<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, 1997
Commission File Number 0-21038
NETWORK SIX, INC.
(Exact name of registrant as specified in its charter)
Rhode Island 05-0366090
(State or other jurisdiction of (I.R.S. Employer
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 27, 1998 (computed by reference to
the closing price of such stock on the NASDAQ/ National Market System) was
$2,325,814.
As of February 28, 1998, there were 734,294 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
- --------------------------------------------------------------------------------
<PAGE>
NETWORK SIX, INC.
Form 10-K
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Item Page
- ------ ----
<C> <S> <C>
Part I
1 Business............................................................. 3
2 Properties........................................................... 9
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 12
6 Selected Financial Data.............................................. 13
7 Management's Discussion and Analysis of Financial Condition and
Results of Operation.............................................. 14
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................... 21
11 Executive Compensation............................................... 21
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
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Network Six, Inc. is a systems integrator and provider of software,
information technology consulting and network services to government and
industry. Incorporated in 1976 under the name National E-F-T, Inc., the Company
has historically 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. However, the Company today targets its
marketing activities to many government agencies as well as non-profits and
private industry.
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. For all intents and purposes the states are in a
fiscal crisis, requiring their human service agencies to become more productive
and perform enhanced functions with fewer personnel.
Human service agencies have large and burdensome caseloads. One in four
children in the United States lives in a single parent household. Welfare
reform has recently passed in Congress and is a
3
<PAGE>
major initiative that could have a significant impact on human service 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. The U.S. Department of Health
and Human Services (HHS) administers these programs at the federal level, with
the exception of the food stamp program that 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 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.
4
<PAGE>
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 childcare.
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.Funding levels in 1998 vary from 50 75%. 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.
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, 1997:
<TABLE>
<CAPTION>
Projected End Date
Program FFP% Of Current FFP%
- -------- ---- ---------------
<S> <C> <C>
Temporary Aid to Needy Families 100% None*
Food Stamps 50% None
CSE 66%-90% September 30, 1999**
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C>
Medicaid 50% None
Medicaid/Managed Care 50-90% Varies
Child Welfare 50%-75% None
Other Human Services Systems Varies Varies
</TABLE>
* State block grants up to a maximum
dollar amount by state.
**Declines to 66%, except for certain
welfare reform initiatives, which would
be eligible for 80% FFP
The Federal Funding Participation percentages shown above are subject to change
by the U.S. Congress.
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, 1997 relating to the
Company's significant contracts with state human services agencies since
December 1994:
<TABLE>
<CAPTION>
State Program Area Project Contract Date Status
- ----- ------------ ------- ------------- ------
<S> <C> <C> <C> <C>
U.S. Virgin Islands CSE transfer system December 1994 In process
Idaho CSE support services May 1995 In process
Washington State CSE support services December 1995 Complete
Louisiana Child Care 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
Maine Child Welfare transfer system April 1997 In process
</TABLE>
6
<PAGE>
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 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 generally 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.
As a result 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 are
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. 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.
7
<PAGE>
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.
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 (now part of TRW) 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,
flexibility and price.
With respect to other State agencies, non-profits and private sector, there
are numerous companies that provide software and system development and
information technology services. None, however, dominates 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, 1997, the Company had the
following contracts to provide services which, if fully performed, would result
in the revenues shown:
8
<PAGE>
<TABLE>
<CAPTION>
Amount
Recognized as
Contract
Revenues
Contract Earned thru Backlog
Contract Title Amount(1) 12/31/97 As of 12/31/97(2)
- ---------------------- ------------------- ---------------- -----------------------
<S> <C> <C> <C>
Rhode Island CSE $ 2,498,400 $ 2,270,892 $ 227,508
Rhode Island Support 4,343,584 2,160,445 2,183,139
U.S. Virgin Islands 6,029,590 5,551,948 477,642
Rhode Island Dept. of Health 1,933,916 1,474,453 459,463
Maine Child Welfare (MACWIS) 6,703,578 5,721,103 982,475
Others 554,621 197,381 357,240
----------- ----------- ----------
Totals $22,063,689 $17,376,222 $4,687,467
=========== =========== ==========
</TABLE>
(1) Contract amounts for certain of the above contracts have been adjusted
to reflect change orders for enhancements or additional functionality.
(2) The Company expects that substantially all of its backlog at December
31, 1997 will be realized by the end of 1998. 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.
EMPLOYEES
The Company believes that its future success will depend in large part upon
its continued ability to hire and retain qualified technical and project
management personnel. 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, 1997, the Company had approximately 74 employees. None
of the Company's employees is represented by a labor union. The Company believes
its relations with its employees are excellent.
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 $186,000 that expires on
October 31, 2000. The Company believes that these offices are adequate for its
current and near term needs.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In June 1995, the Company began negotiating a significant amendment to its
contract for a child support enforcement ("CSE") system with the State of Hawaii
(the State) when it determined that the total estimated cost to complete the
system would be significantly greater than expected. In March 1996, the Company
received final State and federal government approval for this contract amendment
totaling $4.4 million. As a result of numerous in-depth reviews of this
contract amendment, management determined that remaining contract costs would
exceed the contract value by $440,000, and therefore, accrued this loss in
December 1995.
In June 1996 the Company announced a new subcontract agreement with
Complete Business Solutions, Inc ("CBSI") to expand CBSI's role in the Hawaii
CSE contract. CBSI, at the request of Hawaii, was contracted to lead a detailed
review of the current system under development. Hawaii, in turn, agreed to pay
CBSI $1.2 million from the Company's remaining contract budget when various
milestones were achieved. The Company had a significant role in the detailed
review and had hoped that its results would facilitate the resolution of open
contractual scope issues.
On September 13, 1996, the State of Hawaii terminated its contract with the
Company, effective September 23, 1996, claiming that the Company had failed to
fulfill its obligations under the contract. In response, the Company also
terminated the contract with the State effective September 23, 1996. The Hawaii
contract, originally estimated to be a $20.7 million contract, was increased to
$25.2 million by the State and 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
contract with the State of Hawaii to develop and install the State's child
support enforcement system. The suit alleges the Company failed to meet
contractual deadlines, provided late, incomplete and/or unsuitable deliverables,
materially breached the contract by never completing the design, the application
programming, and the system test and systems implementation. The State is
seeking an unspecified amount for general damages, consequential and special
damages, liquidated damages, attorneys' fees, reimbursement for the cost of the
suit and interest costs that the court deems just and proper.
The Company vigorously denies the State's allegation and, on January 23,
1997, filed a counter claim against the State alleging that the State has
breached the contract. The Company is seeking $70 million in damages and is
alleging that the State fraudulently induced the Company into designing and
building a system having capabilities and features far beyond the scope of the
Company's contract. The fraudulent inducement was in the form of withholding
payments, improper rejection of work that satisfied the requirements of the
contract and verbal and written abuse of the Company's employees and management.
In addition, Unisys, a vendor providing equipment under the Company's
Hawaii contract, submitted a $896,000 claim against the $10.3 million
performance bond. In February of 1997, the State released all but $1.1 million
of the performance bond; the remainder is intended to cover amounts payable to
Unisys and other subcontractors. In April of 1997, after a detailed review of
their records and discussions with the Company, Unisys agreed to lower their
claim to $859,602 and Aetna Casualty and Surety paid that claim. Lockheed
Martin IMS (Lockheed), who guaranteed the performance bond, reimbursed Aetna for
that claim. In December 1997, the Company reached an agreement with Lockheed to
repay the $859,602 over a five-year period.
10
<PAGE>
On December 13, 1996 CBSI filed a lawsuit in the Superior Court of the
State of Rhode Island for $517,503, which the Company had previously accrued,
plus interest, costs and attorney's fees. The Company disputes the $517,503
owned to CBSI and filed a counterclaim against CBSI on January 13, 1997
alleging, among other things, that CBSI failed to complete its duties required
under the subcontract with the Company in a timely manner, improperly engaged in
negotiations with the State of Hawaii to complete the project, hired and
attempted to hire employees of the Company in violation of its subcontract
agreement with the Company and obtained and utilized confidential information
and proprietary intellectual property inappropriately. Also, the Company
alleges that CBSI owes the Company $482,750 as of December 31, 1996 for which
the Company has not established a reserve for uncollectibility.
On February 3, 1997, the Company filed a third-party complaint ("TPC") as
part of the Hawaii litigation against MAXIMUS Corporation ("MAXIMUS") and CBSI.
MAXIMUS has been the State of Hawaii's contract supervisor and advisor since the
inception of the Hawaii project. The allegations the Company has made against
CBSI in this TPC are substantially similar to the allegations made against CBSI
in the Company's counterclaim to CBSI's December 13, 1996 lawsuit brought
against the Company in Rhode Island. The Company alleged, moreover, that
MAXIMUS is liable to the Company on grounds that: (i) the Company was an
intended third party beneficiary under the contract between the MAXIMUS and
Hawaii; (ii) MAXIMUS tortuously interfered in the contract between the Company
and Hawaii; (iii) MAXIMUS 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 financial effect on the Company and could jeopardize the
Company's ability to continue with its present listing on The Nasdaq National
Market. Management of the Company and its attorneys are unable to predict with
any certainty the ultimate outcome of this litigation, although it is their
belief that a favorable outcome is likely. At December 31, 1997, the Company
had unbilled work-in-process and related receivables from the State and CBSI of
approximately $3.46 million, which exceeds stockholders' equity of approximately
$2.96 million, for which no allowance for uncollectibility has been recorded.
The Company has not accrued for any potential liability to the State, which may
result from this litigation. In addition, the Company has not accrued for any
legal expense to be incurred in connection with this litigation, which could be
significant.
Due to the significant uncertainty created by these events, the Company
ceased recognition of revenue on the Hawaii contract in 1996. An adjustment of
$1.8 million was recorded in the fourth quarter to reverse revenue of $1
million, $400 thousand and $400 thousand previously in the first, second and
third quarters, respectively. In addition, 1996 costs incurred related to the
Hawaii contract of $1.96 million have been charged to expense.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
11
<PAGE>
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 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. 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>
1997
First Quarter $ 2.88 $0.88
Second Quarter 2.13 1.25
Third Quarter 3.00 1.75
Fourth Quarter 3.88 2.25
1996
First Quarter $15.50 $6.00
Second Quarter 15.50 7.25
Third Quarter 11.50 4.00
Fourth Quarter 6.50 0.63
</TABLE>
As of December 31, 1997 there were 298 holders of record of the Common Stock,
representing approximately 331 beneficial owners. The last reported sale price
for the Common Stock, as reported on The Nasdaq National Market on February 27,
1998 was $3.25 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
Common Stock if dividends required to be paid on the Company's Series A
Convertible Preferred Stock are in arrears, which they are.
12
<PAGE>
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, 1997 are derived from the Company's audited financial
statements.
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- ---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Contract revenue earned $11,460,437 $ 7,344,380 $20,985,012 $21,210,878 $14,570,469
Cost of revenue earned 8,620,097 7,359,649 19,299,944 13,768,838 9,206,879
----------- ----------- ----------- ----------- -----------
Gross profit (loss) 2,840,340 (15,269) 1,685,068 7,442,040 5,363,590
Selling, general and
administrative expense 2,071,294 2,240,073 4,369,260 3,700,789 3,030,977
Research & development
expense - - 185,235 - -
Restructuring expense - (119,436) 537,221 - -
Income (loss) from
operations 769,046 (2,135,906) (3,406,648) 3,741,251 2,332,613
Income (loss) before
income taxes 534,950 (2,533,368) (3,792,521) 3,574,612 2,322,061
Net income (loss) 406,950 (1,758,345) (2,427,440) 2,109,020 1,395,718
Net income (loss) per share
Basic 0.25 (2.71) (3.68) 2.79 1.80
Diluted 0.25 (2.71) (3.68) 2.39 1.61
Shared used in computing net
income (loss) per share
Basic 729,927 719,317 709,841 689,587 670,928
Diluted 729,927 719,317 709,841 883,184 867,503
</TABLE>
13
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- ---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Working capital $ 22,117 $(1,073,671) $(2,075,339) $ 6,266,622 $ 4,137,410
Hawaii contract receivables* 3,459,382 3,571,824 5,711,022 3,691,048 958,517
Total assets 9,292,103 8,273,564 14,945,273 11,930,399 9,285,090
Long-term obligations 1,422,725 235,479 254,393 158,038 -
Total stockholders' equity 2,955,420 2,748,777 4,644,494 6,914,434 4,602,337
</TABLE>
* See Note 12 in the notes to the financial statements.
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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements reflecting the Company's
expectations or beliefs concerning future events that could materially affect
Company performance in the future. All forward-looking statements are subject
to the risks and uncertainties inherent with predictions and forecasts. They
are necessarily speculative statements, and unforeseen factors, such as
competitive pressures, litigation results and regulatory and state funding
changes could cause results to differ materially from any that may be expected.
In particular, adverse decisions in on-going material litigation could have a
material adverse effect on the Company's financial condition and operating
results. See Item 3 - Legal Proceedings. Actual results and events may therefore
differ significantly from those discussed in forward-looking statements.
Moreover, forward-looking statements are made in the context of information
available as of the date stated, and the Company undertakes no obligation to
update or revise such statements to reflect new circumstances or unanticipated
events as they occur.
GENERAL
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. Most
14
<PAGE>
recently, the Company began targeting its marketing efforts at other government
agencies as well as non-profits and the private sector.
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. As of yet, however there has been no
revenue recognized from Arizona.
Also in January 1997, the Company announced the formation of a Network
Services Division. The new division, based in Warwick, RI, provides system
administration, consulting, design, implementation and support services in the
LAN, WAN, Internet/intranet and remote communications technology areas. The
Company created this division 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.
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.
In March 1997 the Company announced that it had signed a contract with the
State of Maine, Department of Human Services, to transfer, modify and implement
a child welfare system for $6.3 million. Unisys Corporation is a subcontractor
to the Company on this contract and is playing a significant role in modifying
the system Unisys developed for Indiana for Maine.
In March 1997 the Company received a $332,000 Change Order to its 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." This
Change Order increased the value of the Company's contract with the State of
Rhode Island Department of Health to $1.9 million.
In May 1997 the State of Rhode Island, Department of Human Services,
extended its support contract with the Company for another year, through June
30, 1998. The Company's current contract would have expired on June 30, 1997.
The value of the contract extension is approximately $2.7 million.
In September 1997 the State of Rhode Island, Department of Human Services,
increased its support contract with the Company by $1.7 million in response to
federal welfare reform legislation. This increased the contract ceiling to $4.3
million through June 30, 1998. Also in September 1997, the Company announced it
had been selected by the State of Rhode Island, Department of Administration and
by GTECH Corporation to provide software support services to each of these
entities.
In September 1997 the Company confirmed that it had received a proposal
from Netmaster Group, Inc. ("Netmaster") to invest $1.5 million in the Company,
under certain conditions. The
15
<PAGE>
Company has asked Netmaster to clarify its proposal. There has been no further
contact between the companies.
In January 1998 the Company announced a new $1.5 million line of credit
(See "Liquidity and Capital Resources") and the change of its independent
auditors from KPMG Peat Marwick LLP to Sansiveri, Kimball & McNamee L.L.P. The
Company also announced an extension of the child support enforcement contract
with the U.S. Virgin Islands and a contract to assist MIM Corporation with the
application development of pharmaceutical benefits management system.
Effective February 23, 1998, the Nasdaq Stock Market, Inc. ("Nasdaq")
announced new listing requirements for continued inclusion on the Nasdaq
National Market. Nasdaq has provided notice to the Company that the Company
does not meet the new continued listing requirements with respect to the
Company's net tangible assets and the market value of the Company's listed
Common Stock. Although the Company believes it can propose and effect a plan to
achieve compliance with the new listing requirements, there can be no assurance
that the Company will be able to stay in compliance with the new Nasdaq
requirements and the inability of the Company to satisfy such requirements could
adversely affect the value of the Company's stock. The Company, if de-listed
from The Nasdaq National Market, has the option seek inclusion of its securities
on The Nasdaq SmallCap Market.
The Company has received comments from the Securities and Exchange
Commission regarding the timing of revenue recognition with regard to the
Company's contract with the State of Hawaii during 1996 and whether an allowance
should be taken by the Company against the contract receivable relating to that
contract ($3,459,382 at December 31, 1997). The Company believes that, although
the outcome of the Company's litigation with the State of Hawaii is uncertain
(see Item 3 Legal Proceedings), that it is likely to prevail in the Hawaii
litigation and therefore the Company is correct in not taking an allowance
against that receivable.
The Company has conducted a comprehensive review of its internal computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs being written using two digits rather
that four to define the applicable year. Any of the Company's programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather that the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will not
pose significant operational problems for the Company's computer systems as so
modified and converted. However, if such modifications and conversions are not
completed timely, the Year 2000 may have a material impact on the operations of
the Company.
RESULTS OF OPERATIONS
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:
16
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------
1997 1996 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Contract revenue earned 100.0% 100.0% 100.0% 100.0%
Cost of revenue earned 75.2% 100.2% 92.0% 64.9%
Gross profit 24.8% -0.2% 8.0% 35.1%
Selling and administrative expenses 18.1% 30.5% 20.8% 17.4%
Research and development expense 0.0% 0.0% 0.9% 0.0%
Restructuring 0.0% -1.6% 2.6% 0.0%
Income before income taxes 4.7% -34.5% -18.1% 16.9%
Net income (loss) 3.6% -23.9% -11.6% 9.9%
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Contract revenue earned increased $4,116,057, or 56%, from $7,344,380 in
the year ended December 31, 1996 to $11,460,437 in the year ended December 31,
1997 primarily due to the commencement of the Maine Automated Child Welfare
Information System (MACWIS) and additional work on the Rhode Island support
contract in response to federal welfare reform legislation. This increase was
offset in part by the substantial completion of the Idaho and the Virgin Islands
Child Support Enforcement (CSE) projects and the West Virginia support project.
Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, increased $1,260,448, or 17%, from
$7,359,649 in 1996 to $8,620,097 in 1997. This was a consequence of an
increased level of effort needed to support the higher level of business.
Gross profit increased $2,855,609 from a loss of $15,269 in 1996 to
$2,840,340 in 1997. Gross profit as a percentage of revenue was (0.2%) for 1996
and 25% for 1997. The Company's expected lower margin on the Maine MACWIS
project, where the Company's subcontractor is playing a significant role, was
offset by higher margins on the welfare reform work on the Rhode Island support
project.
Selling, general and administrative expenses decreased $168,779, or 8%,
from $2,240,073 in 1996 to $2,071,294 in 1997 primarily due to a reduction of
expense to support the Company's marketing and proposal efforts. On a
percentage basis, SG&A expenses decreased from 31% in 1996 to 18% in 1997
primarily as a consequence of the Company's efforts to reduce expenses and
increase revenues.
Interest expense decreased $169,895 or 39% from $435,925 in 1996 to
$266,030 due to a lower level of borrowing.
As a result of the foregoing, income before income taxes was $534,950 in
1997, an increase of $3,068,318 from a loss of $2,533,368 in 1996. Income
before income taxes, as a percentage of contract revenue earned increased from a
loss of 34% in 1996 to 5% in 1997.
Net income of $406,950 in 1997 represents an increase of $2,165,295 from a
net loss of $1,758,345 in 1996. As a percentage of contracts revenue earned net
income increased from a loss of 24% in 1996 to 4% in 1997. The Company's
effective tax rate was 31% for 1996 and 24% for 1997. The Company was able to
utilize all remaining carry back and tax credits in 1997.
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
17
<PAGE>
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 revenue of $1 million, $400 thousand and $400 thousand previously
recognized in the first, second and third quarters, respectively. See Item 3
Legal Proceedings.
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 was due to sales of hardware to Virgin
Islands, Hawaii and Rhode Island RICAP projects that were 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. 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 was 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 a 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 to 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
reduced the effective rate for 1996.
LIQUIDITY AND CAPITAL RESOURCES
In order to finance bid preparation costs and to obtain sufficient
collateral to support performance bonds required by some customers, the Company
has, in the past, entered into joint ventures with other firms with greater
financial resources when bidding for contracts. The Company expects to continue
and expand this practice prospectively as well as to pursue more time and
material contracts than it has
18
<PAGE>
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
$1,854,052, $2,253,504 and ($2,732,814) in the years ended December 31, 1997,
1996, and 1995 respectively. Fluctuations in net cash provided by (used in)
operating activities are primarily the result of changes in net income, accounts
receivable and income tax receivable, accounts payable and costs and estimated
earnings in excess of billings on contracts due to differences in contract
milestones and payment dates.
On April 30, 1997 the Company signed a term loan (the "Loan") with its bank
which required the Company to reduce its outstanding borrowings under the Loan
from $1.8 million to the following limits: October 15, 1997 - $1,500,000,
November 15, 1997 - $1,200,000 and December 15, 1997 - $900,000. The interest
rate on the Loan was 16%, with the difference between 16% and prime plus 2%
payable at maturity, which was January 31, 1998. There were also a number of
provisions for accelerated payment to reduce the Loan balance, such as paying
the bank 50% of any contract holdbacks or income tax refunds. In addition, the
Company agreed to provide the bank with a warrant to purchase 50,487
unregistered shares of the Company's Common Stock at $1.75 per share,
exercisable immediately with an expiration date of April 30, 2002, and agreed to
provide the bank 15% of any recovery received from its litigation in Hawaii.
The warrant and the bank's right to a percentage of any recovery would terminate
if the Company paid down the Loan completely or raised $1 million of equity
capital prior to maturity. The Company's obligations under the Loan were
secured by substantially all of the assets of the Company. The Loan also
provided that the Company not pay any dividends on its capital stock without the
consent of the bank. On January 26, 1998 the Loan was paid in full. The warrant
and the bank's right to a percentage of any Hawaii recovery were returned to the
Company.
On December 31, 1997 the Company signed a $1.5 million line of credit with
a commercial lender (the "Line of Credit"). Accounts receivable from four of the
Company's contracts secure the new Line of Credit. The Company can borrow up to
80% of the aggregate invoice amounts and is required to repay any borrowings
within 90 days. The interest rate is prime plus five percent on balances below
$1 million and prime plus one and one half percent on balances over $1 million.
The Line of Credit also carries a six- percent annual service fee on borrowed
balances. At December 31, 1997 the Line of Credit had an outstanding balance of
zero.
The Company believes that cash flow generated by operations will be
sufficient to fund continuing operations through the end of 1998. This assumes,
however, that there are no materially adverse decisions rendered in the ongoing
litigation with Hawaii, MAXIMUS and CBSI. See Item 3-- Legal Proceedings. The
Company is actively seeking new capital to improve its financial flexibility.
The Company believes that inflation has not had a material impact on its
results of operations to date.
19
<PAGE>
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" which established standards for reporting and displaying of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement requires
that an enterprise classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in-
capital in the equity section of the balance sheet. This statement is effective
for fiscal years beginning after December 15, 1997.
In 1997, the American Institute of Certified Public Accountants Statement
of Position No. 97-2, "Software Revenue Recognition" established guidance for
recognizing revenue on software transactions. The adoption of the statement in
1998 is not expected to have a significant effect on the Company's financial
condition or results of operations. This statement is effective for fiscal
years beginning after December 15, 1997.
In December 1997, the Company adopted SFAS No. 128, "Earnings Per Share".
This statement requires the Company to change the method that was previously
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating basic earnings per share, the dilutive effect
of stock options and warrants are excluded.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is contained on pages F-2 to F-24 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 6, 1998, the Company engaged the firm of Sansiveri, Kimball &
McNamee, LLP ("SKM"), as its certifying accountant. The decision to engage SKM
was approved by the Audit Committee of the Board of Directors of the Company.
On January 6, 1998, the Company terminated, with the concurrence of its
Audit Committee, its relationship with its certifying accountant KPMG Peat
Marwick LLP ("KPMG"). Also on January 6, 1998 a Form 8K was filed with the SEC
about this change and about a disagreement with KPMG.
20
<PAGE>
had reason to know that revenue under the contract should not be recognized
because of changed conditions, such revenue was reversed in the fourth quarter
of 1996 and for the year ended December 31, 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The Company currently intends to include the information required by Item
10 for its 1998 Annual Meeting Proxy Statement ("1998 Proxy Statement") and such
proxy statement 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 Company currently intends to include the information required by Item
11 in the Company's 1998 Proxy Statement and such information 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 Company currently intends to include information required by Item 12 in
the Company's 1998 Proxy Statement and such information 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 Company currently intends to include information required by Item 13 in
the Company's 1998 Proxy Statement and such information 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-24 of this
report:
Independent Auditors' Report of Sansiveri, Kimball & McNamee L.L.P.
Independent Auditors' report of KPMG Peat Marwick LLP
Balance Sheets as of December 31, 1997 and 1996
Statements of Operations for the Years Ended December 31, 1997, 1996,
and 1995
Statements of Stockholders' Equity for the Years Ended December 31,
1997, 1996, and 1995
21
<PAGE>
Statements of Cash Flows for the Years Ended December 31, 1997, 1996
and 1995
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.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<C> <S>
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, as amended (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 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)
10.7 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)
10.8 Non-employee Director Stock Option Plan (incorporated by reference
from the Company's Form 10-K, exhibit 10.12, for the fiscal year
ended December 31, 1996)
</TABLE>
22
<PAGE>
<TABLE>
<C> <S>
10.9 Contract dated May 1996 between the Company and the State of Rhode
Island Department of Health re RICAP system (incorporated by
reference from the Company's Form 10-K, exhibit 10.13, for the
fiscal year ended December 31, 1996)
10.10 Contract dated July 1996 between the Company and the State of Rhode
Island Department of Human Services re support services
(incorporated by reference from the Company's Form 10-K, exhibit
10.14, for the fiscal year ended December 31, 1996)
10.11 Contract dated May 1996 between the Company and Complete Business
Solutions, Inc. re walk through agreement (incorporated by
reference from the Company's Form 10-K, exhibit 10.15, for the
fiscal year ended December 31, 1996)
10.12 Employment Agreement between the Company and Mr. Kenneth C. Kirsch
dated January 1, 1997 (incorporated by reference from the Company's
Form 10-K, exhibit 10.16, for the fiscal year ended December 31,
1996)
10.17 Credit Agreement dated December 31, 1997 between the Company and
Prinvest Financial Corporation
10.18 Contract dated April , 1997 between the Company and the State of
Maine Re: Automated child welfare system
10.19 Settlement agreement dated December 29, 1997 between the Company
and Lockheed Martin IMS re note payable
22.1 List of Subsidiaries (incorporated by reference from the Company's
Form 10, File No. 0-21038)
23.1 Consent of Sansiveri, Kimball & McNamee L.L.P.
23.2 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule -- 1997
27.2 Financial Data Schedule -- 1996, 1995 and quarters for 1996
27.3 Financial Data Schedule -- quarters for 1997
</TABLE>
(B) REPORTS ON FORM 8-K.
No Current Reports on Form 8-K were filed during the fourth quarter of 1997.
23
<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 31st day of March 1998.
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, March 31, 1998
----------------------- and Chief Executive Officer
Kenneth C. Kirsch (Principal Executive Officer)
/s/ Dorothy M. Cipolla Chief Financial Officer, and March 31, 1998
- ------------------------ Treasurer (Principal Financial
Dorothy M. Cipolla and Accounting Officer)
/s/ Dana H. Gaebe Director March 31, 1998
- ------------------------
Dana H. Gaebe
/s/ Nicholas R. Supron Director March 31, 1998
- ------------------------
Nicholas R. Supron
/s/ Clifton C. Dutton Director March 31, 1998
- ------------------------
Clifton C. Dutton
24
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report of Sansiveri, Kimball & McNamee L.L.P. F-2
Independent Auditors' Report of KPMG Peat Marwick LLP F-3
Balance Sheets as of December 31, 1997 and 1996 F-4
Statements of Operations for the Years Ended December 31, 1997, 1996, and 1995 F-6
Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996, and 1995 F-7
Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995 F-8
Notes to Financial Statements F-10
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Network Six, Inc.:
We have audited the accompanying balance sheet of Network Six, Inc. as of
December 31, 1997 and the related statements of operations, stockholders' equity
and cash flows for the year ended December 31, 1997. 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 audit. The
financial statements of Network Six, Inc. as of December 31, 1996 and 1995 were
audited by other audits or, whose report dated March 28, 1997 on those
statements included an explanatory paragraph that described significant
uncertainties as to the Company's ability to continue as a going concern.
We conducted our audit 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 audit provides 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, 1997, and the results of its operations and its cash flows for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed more fully in Note 12 to the financial statements, in 1996 the
State of Hawaii terminated a 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. At
December 31, 1997 and 1996, the Company had unbilled work-in-progress and
related receivables from the State of Hawaii of approximately $3.5 million.
Also, the Company is involved in other litigation related to the Hawaii contract
as discussed in Note 12.
Sansiveri, Kimball & McNamee L.L.P.
/s/ Sansiveri, Kimball & McNamee L.L.P.
Providence, Rhode Island
March 3, 1998
F-2
<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 of Hawaii terminated a
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-process related to the contract with the State of
Hawaii of approximately $3.5 million, which exceeded the Company's stockholders'
equity of approximately $2.7 million, for which no allowance for
uncollectability had 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.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Providence, Rhode Island
March 28, 1997
F-3
<PAGE>
<TABLE>
<CAPTION>
NETWORK SIX, INC.
Balance Sheets
December 31, 1997 and 1996
ASSETS (NOTE 4) 1997 1996
- --------------- ----------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 1,291,924 $ 127,581
Contract receivables, less allowance for doubtful
accounts of $50,000 in 1997 and
$97,856 in 1996 (note 2) 2,011,379 1,528,757
Costs and estimated earnings in excess of billings
on contracts (note 3) 1,388,515 1,864,939
Income taxes receivable (note 6) - 516,046
Other assets 244,257 158,976
----------- ----------
Total current assets 4,936,075 4,196,299
----------- ----------
Property and equipment (note 5)
Computers and equipment 506,484 620,042
Furniture and fixtures 167,558 194,878
Leasehold improvements 20,191 20,191
----------- ----------
694,233 835,111
Less: accumulated depreciation and amortization 627,146 696,596
----------- ----------
Net property and equipment 67,087 138,515
Deferred taxes (note 6) 391,475 190,624
Contract receivables and costs in excess of billings
on Hawaii contract (notes 2, 3 and 12) 3,459,382 3,571,824
Other assets 438,084 176,302
----------- ----------
$ 9,292,103 $8,273,564
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
NETWORK SIX, INC.
Balance Sheets, continued
December 31, 1997 and 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------ ----------------- ------------------
<S> <C> <C>
Current liabilities:
Notes payable to bank (note 4) $ 1,160,000 $ 1,800,000
Current installment of obligations under capital leases (note 5) 82,690 70,190
Accounts payable 188,377 1,732,332
Accrued salaries and benefits 449,133 470,767
Accrued subcontractor expense 1,352,393 22,244
Accrued restructuring (note 11) - 5,383
Note payable - short term (note 7) 163,871 143,646
Other accrued expenses 342,465 508,194
Billings in excess of costs and estimated earnings on contracts (note 3) 155,754 31,771
Income taxes payable (note 6) 13,338 -
Deferred taxes (note 6) 545,869 270,021
Preferred stock dividends payable 460,068 234,760
---------- -----------
Total current liabilities 4,913,958 5,289,308
---------- -----------
Obligations under capital leases, excluding current
installments (note 5) 104,003 171,608
Note payable - long term (note 7) 742,239 63,871
Hawaii Payable (note 12) 576,483 -
---------- -----------
Total Liabilities 6,336,683 5,524,787
---------- -----------
Commitments (notes 5, 9 and 12)
Other information (notes 10 through 11)
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 1997 and
1996; 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 734,294 shares in 1997 and 721,192 in 1996 73,429 72,119
Additional paid-on capital 1,670,939 1,653,296
Retained earnings (accumulated deficit) (1,024,622) (1,206,265)
Treasury stock 3,748 common shares at cost - (6,047)
----------- -----------
Total stockholders' equity 2,955,420 2,748,777
Total Liabilities & Stockholder's Equity $ 9,292,103 $ 8,273,564
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
NETWORK SIX, INC.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ----------------- -----------------
<S> <C> <C> <C>
Contract revenue earned (note 10) $11,460,437 $ 7,344,380 $20,985,012
Cost of revenue earned 8,620,097 7,359,649 19,299,944
----------- ----------- -----------
Gross profit (loss) 2,840,340 (15,269) 1,685,068
Selling, general & administrative expenses 2,071,294 2,240,073 4,369,260
Research & development expense - - 185,235
Restructuring (note 11) - (119,436) 537,221
----------- ----------- -----------
Income (loss) from operations 769,046 (2,135,906) (3,406,648)
Other deductions (income)
Interest expense 266,030 435,925 396,286
Interest earned (31,934) (38,463) (10,413)
----------- ----------- -----------
Income (loss) before income taxes 534,950 (2,533,368) (3,792,521)
Income taxes (note 6) 128,000 (775,023) (1,365,081)
----------- ----------- -----------
Net income $ 406,950 $(1,758,345) $(2,427,440)
=========== =========== ===========
Net income (loss) per share:
Basic $0.25 $(2.71) $(3.68)
=========== =========== ===========
Diluted $0.25 $(2.71) $(3.68)
=========== =========== ===========
Shares used in computing net income per share:
Basic 729,927 719,317 709,841
=========== =========== ===========
Diluted 729,927 719,317 709,841
=========== =========== ===========
Preferred dividends declared $ 225,308 $ 187,500 $ 187,500
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
NETWORK SIX, INC.
Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<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 31,1994 $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 (187,500) (187,500)
7.5%/share
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
Net Income 406,950 406,950
Dividends declared on preferred stock
7.5%/share (Q1-Q3); 13.5% (Q4) (225,308) (225,308)
Sale of 4,998 treasury shares 6,047 6,047
Sale of 13,102 new shares 1,310 17,643 18,954
-------------------------------------------------------------------------------
Balance at December 31, 1997 $2,235,674 $73,429 $1,670,939 $(1,024,623) $ - $ 2,955,420
===============================================================================
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
NETWORK SIX, INC.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
Net Income (loss) $ 406,950 $(1,758,345) $(2,427,440)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 82,010 337,460 400,904
Provision for doubtful accounts (47,856) 47,856 -
Loss on sale/disposal of fixed assets 9,023 60,487 -
Changes in operating assets and liabilities:
Contract receivables (434,765) (100,059) 364,203
Cost and estimated earnings
in excess of billings on contracts 476,423 1,348,138 1,360,086
Income taxes receivable 516,046 1,231,778 (1,672,533)
Other current assets (85,281) 105,186 (97,611)
Deferred tax assets (200,851) 80,736 (216,999)
Due from officer - 63,779 (4,654)
Other assets (261,782) 256,547 (114,587)
Long Term Amounts Due from Hawaii 112,442 2,139,198 (2,019,974)
Accounts payable (1,543,955) 35,333 1,236,419
Accrued salaries and benefits (21,634) 28,104 236,332
Accrued profit sharing - - (602,922)
Accrued subcontractor exp. 1,330,149 (399,613) (223,878)
Other notes payable 698,593 207,517 -
Hawaii payable 576,483 - -
Other accrued expenses (165,729) (110,675) 244,467
Accrued restructuring (5,383) (512,297) 517,680
Billings in excess of costs
and estimated earnings on contracts 123,983 (355,028) 164,049
Income taxes payable 13,338 - -
Deferred tax liability 275,848 (475,598) 123,644
--------------- -------------- --------------
Net cash provided by (used in) operating
activities 1,854,052 2,230,504 (2,732,814)
--------------- -------------- --------------
</TABLE>
F-8
<PAGE>
NETWORK SIX, INC.
Statements of Cash Flows, Continued
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from investing activities:
Cash Proceeds from Sale/Disposal of Capital Assets $ 1,948 $ 32,811 $ -
Capital expenditures (21,552) (10,277) (383,808)
------------- ------------ -------------
Net cash provided by (used in) investing
activities (19,604) 22,534 (383,808)
------------- ------------ -------------
Cash flows from financing activities:
Principal payments on capital lease obligations (55,105) (181,235) (107,512)
Net proceeds (payments) from note payable to bank (640,000) (3,200,000) 3,450,000
Proceeds from issuance of common stock 18,953 50,126 345,000
Proceeds from sales of treasury stock 6,047 - -
Payment of dividends - - (187,500)
------------- ------------ -------------
Net cash provided by (used in) financing activities (670,105) (3,331,109) 3,499,988
------------- ------------ -------------
Net increase (decrease) in cash 1,164,343 (1,078,071) 383,366
Cash at beginning of year 127,581 1,205,652 822,286
------------- ------------ -------------
Cash at end of year $1,291,924 $ 127,581 $1,205,652
============= ============ =============
Supplemental cash flow information:
Cash (received) paid during the year for:
Income taxes $ (467,781) $(2,086,198) $ 307,453
Interest 222,376 399,182 372,484
============= ============ =============
Supplemental disclosure of non-cash investing activities
Acquisition of assets through capital lease obligations - - $ 318,106
============= ============ =============
See accompanying notes to financial statements.
</TABLE>
F-9
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) Description of Business
Network Six, Inc. (the "Company"), formerly Network Solutions, Inc., is a
provider of software development and computer-related consulting services to
government and industry. Founded in 1976, the Company focuses on providing its
services to state government health and 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 generally 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
procurement, and personnel training. More recently, the Company has expanded
its customer base to include private sector, non-profit and other
organizations.
The Company has reported income from operations in 1997 after having sustained
significant losses in both 1996 and 1995. The Company has also successfully
obtained working capital financing as discussed in Note 4, that Management
expects will provide the Company with adequate funds to support operations in
1998. In addition, the on-going litigation, as more fully discussed in Note
12, is not expected to be resolved until late 1999.
(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 includes 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.
F-10
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
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 is federally funded. Over the
years, the Company 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.
(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 income in the period that includes
the enactment date.
(f) Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income
(loss), after deducting
F-11
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
dividends on Series A convertible preferred stock by the weighted average
number of common shares, and in the case of diluted earnings per share
assuming the conversion of the convertible preferred stock and common stock
equivalents outstanding during the period. Common stock equivalents include
stock options and warrants. For 1997, 1996 and 1995, the stock purchase
warrants, options, and convertible preferred stock and related dividends
declared have not been included in the computation of net income or loss 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 the ultimate collectability on
the Hawaii contract receivables, estimated costs to complete under the
percentage of completion method of accounting. Actual results could differ
from those estimates.
(i) Reclassifications
Certain 1996 and 1995 balances have been reclassified to conform to the 1997
presentation.
(j) Recent Accounting Pronouncements
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" which established standards for reporting and displaying of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of the balance sheet. This statement is
effective for fiscal years beginning after December 15, 1997.
In 1997 the American Institute of Certified Public Accountants Statement of
Position No. 97-2, "Software Revenue Recognition" established guidance for
recognizing revenue on software transactions. The adoption of the statement
in 1998 is not expected to have a significant effect on the Company's
financial condition or results of operations. This statement is effective for
fiscal years beginning after December 15, 1997.
In December 1997, the Company adopted SFAS No. 128, "Earnings Per Share".
This statement requires the Company to change the method that was previously
used to compute earnings per share and to restate all prior periods. Under
the new requirements for calculating basic earnings per share, the dilutive
effect of stock options and warrants are excluded.
F-12
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(2) Contract Receivables
<TABLE>
<CAPTION>
Contract receivables at December 31 consist of: 1997 1996
------------ ------------
<S> <C> <C>
Time and materials and completed fixed price contracts $ 476,552 $1,339,864
Fixed price contracts in progress 1,584,827 286,749
-------------- --------------
2,061,379 1,626,613
Less allowance for doubtful accounts 50,000 97,856
-------------- --------------
$2,011,379 $1,528,757
============== ==============
</TABLE>
At December 31, 1997 and 1996, $571,286 was receivable from the State of Hawaii
("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.
(3) Costs and Estimated Earnings on Contracts
<TABLE>
<CAPTION>
Costs and estimated earnings on contracts at
December 31 consist of: 1997 1996
---------------- ----------------
<S> <C> <C>
Beginning balance $ 1,833,168 $ 2,826,278
Costs incurred 8,620,097 7,359,649
Estimated Earnings 2,840,340 (15,269)
------------ -----------
13,293,605 10,170,658
Less billings 12,060,844 8,337,490
------------ -----------
$ 1,232,761 $ 1,833,168
============ ===========
Included in the accompanying balance sheets under the
following captions: 1997 1996
----------- -----------
Costs and estimated earnings in excess of billings on contracts $ 1,388,515 $ 1,864,939
Billings in excess of costs and estimated earnings on contracts (155,754) (31,771)
----------------- -----------------
$ 1,232,761 $ 1,833,168
================= =================
</TABLE>
Costs and estimated earnings on contracts at December 31, 1997 and 1996 are
expected to be billed and collected within one year. At December 31, 1997 and
1996 $2,925,238 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.
F-13
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(4) Note Payable to Bank
On April 30, 1997 the Company signed a term loan (the "Loan") with its bank
which required the Company to reduce its outstanding borrowings under the Loan
from $1.8 million to the following limits: October 15, 1997 - $1,500,000,
November 15, 1997 - $1,200,000 and December 15, 1997 - $900,000. The interest
rate on the Loan was 16%, with the difference between 16% and prime plus 2%
payable at maturity, which was January 31, 1998. There were also a number of
provisions for accelerated payment to reduce the loan balance, such as paying
the bank 50% of any contract holdbacks or income tax refunds. In addition, the
Company agreed to provide the bank with a warrant to purchase 50,487
unregistered shares of the Company's Common Stock at $1.75 per share,
exercisable immediately with an expiration date of April 30, 2002, and agreed to
provide the bank 15% of any recovery received from its litigation in Hawaii.
The warrant and the bank's right to a percentage of any recovery terminate if
the Company pays down the Loan completely or raises $1 million of equity capital
prior to maturity. The Company's obligations under the Loan were secured by
substantially all of the assets of the Company. The Loan also provided that the
Company not pay any dividends on its capital stock without the consent of the
bank. On January 26, 1998 the Loan was paid in full and the warrants and the
rights to a percentage of any Hawaii recovery were returned to the Company.
On December 31, 1997 the Company signed a $1.5 million line of credit with a
commercial lender. Receivables from four of the Company's contracts secure the
new line of credit. The Company can borrow up to 80% of the invoice amount on a
ninety-day promissory note. The interest rate is prime plus five percent on
balances below $1 million and prime plus one and one half percent on balances
over $1 million. The line also carries a six- percent annual service fee. The
prime rate was 8.5% at December 31, 1997.
(5) Leases
The Company leases office space and equipment under several operating leases
expiring at various times through 1998. Rent expense including utilities for the
years ended December 31, 1997, 1996 and 1995 was approximately $186,000,
$431,000 and $780,000, respectively. Rental obligations as of December 31, 1997
for the remainder of the lease terms are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating
Leases
<S> <C> <C>
1998 $102,758 $174,047
1999 83,436 166,445
2000 29,838 138,703
----------- -----------
Total lease payments 216,032 $479,195
===========
Amount representing interest 29,339
-----------
Net present value of payments 186,693
Less current portion 82,690
-----------
Long term portion $104,003
===========
</TABLE>
F-14
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
The Company subleased a portion of its leased office space to a customer in
1995. Rental income earned was approximately $27,000. The sublease agreement
expired in 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 $5,300, $2,500 and $27,000, respectively for 1997, 1996 and 1995.
Over the life of these leases the Company will recognize approximately $107,000
of lease interest income. Approximately $18,500, $31,500 and $26,000 of lease
interest income was recognized in 1997, 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> <C>
1998 $108,256
1999 90,530
2000 26,366
-------------
225,152
Amount representing interest 32,044
-------------
Net present value of payments 193,108
Less current portion 97,243
-------------
Long term portion $ 95,865
=============
</TABLE>
Approximately $73,700 of the net present value of payments is related to the
Hawaii contract and had been reclassified to contract receivables and costs in
excess of billings on Hawaii contract, the remainder is classified in other
assets.
(6) Income Taxes
The components of income tax expense (benefit) for the years ended December 31,
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ -------------- ---------------
Current taxes:
<S> <C> <C> <C>
Federal $ 36,000 $(380,161) $(1,171,725)
State 17,000 - (100,000)
---------- --------- -----------
Sub total 53,000 (380,161) (1,271,725)
Deferred taxes:
Federal 53,000 (314,651) (61,988)
State 22,000 (80,211) (31,368)
---------- --------- -----------
Sub total 75,000 (394,862) (93,356)
---------- --------- -----------
Total $128,000 $(775,023) $(1,365,081)
========== ========= ===========
</TABLE>
F-15
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
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>
1997 1996 1995
------------- -------------- ---------------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $181,883 $(861,345) $(1,289,454)
Increase in income tax expense (benefit)
resulting from state and local taxes, net
of federal income tax benefit 25,740 (52,939) (86,703)
Change in beginning of the year balance of
the valuation allowance for deferred tax
asset, allocated to income tax expense (84,000) 134,000 -
Other, net 4,377 5,261 11,076
-------------- --------------- -----------------
Total income tax expense (benefit) $128,000 $(775,023) $(1,365,081)
============== =============== =================
Effective tax rate 24 % (31) % (36) %
============== =============== =================
</TABLE>
Deferred tax assets and liabilities at December 31 are comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
Deferred tax assets:
<S> <C> <C>
Accounts receivable, principally
due to allowance for $ 19,640 $ 38,438
doubtful accounts Deferred
compensation 77,805 78,943
Unamortized retainage,
due to change
in tax reporting 24,409 48,818
Property, plant and equipment
depreciation 35,451 138,897
Non-deductible loss on contract 80,350 58,236
Vacation expense 35,997 30,643
Contingent
liability 200,380 200,380
Health insurance 1,268 24,068
Stock bonus 16,940 -
Net operating
loss carry
forward - 27,552
Alternative
minimum tax
credit carryover - 56,420
-------- --------
Total gross deferred
tax assets 492,240 702,395
Less valuation allowance 50,000 134,000
--------- --------
Net deferred tax asset 442,240 568,395
--------- --------
</TABLE>
F-16
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Deferred tax liabilities: 1997 1996
------------ -------------
<S> <C> <C>
Retainage, due to deferral for tax reporting $596,634 $638,576
Other - 9,216
-------- --------
Total gross deferred tax 596,634 647,792
liability
-------- --------
Net deferred tax
liability $154,394 $ 79,397
======== ========
</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, 1997 is supported by the fact that the Company has sufficient
reversals of temporary differences to support the recognition of the deferred
tax assets.
(7) Notes Payable
On December 12, 1996 the Company restructured a $218,901 account payable with
CPL Worldgroup ("CPL") to an eighteen month unsecured note payable. CPL is a
subcontractor to the Company, and 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. All payments were made when due and the note was paid off in
February of 1998.
On December 29, 1997 the Company restructured a $842,239 account payable with
Unisys to a four year unsecured note payable. After Unisys filed a claim
against the Company's Hawaii- related performance bond, the bonding company paid
Unisys, and then Lockheed Martin IMS Corporation ("Lockheed") reimbursed the
bonding company. Lockheed had guaranteed the Company's performance bond for the
Hawaii contract. The note is payable to Lockheed and carries an initial interest
rate of five percent through 1998, six percent during 1999, seven and one half
percent in 2000 and nine percent during 2001, with such interest to be paid
monthly. Principal payments are to be made annually as follows: December 1998 -
$100,000, December 1999 - $200,000, December 2000 - $200,000 and December 2001 -
$342,239. Under certain conditions, the Company is obligated to pay Lockheed
the remaining principal balance within 15 days of receipt of funds if the
Company settles or wins its litigation against the State of Hawaii. The note
has a discount provision for early payment.
(8) Stockholders' Equity
(a) 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
F-17
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
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 basis of four shares of Preferred Stock for one share of Common Stock 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, 1997 were $460,068.
(b) 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, 1997 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, 1997 all of these warrants remain outstanding and are exercisable
until November 23, 2003.
F-18
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
Warrants to purchase 50,487 shares of the Company's Common Stock at an
exercise price of $1.75 per share were authorized and issued in 1997 to the
Company's principal lender at that time. At December 31, 1997 all of these
warrants remained outstanding and exercisable until April 30, 2002. On January
26, 1998, however, these warrants were returned to the Company, per the terms
of the Loan agreement with the Company's principal lender.
(c) 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, 1994, respectively. Options granted under the Stock Option Plans
are intended to qualify as incentive options under Section 422(a) 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. 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.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting and Disclosure for Stock Based Compensation," which provides for a
fair value based methodology of accounting for all stock option plans.
The Company applies APB Opinion 25 and related interpretations in accounting
for these plans. Since options were granted at fair market value at date of
grant, no compensation cost has been recognized. Had compensation cost been
determined pursuant to SFAS No. 123, the Company's net income (loss) and net
income (loss) per share would have been adjusted to the pro forma amounts
indicated in the table below. The effects on pro forma net income (loss)
obtained from applying SFAS No. 123 may not be representative of the effects
on reported net income (loss) for future years.
<TABLE>
<CAPTION>
1997 1996
----------------- --------------
<S> <C> <C>
Net income As Reported $406,950 $(1,758,345)
(loss):
Pro Forma 376,570 (1,807,185)
Net income
(loss)
per share: As Reported $ 0.25 $ (2.71)
Pro Forma 0.18 (2.77)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997 and 1996,
F-19
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
respectively; no dividend yield; expected volatility of 86.8% and 66.6%;
risk-free interest rate of 6.1% and 6.048%; and expected lives of five years.
The weighted-average fair market value of options granted during 1997 and 1996
was $1.13 and $0.88, respectively.
A summary of the status of the Company's stock option plan as of December 31,
1997, 1996 and 1995 and changes during the years on those dates is presented
below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------------
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 92,850 $1.71 41,281 $28.62 25,250 $40.10
Granted 71,600 1.58 152,550 4.32 41,781 28.78
Cancelled - - (81,950) 15.76 (13,000) 26.62
Exercised - - (4,900) 7.75 (11,750) 29.36
Forfeited (28,225) 1.71 (14,131) 24.93 (1,000) 30.00
----------- ---------- ----------
Outstanding at
end of year 136,225 1.64 92,850 1.71 41,281 28.62
=========== ========== ==========
Exercisable at year end 46,392 1.82 55,700 1.86 41,281 28.62
=========== ========== ==========
</TABLE>
The following table summarizes information about the Company's stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Weighted Avg Number
Number Remaining Exercisable
Outstanding Contractual At Dec 31,
Exercise Price At Dec 31, 1997 Life 1997
- --------------- ---------------- -------------- -----------
<S> <C> <C> <C>
$2.00 28,875 8.9 28,875
1.75 48,550 9.3 1,250
1.50 40,050 8.9 16,267
1.13 18,750 9.3 -
------------- ----------
136,225 46,392
============= ==========
</TABLE>
F-20
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
At December 31, 1997, 1996, and 1995, common shares reserved for issuance under
these plans were 200,000, 125,000 and 125,000, respectively. 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. There was no profit sharing plan expense for the years
ended December 31, 1997, 1996 and 1995.
The Company sponsors a 401(k) Plan Trust in which all employees are eligible to
participate. Participants can contribute up to 15% of total compensation
subject to the annual Internal Revenue Service dollar limitation. The plan
provides for a Company match of 10%, up to 5% of the participant's contribution.
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 the consulting agreement was
seven years and eight years for the deferred compensation agreement. 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.
(10) Concentration of Revenue
During 1997, 1996 and 1995 the Company had the following sales from customers
whose individual sales exceeded 10% of the Company's total sales:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Rhode Island DHS $4,222,923 $2,399,170 $ 2,882,898
Maine Dept of Human Services 5,721,103 - -
Virgin Islands - 1,026,195 4,087,519
Hawaii - - 6,096,162
RI Dept - 927,372 -
of Health
---------- ---------- -----------
$9,944,026 $4,352,737 $13,066,579
========== ========== ===========
</TABLE>
F-21
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(11) Restructuring
In December 1995 as a result in 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 has
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 and 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 1997
Balance Paid in 1996 Adjustment Balance Paid in 1997 Balance
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries & benefits $248,839 $(259,629) $ 16,173 $5,383 $(5,383) -
Rental space 268,841 (133,232) (135,609) - - -
--------- ---------- ---------- ------- -------- -------
$517,680 $(392,861) $(119,436) $5,383 $(5,383) -
========= ========== ========== ======= ======== =======
</TABLE>
(12) Litigation
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 continued 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 Solutions, Inc. (CBSI) to conduct a detailed review of the
system to facilitate the resolution of open
F-22
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
contractual 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 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 with the Company related to the detailed review of the system 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. 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 system, incorporating changes to comply with the recent
welfare reform legislation, for approximately $19 million.
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 prejudgment interest, costs and attorneys' fees.
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
F-23
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
on grounds that: (i) the Company was an intended third party beneficiary under
the contract between MAXIMUS and Hawaii; (ii) MAXIMUS tortuously 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, although it is their belief
that an unfavorable outcome is unlikely. If the Company is unable to prevail in
its suit with the State such a result could have a material adverse financial
effect on the Company and could jeopardize the Company's ability to continue
with its present listing on The Nasdaq National Market. At December 31,1997, 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 $2.8 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, 1996 costs incurred related to the
Hawaii contract of $1.96 million have been charged to expense.
F-24
<PAGE>
AGREEMENT
---------
THIS AGREEMENT is entered into effective April 1, 1996 by and between
Network Six, Inc., a corporation organized under the laws of the State of Rhode
Island (the "Corporation"), and Robert E. Radican, residing in St. Thomas,
United States Virgin Islands ("Radican")
WHEREAS, the Corporation and Radican entered into a Deferred Compensation
Agreement effective January 1, 1994, whereby certain sums were to be paid by the
Corporation into a so-called "Rabbi Trust" for the ultimate benefit of Radican.
At that time, Merrill Lynch Trust Companies became the trustee of the trust;
WHEREAS, the first Deferred Compensation Agreement of January 1, 1994 was
replaced by a Deferred Compensation Agreement effective January 1, 1995; and
WHEREAS, the Corporation and Radican now wish to terminate the Deferred
Compensation Agreement, but to provide for the same payments called for
thereunder to be paid directly to Radican rather than to the aforementioned
trust.
NOW, THEREFORE, the parties hereby agree as follows:
1. The Deferred Compensation Agreement dated effective January 1, 1995
between the Corporation and Radican is hereby terminated.
2. Commencing on the last day of April, 1996 and continuing on the last
day of each subsequent month until and including December 31, 2001, the
Corporation shall pay to Radican the sum of $5,000 per month in consideration of
the termination of the Deferred Compensation Agreement, his past service to the
Corporation and the non-competition covenant hereinafter set forth.
3. The Corporation and Radican shall notify Merrill Lynch Trust Companies
of the termination of the Deferred Compensation Agreement and Merrill Lynch
Trust Companies shall be directed to pay over and deliver to Radican the entire
current balance of Radican's "Deferred Compensation Account" in the trust to
Radican.
4. Radican agrees that for a period of four (4) years and six (6) months
from the date hereof he will not compete with the Corporation in the state
government human services systems integration business, so long as the
Corporation has made all payments to Radican required by the agreement.
IN WITNESS WHEREOF, the Corporation has caused this agreement to be
executed by its duly authorized office and Radican has hereto set his hand as of
the date first above written.
NETWORK SIX, INC.
By:/s/ Kenneth C. Kirsch
------------------------
/s/ R. E. Radican
------------------------
Robert E. Radican
<PAGE>
Exhibit 10.17
FORM Financing and Security Agreement
REVISED 10/01/97
PRINVEST
FINANCING AND SECURITY AGREEMENT
THIS FINANCING AND SECURITY AGREEMENT (the "Agreement") is made this 31st
---------
day of December , 199 7 , between PrinVest Financial Corp, a
--------------- ----
New Jersey corporation, whose principal business address is 3 Princess Road,
Lawrenceville, NJ ("Lender"); and Network Six, Inc., a Rhode Island corporation,
whose principal business address is 475 Kilvert Street, Warwick, RI 02886
("Borrower").
In consideration for loans to be made pursuant to the Promissory Note(s) to be
given to Lender by Borrower hereunder, pursuant to the more specific terms as
outlined on the attached Term Sheet, Exhibit A, incorporated herein and made a
part hereof, initial receipt of which is hereby acknowledged, the undersigned
Borrower hereby pledges, grants a security interest in, and assigns to the
Lender (or its nominee or assignee) all the Borrower's right, title, and
interest in and to its contracts and/or purchase order(s) with the United States
of America, its agencies and instrumentalities, state and local governmental
units, their agencies and instrumentalities, as well as all of the Borrower's
contracts and/or purchase order(s) with non-governmental commercial entities, as
such may be hereafter amended, renewed or supplemented from time to time,
together with all accounts and accounts receivable arising from performance
thereunder, all instruments and chattel paper evidencing such accounts and
accounts receivable and all proceeds therefrom, now existing or hereafter
entered into (together "Contracts"), including without limitation those listed
on the attached Schedule 1, as may be amended by the parties, (such schedule or
amended schedule"Schedule 1"), incorporated herein and made a part hereof,
together with all of Borrower's rights of action accrued or to accrue thereon,
including, without limitation, full power to collect, sue for, compromise,
assign, or in any other manner enforce collection thereof in Lender's name or
otherwise. Lender shall have no obligation to perform in any respect any
contractual obligations relating to any Contract(s). Borrower agrees to give
the Lender the right of first refusal with respect to the financing of any
Contract(s) except to Lender for so long as the security interests granted under
this Agreement remain in effect unless otherwise permitted in writing by the
Lender. The parties hereto further agree as follows:
1. As a material inducement to Lender to enter into this Agreement, Borrower
warrants and represents that:
a) The Borrower is the sole and absolute owner of the Contracts, has full
legal right to execute, deliver, and perform the pledge and assignment
of its rights under the Contracts for monies due or to become due, and
has not made any prior assignment of the Contracts, other than as
specifically indicated on Schedule 1.
b) The invoices on the Contracts are due and owing to Borrower without
allowance, discount, return, defense, counterclaim or offset, and the
payment of said invoices as issued is not, and will not be, contingent
upon my work to be performed in the future. Borrower has no reason to
believe that the said invoices will not be paid in full.
c) Borrower will execute Assignments of Claim in favor of Lender for all
Contracts, in a form acceptable to the Lender, so that Lender may be
designated as the Assignee.
d) The information in the Application submitted by Borrower to Lender was
true and correct when given, and all other representations made, either
before or after the signing of this Agreement, both written and oral in
nature, with respect to Borrower's financial condition and Contracts to
be assigned, provided, still provide and will continue to provide an
accurate depiction of Borrower's financial condition, the Borrower's
Contracts or the Borrower's performance under said Contracts and were
not, are not and will not be erroneous or misleading when given. In
addition, as of the date of execution of this Agreement, there have
been no material, undisclosed adverse changes with respect to such
financial condition of Borrower or the Borrower's Contracts.
e) Borrower understands that the security interest granted herein Secures
Borrower's performance and payment of all of its obligations to Lender
whether now existing or hereinafter incurred, however such obligations
may be evidenced including without limitation all principal, interest,
fees and/or out-of-pocket expenses now or becoming due to Lender
(collectively the "Liabilities").
f) Borrower further acknowledges that at the time of execution hereof
Lender has agreed, subject to final due diligence on a case by case
basis, to make loans to Borrower in accordance with the Term Sheet
attached hereto as Exhibit A and the Funding Policies attached hereto
as Exhibit B (as either exhibit may be subsequently amended),
incorporated herein and made a part hereof, and executed by Borrower
and Lender in connection herewith, and provided that the conditions
contained therein and herein are satisfied. It is understood that the
attachment of the Term Sheet hereto is not intended to limited the
obligations to be secured by the security interests granted herein.
g) Other than execution of an Assignment of Claim with respect to
Contracts and the execution and filing of the UCC-1 Financing
Statements in the following location(s), State of Rhode Island; no
consent, approval, filing or registration is necessary for the valid
execution, delivery or performance by Borrower of this Agreement or
with respect to any of the Liabilities.
h) Borrower's chief executive office and place where Borrower keeps its
books and records relating to the collateral is 475 Kilvert Street,
Warwick, RI and Borrower's state of incorporation is Rhode Island.
i) Neither the Contracts nor any of the other collateral pledged hereunder
are subject to any lien, encumbrance or security interest other than in
favor of Lender, except as specifically noted on Schedule 1.
<PAGE>
FORM Financing and Security Agreement
REVISED 10/01/97
j) Borrower is in compliance with all applicable statutes, regulations,
ordinances, court decrees, or other directives of the United States of
America, and all states, counties, municipalities, and agencies with
respect to the manufacture and sales of its goods, the rendition of its
services and/or its conduct of business. Without limiting the
foregoing, Borrower has filed all federal, state, and local tax returns
and other reports it is required to file and has paid or made adequate
provisions for payment of all such taxes, assessments and other
government charges.
k) The execution, delivery of this Agreement, and the performance by
Borrower of its obligations hereunder, do not conflict with any
provision of law applicable to Borrower or of any agreement binding on
it.
2. Lender shall have the right to charge Borrower for the amount of any
default, or of any allowance, discount, return, defense, setoff or offset taken
or claimed by any payors on the Contract(s). Lender shall have the right to
deduct said amount from any other billing rights or monies due to Borrower,
whether included under the terms of this Financing Agreement, subsequent
amendments to this Financing Agreement, or any other similar agreement, past or
future, between Borrower and Lender.
3. Said Contracts shall be the property of Borrower and shall be collected by
Lender but, IF FOR ANY REASON ANY PAYMENTS ASSIGNED TO THE LENDER SHOULD BE
---
PAID TO BORROWER, BORROWER SHALL PROMPTLY NOTIFY LENDER OF SUCH PAYMENT, SHALL
HOLD ANY CHECK, DRAFT, OR MONIES ("PAYMENTS") SO RECEIVED FOR THE BENEFIT OF
LENDER AND SHALL PAY OVER SUCH PAYMENTS TO LENDER ON THE SAME BUSINESS DAY.
Borrower acknowledges that any failure to pay over such Payments immediately to
Lender shall be a default hereunder and may constitute misappropriation of funds
and may subject the Borrower to criminal liability. The forgoing not
withstanding, Borrower and Lender agree that any failure of the Borrower to
remit Payments to the Lender within five (5) business days after receipt by
Borrower will result in the Lender assessing, at its sole option, a conversion
charge equal to five percent (5%) of the amount of face value of such Payments.
Demand or collection of such conversion charges shall not constitute a waiver by
the Lender of rights it may have to declare and Event of Default and exercise
remedies as a result of Borrower's failure to immediately pay such Payments to
the Lender. Exercise of these rights by Lender shall in no way limit or restrict
any other rights accruing to Lender hereunder or at law.
4. Borrower shall immediately advise Lender, in writing if:
a) Borrower's place of business and record keeping is changed or a new
place is added or Borrower changes its state of incorporation;
b) There occurs any circumstance or situation, including without
limitation any customer disputes and/or supplier/subcontractor lien
filings related to or which may impact upon full payment of any
invoices submitted or to be submitted for financing under the
Contract(s);
c) There are any changes, modifications, amendments or terminations of
said Contracts;
d) There are any changes in the senior management of the Borrower or
should any person previously authorized to execute loans documents on
behalf of the Borrower be terminated or relieved of their authority to
execute such documents;
e) There is, or is threatened, any attachment or other legal process
levied against Borrower including without limitation, (i) any
assessment made concerning any tax liability, (ii) if any taxing
authority provides any notice of an intent to place a levy or lien, or
(iii) if any tax lien or levy is actually recorded;
f) There are any previously, undisclosed adverse changes with respect to
Borrower's financial condition, the Borrower's Contracts or the
Borrower's performance under said Contracts occur;
g) Borrower dissolves, merges or consolidates with or into my corporation
or otherwise change its identity or corporate or business structure;
and/or
h) Borrower changes its corporate name or uses any trade name not
previously disclosed in writing to the Lender.
5. To further secure the Liabilities, Borrower hereby grants Lender a security
interest in all present and future accounts, accounts receivable, instruments,
documents, contract rights, chattel paper, inventory, equipment, fixtures, money
deposit accounts, insurance policies, reserves, reserve accounts, general
intangibles, and proceeds thereof presently existing or hereafter arising,
either now owned or hereafter acquired by Borrower, and whether or not relating
to the Contracts, and all goods and inventory in all stages of manufacture, and
the interest of Borrower in any goods, products, and proceeds thereof, and all
books and records pertaining to security and agrees to cooperate fully with
Lender with respect to filing appropriate financing statements to perfect and
evidence same.
Lender is to be authorized to notify all contracting entities and/or its
designated payors ("Account Debtors") of Borrower that all future payment(s) on
Contract(s) shall be made directly to Lender without endorsement. Any surplus
payments received by Lender shall be refunded to Borrower. Upon payment in full
of the Liabilities (and provided that Lender has no further obligation to
provide financing), and, at Borrower's written request, Lender agrees to release
its security interest under this Paragraph. Borrower shall be responsible for
preparing and filing any termination statements reasonably required in
connection therewith; provided that Lender shall cooperate with Borrower and
shall not unreasonably withhold its consent and acknowledgment of the same.
FORM Financing and Security Agreement
REVISED 10/01/97
2
<PAGE>
6. Prior to an Event of Default, Lender shall apply payments on invoices under
Contract(s) in the following order and manner, unless otherwise agreed to in
writing between the parties:
a) First, to accrued interest and/or servicing fees on the amount of the
-----
invoice funded, if applicable;
b) Second, to any other outstanding fee due by Borrower to Lender in
-------
accordance with the terms of the Term Sheet,
c) Third, to the principal balance of the invoice funded, if applicable;
-----
d) Fourth, to accrued interest and/or servicing fees on advances on any
------
other financed invoices on which payment shortfalls have occurred;
e) Fifth, to the principal balance(s) on any other invoices on which
-----
payment shortfalls have occurred;
f) Sixth, to satisfy any previously agreed upon third party payments,
-----
pursuant to a Third Party Agreement to which both Lender and Borrower
are parties;
g) Seventh, to reduce outstanding balances of any Mobilization, Temp
-------
Mobe or Purchase Order loans owed by Borrower, with applications first
made to retire accrued interest and fees, and then to outstanding
principal balances, if applicable;
h) Eighth, to retire any other outstanding Liability then due and
------
payable to Lender by Borrower; and
i) Ninth, with any remaining monies being paid by Lender to Borrower,
-----
less applicable deductions pursuant to the provisions of Paragraph 2.
After the occurrence of an Event of Default, Lender shall be entitled to apply
any payments or proceeds received by it against the Liabilities, whether
interest, fees, principal, costs of collection or otherwise, in such manner and
order as Lender may, at its sole discretion, determine.
LENDER WILL NOT BE HELD RESPONSIBLE FOR FUNDS WHICH ARE NOT PROPERLY ADDRESSED
TO THE APPROPRIATE LOCKBOX OR LOCKBOX ACCOUNT REFLECTED IN THE NOTICE OF
ASSIGNMENT. Credit for such misdirected funds will be given only when such funds
are credited to Lender's account. Borrower is urged to make sure that Account
Debtors properly identify all checks and wires sent to the Lender's Lockbox or
Lockbox Account on behalf of the Borrower. Should funds received by Lender not
be adequately marked so as to enable Lender to identify the proper Borrower,
Borrower's contract number or Borrower's invoice number, which was detailed in
the Promissory Note, Lender will credit the Borrower as soon as these funds are
properly identified, to reflect the date said funds were credited to Lender's
account.
7. In the event any Liabilities reach their maturity date and still remain
unpaid in part or in their entirety, Lender, at its sole option, may do one or
more of the following:
a) Require the Borrower to pledge additional collateral to secure the
Liabilities, thereby replacing the original collateral, with interest
rate and servicing fee remaining the same as on the original note;
b) Allow any matured note(s) to continue to age with the interest rate
otherwise payable thereunder increasing immediately and without notice
and thereafter shall be payable at a rate of four percent (4%) per
annum in excess of the rate otherwise payable with the servicing fee
remaining the same rate as on the original note until the obligation
thereunder is paid in full or sufficient collateral acceptable to the
Lender is provided;
c) Declare an Event of Default under paragraph 8 and exercise its remedies
hereunder or otherwise available to it; or
d) Rewrite any matured note(s) with the new note's principal reflecting
(i) any unpaid principal balance and any unpaid interest accruals on
the matured note(s) and (ii) a servicing fee on the outstanding
balance(s) equal one percent (1%) per 30-day period or fraction
thereof. The interest rate on the new note will be calculated at two
percent (2%) in excess of the interest rate on the original note.
8. If any of the following events ("Events of Default") shall occur and be
continuing:
a) Any Liability is not paid in a timely manner by or on behalf of the
Borrower;
b) The filing of any petition by or against the Borrower or any guarantor
or surety for any Liability (each an "Obligor"), or the commencement of
any proceedings for the relief or readjustment of the indebtedness of
the Obligor, either through reorganization, composition, extension or
otherwise, under any law relating to bankruptcy, insolvency or
reorganization or relief of debtor;
c) The general nonpayment by any Obligor of their respective debts as such
debts become due, or the admission in writing by an Obligor of its
inability to pay its debts generally, the making by an Obligor of a
general assignment for the benefit of creditors or the taking advantage
by any Obligor of any insolvency law;
d) Any seizure, vesting or intervention by or under authority of a
government, by which the management of an Obligor is displaced or its
authority in the conduct of its business is curtailed;
e) The appointment of a receiver or conservator of any property of an
Obligor;
f) The assertion of any defense, setoff counterclaim or reduction in the
projected payment from the amount shown on the original invoice by any
Account Debtor under any Contract;
FORM Financing and Security Agreement
REVISED 10/01/97
3
<PAGE>
g) If the Borrower fails to perform any of its covenants and/or reporting
obligations to the Lender under this Agreement when and as required
herein, time being of the essence;
h) If there occurs any event of default under any other document executed
in connection with any of the Liabilities;
i) Borrower submits any invoice(s) for financing on which Borrower has
already received payment or on which Borrower otherwise has knowledge
payment(s) will not be properly made to Lender.
j) If Borrower fails to comply in a timely manner with any federal, state
or local tax or other reporting requirements (including without
limitation requirements relating to the filing of payroll tax returns),
or fails to make timely payment of all tax or municipal obligations, or
if any federal, state or local government asserts or files any tax or
other statutory lien or levy on, or claim of set-off against, any
assets of the Borrower, or otherwise claims or asserts in writing that
the Borrower has failed to comply with its tax or other payment
obligation or otherwise states in writing its intention to file any
lien against the Borrower's assets for failure to pay any or all
required tax or other obligations.
k) If any representation or warranty contained herein or any information,
report, financial statement, exhibit, certificate or schedule furnished
by or on behalf of the Borrower or any Obligor in this Agreement or in
connection with this Agreement whether provided prior to, simultaneous
with or after the execution of this Agreement, contains any material
misstatement of fact or omitted or omits to state any material fact
necessary to make the statements herein or therein not misleading or in
the Borrower provides information to the Lender which is inconsistent
with the information provided by the Borrower to any Account Debtor or
received by the Borrower from any Account Debtor pursuant to any
Contract or if the Borrower takes any action, whether intentional or
unintentional, which has the effect of diverting from the Lender any of
the payments receivable or to be receivable under my Contract which has
been assigned to the Lender, except as expressly set forth in this
Agreement or otherwise in writing by the Lender.
Then or at any time after the happening of any such Event of Default, the
Lender may seek any and all remedies available for the enforcement of this
Agreement at law or in equity, and without limitation, the Lender may also,
in its sole discretion, but shall not be obligated to, (i) advance any
further funds to Borrower, and/or (ii) declare all Liabilities payable by
the Borrower to be forthwith due and payable and/or (iii) exercise any or
all of its rights to collect on the collateral hereunder. If it becomes
necessary for Lender to utilize collection efforts or engage an attorney to
enforce its rights against Borrower, Borrower agrees to pay all expenses in
connection therewith, including reasonable attorney's fees and costs.
9. Borrower will, upon any request of the Lender, within five (5) business
days, provide the Lender with its latest financial statements, current accounts
receivable and/or accounts payable aging reports and a detailed inventory of all
collateral encumbered by the security interest granted to the Lender.
10. Should any of the Contract(s) being financed by the Lender be construction
projects or otherwise contain provisions under which Borrower's subcontractors
and/or suppliers have the right to petition the issuer or owner of the
Contract(s) for direct payment, Borrower agrees that all such payments will be
made to such suppliers and/or subcontractors in a timely manner; as Borrower
agrees that to fail to make such payments could impair the Lender's ability to
collect in full on invoices financed by the Lender. Borrower's failure to make
such timely payments shall be an Event of Default hereunder and may constitute
misappropriation of funds.
11. Lender may use all reasonable efforts, including direct contact with
Account Debtor(s), to collect amounts due under this Financing Agreement.
12. In the event it should become necessary for the Lender to enforce its
rights hereunder against my Account Debtor(s) under any Contract(s), Borrower
agrees to pay reasonable attorneys' fees, up to a maximum amount permitted by
law. In such event, Borrower will fully cooperate with Lender in connection with
such collection effort, and will provide witnesses and documents, at Borrower's
sole cost and expense, as may be required in connection with such efforts.
13. Borrower hereby grants a limited power of attorney to Lender to execute and
-----------------
file financing statements pursuant to the Unifom Commercial Code in Borrower's
name, to file Assignments of Claims, Notices of Assignment, Notices of Releases
of Assignment and Releases of Assignment with Account Debtors in Borrower's
name, and to endorse Borrower's name, and to negotiate or to deposit, any and
all checks, notes, drafts, or other orders for payment of money payable or
endorsed to Borrower which come into Lender's possession hereunder.
14. Borrower understands that funding of the loan(s) contemplated by the Term
Sheet attached hereto, the Funding Policies attached hereto and executed by
Lender and Borrower, this Agreement and the other documents executed in
connection with this Agreement will be made to, or on behalf of the Borrower,
only after receipt and approval of properly executed copies of Assignments of
Claim, Notices of Assignment, Notices of Release of Assignment and Releases of
Assignment when applicable, UCC-1 Financing Statements, Borrower Promissory
Notes, Borrower Disbursement Summaries, complete copies of the Borrower's
Assigned Contracts, duplicate copies of the Borrower's invoices under
Contract(s) identical to those submitted to respective Account Debtors, related
invoice acceptances/acknowledgments from the Account Debtors, and such
FORM Financing and Security Agreement
REVISED 10/01/97
4
<PAGE>
other documents as may be required by Lender to secure proper collateral for
Lender and ensure the Lender's first security position as a lender to the
Borrower. Borrower further understands that funding any such loans are
conditional upon Lender's completion of its due diligence with respect to
Borrower's and Account Debtors' creditworthiness, the absence of any material
changes in the finances, business operations, business prospects of the Borrower
or performance by either Borrower or Accounts Debtor(s) under any Contract(s)
and is subject to the absolute right of the Lender, in its sole discretion, to
finance any invoice submitted for financing. The Borrower agrees that the Lender
may authorize transfers of proceeds of loans and/or final settlements of
invoices under the Contract(s) either directly to the Borrower or to designated
third parties upon the mutual written agreement of the Lender and the Borrower
or, at Lender's sole option, to pay off shortfalls on existing invoice payment
under one or more notes or to reduce Borrower's obligations under Mobilization
or Temp Mobe notes as outlined in Paragraph 6.
15. The term of this Agreement shall extend until the payment in full by
Borrower of all Liabilities due to the Lender or the termination of the last
Contract(s) upon which Lender has an acknowledged Assignment(s) of Claim,
whichever comes last. However, this does not affect the right of the Borrower to
prepay Liabilities, in whole or in part, without penalty, at any time.
16. Borrower acknowledges that any reports, audits, credit checks or similar
investigations have been or will be performed by or for Lender's own purposes
and not for the benefit of Borrower, and Borrower agrees that it has no right to
rely thereon. Borrower further agrees that any lockbox or other procedure
established by Lender to collect payment under the Contract(s) are intended for
Lender's benefit and not for the benefit of Borrower, and Lender shall have no
duty or obligation to Borrower for any loss or damage to Borrower as a result
thereof except for Lender's willful misconduct. Lender and Borrower acknowledge
that this Agreement shall not create any (i) agency, (ii) partnership or (iii)
---
joint venture relationship between Lender and Borrower.
17. Borrower acknowledges and agrees that Lender may assign or sell
participating interests in all or any portion of the Liabilities and any
assignee or purchaser shall have a beneficial interest in the collateral pledged
herein. Borrower agrees that in no event shall it have or acquire any rights or
claims with respect to or against any such persons.
18. This Agreement may, from time to time, be subsequently amended by the
parties to provide for the purchase and sale or financing of such Contract(s),
along with all attendant rights herein described, as may be submitted by
Borrower and accepted by Lender under terms agreeable to both parties. Such
amendments to this Agreement shall be made in writing and signed by both
parties, and shall be subject to all the terms and conditions herein described,
except where specifically noted under the terms of said amendment(s).
19. Borrower hereby submits to jurisdiction in the State of New Jersey for the
enforcement of this Agreement or any claim(s) hereunder, and hereby waives any
and all rights under the laws of any foreign jurisdiction to object to such
jurisdiction. Any claim by Borrower against Lender shall be brought in the
Superior Court for the State of New Jersey only. THE PARTIES HEREBY WAIVE ANY
AND ALL RIGHTS TO A TRIAL BY JURY in any action, suit, counterclaim or cross
claim arising in connection with, out of or otherwise relating to this
Agreement, the other loan documents, the obligations, the collateral in any
transaction arising therefrom a related thereto. This Agreement shall be
construed in accordance with the laws of the State of New Jersey.
20. Borrower agrees to indemnify and hold the Lender, its officers, directors,
employees, principals and shareholders, harmless from and against any loss,
liability, expense, damage or injury suffered or sustained resulting from third-
party claims and arising from (i) acts or omissions of the Borrower, (ii) acts
or omissions of any agent, assignee, broker ordelegee of the Borrower, or (iii)
otherwise in connection with the financing provided hereby or any of the
activities of Borrower so funded. Borrower's obligations to provide such
indemnification shall survive the term of this Agreement and shall continue in
full force and effect for a period of sixty (60) months from the date of such
termination.
21. Whenever, by the terms of this Agreement, notice shall be given, such
notice shall be in writing and sent by facsimile transmission (provided evidence
of transmission is maintained), or national overnight or courier delivery
service, addressed to the respective addresses of the parties set forth on the
first page of this Agreement, or at such other telephone numbers or addresses as
have, from time to time, been designated by like notice.
22. The provisions of this Agreement are severable. Should any provisions
herein be found to be invalid or unenforceable by a court of competent
jurisdiction, the other provisions shall remain in full force and effect as
though the invalid or unenforceable provision were never a part hereof.
23. No waiver of or failure to enforce any provisions of this Agreement shall
be deemed, or shall constitute, a waiver of any other provision of this
Agreement, nor shall such waiver or failure to enforce constitute a continuing
waiver of any provision of this Agreement.
24. The parties hereby represent that each has caused, and will cause, the
proper corporate or individual actions to be taken by each respectively, to
effectuate the rights and obligations granted under this Agreement.
FORM Financing and Security Agreement
REVISED 10/01/97
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<PAGE>
25. In connection with any disagreement or litigation arising out of, or in
connection with, this Agreement, Borrower agrees to reimburse Lender for all of
its expenses in connection therewith, including reasonable attorneys' fees, at
the trial and appellate levels, unless Borrower prevails in a final judgment
which is unappealable or unappealed.
26. All the terms and provisions of this Agreement shall be binding upon and
inure to the benefit and be enforceable by the successors in interest of the
respective parties hereto. Nothing contained herein, expressed or implied, is
intended nor shall it be construed to confer to or give to any person, firm, or
corporation other than the parties hereto any rights or remedies under or by
reason of this Agreement.
27. Neither party may assign this Agreement without the other's written
consent, which consent shall not be unreasonably withheld. Nothing herein
contained shall limit the right of the Lender to assign or sell, all or any
portion of the Liabilities.
28. Reference to the masculine shall include the feminine and neuter, and vice
----
versa. Reference to the singular shall include the plural, and vice versa.
- ----- ----------
29. This Agreement sets forth the entire agreement and understanding between
the parties as to the subject matter hereof, and merges and supersedes all prior
discussions, agreements, and understandings of every and any nature between
them. No party shall be bound by any condition, definition, warranty, or
representation, other than as expressly set forth or provided for in this
Agreement, or as may be, on or subsequent to the date hereof, set forth in
writing and signed by the parties hereto.
30. This Agreement may be executed in any number of counterparts, each of which
shall be an original but all of which shall constitute the entire instrument.
Signature pages may be exchanged by telefacsimile to expedite the closing, with
original signatures to be exchanged as soon as possible thereafter.
31. By executing this Agreement, the parties acknowledge that they have been
fully advised by independent counsel as to the ramifications of the terms and
provisions of this Agreement, and the signatories have authority to act on
behalf of the respective entities in executing this Agreement, for the purposes
herein contained.
IN WITNESS WHEREOF, the parties have executed this Financing Agreement and
affixed their signatures on the date first above written.
LENDER: PRINVEST FINANCIAL CORP
By: /s/ Pamela K. Wilson 1/12/98
---------------------- ---------
Signature Date
ACCEPTED AND AGREED TO:
BORROWER: NETWORK SIX, INC.
By: /s/ Kenneth C. Kirsch 12/31/97
--------------------- --------
Signature Date
President & CEO
-----------------
Print Name & Title
FORM Financing and Security Agreement
REVISED 10/01/97
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<PAGE>
EXHIBIT A
TERM SHEET
In consideration of the services being rendered by PrinVest Financial Corp (the
"Lender") in providing the contract financing to Network Six, Inc. ("Borrower"),
certain administrative procedures with respect to such financing will be
necessary, and the Borrower agrees to pay Lender as follows:
GENERAL FEES
-------------
An Enrollment Fee of $350.00 (paid).
--------------
An Origination Fee of $5,000.00, as a one time charge deducted from the first
---------------
funding.
SERVICING FEES
--------------
A per diem Servicing Fee of 0.0167% of each funded amount collected at the time
-------------
payments are received and processed.
A Servicing Fee of one $1.00 for each non-financed "pass through" invoices will
-------------
be assessed.
INTEREST RATES
--------------
- --------------------------------------------------------------------------------
All interest rates are based on a 360-day year, but charged on the number of
days or periods elapsed. All Prime-based interest rates are based on the Prime
Rate as published in "The Wall Street Journal" on the date of funding
- --------------------------------------------------------------------------------
An Interest rate on Accounts Receivable (invoice) financing of Prime plus 1.5%
-------------------
per annum collected on a per diem basis, subject to the minimum 5day OID period
calculation, on the net outstanding balance of monies advanced to, or on behalf
of, Borrower, for all eligible invoices, plus any accrued fees and/or charges
incurred in providing such financing (other than previous interest charges) will
be charged.
MONTHLY SURCHARGE
------------------
In the event the Borrower's outstanding principal loan balance drops below
$1,000,000 at any time during any fiscal month (refer to Exhibit C), the
Borrower will be assessed a surcharge equal to 3.5% per annum on the Borrower's
average daily outstanding loan balance for such month. This surcharge will be
captured from future advances and/or residuals, at the Lender's discretion.
ADVANCE RATES
--------------
The above fee and interest rate schedules reflect a receivables financing
advance rate of:
* 80% on acknowledged and/or approved invoices.
RESIDUAL PAYMENTS
-----------------
Residual payments will be forwarded to the Borrower:
* Within three (3) business days after funds are credited to the Lender's
account.
BORROWER'S CREDIT LIMIT
-----------------------
THE LENDER HAS APPROVED AN OVERALL CREDIT LIMIT OF $1,500,000.00 FOR THE
BORROWER; SAID LIMIT REPRESENTING THE MAXIMUM OUTSTANDING BALANCE BORROWER
------- ----------- -------
WILL BE PERMITTED AT ANY ONE TIME. In the event, either by consent or
circumstances, the Borrower's outstanding balance exceeds the aforementioned
credit limit, such event shall not be considered a waiver or change to the
credit limit; and Lender reserves the right to limit future advances so that
Borrower does not exceed its credit limit. Upon demand by the Lender, if
Borrower's outstanding principal loan balance exceeds its credit limit, Borrower
will pay Lender sufficient funds to reduce its outstanding balance below its
credit limit. The foregoing Credit Limit is subject to the absolute right of the
Lender, in its sole discretion, to finance or not finance any invoice submitted
for funding.
7
<PAGE>
FORM Financing and Security Agreement
REVISED 10/01/97
OTHER TERMS AND CONDITIONS
--------------------------
The following terms and conditions must be met prior to the first funding:
* All invoices submitted for financing must be accompanied by a completed
invoice verification form and signed by Borrower's account debtor. Invoice
verification form to be supplied by the Lender.
* Borrower must provide written authorization from the Purchasing Agent at the
State of Rhode Island authorizing the assignment of proceeds to Lender for
both the Dept. Of Human Services and the Dept. Of Health contracts. Proceeds
must be remitted to the Lender's lockbox as shown on page 8 of the Financing
& Security Agreement.
* Borrower must provide written authorization from the proper person at the
State of Maine authorizing the assignment of proceeds to Lender for the
Dept. Of Human Services contract. Proceeds must be remitted to the Lender's
lockbox as shown on page 8 of the Financing & Security Agreement.
* Lender must be in receipt of UCC-3 releases from Unisys Corp for the dollar
amount of the Maine Dept. of Human Services contract that Network Six will
fund with Lender.
* Lender must be in receipt of UCC-3 terminations from Citizens Bank for both
Network Six, lnc. and Network Six, Inc.
* Borrower must provide Lender with copy of complete Articles of
Incorporation.
If either Mobilization, Temp Mobe or Purchase Order loans are being provided,
Borrower warrants Borrower will use such loans only for those purposes
----
specifically outlined in the use of proceeds statement required by and submitted
to the Lender as a prerequisite for consideration of such financing.
Borrower will also be required to submit Accounts Payable and Accounts
Receivable Aging reports, and Financial Statements each quarter, as well as
provide audited Financial Statements once a year, if available.
In the event any payments received on behalf of the Borrower are subsequently
returned by the Borrower's bank or the Borrower's customer's bank for
insufficient funds or any other reason which was not caused by a mistake on the
part of the Lender, Borrower acknowledges the greater of $50.00 "return check
charge", or the maximum allowed under law, will be assessed.
NETWORK SIX, INC. IS RESPONSIBLE FOR INDICATING THE FOLLOWING PAYMENT
INFORMATION ON ALL INVOICES SUBMITTED FOR FINANCING BY PRINVEST.:
REMIT PAYMENT TO: PRINVEST FINANCIAL CORP
FBO: NETWORK SIX, INC.
P.O. BOX 6453, BOSTON, MA 02212-6453
Senior Officers and/or shareholders of Borrower will not increase benefits to
themselves or one another; nor will they repay existing loans to any officers,
stockholders or employees of the Borrower; nor will the company make any new
loans made to any officers and/or shareholders by Borrower during such time as
any Mobilization loans from the Lender remain outstanding.
In the event Lender determines that there are reasonable grounds to believe
Borrower has experienced material financial, contract or other changes, Lender
reserves the right to undertake an on-site audit of Borrower at Borrower's
expense.
Bank wire and lock box fees, UCC search and filing fees, messenger costs, postal
and/or overnight mail, third-party payment fees and other costs incurred by
Lender (including, but not limited to, reasonable attorneys' fees and insurance
bonding premiums) will be charged to Borrower as they are incurred.
These interest rates, fees and other charges; authorized advance rates; credit
limits and other terms and conditions contained herein are subject to change
with a 30-day advance written notice by the Lender. This Term Sheet only
commits Lender to the financing of the Contract(s) stated on Schedule 1. Lender
reserves the right of first refusal to provide financing on any and all new
contracts awarded to Borrower with a mutually agreed upon rate schedule.The
following terms mean;
A) "ACCOUNTS RECEIVABLES FINANCING", "ACCOUNTS RECEIVABLE LOANS", "INVOICE
FINANCING" OR "INVOICE LOANS" refers to loans made by Lender to Borrower
which are backed by receivables due on specific invoices submitted to
Account Debtors under Contracts whose proceeds have been assigned to the
Lender.
B) "MOBILIZATION" and/or "WORKING CAPITAL" Financing or Loans refers to loans
made by Lender to Borrower which are not backed by particular invoices, but
which are Contract-specific; pursuant to a Contract assigned to the Lender.
8
<PAGE>
FORM Financing and Security Agreement
REVISED 10/01/97
C) "TEMP MOBE FINANCING" or "TEMP MOBE LOAN" refers to both Overhead Financing
and Purchase Order Financing.
D) "OVERHEAD FINANCING" or "OVERHEAD LOAN" refers to advances made by Lender to
Borrower to pay for general overhead expenses, including payroll costs, to
produce good or services to generate an identifiable invoice pursuant to a
Contract assigned to the Lender. These loans will be converted into an
Accounts Receivable Loan upon the receipt of the invoice for which the
Overhead Financing funds were used.
E) "PURCHASE ORDER FINANCING" or "PURCHASE ORDER LOAN" refers to advances made
by Lender to Borrower to purchase materials to produce good or services to
generate an identifiable invoice pursuant to a Contract assigned to the
Lender. These loans will be converted into an Accounts Receivable Loan upon
the receipt of the invoice for which the Purchase Order funds were used.
F) "RESIDUALS" are defined as that portion of an invoice payment received on
behalf of a Client under an assigned Contract which remains after the
payment has been applied to repay both principal advances made by Lender to
Borrower against that invoice together with interest accruals on such
advances. If no advances were made against an invoice for which payment is
received, the total amount of such payments will be considered as Residuals,
in the absence of specific written agreements to the contrary.
G) "OID PERIOD" is that minimum period of time on which interest charges and
servicing fees will be charged, irrespective or how quickly after a funding
payment is received by and credited to the Lender's account."
ACCEPTED AND EXECUTED this 31 day of December , 1997 .
---------------- ----------- ---
NETWORK SIX, INC.
By: /s/ Kenneth C. Kirsch 12/31/97
--------------------- --------
Signature Date
PRINVEST FINANCIAL CORP
By: /s/ Pamela K. Wilson 1/12/98
--------------------- --------
Signature Date
9
<PAGE>
FORM Financing and Security Agreement
REVISED 10/01/97
EXHIBIT B
FUNDING POLICIES
PrinVest Financial Corp ("Lender") would like to welcome Network Six, Inc.
("Borrower") as a new PrinVest client. We are dedicated to providing reliable
and timely fundings together with a responsive and professional level of service
to our clients, one unmatched by our competitors.
While we understand your need for funding is sometimes urgent, there are
procedures to which we must adhere. So that you will be fully aware of our
funding policies and to facilitate the growth of a long-term relationship,
please make note of the following telephone and facsimile numbers which will
connect you directly to our Servicing Department and your Account Executive.
TELEPHONE: (609) 219-9000 FACSIMILE: (609) 844-0449
SCHEDULE FOR FUNDING
ALL APPROVED INVOICES WILL BE FUNDED NOT LATER THAN THE FOLLOWING BUSINESS DAY.
After Lender receives your request for a funding, together with copies of all
invoices to be financed and all related invoice approvals, acceptances or,
---
acknowledgments (remember, it is your responsibility to provide the necessary
----
invoice approvals, acceptances or acknowledgments in support of your invoices
being submitted for financing) , a Promissory Note and Disbursement Summary are
prepared and faxed to you. These documents detail your interest obligations,
all funding and wire fees, out-of-pocket deductions, and net disbursements to or
on behalf of your company.
Have an authorized company representative (designated by a written Resolution of
your Board of Directors) (a) sign, seal and have witnessed the Promissory Note,
(b) sign and date Disbursement Summary and (c) return both documents to Lender
via facsimile prior to 2:30pm. Upon receipt of those documents, funds will be
--------
wired as detailed in the Disbursement Summary.
- --------------------------------------------------------------------------------
You must also make a clean, hard copy of each Promissory Note (signed, sealed
----
and witnessed); and then return each executed copy to the Lender by air express
or first class mail; to guaranty receipt by the Lender within a maximum of five
(5) business days.
A failure to return signed originals of Promissory Notes can delay future
fundings.
- --------------------------------------------------------------------------------
RECEIPTS OF PAYMENT
Once Lender obtains notification of payments and those funds have been credited
to its account for your firm's benefit, Lender will apply those monies to your
account, as appropriate. If Residuals are being applied to Mobilization notes
or to offset shortfalls on any previously paid invoices financed by Lender, such
applications will be made by Lender. You will be provided with a weekly report
detailing all receipts for the preceding and their applications, together with
copies of all check stubs and wire advices. Interest charges are calculated
from the day to, and inclusive of, the day verified funds are received and
properly credited to the Lender Lockbox Account identified in the respective
Notice of Assignment.
If you have any questions, please contact your Account Executive or Sales
Representative, whom will be glad to assist you.
10
<PAGE>
FORM Financing and Security Agreement
REVISED 10/01/97
SCHEDULE 1
to the
FINANCING AND SECURITY AGREEMENT
CONTRACT COLLATERAL
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Contracting Entity Contract Number Contract Date Indicate Assignee If Now
Under Assignment(1)
<S> <C> <C> <C>
RI Dept. Of Health All
RI Dept of Human Services All
Maine Dept. of Human Services All
- ---------------------------------------------------------------------------------------------
</TABLE>
Note: (1) Borrower hereby warrants that none of the above listed contracts,
other than those indicated above have been previously assigned; and that it will
assist the Lender to secure all necessary releases of assignment and releases of
filed notices of assignment, with time being of the essence.
FINAL PAGE
11
<PAGE>
Form: Borrowing Resolutions for Corporations
Revised: 02/03/97
BORROWING RESOLUTION OF THE BOARD OF DIRECTORS
OF
Network Six, Inc.
I HEREBY CERTIFY that I am the duly elected and qualified Secretary of Network
Six, Inc., and the keeper of the records and corporate seal of said corporation;
that the following is a true and correct copy of resolutions duly adopted at a
meeting of the Board of Directors thereof, held in accordance with its by-laws
at its corporate offices located at 475 Kilvert Street, Warwick, RI O2886, on
the 31 day of December 1997 ; and that the same are now in full force.
----- ---------- -
COPY OF THE APPROVED RESOLUTION
AUTHORITY TO PROCURE LOANS
"BE IT RESOLVED, that the (insert titles only) President or Treasurer
----------------------
of this Corporation, or his/her successors in office, and any (insert number
required to sign) 1 of them be hereby authorized, on behalf of, and in the
-
name of this Corporation to:
(a) Negotiate and procure loans, letters of credit and/or other credit
facilities from PrinVest Financial Corp, a New Jersey corporation (the
"Lender") in an amount not to exceed Three Million Dollars, $3,000,000.00
---------------------
in the aggregate at any one time outstanding.
(b) Discount with or through the Lender commercial or other business paper
belonging to this Corporation, made or drawn by or upon third parties,
without limit as to amount;
(c) Give security for any liabilities of this Corporation to the Lender by
pledge or assignment or lien upon any real or personal property, tangible
or intangible, of this Corporation; and
(d) Execute in such form as may be required by the Lender all notes and
other evidences of such loans, letters of credit or other credit
facilities, all instruments or pledges, assignment or lien, lockbox and
other account agreement, or other certificates, documents and agreements in
connection with any of the foregoing."
"RESOLVED FURTHER, that any of the aforesaid officers may direct and authorize
the Lender or any other third party to pay the proceeds of any such loans,
credit facilities or discounts, whether so payable to the order of any of said
persons in their individual capacities or not and whether such proceeds are
deposited to the individual credit of any said persons or not and the Lender
shall be fully protected, indemnified and held harmless from any liability by
the Corporation in following such direction."
"RESOLVED FURTHER, that this resolution shall continue in force and the Lender
may consider the holders of said offices and their signatures, respectively, to
continue as set forth in the certificate of the Secretary of this Corporation
accompanying a copy of this resolution when delivered to the Lender or in any
similar subsequent certificates, until notice to the contrary in writing is duly
served on the Lender."
I HEREBY FURTHER CERTIFY that the following named persons have been duly elected
to the offices set opposite their respective names, that they continue to hold
these offices at the present time, and that the signatures of each respectively
appear as follows:
12
<PAGE>
Form: Borrowing Resolution for Corporations
Revised: 02/03/97
(PLEASE SUPPLY GENUINE SIGNATURES HEREUNDER)
<TABLE>
<CAPTION>
TITLE NAME SIGNATURE
- ------------------------ ----------- -----------
<S> <C> <C>
(typed or printed)
President Kenneth C. Kirsch /s/ Kenneth C. Kirsch
------------------ ----------------------
Vice President
------------------ ----------------------
Treasurer Dorothy M. Cipolla /s/ Dorothy M. Cipolla
------------------ ----------------------
Assistant Treasurer
------------------ ----------------------
Secretary Dorothy M. Cipolla /s/ Dorothy M. Cipolla
------------------ ----------------------
Assistant Secretary
------------------ ----------------------
(Other)
------------------ ----------------------
</TABLE>
IN WITNESS WHEREOF, I have hereunto affixed my name as Secretary and have
caused the corporate seal of said Corporation to be affixed hereto this
31 day of December , 1997 .
- ----- -------------- ----
/s/ Dorothy M. Cipolla
------------------------
Secretary
I hereby certify that I am a Director of said Corporation and that the foregoing
is a correct copy of resolutions passed as therein set forth, and that the same
are now in full force.
By: /s/ Kenneth C. Kirsch 12/31/97
------------------------------- ----------
Director (other than Secretary) Date
13
<PAGE>
FORM State Government Instrument of Assignment
REVISED 01/10/97
STATE AND MUNICIPAL GOVERNMENT
INSTRUMENT OF ASSIGNMENT OF CLAIM
Company: Network Six, Inc. ("Assignor")
ADDRESS: 475 Kilvert Street
CITY/STATE/ZIP: Warwick, RI 02886
ISSUING ENTITY: Maine Dept. of Human Services ("Purchaser")
Director, Bureau of Child and Family Services
11 State House StationAugusta, ME 02886
CONTRACT NUMBER(S): ALL ("Contract")
KNOW ALL MEN BY THESE PRESENTS: For value received, the undersigned Assignor
does hereby sell, assign, set over, and transfer to PrinVest Corp, a New Jersey
corporation, located at 3 Princess Road, Lawrenceville, NJ 08648 ("ASSIGNEE"),
as agent for others, all rights to and interests in all moneys due or to become
due, including modifications and renewals thereof, and any and all amendments
thereof and supplements thereto, from the aforementioned Purchaser accruing
under the aforementioned Contract; together with all the moneys now due and all
the moneys hereafter to become due to Assignor on account of any increases in or
amendments, additions, or supplements to the Contract or any extensions thereof,
or additional work done and/or materials and supplies furnished thereunder, or
any modification, amendment, change order, or other arrangement relating to the
Contract.
Assignor hereby irrevocably constitutes and appoints Assignee the true and
lawful attorney of Assignor to demand, receive, and enforce payments, and to
give receipts, releases, and satisfactions, either in the name of Assignor or in
the name of Assignee, in the same manner and with the same effect as Assignor
could do if this Assignment had not been made.
The Assignee shall not be held responsible for the performance of any work
on any of the items mentioned in said Contract.
SIGNED, SEALED, AND DELIVERED:
ATTEST: ASSIGNOR:
Corporate Secretary/Notary NETWORK SIX, INC.
BY: /s/ Robert W. Vera, Jr. BY: /s/ Kenneth C. Kirsch 12/31/97
------------------------- -------------------------------
Signature Signature Date
DATE: 12-31-97 Kenneth C. Kirsch, President & CEO
--------- ----------------------------------
Print Name and Title
(Seal)
14
<PAGE>
FORM State Government Instrument of Assignment
REVISED 01/10/97
STATE AND MUNICIPAL GOVERNMENT
INSTRUMENT OF ASSIGNMENT OF CLAIM
COMPANY: Network Six, Inc. ("Assignor")
ADDRESS: 475 Kilvert Street
CITY/STATE/ZIP: Warwick, RI 02886
ISSUING ENTITY: RI Dept. of Human Services - Management Services
("Purchaser") 600 New London AvenueCranston, RI 02920
CONTRACT NUMBER(S): ALL ("Contract"')
KNOW ALL MEN BY THESE PRESENTS: For value received, the undersigned
Assignor does hereby sell, assign, set over, and transfer to PrinVest Corp, a
New Jersey corporation, located at 3 Princess Road, Lawrenceville, NJ 08648
("ASSIGNEE"), as agent for others, all rights to and interests in all moneys due
or to become due, including modifications and renewals thereof, and any and all
amendments thereof and supplements thereto, from the aforementioned Purchaser
accruing under the aforementioned Contract; together with all the moneys now due
and all the moneys hereafter to become due to Assignor on account of any
increases in or amendments, additions, or supplements to the Contract or any
extensions thereof, or additional work done and/or materials and supplies
furnished thereunder, or any modification, amendment, change order, or other
arrangement relating to the Contract.
Assignor hereby irrevocably constitutes and appoints Assignee the true and
lawful attorney of Assignor to demand, receive, and enforce payments, and to
give receipts, releases, and satisfactions, either in the name of Assignor or in
the name of Assignee, in the same manner and with the same effect as Assignor
could do if this Assignment had not been made.
The Assignee shall not be held responsible for the performance of any work
on any of the items mentioned in said Contract.
SIGNED, SEALED, AND DELIVERED:
ATTEST: ASSIGNOR:
Corporate Secretary/Notary NETWORK SIX, INC.
BY: /s/ Robert W. Vera, Jr. BY: /s/ Kenneth C. Kirsch 12/31/97
------------------------- --------------------- --------
Signature Signature Date
DATE: 12-31-97 Kenneth C Kirsch, President & CEO
-------- -----------------------------------
Print Name and Title
(Seal)
15
<PAGE>
FORM State Government Instrument of Assignment
REVISED 01/10/97
STATE AND MUNICIPAL GOVERNMENT
INSTRUMENT OF ASSIGNMENT OF CLAIM
Company: Network Six, Inc. ("Assignor")
Address: 475 Kilvert Street
City/State/Zip: Warwick, RI 02886
Issuing Entity: RI Dept of Health ("Purchaser")
3 Capitol Hill, Room 302
Providence, RI 02908
Contract Number(s): ALL ("Contract")
KNOW ALL MEN BY THESE PRESENTS: For value received, the undersigned
Assignor does hereby sell, assign, set over, and transfer to PrinVest Corp, a
New Jersey corporation, located at 3 Princess Road, Lawrenceville, NJ 08648
("ASSIGNEE"), as agent for others, all rights to and interests in all moneys due
or to become due, including modifications and renewals thereof, and any and all
amendments thereof and supplements thereto, from the aforementioned Purchaser
accruing under the aforementioned Contract; together with all the moneys now due
and all the moneys hereafter to become due to Assignor on account of any
increases in or amendments, additions, or supplements to the Contract or any
extensions thereof, or additional work done and/or materials and supplies
furnished thereunder, or any modification, amendment, change order, or other
arrangement relating to the Contract.
Assignor hereby irrevocably constitutes and appoints Assignee the true and
lawful attorney of Assignor to demand, receive, and enforce payments, and to
give receipts, releases, and satisfactions, either in the name of Assignor or in
the name of Assignee, in the same manner and with the same effect as Assignor
could do if this Assignment had not been made.
The Assignee shall not be held responsible for the performance of any work
on any of the items mentioned in said Contract.
SIGNED, SEALED, AND DELIVERED:
ATTEST: ASSIGNOR:
Corporate Secretary/Notary NETWORK SIX, INC.
BY: /s/ Robert W. Vera, Jr. BY: /s/ Kenneth C. Kirsch 12/31/97
------------------------- ----------------------- ----------
Signature Signature Date:
DATE: 12-31-97 Kenneth C. Kirsch, President & CEO
-------- ----------------------------------
Print Name and Title
(Seal)
16
<PAGE>
FORM: Amendment to the Financing and Security Agreement
REVISED: 10/01/96
AMENDMENT
TO THE
FINANCING AND SECURITY AGREEMENT
THIS AMENDMENT to a certain Financing and Security Agreement (the "Financing
Agreement") dated 12/31/97 (the "Amendment") is made this
-----------
__________ day of December 1997, between PrinVest Financial Corporation, a
New Jersey corporation, whose principal business address is 3 Princess Road,
Lawrenceville, NJ 08648 ("Lender"), and Network Six, Inc., a Rhode Island
corporation, whose principal business address is 475 Kilvert Street, Warwick, RI
02886 ("Borrower").
1. The following sections of the Financing Agreement are amended as follows:
* Page 1, Paragraph 2, Lines 8 and 9 is changed to read, "... therefrom, now
existing or hereafter entered into (together "Contracts"), but limited to
such accounts and accounts receivable as listed on Schedule 1, as may be
amended by the parties. ..."
* Page 2, Section 5, Paragraph 1 is changed to read, "To further secure the
Liabilities, Borrower hereby grants Lender a security interest in specific
present and future accounts and accounts receivable as listed in schedule
one, and amended from time to time and proceeds thereof presently existing
or hereafter arising, all interest of the Borrower in said accounts,
accounts receivable and/or proceeds thereof, and all books and records
pertaining thereto; and agrees to cooperate fully with Lender with respect
to filing appropriate financing statements to perfect and evidence same."
* Page 2, Section 5, Paragraph 2, last sentence is changed to read "Lender
shall be responsible for preparing and the Borrower shall be responsible
for filing any termination statements reasonably required in connection
therewith; provided that Lender shall cooperate with Borrower and shall not
unreasonably withhold its consent and acknowledgment of the same."
* Page 3, Section 6(f) will only be relevant if the Lender and Borrower enter
into a third-party payment agreement.
* Page 4, Section 9 is changed to read, "Borrower will, upon any request of
the Lender, within five (5) business days, provide the Lender with its
financial statements for the last closed month, current accounts receivable
and/or accounts payable aging reports and a detailed inventory of all
collateral encumbered by the security interest granted to the Lender.
* Page 5, Section 21 is amended to reflect that all information being
provided by the Lender to the Borrower will be directed to Ms. Dorothy M.
Cipolla, Chief Financial Officer; unless the Lender receives subsequent
written instructions to the contrary.
2. All of the definitions, terms and conditions of the aforereferenced
Financing Agreement between Lender and Borrower remain in full force and effect
as part and parcel of Amendment, except as specifically changed here.
3. This Amendment must be executed by Network Six, Inc. and returned to
PrinVest Financial Corp within seven (7) days of the date set forth above.
This Amendment contains the entire understanding of the parties with regard to
this Amendment. No waiver or modification to the provisions of this Amendment
will be valid unless in writing and signed by both parties. Borrower herein
affirms it has no defenses, counter-claims, set off or other claim against
Lender, its agents or assignees, or with respect to Borrower's obligations under
the Financing Agreement.
IN WITNESS WHEREOF, the parties have executed this Amendment and affixed their
signatures on the date first above written.
LENDER: PRINVEST FINANCIAL CORP
BY: /s/ Pamela K. Wilson
----------------------
Signature
Pamela K. Wilson, Director 1/12/98
---------------------------- ---------
Print Name and Title Date
BORROWER: NETWORK SIX, INC.
BY: /s/ Kenneth C. Kirsch
-----------------------
Signature
17
<PAGE>
Exhibit 10.18
STATE OF MAINE
DEPARTMENT OF HUMAN SERVICES
11 STATE HOUSE STATION
AUGUSTA, MAINE
04333-0011
ANGUS S. KING, JR. KEVIN W. CONCANNON
GOVERNOR COMMISSIONER
February 24, 1997
Mr. Joseph Murray
Network Six, Inc.
475 Kilvert Street
Warwick, R.I. 02886
RE: MACWIS Contract
Dear Mr. Murray:
Enclosed please find the final version of the MACWIS Contract. It is my
determination that this version is reasonable in accommodating the issues raised
in the past.
The State of Maine has dedicated significant resources to the initiation of this
contract and the enclosed version is the final iteration. Please notify Peter
Walsh of your final decision on this matter within twenty four hours of the
receipt of this document.
As you are aware, prior to a final signing of this document the following
documents will need to be received:
* A copy of the required performance bond
* Certification that any required insurance polices have been issued.
I acknowledge that this has been a long process for all involved and the State
of Maine is very eager to begin this exciting project. We await your response.
Sincerely,
Kevin W. Concannon
Commissioner
Maine Department of Human Services
cc: Peter Walsh: Deputy Commissioner of Programs
Rudy Naples: Deputy Commissioner of OMB
Nancy Carlson: Director of the Bureau of Child and Family Services
Joseph Radziszewski: Director of the Division of Data Processing
Janice Cooper: MACWIS Project Manager
<PAGE>
STATE OF MAINE
CONTRACT FOR SPECIAL SERVICES
Commencement Date April 1, 1997
-------------
Dollar Amount $6,265,738.00 Termination Date March 1, 1999
--------------- -------------
THIS AGREEMENT, made this 1st day of April, 1997, is by and between the State of
Maine, Department of Human Services, hereinafter called "Department," and
Network Six, Inc., hereinafter called "Contractor."
The type of organization of the Contractor is:
_____1. An individual doing business as__________________________
_____2. A partnership.
__X__3. A corporation of the State of Rhode Island
---------------------------
_____4. Other: __________________________________________________
The principal office of the Contractor is located
at (street, city, state, zip):
475 Kilvert Street, Warwick, Rhode Island 02886
The Employer Identification Number (Federal tax identification number) of
the Contractor is 05-036-6090
-----------
WITNESSETH, that for and in consideration of the payments and agreements
hereinafter mentioned, to be made and performed by the Department, the
Contractor hereby agrees with the Department to furnish all qualified personnel,
facilities, materials and services and in consultation with the Department, to
perform the services, study or projects described in Rider B. The following
riders are hereby incorporated into this contract:
Rider A - Payment and Other Provisions
Rider B - Specifications of Work to be Performed
IN WITNESS WHEREOF, the Department and the Contractor, by their representatives
duly authorized, have executed this agreement in three original copies.
CONTRACTOR: DEPARTMENT:
Network Six, Inc. Maine Department of Human Services
- -------------------------- ----------------------------------
Contractor Name Department Name
By: /s/ Kenneth C. Kirsch By:
----------------------- --------------------------------
Authorized Signature Authorized Signature
Kenneth C. Kirsch, President/CEO Kevin W. Concannon, Commissioner
- -------------------------------- ----------------------------------
Typed Name and Title Typed Name and Title
APPROVED, CONTRACT REVIEW COMMITTEE: APPROVED, ATTORNEY GENERAL
(if applicable):
Date: ______________________, 1997 Date: ___________________________, 1997
Chairman Attorney General
*By Bureau of Purchases
<PAGE>
STATE OF MAINE
MAINE AUTOMATED CHILD WELFARE
INFORMATION SYSTEM
CONTRACT FOR SPECIAL SERVICES
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<C> <S> <C>
INTRODUCTION AND RECITALS............................................. 1
RIDER A: PAYMENT AND OTHER PROVISIONS................................. 3
1.0 General Provisions........................................... 3
1.1 Definitions.................................................. 3
1.2 Contract Defined; Order of Priority.......................... 7
1.2.1 Deviations From The RFP............................... 7
1.3 Modification................................................. 7
1.4 Contract Approval............................................ 7
1.5 Updated Detailed Project Plan................................ 8
1.6 Beginning Of Work............................................ 8
1.7 Contract Price............................................... 8
1.8 Invoices and Payments....................................... 8
1.9 Benefits and Deductions...................................... 8
1.10 Independent Capacity......................................... 8
1.11 Contract Administrator...................................... 9
1.12 Project Manager.............................................. 9
1.13 Subletting, Assignment or Transfer........................... 9
1.14 Equal Employment Opportunity Assurances...................... 9
1.14.1 Non-Discrimination in Employment Assurances........... 9
1.14.2 Non-Discrimination in Advertising Assurances.......... 10
1.14.3 Labor Union Assurances................................ 10
1.14.4 Subcontractor Assurances.............................. 10
1.14.5 Civil Rights Act and Rehabilitation Act Assurances.... 10
1.15 Employment and Personnel..................................... 10
1.16 State Employees Not to Benefit............................... 11
1.17 Warranty..................................................... 11
1.18 Access to Records............................................ 11
1.19 Governmental Requirements.................................... 11
1.20 Interpretation and Performance............................... 11
1.20.1 Governing Law......................................... 11
1.20.2 Severability.......................................... 11
1.20.3 Reliance on Policy Determinations..................... 11
1.20.4 Titles Not Controlling................................ 12
1.20.5 Gender and Number..................................... 12
1.20.6 No Rule of Construction............................... 12
1.21 State Held Harmless.......................................... 12
1.22 Entire Agreement............................................. 13
1.23 Advertising Award............................................ 13
1.24 Notices...................................................... 13
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
2.0 Type Of Contract............................................. 13
2.1 Term Of The Contract......................................... 13
2.2 Limitation................................................... 14
2.3 Fiscal Year.................................................. 14
3.0 Termination Of Contract...................................... 14
3.1 Termination Claims........................................... 15
3.2 Default By Contractor........................................ 15
3.3 Assurances Before Breach..................................... 16
3.4 State Options At Termination................................. 16
4.0 Contractor Freedom From Liability (Force Majeure)............ 16
5.0 Liquidated Damages Failure To Meet Performance Standards..... 17
5.1 Documentation................................................ 18
5.2 Timeliness of the Project.................................... 18
5.3 Deliverables and Report Production........................... 19
5.4 Performance Standard Measurements............................ 19
5.5 Systems User Documentation................................... 19
6.0 Failure To Perform........................................... 20
7.0 Contractor Personnel......................................... 20
8.0 Changes In Scope............................................. 21
8.1 Changes In Scope (CIS)....................................... 21
8.2 Impact of CIS................................................ 21
8.3 Negotiations of CIS.......................................... 22
8.4 Failure to Negotiate CIS..................................... 22
8.5 Change Orders Within Scope................................... 22
8.6 Events Constituting CIS...................................... 22
8.7 Final Decisions Regarding CIS................................ 23
8.8 Restrictions of CIS.......................................... 23
8.9 Claims for Compensation for CIS.............................. 24
8.10 Authority to Issue Change Orders............................. 24
8.11 Modifications Which Do Not Constitute CIS.................... 24
8.12 Change Rates for CIS......................................... 24
9.0 Disputes..................................................... 24
10.0 Confidentiality Of Information............................... 25
11.0 Prime Contractor Responsibilities............................ 25
11.1 Subcontracts................................................. 25
12.0 Ownership Of Information..................................... 26
12.1 Custom Software.............................................. 26
12.2 COTS Software................................................ 28
13.0 Liability.................................................... 29
14.0 Waiver....................................................... 29
15.0 Warranty..................................................... 29
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
16.0 Insurance....................................................... 30
16.1 Minimum Insurance............................................... 30
16.2 Certificates.................................................... 30
16.3 Notice Of Change................................................ 31
16.4 Liability Not Limited........................................... 31
16.5 Insurance Of Assumed Contractual Risk........................... 31
17.0 Payment......................................................... 31
17.1 Invoices........................................................ 32
17.2 Method Of Charging.............................................. 32
18.0 Inspection And Approval......................................... 32
19.0 Conflict Of Interest............................................ 32
20.0 State Property.................................................. 33
21.0 Federal Inspections............................................. 33
22.0 Copies Of Reports............................................... 33
23.0 Copyright Of Data............................................... 33
24.0 Training........................................................ 34
25.0 Patent, Copyright And Other Proprietary Indemnification......... 34
26.0 Application Program Source Code................................. 34
27.0 Accounting Requirements......................................... 34
28.0 Audit Requirements.............................................. 34
29.0 Records Retention Requirements.................................. 35
30.0 Audit Liabilities............................................... 35
31.0 Taxes........................................................... 35
32.0 Price Protection................................................ 36
33.0 Lobbying Certification.......................................... 36
34.0 Pricing And Discount............................................ 36
35.0 Cover........................................................... 36
36.0 Additional Defaults............................................. 37
37.0 Performance Assurance........................................... 37
RIDER B: SPECIFICATIONS OF THE WORK TO BE PERFORMED...................... 39
</TABLE>
<PAGE>
INTRODUCTION AND RECITALS
This Contract is entered into as of __________________________ by and between
the State ofMaine, Department of Human Services (hereinafter referred to as
"State", "DHS" or "Department") and Network Six, Incorporated (hereinafter
referred to as the "Contractor").
WHEREAS, the Department desires to implement a Maine Automated Child Welfare
Information System (hereinafter referred to as "MACWIS"); and
WHEREAS, the Department is authorized by the laws of the State of Maine to
contract with organizations for the implementation of such a system; and
WHEREAS, the Department solicited proposals for such implementation by issuing a
Request for Proposals issued by the Department on December 4, 1995; and
WHEREAS, the Department evaluated all proposals received in response to the
Request for Proposals in a fair and unbiased manner; and
WHEREAS, the Department reviewed the proposed systems of all responding vendors
at system demonstrations and presentations by the key contractor employees
proposed for the project; and
WHEREAS, the Department further interviewed the key employees of the two highest
scoring responding vendors; and
WHEREAS, the Department selected the Contractor as the successful vendor for the
transfer, design, development, implementation and testing of MACWIS after
evaluating its proposal, reviewing its proposed system, conducting key employee
interviews and determining that the Contractor's and Subcontractor's key
employees to be assigned to the design, development and implementation of the
proposed system possessed abilities and could deliver a level of service not
available from other proponents; and
WHEREAS, the State's Contract Review Committee approved the selection of the
Contractor; and
WHEREAS, the Contractor is qualified and willing to perform its duties as set
out herein subject to the terms and conditions stated below; and
WHEREAS, the Contractor has agreed to supplement its personnel with the
appropriate technical consultants and subcontractors as necessary to
satisfactorily complete its duties and responsibilities; and
WHEREAS, the Contractor acknowledges that the Department may use Consultant
assistance to help it monitor the Contractor's performance under this Contract
and the Contractor agrees that it will cooperate with and provide State
Consultants with any information that is reasonably needed to monitor the
Contractor's work under this Contract;
NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual
promises contained herein, the Department and the Contractor agree as follows:
<PAGE>
RIDER A
PAYMENT AND OTHER PROVISIONS
1.0 GENERAL PROVISIONS
1.1 DEFINITIONS
The following terms used in this Contract shall be defined as follows, unless
the context clearly indicates otherwise:
ACF: (Federal) Administration for Children and Families (DHHS)
AFDC: Aid to Families with Dependent Children
APD: Advance Planning Document. The MACWIS APD was submitted in
separate Planning (PAPD) and Implementation (IAPD) versions.
ASPIRE: Additional Support for People in Retraining and Education
BCFS: (State) Bureau of Child and Family Services (DHS)
BFI: (State) Bureau of Family Independence (formerly Bureau of Income
Maintenance) (DHS)
BIS: (State) Bureau of Information Services (DOAFS)
CONTRACTOR: Network Six, Incorporated (NSI) and any of its subsidiaries,
affiliated entities, or successors.
CONTRACTOR'S Kenneth C. Kirsch, President of NSI, or his successor
DISPUTE
RESOLUTION
AUTHORITY:
CSE: Child Support Enforcement
DAY: A calendar day, unless otherwise specified in this Contract
DELIVERABLE: The work products produced by the Contractor for submission to
DHS for its review and approval in accordance with the provisions
of this Contract
DEPARTMENT: (State) Department of Human Services
DHHS: (Federal) Department of Health and Human Services
DHS: (State) Department of Human Services
<PAGE>
DHS-DDP: (State) Department of Human Services - Division of Data
Processing
DHS-DP: DHS-DDP
DISPUTE
RESOLUTION Kevin W. Concannon, Commissioner of DHS, or his successor, and
AUTHORITIES: Kenneth C. Kirsch, President of NSI, or his successor
DOAFS: (State) Department of Administrative and Financial Services
DSER: (State) Division of Support Enforcement and Recovery (BFI)
EFFECTIVE The effective date of this Contract is the date the Contract is
DATE: fully executed by the State and the Contractor, subsequent to
the contract's approval by both the U.S. Department of Health
and Human Services and the State's Contract Review Committee
EFFP: Enhanced Federal Financial Participation
EVENT: Any written or oral communication, direction, instruction,
interpretation or determination by or from the State's Contract
Administrator, Project Manager, or any duly designated and
authorized representative thereof, or any omission of the State's
Contract Adiministrator, Project Manager, or any duly designated
and authorized representative thereof.
FAMIS: Family Assistance Management Information System
FFP: Federal Financial Participation
FNS: (Federal) Food and Nutrition Service
HCFA: (Federal) Health Care Financing Administration
IAPD: Implementation Advance Planning Document
ICWIS: Indiana Child Welfare Information System
IDRT: The Interim Dispute Review Team, consisting of the following
persons or their successors: Peter Walsh, Deputy Commissioner for
Programs, DHS, and Donna Guido, Vice President, NSI. If a dispute
involves the Subcontractor, then the IDRT shall also include
Rudolph Naples, Deputy Commissioner, Office of Management and
Budget, DHS, and Christopher Burpo, MACWIS Engagement Principal,
Unisys
<PAGE>
IV-A: Medicaid Eligibility Program/Title IV-A of the Social Security
Act Administered in Maine by the Bureau of Family Independence
(BFI)
IV-D: Child Support Enforcement Program/Title IV-D of the Social
Security Act Administered in Maine by the Division of Support
Enforcement and Recovery (DSER)
IV-E: Child Welfare Program/Title IV-E of the Social Security Act
Administered in Maine by the Bureau of Child and Family Services
(BCFS)
JET: Job Exploration and Training
JOBS: Job Opportunities and Basic Skills training
KEY PERSONNEL: Key Personnel are defined as the following individuals:
the Contractor's Project Manager: Eileen Cerbarano, NSI;
the Deputy Project Manager/Implementation Manager:
John O'Cassidy, NSI;
the Application Development Manager/Lead Analyst:
Gerry O'Brien,Unisys;
the two (2) Policy Specialists (part time, to the extent that
their time is allocated to the project per the RFP or the
latest mutually agreed upon version of the Project
Plan): Gerry Robinson, Unisys, and Joseph Murray, NSI;
the Lead Programmer: J. R. Sandavi, Unisys;
the Intake Team Leader: Gary Romeo, Unisys;
the Case Management Team Leader: Chris Cox, Unisys;
the Resource Management Team Leader: Juan Ribot, Unisys;
the Financial Management/Interfaces Team Leader: James Gillett,
NSI;
the Technical Team Leader/Database Specialist: Peter Philp, NSI;
the Training Team Leader/Help Desk: Martin Tenesh, NSI;
the Conversion Team Leader: Henry Ruppenthal, NSI;
and the Development Tool Specialist: Chris Turner, NSI.
This definition of key personnel supersedes and replaces any and all earlier
- ----------------------------------------------------------------------------
such definitions in the Request for Proposal and the Contractor's proposals
- -------------------------------------------------------------------------
submitted in response to the Request for Proposal.
- --------------------------------------------------
MACWIS: Maine Automated Child Welfare Information System
MFASIS: Maine Financial and Administration Services Information System
MMIS: Medicaid Management Information System
NECSES: New England Child Support Enforcement System
PAPD: Planning Advance Planning Document
<PAGE>
PRIME
CONTRACTOR: Contractor
PROPOSAL: The proposal submitted by the Contractor in response to the RFP.
REQUEST FOR The State's Request for Proposal for MACWIS, as amended and
PROPOSAL: supplemented by the MACWIS Bidders' Conference Questions and
Answers dated January 4, 1996 and the MACWIS Bidders' Conference
Additional Questions and Answers dated February 1, 1996
RFP: Request for Proposal
RIDERS: Written materials that are attached to this Contract and/or
incorporated by reference
SACWIS: Statewide Automated Child Welfare Information System
SIRU: (State) Special Investigations and Recovery Unit
SSA: (Federal) Social Security Administration
SSN: Social Security Number
STATE: The State of Maine
STATE'S Kevin W. Concannon, Commissioner of DHS, or his successor
DISPUTE
RESOLUTION
AUTHORITY:
SUBCONTRACTOR: Any person not in the employ of the Contractor, or any
organization not owned by the Contractor including its officers,
employees or agents, performing work which is the responsibility
of the Contractor under this Contract, including any technical
consultant, firm, or corporation retained by the Contractor to
furnish or supply services, materials, equipment or supplies in
connection with this Contract
SUBCONTRACTOR: Unisys, Inc., and any of its subsidiaries, affiliated entities,
or successors and agents performing work that is the
responsibility of the Subcontractor under this Contract,
including any technical consultant, firm, or corporation
retained by the Subcontractor to furnish or supply services,
materials, equipment or supplies in connection with this
Contract
<PAGE>
TRANSFER As specified in the Contractor's proposal the Transfer System
SYSTEM: is the State of Indiana SACWIS, known as ICWIS. The
transfer system includes any additional components developed and
implemented subsequent to the submission of the Contractor's
proposal.
USDA: (Federal) United States Department of Agriculture
1.2 CONTRACT DEFINED; ORDER OF PRIORITY
The contract between the State of Maine and the Contractor shall include the
terms set forth in: (i) this Rider A and any cover sheet attached hereto; (ii)
Rider B, which incorporates by reference both the Request for Proposal, as
amended and supplemented by the MACWIS Bidders' Conference Questions and Answers
dated January 4, 1996, and the MACWIS Bidders' Conference Additional Questions
and Answers dated February 1, 1996 (the "RFP"), and the Contractor's Proposal
submitted in response to the RFP (the "Proposal"), subject to the terms set
forth below in Section 1.2.1 of this Rider A; and (iii) any subsequent contract
amendments duly agreed to and signed by both parties (collectively, the
"Contract"). In the event of a conflict in language among the documents
referenced above, the provisions and requirements set forth and/or referenced in
this Rider A or any subsequent amendments shall govern, followed in priority by
the RFP and the Contractor's Proposal. In the event that an issue is addressed
in one document that is not addressed in the other documents, no conflict in
language shall be deemed to occur. However, the State reserves the right to
clarify any contractual relationship in writing with the agreement of the
Contractor, and such written clarification shall govern in case of conflict with
the applicable requirements stated in the RFP or the Contractor's proposal.
1.2.1 DEVIATIONS FROM THE RFP
The requirements appearing in the RFP are a part of the terms and conditions of
this Contract. The State has reviewed the Proposal and accepts as part of this
Contract those deviations from the specifications contained in Section 3 of the
RFP that pertain to the Contractor's scope of work with respect to the MACWIS
system and that have been specifically identified by the Contractor in Sections
III, IV, V, VI, VII, and 8.1.2 of the Proposal; provided, however, that in no
event shall anything contained in the Proposal be deemed to supersede or
contravene the terms and conditions set forth in this Rider A.
1.3 MODIFICATION
No modification or change of any provision in this Contract shall be made, or be
construed to have been made, unless such modification is mutually agreed to in
writing by the Contractor and the State. The contract modification will be
incorporated as a written amendment to this Contract. Memoranda of understanding
and correspondence shall not be construed as amendments to this Contract.
1.4 CONTRACT APPROVAL
In Maine, authority to approve contracts on behalf of the State is vested in the
initiating department, the State Contract Review Committee and the Attorney
General. The Contractor shall sign this Contract which shall then be forwarded
for approval and signature by all appropriate officials in the Maine State
government and approval by the federal funding agencies. Whenever the State is
required by terms of this Contract to provide written notice to the Contractor,
such notice must be signed by the State's Contract Administrator or Project
Manager, as appropriate under the applicable provisions of this Contract.
<PAGE>
1.5 UPDATED DETAILED PROJECT PLAN
Within thirty (30) days of execution of this Contract, the State and the
Contractor shall prepare an Updated Detailed Project Plan which shall detail due
dates for each of the contract deliverables. The Updated Project Plan shall be
incorporated into this Contract and made a part thereof. All deliverables
approved by the Department shall be considered part of this Contract. In the
event any disagreement arises as to any term or provision to be included in the
Updated Project Plan, the State's Project Manager shall determine such term or
provision, subject to the dispute resolution procedures set forth in Section 9,
Disputes.
1.6 BEGINNING OF WORK
The Contractor must not commence any billable work until this Contract has been
fully executed by the parties and has been approved by the U.S. Administration
for Children and Families. Subsequent to federal approval, the Project Manager
will notify the Contractor in writing that work may commence.
1.7 CONTRACT PRICE
This is a fixed price.contract to provide the personal services, together with
supporting materials, as specified in Rider B for the amount of $6,265,738.00.
1.8 INVOICES AND PAYMENTS
Payment shall be made by the Department within 45 days after receipt
of an approved itemized invoice submitted by the Contractor upon its usual
billing forms or business letterhead.
1.9 BENEFITS AND DEDUCTIONS
The Contractor understands and agrees that at all times during the term of this
Contract it shall be acting in its capacity as an Independent Contractor for
whom no Federal or State Income Tax will be deducted by the Department, and for
whom no retirement benefits, survivor benefit insurance, group life insurance,
vacation and sick leave, and similar benefits available to State employees will
accrue. The Contractor further understands that annual information returns as
required by the Internal Revenue Code or State of Maine income tax law will be
filed by the State Controller with the Internal Revenue Service and the State of
Maine Bureau of Taxation, copies of which will be furnished to the Contractor
for its Income Tax records.
1.10 INDEPENDENT CAPACITY
The parties hereto agree that the Contractor, and any agents and employees of
the Contractor, in the performance of this agreement, shall act in an
independent capacity and not as officers or employees or agents of the State.
1.11 CONTRACT ADMINISTRATOR
All invoices, progress reports, correspondence, notices and related submissions
from the Contractor shall be directed to:
Name: Nancy D. Carlson, Esq.
Title: Director, Bureau of Child and Family Services
Maine Department of Human Services
Address: 11 State House Station
Augusta, Maine 04333-0011
who is designated as the Contract Administrator on behalf of the Department for
this Contract. The Contract Administrator shall be the Department's
representative during the period of this agreement. He or she has authority to
stop the work if necessary to ensure its proper execution. He or she shall
certify to the Department when payments under this Contract are due and the
amounts to be paid.
<PAGE>
1.12 PROJECT MANAGER
The Contract Administrator may designate, in writing, a person or persons with
delegated authority to act on the Contract Administrator's behalf (the "Project
Manager"), and the Contractor may rely upon such designation until given notice
of its revocation; provided, however, that in no event shall any such
designation be effective to allow the Project Manager, without the approval of
the Contract Administrator, to (i) authorize the payment of invoices; (ii)
consent to any amendment or modification of this Contract, except as provided in
Section 8, Changes in Scope; or (iii) terminate this Contract.
1.13 SUBLETTING, ASSIGNMENT OR TRANSFER
The Contractor shall not sublet, sell, transfer or assign or otherwise dispose
of this Contract or any portion thereof, or of its right, title or interest
therein, without written request to and written consent of the Contract
Administrator, except to a bank. No subcontracts or transfer of this Contract
shall in any case release the Contractor of its liability under this Contract.
1.14 EQUAL EMPLOYMENT OPPORTUNITY ASSURANCES
During the performance of this Contract, Contractor agrees as follows:
1.14.1 NON-DISCRIMINATION IN EMPLOYMENT ASSURANCES
The Contractor will not discriminate against any employee or applicant for
employment relating to this Contract because of race, color, religious creed,
sex, sexual orientation, national origin, ancestry, age, or physical handicap,
unless related to a bona-fide occupational qualification. Contractor will take
affirmative action to ensure that applicants are employed and employees are
treated during employment, without regard to their race, color, religious creed,
sex, sexual orientation, national origin, ancestry, age or physical handicap.
Such action shall include, but not be limited to the following: employment,
upgrading, demotions, or transfers; recruitment or recruitment advertising;
layoffs or terminations; rates of pay or other forms of compensation; and
selection for training including apprenticeship. Contractor agrees to post in
conspicuous places available to employees and applicants for employment notices
setting forth the provisions of this non-discrimination clause.
1.14.2 NON-DISCRIMINATION IN ADVERTISING ASSURANCES
Contractor will, in all solicitations or advertising for employees placed by or
on behalf of Contractor relating to this Contract, state that all qualified
applicants will receive consideration for employment without regard to race,
color, religious creed, sex, sexual orientation, national origin, ancestry, age,
or physical handicap.
1.14.3 LABOR UNION ASSURANCES
Contractor will send to each labor union or representative of the workers with
which Contractor has a collective bargaining agreement, or other contract or
understanding, whereby Contractor is furnished with labor for the performance of
this Contract, a notice, to be provided by the contracting department or agency,
advising the said labor union or workers' representative of Contractor's
commitment under this section and shall post copies of the notice in conspicuous
places available to employees and the applicants for employment.
1.14.4 SUBCONTRACTOR ASSURANCES
Contractor will cause the foregoing provisions to be inserted in any
subcontracts for any work covered by this Contract so that such provisions shall
be binding upon each subcontractor, provided that the foregoing provisions shall
not apply to contracts or subcontracts for standard commercial supplies or raw
materials. The Contractor, or any subcontractor holding a contract directly
under
<PAGE>
the Contractor, shall, to the maximum feasible extent, list all suitable
employment openings with the Maine Employment Security Commission. This
provision shall not apply to employment openings which the Contractor, or any
subcontractor holding a contract under the Contractor, proposes to fill from
within its own organization. Listing of such openings with the Employment
Services Division of the Maine Employment Security Commission shall involve only
the normal obligations attached to such listings.
1.14.5 CIVIL RIGHTS ACT AND REHABILITATION ACT ASSURANCES
Compliance with Title VI of Civil Rights Act of 1964 (42 U.S.C. & 2000d et
seq.); section 504 of the Rehabilitation Act of 1973, as amended (29 U.S.C. &
794); and the United States Administration for Children and Families Regulations
found in 45 C.F.R., parts 80 and 84, is required of the Contractor and all
subcontractors.
1.15 EMPLOYMENT AND PERSONNEL
The Contractor shall not engage on a full-time, part-time or other basis during
the term of this Contract any professional or technical personnel who are or
have been at any time during the term of this Contract in the employ of any
State Department or Agency, except regularly retired employees, without the
written consent of the public employer of such person. Further, the Contractor
shall not engage on this project on a full-time, part-time or other basis during
the term of this Contract any retired employee of the Department who has not
been retired for at least one year, without the written consent of the Contract
Review Committee.
1.16 STATE EMPLOYEES NOT TO BENEFIT
No individual employed by the State at the time this Contract is executed or any
time thereafter shall be admitted to any share or part of this Contract or to
any benefit that may arise therefrom directly or indirectly due to his or her
employment by or financial interest in the Contractor or any affiliate of the
Contractor.
1.17 WARRANTY
The Contractor warrants that it has not employed or written any company or
person, other than a bona fide employee working solely for the Contractor, to
solicit or secure this Contract, and that it has not paid, or agreed to pay any
company or person, other than a bona fide employee working solely for the
Contractor any fee, commission, percentage, brokerage fee, gifts, or any other
consideration, contingent upon, or resulting from the award for making this
Contract. For breach or violation of this warranty, the Department shall have
the right to annul this Contract without liability or, in its discretion, to
deduct from the contract price or consideration, or otherwise recover the full
amount of such fee, commission, percentage, brokerage fee, gifts, or contingent
fee.
1.18 ACCESS TO RECORDS
The Contractor shall maintain all books, documents, payrolls, papers, accounting
records and other evidence pertaining to costs incurred under this agreement and
to make such materials available at the Contractor's offices at all reasonable
times during the term of this Contract and for three years from the date of the
expiration of this Contract, for inspection by the Department or any authorized
representative of the State of Maine and copies thereof shall be furnished, if
requested.
1.19 GOVERNMENTAL REQUIREMENTS
The Contractor warrants and represents that all governmental ordinances, laws
and regulations shall be complied with, subject to the provisions of Section
8.5, Change Orders Within Scope.
1.20 INTERPRETATION AND PERFORMANCE
<PAGE>
1.20.1 GOVERNING LAW
This agreement shall be governed by the laws of the State of Maine as to
interpretation and performance.
1.20.2 SEVERABILITY
Whenever possible, each provision of this Contract shall be interpreted in such
a manner as to be effective and valid under applicable law, but if any provision
of this Contract or the application thereof to any person(s) or circumstances
shall be deemed to be prohibited or invalid under such applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity, and such prohibition or invalidity shall not invalidate the
remainder of such provision or the other provisions of this Contract.
1.20.3 RELIANCE ON POLICY DETERMINATIONS
The State shall determine all program policy. The Contractor may from time to
time request the State to make policy determinations or to issue operating
guidelines required for proper performance of this Contract, and the State's
Project Manager shall respond in writing in a timely manner. The Contractor
shall be entitled to rely upon and act in accordance with such written policy
determinations and operating guidelines, unless subsequently amended, modified
or changed in writing by the Department, and shall incur no liability in doing
so unless the Contractor acts negligently, maliciously, fraudulent, or in bad
faith. Nothing contained in this Contract or in any agreement, determination,
operating guideline, or other communication from the Department shall relieve
the Contractor of its obligation to keep itself informed of applicable State and
federal laws, regulations, policies, procedures and guidelines, and, subject to
the provisions of Section 8.5, Change Orders Within Scope, to be in complete
compliance and conformity therewith.
1.20.4 TITLES NOT CONTROLLING
Titles of paragraphs used herein are for the purpose of facilitating ease of
reference only and shall not be construed to imply a contractual construction of
language.
1.20.5 GENDER AND NUMBER
The use of the masculine, feminine, or neuter gender, or of the singular or
plural number, from time to time herein shall not be so construed as to require
a particular implication therefrom, and any such gender or number may be implied
as the context may require.
1.20.6 NO RULE OF CONSTRUCTION
The parties acknowledge that this Contract was initially prepared by the State
solely as a convenience and that all parties hereto, and their counsel, have
read and fully negotiated all the language used in this Contract. The parties
acknowledge that, because all parties and their counsel participated in
negotiating and drafting this Contract, no rule of construction shall apply to
this Contract that construes ambiguous or unclear language in favor of or
against any party because such party drafted this Contract.
1.21 STATE HELD HARMLESS
The Contractor agrees to indemnify, defend and hold harmless the State, its
officers, agents and employees front any and all claims and losses accruing or
resulting to any and all contractors, subcontractors, material-persons, laborers
and any other person, firm or corporation furnishing or supplying work,
services, materials or supplies in connection with the performance of this
Contract and from any and all claims and losses accruing or resulting to any
person, firm or corporation who may be injured or damaged by the Contractor or
any subcontractor in connection with the performance of this Contract and
against any liability, including costs and expenses for violation of proprietary
rights, copyrights, or rights of privacy, arising out of publication,
translation, reproduction, delivery, performance, use or disposition of any data
furnished under this Contract or based on any libelous or other unlawful matter
contained in such data.
<PAGE>
The Contractor further agrees to procure liability insurance, naming the State
as an insured, for the purpose of insuring against potential liabilities of the
Contractor pursuant to this Section 1.21. Said insurance shall be subject to the
approval of the State and shall remain in effect for the full term of this
Contract. Failure to maintain such insurance shall constitute a default,
subject to an applicable remedies set forth in Section 3 of this Rider A.
The State shall give the Contractor prompt written notice of each such claim or
suit and full right and opportunity (subject to the approval of the Attorney
General) to conduct the Contractor's own defense thereof, together with full
information and all reasonable cooperation.
1.22 ENTIRE AGREEMENT
This Contract contains the entire agreement of the parties, and neither party
shall be bound by any statement or representation not contained herein.
1.23 ADVERTISING AWARD
The Contractor shall not refer to awards in commercial advertising in such a
manner as to state or imply that the Contractor or its services are endorsed or
preferred by the State of Maine. News releases pertaining to this project will
not be made without prior approval from the State of Maine.
1.24 NOTICES
After contract award, all notices under this Contract shall be deemed duly
given:
. upon delivery, if delivered by hand against receipt; or
. three (3) business days after posting if sent by registered or certified
mail, return receipt required.
All notices to the State are to be delivered concurrently to the State's
Contract Administrator and Project Manager at the address given in Section 1.11
of this Rider A or to such other address or party as is designated.
All notices to the Contractor are to be delivered to the following address:
Eileen Cerbarano
Network Six, Inc.
475 Kilvert Street
Warwick, Rhode Island 02886
Either party may change its address for notification purposes by giving written
notice of the change and setting forth the new address and an effective date.
2.0 TYPE OF CONTRACT
This Contract is a contact for personal services on the basis of a firm fixed
price for the design, development, implementation and warranty support of
MACWIS.
2.1 TERM OF THE CONTRACT
The term of this Contract shall begin on the first day after this Contract has
been approved by the U.S. Administration for Children and Families and has been
fully executed by the parties, and shall expire twenty four (24) months later,
or at the completion of all specified tasks and delivery of all contracted
products, goods, and services as defined in this Contract including performance
of any warranty and/or maintenance agreements, whichever is the later date,
unless earlier terminated pursuant to the terms of this Contract.
<PAGE>
2.2 LIMITATION
This Contract is subject to available budgetary appropriations and shall not
create any obligation on behalf of the Department in excess of such
appropriations. Subject to this limitation, and to the extent possible, the
Contractor shall be paid for work performed prior to termination in accordance
with Sections 3 and 3.1 of this Rider A. In the event that the amount of funds
appropriated is such that the Department must restrict or terminate funding for
this Contract, the Department will provide the Contractor with immediate written
notice of said restriction or termination of funding. The State may, in its sole
discretion, also terminate this Contract upon thirty (30) days notice to the
Contractor as a result of said restriction or termination of funding.
It is understood by the parties that the termination clause regarding non-
appropriation of funds by the Legislature is a requirement of both State law and
the Maine Constitution. Within this requirement, however, the Department
warrants that it will include a request to the Governor for each biennium during
the contract period.
2.3 FISCAL YEAR
For the purposes of this Contract, "state fiscal year" will be defined as the
state fiscal year: July 1 through June 30. "Federal fiscal year" will be
defined as October 1 through September 30.
3.0 TERMINATION OF CONTRACT
Notwithstanding any other provision of this Contract, the performance of work
under this Contract may be terminated by the Department in whole or in part
whenever, for any reason, the Contract Administrator shall determine that such
termination is in the best interest of the Department. Any such termination
shall be effected by delivery to the Contractor of a Notice of Termination
specifying the extent to which performance of the work under this Contract is
terminated and the date on which such termination becomes effective.
In the event of any such termination, the Contractor shall be entitled to
receive just and equitable compensation for all accepted deliverables and
satisfactory authorized work performed as of the termination date, subject to
the terms of this Section 3 of this Rider A. In no event, however, shall the
Contractor be paid for loss of anticipated profit.
Upon delivery to the Contractor of a Notice of Termination, pursuant to section
1.24, Notices, of this Rider A specifying the nature of the termination, the
extent to which performance of work under this Contract is terminated, and the
date upon which such termination becomes effective, the Contractor shall:
(i) stop work under this Contract on the date and to the extent specified
in the Notice of Termination;
(ii) take such action as may be necessary, or as the State's Project
Manager may direct, for the protection and preservation of the
property related to this Contract which is in the possession of the
Contractor and in which the State has or may acquire an interest;
(iii) terminate all orders to the extent that they relate to the performance
of work terminated by the Notice of Termination;
(iv) assign to the State in the manner and to the extent directed by the
State's Project Manager all of the rights, title, and interest of the
Contractor under the orders so terminated, in which case the State
shall have the right, at its discretion, to settle or pay any or all
claims arising out of the terminations of such orders, however,
notwithstanding this provision, the Contractor will not be obligated
to assign any such rights, title or interest in the absence of payment
therefor by the State;
(v) with the approval or ratification of the State's Project Manager,
settle all outstanding
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liabilities and all claims, arising out of such termination of orders,
the cost of which would be reimbursable in whole or in part, in
accordance with the provision of this Contract;
(vi) transfer title to the State (to the extent that title has not already
been transferred) and deliver in the manner, at the times, and to the
extent directed by the State's Project Manager all files, processing
systems, data manuals, or other documentation, in any form, that
relate to all the work completed or in progress prior to the Notice of
Termination; and
(vii) complete the performance of such part of the work as shall not have
been terminated by the Notice of Termination.
The Contractor shall proceed immediately with the performance of the above
obligations notwithstanding any delay in determining or adjusting the amount of
any item of reimbursable price under this clause.
In any event, this Contract shall terminate at the time specified in Section 2.1
of this Rider A.
3.1 TERMINATION CLAIMS
Pursuant to Section 3, Termination of Contract, the State shall determine, on
the basis of information available, including information provided by the
Contractor, the amount, if any, due to the Contractor by reason of the
termination and shall thereupon pay to the Contractor the amount so determined.
Acceptance of said payment shall not constitute a waiver by the Contractor of
the right to dispute the State's determination of the amount due, pursuant to
the dispute resolution mechanism contained in Section 9 of this Rider A.
3.2 DEFAULT BY CONTRACTOR
If the Contractor fails to fulfill in a timely and proper manner its obligations
under this Contract, or if the Contractor shall violate any of the material
terms of this Contract, the State shall have the right, after the expiration of
any applicable notice and cure period(s), to terminate this Contract, said
termination to be effective upon the date notice of termination is given, and
the State may thereafter withhold payment of any amount in excess of fair
compensation for the work actually completed by the Contractor prior to
termination of this Contract and will be entitled to pursue all of its other
available legal remedies against the Contractor.
Notwithstanding the above, the Contractor shall not be relieved of liability to
the State for damages sustained by virtue of any breach of this Contract by the
Contractor. In addition to any other liabilities provided for in this Contract,
such Contractor liability may include, but is not limited to, all incidental and
consequential damages arising or resulting from any breach of this Contract.
The State may, by written notice of default to the Contractor, provide that the
Contractor may cure a failure or breach of this Contract within a period of
thirty (30) days (or such longer period as the State's Contract Administrator or
Project Manager may authorize in writing), said period to commence upon receipt
of the notice of default specifying such failure or breach. The State's
exercise of this provision allowing the Contractor time to cure a failure or
breach of this Contract does not constitute a waiver of the State's right to
terminate this Contract, without providing a cure period, for any other failure
or breach of this Contract.
3.3 ASSURANCES BEFORE BREACH
If documentation or any other deliverables due under this Contract are not to
the satisfaction of the Project Manager, the Contractor is to be prepared to
deliver additional Contractor resources to the project in order to complete the
deliverable to the satisfaction of DHS and to demonstrate that other project
schedules will not be affected. Upon written notice by the State's Project
Manager of the State's concerns regarding the quality or timeliness of an
upcoming deliverable, the Contractor shall, within five (5) business days of
receipt of said notice, submit a corrective action plan
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documenting the Contractor's approach to completing the deliverable to the
satisfaction of the State's Project Manager without affecting other project
schedules. At his or her sole discretion, the State's Project Manager, within
five (5) business days of receipt of the corrective action plan, shall either
approve the plan, reject the plan, or return the plan to the Contractor with
specific instructions as to how the plan can be modified to merit approval and a
specific time period in which the revised plan must be resubmitted. Said
determination, approving, rejecting or returning the plan, shall not be subject
to the dispute resolution mechanism set forth in Section 9 of this Rider A.
Failure to submit, within the time period set forth herein, a corrective action
plan that is approved by the State's Project
Manager, or failure to comply with such an approved plan, shall constitute a
material breach of this Contract, and is subject to the provisions of
termination as specified in section 3.2, Default by Contractor.
3.4 STATE OPTIONS AT TERMINATION
In the event the State terminates this Contract pursuant to section 3,
Termination of Contract, the State may at its option:
(i) retain all or a portion of such hardware, equipment, software, and
documentation as has been provided, obtaining clear title to the same,
and procure upon such terms and in such manner as the State's Project
Manager may deem appropriate, hardware, equipment, software, and
documentation, or services as are necessary to complete the project;
or
(ii) to the extent that the termination is pursuant to Section 3.2 of this
Rider A, return, as is, all or a portion of hardware, equipment,
software, and documentation to Contractor at Contractor's expense in
which instance the Contractor must remit all moneys previously paid by
the State within five (5) business days of receipt of such hardware,
equipment, software, and documentation.
Notwithstanding the above, nothing herein shall limit the right of the State to
pursue any other legal remedies against the Contractor.
4.0 CONTRACTOR FREEDOM FROM LIABILITY (FORCE MAJEURE)
The Contractor shall not be liable for any damages if the failure to perform
this Contract arises out of causes beyond the control and without the fault or
negligence of the Contractor. Such causes may include, but are not restricted
to, acts of God, acts of the State of Maine solely in its sovereign or
contractual capacity, fires, floods, epidemics, quarantine restrictions,
strikes, freight embargoes, and unusually severe weather; but in every case the
failure to perform must be beyond the control and without the fault or
negligence of either the Contractor or is subcontractor(s). When such a cause
arises, the Contractor shall notify the State of Maine immediately in writing of
its failure to perform, describing the cause of failure and how it affects
performance, and the anticipated duration of the inability to perform. The
State of Maine shall review the information provided and may, at its option,
terminate this Contract.
5.0 LIQUIDATED DAMAGES FAILURE TO MEET PERFORMANCE STANDARDS
The Contractor agrees that time is of the essence in the performance of this
Contract. The State and the Contractor agree that in the event of a failure to
meet the milestones and project deliverable dates or any standard of performance
within the time set forth in the Contractor's Project Workplan contained within
the Contractor's proposal included in this Contract, damage shall be sustained
by the State and that it may be impractical and extremely difficult to ascertain
and determine the actual damages which the State will sustain by reason of such
failure. It is therefore agreed that the State, at its sole option, and subject
to the provisions of Section 3.2 of this Rider A, may require the Contractor to
pay liquidated damages for such failures according to the following Sections 5.1
through 5.5 and with the following provisions:
(i) Where the failure is the sole and exclusive fault of the State, no
liquidated damages shall be imposed.
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(ii) Where responsibility for the failure is shared by the State and the
Contractor, one-half of the liquidated damages stated in the
appropriate subsection below shall be imposed.
(iii) Where the failure is the sole and exclusive fault of the Contractor,
the full amount of the liquidated damages stated in the appropriate
subsection below shall be imposed.
The imposition of liquidated damages shall not limit the State's right to pursue
any other remedies available to it, including but not limited to the right to
seek damages pursuant to Section 3.2 of this Rider A.
For any failure by the Contractor to meet any performance standard, milestone or
project deliverable date that is not specifically outlined below, the State of
Maine may require the Contractor to pay liquidated damages in the amount of five
hundred dollars ($500) (subject to the provisions of shared responsibility
stated above) per business day per deliverable, milestone, or performance
standard for each and every business day thereafter (not to exceed 180 business
days) until such deliverable, milestone, or performance standard is completed
and accepted by the State of Maine. The State at its option may begin default
proceedings at any point during this period.
Written notification of failure to meet a performance requirement shall be given
by the State's Project Manager to the Contractor. The Contractor shall have
five (5) business days or other mutually agreed period from the date of receipt
of written notification of a failure to perform the specifications to cure the
failure set forth in the written notification. If the failure is not resolved
within this period, liquidated damages may be imposed retroactively to the date
of expected delivery.
In the event that liquidated damages have been imposed and retained by the
State, any such damages shall be refunded, provided that the entire system
turnover to the State has been accomplished and approved by the State according
to the original schedule in the Project Workplan contained within the
Contractor's Proposal included in this Contract, as modified by mutually agreed
upon change orders.
5.1 DOCUMENTATION
Requirement: The Contractor is responsible for providing to DHS complete,
accurate, and timely documentation for MACWIS. Such documentation shall be
according to the specifications described in Section 3 of the RFP. The
Contractor shall also be responsible for providing any copies of documentation
required by applicable Federal authorities.
Any changes which occur to the system shall be documented according to the
standards described in Section 3 of the RFP and documentation of those changes
shall be provided to DHS within thirty (30) days of State approval of
implementation of the change.
LIQUIDATED DAMAGES: The Contractor shall pay five hundred dollars ($500) for
each business day (or any part thereof) from the date documentation was due
until the date following its acceptance as to format and completeness of
contents based on State reviews conducted in accordance with RFP requirements or
the latest mutually agreed upon version of the Updated Project Workplan.
5.2 TIMELINESS OF THE PROJECT
REQUIREMENT: The State intends to accomplish this project within the time
frames outlined in Section 3 of the RFP. The Contractor shall finalize and
submit the updated project workplan to DHS for approval within thirty (30) days
of contract signing. The Contractor shall also be required to update and submit
an updated project workplan to DHS on a monthly basis. If, for any reason, the
Contractor is delayed in meeting the approved schedule by neglect of the State
or by any cause beyond the Contractor's control, then the contract schedule may
be extended by change order for such reasonable time as the State may determine.
Any claim for extension of time shall be made in
<PAGE>
writing to the Project Manager not more than ten (10) business days after the
Contractor reasonably would have become aware of the delay; otherwise, it shall
be waived.
If the State determines that delays in meeting the approved schedule were caused
by Contractor error or neglect, then the State may assess damages as prescribed
below.
LIQUIDATED DAMAGES: Five hundred dollars ($500) shall be paid by the Contractor
for each business day or any part thereof from the date the approved project
workplan or its monthly update was due until the date it is provided to DHS in
an acceptable form.
For delay in meeting key dates identified in the approved project workplan, five
hundred dollars ($500) shall be paid by the Contractor for each business day, or
part thereof, until the Contractor returns to the approved schedule. Damages
shall be deferred if a change order is approved by the Department.
The Contractor shall pay the full amount of any fiscal penalties imposed by
federal agencies for failure to meet the approved schedule if the Department
determines that Contractor errors or performance are the cause of delay.
5.3 DELIVERABLES AND REPORT PRODUCTION
REQUIREMENT: Unless the number of copies is otherwise specified, five (5)
copies of each deliverable described in Section 3 of the RFP shall be delivered
to the Project Manager in final form on the date specified in the approved
project workplan. All deliverables described in Section 3 of the RFP shall be
delivered in a format approved by DHS and shall meet the minimum requirements.
All MACWIS reports shall be produced in a format approved by DHS during design
and development or as later required because of changes in federal and/or state
reporting requirements specified in Section 3 of the RFP.
All MACWIS reports shall be delivered to locations according to a schedule to be
agreed upon by DHS and the Contractor.
LIQUIDATED DAMAGES: Five hundred dollars ($500) shall be paid by the Contractor
for each business day, per report or per deliverable, that the report or
deliverable is late, includes less than the required copies, or is found
unacceptable by state review teams in meeting the requirements of this Contract.
5.4 PERFORMANCE STANDARD MEASUREMENTS
REQUIREMENT: The Contractor shall provide the necessary equipment and/or
methodology for measuring performance as described in Section 3 of the RFP and
shall certify its accuracy in performing those measurements. Such equipment
and/or methodology is subject to approval by DHS.
Measurements shall be taken on a schedule to be provided by DHS. Additional
measurement periods shall be required, at the option of DHS, on demand and
unannounced.
LIQUIDATED DAMAGES: The Contractor shall be assessed one thousand dollars
($1,000) for each business day or any part thereof for which scheduled or
unannounced measurements are not taken.
<PAGE>
5.5 SYSTEMS USER DOCUMENTATION
REQUIREMENT: The Contractor is responsible for providing to DHS complete,
accurate and timely systems user documentation. Such documentation shall be
according to the specification described in Section 3 of the RFP. Five (5)
copies of such documentation shall be provided to DHS in draft form during the
Pilot Test Task. Additional copies of the user documentation (training
materials, trainer guides and user guides) shall be provided by the Contractor
according to the schedule identified in the approved project workplan.
Any changes which occur to the system shall be documented according to the
standards described in Section 3 of the RFP. Documentation of those changes
shall be provided to DHS within thirty (30) days of State approval of
implementation of the change.
LIQUIDATED DAMAGES: The Contractor shall be assessed one thousand dollars
($1,000) for each business day, or any part thereof, from the date documentation
was due following state approval of implementation of the change until the date
it is provided and found to be acceptable as to format and completeness of
contents based an RFP requirements and State reviews.
6.0 FAILURE TO PERFORM
In the event the Contractor has failed to perform any substantial obligation
under this agreement, or has otherwise committed a failure or breach of this
Contract under Section 3.2, Default by Contractor, DHS may withhold all moneys
due and payable to the Contractor, without penalty, until such failure is cured
or otherwise adjudicated.
7.0 CONTRACTOR PERSONNEL
The State will provide office space in Augusta, Maine, for Contractor and
subcontractor staff, the prototype development and testing LAN, and JAD/RAD
sessions. The facilities and furnishings provided by the State are detailed in
Appendix H of the RFP, Contractor Facilities. BCFS requires that all Contractor
staff be located at this site during their participation in the project. To the
extent possible, BCFS prefers that the State's MACWIS staff also be housed in
this facility.
The parties recognize that the primary value of the Contractor to the State
derives directly from the Key Personnel assigned to the project. Therefore, the
parties agree that Key Personnel shall be assigned to the MACWIS project in
accordance with the time frames in the most recent mutually agreed upon project
schedule and work plan, and that no re-deployment or replacement of any Key
Personnel may be made without prior written consent of the State. Replacement
of such personnel, if approved, shall be with personnel of equal or greater
ability and qualifications.
The State shall retain the right to reject any of the Contractors and/or
Subcontractor,s employees whose qualifications, in the State's judgment, do not
meet the standards established by the State as necessary for the performance of
the services. In considering the Contractor's and the Subcontractor's
employee's qualifications, the State will act reasonably and in good faith.
Notwithstanding anything herein to the contrary, and without limitation of any
other remedies herein contained, in the event that any of the Contractor's or
the Subcontractor's Key Personnel as previously defined is/are redeployed or
shall cease to be employed on a full-time basis by the Contractor or the
Subcontractor, the State shall have the option, at its sole discretion, to
declare a default and terminate this Contract pursuant to Section 3.2, unless
the State determines, acting reasonably and in good faith, that the Contractor
has provided replacement personnel with equal or greater ability and
qualifications.
The Contractor may not propose individuals for this project that are employees
of a State agency. Federal regulations prohibit the federal government from
paying twice for any employee. For
<PAGE>
example, a person who is an employee of one state could not be employed to work
on a project in a second state and be paid in any way by that state (including
paid leave status) as long as any part of his state compensation is reimbursed
by the federal government.
During the course of this Contract, the State reserves the right to require the
Contractor to reassign or otherwise remove from the project any Contractor or
subcontractor employees found unacceptable by the State. In considering the
Contractor's and subcontractor's 'employee's acceptability, the State shall act
reasonably and in good faith.
8.0 CHANGES IN SCOPE
The State may, at any time by written order, make changes within the general
scope of this Contract. No changes in scope are to be conducted except at the
approval of the State. This section establishes the-only procedures by which the
Contractor may obtain any compensation or reimbursement in excess of the amounts
specifically provided for elsewhere in this Contract for any services rendered
or property delivered or expense incurred in the performance of this Contract.
During the Project Planning and Initiation phase, the State and the Contractor
agree to jointly develop change control management procedures covering Change
Order requests.
8.1 CHANGES IN SCOPE (CIS)
From time to time, the DHS may request modifications to MACWIS not required by
any provision of this Contract. The DHS shall make any such request in writing
signed by the Project Manager and plainly labeled or titled a "Change Order."
The Change Order shall specify whether the requested change is to be implemented
on a certain date, or placed into effect only after approval of the Contractor's
price proposal as described in Section 8.2 below. The Contractor shall not be
penalized for any delays or change in the project schedule resulting from a DHS
initiated Change Order.
8.2 IMPACT OF CIS
The Contractor shall promptly, and in no event more than ten (10) business days
after receipt of such Change Order, furnish to the Project Manager a written
statement whether the change has a price or schedule impact. If there is a
price or schedule impact, the statement shall include a description of the
estimated price increase or decrease involved in implementing the change and any
impact on the schedule. Any statement of price increase shall be accompanied by
substantiation sufficient to show that the estimated increase meets all of the
following criteria:
(i) The charge for Contractor staff is based solely upon the categories
and change order rates identified in the proposal.
(ii) Allowance was made for any increase or decrease in the cost of the
Contractor's performance of the remainder of the contract, as a
result of implementing the Change Order.
(iii) Allowance was made for any economies to the Contractor resulting from
the duplication or overlapping of similar work which has been or will
be performed in any other site.
In the event that the State issues a Change Order and subsequently decides not
to implement the change, the Contractor shall be entitled to compensation for
the time and effort expended by Contractor staff in analysis of the price and
schedule impact of the change. Upon written notification by the State's Project
Manager that the State does not intend to proceed with the change, the
Contractor's Project Manager shall furnish to the State's Project Manager an
invoice detailing the number of hours expended on the analysis of price and
schedule impact, by category of personnel involved and their associated change
order rates as identified in the Contractor's proposal.
<PAGE>
8.3 NEGOTIATIONS OF CIS
The parties shall then negotiate and attempt in good faith to agree upon a plan
and schedule for implementation of the Change Order, and the time, manner, and
amount of payment or price increase or decrease or change to schedule consistent
with the criteria in Section 8.2 above.
8.4 FAILURE TO NEGOTIATE CIS
If the parties are unable to reach an agreement under Section 8.3 above, and the
Change Order is intended to implement or address Federal or State law or
regulation or Departmental or Bureau policy, the State's Project Manager may
make a determination of the revised price or schedule, and, upon written
instruction from the Project Manager, the Contractor shall proceed forthwith to
implement the Change Order, subject to the Contractor's right to appeal the
Project Manager's determination of the price or schedule. In the event the
Project Manager fails to make a price or schedule determination and instruct the
Contractor in writing, or the Change Order is not intended to implement or
address Federal or State law or regulation or Departmental or Bureau policy, the
Contractor shall not be obligated to implement the Change Order.
8.5 CHANGE ORDERS WITHIN SCOPE
If in the sole judgment of the State's Project Manager any modification
described in a Change Order is within the scope of this Contract or is otherwise
necessary to achieve compliance with Maine or Federal law or regulation or
Departmental or Bureau policy, and the modification is to the functional
requirements specification and the Requirements Specification Document has not
been approved by the State at the time of the Change Order, or the modification
is to the design specification and the State has not approved the Detailed
Design Document at the time of the Change Order, the State's Project Manager may
so inform the Contractor, in which event the Contractor shall proceed forthwith
to implement the Change Order without initial resort or recourse to the
provisions of Sections 8.2 and 8.3 above. At its option, the Contractor may
also initiate dispute resolution procedures pursuant to Section 9, Disputes.
The procedures established in Sections 8.2 and 8.3 or 8.4, as appropriate, shall
be followed as soon as practicable after the Contractor has begun implementation
of the Change Order. Any Change Orders for functional requirements
specification changes issued after the State's approval of the Requirements
Specification Document, or any Change Orders for design specification changes
issued after the State's approval of the Detailed System Design Document, shall
be considered changes in scope and are subject to Sections 8.0, 8. 1, 8.2 and
8.3.
8.6 EVENTS CONSTITUTING CIS
If the Contractor considers that an Event constitutes a Change Order, but is not
plainly identified, labeled, or titled as such, the Contractor shall so advise
the State's Project Manager in writing within five (5) business days of such
Event, and shall request the Project Manager's written confirmation thereof.
Such notice to the Project Manager shall state the following:
(i) the nature and pertinent circumstances of the communication, act, or
omission regarded as a Change Order;
(ii) the date of the communication, act, or omission, and the identification
of each individual involved in such communication, act, or omission,
listing his or her name and function;
(iii) the identification of any documents involved;
(iv) the substance of any oral communications;
(v) the particular technical requirements or contract requirements regarded
as changed;
(vi) the direct and foreseeable consequential effects of the communication,
act, or omission regarded as a Change Order upon the contracted price,
manner, and sequence of performance, and delivery of supplies or
services, identifying which supplies or services are or will be
affected; and
(vii) the Contractor's best estimate as to the extent to which each such price
and performance schedule element of this Contract should be adjusted.
<PAGE>
The State's Project Manager shall respond within ten (10) business days of
receipt of the Contractor's notice as required above:
(i) to countermand the action or communication regarded as an Event;
(ii) to deny that the Event is a Change Order under this Section 8, or to
confirm that the Event is a Change Order by issuance of a written change
notice designated a Change Order; or
(iii) if the information in the Contractor's notice is inadequate to permit a
decision to be made, advise the Contractor as to what additional
information is required and establish the date by which said information
should be furnished.
If the Contractor complies with any order, direction, interpretation or
determination, written or oral, from someone other than the Project Manager
without providing the notice in the manner and within the time specified in this
Section 8.6, then DHS shall not be liable for any increased price, delay in
performance or contract non-conformance by the Contractor.
8.7 FINAL DECISIONS REGARDING CIS
If the State's Project Manager denies that the Event constitutes a basis for an
adjustment in price or performance schedule, the Project Manager shall, within
ten (10) business days of receipt of the Contractor's notice, specifically set
forth in writing the reasons upon which the Project Manager relied in denying
that the Event constituted a basis for an adjustment in the price or performance
schedule. Upon receipt of such notice, the Contractor's Project Manager shall,
within ten (10) business days of receipt of such notice, send the State's
Project Manager written notice of his or her assent to the denial or initiate
dispute resolution procedures pursuant to Section 9, Disputes.
8.8 RESTRICTIONS OF CIS
Except as provided in this Section 8, no order, statement, or conduct of the
Project Manager, the DHS or any agent or representative thereof, shall be
treated as a Change Order under this Section 8, or entitle the Contractor to an
equitable adjustment hereunder, and the Contractor will not be required to
implement the Change Order if the Change Order procedures are not followed by
the State.
The parties will incorporate in the Project Plan a specific period for review
and acceptance of the specifications for each scheduled deliverable. Upon
acceptance of said specifications by the State, the specifications will be
frozen. Any subsequent change request will be considered after acceptance of
the deliverable by the State.
8.9 CLAIMS FOR COMPENSATION FOR CIS
Any claim by the Contractor for adjustment under this Section 8 must be asserted
within thirty (30) days from the date of receipt by the Contractor of a written
Change Order under Section 8.1, a written instruction under Section 8.4 or the
Contractor's furnishing of a written notice or the Project Manager's
acknowledgment of a Change Order under Section 8.6.
8.10 AUTHORITY TO ISSUE CHANGE ORDERS
For the purpose of issuing Change Orders under this Contract, the term "Project
Manager" shall not include any representative of the Project Manager whether or
not such representative is acting within the scope of his or her authority
except only in those instances where the Project Manager is unavailable,
immediate action is required and the Project Manager has notified the Contractor
in writing, citing the authority of this Section 8.10, that a specified
individual has the authority to issue Change Orders, including a description of
the exact scope and duration of the individual's authority.
<PAGE>
8.11 MODIFICATIONS WHICH DO NOT CONSTITUTE CIS
In no event shall the correction of any deliverable to obtain its approval, nor
any services required to satisfy conditions on certification, nor performance of
any other work required under this Contract be deemed a modification permitting
or requiring treatment as a Change Order.
8.12 CHANGE RATES FOR CIS
All work for which the Contractor is entitled to any compensation for Contractor
staff in accordance with the provisions of this Section 8 shall be compensated
solely in accordance with the change order rates set forth in the Contractor's
proposal.
9.0 DISPUTES
In the event of any dispute arising during the term of this Contract concerning
performance of this Contract, either party shall serve written notice of such
dispute on the other party, and the dispute shall initially be decided by the
State's Project Manager who shall, within five (5) business days, reduce such
decision to writing and serve a copy on the Contractor. Should the Contractor
be dissatisfied with this decision, the Contractor may, within five (5) business
days of receipt of the decision, submit the dispute to the Interim Dispute
Review Team (IDRT).
The State's Project Manager and the Contractor's Project Manager will forward to
the IDRT whatever materials or information are necessary for consideration of
the dispute. Within five (5) business days, the IDRT shall either: (i) in the
event that the IDRT is in agreement as to how the dispute should be resolved,
issue a joint opinion that shall be binding on both parties; or (ii) in the
event that the IDRT does not reach agreement as to how the dispute should be
resolved, submit the dispute to the State's and Contractor's Dispute Resolution
Authorities.
In the event that the State's and Contractor's Dispute Resolution Authorities
are in agreement as to how the dispute should be resolved, they shall issue a
joint opinion, within five (5) business days, that shall be binding on both
parties. If the State's and Contractor's Dispute Resolution Authorities fail to
issue a joint opinion within the time period specified herein, the parties shall
proceed in accordance with the written decision of the State's Dispute
Resolution Authority.
In the event that the Contractor remains aggrieved, the Contractor may, while
implementing the decision, pursue whatever legal or equitable remedies are
available. Any legal proceedings against the State regarding this Contractor
shall be brought in State of Maine administrative or judicial forums.
In the event of any litigation, appeal, or other legal action to enforce any
provision of this Contract, the Contractor agrees to pay all expenses of such
action, including attorney's fees and costs at all stages of litigation, if the
State is the prevailing party.
10.0 CONFIDENTIALITY OF INFORMATION
All materials and information provided to the Contractor and/or any
subcontractors by the State or acquired by the Contractor and/or any
subcontractors on behalf of the State whether verbal, written, magnetic media,
cards or otherwise shall be regarded as confidential information in accordance
with the provisions of federal and state law and ethical standards, and all
necessary steps shall be taken by the Contractor to safeguard the
confidentiality of such material or information in conformance with federal and
state law and ethical standards.
11.0 PRIME CONTRACTOR RESPONSIBILITIES
The Contractor is solely responsible for fulfillment of this Contract with the
State. The Contractor assumes responsibility for all services offered and
products to be delivered whether or not the Contractor is the manufacturer or
producer of said services. The Contractor will be responsible for the entire
contract performance whether or not subcontractors are used.
<PAGE>
The Contractor acknowledges that it was selected by the State due to the
determination that the Contractor's and Subcontractor's Key Personnel assigned
to the project displayed abilities and a proposed level of personal services not
available, to the same degree, from other proponents. Accordingly, no portion
of this Contract or the services required under this Contract may be assigned,
delegated or subcontracted without prior written consent of the State.
11.1 SUBCONTRACTS
Unless provided for in this Contract, no contract shall be made by the
Contractor with any other party for furnishing any of the work or services
herein contracted for without the consent, guidance, and approval of the State.
Any subcontract hereunder entered into, subsequent to the execution of this
Contract, must be approved by the State. This provision will not be taken as
requiring the approval of contracts of employment between the Contractor and
personnel assigned for services thereunder. All references in the Contract to
the Contractor should be construed to encompass both the Contractor and any
subcontractor(s). All subcontract agreements must contain the following
requirements:
(i) all subcontractors must contain the Assurances enumerated in Section
1.14 of this Rider A; and
(ii) all subcontracting agreements must be signed and delivered to the
State's Project Manager within five (5) business days following the
subcontract execution date.
The Contractor shall be wholly responsible for performance of the entire
contract whether or not subcontractors are used. Any subcontract into which the
Contractor enters with respect to performance under this Contract shall not
relieve the Contractor in any way of responsibility for performance of its
duties. Further, the State will consider the Contractor to be the sole point of
contact with regard to contractual matters, including payment of any and all
charges resulting from this Contract. The State shall bear no liability for
paying the claims of any subcontractors, whether or not those claims are valid.
The Contractor shall give the State immediate notice in writing of any legal
action or suit filed, and prompt notice of any claim made against the Contractor
by any subcontractor or vendor which may result in litigation related in any way
to this Contract or which may affect the performance of duties under this
Contract. The requirement of prior approval of any subcontract under this
Contract shall not make the State a party to any subcontract or create any
right, claim or interest in the subcontractor or proposed subcontractor against
the State. The Contractor agrees to defend (subject to the approval of the
Attorney General) and indemnify and hold harmless the State against any claim,
loss, damage, or liability against the State based upon the prior approval
requirements of this Section 11, Prime Contractor Responsibilities. No
subcontract or delegation shall relieve or discharge the Contractor from any
obligations or liability under this Contract.
12.0 OWNERSHIP OF INFORMATION
Al1 notebooks, plans, working papers, or other work produced in the performance
of this Contract are the joint property of the Department and upon request shall
be turned over to the Department. The State and the Federal government shall
have unlimited rights to use, disclose, duplicate, or publish for any purpose
whatsoever all information, and data developed, derived, documented, or
furnished by the Contractor under this Contract. The Contractor shall furnish
such information and data, upon the request of the State, in accordance with
applicable federal and state law.
In accordance with the term of this Contract, the Contractor shall furnish to
the State two types of software: customized software developed by the Contractor
specifically to design, develop, implement, test and administer MACWIS and its
predecessor system ("custom software"); and
<PAGE>
commercial, off-the-shelf commodity software developed by the Contractor or
other third parties for generic applications ("COTS software").
12.1 CUSTOM SOFTWARE
For custom software furnished by the Contractor, the following terms and
conditions shall apply.
The State and all appropriate federal agencies must receive a royalty-free,
nonexclusive, and irrevocable license to reproduce, publish or otherwise use and
to authorize others to do so, all application software including, but not
limited to, all source, object and executable code, instructions, files, and
documentation composing the statewide MACWIS, its predecessor system, and all
associated custom administrative, maintenance and test software which is
installed as a result of this Contract.
Specifically, the State will be granted
:
(i) all of the rights described above in and to the executable code;
(ii) all of the rights described above in and to all source and object
codes;
(iii) the right to compile the source and create new object / executable
code;
(iv) the right to modify the source code;
(v) the right to duplicate the source, object, and executable codes;
(vi) the right to distribute the source, object, and executable codes
to others; and
(vii) the right to transfer these rights to others.
The license shall include all components of MACWIS, including but not limited to
the following:
(i) all MACWIS application programs in the most current version;
(ii) all system instructions or scripting language for operating MACWIS
in the most current version;
(iii) all data files in the most current versions and prior versions kept
according to operating instructions;
(iv) user and operational manuals and other documentation;
(v) system and program documentation describing the most current version
of MACWIS;
(vi) network configuration and control documentation;
(vii) training programs and material in the operation and maintenance of
the system for DHS
(viii) staff, DHS's agents, or designated representatives;
(ix) any and all performance enhancing operational plans and products
developed for MACWIS; and
(x) all specialized or specially modified operating system software and
specially developed programs, including utilities, software, and
documentation which are required for or used in the operation of
MACWIS, but which may not be considered as being developed or
modified under this Contract.
A fundamental obligation of the Contractor is the delivery to DHS of a non-
exclusive license to all rights to the complete system, including any and all
performance-enhancing software and operational plans whether developed under
this Contract or before it. This obligation to provide a license to all rights
on the part of the Contractor is not subject to limitation in any respect.
The State will be granted unlimited non-exclusive rights in and to all
application software, documentation and plans associated with this project.
These rights reserve the license to reproduce, publish or otherwise use such
application software, documentation, and plans and to authorize their use by
others.
<PAGE>
In addition to the license rights described above, the Contractor agrees to
furnish the State with any and all additional rights in and to the MACWIS system
which may be required by federal law or regulation.
The Contractor agrees to furnish to the State a copy of all documentation
created at any time during the period of this Contract and for this Contract,
brought up-to-date as of the date of delivery. Licenses for any application
software and/or documentation will convey upon DHS's approval of
deliverables and payment to the Contractor for the deliverables within the task,
less retainage.
When the State shall come into possession of the application software,
documentation, and plans
developed for this Contract in accordance with this Contract, the State shall
thereafter have the absolute right to modify them for any function which the
State deems desirable.
In addition, if the Contractor purchases any software products as a part of this
agreement, that software will become the property of the State at the completion
of the project without further costs being incurred.
12.2 COTS SOFTWARE
For COTS software furnished by the Contractor, the following terms and
conditions shall apply.
The contractor grants to the State a personal, non-exclusive and nontransferable
license to use COTS software and related documentation according to the terms
and conditions of this Agreement, solely for the State's internal data
processing requirements on the CPU in the United States on which COTS software
is initially installed. The State's use of COTS software will also be governed
by any additional conditions which the Contractor may provide on or prior to
delivery of COTS software. The State agrees that the Contractor may, at its own
expense, periodically inspect the computer site in order to audit COTS software
supplied by the Contractor installed at the State's site at mutually agreed upon
times. In the event that a separate license agreement accompanies non-
Contractor commodity COTS software, then the separate license agreement terms
supercede the above license grant for that COTS software.
The State may develop application programs, may modify any Contractor
application COTS software and may combine such with other programs or materials
to form an updated work, provided that upon discontinuance or termination of the
license, the Contractor application COTS software will be removed from the
updated work and returned to the Contractor.
The State will not decompile or disassemble any COTS software provided under
this Agreement or modify COTS software which bears a copyright notice of any
third party. The State will make and maintain no more than one archival copy
(for backup purpose) of each item of COTS software, and each copy will contain
all legends and notices and will be subject to the same conditions and
restrictions as the original.
If the CPU on which any item of COTS software is licensed becomes temporarily
unavailable, use of such COTS software may be temporarily transferred to an
alternative CPU until the original CPU becomes available.
No license is granted to the State to use any Contractor proprietary operating
system COTS software to assess, test or develop any hardware products or COTS
software programs that will be marketed by the State or others for compensation.
This license does not apply to MS/DOS, UNIX and CTOS/BTOS operating systems or
the development of application programs. Application programs mean programs for
performing specific automatic data processing tasks such as payroll,
<PAGE>
inventory control, information retrieval, or repetitive arithmetic operations,
but excludes programs such as environmental programs, handlers, operating
systems, and data base management programs.
If the State desires to: (a) use COTS software in a service bureau mode, (b)
use COTS software at another location, (c) use COTS software as restricted in
the preceding paragraph, or (d) transfer operational use of the COTS software to
a third party; then the State shall request prior permission in writing from the
Contractor. The Contractor will then advise the State whether, and under what
terms and conditions, the Contractor will license the COTS software as
requested. All restrictions applicable to the State will also apply to any
permitted service bureau or third party users.
This Agreement does not transfer to the State title to any intellectual property
contained in any COTS software, documentation or Proprietary Information.
No party shall be entitled to use any COTS software unless the party has a valid
written license to use such COTS software and all applicable charges for the use
of such COTS software have been paid.
13.0 LIABILITY
In addition to any other liabilities provided for in this Contract, the
Contractor's liability may include, but is not limited to, all incidential and
consequential damages arising from or resulting from any breach of this
Contract, including breach of any express or implied warranties.
In no event shall the State be liable to the Contractor for any incidental or
consequential damages arising from or resulting from either the performance of
this Contract, or the termination of this Contract.
14.0 WAIVER
This contract may be modified only by written amendment executed by all parties
hereto, and approved by the appropriate State officials and federal agencies,
with the exception of terms outlined in Section 8, Changes in Scope. Waiver of
any breach of any term or condition of this Contract shall not be deemed a
waiver of any prior or subsequent breach.
15.0 WARRANTY
The Contractor shall be required to expressly warrant deliverables as being
correct and compliant with the terms of this Contract. The Contractor hereby
warrants that all application software shall:
(i) operate as described in the Contractor's Proposal and as detailed in
the RFP;
(ii) operate and conform to the detailed system specifications described in
the Contractor's most recent General and Detailed System Design
documents, which must be approved by the State in accordance with the
criteria set forth in the RFP or the latest mutually agreed version of
the project plan; and
(iii) conform to standards of this Contract and those generally observed in
the industry.
This warranty encompasses correction of defective deliverables and revision of
the same as necessary, including deficiencies found during testing,
implementation, or post-implementation for a period of one year. At the
direction of the State, the Contractor must immediately work to correct any
deviations from specifications and all software related and performance
deficiencies of MACWIS and must completely correct such deficiencies within five
(5) days (or longer with written notification from the State's Project Manager).
This may require emergency maintenance to correct code problems on a 24-hour,
seven days a week basis. The State shall only invoke its right to require
emergency maintenance in the event that the defect is material and impairs the
operation of the system.
<PAGE>
The Contractor will also be responsible for correcting and/or updating any
documentation affected by any operations support performed under this warranty
provision.
Contractor shall correct deficiencies in the deliverables on a timely basis as
requested by the State and replace incorrect or defective deliverables within
one week of notification by the State of such deficiencies, or such longer
period as may be necessary using all diligence and dispatch as agreed between
the Contractor and the State. If the Contractor fails to repair a deficiency or
defect within the warranty period, the State may, at its option, act to repair
the deficiency, and the Contractor shall be required to reimburse the State for
all costs incurred, provided Contractor was afforded an opportunity to correct
such deficiency or defect, pursuant to Section 3.2, Default by Contractor, and
failed to do so.
Failure of the Contractor to fulfill any written commitment within the scope of
this Contract shall render the Contractor liable for services due to the State
of Maine under the terms of this Contract.
16.0 INSURANCE
On or before beginning performance under this Contract, the Contractor shall
obtain from an insurance company duly authorized to do business in Maine,
insurance as follows.
16.1 MINIMUM INSURANCE
The Contractor shall obtain, pay for, and keep in force the following minimum
insurance and shall furnish a certificate or certificates evidencing that such
insurance is in effect:
(i) disability, workman's compensation, and unemployment compensation in
accordance with the statutory requirements of the state where the work
is performed;
(ii) general liability insurance (including automobile and broad form
contractual coverage) against bodily injury or death of any person in
the amount of one million dollars ($1,000,000) for any one occurrence;
and
(iii) insurance against liability for property damages as well as first-party
fire insurance, including contents coverage for all records maintained
pursuant to this Contract, in the amount of one million dollars
($1,000,000).
16.2 CERTIFICATES
The Contractor shall furnish to the State a certificate(s) evidencing that
required insurance is in effect, for the policy amounts, and applicable policy
numbers and expiration dates, within ten (10) business days of contract signing.
In the event of cancellation of any insurance coverage, the Contractor shall
immediately notify the State of such cancellation. The Contractor will be
required to obtain suitable replacement coverage within fourteen (14) days of
the cancellation. The State, at its option, may impose a stop work order on the
Contract until such replacement coverage is secured and approved by the State.
If a stop work order is imposed, the State shall not be liable for any costs or
lost profits incurred by the Contractor.
16.3 NOTICE OF CHANGE
The Contractor shall provide the State with written notice at least ten (IO)
business days prior to any change in the insurance coverage obtained to comply
with this section.
16.4 LIABILITY NOT LIMITED
The provisions of this clause shall not be deemed to limit the liability or
responsibility of the Contractor or any of its subcontractors hereunder.
<PAGE>
16.5 INSURANCE OF ASSUMED CONTRACTUAL RISK
The Contractor may insure any portion of the risk assumed under the provisions
of this Contract based upon the Contractor's ability (size and financial
reserves included) to survive a series of adverse experiences, including
withholding of payment by the State, or imposition of penalties by DHS. Express
prior written approval of the Contract Administrator is required for any
proposed program of self-insurance.
17.0 PAYMENT
The State and Contractor have identified certain deliverables on which payment
will be based. Payment deliverables are those that represent the completion of
major phases of the project. The MACWIS project payment deliverables are
detailed in Cost Table 7 of the Contractor's Cost Proposal submitted in response
to the RFP.
Payment deliverables are predicated upon successful completion and written
approval by the State of the described tasks and deliverables. Payments will be
made to the Contractor after written approval of the payment deliverable. The
State will make payments to the Contractor within fortyfive (45) business days
after approval of the invoice by the Contract Administrator.
The amount of the payment will be determined in the following manner.
(i) The allowable payment amount from each payment deliverable will be
multiplied by ten (10) percent, giving the amount that will be withheld
from the payment. The remaining ninety (90) percent of the deliverable
payment will be made after written acceptance of the deliverable by the
State.
(ii) The retained amount from each of the payment deliverables that consist
entirely of COTSsoftware and/or non-custom hardware will be held by the
State until the successful turnover and acceptance of MACWIS by the
State.
(iii) The retained amount from each of the payment deliverables that do not
consist entirely of COTS software and/or non-custom hardware will be
held by the State until the successful conclusion of the warranty
phase; provided, however, that the State shall release the following
amounts to the Contractor prior to the successful conclusion of the
warranty phase:
Three months after acceptance of MACWIS: $114,000
Six months after acceptance of MACWIS: $114,000
End of warranty period: Remaining balance.
17.1 INVOICES
Invoices for payment, submitted on approved State invoice forms, shall be
submitted to the State's Contract Administrator at the address given in Section
1.11 of this Rider A. No invoices will be processed for payment until approved
by the State's Contract Administrator.
17.2 METHOD OF CHARGING
The charges described in this Contract are the only charges now or hereafter to
be levied by the Contractor for the services to be performed by it. There are no
other charges to be made by the Contractor to the State, unless they are
approved in accordance with the provisions of Section 1.2, Contract Defined;
Order of Priority, Section 1.3, Modification, or Section 8, Changes in Scope.
The Contractor shall maintain documentation for all charges against the State
under this Contract. The books, records and documents of the Contractor,
insofar as they relate to work performed or money received under this Contract,
shall be maintained for a period of five full years from the date
<PAGE>
of the final payment, and shall be subject to audit at any reasonable time and
upon reasonable notice, by the State, or any appropriate federal agency, or
their duty appointed representatives. The records shall be maintained in
accordance with Generally Accepted Accounting Principles (GAAP).
18.0 INSPECTION AND APPROVAL
Final inspection and approval of all work required under this Contract shall be
performed by the State's Contract Administrator and other officials that the
State of Maine may so designate.
The State of Maine or its authorized representatives shall at all reasonable
times have the right to enter the premises or such other places where duties
under this Contract are being performed, to inspect, monitor or otherwise
evaluate the work being performed. All inspections and evaluations shall be
performed in such a manner that will not unreasonably delay work.
19.0 CONFLICT OF INTEREST
No official or employee of the State and no other public official of the State
of Maine or the federal government who exercises any functions or
responsibilities in the review or approval of the undertaking or carrying out of
the project shall, prior to the completion of the project, voluntarily acquire
any personal interest, direct or indirect, in this Contract.
The Contractor covenants that it presently has no interest and shall not acquire
any interest, direct or indirect, which would conflict in any manner or degree
with the performance of its services hereunder. The Contractor further
covenants that in the performance of this Contract, no person having any such
known interests shall be employed.
20.0 STATE PROPERTY
The Contractor shall be responsible for the proper custody and care of any State
owned property furnished for Contractor's use in connection with the performance
of this Contract, and the Contractor will reimburse the State for its loss or
damage, normal wear and tear excepted.
21.0 FEDERAL INSPECTIONS
During and after this project, the U.S. Administration for Children and Families
or their authorized representatives shall be allowed access to inspect all
Contractor materials, documents, work papers, deliverables, or any such other
items which pertain to this project. The Contractor shall cooperate with any
federal reviews and shall supply copies of any requested materials. This
requirement also applies to any subcontractor(s) who may be engaged in the
project. Any subcontract permitted by the State must contain a provision which
sets forth the subcontractor's agreement with the terms set forth in this
paragraph.
22.0 COPIES OF REPORTS
Upon completion of the project, the Contractor shall convey to the State copies
of all interim reports, cost records, data collection forms, and any other
working papers that support final system approval. These items shall also be
made available, upon request, to officials from the U.S. Administration for
Children and Families and other authorized officials from the federal government
23.0 COPYRIGHT OF DATA
The Contractor may not publish or copyright any data without prior approval,
unless otherwise stated herein; provided, however, that the Contractor may
publish source and object code without obtaining such prior approval. Unless
otherwise stated herein, the State and the federal government shall have the
right to publish, duplicate, use and disclose all such data in any manner, and
for any purpose whatsoever, and may authorize others to do so.
<PAGE>
"Data" shall mean all results, technical information and materials developed
and/or obtained in the performance of the services hereunder, including but not
limited to, all reports, surveys, plans, charts, recordings (video and/or
sound), pictures, drawings, analyses, source and object code, graphic
representations, computer programs and printouts, notes and memoranda, and
documents whether finished or unfinished, which result from or are prepared in
connection with the services performed hereunder.
24.0 TRAINING
The Contractor shall provide, in accordance with the specified in this Contract,
quality instruction on all technical and user aspects of the system. The
Contractor shall also develop a post-training proficiency examination. This
examination is to be given to the students immediately upon completion of the
training, and additional training must be provided to the students not
demonstrating competency in the required skills. The Project Manager and
Training Coordinator must provide in advance all training materials including
proficiency examinations that are provided by the Contractor.
25.0 PATENT, COPYRIGHT AND OTHER PROPRIETARY INDEMNIFICATION
The Contractor warrants that all equipment, software, supplies, and other
products provided hereunder and all services do not and will not infringe upon
or violate any patent, copyright, trade secret, or any other proprietary right
of any third party. In the event of any claim by a third party against the
State, the State shall promptly notify the Contractor and the Contractor shall
cooperate in the defense of such claim at the Contractor's expense and shall
indemnify the State against any loss, cost, expense, or liability arising out of
such claim, including reasonable attorney's fees.
26.0 APPLICATION PROGRAM SOURCE
CODEConcurrent with the delivery of the software pursuant to this Contract, the
Contractor shall provide the Project Manager with one copy of the source code
for each custom software application program provided. The Contractor shall
update, improve, add to, and otherwise modify the source code consistent with
any modifications or enhancements made pursuant to this Contract. One hard copy
and one copy on magnetic medium must be provided at no cost to the state within
five (5) business days of the State's request. Up to twenty (20) requests must
be accommodated at no cost to the State. The hard copy requirement for any
request may be waived by written notification by the State's Project
Manager.
27.0 ACCOUNTING REQUIREMENTS
The Contractor shall establish and maintain an accounting system in accordance
with Generally Accepted Accounting Principles (GAAP). The accounting system
shall maintain records pertaining to the tasks defined in this Contract and all
other costs and expenditures made under this Contract
Specific accounting records and procedures are subject to State and federal
approval. Accounting procedures, policies, and records shall be completely open
to state and federal audit at any time during the contract period and for five
yews thereafter.
28.0 AUDIT REQUIREMENTS
The Contractor shall maintain books, records, documents, and other evidence
pertaining to the administrative costs and expenses of this Contract to the
extent and in such detail as shall properly reflect all revenues, all net costs,
direct and apportioned, and other costs and expenses of whatever nature as
relating to performance of contractual duties under the provisions of this
Contract. The Contractor's accounting procedures and practices shall conform to
Generally Accepted Accounting Principles (GAAP) and the costs properly
applicable to this Contract shall be readily ascertainable therefrom.
<PAGE>
For work to be performed on an hourly reimbursement rate or cost reimbursement
basis, the allowability of direct and indirect costs shall be governed by 41
C.F.R., Subpart 1-15.
29.0 RECORDS RETENTION REQUIREMENTS
The Contractor hereby to the conditions of 45 C.F.R., Part 74.24 (a), (b), and
(d) regarding retention and access requirements relating to all financial and
programmatic records, supporting documents, statistical records, and other
records of this Contract. In addition, the Contractor shall agree to the
following terms regarding retention of contract records and access for
government officials.Unless the State specifies in writing a shorter period of
time, the Contractor agrees to preserve and make available all other pertinent
books, documents, papers, and records of the Contractor involving transactions
related to this Contract for a period of five years from the date of expiration
or termination of this Contract.Records involving matters in litigation shall be
kept for one year following the termination of litigation, including all appeals
if the litigation has not terminated within five years.
The Contractor hereby agrees that authorized federal and State representatives
shall have access to and the right to examine the items listed above during the
contract period and during the five year post-contract period or until
resolution. During the contract period, the access to these items will be
provided at the Contractor's office in Augusta, Maine at all reasonable times.
During the five year post-contract period, delivery of and access to the listed
items will be at no cost to the State.
The provision of this section shall be incorporated in any subcontract of
$10,000 or more.
30.0 AUDIT LIABILITIES
In addition to, and not in any way in limitation of the obligation of this
Contract, it is understood and agreed by the Contractor that the Contractor
shall be held liable for any State or federal audit exceptions that are the
fault of the Contractor or that arise out of any action, inaction or negligence
by the Contractor. In the event of an audit exception for which the Contractor
is liable as defined in this section, the Contractor shall have thirty (30) days
to remedy the exception. If the Contractor fails to remedy the exception within
this time period, the Contractor shall immediately return to the State all
payments made under this Contract which have been disallowed because of such an
exception.31.0 TAXES The State is not required to pay taxes of any nature;
however, if Contractor is required to pay sales, use, value-added, or other
federal, state, or local taxes based on the licenses or services provided in
this Contract, except taxes based on Contractor's income or property tax for
software, then such taxes shall be billed to and paid by the State upon evidence
of payment by Contractor.
31.0 TAXES
The State is not required to pay taxes of any nature; however, if Contractor is
required to pay sales, use, value-added, or other federal, state, or local taxes
based on the licenses or services provided in this Contract, except taxes based
on Contractor's income or property tax for software, then such taxes shall be
billed to and paid by the State upon evidence of payment by Contractor.
32.0 PRICE PROTECTION
The Contractor hereby warrants and represents that all the prices, terms,
warranties, and benefits granted by the Contractor are comparable to or better
than the equivalent terms being offered by the Contractor to any present
customer meeting the same qualifications or requirements as DHS. Except as
otherwise provided herein, if the Contractor shall, during the term of this
Contract, enter into arrangements with any other said customer providing greater
benefits or more favorable terms for like services, the Contractor shall be
obligated to provide the same to DHS.
<PAGE>
33.0 LOBBYING CERTIFICATION
Section 1352 of Title 31 of the U.S. Code requires that funds appropriated to a
Federal agency be subject to a requirement that any Federal Contractor or
grantee (such as the State) certify that no Federal funds will be used to lobby
or influence a federal officer or member of Congress. The certification the
State has been required to sign provides that the language of this certification
shall be included in the award documents for all sub-awards at all tiers
(including subcontracts, subgrants, and contracts under grants, loans, and
cooperative agreements) and that all sub-recipients shall verify and disclose
accordingly, The certification also requires the completion of Federal lobbying
reports and the imposition of a civil penalty of $10,000 to $100,000 for failing
to make a required report. As a sub-recipient, the Contractor understands and
agrees to the Federal requirements for certification and disclosure.
34.0 PRICING AND DISCOUNT
The Contractor warrants that any element of recurring or nonrecurring
cost which must be borne by the State has been identified by Contractor in its
Proposal. This includes, but is not limited to hardware, maintenance, cabling,
system engineering, manuals and documentation, training, demonstration,
consultation, shipping charges, installation costs, testing, and manufactured
supplied programs, and that all items of cost to achieve compliance with the
State's requirements have been shown in the Contractor's Cost Proposal, which is
attached by reference to this Contract.
Federal funding is being used for acquisition of products and/or services, under
this Contract.Consequently, interest cannot be paid under any installment
purchase or lease/purchase agreement entered into as a part of this Contract.
Contractor agrees to convey to the State good title to purchased items free and
clear of all liens, pledges, mortgages, encumbrances or other security interest.
35.0 COVER
If, in the reasonable judgment of the State, a default by the Contractor is not
so substantial as to require termination reasonable efforts to induce the
Contractor to cure the default are unavailing, and the default is capable of
being cured by the State or by another contractor without unduly interfering
with continued performance by the Contractor, the State may provide or procure
the services reasonably necessary to cure the default, in which event the
Contractor shall reimburse the State for the reasonable cost of those services.
36.0 ADDITIONAL DEFAULTS
In the event Contractor shall be the subject of an order for relief purusant to
Title 11, United States Code and/or entered by any United States Bankruptcy
Court; or shall make an assignment for the benefit of creditors; or shall apply
for or consent to the appointment of a receiver, trustee, custodian, or similar
officer for him or it or for all or any substantial part of his or its property;
or such receiver, trustee, custodial or similar officer shall be appointed
without the application or consent of the Contractor; or if the Contractor shall
institute (by petition, application, answer, consent, or otherwise) any
bankruptcy, insolvency, reorganization, arrangement, readjustment or debt,
dissolution, liquidation or similar proceeding relating to it under the laws of
any jurisdiction; or any such proceeding shall be instituted (by petition,
application or otherwise) against the Contractor, or where the petition is filed
against the Contractor by creditors and is not dismissed within thirty (30)
days, then, in any such event, the State may terminate this Contract pursuant to
Section 3.2. The Contractor agrees that this Contract is a contract for personal
services pursuant to 11 U.S.C. && 365(c)(1) and (e)(2)(A).
<PAGE>
37.0 PERFORMANCE ASSURANCE
A Performance Bond in the amount of twenty-five percent (25%) of the total
amount of this Contract is required by the State to ensure the vendor's faithful
performance to the specifications and conditions of this Contract. The amount of
the bond required by the State shall be reduced over the course of the project
as certain deliverables are accepted and approved by the State according to the
following schedule. Each such reduction shall only be made upon written
confirmation by the State that all associated deliverables, as enumerated below,
have been accepted and approved by the State. Such confirmation shall not be
unreasonably withheld by the State. The bond reduction schedule is as
follows:
Upon the State's acceptance and approval of the following deliverables,
the required performance bond may be reduced from 25% to 20% of the total
project cost:
. all deliverables associated with Task 3, Project Planning and Initiation, as
detailed in Cost Table 7 of the Vendor's Proposal;
. the Training Needs Analysis Questionnaire;
. the Draft Comprehensive Training Plan and Schedule;
. the Prototype Detailed System Design Document;
. the Prototype Design Analysis Report;
. the Prototype User and Technical Manuals;
. the Prototype Development Analysis Report;
. the Prototype Detailed Implementation Plan;
. the Prototype Implementation Analysis Report;
. the Prototype Acceptance Test Plan;
. the MACWIS Central Server Hardware, Peripherals, and Software;
. the Prototype, Draft and Final versions of the Requirements
Specification Document;
. the Draft and Final versions of the Detailed Conversion Test Plan;
. the Prototype and Draft versions of the Data Model; and
. the Prototype and Draft versions of the General System Design Document
Upon the State's acceptance and approval of the following deliverables, the
required performancebond may be reduced from 20% to 15% of the total project
cost:
. the Final Data Model;
. the Final General System Design Document;
. the Draft and Final versions of the Detailed System Design Document;
. the Draft and Final versions of the Comparative Analysis Report;
. the Draft and Final versions of the System Development Test Plan;
. the Draft and Final versions of the Conversion Specification Document; and
. the physical implementation of the MACWIS Central Server Hardware,
Peripherals and Software.
Upon the State's acceptance and approval of the following deliverables, the
required performance bond may be reduced from 15% to 10% of the total project
cost:
. MACWIS operational on the Development/Prototype LAN;
. the Draft versions of all System and User Documentation;
. the Draft and Final versions of the Development Test Analysis Report;
. the Draft and Final versions of the Detailed Implementation Plan;
. all deliverables associated with Task 5, System Development, as detailed in
cost Table 7 of the Vendor's Proposal contained in this Contract;
<PAGE>
. all deliverables associated with Task 6, System Implementation, as detailed
in Cost Table 7 of the Vendor's Proposal contained in this Contract;
. the Draft and Final versions of the Data Conversion Test Results Report; and
. all Data Conversion Documentation for Users and Software Maintenance.
Should the amount of the required performance bond be reduced according to the
above schedule, then the vendor shall be required to maintain a performance bond
in the amount of ten percent (10%) of the total amount of this Contract. This
bond will only be released upon satisfactory completion of the entire project
plan as set forth in this Contract and the written acceptance by the State of
all deliverables related to this Contract.
The vendor will be required to furnish the bond to the Department of Human
Services. No contract will be executed until the bond is received. The bond will
be procured at the expense of the vendor, naming the Department of Human
Services as the obligee.
The bond shall be forfeited in whole or in part, as appropriate, under the
following circumstances:
. if this Contract is terminated during the Contract life for cause;
. if this Contract is terminated during the contract life for breach of
contract; or
. the vendor becomes insolvent during the term of this Contract.
The Purchasing Division of the Department of Administration and the State
Attorney General reserve the right to require the vendor to substitute an
acceptable performance assurance mechanism in such form as they may require.
<PAGE>
RIDER B
SPECIFICATIONS OF THE WORK TO BE PERFORMED
The specifications of the work to be performed pursuant to this Contract
are set forth in the following:
1. The State's Request for Proposal, as amended and supplemented by the
MACWIS Bidders' Conference Questions and Answers dated January 4, 1996, and
the MACWIS Bidders' Conference Additional Questions and Answers dated
February 1, 1996, all of which together constitute the RFP and all of which
are attached hereto as Exhibit A and expressly incorporated by reference
herein; and
2. The Contractor's Proposal submitted in response to the RFP, which
Proposal is attached hereto as Exhibit B and expressly incorporated by
reference herein; subject, however, to the provisions of Rider A, Section
1.2.1, Deviations from the RFP.
<PAGE>
CONFIDENTIAL
Cost Table 7 - MACWIS PAYMENT SCHEDULE BY DELIVERABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Deliver- Deliverable Deliver- GROSS PAYMENT
able able
Number Due Date
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
TASK 1 - PROJECT MANAGEMENT 4/7/97 - 3/31/98
Regular Updates to the Project Plan (Updated
Monthly at a Minimum)
Weekly Status Reports
TOTAL PAYMENT TASK 1
- ----------------------------------------------------------------------------------------------------------------------------
TASK 2 - QUALITY ASSURANCE 4/14/97 - 2/27/98
--------------------------------------------
Quality Review Meetings
--------------------------------------------
TOTAL PAYMENT TASK 2
- ----------------------------------------------------------------------------------------------------------------------------
3.. TASK 3 - PROJECT PLANNING & INITIATION 4/7/97 - 5/7/98
- ----------------------------------------------------------------------------------------------------------------------------
3.1. Establish Augusta Project Office 35,527 267,893
- ----------------------------------------------------------------------------------------------------------------------------
3.2. Install Develop. Server, Workstations, Develop Prototype LAN 35,530 194,153
- ----------------------------------------------------------------------------------------------------------------------------
3.3. Install Donor System 35,535 89,745
- ----------------------------------------------------------------------------------------------------------------------------
3.4. Install Project Management HW/SW 35,535 38,195
- ----------------------------------------------------------------------------------------------------------------------------
3.5. Project Kick-Off Meeting 35,537 97,076
- ---------------------------------------------------------------------------------------------------------------------------
3.6.1 First Update to Project Workplan DRAFT 35,548 68,398
- ----------------------------------------------------------------------------------------------------------------------------
3.6.2 First Update to Project Workplan FINAL 35,557 138,871
- ----------------------------------------------------------------------------------------------------------------------------
3.7. Project Management Manual 35,548 38,700
- ----------------------------------------------------------------------------------------------------------------------------
3.8. MACWIS Standards and Procedures Manual 35,550 27,390
- ----------------------------------------------------------------------------------------------------------------------------
3.9. MACWIS Communications Plan 35,550 48,538
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 3 1,008,959
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
4.. TASK 4 - SYSTEM DESIGN 4/7/97 - 7/28/97
- ----------------------------------------------------------------------------------------------------------------------------
4.1. Develop Training Needs Analysis Questionnaire 35,541 2,930
- ----------------------------------------------------------------------------------------------------------------------------
4.2.1 Comprehensive Training Plan and Schedule DRAFT (Final in Task 6) 35,548 11,720
- ----------------------------------------------------------------------------------------------------------------------------
4.3. Prototype Deliverables Format and Content
- ----------------------------------------------------------------------------------------------------------------------------
4.3.1 Requirements Specifications Document RSD) 35,541 44,118
- ----------------------------------------------------------------------------------------------------------------------------
4.3.2 Data Model 35,541 27,731
- ----------------------------------------------------------------------------------------------------------------------------
4.3.3 General System Design (GSD) 35,548 25,210
- ----------------------------------------------------------------------------------------------------------------------------
4.3.4 Detailed System Design (DSD) 35,548 6,303
- ----------------------------------------------------------------------------------------------------------------------------
4.3.5 Design Analysis Report (DesAR) 35,548 12,605
- ----------------------------------------------------------------------------------------------------------------------------
4.3.6 User and Technical Manuals 35,555 99,273
- ----------------------------------------------------------------------------------------------------------------------------
4.3.7 Development Analysis Report (DevAR) 35,555 26,473
- ----------------------------------------------------------------------------------------------------------------------------
4.3.8 Detailed Implementation Plan (DIP) 35,561 18,200
- ----------------------------------------------------------------------------------------------------------------------------
4.3.9 Implementation Analysis Report (ImpAR) 35,569 1,382
- ----------------------------------------------------------------------------------------------------------------------------
4.3.10 Acceptance Test Plan (ATP) 35,569 2,763
- ----------------------------------------------------------------------------------------------------------------------------
4.4. Deliver Central Server, Peripherals, Software 35,576 860,601
- ----------------------------------------------------------------------------------------------------------------------------
4.5.1 Requirements Specifications Document (RSD) DRAFT 35,576 131,031
- ----------------------------------------------------------------------------------------------------------------------------
4.5.1 Requirements Specifications Document (RSD) FINAL 35,597 262,062
- ----------------------------------------------------------------------------------------------------------------------------
4.6.1 Data Model DRAFT 35,569 83,111
- ----------------------------------------------------------------------------------------------------------------------------
4.6.2 Data Model FINAL 35,590 168,471
- ----------------------------------------------------------------------------------------------------------------------------
4.7.1 General System Design Document DRAFT 35,569 75,555
- ----------------------------------------------------------------------------------------------------------------------------
4.7.2 General System Design Document FINAL 35,590 151,338
- ----------------------------------------------------------------------------------------------------------------------------
4.8.1 Detailed System Design Document DRAFT 35,618 99,880
- ----------------------------------------------------------------------------------------------------------------------------
4.8.2 Detailed System Design Document FINAL 35,639 199,760
- ----------------------------------------------------------------------------------------------------------------------------
4.9.1 Comparative Analysis Report DRAFT 35,583 37,778
- ----------------------------------------------------------------------------------------------------------------------------
4.9.2 Comparative Analysis Report FINAL 35,604 75,669
- ----------------------------------------------------------------------------------------------------------------------------
4.10.1 System Development Test Plan DRAFT 35,576 18,889
- ----------------------------------------------------------------------------------------------------------------------------
4.10.2 System Development Test Plan FINAL 35,597 37,834
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 4 2,480,687
- ----------------------------------------------------------------------------------------------------------------------------
5.. TASK 5 - SYSTEM DEVELOPMENT 6/2/97 - 10/10/97
- ----------------------------------------------------------------------------------------------------------------------------
5.1. Physical Implementation of MACWIS Central Server HW & DB SW 35,597 89,753
- ----------------------------------------------------------------------------------------------------------------------------
5.2. Operational MACWIS Developed on Dev./Prototype LAN 35,713 695,641
- ----------------------------------------------------------------------------------------------------------------------------
5.3.1 System and System User Documentation DRAFT (Final in Task 11) 35,713 37,743
- ----------------------------------------------------------------------------------------------------------------------------
5.4.1 Development Test Analysis Report DRAFT 35,692 79,339
- ----------------------------------------------------------------------------------------------------------------------------
5.4.2 Development Test Analysis Report FINAL 35,713 158,917
- ----------------------------------------------------------------------------------------------------------------------------
5.5.1 Detailed Implementation Plan DRAFT 35,681 54,545
- ----------------------------------------------------------------------------------------------------------------------------
5.5.2 Detailed Implementation Plan FINAL 35,702 109,255
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENTS TASK 5 1,225,193
- ----------------------------------------------------------------------------------------------------------------------------
6.. TASK 6 - SYSTEM IMPLEMENTATION 10/13/97 - 11/28/97
- ----------------------------------------------------------------------------------------------------------------------------
6.1. Initial Load of the MACWIS Database 35,720 82,904
- ----------------------------------------------------------------------------------------------------------------------------
6.2. Implementation of all MACWIS functionality on Central Server 35,737 113,639
- ----------------------------------------------------------------------------------------------------------------------------
6.3. Completion of Training for BCFS Trainers 35,737 61,538
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Deliver- Deliverable
able
Number 10% HOLDBACK NET PAYMENT
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
TASK 1 - PROJECT MANAGEMENT 4/7/97 - 3/31/98 No Payment for these deliverables
Regular Updates to the Project Plan (Updated
Monthly at a Minimum)
Weekly Status Reports
TOTAL PAYMENT TASK 1
- --------------------------------------------------------------------------------------------------------------------------------
TASK 2 - QUALITY ASSURANCE 4/14/97 - 2/27/98 No Payment for these deliverables
----------------------------------------------------------------------------------------------------------------------
Quality Review Meetings
----------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 2
- --------------------------------------------------------------------------------------------------------------------------------
3.. TASK 3 - PROJECT PLANNING & INITIATION 4/7/97 - 5/7/98
- --------------------------------------------------------------------------------------------------------------------------------
3.1. Establish Augusta Project Office 26,789 241,104
- --------------------------------------------------------------------------------------------------------------------------------
3.2. Install Develop. Server, Workstations, Develop Prototype LAN 19,415 174,738
- --------------------------------------------------------------------------------------------------------------------------------
3.3. Install Donor System 8,975 80,771
- --------------------------------------------------------------------------------------------------------------------------------
3.4. Install Project Management HW/SW 3,820 34,376
- --------------------------------------------------------------------------------------------------------------------------------
3.5. Project Kick-Off Meeting 9,708 87,368
- --------------------------------------------------------------------------------------------------------------------------------
3.6.1 First Update to Project Workplan DRAFT 6,840 61,558
- --------------------------------------------------------------------------------------------------------------------------------
3.6.2 First Update to Project Workplan FINAL 13,887 124,984
- --------------------------------------------------------------------------------------------------------------------------------
3.7. Project Management Manual 3,870 34,830
- --------------------------------------------------------------------------------------------------------------------------------
3.8. MACWIS Standards and Procedures Manual 2,739 24,651
- --------------------------------------------------------------------------------------------------------------------------------
3.9. MACWIS Communications Plan 4,854 43,684
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 3 100,897 908,064
- --------------------------------------------------------------------------------------------------------------------------------
4.. TASK 4 - SYSTEM DESIGN 4/7/97 - 7/28/97
- --------------------------------------------------------------------------------------------------------------------------------
4.1. Develop Training Needs Analysis Questionnaire 293 2,637
- --------------------------------------------------------------------------------------------------------------------------------
4.2.1 Comprehensive Training Plan and Schedule DRAFT (Final in Task 6) 1,172 10,548
- --------------------------------------------------------------------------------------------------------------------------------
4.3. Prototype Deliverables Format and Content
- --------------------------------------------------------------------------------------------------------------------------------
4.3.1 Requirements Specifications Document RSD) 4,412 39,706
- --------------------------------------------------------------------------------------------------------------------------------
4.3.2 Data Model 2,773 24,958
- --------------------------------------------------------------------------------------------------------------------------------
4.3.3 General System Design (GSD) 2,521 22,689
- --------------------------------------------------------------------------------------------------------------------------------
4.3.4 Detailed System Design (DSD) 630 5,673
- --------------------------------------------------------------------------------------------------------------------------------
4.3.5 Design Analysis Report (DesAR) 1,261 11,345
- --------------------------------------------------------------------------------------------------------------------------------
4.3.6 User and Technical Manuals 9,927 89,346
- --------------------------------------------------------------------------------------------------------------------------------
4.3.7 Development Analysis Report (DevAR) 2,647 23,826
- --------------------------------------------------------------------------------------------------------------------------------
4.3.8 Detailed Implementation Plan (DIP) 1,820 16,380
- --------------------------------------------------------------------------------------------------------------------------------
4.3.9 Implementation Analysis Report (ImpAR) 138 1,244
- --------------------------------------------------------------------------------------------------------------------------------
4.3.10 Acceptance Test Plan (ATP) 276 2,487
- --------------------------------------------------------------------------------------------------------------------------------
4.4. Deliver Central Server, Peripherals, Software 86,060 774,541
- --------------------------------------------------------------------------------------------------------------------------------
4.5.1 Requirements Specifications Document (RSD) DRAFT 13,103 117,928
- --------------------------------------------------------------------------------------------------------------------------------
4.5.2 Requirements Specifications Document (RSD) FINAL 26,206 235,856
- --------------------------------------------------------------------------------------------------------------------------------
4.6.1 Data Model DRAFT 8,311 74,800
- --------------------------------------------------------------------------------------------------------------------------------
4.6.2 Data Model FINAL 16,647 149,824
- --------------------------------------------------------------------------------------------------------------------------------
4.7.1 General System Design Document DRAFT 7,556 68,000
- --------------------------------------------------------------------------------------------------------------------------------
4.7.2 General System Design Document FINAL 15,134 136,204
- --------------------------------------------------------------------------------------------------------------------------------
4.8.1 Detailed System Design Document DRAFT 9,988 89,892
- --------------------------------------------------------------------------------------------------------------------------------
4.8.2 Detailed System Design Document FINAL 19,976 179,784
- --------------------------------------------------------------------------------------------------------------------------------
4.9.1 Comparative Analysis Report DRAFT 3,778 34,000
- --------------------------------------------------------------------------------------------------------------------------------
4.9.2 Comparative Analysis Report FINAL 7,567 68,102
- --------------------------------------------------------------------------------------------------------------------------------
4.10.1 System Development Test Plan DRAFT 1,889 17,000
- --------------------------------------------------------------------------------------------------------------------------------
4.10.2 System Development Test Plan FINAL 3,783 34,051
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 4 247,868 2,230,821
- --------------------------------------------------------------------------------------------------------------------------------
5.. TASK 5 - SYSTEM DEVELOPMENT 6/2/97 - 10/10/97
- --------------------------------------------------------------------------------------------------------------------------------
5.1. Physical Implementation of MACWIS Central Server HW & DB SW 8,975 80,778
- --------------------------------------------------------------------------------------------------------------------------------
5.2. Operational MACWIS Developed on Dev./Prototype LAN 69,564 626,077
- --------------------------------------------------------------------------------------------------------------------------------
5.3.1 System and System User Documentation DRAFT (Final in Task 11) 3,774 33,969
- --------------------------------------------------------------------------------------------------------------------------------
5.4.1 Development Test Analysis Report DRAFT 7,934 71,405
- --------------------------------------------------------------------------------------------------------------------------------
5.4.2 Development Test Analysis Report FINAL 15,892 143,025
- --------------------------------------------------------------------------------------------------------------------------------
5.5.1 Detailed Implementation Plan DRAFT 5,455 49,091
- --------------------------------------------------------------------------------------------------------------------------------
5.5.2 Detailed Implementation Plan FINAL 10,926 98,330
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENTS TASK 5 122,520 1,102,675
- --------------------------------------------------------------------------------------------------------------------------------
6.. TASK 6 - SYSTEM IMPLEMENTATION 10/13/97 - 11/28/97
- --------------------------------------------------------------------------------------------------------------------------------
6.1. Initial Load of the MACWIS Database 8,290 74,614
- --------------------------------------------------------------------------------------------------------------------------------
6.2. Implementation of all MACWIS functionality on Central Server 11,364 102,275
- --------------------------------------------------------------------------------------------------------------------------------
6.3. Completion of Training for BCFS Trainers 6,154 55,384
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Deliver- Deliverable Deliver-
able able GROSS
Number Due Date PAYMENT
- ----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
4.2.2 Comprehensive Training Plan and Schedule FINAL 35,758 39,714
- ----------------------------------------------------------------------------------------------------------------------------
6.4.1 Implementation Analysis Report DRAFT 35,744 4,141
- ----------------------------------------------------------------------------------------------------------------------------
6.4.2 Implementation Analysis Report FINAL 35,762 8,295
- ----------------------------------------------------------------------------------------------------------------------------
6.5.2 Detailed Acceptance Test Plan, Inc. Benchmark Test Cases FINAL 35,762 16,590
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 6 335,104
- ----------------------------------------------------------------------------------------------------------------------------
7.. TASK 7 - ACCEPTANCE TESTING 11/10/97 - 2/9/98
- ----------------------------------------------------------------------------------------------------------------------------
7.1. Acceptance Test Team Trained 35,751 94,923
- ----------------------------------------------------------------------------------------------------------------------------
7.2. Errors Identified During Testing & Retesting Documented & Resolved 35,793 221,192
- ----------------------------------------------------------------------------------------------------------------------------
7.3.1 Acceptance Test Result Report DRAFT 35,793 31,918
- ----------------------------------------------------------------------------------------------------------------------------
7.3.2 Acceptance Test Results Report FINAL 35,811 63,932
- ----------------------------------------------------------------------------------------------------------------------------
7.4.1 Detailed Pilot Test Plan DRAFT 35,751 41,739
- ----------------------------------------------------------------------------------------------------------------------------
7.4.2 Detailed Pilot Test Plan FINAL 35,772 83,603
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 7 537,307
- ----------------------------------------------------------------------------------------------------------------------------
8.. TASK 8 - PILOT SITE IMPLEMENTATION 1/5/98 - 2/20/98
- ----------------------------------------------------------------------------------------------------------------------------
8.1. Full Installation of Operational MACWIS in Selected Pilot Office 35,807 71,500
- ----------------------------------------------------------------------------------------------------------------------------
8.2. MACWIS Help Desk Procedures Documented 35,807 50,315
- ----------------------------------------------------------------------------------------------------------------------------
8.3. Errors Identified During Testing & Retesting Documented & Resolved 35,804 55,611
- ----------------------------------------------------------------------------------------------------------------------------
8.4.1 Pilot Test Analysis Report DRAFT 35,804 13,108
- ----------------------------------------------------------------------------------------------------------------------------
8.4.2 Pilot Test Analysis Report FINAL 35,825 26,614
- ----------------------------------------------------------------------------------------------------------------------------
8.4.1 Detailed Statewide Implementation Test Plan DRAFT 35,825 15,873
- ----------------------------------------------------------------------------------------------------------------------------
8.4.2 Detailed Statewide Implementation Test Plan FINAL 35,846 31,793
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENTS TASK 8 264,814
- ----------------------------------------------------------------------------------------------------------------------------
9.. TASK 9 - STATEWIDE IMPLEMENTATION 2/9/98 - 3/6/98
- ----------------------------------------------------------------------------------------------------------------------------
9.1. Full Statewide Implementation of MACWIS Satisfying RFP Requirements 35,853 67,168
- ----------------------------------------------------------------------------------------------------------------------------
9.2. Benchmark Test Performance Report 35,853 9,872
- ----------------------------------------------------------------------------------------------------------------------------
9.3.1 Statewide Implementation Analysis Report DRAFT 35,846 2,430
- ----------------------------------------------------------------------------------------------------------------------------
9.3.2 Statewide Implementation Analysis Report FINAL 35,860 4,867
- ----------------------------------------------------------------------------------------------------------------------------
9.4.1 System Turnover Plan DRAFT 35,832 27,953
- ----------------------------------------------------------------------------------------------------------------------------
9.4.2 System Turnover Plan FINAL 35,853 55,906
- ----------------------------------------------------------------------------------------------------------------------------
10.. TASK 10 - LEGACY DATA CONVERSION 4/7/97 - 2/6/98
- ----------------------------------------------------------------------------------------------------------------------------
10.1.1 Detailed Conversion Test Plan DRAFT 35,548 2,858
- ----------------------------------------------------------------------------------------------------------------------------
10.1.2 Detailed Conversion Test Plan FINAL 35,566 5,725
- ----------------------------------------------------------------------------------------------------------------------------
10.2.1 Conversion Specification Document DRAFT 35,569 8,767
- ----------------------------------------------------------------------------------------------------------------------------
10.2.2 Conversion Specification Document FINAL 35,587 19,555
- ----------------------------------------------------------------------------------------------------------------------------
10.3. Conversion Programs 35,701 28,548
- ----------------------------------------------------------------------------------------------------------------------------
10.4.1 Conversion Test Results Report DRAFT 35,688 3,834
- ----------------------------------------------------------------------------------------------------------------------------
10.4.2 Conversion Test Results Report FINAL 35,709 7,681
- ----------------------------------------------------------------------------------------------------------------------------
10.5. Data Conversion - Pilot Office 35,800 19,397
- ----------------------------------------------------------------------------------------------------------------------------
10.6. Conversion Documentation for Users and Software Maintenance 35,713 3,730
- ----------------------------------------------------------------------------------------------------------------------------
10.7. Data Conversion - Central and Regional Offices 35,832 30,540
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 10 130,635
- ----------------------------------------------------------------------------------------------------------------------------
11.. TASK 11 - OPERATIONS SUPPORT/WARRANTY 3/1/98 - 2/26/99
- ----------------------------------------------------------------------------------------------------------------------------
11.1. Completion of Training or State MIS Operations Staff 35,881 27,535
- ----------------------------------------------------------------------------------------------------------------------------
5.3.2 System and System User Documentation FINAL 35,881 11,563
- ----------------------------------------------------------------------------------------------------------------------------
11.2. Successful Turnover of MACWIS to State Technical Personnel 35,881 23,951
- ----------------------------------------------------------------------------------------------------------------------------
Release of Equipment Holdback to Unisys 35,886
- ----------------------------------------------------------------------------------------------------------------------------
11.3.1 System Turnover Results Report DRAFT 35,895 1,495
- ----------------------------------------------------------------------------------------------------------------------------
11.3.2 System Turnover Results Report FINAL 35,909 2,995
- ----------------------------------------------------------------------------------------------------------------------------
11.4. Warranty - Month 1 35,885 4,192
- ----------------------------------------------------------------------------------------------------------------------------
11.5. Warranty - Month 2 35,915 4,192
- ----------------------------------------------------------------------------------------------------------------------------
11.6. Warranty - Month 3 35,946 4,192
- ----------------------------------------------------------------------------------------------------------------------------
Release of Holdback to Unisys 35,947
- ----------------------------------------------------------------------------------------------------------------------------
11.7. Warranty - Month 4 35,976 4,192
- ----------------------------------------------------------------------------------------------------------------------------
11.8. Warranty - Month 5 36,007 4,192
- ----------------------------------------------------------------------------------------------------------------------------
11.9. Warranty - Month 6 36,038 4,192
- ----------------------------------------------------------------------------------------------------------------------------
Release of Holdback to Unisys 36,039
- ----------------------------------------------------------------------------------------------------------------------------
11.1. Warranty - Month 7 36,068 4,192
- ----------------------------------------------------------------------------------------------------------------------------
11.11. Warranty - Month 8 36,099 4,192
- ----------------------------------------------------------------------------------------------------------------------------
11.12. Warranty - Month 9 36,129 4,192
- ----------------------------------------------------------------------------------------------------------------------------
11.13. Warranty - Month 10 36,160 4,192
- ----------------------------------------------------------------------------------------------------------------------------
11.14. Warranty - Month 11 36,191 4,192
- ----------------------------------------------------------------------------------------------------------------------------
11.15. Warranty - Month 12 36,217 4,192
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 11 117,843
- ----------------------------------------------------------------------------------------------------------------------------
Release of Unisys Holdback to Network Six for $100,00 in Task 3 36,220
- ----------------------------------------------------------------------------------------------------------------------------
Release of Holdback to Network Six 36,220
- ----------------------------------------------------------------------------------------------------------------------------
Totals 6,268,738
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Deliver- Deliverable
able
Number 10% HOLDBACK NET PAYMENT
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
4.2.2 Comprehensive Training Plan and Schedule FINAL 3,971 35,743
- --------------------------------------------------------------------------------------------------------------------------------
6.4.1 Implementation Analysis Report DRAFT 414 3,727
- --------------------------------------------------------------------------------------------------------------------------------
6.4.2 Implementation Analysis Report FINAL 830 7,466
- --------------------------------------------------------------------------------------------------------------------------------
6.5.1 Detailed Acceptance Test Plan, Inc. Benchmark Test Cases DRAFT 828 7,455
- --------------------------------------------------------------------------------------------------------------------------------
6.5.2 Detailed Acceptance Test Plan, Inc. Benchmark Test Cases FINAL 1,659 14,931
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 6 33,510 301,595
- --------------------------------------------------------------------------------------------------------------------------------
7.. TASK 7 - ACCEPTANCE TESTING 11/10/97 - 2/9/98
- --------------------------------------------------------------------------------------------------------------------------------
7.1. Acceptance Test Team Trained 9,492 85,431
- --------------------------------------------------------------------------------------------------------------------------------
7.2. Errors Identified During Testing & Retesting Documented & Resolved 22,119 199,073
- --------------------------------------------------------------------------------------------------------------------------------
7.3.1 Acceptance Test Result Report DRAFT 3,192 28,726
- --------------------------------------------------------------------------------------------------------------------------------
7.3.2 Acceptance Test Results Report FINAL 6,393 57,539
- --------------------------------------------------------------------------------------------------------------------------------
7.4.1 Detailed Pilot Test Plan DRAFT 4,174 37,565
- --------------------------------------------------------------------------------------------------------------------------------
7.4.2 Detailed Pilot Test Plan FINAL 8,360 75,243
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 7 53,730 483,577
- --------------------------------------------------------------------------------------------------------------------------------
8.. TASK 8 - PILOT SITE IMPLEMENTATION 1/5/98 - 2/20/98
- --------------------------------------------------------------------------------------------------------------------------------
8.1. Full Installation of Operational MACWIS in Selected Pilot Office 7,150 64,350
- --------------------------------------------------------------------------------------------------------------------------------
8.2. MACWIS Help Desk Procedures Documented 5,032 45,284
- --------------------------------------------------------------------------------------------------------------------------------
8.3. Errors Identified During Testing & Retesting Documented & Resolved 5,561 50,050
- --------------------------------------------------------------------------------------------------------------------------------
8.4.1 Pilot Test Analysis Report DRAFT 1,311 11,797
- --------------------------------------------------------------------------------------------------------------------------------
8.4.2 Pilot Test Analysis Report FINAL 2,661 23,953
- --------------------------------------------------------------------------------------------------------------------------------
8.4.1 Detailed Statewide Implementation Test Plan DRAFT 1,587 14,286
- --------------------------------------------------------------------------------------------------------------------------------
8.4.2 Detailed Statewide Implementation Test Plan FINAL 3,179 28,614
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENTS TASK 8 26,481 238,334
- --------------------------------------------------------------------------------------------------------------------------------
9.. TASK 9 - STATEWIDE IMPLEMENTATION 2/9/98 - 3/6/98
- --------------------------------------------------------------------------------------------------------------------------------
9.1. Full Statewide Implementation of MACWIS Satisfying RFP Requirements 6,717 60,451
- --------------------------------------------------------------------------------------------------------------------------------
9.2. Benchmark Test Performance Report 987 8,885
- --------------------------------------------------------------------------------------------------------------------------------
9.3.1 Statewide Implementation Analysis Report DRAFT 243 2,187
- --------------------------------------------------------------------------------------------------------------------------------
9.3.2 Statewide Implementation Analysis Report FINAL 487 4,380
- --------------------------------------------------------------------------------------------------------------------------------
9.4.1 System Turnover Plan DRAFT 2,795 25,158
- --------------------------------------------------------------------------------------------------------------------------------
9.4.2 System Turnover Plan FINAL 5,591 50,315
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENTS TASK 9 16,820 151,376
- --------------------------------------------------------------------------------------------------------------------------------
10.. TASK 10 - LEGACY DATA CONVERSION 4/7/97 - 2/6/98
- --------------------------------------------------------------------------------------------------------------------------------
10.1.1 Detailed Conversion Test Plan DRAFT 286 2,572
- --------------------------------------------------------------------------------------------------------------------------------
10.1.2 Detailed Conversion Test Plan FINAL 573 5,153
- --------------------------------------------------------------------------------------------------------------------------------
10.2.1 Conversion Specification Document DRAFT 877 7,890
- --------------------------------------------------------------------------------------------------------------------------------
10.2.2 Conversion Specification Document FINAL 1,958 17,600
- --------------------------------------------------------------------------------------------------------------------------------
10.3. Conversion Programs 2,855 25,693
- --------------------------------------------------------------------------------------------------------------------------------
10.4.1 Conversion Test Results Report DRAFT 383 3,451
- --------------------------------------------------------------------------------------------------------------------------------
10.4.2 Conversion Test Results Report FINAL 768 6,913
- --------------------------------------------------------------------------------------------------------------------------------
10.5. Data Conversion - Pilot Office 1,940 17,457
- --------------------------------------------------------------------------------------------------------------------------------
10.6. Conversion Documentation for Users and Software Maintenance 273 2,457
- --------------------------------------------------------------------------------------------------------------------------------
10.7. Data Conversion - Central and Regional Offices 3,054 27,486
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 10 12,967 116,672
- --------------------------------------------------------------------------------------------------------------------------------
11.. TASK 11 - OPERATIONS SUPPORT/WARRANTY 3/1/98 - 2/26/99
- --------------------------------------------------------------------------------------------------------------------------------
11.1. Completion of Training or State MIS Operations Staff 2,754 24,782
- --------------------------------------------------------------------------------------------------------------------------------
5.3.2 System and System User Documentation FINAL 1,156 10,407
- --------------------------------------------------------------------------------------------------------------------------------
11.2. Successful Turnover of MACWIS to State Technical Personnel 2,395 21,556
- --------------------------------------------------------------------------------------------------------------------------------
Release of Equipment Holdback to Unisys 97,776
- --------------------------------------------------------------------------------------------------------------------------------
11.3.1 System Turnover Results Report DRAFT 150 1,346
- --------------------------------------------------------------------------------------------------------------------------------
11.3.2 System Turnover Results Report FINAL 300 2,696
- --------------------------------------------------------------------------------------------------------------------------------
11.4. Warranty - Month 1 419 3,773
- --------------------------------------------------------------------------------------------------------------------------------
11.5. Warranty - Month 2 419 3,773
- --------------------------------------------------------------------------------------------------------------------------------
11.6. Warranty - Month 3 419 3,773
- --------------------------------------------------------------------------------------------------------------------------------
Release of Holdback to Unisys 114,058
- --------------------------------------------------------------------------------------------------------------------------------
11.7. Warranty - Month 4 419 3,773
- --------------------------------------------------------------------------------------------------------------------------------
11.8. Warranty - Month 5 419 3,773
- --------------------------------------------------------------------------------------------------------------------------------
11.9. Warranty - Month 6 419 3,773
- --------------------------------------------------------------------------------------------------------------------------------
Release of Holdback to Unisys 114,058
- --------------------------------------------------------------------------------------------------------------------------------
11.1. Warranty - Month 7 419 3,773
- --------------------------------------------------------------------------------------------------------------------------------
11.11. Warranty - Month 8 419 3,773
- --------------------------------------------------------------------------------------------------------------------------------
11.12. Warranty - Month 9 419 3,773
- --------------------------------------------------------------------------------------------------------------------------------
11.13. Warranty - Month 10 419 3,773
- --------------------------------------------------------------------------------------------------------------------------------
11.14. Warranty - Month 11 419 3,773
- --------------------------------------------------------------------------------------------------------------------------------
11.15. Warranty - Month 12 419 3,773
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL PAYMENT TASK 11 11,783 431,955
- --------------------------------------------------------------------------------------------------------------------------------
Release of Unisys Holdback to Network Six for $100,00 in Task 3 100,000
- --------------------------------------------------------------------------------------------------------------------------------
Release of Holdback to Network Six 200,000
- --------------------------------------------------------------------------------------------------------------------------------
626,576 6,265,751
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Bond No. 6996
ACSTAR
INSURANCE COMPANY
233 MAIN STREET *P.O. BOX 2350 PERFORMANCE
NEW BRITAIN, CT 06050-22350 BOND
(203) 224-2000
KNOW ALL MEN BY THESE PRESENTS, that We Network Six, Inc. 475 Kilvert
-----------------------------
Street, Warwick, RI 02886, as Principal, and ACSTAR INSURANCE COMPANY, 233 Main
- --------------------------
Street, P.O. Box 2350, New Britain, CT 06050-2350, as Surety, are held and
firmly bound unto
State of Maine, Dept. of Human Services, Augusta, ME 04333
As Obligee, hereinafter called the Obligee, in the penal sum of One million five
----------------
hundred sixty six thousand four hundred thirty five and 00/100------------------
- -------------------------------------------------------------------------------
Dollars ($1,566,435.00) for which payment well and truly to be made we do bind
- -----------------------
ourselves, our heirs, executors, administrators and assigns, firmly by these
presents.
THE CONDITION OF THIS OBLIGATION IS SUCH, that:
WHEREAS, the Principal entered into a certain contract with the Obligee,
dated 2/5/97 for to build an automated child welfare information system for the
------ ---------------------------------------------------------------
State of Maine.
- ---------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
which contract and the specifications therefore shall be deemed a part hereof as
fully as if set out herein.
NOW, THEREFORE, if the said Princial shall well and truly perform all the
work specified in said contract, then this obligation to be void; otherwise to
remain in full force and effect.
The foregoing obligation is subject to the condition that no suit or action
shall be commenced hereunder after the expiration date of one year following the
date on which Principal ceased work on said contract or the date on which final
payment under the contract falls due, or the date on which goods or services
were received by principal, whichever occurs first. The Surety shall have no
obligation to claimants who do not have a direct contract with the Principal.
IN WITNESS WHEREOF, the above bounden parties have executed this instrument
under their several seals this 3rd day of February, 1997 the name and corporate
-------------------------
seal of each corporate party being affixed hereto and these presents duly signed
by its undersigned representatives, pursuant to authority of its governing body.
ATTEST: NETWORK SIX, INC.
------------------------------------
Principal (Seal)
/s/ Dorothy M. Cipolla By: /s/ Kenneth C. Kirsch
- ----------------------------------- ------------------------------------
Kenneth C. Kirsch
President & CEO
ATTEST: ACSTAR INSURANCE COMPANY
/s/ By: /s/ Henry W. Nozko, Jr.
- ----------------------------------- ------------------------------------
Name Henry W. Nozko, Jr.
Title President
- --------------------------------------------------------------------------------
<PAGE>
SETTLEMENT AGREEMENT AND ASSIGNMENT
-----------------------------------
This Agreement made the 29th day of December 1997, between The Aetna Casualty
----
and Surety Company and the Federal Insurance Company, hereinafter referred to as
"Surety", Network Six Inc., hereinafter referred to as "NSI", and Lockheed
Martin IMS Corporation, hereinafter referred to as "Lockheed".
WHEREAS, Surety issued a payment and performance bond on behalf of NSI for
Hawaii's Development and implementation of a Statewide Comprehensive Automated
Child Support System.
WHEREAS, the State of Hawaii has terminated NSI's contract for the Development
and Implementation of a Statewide Comprehensive Automated Child Support System,
hereinafter referred to as "Project" and NSI has commenced litigation against
the State of Hawaii for breech of contract and improper termination.
WHEREAS, Surety received a payment bond claim from Unisys Corporation for unpaid
equipment in the amount of $889,248.59.
WHEREAS, Surety investigated, verified, settled and paid such claim in an amount
of $842,238.78.
WHEREAS, in consideration of paying Unisys Corporation $842,238.78, Surety was
given a full and final release of claim of Surety and NSI.
WHEREAS, in consideration of paying Unisys Corporation $842,238.78, Surety was
given an assignment of any and all rights of Unisys against NSI.
WHEREAS, NSI has an obligation to immediately reimburse Surety for all loss,
cost, and expense realized as a result of Surety issuing said payment and
performance bond both by contract and by common law.
WHEREAS, Lockheed, as third party Indemnitor agreed to indemnify Surety for any
loss, cost, and expense realized as a result of Surety issuing said payment and
performance bond if and when NSI was unable to reimburse Surety.
WHEREAS, the obligation to reimburse Surety primarily belongs to NSI and
secondarily belongs to Lockheed.
WHEREAS, Lockheed has or will reimburse the Surety $842,238.78 as full and final
settlement of said indemnity obligation.
WHEREAS, the Surety, NSI and Lockheed wish to assign all of the Surety's rights
of reimbursement against NSI however derived to Lockheed and enter into an
arrangement in which NSI reimburses Lockheed $842,238.78 with interest over
time.
NOW THEREFORE, in consideration of the promises and mutual covenants, benefits
and detriments contained herein, intending to be legally bound, the parties do
hereby agree as follows:
1
<PAGE>
1. Surety assigns all of its rights against NSI relating to the payment of the
Unisys claim toLockheed.
2. Surety retains all of its right of indemnity against NSI and Lockheed for
any and all loss, cost, and expense stemming from any further liability not yet
known, but otherwise releases NSI and Lockheed for liability borne out of the
Project except for the obligations under this agreement.
3. NSI agrees to execute a promissory note in favor of Lockheed (attached
hereto and incorporated herein (exhibit 1)), in which NSI agrees to pay Lockheed
$842,238.78 plus interest.
4. Said Promissory Note shall be paid in accordance with the payment amounts
and interest rates found in the payment schedule attached hereto and
incorporated herein (exhibit 2).
5. NSI shall be obligated to reimburse Lockheed the remaining principal
balance within 15 days of receipt of funds if NSI settles or wins its litigation
against the State of Hawaii. This provision is only effective if the amount
received by NSI as a result of the dispute with the State of Hawaii is more than
$350,000.00. If the amount of the settlement or award is greater than
$350,000.00, but less than the balance of money owed to Lockheed, NSI is only
obligated to immediately pay the amount of money received over and above the
$350,000.00. The balance shall be paid according to the payment schedule.
6. NSI is precluded from further assigning its rights against the State of
Hawaii to anyone in a manner that would impair Lockheed's right to be paid
therefrom without first obtaining written consent from Lockheed. NSI is
permitted to substitute one creditor for another on any preexisting collateral
assignment of its rights against Hawaii, so long as such substitution does not
increase the value of the assignment.
7. NSI shall provide Lockheed with a report at least every three months
updating Lockheed on the status of the litigation until its conclusion. Such
report shall be limited to public information that is material to the status of
the litigation.
8. Lockheed and NSI release the Surety from any and all known liability and
obligations except for the obligations under this agreement.
9. If NSI has not favorably settled the litigation for an amount greater than
$350,000.00, NSI shall have the option but not the obligation to pay the
principal balance owed to Lockheed early. If NSI pays the entire principal
balance off in full in the first 12 months of the repayment schedule, NSI shall
be entitled to a 7% discount of the principal amount. If NSI pays the entire
principal balance off during months 13 through 24 of the repayment schedule, NSI
shall be entitled to a 5% discount of the principal amount. If NSI pays the
entire principal balance off during months 25 through 36 of the repayment
schedule, NSI shall be entitled to a 2.5% discount of the principal amount. If
NSI pays the entire principal balance off during months 37 through 42 of the
repayment schedule, NSI shall be entitled to a 1.5% discount of the principal
amount. If the entire principal balance is paid early, no future interest shall
accrue or be paid.
10. The rights and obligations contained in this agreement shall be binding
upon the successors and assigns of the parties.
IN WITNESS WHEREOF THE PARTIES HERETO have hereby executed this Settlement
Agreement the date shown beside their signature.
2
<PAGE>
Aetna Casualty and Surety Company
Federal Insurance Company
BY: /s/ Nicholas Seminara Date: 12/23/97 /s/ Sherri L. Monteira
----------------------- ---------- ------------------------
Nicholas Seminara Notary
Claim Counsel
Network Six Inc.
BY: /s/ Kenneth Kirsch Date: 12/24/97 /s/ Janet S. Cherms
-------------------- ---------- ---------------------
Kenneth Kirsch Notary
President and Chief
Executive Officer
Lockheed Martin IMS Corporation
BY: /s/ Robert F. Downing Date: 12/29/97 /s/ Judith A. Puentes
----------------------- ---------- -----------------------
Name: Robert F. Downing Notary
Title: General Counsel
3
<PAGE>
NOTE
----
For value received Network Six Inc., its successors and assigns
unconditionally promise to pay to the order of Lockheed Martin IMS, Eight
Hundred, Forty Two Thousand, Two Hundred, Thirty-eight dollars and no cents,
($842,238.00) plus interest at the rates set forth in the payment schedule
attached hereto and incorporated herein. Interest and principal payments are
set forth in the attached schedule and shall commence one month from the date
hereof. Should Network Six Inc. fail to make any payment within 10 days of when
due for any reason whatsoever (including without limitation the filing of
voluntary or involuntary bankruptcy proceedings): (a) the unpaid principal
balance and unpaid interest as set forth in the attached payment schedule at the
time of such failure to pay, together with an acceleration fee of 5% of such
unpaid principal balance, shall be immediately due and payable; and (b) the
holder of this Note shall have the unconditional right to confess judgment
against Network Six Inc. for the principal unpaid balance and the acceleration
fee referenced above, together with all costs, expenses and attorney's fees
incurred by the holder in perfecting or enforcing such judgment.
This Note arises out of a certain Settlement Agreement and Assignment
amongst Aetna Casualty and Surety Company and the Federal Insurance Company,
Network Six Inc. and Lockheed Martin IMS Corporation and is subject to the terms
of said agreement, including but not limited to terms providing for acceleration
of payment and discount for prepayment.
This Note suspends but does not extinguish the underlying obligation for
which it is given. The "underlying obligation" is set forth in paragraphs three
and four of the aforementioned agreement. The giving, taking, negotiation,
acceptance, payment, or dishonor of this Note shall in no way alter the form,
character or quality of this Note or such underlying obligation, including the
dischargeability status of the Note or such underlying obligation under 11 U.S.
C. & 523. Further, Network Six Inc. hereby waives the right to assert any
statute of limitation defense or statute of repose defense to this Note or to
the underlying obligation.
MAKER: Network Six Inc.
Attest:__________________ By: /s/ Kenneth C. Kirsch
----------------------------
Print name Print name Kenneth C. Kirsch
and title and title President & CEO
Sworn to before me this day of 24th day of December ,1997.
------ -------- ----
/s/ Janet S. Cherms
- ---------------------
Notary Public
My Commission Expires:
7-24-01
Exhibit 1
4
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Payment Number Interest Rate (%) Principal Interest Amount Due
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
1 5% $ 3,509.33 $ 3,509.33
- ----------------------------------------------------------------------------------------------------------
2 5% $ 3,509.33 $ 3,509.33
- ----------------------------------------------------------------------------------------------------------
3 5% $ 3,509.33 $ 3,509.33
- ----------------------------------------------------------------------------------------------------------
4 5% $ 3,509.33 $ 3,509.33
- ----------------------------------------------------------------------------------------------------------
5 5% $ 3,509.33 $ 3,509.33
- ----------------------------------------------------------------------------------------------------------
6 5% $ 3,509.33 $ 3,509.33
- ----------------------------------------------------------------------------------------------------------
7 5% $ 3,509.33 $ 3,509.33
- ----------------------------------------------------------------------------------------------------------
8 5% $ 3,509.33 $ 3,509.33
- ----------------------------------------------------------------------------------------------------------
9 5% $ 3,509.33 $ 3,509.33
- ----------------------------------------------------------------------------------------------------------
10 5% $ 3,509.33 $ 3,509.33
- ----------------------------------------------------------------------------------------------------------
11 5% $ 3,509.33 $ 3,509.33
- ----------------------------------------------------------------------------------------------------------
12 5% $100,000.00 $ 3,509.33 $ 103,509.33
- ----------------------------------------------------------------------------------------------------------
13 6% $ 3,711.20 $ 3,711.20
- ----------------------------------------------------------------------------------------------------------
14 6% $ 3,711.20 $ 3,711.20
- ----------------------------------------------------------------------------------------------------------
15 6% $ 3,711.20 $ 3,711.20
- ----------------------------------------------------------------------------------------------------------
16 6% $ 3,711.20 $ 3,711.20
- ----------------------------------------------------------------------------------------------------------
17 6% $ 3,711.20 $ 3,711.20
- ----------------------------------------------------------------------------------------------------------
18 6% $ 3,711.20 $ 3,711.20
- ----------------------------------------------------------------------------------------------------------
19 6% $ 3,711.20 $ 3,711.20
- ----------------------------------------------------------------------------------------------------------
20 6% $ 3,711.20 $ 3,711.20
- ----------------------------------------------------------------------------------------------------------
21 6% $ 3,711.20 $ 3,711.20
- ----------------------------------------------------------------------------------------------------------
22 6% $ 3,711.20 $ 3,711.20
- ----------------------------------------------------------------------------------------------------------
23 6% $ 3,711.20 $ 3,711.20
- ----------------------------------------------------------------------------------------------------------
24 6% $200,000.00 $ 3,711.20 $ 203,711.20
- ----------------------------------------------------------------------------------------------------------
25 7.50% $ 3,388.99 $ 3,388.99
- ----------------------------------------------------------------------------------------------------------
26 7.50% $ 3,388.99 $ 3,388.99
- ----------------------------------------------------------------------------------------------------------
27 7.50% $ 3,388.99 $ 3,388.99
- ----------------------------------------------------------------------------------------------------------
28 7.50% $ 3,388.99 $ 3,388.99
- ----------------------------------------------------------------------------------------------------------
29 7.50% $ 3,388.99 $ 3,388.99
- ----------------------------------------------------------------------------------------------------------
30 7.50% $ 3,388.99 $ 3,388.99
- ----------------------------------------------------------------------------------------------------------
31 7.50% $ 3,388.99 $ 3,388.99
- ----------------------------------------------------------------------------------------------------------
32 7.50% $ 3,388.99 $ 3,388.99
- ----------------------------------------------------------------------------------------------------------
33 7.50% $ 3,388.99 $ 3,388.99
- ----------------------------------------------------------------------------------------------------------
34 7.50% $ 3,388.99 $ 3,388.99
- ----------------------------------------------------------------------------------------------------------
35 7.50% $ 3,388.99 $ 3,388.99
- ----------------------------------------------------------------------------------------------------------
36 7.50% $200,000.00 $ 3,388.99 $ 203,388.99
- ----------------------------------------------------------------------------------------------------------
37 9% $ 2,566.79 $ 2,566.79
- ----------------------------------------------------------------------------------------------------------
38 9% $ 2,566.79 $ 2,566.79
- ----------------------------------------------------------------------------------------------------------
39 9% $ 2,566.79 $ 2,566.79
- ----------------------------------------------------------------------------------------------------------
40 9% $ 2,566.79 $ 2,566.79
- ----------------------------------------------------------------------------------------------------------
41 9% $ 2,566.79 $ 2,566.79
- ----------------------------------------------------------------------------------------------------------
42 9% $ 2,566.79 $ 2,566.79
- ----------------------------------------------------------------------------------------------------------
43 9% $ 2,566.79 $ 2,566.79
- ----------------------------------------------------------------------------------------------------------
44 9% $ 2,566.79 $ 2,566.79
- ----------------------------------------------------------------------------------------------------------
45 9% $ 2,566.79 $ 2,566.79
- ----------------------------------------------------------------------------------------------------------
46 9% $ 2,566.79 $ 2,566.79
- ----------------------------------------------------------------------------------------------------------
47 9% $ 2,566.79 $ 2,566.79
- ----------------------------------------------------------------------------------------------------------
48 9% $342,239.00 $ 2,566.79 $ 344,805.79
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
TOTAL $842,239.00 $158,115.73 $1,000,354.73
- ----------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
INDEPENDENT AUDITORS CONSENT
To the Board of Directors and 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 3, 1998
relating to the balance sheet of Network Six, Inc. as of December 31, 1997 and
the related statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1997 which report appears in the December 31, 1997
annual report on Form 10-K of Network Six, Inc.
Sansiveri, Kimball & McNamee, L.L.P.
/s/ Sansiveri, Kimball & McNamee, L.L.P
Providence, Rhode Island
March 3, 1998
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK APPEARS HERE]
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors of Network Six, Inc.:
We consent to the incorporation by reference 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 sheet of Network Six, Inc. as of December 31, 1996, and
the related statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1996, which report
appears in the December 31, 1997 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 contract with the
State, has become a party to other litigation related to the Hawaii contract,
has suffered recurring losses, and has a bank financing agreement which has
expired. These circumstances raise substantial doubt about 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 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,291,924
<SECURITIES> 0
<RECEIVABLES> 2,061,379
<ALLOWANCES> 50,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,936,075
<PP&E> 694,233
<DEPRECIATION> 627,146
<TOTAL-ASSETS> 9,292,103
<CURRENT-LIABILITIES> 4,913,958
<BONDS> 0
0
2,235,674
<COMMON> 73,429
<OTHER-SE> 646,317
<TOTAL-LIABILITY-AND-EQUITY> 9,292,103
<SALES> 11,460,437
<TOTAL-REVENUES> 11,460,437
<CGS> 8,620,097
<TOTAL-COSTS> 10,691,391
<OTHER-EXPENSES> (31,934)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 266,030
<INCOME-PRETAX> 534,950
<INCOME-TAX> 128,000
<INCOME-CONTINUING> 406,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 406,950
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 1,205,652 127,581 938,266 631,822 438,110
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 3,128,267 1,626,613 2,320,469 2,082,190 2,330,914
<ALLOWANCES> 50,000 97,856 50,000 50,000 93,124
<INVENTORY> 0 0 0 0 0
<CURRENT-ASSETS> 13,606,768 4,215,637 12,421,928 12,051,330 10,026,379
<PP&E> 1,740,245 835,111 1,742,555 1,215,467 1,185,094
<DEPRECIATION> 1,181,249 696,596 1,261,253 830,259 872,020
<TOTAL-ASSETS> 14,945,274 8,273,564 13,633,903 12,990,804 10,797,190
<CURRENT-LIABILITIES> 10,046,386 5,289,308 8,562,250 7,838,799 6,047,662
<BONDS> 0 0 0 0 0
0 0 0 0 0
2,235,674 2,235,674 2,235,674 2,235,674 2,235,674
<COMMON> 286,070 72,119 286,537 288,494 288,497
<OTHER-SE> 2,122,751 440,984 2,320,901 2,422,833 2,037,997
<TOTAL-LIABILITY-AND-EQUITY> 14,945,274 8,273,564 13,633,903 12,990,804 10,797,190
<SALES> 20,985,012 7,344,380 3,686,829 2,579,934 1,657,465
<TOTAL-REVENUES> 20,985,012 7,344,380 3,686,829 3,579,934 1,657,465
<CGS> 18,313,570 7,359,649 2,520,413 1,826,237 1,607,719
<TOTAL-COSTS> 24,391,660 9,480,286 3,229,893 2,288,310 2,093,223
<OTHER-EXPENSES> (10,413) (38,463) (40,678) (19,655) (2,503)
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 396,286 435,925 101,000 120,328 127,530
<INCOME-PRETAX> (3,792,521) (2,533,368) 396,614 190,951 (565,792)
<INCOME-TAX> (1,365,081) (775,023) 164,043 78,290 (228,347)
<INCOME-CONTINUING> (2,427,440) (1,758,345) 232,571 112,661 (337,445)
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> (2,427,440) (1,758,345) 232,571 112,661 (337,445)
<EPS-PRIMARY> (3.42) (2.71) 0.33 0.16 (0.47)
<EPS-DILUTED> (3.42) (2.71) 0.33 0.16 (0.47)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 601,116 386,887 1,996,047
<SECURITIES> 0 0 0
<RECEIVABLES> 730,767 3,109,929 1,705,814
<ALLOWANCES> 50,000 50,000 50,000
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 3,321,492 4,365,945 4,903,989
<PP&E> 814,560 828,895 652,281
<DEPRECIATION> 706,111 726,351 610,822
<TOTAL-ASSETS> 7,889,196 8,862,074 9,322,452
<CURRENT-LIABILITIES> 5,137,588 5,930,774 5,930,774
<BONDS> 0 0 0
0 0 0
2,235,674 2,235,674 2,235,674
<COMMON> 72,119 73,429 73,429
<OTHER-SE> 262,563 482,306 551,735
<TOTAL-LIABILITY-AND-EQUITY> 7,889,196 8,862,074 9,322,452
<SALES> 1,414,186 3,431,835 3,572,313
<TOTAL-REVENUES> 1,414,186 3,431,835 3,572,313
<CGS> 973,140 2,593,348 2,765,551
<TOTAL-COSTS> 1,499,471 3,066,335 3,324,106
<OTHER-EXPENSES> (3,575) (4,797) (2,130)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 50,658 61,979 76,775
<INCOME-PRETAX> (132,187) 308,318 173,562
<INCOME-TAX> 0 65,521 56,872
<INCOME-CONTINUING> (132,187) 242,797 116,690
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (132,187) 242,797 116,690
<EPS-PRIMARY> (0.25) 0.20 0.09
<EPS-DILUTED> (0.25) 0.20 0.09
</TABLE>
