any and all agreements, certificates, instruments and
other documents as they or any one of them shall deem
necessary or appropriate.
IN WITNESS WHEREOF, I have executed this Certificate of Secretary
on the 27 day of September, 1996.
/s/ Dorothy M. Cipolla
------------------------
Secretary
<PAGE>
NETWORK SIX, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
This Network six, Inc. Non-Employee Director Stock Option Plan
(the "Plan") is adopted by Network Six. Inc. (the "Company") for the
purpose of advancing the interests of the company by providing
incentives for the continued services of the company's non-employee
directors and by attracting able individuals to directorships with the
Company.
1. Definitions. For purposes of this Plan, the following term
-----------
shall have the meanings set forth below:
"Board" means the Board of Directors of the Company.
"Common Shares" means the Company's common stock, $.10 par value
per share.
"Company" means Network Six, Inc., a Rhode Island corporation.
"Effective Date" means March 15, 1995.
"Grant Date" means the effective date of a grant of options
pursuant to Paragraph 4(a) and 4(b) hereof.
"Market Value" means the closing price of the Common Shares as
reported by NASDAQ.
"participant" means a director who has met the requirements of
eligibility and participation described in Paragraph 3 hereof.
2. Administration. The Plan shall be administered by the Board.
--------------
Subject to the provisions of the Plan, the Board shall have the
authority to interpret the provisions and supervise the administration
or the Plan. All decisions made by the Board under the provisions of
the Plan shall be made by the affirmative vote of a majority of the
directors then in office. The following provisions shall apply to the
administration of the Plan by the Board:
(a) The Board shall have full authority subject to the
express provisions of the Plan to interpret the Plan, to provide,
modify and rescind rules and regulations relating to it to
determine the terms and provisions of each option and the form of
any option agreement evidencing an option granted under the Plan
and to make all other determinations and perform such actions as
the Board deems necessary or advisable to administer the Plan.
<PAGE>
(b) The Board shall not be held liable for any action taken
or determination made in good faith with respect to the Plan or
any option granted hereunder.
3. Eligibility and Participation
--------------- -------------
(a) A non-employee director of the Company shall
automatically become a Participant in the Plan as of the later of (1)
the Effective Date, or (ii) the date of initial election to the Board.
A director who is a regular employee of the Company is not eligible to
participate in the Plan.
(b) A Participant shall cease participation in the Plan as
of the date the Participant (i) fails to be re-elected to the Board,
(ii) resigns or otherwise vacates his position on the Board, or (iii)
becomes a regular employee of the Company.
4. Grant of Options.
----------------
(a) Each person who is a Participant on the Effective Date
shall be automatically and without the exercise of discretion by any
person awarded a non-qualified option to purchase 5,000 Common Shares
effective as of the Effective Date, at a price equal to the Market
Value of Common Shares on that date. Any person who becomes a
Participant after the Effective Date. shall be awarded a non-qualified
option to purchase 5,000 Coupon Shares effective as of the date on
which such Participant is first elected to the Board, at a price equal
to the Market Value of Common Shares on that date.
(b) Beginning with January 15, 1996, each Participant shall,
automatically and without the exercise of discretion by any person, be
awarded as of January 15 of each year that the Plan is in effect a
non-qualified option to purchase 5,000 Common Shares at a price equal
to the Market Value of Common Shares on that date.
(c) Notwithstanding Sections (a) and (b) above, no
Participant shall be awarded options for more than 15,000 Common
Shares in total under the Plan.
(d) All options awarded under the Plan shall have a term of
10 years.
(e) Options awarded under the Plan shall not qualify as
incentive stock options within the meaning of Section 423 of the
Internal Revenue Code.
5. Method of Exercise. An option granted under the Plan may be
------------------
exercised, in whole or in part, by submitting a written notice to the
Board, signed by the Participant or such other
2
<PAGE>
person who may be entitled to exercise such option, and specifying the
number of Common Shares as to which the option is being exercised.
Such notice shall be accompanied by the payment of the full option
price for such Common Shares, or shall fix a date. (not more than ten
business days from the date of such notice) for the payment of the
full option price of the Common Shares being purchased. Payment shall
be made in the form of cash, Common Shares (to the extent permitted by
law) , or both. A certificate or certificates for the Common Shares
purchased shall be issued by the Company after the exercise of the
option and full payment therefor. Upon exercise or an option, the
optionee will be required to pay to the Company the amount of any
federal , state or local taxes required by law to be withheld in
connection with such exercise.
6. Termination of Directorship. If a participant fails to be
---------------------------
re-elected to the Board, resigns or otherwise ceases to be a director
of the company for reasons other than death or disability (within the
meaning of Section 22(e) (3) of the Internal Revenue Code), all
options granted under this Plan to such participant which have not
been exercised on such date shall terminate if not exercised before
thirty (30) days following such termination, or at such earlier time
as lay be applicable under Paragraph 4(c) above. If the Participant
dies or becomes disabled within the thirty (30) day period described
above, such remaining options may be exercised by the Participant or
the Participant's personal representative at any time before the
expiration of twelve (12) months following the date of death or
commencement of disability.
If a Participant ceases to be a director of the company by reason
or death or disability (within the meaning of Section 22(e)(3) of the
Internal Revenue Code), all options granted under this Plan to such
Participant which have not been exercised on such date may be
exercised at any time before the expiration of twelve (12) months
following the date of death or commencement of disability, or such
earlier time as may be applicable under Paragraph 4(c) above.
7. Non-transferability. Each option and all tights thereunder
-------------------
shall be exercisable during the Participant's lifetime only by him and
shall be non-assignable and non-transferable by the participant
except, in the event of the Participant's death, by will or by the
laws of descent and distribution. In the event the death of a
Participant occurs, the representative or representatives of the
Participant's estate, or the person or persons who acquired (by
bequest or inheritance) the rights to exercise the Participant's
options in whole or in part may exercise the option prior to the
expiration of the applicable exercise period, as specified in
Paragraph 6 above.
3
<PAGE>
8. No Rights as Stockholder. A Participant shall have no rights
------------------------
as a stockholder with respect to any Common Shares subject to the
option prior to the date of issuance of a certificate or certificates
for such Common Shares.
9. Compliance with Securities Laws. Options granted and Common
-------------------------------
Shares issued by the Company upon exercise of options shall be granted
and issued only in full compliance with all applicable securities
laws, including laws, rules arid regulations of the Securities and
Exchange Commission and applicable state Blue Sky Laws. With respect
thereto, the Board may impose. such conditions on transfer,
restrictions and limitations as it may deem necessary and appropriate
to assure compliance with such applicable securities laws.
10. Shares Subject to the Plan.
--------------------------
(a) The Common Shares to be issued and delivered by the
Company upon the exercise of options under the Plan may be either
authorized but unissued shares or treasury shares of the Company.
(b) The aggregate number of Common Shares of the Company
which may be issued under the Plan shall not exceed 100,000 shares;
subject, however, to the adjustment provided in Paragraph 11 in the
event of stock splits, stock dividends, exchanges of shares or the
like occurring after the effective date of this Plan.
(c) common Shares covered by an option which is no longer
exercisable with respect to such shares shall again be available for
issuance under this Plan.
11. Share Adjustments. In the event there is any change in the
-----------------
Company's Common Shares resulting from stock splits, stock dividends,
combinations or exchanges of shares, or other similar capital
adjustments, equitable proportionate adjustments shall automatically
be made without further action by the Board in (i) the number of
Common Shares available for award under this Plan, (ii) the number of
common Shares subject to options granted under this Plan, and (iii)
the option price of options granted under this Plan.
12. Amendment or Termination. The Board may terminate this Plan
------------------------
at any time, and may amend the Plan at any time or from time to time;
provided, however, that the Plan shall not be amended more than once
every six months, other than to comport with changes in the Internal
Revenue Code, the Employee Retirement Income security Act, or the
rules thereunder; and further provided that any amendment that would
increase the aggregate number of Common Shares that may be issued
under the Plan, materially increase the benefits accruing to
Participants under
4
<PAGE>
this Plan, or materially modify the requirements as to eligibility for
participation in the Plan shall be subject to the approval of the
Company stockholders to the extent required by rule 16b-3 wider the
securities Exchange Act of 1934, as amended, or any other governing
rules or regulations except that such increase or modification that my
result from adjustments authorized by Paragraph 11 does not require
such approval. If the Plan is terminated, any unexercised option shall
continue to be exercisable in accordance with its terms.
l3. Company Responsibility. All expenses of this Plan, including
----------------------
the cost of maintaining records, shall be borne by the Company.
14. Stockholders Approval. This Plan must be approved by the
---------------------
Company's stockholders within twelve (12) months of the Effective Date
and if not so approved, this Plan and all options granted hereunder
shall be void from their inception.
15. Implied Consent. Every Participant, by acceptance of an
---------------
award under this Plan, shall be deemed to have consented to be bound,
on his or her own behalf and on behalf of his or her heirs, assigns,
and legal representatives, by all of the terms and conditions of this
Plan.
16. Rhode Island law to Govern. This Plan shall be construed and
--------------------------
administered in accordance with and governed by the laws of the State
of Rhode Island.
IN WITNESS WHEREOF, the Company has caused this Plan to be
executed by its duly authorized officer as of the 15th day of March,
1995.
NETWORK SIX, INC.
By: /s/ Richard F. Hawkins
-------------------
Title: President
------------
5
<PAGE>
FIRST AMENDMENT TO THE NETWORK SIX, INC.
---------------------------------------
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
---------------------------------------
Pursuant to the resolution of the Board of Directors dated
May 25, 1995, the Network Six, Inc. Non-Employee Director Stock
option Plan is hereby amended with respect to Paragraph 7
thereof to allow the assignment to Saugatuck Associates II,
Inc. of any and all options and rights thereunder which may be
granted to Owen Stevenson Crihfield under the Plan.
IN WITNESS WHEREOF, this Amendment has been signed by the
Company's president as of the 25th day of May, 1995.
NETWORK SIX, INC.
By: /s/ Richard F. Hawkins
----------------------
Title: President
--------------------
<PAGE>
STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS
DEPARTMENT OF HEALTH
Safe and Healthy Lives in Safe and Healthy Communities
AGREEMENT
---------
BETWEEN: Rhode Island Department of Health
Division of Family Health
3 Capitol Hill, Room 302
Providence, Rhode Island 02908-5097
AND: Network Six, Inc.
475 Kilvert Street
Warwick, Rhode Island 02886
RELATING TO: IMPLEMENTATION OF THE RHODE ISLAND
CHILDREN'S ACCESS PROGRAM
Work and activities by NETWORK SIX, INC. to be undertaken in
accordance with the attached APPENDIX I Terms and Conditions and
APPENDIX II Work Program Specification in consideration of
compensation to be made by the Rhode Island Department of Health (RI
DH) as set forth in APPENDIX III Budget.
This contract is not valid or legally binding until signed
by both parties and the purchase order has been issued by the Office
of Purchases. Do not perform any work on this contract until the
purchase order is issued.
APPROVED:
RHODE ISLAND DEPARTMENT OF HEALTH NETWORK SIX, INC.
/s/ Patricia A. Nolan /s/ Kenneth C. Kirsch
------------------------------ --------------------
Patricia A. Nolan, M.D., M.P.H. Kenneth C. Kirsch, President
Director of Health CEO
DATE: 5/28/96 DATE: 5/15/96
CANNON BUILDING, Three Capitol Hill, Providence, Rhode Island 02908-5097
Telecommunication Device for the Deaf (TDD): 277-2506
<PAGE>
APPENDIX I
A. Specific Terms and Conditions
<TABLE>
<S> <C> <C>
1. Contractor Network Six, Inc.
---------------------------
Address 475 Kilvert Street
---------------------------
Warwick RI 02886
---------------------------
FEIN # 05-0366090
2. Dates Starting Date June 1, 1996
---------------------------
Termination Date June 30, 1998
---------------------------
3. Contract Officer Amy Zimmerman, Chief
---------------------------
(for the Department Children's Preventive Services
---------------------------
of Health) Division of Family Health
---------------------------
4. Project Officer Harvey Levin
---------------------------
(for the Contractor) NSI
---------------------------
5. Contract Amount $1 580,418.00
6. Special Conditions
</TABLE>
1. There will be a ten percent hold back on the dollars attributed
to each task for the delivery of professional services, based on
the successful completion of the task and fulfillment of the
deliverable schedule. Phase two and Phase four deliverables include
hardware costs for which the 10% holdback does not apply. The hold
back for phases one through nine will be paid upon successful
completion of phase 9. The holdback on phase ten will be paid upon
successful completion of phase 10.
2. NSI will bill not more than monthly for accepted and approved
deliverables within those months.
3. All terms and conditions stated in the RFP (section 8, and which
were unconditionally accepted by NSI as part of their proposal) are
considered to be legal and binding for this contract.
4. NSI will verify all plans to purchase hardware and software,
except for the development environment, with the RIDH Project
Officer prior to placing orders and purchasing equipment.
5. Any combination of optional services may be requested by the
RIDH at any time. Determination for the need for optional services
may not be made until close to the completion of the project. If
optional services are requested, the purchase order will be
increased to cover the costs of the optional services.
<PAGE>
6. Change Requests for this contract will follow the procedures
outlined in Section 8 of the RFP. If additional funds are necessary
as a result of the change request; the purchase order will be
increased to cover those costs.
<PAGE>
APPENDIX I (continued)
Article 1
- ---------
Parties to Agreement. This Agreement is made by and between the Rhode Island
- --------------------
Department of Health (RIDH) and the party specified in APPENDIX I Al (the
Contractor) .
Article 2
- ---------
Period of Performance. This Agreement will be effective on the starting date as
- ---------------------
specified in APPENDIX I A2 and, unless renewed or extended, will expire on the
termination date as specified in APPENDIX I A2. It is understood and agreed by
and between the parties that this Agreement covers work and services to be
provided by the Contractor for the period specified in APPENDIX I AZ.
Article 3
- ---------
Modification of Agreement. This Agreement may be amended in accordance with
- -------------------------
Article 11 herein and/or may be amended or extended by mutual written consent
provided that such consent may not be unreasonably withheld, and further
provided, that there is a fiscal appropriation for any extension.
Article 4
- ---------
Contract Officer. The contractor agrees to maintain close and continuing
- ----------------
communication with the RIDH contract officer, as specified in APPENDIX I A3,
throughout the performance of work and services undertaken under the terms of
the Agreement. The contract officer is responsible for authorizing all payments
made by RIDH to the Contractor under this Agreement.
Article 5
- ---------
Project Officer. The project officer, as specified in APPENDIX I A4, is
- ---------------
responsible for coordinating and reporting work performed by the Contractor
under this Agreement.
Article 6
- ---------
Delays. Whenever the Contractor has knowledge that any actual or potential
- ------
situation is delaying, or tends to delay the timely performance of work under
this Agreement, the Contractor shall immediately give written notice thereof,
including all relevant information with respect thereto, to the RIDH.
Article 7
- ---------
Funding. This is a cost reimbursement Agreement. In consideration of work and
- -------
services performed by the Contractor in accordance with APPENDIX II of this
Agreement, RIDH agrees to reimburse the Contractor for allowable costs incurred
by the Contractor under this Agreement in an amount not to exceed the amount
specified in APPENDIX I A5 and in accordance with estimated expenditures as set
forth in APPENDIX III Budget. Payments shall be made under this Agreement after
costs have been incurred. Requests for reimbursement for expenditures, supported
by valid invoices, shall be submitted to RIDH by the Contractor not more often
than once per month throughout the duration of this Agreement.
All payments are provisional pending final audit by appropriate state and/or
federal officials.
Article 8
- ---------
Federal Funding Provisions. Funds made available to the Contractor under this
- --------------------------
Agreement are or may be derived from federal funds made available to RIDH. The
<PAGE>
provisions of Article 7 and APPENDIX III notwithstanding, the Contractor agrees
to make claims for reimbursement under this Agreement in accordance with federal
policies governing allowable costs to be charged against federal grants. The
Contractor agrees that no expenditures claimed for reimbursement under this
Agreement will be claimed for reimbursement under any other agreement, grant, or
contract that the Contractor may hold which provides funding from state or
federal sources. The Contractor further agrees to be liable for audit exceptions
that may arise from examination of expenditures: (a) claimed by the Contractor
for reimbursement under this Agreement, and/or (b) submitted by the Contractor
in meeting any cost participation requirements.
In executing this Agreement the Contractor is serving as grantee or independent
contractor under federal grant or contract between the federal government and
RIDH. The master grant, award or cooperative agreement made to RIDH by the
federal government governing activities under this Agreement Is, therefore, made
a part of this Agreement. The Contractor specifically agrees to abide by all
applicable federal requirements for grantees, contractors, or independent
contractors receiving federal funds including, but not limited to, those
requirements set forth or referenced in the master grant or contract relating to
this Agreement and in the following documents which are incorporated by
reference hereto: 45CFR Part 74 (Administration of Grants); DHHS Publication
OASH 90-50,000 (Grants Policy Statement) Rev. 10/90; OMB Circular A-110
(Uniform Administrative Requirements for Grants and Agreements with Institutions
of Higher Education, Hospitals and other Nonprofit Organizations); and A-133
(Audits of Institutions of Higher Education and Other Nonprofit Organizations).
It is understood and agreed in the event less than full federal funding or other
funding is received by RIDH due to failure of the Contractor to comply with the
terms of this Agreement, the Contractor is liable to the State of Rhode Island
for an amount equal to the amount of the denied funding. The amount of the
denied funding shall be payable upon demand of RIDH.
Article 9
- ---------
Prepayment. Articles 7 and 8 notwithstanding, prepayment will be allowed
- ----------
provided that it is requested and approved under the appropriate mechanism and
subsequently accounted for with proper documentation.
Article 10
- ----------
Withholding of Payments. The Contractor shall, in a satisfactory and proper
- -----------------------
manner is determined in the sole and exclusive discretion of RIDH, complete all
obligations and duties as stipulated in this Agreement. Failure of the
Contractor to perform or deliver required work, services, or reports under this
Agreement may result in the withholding of payments by RIDH to the Contractor.
The Contractor understands and agrees that failure to meet its requirements
under this Agreement may result in withdrawal of other state or federal funds
that may have been made available to the Contractor, at the option of RIDH.
Article II
- ----------
Termination of Agreement. This Agreement may be terminated upon fifteen (15)
- ------------------------
days written notice by either party. In the event of termination by either
party, all property and finished or unfinished documents, data, studies, and
reports prepared by the Contractor under this Agreement, shall, at the option of
RIDH, become its property. Notwithstanding the above, the Contractor shall not
<PAGE>
be relieved of liability to RIDH for damages sustained by RIDH by virtue of any
breach of this Agreement by the Contractor; and RIDH may withhold payment to the
Contractor for the purpose of setoff until such time as the exact amount of
damages due to RIDH from the Contractor is determined. Notice of the effective
date of termination will include the reports that must be completed. The above
mentioned fifteen (15) day written notice notwithstanding, RIDH expressly
reserves the unilateral right to terminate, amend and/or reduce services and
payments under this Agreement, effective immediately upon notice to the
Contractor, in the event that the funding underlying the participation of RIDH
is limited or curtailed. Further, the Contractor agrees to hold RIDH harmless
from any and all liability which may arise under this Agreement.
In the event of termination by either party, final payment by RIDH to the
Contractor for work and services provided by the Contractor under this Agreement
up to the effective date of termination shall be made in proportion to work
completed and allowable expenses incurred, in accordance with the principles of
cost reimbursement, agreements and contracts.
Article 12
- ----------
Recordkeeping/Inspection of Records and Reports. The Contractor agrees to keep
- -----------------------------------------------
discrete financial records of expenditures made under this Agreement, including
time records of employees whose work is to be charged in whole or in part to
this Agreement; to maintain such records in accordance with standard accounting
practices; to make such records available on request to appropriate state and/or
federal officials for examination or audit, ensure that audits are conducted in
accordance with OMB Circulars A-110 and A-133 if applicable, and to keep such
records on file until final audit of RIDH records under the federal grant
funding of this Agreement, or until such time as federal provisions permit the
records to be discarded. All management correspondences that accompany audit
reports must be sent to RIDH. If a client served by this contract is charged
for service, the contractor must report this income.
The Contractor shall submit to RIDH a final expenditure report by line item or
in such other detail as RIDH may require, such report to be submitted not later
than forty-five (45) days. following termination of this Agreement. The
Contractor further agrees to provide such special reports and data as may be
required by the contract officer or by appropriate state or federal agencies.
Article 13
- ----------
On-Site Inspection. The Contractor agrees to permit on-site monitoring
- -------------------
evaluation, and inspection of all activities related to this Agreement by
officials of the RIDH, its designee, and, where appropriate, the federal
government.
Article 14
- ----------
Partnership. It is understood and agreed that nothing herein is intended or
- -----------
should be construed in any manner as creating or establishing the legal relation
of partnership between the parties hereto, or as constituting the employees,
agents, or representatives of the Contractor included in this Agreement as
employees, agents, or representatives of RIDH.
<PAGE>
Article 15
- ----------
Nonliability for Personal Injuries. The Contractor will indemnify and hold the
- ----------------------------------
State of Rhode Island, RIDH, and its officials harmless against any claims for
injury or damage of any kind to persons or property occurring or arising during
the period of this Agreement.
Article 16
- ----------
Severability. If any provision of this Agreement is held invalid, the remainder
- ------------
of this Agreement shall not be affected thereby if such remainder would then
continue to conform to the terms and requirements of applicable law.
Article 17
- ----------
Proprietorship. All equipment, property, finished or unfinished documents,
- --------------
computer software, data studies, and reports prepared or acquired by the
Contractor under this Agreement and for which reimbursement was claimed under
this Agreement shall, at the option of RIDH, become the property of RIDH. The
Contractor further understands and agrees to abide by federal regulations,
requirements, and policies governing the disposition of equipment or property
purchased with funds made available to the Contractor under this Agreement or
with funds identified by the Contractor as matching expenditures under this
Agreement. The Contractor agrees to maintain an equipment inventory list under
this Agreement and to identify related equipment properly for inspection.
Article 18
- ----------
Copyright. No reports or other documents produced in whole or in part under
- ---------
this Agreement shall be the subject of an application for copyright by or on
behalf of the Contractor.
Article 19
- -----------
Publicity. The Contractor will give due credit to the RIDH and the appropriate
- ---------
state and/or federal agencies. RIDH will be credited on all media
announcements, billboards, and educational materials produced or developed under
the scope of this Agreement.
Article 20
- ----------
Interest of Contractor. The Contractor covenants that it presently has no
- ----------------------
pecuniary interest and shall not acquire any such interest, direct or indirect,
which would conflict in any manner or degree with the performance of services
required to be performed under this Agreement. The Contractor further covenants
that in the performance of this Agreement no person having any such interest
shall be employed.
Article 21
- ----------
Civil Rights. The Contractor agrees to abide by applicable provisions of Title
- ------------
VI of the Civil Rights Act of 1964, as amended; Section 504 of the
Rehabilitation Act of 1973; the Age Discrimination Act of 1975 (P.L. 94-135,
Title III); the Americans with Disability Act of 1990 (P.L. 101-336); all other
applicable federal and state laws relating to equal employment
opportunities; State Executive Order No. 19 dated 15 December 1977, State
Executive Order No. 80-9 dated 24 March 1980, and State Executive Order No. 85-
11. The Contractor asserts that no person shall, on the grounds of race, color,
national origin, religion, sex, age, political belief, sexual preference, or
handicap, be excluded from participation in, be denied the benefits of, or be
subjected to discrimination
<PAGE>
under any program or activities undertaken in behalf of this Agreement. In
addition, the Contractor agrees to establish a procedure for complaint from any
person who believes that such discrimination is being practiced in any activity
relating to this Agreement.
Article 22
- ----------
Drug Free Workplace Policy. The Contractor agrees to comply with the
- ---------------------------
requirements of the Governor's Executive Order No.. 91-14, the State's Drug Free
Workplace Policy, and the Federal Omnibus Drug Abuse Act of 1988. The Contractor
acknowledges that a violation of the Drug Free Workplace Policy may, at RIDH's
option, result in termination of this Agreement.
Article 23
- ----------
Subcontracts. Any proposed subcontract under this Agreement shall be submitted
- ------------
to the Rhode Island Department of Health contract officer for approval prior to
execution. Failure to comply with the provisions of this article could result
in denial of reimbursement for such nonapproved subcontractual services.
Article 24
- ----------
Confidentiality of Department of Health Records. The contractor agrees to abide
- -----------------------------------------------
all federal and state laws and regulations governing the confidentiality of
information to which he/she may have access pursuant to the terms of this
Agreement. In addition, the contractor agrees to comply with the Department of
Health Confidentiality Policy recognizing a person's basic right to privacy and
confidentiality of personal information. ("Confidential records" are the
records as defined in Section 38-2-3-(d) (1)-(1-19) of the General Laws,
entitled "Access to Public Records" and described in "Access to Department of
Health Records.") Failure to abide by the Department's Confidentiality Policy
will result in termination of the Agreement.
Article 25
- ----------
Lobbying. Section 1352. Public Law 101-121, requires subcontractors paid
- --------
through a federal award that exceeds $100,000 to certify that they have not used
appropriated funds for payments to lobbyists. If any funds are used to pay
lobbyists, even if they are from sources other than this award, the
subcontractor must submit a disclosure form to RIDH with the name, address,
payment details and purpose of any agreements with lobbyists.
Article 26
- ----------
Controller's Approval. This Agreement shall take effect upon the issuance of a
- ---------------------
purchase order or miscellaneous encumbrance by the State Controller.
Revised February 1994
<PAGE>
AGREEMENT NO.
-----------------
FROM THE
STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS
DEPARTMENT OF HUMAN SERVICES
TO
Network Six, Inc.
----------------
NAME OF PROVIDER
<PAGE>
AGREEMENT
This agreement, including attached addenda, is hereby entered into this first
day of July 1995, by and between the Rhode Island Department of Human Services,
hereinafter referred to as the DEPARTMENT, and Network Six, Inc. hereinafter
referred to as the PROVIDER.
Whereas, the DEPARTMENT desires to engage the PROVIDER to offer services and
activities further described in Addendum I - Program.
--------------------
Now, therefore, the parties hereto do mutually agree as follows:
PAR. 1. PERFORMANCE
- -------------------
The PROVIDER shall in a satisfactory manner, perform all
obligations and duties as contained in Addendum I - Program,
--------------------
hereby incorporated by reference into this agreement. Disputes
concerning PROVIDER's performance shall be addressed according to
the procedure defined in Par. 22 - Settlement of Disputes.
PAR. 2. TIME OF PERFORMANCE
- ---------------------------
The PROVIDER shall commence performance of this Agreement on the
first day of July 1996, and shall complete performance no later
than the thirtieth day of June 1997, unless terminated prior to
that date by other provisions of this Agreement.
PAR. 3. BUDGET
- --------------
Total payment for services to be provided under this Agreement
shall not exceed $2,569,920.00 for the period July 1, 1996
through June 30,1997. As detailed in the budget attached hereto
and incorporated by reference in Addendum II - Budget.
--------------------
Expenditures exceeding budgeted line-item categories
2
<PAGE>
by ten percent (10%) shall not be authorized unless prior written
approval is first obtained pursuant to Par. 7. - Changes of this
--------------------
Agreement, subject to the maximum amount of this Agreement as
above stated.
PAR. 4. METHOD OF PAYMENTS AND REPORTS
- --------------------------------------
The DEPARTMENT will make payments to the PROVIDER in accordance
with provisions of Addendum III - Payments and Reports Schedule
--------------------------------------------
attached hereto. The PROVIDER will complete and forward narrative
and fiscal reports as per Addendum III - Payments and Reports
-----------------------------------
Schedule.
--------
PAR. 5. TERMINATION OF AGREEMENT
- --------------------------------
This Contract shall be subject to termination under any of the
following conditions:
a. Mutual Agreement
----------------
The contracting parties mutually agree in writing to
termination.
b. Default by the PROVIDER
-----------------------
The Rhode Island Department of Human Services may, by written
notice to the PROVIDER signed by the Contract Administrator,
terminate the PROVIDER's right to proceed as to the contract
if the PROVIDER:
1. materially fails to perform the services within the time
specified or any extension thereof, or
2. so fails to make progress as to materially endanger
performance of the contract in accordance with its terms,
or
3. otherwise fails to perform any other material provisions
of the contract; provided, however, that in any such event
the Rhode Island Department of Human Services, through the
Contract Administrator, shall give the PROVlDER at least
ninety (90) days prior written notice. Termination at the
option of the Rhode Island Department of Human Services
shall be effective ninety (90 days) after receipt of such
notice, unless the
3
<PAGE>
PROVlDER shall have corrected said failure(s) within thirty
(30) days after receipt by the PROVlDER of such written
notice; any such failure to perform which, in the exercise
of due diligence, cannot be cured in such thirty (30) day
period shall not be deemed a default so long as the
PROVlDER shall within such period commence and thereafter
continue diligently to cure each failure to perform.
c. Termination in the Interest of the Department of Human Services The
---------------------------------------------------------------
Contract Administrator, by ninety (90) days prior written notice,
may terminate performance of work under this contract, in whole or
in part, when it is in the best interest of the Rhode Island
Department of Human Services to do so. In the event of such
termination, the PROVIDER will be compensated for all work
performed prior to such termination date and for all reasonable
costs and liabilities to which the PROVlDER has, out of necessity,
obligated itself as a result of this contract which are applicable
to any period after such termination up to the term of the contract
as determined in accordance with the applicable provision of 41
Code of Federal Regulations Section 108. Payment to PROVlDER under
this clause shall include reasonable profit on all reasonable costs
and liabilities described herein. The PROVlDER shall use its best
efforts to minimize the cost to the Rhode Island Department of
Human Services.
d. Default by the Department of Human Services
-------------------------------------------
This contract may be terminated by the PROVIDER, for cause, upon
the failure of the Rhode Island Department of Human Services to
perform any material provision required of it by the contract
provided the PROVlDER shall give the Contract Administrator at
least ninety (90) days prior written notice. Termination, at the
option of the PROVlDER shall be effective ninety (90) days after
receipt of such notice, unless the Rhode Island Department of Human
Services shall have corrected such failure(s) thirty (30) days
after the receipt by the Contract Administrator of such written
notice; any failure which, in the exercise of due diligence, cannot
be cured
4
<PAGE>
within such thirty (30) day period shall not be deemed a default so
long as the Rhode Island Department of Human Services shall within
such period commence and thereafter continue diligently to cure
such failure. The competency of members of Rhode Island Department
of Human Services' staff shall not be a reason for finding the DHS
in default.
e. Availability of Funds
---------------------
It is understood and agreed by the parties hereto that all
obligations of the Rhode Island Department of Human Services,
including the continuance of payments hereunder, are contingent
upon the availability and continued appropriation of State and
Federal funds, and in no event shall the Rhode Island Department of
Human Services be liable for any payments hereunder in excess of
such available appropriated and allocated funds. In the event that
the amount of any available or appropriated and allocated funds
provided by the State or Federal sources for the purchase of
services hereunder shall be reduced, terminated or shall not be
continued at an aggregate level sufficient to allow for the
purchase of the specified amount of services to be purchased
hereunder for any reason whatsoever, the Rhode Island Department of
Human Services shall notify the PROVlDER of such reduction of funds
available and the Rhode Island Department of Human Services shall
be entitled to reduce its commitment hereunder as it deems
necessary.
None of the provisions of this paragraph shall entitle the PROVlDER
to compensation for anticipated profits for unperformed work.
PAR. 6. RESPONSIBILITIES UPON TERMINATION
- -----------------------------------------
If the contract is terminated for cause, the party terminating
shall be reimbursed by the other party for all reasonable costs
and liabilities which are applicable to any period after such
termination and for all excess costs which such party reasonably
incurs as a direct result of such termination; provided, however,
that:
5
<PAGE>
a. in the event of termination for default, the PROVIDER shall
not receive reimbursement for any loss of anticipated profits;
b. both parties hereto shall use best efforts to minimize the costs of
termination, and
c. in any event, the period during which such costs shall be computed
shall not extend beyond the then current date of expiration of the
contract and such costs shall not duplicate any payments made for
completed milestones and deliverables, nor exceed the amounts which
would otherwise have been due had they been completed.
Upon termination or expiration of the contract, the PROVlDER shall, if
requested by the Contract Administrator at least ninety (90) days prior
to such termination or expiration, provide reasonable training for the
Rhode Island Department of Human Services' personnel and/or continued
performance of the services specified herein for up to six (6)
additional thirty (30) day periods commencing with the date of
termination or expiration and continuing until given thirty days notice
by the Contract Administrator to discontinue such training and/or
services. For providing such training or continued performance after the
term of the contract, the Rhode Island Department of Human Services
shall pay the PROVlDER at mutually agreed rates for personnel and
supplies used in providing such training and/or services.
PAR. 7. CHANGES
- ---------------
The DEPARTMENT may permit changes in the scope of services, time of
performance, or approved budget of the PROVIDER to be performed
hereunder. Such changes, which are mutually agreed upon by the
DEPARTMENT and PROVIDER, must be in writing and shall be made a part of
the Agreement by numerically consecutive amendment.
6
<PAGE>
PAR. 8. SUBCONTRACTS
- --------------------
It is expressly agreed the PROVlDER shall not enter into any
subcontracts to perform the services listed in ADDENDUM I -
------------
Program or any other obligations to be performed by the PROVlDER
-------
pursuant to this Agreement unless approved in writing by the
Department, such approval not to be unreasonably withheld.
PAR. 9. NONLIABILITY FOR PERSONAL INJURIES
- ------------------------------------------
The PROVlDER will hold the State of Rhode Island and its officials harmless
against claims for personal injuries of any kind which the staff of
PROVlDER may suffer directly or may cause to be suffered by any person or
persons in the performance of this contract.
PAR. 10. NONDISCRIMINATION IN EMPLOYMENT AND SERVICES
- -----------------------------------------------------
The PROVlDER agrees to comply with the requirements of Title VI of the
Civil Rights Act of 1964 (42 USC 2000d et seq.); Section 504 of the
Rehabilitation Act of 1973, as amended (29 USC 794); Title IX of the
Education Amendments of 1972 (20 USC 1681 et seq.); the United States
Department of Health and Human Services Regulations found in 45 CFR, parts
80 and 84; and the United States Department of Education Implementing
Regulations (34 CFR, Parts 104 and 106); which prohibit discrimination on
the basis of race, color, national origin, handicap, or sex, in acceptance
for or provision of services, employment, or treatment in educational or
other programs or activities.
The PROVlDER acknowledges receipt of Addendum V - Notice to Department of
------------------------------------
Human Services Service Providers of their Responsibilities under Title VI
-------------------------------------------------------------------------
of the Civil Rights Act of 1964 and Addendum VI - Notice to Department of
------------------------------- -------------------------------------
Human Services Service Providers of their Responsibilities under Section
------------------------------------------------------------------------
504 of the Rehabilitation Act of 1973 incorporated herein by reference and
-------------------------------------
made part of this Agreement.
The PROVIDER agrees to comply with all other provisions applicable to law,
including the Governor's Executive Order No.85-11, which prohibits
discrimination on the basis of race, color, religion, sex, age, national
origin, political belief, sexual preference, or handicap. The PROVlDER also
agrees to comply with the requirements of the Department of Human Services
for safeguarding of client information.
Failure to comply with this item may be the basis for cancellation of this
Agreement.
7
<PAGE>
PAR. 11. ASSIGNABILITY
- ----------------------
The PROVIDER shall not assign any interest in this Agreement
(whether by assignment or novation) without the prior written
consent of the DEPARTMENT thereto; provided, however, that claims
-----------------
or money due or to become due to the PROVIDER from the DEPARTMENT under
this Agreement may be assigned to a bank, trust company, or other financial
institution without such approval. Notice of any such assignment or
transfer shall be furnished promptly to the DEPARTMENT.
PAR. 12. COPYRIGHTS
- -------------------
The PROVlDER is free to copyright any books, publications, or other
copyrightable materials developed in the course of or under this agreement,
but the DEPARTMENT shall reserve a royalty-free, nonexclusive, and
irrevocable right to reproduce, publish, or otherwise use, and to authorize
others to use, the work for government purposes.
PAR. 13. GOVERNING LAW
- ----------------------
This Agreement is deemed executed and delivered in the City of Cranston,
State of Rhode Island, and all questions arising out of or under this
Agreement shall be governed by the laws of the State of Rhode Island.
8
<PAGE>
PAR. 14. PARTNERSHIP
- --------------------
It is understood and agreed that nothing herein is intended or should be
construed in any manner as creating or establishing the legal relation of
partnership between the parties hereto, or as constituting the employees,
agents, or representatives of the PROVIDER included in this Agreement as
employees, agents, or representatives of the Department of Human Services.
PAR. 15. ACCESSIBILITY AND RETENTION OF RECORDS
- ---- ------------------------------------------
The PROVIDER agrees to make accessible and to maintain all fiscal and
activity records relating to this Agreement to State and/or Federal
officials. This is also intended to include any auditing, monitoring, and
evaluation procedures, including on-site visits, performed individually or
jointly, by State or Federal officials or their agents. If such records are
maintained out of the State of Rhode Island, such records shall be made
accessible by the PROVIDER at a Rhode Island location. Minutes of Board of
Directors meetings, fiscal records, and narrative records pertaining to
activities performed will be retained for audit purposes for a period of at
least three (3) years following the submission of the final expenditure
report for this Agreement or, if audit findings have not been received at
the end of the three (3) years, the records shall be retained until
resolution of the audit findings are made.
PAR. 16. SEVERABILITY
- ---------------------
If any provision of this Agreement is held invalid, the remainder of this
Agreement shall not be affected thereby if such remainder would then
continue to conform to the terms and requirements of applicable law.
PAR. 17. DRUG FREE WORK PLACE POLICY
- ------------------------------------
The PROVlDER agrees to comply with the requirements of the Governor's
Executive Order No. 89-14 and the Federal Anti-Drug Abuse Act of 1988. As a
condition of contracting with the State of Rhode Island, the PROVIDER
hereby
9
<PAGE>
agrees to abide by Addendum VII - The State's Drug Free Work Place Policy,
------------------------------------------------------
and in accordance therewith has executed Addendum VIII - Drug Free Work
------------------------------
Place Policy Contractor Certificate of Compliance.
-------------------------------------------------
Furthermore, the PROVIDER agrees to submit to DHS any report or forms which
may from time-to-time be required to determine the PROVIDER's compliance
with this policy.
The PROVlDER acknowledges that a violation of the Drug Free Work Place
Policy may, at DHS' option, result in termination of this Agreement.
<TABLE>
<CAPTION>
PAR. 18. ATTACHMENTS
- ------------------------------------------------------------------------------------------------------------
Attached hereto and made part of this Agreement are the following Addeda:
<S> <C> <C>
ADDENDUM I. Program
ADDENDUM II. Budget
ADDENDUM III. Payments and Report Schedule
ADDENDUM IV. N/A
ADDENDUM V. Notice to Department of Human Services
Service Providers of their Responsibilities
under Title VI of the Civil Rights Act of 1964
ADDENDUM VI Notice to Department of Human Services
Service Providers of their Responsibilities
under Section 504 of the Rehabilitation Act of 1973
ADDENDUM VII. Drug Free Work Place Policy
ADDENDUM VIII. Contractor Certificate of Compliance
</TABLE>
PAR. 19. SETTLEMENT OF DISPUTES
- -------------------------------
Any dispute concerning a question of fact arising under the contract which
is not disposed of by agreement between the DEPARTMENT's named liaison and
the PROVIDER's named liaison shall be decided by the following process:
10
<PAGE>
Step 1 - The DEPARTMENT's Project Manager and the PROVIDER's
Project Manager will attempt to resolve the issue at
hand.
Step 2 - If the Step 1 process does not result in resolution,
then the issue shall be resolved by a Committee of
three consisting of the Associate Director of
Management Services (DHS), the President of the
PROVIDER, and a mutually agreed to third party.
The Committee's decision shall be final and conclusive subject only to
whatever rights, if any, the PROVlDER may have pursuant to Rhode Island
law. In connection with any appeal to the Contract Administrator under this
paragraph, the PROVlDER shall be afforded an opportunity to be heard and to
offer evidence in support of its appeal. Pending final decision of a
dispute, the PROVlDER shall proceed diligently with the performance of the
contract in accordance with the Contract Administrator's direction.
PAR. 20. WORK REVIEWS
- ---------------------
The PROVlDER agrees that all work performed under this agreement may be
reviewed by the Office of Information Processing, Department of
Administration, State of Rhode Island.
11
<PAGE>
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE HEREUNDER SET THEIR
HANDS AS OF THE DATE FIRST ABOVE WRITTEN AND THE AGREEMENT MADE
LEGALLY BINDING AS FOLLOWS:
WITNESS: /s/ Cynthia V. Goula BY: /s/ Kenneth C. Kirsch
-------------------- ---------------------------
(SIGNATURE) CHAIR OR AUTHORIZED
AGENT/SIGNATURE PROVlDER
Cynthia V. Goula Kenneth C. Kirsch
- ----------------------- -----------------------
(TYPE OR PRINT NAME) (TYPE OR PRINT NAME)
WITNESS: /s/ Paul H. McLaughlin /s/ O.B. Kenerson
---------------------- ---------------------------
(SIGNATURE) (DEPARTMENT OF HUMAN SERVICES)
/s/ Paul H. McLaughlin O.B. Kenerson
--------------------------
(TYPE OR PRINT NAME)
WITNESS: /s/ John Young
----------------------- ---------------------------
(SIGNATURE) (DEPARTMENT OF ADMINISTRATION)
-----------------------
(TYPE OR PRINT NAME)
AGREEMENT NO.
12
<PAGE>
SUBCONTRACT AGREEMENT
---------------------
This Agreement is Entered into this
7th day of June, 1996
between
NETWORK SIX, INC.
a Rhode Island Corporation
with offices at 475 Kilvert Street, Warwick, RI 02886
(hereinafter referred to as "NSI")
and
COMPLETE BUSINESS SOLUTIONS, INC.
with offices at
32605 W. Twelve Mile; Suite 250
Farmington Hills, MI 48334
(hereinafter referred to as "CBSI")
WHEREAS, NSI desires to retain the services of CBSI as specified by the
attached subcontractor Statement of Work, and
WHEREAS, CBSI desires to render certain services to NSI, as specified by
the attached subcontractor Statement of Work,
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, NSI and CBSI hereby agree as follows:
1. CBSI agrees to carry out all work in good faith and in accordance with
the Statement Of Work (Attachment A) and in relation to the time
frames specified in the Statement Of Work. CBSI agrees not to assign
its rights hereunder or any interest herein without the written
consent of NSI.
2. NSI shall provide evidence to CBSI, in the form of a letter signed by
the State of Hawaii and NSI attached hereto as Attachment D, that the
State of Hawaii has accepted the following irrevocable payment
instructions:
NSI shall be responsible for invoicing the State Of Hawaii on behalf
of CBSI and for securing tidy payment for CBSI directly tom the State
of Hawaii under this subcontract Payment shall be made in the amounts
and on the dates (assuring the completion of deliverables) set forth
in the Statement Of Work Section XI. Invoices shall indicate that the
State of Hawaii shall designate NSI us the payee and payment shall be
made either by check to the following address:
Complete Business Solutions, Inc.
32605 W. Twelve Mile Road, Suite 250
Farmington Hills, MI 48334
Attn: Tim Manney
or by wire transfer to NBD Bank, Account #3776084. NSI understands and
agrees that such invoice payments will be deposited into NBD Bank,
Account #3776084 in accordance wit the banking resolution set forth
herein as
2
<PAGE>
Attachment C. If payments are made in accordance with the above
payment instructions, NSI shall be in default, subject to the notice
provisions of this agreement, for failure to meet the payment
obligations.
3. NSI will assign seven (7) qualified NSI employees to assist CBSI in
completing the Statement of Work. CBSI agrees to utilize each of the
NSI employees for 40 hours per week for the duration of the work. In
the event NSI personnel are not performing in the judgment of the
CBSI manager, such personnel shall be removed. NSI will have two (2)
weeks to find a replacement. NSI will invoice CBSI semi-monthly for
services based an actual hours worked and at the following rates:
a) Subsystem Team Leads (3) $90.00/hr
b) System Analysts (2) $65.00/hr
c) Analyst Designers (2) $65.00/hr
d) Office Manager (1) $40.00/hr
e) Administrative Assistant (1) $10.00/hr
CBSI will pay NSI invoices based OK approved timesheets within ten
(10) day. of the invoice date. Timesheets will be deemed to be
approved unless objected to in writing to NSI within two (2) business
days of their submission.
4. CBSI will also pay to NSI an overhead charge totaling $59,363 which
will be paid at the completion by CBSI of the work set forth in the
Statement of
3
<PAGE>
Work. If the work is not completed on time and within budget, the
amount of this overhead charge will be reduced to an amount negotiated
by CBSI and NSI.
5. NSI personnel assigned to this subcontract will complete and submit to
CBSI a weekly timesheet by the Monday- following each week in which
work on assigned tasks occurs. The timesheet must be approved by the
CBSI project manager.
6. CBSI personnel assigned to this subcontract will perform their
assigned tasks at the NSI project development facility in Honolulu,
Hawaii. CBSI shall pay NSI a facilities fee of $156,000, payable in
arrears in four (4) monthly installments of $39,000 commencing June
15, 1996 and NSI shall provide the following facilities, workspace and
equipment for CBSI employees as currently available at 650 Iwilei
Road, Suite 400, 89 well as all building maintenance and office
supplies necessary for CBSI employees to perform their work:
a) Existing office space and furniture
b) Existing PC workstations, servers and cabling
c) Existing telephone, fax, mail delivery and copying services.
CBSI will designate one individual to serve as NSI's primary -point of
contact.
4
<PAGE>
7. This agreement shall be effective upon receipt by NSI of a Notice to
Proceed by the State of Hawaii on the statement of Work (and approval
by the State of Hawaii of this subcontract between NSI and CBSI) and
shall remain in effect for the period sent forth in the Statement of
Work.
Either party, upon giving written notice to the other party, may
terminate this agreement:
i. if the other party or its employees, consultants or other
agents violate any material provision of this subcontract (which shall
include but not be limited to failure to timely make payment, which
shall extend to the obligation of the State of Hawaii to timely make
payment to CBSI in accordance with the payment provisions of this
subcontract) and the violation is not remedied within thirty (30) days
of the party's receipt of written notice of the violation (or remedied
within five (5) days in the case of failure to make timely payment);
and/or
ii. at any time in the event the other party terminates or suspends
its business, files for bankruptcy, is dissolved, goes into
liquidation, has a receiver appointed over any of its assets or
otherwise files for protection from under U.S. bankruptcy laws.
8. CBSI agrees to provide qualified technical and management personnel
with sufficient related experience to complete the Statement of Work.
5
<PAGE>
9. NSI and CBSI agree that CBSI's status in rendering service to the
terms hereof shall be that of independent contractor and not of an
employee or agent of NSI. CBSI further agrees to carry adequate public
liability and other appropriate forms of insurance.
10. CBSI shall maintain books, records, and documents in accordance with
accounting procedures and practices which sufficiently and properly
reflect all expenditures of funds provided by NSI under this contract.
11. CBSI shall assure that these records shall be subject at all times to
inspection, review, or audit by State personnel and other personnel
duly authorized by the CSEA, as well as by federal personnel.
12. CBSI shall retain all financial records, supporting documents,
statistical records, and any other documents pertinent to the
subcontract contract for a period of five (5) years after termination
of this subcontract, or if an audit has been initiated and audit
findings have not been resolved at the end of five (5) years, the
records shall be retained until resolution of the audit findings.
13. CBSI agrees to keep in confidence any confidential or proprietary data
relative to NSI business to which it may be given access, and to
return to NSI such
6
<PAGE>
materials as have been made available to CBSI in the course of its
services as subcontractor, whether proprietary or not.
14. During the period of this subcontract and for one year thereafter,
CBSI will not engage in negotiations with the Hawaii Child Support
Enforcement Agency (CSEA) or any other party for the purposes of
securing contracts, independent of NSI, which are directly related or
follow-on efforts to the requirements of this subcontract or to NSI's
contract with Hawaii for the KEIKI project, without the written
consent of NSI which shall not be unreasonably withheld. CBSI's
obligations under this paragraph 14 shall terminate in the event that
NSI breaches this Agreement or in the event that NSI has not paid in
full the past due balance stated in paragraph 19 on or before
September 30, 1996.
15. CBSI warrants that if CBSI refers to the KEIKI project in future
proposals, when describing CBSI firm qualifications, that CBSI will
clearly state CBSI was a "subcontractor to NSI" in this project.
16. In the event the NSI contract on which CBSI is working is
terminated for convenience of the government, lack of funds, or for
default, this subcontract agreement will also be terminated.
Notification to CBSI of such termination shall be provided by
telephone and confirmed in writing as promptly as practicable after
receipt by NSI. NSI shall be liable to CBSI for all sums
7
<PAGE>
owing on all deliverables per the Statement of Work, other than those
in connection with any claimed breach on the part of CBSI by NSI. In
the event a payment deliverable is not complete, fees shall be
determined on a basis consistent with NSI's contract with the State of
Hawaii.
17. CBSI agrees to the applicable terms and conditions of NSI's contract
with the State of Hawaii which are incorporated in this agreement as
Attachment B.
18. In the event of a dispute over the subcontract, the laws of the State
of Rhode Island shall prevail.
19. These terms and conditions will supersede the Subcontract Agreement
dated May 16, 1994 between CBSI and NSI, provided however that all
sums owing under that prior contract remain due and owing. The
parties expressly agree that the amount owing is $489,740.56 as of
March 31,1996 and in consideration of ibis Agreement NSI waives any
and all defenses to such obligation and any and all rights of set-off.
20. Any modification to these terms and conditions must be in writing and
signed by authorized representatives of NSI and CBSI.
8
<PAGE>
IN WITNESS WHEREOF, NSI and CBSI have entered this Agreement to be enacted
as of the date first written above.
NETWORK SIX, INC. COMPLETE BUSINESS SOLUTIONS, INC.
By: /s/ Kenneth C. Kirsch By:/s/ Tim Manney
Title: /s/ President & CEO Title: /s/ Chief Financial Officer
Witness: /s/ Dorothy M. Copolla Witness: /s/
9
<PAGE>
EXHIBIT 10.29
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated effective January 1. 1997,
(hereinafter called the "Effective Date"), between KENNETH C. KIRSCH
of Providence, Rhode Island (hereinafter called the "Employee"), and
NETWORK SIX, INC., a Rhode Island corporation (hereinafter called the
"Corporation"). This Agreement supersedes a prior Employment
Agreement between the parties dated effective January 1, 1996, which
is hereby agreed to be cancelled.
The Corporation desires to establish its right to the services of
the Employee in an executive capacity for a period from the Effective
Date until December 31, 1996, on the terms and conditions hereinafter
set forth, and the Employee is willing to accept such employment on
such terms and conditions.
In consideration of the premises and of the mutual agreements
hereinafter set forth, the parties hereto have agreed and do hereby
agree as follows:
1. The Corporation hereby employs the Employee, and the Employee
hereby agrees to serve the Corporation, as President and Chief
Executive Officer or in such other capacity as the Board of Directors
shall determine, for a period (hereinafter called the "Employment
Period") commencing on the Effective Date, and continuing through
December 31, 1998 or upon earlier termination of this Agreement.
<PAGE>
2. During the Employment Period, the Employee will devote his
full time, energy and skill to the services of the Corporation and the
promotion of its interests (three weeks paid vacation per year and
reasonable absences because of sickness excepted).
3. (a) During the term of this Agreement and for a period of
one (1) year from the date of the termination of this Agreement by the
Corporation for other than willful misconduct or dereliction of duty
which materially and adversely affects the Corporation, the Employee
will not, within the United States or its territories, directly or
indirectly, own, manage, operate, join, control, be employed, or
participate in the ownership, management, operation, or control of, or
be connected in any manner with any business of the type and character
engaged in by the Corporation at the time of such termination. In the
event of the termination of this Agreement by the Employee, other than
for breach of this Agreement by the Corporation, or by the Corporation
for willful misconduct or dereliction of duty which materially and
adversely affects the Corporation, the period of such non-competition
shall be two (2) years from the date of such termination.
(b) The Employee believes the area and period of time herein
specified are reasonable in view of the nature of the business in
which the Corporation is engaged. However, if such period and/or such
area should be adjudged unreasonable in any judicial proceedings then
the period of time shall be reduced by such number of months as are
deemed unreasonable and/or the area shall be reduced by the locations
deemed unreasonable, so that this Agreement may be enforced during
such period of time and in such area as is adjudged to be reasonable.
2
<PAGE>
(c) The Employee recognizes and agrees that the Corporation's
remedy at law for any breach of the provisions of this Agreement would
be inadequate, and he agrees that for breach of such provisions, the
Corporation shall, in addition to such other remedies as may be
available to it at law or in equity or as provided in this Agreement,
be entitled to injunctive relief and to enforce its rights by an
action for specific performance to the extent permitted by law.
4. (a) As remuneration for his services and promises to the
Corporation, the Corporation shall pay to the Employee a base annual
salary of $160,000 for each of 1997 and 1996. In addition, the
Employee may receive bonuses for 1997 up to 80% of his base pay and
for 1998 up to l00% of his base pay in the absolute discretion of the
Board of Directors. The amount of any bonuses will be based upon the
attainment of objectives established by the Board of Directors such
as, for example, new sales contracts, earnings before interest and
taxes (EBIT), stock price, removal of accountant's going concern
opinion, infusion of new equity, settlement of material litigation or
any other objectives established by the Board. Upon the execution of
this Agreement the Employee shall meet with the Board so that the
Board can establish the initial objectives with the input of the
3
<PAGE>
Employee. Thereafter, there may be additional such meetings for the
establishment of new objectives or reprioritizing the initial
objectives. If the Board does award bonuses hereunder, the bonus
amounts shall be paid not later than March 1, 1998 for the 1997
calendar year and not later than March 1, 1999 for the 1998 calendar
year. The Employee shall not be a member of the Corporation Profit
Sharing Plan. The Employee shall have full participation in any
medical and dental plans, 401(K) plans, pension plans, disability and
life insurance plans or similar plans as the Corporation may have from
time to time. It is understood that the Corporation does not
contribute to the 401(K) plan nor does it presently have a pension
plan.
(b) During the Employment Period, the Employee shall be
reimbursed by the Corporation for all business-related expenses
incurred by the Employee, including but not limited to marketing,
travel and entertainment expenses.
(c) During the Employment Period, the Corporation shall
provide the Employee with an automobile, including maintenance,
repairs, insurance, fuel and all costs incident thereto. Said
automobile shall be of the same nature and character as a Buick Park
Avenue model or equivalent. Should the Employee desire a more
expensive automobile, the Corporation shall provide it so long as the
Employee pays the difference in cost. At the end of the Employment
Period, and if this Agreement has not been terminated by the Employee
or by the Corporation for the reasons set forth in paragraph 5 hereof,
the Employee shall have the
4
<PAGE>
option to take over the lease if the automobile is leased by the
Corporation and such lease is assignable.
(d) During the Employment Period, the Corporation shall pay
the premium (or promptly reimburse the Employee if he pays the
premiums) for one million dollars of term insurance on the life of the
Employee with the Employee designating the beneficiary.
(e) As remuneration for his continued services hereunder, the
Employee will be granted options on February 3, 1997 for 18,750 shares
and on February 2, 1998 for an additional 18,750 shares under the
terms of the Corporation's 1993 Incentive Stock Option Plan. The
options will vest over a three year period from the date of grant,
one-third each year. The Employee acknowledges that without further
shareholder approval some or all of these options may be non-
qualified.
5. This Agreement may not be terminated by the Corporation
during the Employment Period for any reason whatsoever, except upon
the Employee's death or disability, or upon the Board of Directors'
reasonable determination that the Employee is not adequately
performing his duties, or for Employee's willful misconduct or
dereliction of duty which materially and adversely affects the
Corporation.
6. The Employee shall have the right to terminate this Agreement
upon providing, at least thirty (30) days in advance, formal written
notice to the Corporation of his intention to so terminate. Said
notice shall be sent by registered mail, return
5
<PAGE>
receipt requested, to the Corporation at its principal place of
business.
7. (a) If the Employee is terminated by the Corporation during
the Employment Period for other than willful misconduct or dereliction
of duty which materially and adversely affects the Corporation, then
the Employee shall be entitled to severance pay equal to the greater
of one year of base salary or the balance of base salary due under
this Agreement. Also, the Employee may elect to terminate this
Agreement (by giving the notice set forth in Paragraph 6), and be
entitled to severance pay, in the event of change of control of the
Corporation during the Employment Period. "Change of control" shall
mean a transaction resulting in a change of ownership of 51% or more
of the voting stock of the Corporation or a sale or transfer of
substantially all of the assets of the Corporation. Also, the Employee
may elect to terminate this Agreement by giving the aforesaid notice
and be entitled to severance pay in the event that during the
Employment Period the Corporation materially degradates his duties or
responsibilities or transfers him outside of the Rhode Island area.
Severance pay shall be paid in equal installments over a twelve (12)
month period after termination, on the regular pay days of the
Corporation, in arrears, or in a lump sum at the option of the
Employee, and less all required withholdings. In the event of
termination of this Agreement under any circumstance which gives rise
to severance pay, the Employee may, within thirty (30) days of such
termination,
6
<PAGE>
elect to convert any or all of his vested outstanding qualified
incentive stock options ("ISO's") to non-qualified stock options with
expiration dates ten (10) years from the date of the original ISO
grants. The Employee agrees that in consideration for this provision
for severance pay and the right to convert vested ISO's to non-
qualified stock options, he will assert no claims arising out of his
employment relationship, or the non-renewal or termination thereof,
against the Corporation or its officers, directors, stockholders,
employees, agents and representatives.
(b) If this Agreement is not renewed by the Employee and the
Corporation immediately after its expiration on December 31, 1998, the
Employee shall not be bound by any non-compete requirement, however,
the Corporation shall have the option to require a new period of non-
competition by the Employee, as set forth in paragraph 3 hereof, for
up to twelve (12) months from December 31, 1998 in return for the
payment to the Employee of severance pay of $13,333 per month for each
month of non-competition. The Corporation shall give written notice
to the Employee prior to January 1, 1999 of its exercise of this
option and the number of months of non-competition and severance pay.
8. As a condition to Employee's continued employment and his
rights and benefits under this Agreement, Employee agrees to purchase
from the Corporation a minimum of $25,000 and a maximum of $100,000 of
the Corporation's unregistered common stock prior to December 31,
1997. The price will be at 85% of the stock market price on the date
or dates of purchase. The actual dates
7
<PAGE>
of purchase will be determined by the Employee in conformance with all
securities and other laws. Also, Employee agrees to purchase in 1998
and prior to June 30, 1998 a minimum of $25,000 and a maximum of
$100,000 of the Corporation's unregistered common stock on the same
terms as to price and date of purchase.
9. The Employee shall not, during the Employment Period or any
time thereafter, divulge to others or use for his own benefit any
confidential or proprietary information relating to the business or
affairs of the Corporation.
10. This Agreement is personal in nature, and neither of the
parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder, except
that this Agreement shall be binding upon a successor corporation or
owner in the event of a merger, consolidation, or transfer or sale of
all or substantially all the assets or stock of the Corporation.
11. No modification, amendment or waiver of any of the
provisions of this Agreement shall be effective unless in writing
specifically referring hereto and signed by both of the parties.
12. This Agreement embodies the entire agreement of the parties
hereto with respect to the Employee's duties and obligations and his
compensation therefor.
13. All questions pertaining to the validity, construction,
execution and performance of this Agreement shall be construed in
accordance with and governed by the laws of the State of Rhode Island.
8
<PAGE>
14. The provisions of paragraphs 3, 7 and 9 of this Agreement
shall survive the expiration of this Agreement or the termination of
the employment provided for hereunder.
IN WITNESS WHEREOF, the said NETWORK SIX, INC., has caused this
instrument to be executed by its duly authorized officer, and Kenneth
C. Kirsch has hereunto signed this Agreement as of the day and year
first above written.
WITNESS: NETWORK SIX, INC.
/s/ Janet S. Cherms /s/ Dorothy M. Cipolla
------------------------------ -------------------------
/s/ Janet S. Cherms /s/ Kenneth C. Kirsch
------------------------------ -------------------------
KENNETH C. KIRSCH
9
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Shareholders of Network Six, Inc.:
We consent to the incorporation by references in the registration statement (No.
33-87208) on Form S-8 of Network Six, Inc. of our report dated March 28, 1997
relating to the balance sheets of Network Six, Inc. as of December 31, 1996 and
1995, and the related statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996,
which report appears in the December 31, 1996 annual report on Form 10-K of
Network Six, Inc.
Our report dated March 28, 1997, contains an explanatory paragraph that states
the Company became a defendant in significant litigation with the State of
Hawaii (the State) related to its system implementation engagement with the
State. Management of the Company and its attorneys are unable to predict with
any certainty the ultimate outcome of this litigation, including the probability
that this litigation will have a materially adverse impact on the Company's
financial position. At December 31, 1996, the Company had unbilled work-in-
progress and related receivable from the State of Hawaii of approximately $5
million, which exceeded stockholders' equity, and for which no allowance for
uncollectibility has been recorded. Additionally, the Company has not accrued
for any liabilities to the State which may result from this litigation. In
addition, the Company is involved in other less significant litigation related
to the Hawaii contract as discussed in Note 12, has suffered recurring losses,
and its bank financing agreement has expired. These circumstances raise
substantial doubt the entity's ability to continue as a going concern. The 1996
and 1995 financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
/s/ KPMG Peat Marwick LLP
Providence, Rhode Island
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 127,581
<SECURITIES> 0
<RECEIVABLES> 1,626,613
<ALLOWANCES> 97,856
<INVENTORY> 0
<CURRENT-ASSETS> 4,196,298
<PP&E> 835,111
<DEPRECIATION> 696,596
<TOTAL-ASSETS> 8,273,564
<CURRENT-LIABILITIES> 5,289,308
<BONDS> 0
0
2,235,674
<COMMON> 72,119
<OTHER-SE> 440,984
<TOTAL-LIABILITY-AND-EQUITY> 8,273,564
<SALES> 7,344,380
<TOTAL-REVENUES> 7,344,380
<CGS> 7,359,649
<TOTAL-COSTS> 9,480,286
<OTHER-EXPENSES> (38,463)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 435,925
<INCOME-PRETAX> (2,533,368)
<INCOME-TAX> (775,023)
<INCOME-CONTINUING> (1,758,345)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,758,345)
<EPS-PRIMARY> (2.71)
<EPS-DILUTED> (2.71)
</TABLE>
