<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, 1998
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 26, 1999 (computed by reference
to the closing price of such stock on The NASDAQ SmallCap Market) was
$3,900,800.
As of February 26, 1999, there were 780,160 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 1999 Annual
Meeting of Stockholders Part III
<PAGE>
NETWORK SIX, INC.
Form 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
Part I
<S> <C> <C>
1 Business........................................................................................... 3
2 Properties......................................................................................... 10
3 Legal Proceedings.................................................................................. 10
4 Submission of Matters to a Vote of Security Holders................................................ 12
Part II
5 Market for Registrant's Common Equity and Related Stockholder Matters.............................. 13
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........................................................ 23
9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure........................................................................... 23
Part III
10 Directors and Executive Officers of the Registrant................................................. 23
11 Executive Compensation............................................................................. 23
12 Security Ownership of Certain Beneficial Owners and Management..................................... 24
13 Certain Relationships and Related Transactions..................................................... 24
Part IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 24
Signatures......................................................................................... 27
</TABLE>
2
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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. In 1998, substantial portions of its revenues were derived
from contracts with such agencies. The Company today also targets its marketing
activities to many government agencies other than human service agencies, as
well as higher education and network services.
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 the 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 and complexity 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 increasingly
retain 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. Business and government organizations are also
turning to 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 are among the organizations
that most need the services of outside providers of information technology
services to upgrade and maintain their computer based information systems. They
have large and burdensome caseloads, must maintain extensive records, and they
are being required 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 states administer
(see chart below), requires detailed, standardized reporting of program data,
elimination of errors, and more responsive management. Yet the information
systems of many such agencies are obsolete and have limited data interfacing
capabilities. Moreover, the states often require
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them to do more with less.
The federal government assists the states by providing financial
assistance for information systems in five major areas: (i) the Child Support
Enforcement (CSE) program; (ii) the previous welfare programs of AFDC and Jobs
Opportunities and Basic Skills (JOBS) program which have been combined into the
TANF (Temporary Assistance to Needy Families) and together with the food stamp
program; (iii) the Medicaid and experimental managed care programs; (iv) the
Child Welfare program; and (v) 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 government established the Child Support
Enforcement (CSE) program in 1975 in response to the increasing failure of many
parents to provide financial support to their children. The CSE program is
intended to help strengthen families and reduce dependence on government
assistance by requiring parents to support their children rather than the
government. State governments generally must 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 require that that state CSE
systems, in order to receive federal funding, to meet certain federal functional
requirements covering case initiation, case management, database linkage,
financial management, enforcement, security, privacy, and reporting. Welfare
reform has had a major impact on CSE systems as well. Welfare reform mandated:
(i) changes to the way collections are distributed; (ii) added a Federal Case
Registry (FCR) which is a central repository for child support cases and
participants from all states; (iii) new interstate case processing; and (iv)
modification to federal reporting requirements.
TANF. The automated information system requirements of two distinct
federal-state programs - AFDC and Food Stamps - are usually combined at the
state level, previously under the name FAMIS or "Family Assistance Management
Information System." Welfare reform has changed the name of the program to TANF
(Temporary Assistance to Needy Families). Welfare reform has established time
limits for assistance and has made the need for education, training, job
placement, and other supportive services especially important.
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 are part of the cost of operating
an automated food stamp program.
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.
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CHILD WELFARE. In November 1993 Congress created a funding authority for
Statewide Automated Child Welfare Information Systems (SACWIS) that provided
federal funds at a 75% rate for the creation of information systems for fiscal
years 1994, 1995, 1996 and 1997. Funding levels for 1998 and beyond were and are
generally 50%. 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 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 system automation by selected program as of
December 31, 1998:
<TABLE>
<CAPTION>
Projected End Date
Program FFP% Of Current FFP%
- ------- ---- ---------------
<S> <C> <C>
Temporary Aid to Needy Families Varies* None*
Food Stamps 50% None
CSE 66%-90% September 30, 1999**
Medicaid 50% None
Medicaid/Managed Care 50-90% Varies by program component
Child Welfare 50%-75% None
Other Human Services Systems Varies Varies by program component
</TABLE>
* States receive block grants and are
permitted to use federal funds within their
discretion.
**Declines to 66%, except for certain
welfare reform initiatives, which would be
eligible for 80% FFP.
The FFP percentages shown above are subject to change at any time by the U.S.
Congress.
CONTRACTS AND SERVICES PROVIDED
The Company's contracts with state agencies have covered four basic
types of projects: (i) the transfer of an entire automated information system
currently in use by another state, which may involve 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
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agency's existing system; and (iv) the provision of support services with
respect to an existing system. The following table sets forth information as of
December 31, 1998 relating to the Company's significant contracts with state
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 Completed
Rhode Island TANF/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 Completed
MACWIS warranty phase
Maine Child Welfare Support services April 1998 In process
MACWIS
</TABLE>
CONTRACT PROCESS. Because most human services agency contracts involve
federal funding, they originate with a federally required Advanced Planning
Document (APD) submitted by the state agency to the federal government for
approval. The federal government reviews APDs to ensure that the system proposed
by the agency incorporates minimum functional requirements and will otherwise
meet federal, state, and user needs in a cost effective manner. Following
approval of the APD, the state agency prepares a request for proposals (RFP)
from private industry for software services and for equipment, or hardware, by
which the system will operate. Each RFP, which is also subject to approval by
the federal government, is usually divided into two parts, one soliciting
technical proposals and the other soliciting price proposals. There may be
separate RFP's for hardware and software or the RFP may be a "bundled" bid that
includes both hardware and software.
RFPs essentially define the procuring agency's functional requirements,
and proposals submitted in response thereto by the Company and its competitors
are extensive, detailed descriptions of the 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.
6
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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 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 generally 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.
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 approximately five years and that the systems require revisions every year to
keep up with changing legislation, regulation, and its needs.
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.
HIGHER EDUCATION
The Company has included Higher Education as a market focus. At a local
university, the Company is working on a number of initiatives that fall under
the Strategic IT Planning umbrella. In addition to assisting the university in
building a comprehensive Strategic IT Plan, the Company has been working on
components of this plan, including Administrative Department Assessments,
Administrative Systems Planning, and Year 2000 planning and remediation. The
Company views its relationship with this customer as a true partnership and
looks forward to continued successes in helping them meet their goals
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and objectives.
The Company is working to expand the education client base. The education market
is ever evolving and is demanding more and more IT resources. The Company can
help these institutions meet their needs for new and existing systems
initiatives. Our qualifications as a successful systems integrator, with
seasoned IT professionals from a variety of disciplines, allows us to offer real
value to this market. Our success is a reflection of the value we can offer, and
we will continue to pursue opportunities for market sector growth.
NETWORK SERVICES
The Company's network services practice continues to grow. Since 1997,
the Company has added many new accounts including private sector companies,
cities, towns, and local colleges. In addition, the Company provides network
services for current Company customers as well as for the Company offices.
Highlights of 1998 projects include work for several municipalities and higher
education customers as well as private and non-profit sector customers.
During 1998, the Company planned and implemented a Windows NT WAN/LAN
for a non-profit center involving two primary locations made up of a total of
five buildings. Work on the project included hardware and software procurement
and installation, as well as electronic messaging, Internet access, remote
dial-in access, anti-virus, system back-up and support services.
The Company also planned and implemented Windows NT wide-area and
local-area networks for different municipalities. Work included hardware and
software procurement and installation, as well as the installation of the
Microsoft Exchange messaging System.
The Company has also done work for several area colleges and
universities. It conducted a high-level assessment of a university's network
infrastructure as part of a larger consulting project. The infrastructure
assessment involved a review of the university's Help Desk services,
infrastructure documentation, disaster recovery plan, network security, system
procedures and MIS organizational structure. The review concluded with a report
on the findings and recommendations for improvements. The Company was also
selected by another college to provide desktop PC configuration and
troubleshooting services. The project involved the configuration of over 350 new
Dell computers for use in administrative and academic areas.
The Company has also provided network support to several private sector
companies. The projects include migrating an existing Novell NetWare LAN to a
Windows NT network, providing help desk support, and other network services.
COMPETITION
The Company operates in a highly competitive market. The Company's
competitors for state human services agency contracts include firms such as
Andersen Consulting, Unisys, DRC, American Management Systems, BDM International
(now part of TRW) and Deloitte & Touche. These competitors have 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.
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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, 1998, the Company had the
following contracts to provide services which, if fully performed, would result
in the revenues shown:
<TABLE>
<CAPTION>
Contract Contract Revenues Backlog
Contract Title Amount(1) Earned Thru 12/31/98 as of 12/31/98(2)
-------------- ----------- -------------------- -----------------
<S> <C> <C> <C>
Rhode Island CSE $ 1,859,426 $ 1,701,523 $ 157,903
Rhode Island Support 5,307,043
2,828,601 2,478,442
U.S. Virgin Islands 5,879,074
5,533,718 345,356
Rhode Island Dept. of Health 2,008,788
1,729,665 279,123
Maine Child Welfare (MACWIS) (3) 9,346,858
8,369,380 977,478
MIM Corporation (4) 1,311,897
1,188,327 123,570
Others 157,600
129,514 28,086
------------- ------------------- -----------------
Totals $ 25,870,686 $ 21,480,728 $ 4,389,958
------------- ------------------- -----------------
------------- ------------------- -----------------
</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, 1998 will be realized by the end of 1999. 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.
(3) This includes both the transfer and support services contracts.
(4) The Company has been doing time and materials consulting for MIM
Corporation since January 1998. The Company entered into a one-year
support contract with them in March 1999.
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.
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As of December 31, 1998, the Company had approximately 100 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 also leases 3,600 square feet in Augusta, Maine to
support project activities. This lease expires June 30, 1999. The Company
believes that these offices are adequate for its current and near term needs.
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.
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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.
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 $70 million in damages.
In connection with the Hawaii litigation the Company was ordered to
assign all Hawaii related leases to the State. One of the lessors has sued the
Company for failure to pay. The Company believes it was released of all
responsibility on the lease per the court order.
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
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continue with its present listing on The NASDAQ SmallCap 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
unfavorable outcome is unlikely. At December 31, 1998, the Company had unbilled
work-in-process and related receivables from the State and CBSI of approximately
$3.46 million, which is slightly less than stockholders' equity of approximately
$3.8 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 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on The NASDAQ SmallCap 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 prior to
October 29, 1998 thereafter on the NASDAQ SmallCap Market.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1998
First Quarter $ 5.38 $ 2.75
Second Quarter
6.00 3.38
Third Quarter
9.75 3.19
Fourth Quarter
5.25 2.94
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
</TABLE>
As of December 31, 1998 there were 302 holders of record of the Common Stock,
representing approximately 391 beneficial owners. The last reported sale price
for the Common Stock, as reported on The NASDAQ SmallCap Market on February 26,
1999 was $5.00 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.
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, 1998 are derived from the Company's audited financial
statements.
13
<PAGE>
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Contract revenue earned $ 10,399,979 $ 11,460,437 $ 7,344,380 $ 20,985,012 $ 21,210,878
Cost of revenue earned 6,418,678 8,620,097 7,359,649 19,299,944 13,768,838
------------ ------------ ----------- ------------ ------------
Gross profit (loss) 3,981,301 2,840,340 1,685,068 7,442,040
(15,269)
Selling, general and
administrative expense 2,260,418 2,071,294 2,240,073 4,369,260 3,700,789
Research & development
expense 185,235
- - - -
Restructuring expense (119,436) 537,221
- - -
Income (loss) from
operations 1,720,883 769,046 (2,135,906) (3,406,648) 3,741,251
Income (loss) before
income taxes 1,674,006 534,950 (2,533,368) (3,792,521) 3,574,612
Net income (loss) 1,061,006 406,950 (1,758,345) (2,427,440) 2,109,020
Net income (loss) per share
Basic
0.96 0.25 (2.71) (3.68) 2.79
Diluted
0.96 0.25 (2.71) (3.68) 2.39
Shares used in computing net income
(loss) per share
Basic 758,547 729,927 719,317 709,841 689,587
Diluted 758,547 729,927 719,317 709,841 883,184
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $ 1,416,200 $ 22,117 $(1,073,671) $(2,075,339) $ 6,266,622
Hawaii contract receivables* 3,459,382 3,459,382 3,571,824 5,711,022 3,691,048
Total assets 8,700,782 9,292,103 8,273,564 14,945,273 11,930,399
Long-term obligations 1,156,812 1,422,725 235,479 254,393 158,038
Total stockholders' equity 3,808,883 2,955,420 2,748,777 4,644,494 6,914,434
</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.
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<PAGE>
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. Commencing in 1998, the Company began targeting its
marketing efforts at other state government agencies as well as non-for-profit
organizations and the private commercial sector.
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 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 development of
a pharmaceutical benefits management system.
On October 29, 1998 the Company's stock was transferred from the
NASDAQ National Market and moved to The NASDAQ SmallCap Market.
The Company received comments on January 30, 1998 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, 1998). The Company
believes that, although the outcome of the Company's litigation with the State
of Hawaii is uncertain (see Item 3 - Legal Proceedings), it is likely to prevail
in the Hawaii litigation and therefore the Company is not required to take an
allowance against that receivable.
In April 1998 the Company announced the extension of its contract with
the State of Rhode Island, Department of Human Services, to support the InRHODES
system. The contract has been extended through June 30, 1999. The contract
extension is valued at approximately $2.8 million. InRHODES is a comprehensive
computer system that integrates data and functions for the Family Independence
Program, Food Stamps, Child Support Enforcement, Medicaid Eligibility and
General Public Assistance programs.
15
<PAGE>
In May 1998, the Company announced a three-month support contract with
the State of Maine, Department of Human Services, for the child welfare system
known as MACWIS that the Company recently developed and implemented followed by
a one-year support contract valued at $1.8 million. The $1.8 million contract
was signed in June 1998 and subsequently increased to $1.9 million.
In May 1998 director Dana Gaebe decided not to run for re-election to
the Board of Directors. The Company wishes to thank Mr. Gaebe for his twenty-two
years of service as a Board member.
In September 1998, the Company announced it had entered into a
$250,000 term loan with the Business Development Corporation of Rhode Island and
a $250,000 term loan with the Small Business Loan Fund Corporation, a subsidiary
of the Rhode Island Economic Development Corporation. See Liquidity and Capital
Resources.
In December 1998, the Company announced that Mr. Ralph O. Cot,
formally an executive with Commercial Union, a global insurance provider, had
joined the Board of Directors.
In January 1999, the Company announced that the State of Rhode Island,
Department of Administration, had increased its contract with the Company for an
additional $2.5 million for enhancing the State's InRHODES computer system. This
brings the total value of the Company's support contract with the State of Rhode
Island for InRHODES-related work to $5.3 million.
In February 1999 the Company announced that Dr. Samara H. Navarro,
formally Deputy Commissioner, Department of Children and Families, State of
Florida, joined the Company as Vice President of Governmental Services.
YEAR 2000 DISCLOSURE
The Year 2000 issue concerns the inability of information systems,
primarily computer software programs, to recognize properly and process date
sensitive information subsequent to December 31, 1999. The Company has committed
resources (approximately $50,000) over the past six months to improve its
information systems ("IS project"). The Company has used this IS project as an
opportunity to evaluate its state of readiness, estimate expected costs and
identify and quantify risks associated with any potential year 2000 issues.
State of Readiness:
In evaluating the Company's exposure to the year 2000 issue, management
first identified those systems that were critical to the ongoing business of the
Company and that would require significant manual intervention should those
systems be unable to process dates correctly following December 31, 1999. These
systems were the Company's internal time tracking system and internal
administrative system. Once these systems were identified, the following steps
were identified as those that would be required to be taken to ascertain the
Company's state of readiness:
I. Obtaining letters from software and hardware vendors concerning
the ability of their products to properly process dates after
December 31, 1999;
II. Testing the operating systems of all hardware used in the
Company, and internal administration systems to determine if
dates after December 31, 1999 can be processed correctly;
III. Surveying other parties who provide or process information in
electronic format to the
16
<PAGE>
Company as to their state of readiness and ability to process
dates after December 31, 1999; and
IV. Testing the identified information systems to confirm that they
will properly recognize and process dates after December 31,
1999.
The Company anticipates completion of Step I - Step IV above for all
material software and hardware by the end of June 1999. Any software or
hardware determined to be noncompliant will be modified, repaired or
replaced. The Company estimates the costs of such modifications,
repairs and replacements to be $100,000 at this time.
Costs:
As noted above, the Company spent approximately $50,000 over the past
six months to improve its information systems. In addition, the Company
anticipates that it will spend approximately $50,000 over the next 12 months to
further improve its information systems.
Risks:
Effective August 4, 1998, the Securities and Exchange Commission issued
Release No. 33-7558 (the "Release") in an effort to provide further guidance to
reporting companies concerning disclosure of the year 2000 issue. In this
Release, the Commission required that registrants include in its year 2000
disclosure a reasonable description of its "most reasonably likely worst case
scenario." Based on the Company's assessment and the results of remediation
performed to date as described above, the Company believes that all problems
related to the year 2000 will be addressed on a timely basis so that the Company
will experience little or no disruption in its business immediately following
December 31, 1999. However, if unforeseen difficulties arise, or if compliance
testing is delayed or necessary remediation efforts are not accomplished in
accordance with the Company's plans described above, the Company anticipates
that its "most reasonably likely worst case scenario" (as required to be
described by the Release) is that some percentage of the Company's time tracking
related to contract labor costs would need to be processed manually for some
limited period of time. In addition, the Company anticipates that all businesses
(regardless of their state of readiness), including the Company, will encounter
some minimal level of disruption in its business (e.g., phone and fax systems,
alarm systems, etc.) as a result of the year 2000 issue. However, the Company
does not believe that it will incur any material expenses or suffer any
significant loss of revenues in connection with such minimal disruptions.
Contingency Plans:
As discussed above, in the event of the occurrence of the "most
reasonably likely worst case scenario" the Company could hire an appropriate
level of temporary staff to manually assist with the time tracking process.
Forward Looking Statements:
Certain information set forth above regarding the year 2000 issue and
the Company's plans to address those problems are forward looking statements
under the Securities Act and the Exchange Act. See the second paragraph of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for a discussion of forward-looking statements and related risks and
uncertainties. In addition, certain factors particular to the year 2000 issue
could cause actual results to differ materially
17
<PAGE>
from those contained in the forward looking statements, including, without
limitation: failure to identify critical information systems which experience
failures, delays and errors in the compliance and remediation efforts described
above, unexpected failures by key vendors, software providers or business
partners to be year 2000 compliant or the inability to repair critical
information systems. In any such event, the Company's results of operations and
financial condition could be adversely affected. In addition, the failure to be
year 2000 compliant of third parties outside of our control such as electric
utilities or financial institutions could adversely effect the Company's results
of operations and financial condition.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated, information
derived from the Company's Financial Statements expressed as a percentage of the
Company's contract revenue earned:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Contract revenue earned 100.0% 100.0% 100.0% 100.0%
Cost of revenue earned 61.7% 75.2% 100.2% 92.0%
Gross profit 38.3% 24.8% -0.2% 8.0%
Selling and administrative expenses 21.7% 18.1% 30.5% 20.8%
Research and development expense 0.0% 0.0% 0.0% 0.9%
Restructuring 0.0% 0.0% -1.6% 2.6%
Income before income taxes 16.1% 4.7% -34.5% -18.1%
Net income (loss) 10.2% 3.6% -23.9% -11.6%
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Contract revenue earned decreased $1,060,457, or 9%, from $11,460,437
in the year ended December 31, 1997 to $10,399,980 in the year ended December
31, 1998 primarily due to the completion of the Idaho Child Support Enforcement
project in March 1997, and the substantial completion of the Rhode Island
Department of Health system (KidsNet) and the Maine Automated Child Welfare
Information System (MACWIS) projects. This decrease was offset by increased work
on the Rhode Island Department of Human Services contract due to welfare reform,
commencement of the MIM Corporation project, and increased business for the
Company's Network Services Division.
Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, decreased $2,201,419, or 26%, from
$8,620,097 in 1997 to $6,418,678 in 1998. This was primarily due to a lower
reliance on subcontractor labor, which is generally at a higher cost than the
Company's internal staff.
Gross profit increased $1,140,961 from $2,840,340 in 1997 to $3,981,301
in 1998. Gross profit, as a percentage of revenue was 25% for 1997 and 38% for
1998. This was primarily because of the Company's improved margins on the Maine
MACWIS support project over the Maine MACWIS project.
Selling, general and administrative expenses increased $189,124, or 9%,
from $2,071,294 in 1997 to $2,260,418 in 1998 primarily due to an increase in
marketing and related expenses. On a percentage basis, SG&A expenses increased
from 18% in 1997 to 22% in 1998, as a percentage of
18
<PAGE>
contract revenue earned.
Interest expense decreased $140,716 or 53% from $266,030 in 1997 to
$125,314 in 1998 due to a lower level of borrowing.
As a result of the foregoing, income before income taxes was $1,674,006
in 1998, an increase of $1,139,056 from $534,950 in 1997. Income before income
taxes, as a percentage of contract revenue earned increased from 5% in 1997 to
16% in 1998.
Net income of $1,061,006 in 1998 represents an increase of $654,056, or
161%, from $406,950 in 1997. As a percentage of contract revenue earned, net
income increased from 4% in 1997 to 10% in 1998. The Company's effective tax
rate was 24% for 1997 and 37% for 1998.
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, as a percentage
of contract revenue earned, 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 contract revenue
earned net income increased from a loss of 24% in 1996 to income of 4% in 1997.
The Company's effective tax rate was 31% for 1996 and 24% for 1997.
19
<PAGE>
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 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 operating activities was
$1,066,014, $1,854,052 and $2,230,504 in the years ended December 31, 1998,
1997, and 1996 respectively. Fluctuations in net cash provided by 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 warrants 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 warrants 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. As of December 31, 1997, the balance was
$1,160,000. The warrants 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, 1998 the Line of Credit had an
outstanding balance of zero.
20
<PAGE>
On September 21, 1998 the Company entered into two five-year term
loans, each for $250,000. One lender was the Small Business Loan Fund
Corporation, ("SBLFC"), a subsidiary of the Rhode Island Economic Development
Corporation. The other lender was the Business Development Corporation of Rhode
Island ("BDC"). The SBLFC loan carries an annual interest rate of 9.5% and must
be repaid over five years. The BDC loan carries an annual interest rate of
10.25%, and an annual deferred fee of $5,000, and must be paid back over five
years. Both term loans are secured by substantially all the assets of the
Company. The BDC was also issued five-year warrants to purchase 11,500
unregistered shares of the Company's Common Stock at a price of $4.50 per share.
The warrants expire on September 20, 2003. The fair value of the warrants was
estimated by the Company to be $36,806 using the Black-Scholes model and is
being amortized ratably over the exercise period. Such amount is included in
other noncurrent assets on the accompanying balance sheet.
The Company believes that cash flow generated by operations will be
sufficient to fund continuing operations through the end of 1999. 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 believes that inflation has not had a material impact on
its results of operations to date.
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, 1997and had no effect on
the Company's financial statements for 1997 and 1998.
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" was issued.
This statement requires the use of the "management approach" model for segment
reporting. The management approach model is founded upon the way the Company's
management organizes segments within the Company for making operating decisions
and assessing performance. Reportable segments are based on products and
services, geography, management structure, or other parameters which management
uses to organize a company. The Company is required to adopt this new standard
for the year ended December 31, 1998; however, such standard had no effect on
the Company's financial statements for 1997 and 1998.
In February 1998, Statement of Financial Accounting Standards No, 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" was
issued. This statement standardizes the disclosure requirements for pensions and
other postretirement benefits, requires additional information on changes in the
benefit calculation, and eliminates certain disclosures that are no longer
considered useful. This statement effectively revised guidance previously
provided by Statement of Financial Accounting Standards Nos., 87,88 and 106. The
Company is required to adopt the new standard for the year ended December 31,
1998; however, such standard had no effect on the Company's financial statements
for 1998.
21
<PAGE>
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that entities recognize all derivatives as both assets and liabilities
in the statement of financial position and measure those instruments at fair
value. This standard is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Labor Considerations
Due to the technical and labor-intensive nature of the Company's business,
continued success of the Company depends largely upon the ability of management
to attract and retain highly-skilled information technology professionals and
project managers possessing the technical skills and experience necessary to
deliver the Company's services. There is a high demand for qualified information
technology professionals worldwide and they are likely to remain a limited
resource for the foreseeable future. The Company has no assurance that qualified
information technology professionals will continue to be available in sufficient
numbers, or at wages, which will enable the Company to retain current or future
employees. A material adverse effect on the Company's business, operating
results, and financial condition would be expected if the Company fails to
attract or retain qualified information technology professionals in sufficient
numbers.
Technological Considerations
Rapid technological change, evolving industry standards, changing client
preferences and new product introductions characterizes the information
technology industry. The Company's success will depend in part on its ability to
develop technological solutions that keep pace with changes in the industry.
There can be no assurance that products or technologies developed by others will
not render the Company's services noncompetitive or obsolete or that the Company
will be able to keep pace with the expected continued rapid changes in
technology. A failure by the Company to address these developments could have a
material adverse effect on the Company's business, operating results and
financial condition.
Year 2000 Client Considerations
The Company's contracts, including year 2000 projects, often involve projects
that are critical to the operations of its clients' businesses and provide
benefits that may be difficult to measure. There can be no assurance that
despite the Company's attempts to contractually limit its liability for damages
arising from errors, mistakes, omissions or negligent acts in rendering its
services, these attempts will be successful. The Company's inability to meet a
client's expectations in the delivery of its services could result in a material
adverse effect to the client's operations and, therefore, could potentially give
rise to claims against the Company or damage the Company's reputation,
detrimentally affecting its business, operating results and financial condition.
Long Term Contract Concerns
The typical contract with a client is for a term of one to three years.
Generally, there is no assurance that a client will renew its contract when it
terminates. Under such contracts, clients may reduce the use of
22
<PAGE>
the Company's services without penalty. Failure by the Company to retain its
existing clients could materially adversely effect its results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is contained on pages F-2 to F-26 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, L.L.P. ("SKM"), as its auditors. Before the engagement, neither the
Company nor anyone on its behalf (i) consulted with the newly engaged accountant
regarding the application of accounting principles to a specific completed or
contemplated transaction or the type of audit opinion that might be rendered on
the Company's financial statements, or (ii) had been provided with advice that
was an important factor considered by the Company in reaching a decision as to
an accounting, auditing or financial reporting issue. 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 auditors KPMG LLP ("KPMG"). KPMG
included in its Independent Auditors' reports dated March 28, 1997 and April 1,
1996 a statement that the accompanying financial statements had been prepared
assuming that the Company will continue as a going concern. In addition, during
the audit of the Company's financial statements for the year ended December 31,
1996, KPMG concluded that approximately $1.8 million of revenue recognized on
the Company's contract with the State of Hawaii during the first three quarters
of 1996 should not have been recognized and should have been reversed in the
respective quarters. The Company believes that the revenue was properly and
correctly recognized and that there is no reason that it should have known under
applicable accounting standards that the revenue should not have been recognized
at the time. Moreover, when the Company 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 1999 Annual Meeting Proxy Statement ("1999 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 1999 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.
23
<PAGE>
The Company currently intends to include information required by Item
12 in the Company's 1999 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 1999 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-26 of this
report:
Independent Auditors' Report of Sansiveri, Kimball & McNamee
L.L.P.
Independent Auditors' Report of KPMG LLP
Balance Sheets as of December 31, 1998 and 1997
Statements of Operations for the Years Ended December 31, 1998,
1997, and 1996
Statements of Stockholders' Equity for the Years Ended December
31, 1998, 1997, and 1996
Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996
Notes to Financial Statements
(2) LIST OF FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted because they are either not
applicable or not required, or the required information is provided in the
financial statements or notes thereto.
(3) LIST OF EXHIBITS.
Exhibit
Number Exhibit
3.1 Articles of Incorporation of the Company, as amended
(incorporated by reference from the Company's Form
10, File No. 0-21038)
3.2 Bylaws of the Company as amended (incorporated by reference
24
<PAGE>
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)
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.
25
<PAGE>
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)
10.13 Credit Agreement dated December 31, 1997 between the Company
and Prinvest Financial Corporation (incorporated by reference
from the Company's Form 10-K, exhibit 10.17, for the fiscal
year ended December 31, 1997)
10.14 Contract dated April , 1997 between the Company and the State
of Maine Re: Automated child welfare system (incorporated by
reference from the Company's Form 10-K, exhibit 10.18, for the
fiscal year ended December 31, 1997)
10.15 Agreement dated December 29, 1997 between the Company and
Lockheed Martin IMS re note payable (incorporated by reference
from the Company's Form 10-K, exhibit 10.19, for the fiscal
year ended December 31, 1997)
10.16 Credit Agreement dated September 23, 1998 between the Company
and Small Business Loan Fund Corporation, a subsidiary of the
Rhode Island Economic Development Corporation
10.17 Credit Agreement dated September 23, 1998 between the Company
and Business Development Corporation of Rhode Island
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 LLP
(B) REPORTS ON FORM 8-K.
A current report on Form 8-K, dated December 1, 1998 was filed by the
Company and included the press release dated December 1, 1998
announcing Ralph H. Cote as a new member of the Board of Directors.
A current report on Form 8-K, dated November 2, 1998 was filed by the
Company and included the press release dated October 29, 1998
announcing the Company's listing on the NASDAQ SmallCap Market.
A current report on Form 8-K, dated October 28, 1998 was filed by the
Company and included the press release dated October 26, 1998,
announcing the Company's results for the quarter ended September 30,
1998. A Statement of Operations (without notes) for the quarters ended
September 30, 1998 and, 1997 was included with the filing. A balance
sheet as of September 30, 1998 and December 31, 1997 was also included
with the filing.
26
<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 18th day of March 1999.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ KENNETH C. KIRSCH Chairman of the Board, President, March 18, 1999
- ------------------------ and Chief Executive Officer (Principal
Kenneth C. Kirsch Executive Officer)
/s/ DOROTHY M. CIPOLLA Chief Financial Officer, and March 18, 1999
- ------------------------ Treasurer (Principal Financial
Dorothy M. Cipolla and Accounting Officer)
/s/ RALPH H. COTE Director March 18, 1999
- ------------------------
Ralph H. Cote
/s/ NICHOLAS R. SUPRON Director March 18, 1999
- ------------------------
Nicholas R. Supron
/s/ CLIFTON C. DUTTON Director March 18, 1999
- ------------------------
Clifton C. Dutton
</TABLE>
27
<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 LLP F-3
Balance Sheets as of December 31, 1998 and 1997 F-4-5
Statements of Operations for the Years Ended December 31, 1998, 1997, and 1996 F-6
Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997, and 1996 F-7
Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996 F-8-9
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, 1998 and 1997 and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1998 and
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 audits. The financial statements of Network Six, Inc. as
of December 31, 1996 were audited by other auditors, 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements referred to above present fairly, in
all material respects, the financial position of Network Six, Inc. at December
31, 1998 and 1997, and the results of its operations and its cash flows for the
years then ended, 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, 1998 and 1997, 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
February 19, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Network Six, Inc.:
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of Network Six, Inc. for the year 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 results of operations and cash flows of Network Six,
Inc. for the year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
The accompanying 1996 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 and related receivables from the State of
Hawaii of approximately $3.5 million, which exceeded the Company's stockholders'
equity of approximately $2.7 million, 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, had 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 financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
KPMG LLP
/s/ KPMG LLP
Providence, Rhode Island
March 28, 1997
F-3
<PAGE>
NETWORK SIX, INC.
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS (NOTE 4) 1998 1997
- ---------------
----------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,442,035 $ 1,291,924
Contract receivables, less allowance for doubtful
accounts of $69,175 in 1998 and
$50,000 in 1997 (note 2) 1,966,788 2,011,379
Costs and estimated earnings in excess of billings
on contracts (note 3) 1,220,253 1,388,515
Other assets 112,433 244,257
----------------- ------------------
Total current assets 4,741,509 4,936,075
----------------- ------------------
Property and equipment (note 5):
Computers and equipment 590,527 506,484
Furniture and fixtures 163,532 167,558
Leasehold improvements 20,191
20,191
----------------- ------------------
774,250 694,233
Less: accumulated depreciation and amortization 602,033 627,146
----------------- ------------------
Net property and equipment 172,217 67,087
Deferred taxes (note 6)
37,097 391,475
Contract receivables and costs in excess of billings
on Hawaii contract (notes 2, 3 and 12) 3,459,382 3,459,382
Other assets 290,577 438,084
----------------- ------------------
Total assets $ 8,700,782 $ 9,292,103
----------------- ------------------
----------------- ------------------
(continued -1)
</TABLE>
F-4
<PAGE>
NETWORK SIX, INC.
Balance Sheets, continued
December 31, 1998 and 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------
-------------- ---------------
<S> <C> <C>
Current liabilities:
Notes payable to bank (note 4) $ - $ 1,160,000
Current installment of obligations under capital leases (note 5)
89,483 82,690
Current portion of long-term debt:
Vendors (note 7)
200,000 163,871
Others (note 4)
91,997 -
Accounts payable
58,456 188,377
Accrued salaries and benefits
579,320 449,133
Accrued subcontractor expense
24,950 1,352,393
Other accrued expenses
320,982 342,465
Billings in excess of costs and estimated earnings on contracts (note 3)
341,572 155,754
Income taxes payable (note 6)
780,066 13,338
Deferred taxes (note 6)
42,491 545,869
Preferred stock dividends payable
795,992 460,068
-------------- ---------------
Total current liabilities
3,325,309 4,913,958
-------------- ---------------
Obligations under capital leases, excluding current
installments (note 5)
38,090 104,003
Long-term debt, less current portion:
Vendors (note 7)
542,239 742,239
Others (note 4)
409,778 -
Hawaii Payable (note 12)
576,483 576,483
-------------- ---------------
Total Liabilities
4,891,899 6,336,683
-------------- ---------------
Commitments (notes 5, 9 and 12)
Other information (notes 10 and 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 1998 and
1997; 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
and outstanding 764,663 shares in 1998 and 734,294 in 1997 76,466 73,429
Additional paid-in capital 1,796,284 1,670,939
Retained earnings (accumulated deficit) (299,541) (1,024,622)
-------------- ---------------
Total stockholders' equity 3,808,883 2,955,420
-------------- ---------------
Total Liabilities and Stockholders' Equity $8,700,782 $ 9,292,103
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes to financial statements. (concluded -2)
F-5
<PAGE>
NETWORK SIX, INC.
Statements of Operations
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Contract revenue earned (note 10) $ 10,399,979 $ 11,460,437 $ 7,344,380
Cost of revenue earned 6,418,678 8,620,097 7,359,649
----------------- ----------------- -----------------
Gross profit (loss) 3,981,301 2,840,340
(15,269)
Selling, general and administrative expenses 2,260,418 2,071,294 2,240,073
Restructuring (note 11) (119,436)
- -
----------------- ----------------- -----------------
Income (loss) from operations 1,720,883 769,046 (2,135,906)
Other deductions (income)
Interest expense 125,314 266,030 435,925
Interest earned
(78,437) (31,934) (38,463)
----------------- ----------------- -----------------
Income (loss) before income taxes 1,674,006 534,950 (2,533,368)
Income taxes (note 6) 613,000 128,000 (775,023)
----------------- ----------------- -----------------
Net income (loss) $ 1,061,006 $ 406,950 $(1,758,345)
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net income (loss) per share:
Basic $ 0.96 $ 0.25 $ (2.71)
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Diluted $ 0.96 $ 0.25 $ (2.71)
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Shares used in computing net income per share:
Basic 758,547 729,927 719,317
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Diluted 758,547 729,927 719,317
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Preferred dividends declared $ 335,925 $ 225,307 $ 187,500
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
NETWORK SIX, INC.
Statements of Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
<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, 1995 $ 2,235,674 $ 71,517 $ 1,603,770 $ 739,580 $ (6,047) $ 4,644,494
Net Loss (1,758,345) (1,758,345)
Dividends declared on preferred stock
7.5%/share (187,500) (187,500)
Shares Issued in connection
with exercise of options 4,900 shares 490 37,485 37,975
Shares Issued in connection with
employee stock purchase plan 1,120 shares 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) (225,307) (225,307)
Sale of 4,998 treasury shares 6,047 6,047
Sale of 13,102 shares of common stock 1,310 17,643 18,953
--------------------------------------------------------------------------------------
Balance at December 31, 1997 2,235,674 73,429 1,670,939 (1,024,622) - 2,955,420
Net Income 1,061,006 1,061,006
Dividends declared on preferred stock
7.5%/share (335,925) (335,925)
Shares Issued in connection
with exercise of options 6,275 shares 628 12,223 12,851
Sale of 24,094 shares of common stock 2,409 76,316 78,725
Warrants issued with term loan 36,806 - 36,806
-------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 2,235,674 $ 76,466 $ 1,796,284 $ (299,541) $ - $ 3,808,883
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
NETWORK SIX, INC.
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income (loss) $1,061,006 $ 406,950 $ (1,758,345)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 47,415 82,010 337,460
Provision for doubtful accounts
19,175 (47,856) 47,856
Loss on sale/disposal of fixed assets 6,518 9,023 60,487
Provision for deferred taxes (149,000) 75,000 (394,862)
Accrued financing fee 20,000 - -
Forgiveness of note payable to vendor (50,036) - -
Changes in operating assets and liabilities:
Contract receivables 25,416 (434,765) (100,059)
Cost and estimated earnings
in excess of billings on contracts 168,262 476,423 1,348,138
Income taxes receivable - 516,046 1,231,778
Other current assets 131,824 (85,281) 105,186
Due from officer - - 63,779
Other noncurrent assets 181,548 (261,785) 256,547
Long term amounts due from Hawaii - 112,442 2,139,198
Accounts payable (129,921) (1,543,955) 35,333
Accrued salaries and benefits 130,187 (21,634) 28,104
Accrued subcontractor exp. (1,327,443) 1,330,149 (399,613)
Other notes payable - 698,593 207,517
Hawaii payable - 576,483 -
Other accrued expenses (21,483) (165,729) (110,675)
Accrued restructuring - (5,383) (512,297)
Billings in excess of costs
and estimated earnings on contracts 185,818 123,983 (355,028)
Income taxes payable 766,728 13,338 -
---------------- ---------------- -----------------
Net cash provided by operating activities 1,066,014 1,854,052 2,230,504
---------------- ---------------- -----------------
</TABLE>
F-8
<PAGE>
NETWORK SIX, INC.
Statements of Cash Flows, Continued
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing activities:
Proceeds from sale of assets $ - $ 1,948 $ 32,811
Capital expenditures (156,299) (21,552) (10,277)
---------------- ---------------- -----------------
Net cash provided by (used in) investing activities (156,299) (19,604) 22,534
---------------- ---------------- -----------------
Cash flows from financing activities:
Principal payments on capital lease obligations (59,120) (55,105) (181,235)
Net proceeds (payments) from note payable to bank (1,160,000) (640,000) (3,200,000)
Proceeds from long-term debt 500,000
- -
Payments on long-term debt (132,060)
- -
Proceeds from issuance of common stock
91,576 18,593 50,126
Proceeds from sales of treasury stock
- 6,047 -
---------------- ---------------- -----------------
Net cash used in financing activities (759,604) (670,105) (3,331,109)
---------------- ---------------- -----------------
Net increase (decrease) in cash 150,111 1,164,343 (1,078,071)
Cash at beginning of year 1,291,924 127,581 1,205,652
---------------- ---------------- -----------------
Cash at end of year $ 1,442,035 $ 1,291,924 $ 127,581
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Supplemental cash flow information:
Cash (received) paid during the year for:
Income taxes $ (4,788) $ (467,781) $(2,086,198)
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Interest $ 89,030 $ 222,376 $ 399,182
---------------- ---------------- -----------------
---------------- ---------------- -----------------
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(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.
(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. 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
F-10
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
portion of state systems integration projects are 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) Cash and cash equivalents
Cash and cash equivalents include investments with an original maturity of three
months or less.
(d) 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.
(e) 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:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements 30 months
Computers and equipment 3 years
Furniture and fixtures 5 years
</TABLE>
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.
(f) 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.
(g) Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income
(loss), after deducting dividends on Series A convertible preferred stock by the
weighted average number of common shares, and 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
F-11
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
equivalents include stock options and warrants. For 1998, 1997 and 1996, 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. Therefore the numerator
of the basic and diluted earnings per share calculations were the same, as was
the denominator.
(h) Costs of Modifying Software
The costs of modifying the Company's software for year 2000 compliance are
charges to expense as incurred.
(i) Costs of Failure to be Year 2000 Compliant
Any losses that may result if the Company, its suppliers, subcontractors, or
customers fail to correct Year 2000 deficiencies are recorded only as they are
incurred.
(j) 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.
(k) 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.
Significant estimates include the allowance for doubtful accounts on contract
receivables, the ultimate collectability on the Hawaii contract receivables and
estimated costs to complete under the percentage of completion method of
accounting. Actual results could differ from those estimates.
(l) Reclassifications
Certain 1996 balances have been reclassified to conform to the 1997
presentation.
(m) 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 and had no effect
on the Company's financial statements for 1997 and 1998.
In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosure
about Segments of an Enterprise and Related Information" was issued. This
statement requires the use of the
F-12
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
"management approach" model for segment reporting. The management approach model
is founded upon the way the Company's management organizes segments within the
Company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, management structure, or
other parameters which management uses to organize a company. The Company is
required to adopt this new standard for the year ended December 31, 1998;
however, such standard had no effect on the Company's financial statements for
1997 and 1998.
In February 1998, Statement of Financial Accounting Standards No,
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
was issued. This statement standardizes the disclosure requirements for pensions
and other postretirement benefits, requires additional information on changes in
the benefit calculation, and eliminates certain disclosures that are no longer
considered useful. This statement effectively revised guidance previously
provided by Statement of Financial Accounting Standards Nos., 87,88 and 106. The
Company is required to adopt the new standard for the year ended December 31,
1998; however, such standard had no effect on the Company's financial statements
for 1998.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that entities recognize all derivatives as either assets and
liabilities in the statement of financial position and measure those instruments
at fair value. This standard is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999.
(2) Contract Receivables
<TABLE>
<CAPTION>
Contract receivables at December 31 consist of: 1998 1997
---- ----
<S> <C> <C>
Time and materials and completed fixed price contracts $ 816,338 $ 476,552
Fixed price contracts in progress 1,219,625 1,584,827
---------------- ---------------
2,035,963 2,061,379
Less allowance for doubtful accounts 69,175 50,000
---------------- ---------------
$1,966,788 $2,011,379
---------------- ---------------
---------------- ---------------
</TABLE>
At December 31, 1998 and 1997, $534,300 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.
F-13
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(3) Costs and Estimated Earnings on Contracts
<TABLE>
<CAPTION>
Costs and estimated earnings on contracts at
December 31 consist of: 1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 1,232,761 $ 1,833,168
Costs incurred 6,418,678 8,620,097
Estimated Earnings 3,981,301 2,840,340
------------------ -----------------
11,632,740 13,293,605
Less billings 10,754,059 12,060,844
------------------ -----------------
$ 878,681 $ 1,232,761
------------------ -----------------
------------------ -----------------
Included in the accompanying balance sheets under the
following captions: 1998 1997
---- ----
Costs and estimated earnings in excess of billings on contracts $ 1,220,253 $ 1,388,515
Billings in excess of costs and estimated earnings on contracts (341,572) (155,754)
------------------ -----------------
$ 878,681 $ 1,232,761
------------------ -----------------
------------------ -----------------
</TABLE>
Costs and estimated earnings on contracts at December 31, 1998 and 1997 are
expected to be billed and collected within one year. At December 31, 1998 and
1997, $2,925,082 was related to the Hawaii contract. This amount has been
reclassified to long term assets due to the litigation discussed in note 12 and
is included in contract receivables and costs in excess of billings on Hawaii
contract.
(4) Notes Payable - Secured
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.
F-14
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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 7.75% at December 31, 1998.
On September 21, 1998 the Company entered into two five-year term loans, each
for $250,000. One lender was the Small Business Loan Fund Corporation,
("SBLFC"), a subsidiary of the Rhode Island Economic Development Corporation.
The other lender was the Business Development Corporation of Rhode Island
("BDC"). The SBLFC loan carries an annual interest rate of 9.5% and must be
repaid over five years. The BDC loan carries an annual interest rate of 10.25%,
and an annual deferred fee of $5,000, and must be paid back over five years.
Both term loans are secured by substantially all the assets of the Company. The
BDC was also issued five-year warrants to purchase 11,500 shares of the
Company's common stock with a strike price of $4.50 per share. The warrants
expire on September 20, 2003. The fair value of the warrants was estimated by
the Company to be $36,806 using the Black-Scholes model and is being amortized
ratably over the exercise period. Such amount is included in other noncurrent
assets on the accompanying balance sheet.
Scheduled maturities of secured long-term debt, including annual deferred fee,
as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 91,997
2000 101,164
2001 105,746
2002 110,782
2003 92,086
----------------
$ 501,775
----------------
----------------
</TABLE>
(5) Leases
The Company leases office space and equipment under several operating and
capital leases expiring at various times through 2000. Rent expense including
utilities for the years ended December 31, 1998, 1997 and 1996 was approximately
$192,000, $186,000 and $431,000, respectively. Rental obligations as of December
31, 1998 for the remainder of the lease terms are as follows:
F-15
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Capital Leases Operating Leases
<S> <C> <C>
1999 $ 112,736 $ 182,600
2000 36,469 138,700
------------------ -----------------
Total lease payments 149,205 $ 321,300
-----------------
-----------------
Amount representing interest 21,632
------------------
Net present value of payments 127,573
Less current portion 89,483
------------------
Long term portion $ 38,090
------------------
------------------
</TABLE>
During 1995, the Company leased various computer equipment from its vendors,
then in turn leased those assets to two of its customers. The Company's lease
obligation is included above. The lease to the customers is accounted for as a
sales type lease. Consequently, the Company recognized a gross profit of
approximately $2,200, $5,300 and $2,500, respectively for 1998, 1997 and 1996.
Over the life of these leases the Company will recognize approximately $107,000
of lease interest income. Approximately $12,200, $18,500 and $31,500 of lease
interest income was recognized in 1998, 1997 and 1996, 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>
1999 $ 164,659
2000 26,366
-----------------
191,025
Amount representing interest 56,938
-----------------
Net present value of payments 134,087
Less current portion 97,243
-----------------
Long term portion $ 36,844
-----------------
-----------------
</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:
F-16
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current taxes:
Federal $599,000 $ 36,000 $(380,161)
State 163,000 17,000 -
-------------- -------------- ---------------
Sub total 762,000 53,000 (380,161)
-------------- -------------- ---------------
Deferred taxes:
Federal (119,000) 53,000 (314,651)
State (30,000) 22,000 (80,211)
-------------- -------------- ---------------
Sub total (149,000) 75,000 (394,862)
-------------- -------------- ---------------
Total $613,000 $128,000 $(775,023)
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
Actual income tax expense (benefit) for the years ended December 31, differed
from the amounts computed by applying the U.S. federal income tax rate of 34
percent to pretax income (loss) from operations as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $569,162 $181,883 $(861,345)
Increase in income tax expense (benefit)
resulting from state and local taxes, net
of federal income tax benefit 93,744 25,740 (52,939)
Change in beginning of the year balance of
the valuation allowance for deferred tax
asset, allocated to income tax expense (50,000) (84,000) 134,000
Other, net 94 4,377 5,261
-------------- -------------- ---------------
Total income tax expense (benefit) $613,000 $128,000 $(775,023)
-------------- -------------- ---------------
-------------- -------------- ---------------
Effective tax rate (%) 37 24 (31)
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
Deferred tax assets and liabilities at December 31 are comprised of the
following:
F-17
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 27,396 $ 19,640
Deferred compensation 61,592 77,805
Unamortized retainage,
due to change in tax reporting - 24,409
Property, plant and equipment depreciation 13,017 35,451
Non-deductible loss on contract 81,012 80,350
Vacation expense 58,295 35,997
Contingent liability 202,030 200,380
Health insurance - 1,268
Stock bonus 31,580 16,940
Loan facility fee 9,901 -
-------------- ---------------
Total gross deferred tax assets 484,823 492,240
Less valuation allowance
- 50,000
-------------- ---------------
Net deferred tax asset 484,823 442,240
-------------- ---------------
Deferred tax liability:
Retainage, due to deferral for tax reporting $490,217 $ 596,634
-------------- ---------------
Net deferred tax liability $ 5,394 $ 154,394
-------------- ---------------
-------------- ---------------
</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, 1998 and 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 - Vendors
On December 12, 1996 the Company restructured a $218,901 account payable with
CPL Worldgroup ("CPL") to an eighteen month unsecured note payable. CPL was a
subcontractor to the Company, and continued to provide services to the Company.
The note carried 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 were made on time
and all future invoices were paid within thirty days, $50,036 of the balance
would 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
F-18
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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 signed. The effective date of the amendment was October 29, 1992 and
the agreement removed them 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
F-19
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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, 1998 were $795,992, which equals $1.11 per share of outstanding
Preferred Stock.
(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, 1998 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,
1998 all of these warrants remain outstanding and are exercisable until
November 23, 2003.
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. 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.
Warrants to purchase 11,500 shares of the Company's Common Stock at an exercise
price of $4.50 per share were authorized and issued in 1998. At December 31,
1998 all of these warrants remain outstanding and are exercisable until
September 20, 2003.
(c) Stock Option Plan
The Company's Board of Directors and stockholders adopted the Company's
Incentive Stock Option Plan (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.
F-20
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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>
1998 1997
---- ----
<S> <C> <C> <C>
Net income (loss): As Reported $ 1,061,006 $ 406,950
Pro Forma 904,264 376,570
Net income (loss)
per share: As Reported $ 0.96 $ 0.25
Pro Forma 0.75 0.18
</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 1998 and 1997, respectively; no dividend yield;
expected volatility of 85.2% and 86.8%; risk-free interest rate of 4.9% and
6.1%; and expected lives of five years. The weighted-average fair market value
of options granted during 1998 and 1997 was $2.56 and $1.13, respectively.
A summary of the status of the Company's stock option plan as of December 31,
1998, 1997 and 1996 and changes during the years on those dates is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
------------------------------------ ------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 136,225 $ 1.64 $ 1.71 41,281 $ 28.62
92,850
Granted 131,410 152,550 4.32
3.65 71,600 1.58
Cancelled (81,950) 15.76
- - - -
Exercised (6,275) (4,900) 7.75
2.05 - -
Forfeited (8,920) (28,225) (14,131) 24.93
2.59 1.71
Outstanding at
---------------- --------------- -------------
end of year 252,440 136,225 92,850 1.71
- 1.64
---------------- --------------- -------------
---------------- --------------- -------------
Exercisable at year end 80,750 55,700 1.86
1.88 46,392 1.82
---------------- --------------- -------------
---------------- --------------- -------------
</TABLE>
F-21
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
The following table summarizes information about the Company's stock options,
considered compensation under SFAS 123, outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Number Weighted Avg. Number
Outstanding Remaining Exercisable
Exercise Price At Dec 31, 1998 Contractual Life At Dec 31, 1998
- -------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
$1.125 6,250
18,750 8.1
1.500 25,483
37,600 8.5
1.750 15,517
44,050 8.3
2.000 26,000
26,000 8.0
3.000 2,500
48,290 9.5
3.125
18,750 9.2 -
3.750 2,500
2,500 9.9
4.000
4,000 9.4 -
4.125 2,500
2,500 9.5
4.500
50,000 9.1 -
------------------ ------------
252,440 80,750
------------------ ------------
------------------ ------------
</TABLE>
At December 31, 1998, 1997, and 1996, common shares reserved for issuance under
these plans were 275,000, 200,000 and 125,000, respectively. At December 31,
1998, 1997 and 1996, common shares available under the Non-Employee Director
Option Plan were 50,000, 25,000 and 25,000, respectively. Each director will be
awarded 2,500 options, each year in January, for a maximum of 10,000 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, 1998, 1997 and 1996.
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.
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
F-22
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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 1998, 1997 and 1996 the Company had the following sales from customers
whose individual sales exceeded 10% of the Company's total sales:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Rhode Island DHS $ 5,361,955 $ 4,222,923 $ 2,399,170
Maine Dept of Human Services 2,651,893 5,721,103 -
MIM Corporation 1,188,327 - -
Virgin Islands - - 1,026,195
RI Dept of Health - - 927,372
------------------ ----------------- -----------------
$ 9,202,175 $ 9,944,026 $ 4,352,737
------------------ ----------------- -----------------
------------------ ----------------- -----------------
</TABLE>
(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
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.
(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.
F-23
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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 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
F-24
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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 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 $70
million in damages.
In connection with the Hawaii litigation the Company was ordered to assign all
Hawaii related leases the to State. One of the lessors has sued the Company for
failure to pay. The Company believes it was released of all responsibility on
the lease per the court order.
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 SmallCap Market. At December 31,1998, the
Company had unbilled work-in-process and related receivables from the State and
CBSI of approximately $3.5 million, which is slightly less than stockholders'
equity of approximately $3.8 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-25
<PAGE>
NETWORK SIX, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(13) Quarterly Financial Data (unaudited)
The following is a summary of quarterly results from operations:
<TABLE>
<CAPTION>
Quarter
1998: First Second Third Fourth
<S> <C> <C> <C> <C>
Contract revenue earned $ 2,221,618 $ 3,253,696 $ 2,662,603 $2,262,062
Gross profit 774,962 1,095,167 1,127,215 983,957
Net income 140,465 309,798 298,136 312,607
Earnings per share 0.08 0.30 0.28 0.30
Weight average shares outstanding 749,503 756,176 763,880 764,630
1997:
Contract revenue earned $ 1,414,186 $ 3,431,835 $ 3,572,313 $3,042,103
Gross profit 441,045 838,487 806,762 754,046
Net income (loss) (132,187) 242,797 116,690 179,650
Earnings (loss) per share (0.24) 0.27 0.09 0.13
Weight average shares outstanding 721,192 729,927 734,294 734,294
</TABLE>
F-26
<PAGE>
EXHIBIT-10.16
SMALL BUSINESS LOAN FUND CORPORATION
LOAN AGREEMENT
This Loan Agreement is entered into by and among SMALL BUSINESS LOAN FUND
CORPORATION, a governmental agency and public instrumentality of the State of
Rhode Island having a principal place of business located at One West Exchange
Street, Providence, Rhode Island 02903 (the "Lender"), and NETWORK SIX, INC., a
Rhode Island Corporation having its chief executive office at 475 Kilvert
Street, Warwick, Rhode Island 02886 (the "Borrower") in connection with
Borrower's Two Hundred Fifty Thousand Dollar ($250,000.00) loan (the "Loan")
from Lender of even date herewith.
Section 1. Recitals.
1.1 Borrower has this day executed and delivered to Lender a Promissory
Note in the original principal amount of Two Hundred Fifty Thousand Dollars
($250,000.00) evidencing the Loan (the "Note");
1.2 The Note is secured or supported, inter alia, by:
(a) a Security Agreement of even date herewith between Borrower and
Lender with respect to the personal property described therein (the
"Security Agreement")
the Note and all such other documents being sometimes hereinafter collectively
referred to as the "Loan Documents".
Section 2. Agreement
Borrower and Lender make this Agreement in order to provide financing for
the purposes described in Section 4.1 hereof, and Lender agrees to make the Loan
upon and subject to all the terms and conditions set forth herein and in the
Loan Documents.
Section 3. Representations and Warranties
Borrower hereby represents and warrants to Lender, which representations
and warranties shall survive the making of the Loan:
3.1 That Borrower (if Borrower is a corporation) is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Rhode Island and has all requisite power and authority to own all of its
properties and assets and to carry on its business as it is now being conducted
and has full power and authority to place mortgages and liens upon its assets
subject to the liens referenced in Exhibit A which is attached hereto and
incorporated herein by reference ("Senior Liens") and to borrow funds secured
thereby;
<PAGE>
3.2 That Borrower is duly qualified and/or registered to do business and
in good standing in all jurisdictions where such qualifications or registration
is required, including, without limitation, the State of Rhode Island, if the
state of Borrower's incorporation or creation is other than Rhode Island;
3.3 That the execution and delivery of the Loan Documents to which
Borrower is a signatory and the consummation of the transactions contemplated
thereby do not violate any provisions of Borrower's Articles of Incorporation,
bylaws, or partnership agreement, as the case may be, or any provision of, or
result in the acceleration of any obligation of Borrower under, any deed of
trust or mortgage, lien, lease, agreement, instrument, arbitration award,
judgment or decree to which Borrower is a party or by which Borrower is bound,
and with respect to which Borrower has not obtained a written waiver, and do not
violate or conflict with any other restriction of any kind or character to which
Borrower is subject;
3.4 That the Loan is being made to Borrower in furtherance of legitimate
purposes of Borrower and all actions required by law, by Borrower's Articles of
Incorporation, bylaws, partnership agreement or otherwise, to authorize
execution and delivery of the Loan Documents to which Borrower is a signatory or
signatories thereof on behalf of Borrower have been taken, and that such Loan
Documents constitute the valid and binding obligations of Borrower, enforceable
in accordance with their respective terms.
3.5 That there are no actions, suits or proceedings pending or, to the
knowledge of Borrower, threatened against or affecting Borrower, or the
properties or other assets of Borrower before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, which if determined adversely to Borrower would have a material adverse
effect on the financial condition, properties or operations of Borrower other
than as heretofore disclosed to the Lender;
3.6 That neither Borrower nor any corporation, partnership, or other legal
entity in which Borrower is a principal is now in default of any of their
obligations and agreements, and no condition exists, which, with the passage of
time or giving of notice or both, would constitute such a default, other than as
heretofore disclosed to the Lender.
Section 4. Covenants and Agreements
4.1 The proceeds of the Loan shall be used solely for hire additional
highly trained network specialists (4-6) to expand current marketing efforts and
modify computer programs to accommodate year 2000 and that Borrower shall, if
requested by Lender, provide to Lender documentation in form reasonably
satisfactory to Lender showing that the proceeds of the Loan were so used.
4.2 Borrower shall maintain or cause to be maintained hazard, liability
and other insurance policies as required by the Loan Documents.
2
<PAGE>
4.3 Borrower shall deliver to Lender within ninety (90) days of the close
of Borrower's fiscal year, the consolidated and consolidating financial
statements of Borrower, including, without limitation, a balance sheet and
income statement, prepared on a review basis by a firm of independent public
accountants selected by Borrower and approved by Lender. Borrower shall also
deliver to Lender (i) within forty five (45) days of the close of each of
Borrower's fiscal quarters, financial statements including, without limitation,
a balance statement, and income statement certified to by Borrower's president
or chief financial officer for the fiscal year to date; (ii) such other
information bearing on the financial condition of Borrower and its business
operations as Lender may reasonably request; and (iii) annual employment reports
in form satisfactory to Lender detailing the number of employees of Borrower,
the change in such number over the course of the applicable year and the average
wages of such employees.
4.4 Borrower shall cause to be provided to Lender such financial
information with respect to any person now or hereafter liable absolutely or
contingently, for the whole or part of the indebtedness evidenced by the Note
(an "Other Liable Party") including, without limitation, any guarantor(s)
thereof, as Lender shall reasonably request, including, without limitation, the
information required of Borrower by Section 4.3 above.
4.5 Borrower shall maintain its principal office and operating facilities
within the State of Rhode Island.
4.6 Borrower shall maintain at its principal operating facilities located
at 475 Kilvert Street, Warwick, Rhode Island 02886, all assets utilized in
connection with the operation of its business, except as specifically permitted
by an instrument in writing executed by Lender or except in the ordinary course
of business.
4.7 The Loan Documents shall be duly executed or shall be caused to be
duly executed by the Borrower and every Other Liable Party, together with such
additional supporting documents as Lender or its counsel may now or hereafter
request.
4.8 Borrower will promptly notify Lender of any condition or event which
constitutes, or would constitute with the passage of time or giving of notice or
both, an Event of Default under the Note or any of the other Loan Documents, and
promptly inform Lender of any events or changes in the financial condition of
Borrower or any Other Liable Party occurring since the date of the last
financial statements of Borrower or such Other Liable Party delivered to Lender,
which individually or cumulatively when viewed in light of prior financial
statements of Borrower or such Other Liable Party delivered to Lender, may
result in a material adverse change in the financial condition of Borrower or
such Other Liable Party.
4.9 Borrower shall, annually before January 31, provide the Lender an
employment report compassing states goals with results obtained.
3
<PAGE>
4.10 The Borrower shall not, without prior written consent of the Lender,
sell the Borrower or substantially all of the assets thereof.
4.11 The Borrower shall not, without the prior written consent of the
Lender, move or transfer any of the Borrower's business or its assets out of the
State of Rhode Island unless in the ordinary course of business.
Section 5. Additional Representations, Warranties and Covenants of Borrower
5.1 The Borrower is now in compliance with, and will at all times comply
with (i) Title VI of the Civil Rights Act of 1964, as amended; and (ii) R.I.G.L.
ss.28-6.1-1, as amended;
5.2 Borrower is now in compliance with, and will at all times comply with
all applicable federal, state and local laws, regulations and ordinances
relating to environmental matters, hazardous waste and hazardous materials of
any kind and will obtain all necessary permits and certificates for all
environmental requirements.
5.3 That the Loan will not result, directly or indirectly, in the
permanent relocation of jobs from one labor area to another.
5.4 Borrower shall obtain Flood Hazard Insurance when reasonably required
by Lender or by applicable law.
5.5 Borrower will insure access for the handicapped if the project
financed in whole or in part by the Loan involves construction with respect to
facilities to which the public will have access.
5.6 Borrower will whenever possible, and in good faith, give consideration
for employment to the long-term underemployed and unemployed residing in the
Rhode Island area for any qualified Rhode Island positions.
5.7 Borrower shall undertake Affirmative Action Programs designed to
eliminate patterns and practices of discrimination.
5.8 Borrower further covenants and agrees that if requested by Lender,
Borrower will present evidence of Borrower's compliance with any of the
provisions of this Section 5.
Section 6. Miscellaneous
6.1 The law governing this Agreement shall be the substantive law of Rhode
Island determined without resort to the state's conflict of law rules.
4
<PAGE>
6.2 All rights of Lender hereunder shall inure to the benefit of its
successors and assigns, and all obligations of Borrower hereunder shall bind
its, his, her or their successors and assigns.
6.3 Lender shall not be deemed to have waived or amended any of its rights
or remedies under any of the Loan Documents except by written instrument duly
executed by a duly authorized officer of Lender.
IN WITNESS WHEREOF, the Borrower and Lender have executed this Agreement
or caused this Agreement to be executed by their duly authorized representatives
on this 21st day of September, 1998.
WITNESS: LENDER:
SMALL BUSINESS LOAN FUND
CORPORATION
/s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
- --------------------------- ----------------------------
Its: Administrator
BORROWER:
NETWORK SIX, INC.
/s/ [ILLEGIBLE] By: /s/ Dorothy M. Cipolla
- --------------------------- ----------------------------
Its: Treasurer
5
<PAGE>
EXHIBIT A
Senior Liens shall include:
1. Any and all liens resulting from a loan agreement entered into between
PrinVest Financial Corp., a New Jersey corporation, and the Borrower hereof
dated December 31, 1997 any successor bank or institutional lender for financing
to be used by the Borrower in conjunction with its day to day business
operations, which financing is or may be secured by Borrower's grant of a first
position security interest in all accounts receivable and work in progress of
the Borrower.
2. Any and all equipment leases presently existing and any other equipment
leases entered into by the Borrower after the date hereof.
3. An assignment of certain litigation proceeds by Borrower to Lockhead
Martin IMS Corporation dated December 24, 1997.
4. A financing arrangement between the Borrower and Unisys Corporation
relating to a contract between Borrower and the State of Maine dated April 11,
997 which is identified as the "Maine Automated Child Welfare Information System
Contract" and evidenced by financing statement 665667 and 665719 filed with the
Rhode Island Secretary of State.
6
<PAGE>
SMALL BUSINESS LOAN FUND CORPORATION
PROMISSORY NOTE
$250,000.00 September 21, 1998
Providence, Rhode Island
FOR VALUE RECEIVED, NETWORK SIX, INC., a Rhode Island corporation, having
a principal place of business located at 475 Kilvert Street, Warwick, Rhode
Island 02886 (hereinafter referred to as "Maker"), jointly and severally, if
more than one, promises to pay to the order of SMALL BUSINESS LOAN FUND
CORPORATION, a governmental agency and public instrumentality of the State of
Rhode Island having a principal place of business located at One West Exchange
Street, Providence, Rhode Island 02903 (hereinafter referred to as "Payee"), the
principal sum of Two Hundred Fifty Thousand Dollars ($250,000.00), payable at
the times hereinafter specified, together with interest, in arrears, from the
date hereof on the unpaid principal balance from time to time outstanding and on
all unpaid installments of interest, whether before or after the maturity of or
default under this note, at the rate of nine and one half percent (9.50%) per
annum.
All interest payable hereunder shall be computed on the basis of the
actual number of days elapsed using a three hundred sixty (360) day year.
Principal and interest hereunder shall be payable in 59 consecutive equal
monthly installments of $5,250.47 each, commencing on the 21st day of October,
1998 and continuing on the same day of each month thereafter through and
including the 21st day of August, 2003, and in one (1) final installment of the
entire unpaid balance of principal and interest on the 21st day of September,
2003.
The entire principal balance, together with all unpaid interest, fees,
expenses and other charges, if not sooner paid, shall in any event be paid on
September 21, 2003.
All sums payable hereunder are payable in lawful money of the United
States of America and in immediately available funds at the above stated office
of Payee or such other place or places as Payee, its successors or assigns
(hereinafter sometimes the "Holder") may designate in writing.
This note may be prepaid at any time, in whole or in part, without penalty
or premium, provided that Maker gives to the Holder not less than ten (10) days
prior written notice thereof. All such partial payments, if applied to principal
pursuant to the terms of this Note, shall be applied against installments of
principal in the inverse order of their maturity.
<PAGE>
All sums paid under this note shall be applied first to any interest,
fees, expenses and other charges then due and unpaid, in such order as the
Holder shall determine, with the remaining balance, if any, to be applied to
unpaid principal.
Whenever a day on which payment of interest and/or principal required to
be made hereunder falls on a Saturday, Sunday or public holiday, such payment
shall be due on the next following normal business day, and where time is
extended for the payment of principal by virtue of the due date thereof falling
on a Saturday, Sunday or public holiday, such extended time shall be included in
the computation of interest.
This note is referred to in a certain Loan Agreement (the "Agreement")
between Maker and Payee of even date herewith and is in all respects subject to
the provisions thereof.
This note is secured or supported by inter alia (check appropriate box or
boxes)
|X| a Security Agreement between Maker and Payee of even date herewith,
granting a security interest in personal property described therein;
all of which documents, agreements and instruments listed above are
hereinafter collectively referred to as the "Security Instruments".
Payee and any successor Holder may assign, transfer or negotiate this note
and any security for the performance of Maker's obligations hereunder, and in
such event all the provisions of this note and the Security Instruments shall
inure to the benefit of and may be exercised by or on behalf of the successor
Holder, and all payments of principal and of interest due and to become due
under this note after the date of such assignment shall not thereafter be
subject to any defense, counterclaim or set-off which Maker may have against any
prior Holder.
The occurrence of any one or more of the following events will constitute
an Event of Default hereunder:
1. Nonpayment of any installment of principal and/or interest due under
this note when it shall become due and payable (no prior demand therefor being
necessary) and such nonpayment shall have continued for more than ten (10) days.
2. Nonpayment of any other sum payable under the Agreement, this note, any
of the Security Instruments or any other documents, instruments or agreements
("Other Documents") now or hereafter securing this note or executed by Maker or
any other person, corporation or other entity now or hereafter liable,
absolutely or contingently, for the whole or any part of the indebtedness
evidenced by this note, including, without limitation, any guarantor(s) hereof
(an "Other Liable Party") in
2
<PAGE>
connection herewith, and such nonpayment shall have continued for more than ten
(10) days after written notice thereof by Holder to Maker.
3. Nonperformance or nonobservance of any of the other covenants,
agreements, or conditions of the Agreement, any of the Security Instruments or
any of the Other Documents after the expiration of applicable grace periods, if
any, and such nonperformance or nonobservance shall have continued for more than
thirty (30) days after written notice thereof by Holder to Maker.
4. The occurrence of any "Event of Default" under the Agreement, any of
the Security Instruments or any of the Other Documents, or the occurrence of any
event or condition which would entitle Holder to exercise any of its remedies
under the Agreement, any of the Security Instruments or any of the Other
Documents.
5. The cancellation, lapse or termination of any insurance coverage
required to be maintained by Maker under the Agreement, any of the Security
Instruments or any of the Other Documents which is not reinstated or replaced
during applicable grace periods.
6. Any real or personal property, mortgaged, pledged or otherwise given to
secure this note or any portion thereof or any interest therein is conveyed,
voluntarily encumbered or otherwise transferred in any way without the prior
written consent of Holder, except as may be specifically provided or described
in the Agreement or the Security Instruments.
7. Breach of or the proving false or misleading, in any material respect,
of any representation or warranty now or hereafter made to any Holder by, on
behalf of, or for the benefit of Maker, or contained in:
(a) the Agreement;
(b) any of the Security Instruments or Other Documents;
(c) this note; or
(d) any loan application, statement, financial statement, certificate or
other document, agreement or instrument furnished, signed or executed in
connection herewith by the Maker or, on behalf of or for the benefit of the
Maker at the request of Maker.
8. The occurrence of any "event of default" under any document, agreement
or instrument now or hereafter (a) evidencing or securing any other obligation
or indebtedness of Maker or any Other Liable Party, to Holder now existing or
hereafter arising or (b) evidencing any obligation or other indebtedness secured
in whole or in part by any or all of the real or personal property covered by
any of the Security Instruments, or the nonpayment, nonperformance or
nonobservance of any of the covenants,
3
<PAGE>
agreements or conditions of any such documents, agreements or instruments, which
nonpayment, nonperformance or nonobservance shall have continued beyond the
expiration of any applicable grace or notice period and the occurrence of any
event or condition which would entitle the obligee of or under any such
documents, agreements or instruments to exercise any of its default remedies
thereunder.
9. Nonpayment of any indebtedness in excess of Fifty Thousand Dollars
($50,000.00) of the Maker or any Other Liable Party (other than this note or the
other indebtedness referred to in the preceding paragraph) if the effect of such
nonpayment is to accelerate the maturity of such indebtedness or to permit the
holder thereof to cause such indebtedness to become due prior to the stated
maturity thereof.
10. (a) (i) The insolvency or inability of Maker or any Other Liable Party
to pay his or its debts as they mature; (ii) the appointment of a receiver,
trustee, custodian or other fiduciary for, or for any of the property of, Maker
or any Other Liable Party; (iii) the making of an assignment for the benefit of
creditors, or the making of or entering into a trust mortgage or deed or other
instrument of similar import for the benefit of creditors, by Maker or any Other
Liable Party; or (iv) the convening of a meeting of the creditors, or the
selection of a committee representing the creditors of Maker or any Other Liable
Party; or
(b) The filing by Maker or any Other Liable Party of a petition,
complaint, motion or other pleading seeking any relief under any receivership,
insolvency, or debtor relief law, or seeking any readjustment of indebtedness,
reorganization, composition, extension or any similar type of relief, or the
filing of a petition, complaint, or motion under any chapter of the federal
bankruptcy code, 11 U.S.C. ss.101 et seq., as the same now exists or may
hereafter by amended (the "Bankruptcy Code"); or
(c) The filing against Maker or any Other Liable Party of a petition,
complaint, motion or other pleading seeking any relief under any receivership,
insolvency, or debtor relief law, or under any chapter of the Bankruptcy Code,
or seeking any readjustment of indebtedness, reorganization, composition,
extension or any similar type of relief, or the entry of any order for relief
under any chapter of the Bankruptcy Code; provided, however, that if Maker shall
immediately notify Holder in writing of the filing of any such petition,
complaint, motion or other pleading against Maker or, any Other Liable Party,
and shall provide evidence satisfactory to Holder that Maker or such Other
Liable Party, as the case may be, has in good faith and within ten (10) days
after the filing of any such petition, complaint, motion or other pleading filed
an answer thereto contesting same, then there shall be no Event of Default under
this subparagraph (c) until the earliest of (i) the entry of an order for relief
or a judgment under any proceedings referred to in this subparagraph (c), (ii)
the appointment of a receiver, trustee, custodian or other fiduciary in any such
proceeding, or (iii) the expiration of a period of thirty (30) days, at the end
of which such petition, complaint, motion or other pleading remains undismissed;
or
4
<PAGE>
(d) The entry of any judgment in excess of Fifty Thousand Dollars
($50,000.00) against, or the attachment or garnishment of any of the property,
goods or credits of Maker or any Other Liable Party which remains unpaid,
unstayed, undismissed or unbonded for a period of sixty (60) days (excluding any
judgment in the Hawaii litigation); or if any foreclosure is commenced (by
judicial proceedings, by publication of notice pursuant to a power of sale or
otherwise) against Maker under any mortgage, deed of trust or security agreement
granted by Maker and is not dismissed or terminated within thirty (30) days
after such commencement.
11. The dissolution, liquidation or termination of existence of Maker or
any Other Liable Party or a sale of all or substantially all of the assets of
Maker or any Other Liable Party out of the ordinary course of business.
12. Any material adverse change in the financial condition of, or any act
or omission of Maker or any Other Liable Party, which leads Holder reasonably to
believe that performance of any of the covenants, agreements, or conditions of
the Loan Agreement, this note, the Security Instruments or any Other Document,
is or may be substantially impaired.
13. If Maker fails to notify Holder in writing within ten (10) days of the
occurrence of any event or condition of which Maker is aware which constitutes
an Event of Default, or which with the passage of time or giving of notice or
both would constitute an Event of Default, and together with such notice,
furnish a written statement to Holder which shall set forth the details of any
action Maker proposes to take with respect thereto.
14. If Maker is a corporation, the merger or consolidation with any
corporation by Maker, without the written consent of the Holder.
Upon the occurrence of any Event of Default, this note, at the option of
the Holder, shall become immediately due and payable without presentment,
demand, protest or notice of any kind, all of which are hereby expressly waived
by Maker and by every Other Liable Party. The Holder's failure to exercise such
option shall not constitute a waiver of the right to exercise it at any other
time. Irrespective of the exercise or nonexercise of the foregoing option, in
the event that any payment herein provided for shall become overdue for more
than five (5) days a "late charge" of five percent (5%) of the overdue payment
shall become immediately due and payable to the Holder as liquidated damages for
failure to make prompt payment, and the same shall be secured by the Security
Instruments.
No renewal or extension granted, or any indulgence shown to, or any
release of, or any dealings between the Holder and any other person,
corporation, or entity now or hereafter interested in this note or in the
property securing this note, whether as owner, encumbrancer, grantor, or
otherwise, shall discharge, extend or in any way affect the obligations of Maker
or any Other Liable Party hereunder.
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<PAGE>
Maker shall remain primarily liable on this note and the Security
Instruments given to secure the same until full payment, unaffected by any
alienation of all or any part of the property securing this note, by any
agreement or transaction between any Holder and any alienee as to payment of
principal, interest or other monies, by any forbearance or extension of time,
guaranty or assumption by others, or by any other matter, as to all of which
notice is hereby waived by Maker.
Maker will pay the reasonable legal and other fees and expenses of the
Holder reasonably incurred in connection with or incidental to (i) the
negotiation, closing and administration of the loan evidenced by this note, and
(ii) the enforcement of any of the obligations of Maker or any Other Liable
Party or rights of the Holder under this note, the Security Instruments or any
other agreement, document or instrument now or hereafter executed in connection
herewith, by litigation or otherwise; and all such fees and expenses shall be
indebtedness under this note and shall be secured by the Security Instruments.
All provisions of this note, the Agreement and the Security Instruments
are expressly subject to the condition that in no event, whether by reason of
acceleration of maturity of the indebtedness evidenced hereby or otherwise,
shall the amount paid or agreed to be paid to Payee hereunder and deemed
interest under applicable law exceed the maximum rate of interest on the unpaid
principal balance of this note allowed by applicable law (the "Maximum Allowable
Rate"), which shall mean the law in effect on the date of this note, except that
if there is a change in such law which results in a higher Maximum Allowable
Rate being applicable to this note, then this note shall be governed by such
amended law from and after its effective date. In the event that fulfillment of
any provision of this note, the Agreement or any of the Security Instruments
results in the interest rate hereunder being in excess of the Maximum Allowable
Rate, the obligation to be fulfilled shall automatically be reduced to eliminate
such excess. If, notwithstanding the foregoing, Payee or any successor Holder
receives an amount which under applicable law would cause the interest rate
hereunder to exceed the Maximum Allowable Rate, the portion thereof which would
excessive shall automatically be applied to and be deemed a prepayment of the
unpaid principal balance of this note and not a payment of interest.
All obligations of Maker hereunder are the joint and several obligations
of all persons or entities executing this note, and all references to Maker
herein shall be deemed to refer to all of them, each of them and any of them.
This note may not be modified or terminated orally.
This note has been executed and delivered in Rhode Island and for all
purposes shall be enforced and construed in accordance with the substantive law
of the State of Rhode Island, without resort to Rhode Island's conflict of laws
rules.
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IN WITNESS WHEREOF, Maker has executed this note or caused this note to be
executed by its duly authorized representatives, under seal, on the date first
written above.
Witnessed by: NETWORK SIX, INC.
/s/ [ILLEGIBLE] By: /s/ Dorothy M. Cipolla
- ---------------------------- -------------------------------
Treasurer
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SMALL BUSINESS LOAN FUND CORPORATION
SECURITY AGREEMENT
THIS AGREEMENT is made this 21st day of September, 1998, by and between
NETWORK SIX, INC., a Rhode Island corporation having its chief executive office
and principal place of business at 475 Kilvert Street, Warwick, Rhode Island
02886 (hereinafter referred to as "Debtor"), and SMALL BUSINESS LOAN FUND
CORPORATION, a governmental agency and public instrumentality of the State of
Rhode Island having a principal place of business at One West Exchange Street,
Providence, Rhode Island 02903 (hereinafter referred to as "Secured Party").
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties agree as follows:
Section 1. Definitions
1.1 "Accounts Receivable" includes all accounts, contract rights, notes,
drafts, acceptances, and all forms of obligations and receivables now or
hereafter owed or belonging to Debtor for Inventory sold or for services
rendered, all guaranties and security therefor, all right, title and interest of
Debtor in the Inventory which gave rise thereto, including the right of stoppage
in transit, and all rights of the Debtor, earned or yet to be earned under
contracts to sell Inventory and/or other goods or to render services.
1.2 "Inventory" includes all inventory, including, all goods, merchandise,
raw materials, work in process, finished goods, supplies, materials used or
consumed in connection with the production thereof, and other tangible personal
property now owned or hereafter acquired by Debtor and held for sale or lease or
furnished or to be furnished under contracts of service or used or consumed in
the business of Debtor as well as contracts and contract rights with respect
thereto, documents representing the same, and the proceeds thereof.
1.3 "Equipment" includes all machinery, equipment, furniture and fixtures
now owned or hereafter acquired by Debtor and all spare and replacement parts
and tools therefore, (including, without limiting the generality of the
foregoing, all equipment listed on any schedule attached hereto).
1.4 "Intangible Property" includes all instruments, documents of title,
warehouse receipts, bills of lading, policies and certificates of insurance,
securities, chattel paper, deposits, cash, patents, trademarks, copyrights,
trade secrets, income tax refunds, proceeds of insurance, contract rights,
choses in action, books and records (wherever located and in whatever form they
are evidenced or stored), general intangibles and all other property now or
hereafter owned by Debtor or in which it may have an interest, including without
limitation, all of the Debtor's right, title and interest in and to any
litigation proceeds payable to Debtor from the State of Hawaii or
<PAGE>
otherwise in connection with the Debtor's contract with the State of Hawaii for
the Development and Implementation of a Statewide Comprehensive Automated Child
Support System.
1.5 "Licenses" includes all municipal, state and federal licenses and
permits on which Debtor is named or in which Debtor has an interest.
1.6 "Senior Liens" include any and all liens listed on Exhibit A which is
attached hereto and incorporated herein by reference.
Section 2. Security Interest
2.1 Debtor hereby grants to Secured Party subject to all Senior Liens and
any equipment leases of the Debtor (" Equipment Leases"), a second position
security interest in, a general lien upon and a right of offset against all of
the following property (the "Collateral"), now owned or hereafter acquired by
Debtor:
|X| all Accounts Receivable;
check if |X| all Inventory;
applicable |X| all Equipment;
|X| all Intangible Property;
|X| all Licenses;
and any and all additions and accessions to and substitutions for and proceeds
(including, without limitation, insurance proceeds) and products of the
foregoing.
2.2 The security interest granted hereby is to secure payment and
performance of all Obligations at any time owing by Debtor to Secured Party. The
term "Obligations" as used in this Security Agreement means and includes all
loans, advances, debts, liabilities, obligationsand covenants owing by Debtor to
Secured Party of every kind and description (whether or not evidenced by any
note or other instrument and whether or not for the payment of money), direct or
indirect, (whether as principal debtor, guarantor, or otherwise), absolute or
contingent, due or to become due, now existing or hereafter arising, including,
without limitation, the payment of the promissory note (the "Note") of the
Debtor of even date herewith in the principal amount of Two Hundred Fifty
Thousand Dollars ($250,000.00), and the payment and performance by Debtor of all
additional obligations contained or referred to in the Note, in this Agreement,
or in any other document, instrument, or agreement securing the Note or the loan
evidenced thereby or executed in connection with the Note or the loan evidenced
thereby, any debt, liability or obligation owing from Debtor to others which
Secured Party may have obtained by assignment or otherwise, and further
including, without limitation, all interest, reasonable fees, charges,
attorneys' fees, court costs and expenses of whatever kind incident to the
collection of the Obligations and the enforcement and protection of the security
interest created hereby, all future advances and interest thereon made by
Secured Party for taxes, levies, insurance and repairs to or maintenance of the
Collateral, all other monies heretofore or hereafter advanced by Secured Party
to or for the account of Debtor at the option of the Secured Party, and all
other present or future
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liabilities and indebtedness of Debtor to Secured Party of any nature
whatsoever, liquidated or unliquidated, absolute or contingent and any
extensions or renewals thereof.
Section 3. Representations and Warranties
Debtor represents and warrants as follows:
3.1 Debtor has the power and authority to own the Collateral, subject to
any and all Senior Liens, to enter into and perform this Agreement and any other
document, instrument or agreement delivered in connection herewith and to incur
the Obligations.
3.2 Debtor has not acquired any of the stock or assets of any other person
or entity nor been the surviving entity in a merger, except as follows:
Acquisitions:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Mergers:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
3.3 Debtor utilizes no trade names in the conduct of its business, except
as follows:
Trade Names
--------------------------------------------------------------------------
--------------------------------------------------------------------------
3.4 Debtor has filed all federal, state and local tax returns and other
reports it is required to file and has paid all taxes, assessments and other
governmental charges now due and payable.
Section 4. Representations, Warranties and Covenants
Debtor represents, warrants and covenants as follows:
4.1 Except for the security interest granted hereby, and except for Senior
Liens, Debtor has, and in the case of after-acquired Collateral, will have good
and marketable title to the Collateral free from any adverse lien, security
interest or encumbrance; and that Debtor will defend the Collateral against all
claims and demands of all persons at any time claiming the same or any interest
therein.
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4.2 All warranties, representations, statements and other information
furnished to Secured Party by Debtor or on behalf of Debtor at the Debtor's
request, are and will be when the same are made or furnished by Debtor accurate
and complete in all material respects.
4.3 The chief executive office of Debtor is as stated above, and Debtor
will not change such chief executive office without thirty (30) days prior
written notice to Secured Party.
4.4 The Collateral is and will be kept at Debtor's address listed above,
and that Debtor will not remove any of the Collateral from said location without
the prior written consent of Secured Party, except Inventory, sold in the
ordinary course of business.
4.5 Except as indicated in Section 4.1 above, no financing statement, tax
lien or other lien, claim or encumbrance covering any of the Collateral or any
proceeds thereof is on file in any public office, and that at the request of
Secured Party, Debtor will join with Secured Party in executing one or more
financing statements pursuant to the Uniform Commercial Code in form
satisfactory to Secured Party and will pay the cost of filing the same in all
public offices wherever filing is deemed by Secured Party to be necessary or
desirable; and Debtor hereby irrevocably constitutes and appoints any officer of
Secured Party. Debtor's attorney-in-fact to execute and file in the name and on
behalf of Debtor such financing statement or statements in the event Debtor
refuses or fails to do so, provided that the Secured Party shall subordinate the
same to all Senior Liens.
4.6 Debtor will not sell, pledge, hypothecate, encumber, assign, or offer
to sell or otherwise transfer the Collateral or any interest therein after the
date hereof without the prior written consent of Secured Party, except in the
ordinary course of business, and except that the Debtor may at any time
refinance Senior Lien with PrinVest to obtain new financing as provided on
Exhibit A as a Senior Lien for which the Debtor may give a first priority
security interest Accounts Receivables and work in progess without the prior
written consent of Secured Party. A sale in the ordinary course of business does
not include, inter alia, a transfer in partial or total satisfaction of a debt.
Lender agrees to subordinate its interest in the accounts receivable and work in
progress to any such bank or institutional Lender.
4.7 Debtor shall maintain insurance at all times with respect to the
Collateral against loss by fire (including so-called extended coverage), theft,
and such other casualties as Secured Party may require in a sum not less than
the replacement cost of the Collateral, In addition Debtor will have and
maintain, in such form and with such companies and in such amounts as shall be
reasonably satisfactory to Secured Party, insurance against such other losses as
may be reasonably required by Secured Party or as are customarily maintained by
similar businesses operating in similar localities and under similar conditions
as Debtor, including by way of illustration and not of limitation, flood, public
liability, personal property, theft, workmens' compensation and collision
insurance. Each and every policy of insurance (except workman's compensation)
shall insure Secured Party's interest regardless of any breach or violation by
Debtor of any warranties, declarations or conditions contained in such policies.
All policies of such insurance shall be in such form as shall be
reasonably satisfactory to Secured Party, shall be made payable in case of loss
to Secured Party, shall provide that the same may not be altered or cancelled by
the insurer except after thirty (30) days prior written notice to
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<PAGE>
Secured Party, and such certificates as Secured Party may from time to time
request, shall be delivered to Secured Party, to be held as collateral security
for the Obligations. Debtor shall have free choice of agent and insurer through
or by which such insurance is to be placed or written provided said insurer is
authorized to write such insurance in the State in which the Collateral is
located, as a licensed resident agent in said state, and has, at all times while
this Agreement is in effect, a general policy-holder's rating of A or A+ in
Best's latest rating guide. If any proceeds under any insurance policies are
paid to Secured Party while any Obligations are outstanding, Secured Party
shall, unless Event of Default has occurred and is continuing, pay over such
proceeds to Debtor for the purpose of replacing the lost, damaged, or destroyed
Collateral with respect to which such proceeds are paid. Upon an Event of
Default, payment may be made to Debtor at the option of the Secured Party or
shall be applied to Debtor's Obligations. Upon Event of Default, Secured Party,
in its discretion, may act as attorney for Debtor in obtaining, adjusting,
settling, and cancelling such insurance. If Debtor fails to procure or maintain
such insurance, Secured Party shall have the right, but not the obligation, to
effect such insurance, in which event Debtor shall repay to Secured Party the
cost thereof immediately upon demand, and until repaid these amounts shall be
added to the unpaid principal balance of the Note, shall bear interest at rate
of interest set forth in the Note and together with such interest shall be
secured by this Agreement and by any other agreements securing the Note.
4.8 Except as indicated in Section 4.1 above, the Collateral is now in
good order and repair, and that Debtor will keep the Collateral in good order
and repair and free from any adverse lien, security interest and encumbrance
(except Senior Liens) and will not waste or destroy the Collateral or operate or
use the Collateral in violation of any statute or ordinance.
4.9 Debtor will pay promptly when due all taxes and assessments upon the
Collateral or for its use or operation or upon any note or notes evidencing the
Obligations.
4.10 Debtor will permit Secured Party, through its authorized attorneys,
accountants and representatives, to inspect and examine the Collateral and/or
books, accounts, records, ledgers and assets of every kind and description of
Debtor with respect to the Collateral at all reasonable times upon reasonable
notice, and to make copies and extracts from such books, accounts, records and
ledgers.
4.11 Debtor will, at all times and from time to time at the request of
Secured Party, do, make, and execute and deliver all such additional and further
acts, things, deeds, assurances and instruments as Secured Party reasonably
deems necessary or appropriate to more completely perfect or maintain perfected
its security interest in the Collateral subject to Senior Liens and/or to
otherwise further vest in and assure to Secured Party its rights hereunder and
in or to the Collateral and the proceeds and products thereof.
4.12 Debtor hereby authorizes Secured Party to file financing and
continuation statements with respect to the Collateral in accordance herewith
without the signature of Debtor whenever lawful.
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4.13 If all or any portion of the Collateral is a motor vehicle or
vehicles otherwise subject to any certificate of title law, Debtor will cause
the interest of Secured Party to be noted thereon, and Secured Party, to the
extent permitted by law, shall hold the original Certificate of Title until
payment in full of the Obligations.
Section 5. Discharge of Liens
At its option, Secured Party may discharge taxes, liens, or security
interests or other encumbrances at any time levied or placed on the Collateral,
and may pay for the maintenance and preservation of the Collateral. Any payment
made or expense incurred by Secured Party pursuant to this provision shall be
repaid to Secured Party immediately upon demand and until repaid, these amounts
shall be added to the unpaid principal balance of the Note, shall bear interest
at the rate of interest set forth in the Note together with such interest shall
be secured by this Agreement and by any other documents, instruments or
agreements now or hereafter securing the Note.
Section 6. Possession by Debtor
Until the occurrence of an Event of Default hereunder, Debtor may have
possession of the Collateral and use it in any lawful manner not inconsistent
with (i) any policy of insurance thereon, (ii) this Agreement or (iii) the Loan
Agreement of even date herewith between Secured Party and Debtor.
Section 7. Events of Default
Debtor shall be in default under this Agreement upon the occurrence of any
of the following "Events of Default": 1. Default in the payment of any amounts
due under the Note, whether at the due date thereof after applicable grace
periods or by acceleration or otherwise, no prior demand therefor being
necessary, such non-payment having continued for ten (10) days; 2. Default in
the payment when due of any other Obligations, such Default continuing beyond
any applicable grace period, such Default having continued for ten (10) days
after written notice thereof by Secured Party to Debtor; 3. Nonperformance or
nonobservance of any of the covenants, agreements or conditions of this
Agreement, and such nonperformance or nonobservance shall have continued for
more than thirty (30) days after written notice except as otherwise provided
herein; ; 4. The proving false of any material representation or warranty
contained herein or in any other document, instrument or agreement now or
hereafter entered into between Debtor and Secured Party or given by or on behalf
of Debtor to Secured Party; 5. Substantial loss, theft, damage or destruction of
the Collateral not covered by insurance; or 6. The occurrence of an "Event of
Default" as defined in the Note.
Section 8. Remedies
Upon the occurrence of an Event of Default and at any time thereafter
Secured Party may while such default continues declare all Obligations secured
hereby immediately due and payable without presentment, demand, protest or other
notice of any kind, and all of which expressly
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<PAGE>
waived. Secured Party in addition to such other rights and remedies as are or
may be set forth in this Agreement or in any other document, agreement or
instrument between Debtor and Secured Party or in the Note, may exercise and
shall have the rights and remedies of a secured party under the Uniform
Commercial Code in effect in Rhode Island at the time of such default. Without
limiting the generality of the foregoing, Secured Party may require Debtor to
assemble the Collateral and make it available to Secured Party at a place
designated by Secured Party.
Secured Party will give Debtor notice of the time and place of any public
sale thereof or the time at which any private sale or any other intended
disposition thereof is to be made. The requirements of notice shall be met if
such notice is mailed, postage prepaid, to Debtor at its address set forth or
other address Debtor provides the Secured Party in writing above at least ten
(10) days before the time of the sale or disposition. Debtor shall pay to
Secured Party on demand any and all expenses including all reasonable attorneys'
fees and legal expenses incurred or paid by Secured Party in protecting or
enforcing its rights, powers and remedies hereunder or under any other document,
instrument or agreement between Debtor and Secured Party or the Note, or in any
way connected with any proceeding or action by whomsoever initiated concerning
the protection or enforcement of such rights, powers and remedies by Secured
Party.
Debtor understands and agrees that Secured Party may exercise its rights
hereunder without giving Debtor any opportunity for a hearing to be held before
Secured Party, through judicial process or otherwise, may take possession of the
Collateral upon the occurrence of an Event of Default and Debtor expressly
waives the right, if any, to such prior hearing.
Section 9. Accounts Receivable
Only upon the Event of Default and while such default continues, and
subject to all rights of Senior Liens in the Collateral:
9.1 If all or any portion of the Collateral is Accounts Receivable, Debtor
hereby irrevocably appoints Secured Party and any other person whom Secured
Party may from time to time designate, with full power and authority, acting in
its own name or in the name of the Debtor;
9.1.1 to endorse Debtor's name on any checks, notes, acceptances, money
orders, drafts or other forms of payment or security that may come into Secured
Party's possession; to sign Debtor's name on any invoice or bill of lading
relating to any Accounts Receivable, on drafts against customers; on schedules
and assignments of Accounts Receivable, on notice of assignment, financing
statements, and other public records, on verifications of accounts and on
notices to customers; to notify the post office authorities to change the
address for delivery of Debtor's mail to an address designated by Secured Party;
to receive, open and dispose of all mail addressed to Debtor; to send requests
for verification of Accounts Receivable to customers of account debtors; and to
do all things necessary to carry out this Agreement;
9.1.2 to obtain from any computer or other billing agency or service any
and all information relating to the Accounts Receivable, including without
limiting the generality of the
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foregoing, copies of all trial balances, aging reports, summary reports, and
lists containing the names and addresses of account debtors;
9.13 to insert in any mailing being made by Debtor or on behalf of Debtor
to account debtors, such notices, letters, flyers or other notifications or
insertions as Secured Party may desire; and
9.1.4 to notify account debtors, or to require Debtor to notify account
debtors, that the Accounts Receivable have been assigned to, and are payable
directly to Secured Party.
9.2 Debtor hereby ratifies and approves all acts of such attorney and
agrees that neither Secured Party nor any other such attorney shall be liable
for any acts or omissions nor for any error of judgment or mistake of fact or
law. This power, being coupled with an interest, is irrevocable so long as any
Accounts Receivable assigned to Secured Party or in which Secured Party has a
security interest remain unpaid or until the Obligations have been fully
satisfied.
9.3 As long as Secured Party does not request that any of the account
debtors on the Accounts Receivable be notified of the assignment thereof to
Secured Party, Debtor shall make collections on the Accounts Receivable. After
notification of account debtors pursuant to Section 9.1.4 above, if Debtor
receives any payments from account debtors, Debtor shall hold the proceeds
received in trust for Secured Party without commingling the same with other
funds of Debtor, and turn over such proceeds to Secured Party in the exact form
in which they are received. If any of said collections include checks, drafts or
other payments payable to Debtor, they shall be duly endorsed by Debtor. Secured
Party being authorized to endorse in the name of Debtor any instruments
delivered to Secured Party unendorsed. All proceeds so received by Secured Party
shall be applied by Secured Party to the payment of the Obligations in such
order as Secured Party shall determine in its discretion.
Section 10. Miscellaneous
10. 1 The captions in this Agreement are for convenience and reference
only and do not define, limit or describe the scope of the provisions hereof.
10.2 The provisions of this Agreement may not be modified or terminated
orally. Secured Party shall not be deemed to have waived or amended any of its
rights or remedies hereunder unless such waiver or amendment be in writing and
signed by it. No delay or omission on the part of the Secured Party in
exercising any such right or remedy shall operate as a waiver of such right or
remedy or any other right or remedy. A waiver on any one occasion shall not be
construed as a bar to or a waiver of the same right or remedy on any future
occasion.
10.3 The rights and remedies provided the Secured Party in this Agreement
and in any other document, instrument or agreement between the parties hereto
shall be cumulative and shall be in addition to and not in derogation of any
rights or remedies provided Secured Party in any such other document, instrument
or agreement or under applicable law or otherwise.
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10.4 All rights of Secured Party hereunder shall inure to the benefit of
its successors and assigns; and all Obligations of Debtor hereunder shall bind
its heirs, executors, administrators, successors and assigns.
10.5 Every word herein purporting to the neuter gender only shall extend
to and include males and females and every word herein importing the singular
number only shall be construed to extend to and include the plural number also.
10.6 In the event any term or provision of this Agreement or the
application thereof to any person or circumstance shall, to any extent, be held
invalid or unenforceable, the remainder of this Agreement or the application of
such term or provision to persons or circumstances other than those to which it
is held invalid or unenforceable, shall be valid and enforceable to the fullest
extent permitted by law.
10.7 The law governing this Agreement shall be the substantive law of the
State of Rhode Island determined without resort to the state's conflict-of-laws
rules.
Notwithstanding any of the foregoing provisions, this Agreement shall at
all times be subordinate to any Senior Liens Debtor has in effect as of the date
of this Agreement or enters into after the date of this Agreement, including the
refinancing of the PrinVest Lien listed on Exhibit A.
IN WITNESS WHEREOF, Debtor and Secured Party have executed this Security
Agreement, under seal, on the day and year first above written.
WITNESS: DEBTOR:
NETWORK SIX, INC.
/s/ [ILLEGIBLE] By: /s/ Dorothy M. Cipolla
- ---------------------------- -------------------------------
Treasurer
SECURED PARTY:
SMALL BUSINESS LOAN FUND
CORPORATION
/s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
- ---------------------------- -------------------------------
Administrator
9
<PAGE>
EXHIBIT A
Senior Liens shall include:
1. Any and all liens resulting from a loan agreement entered into between
PrinVest Financial Corp., a New Jersey corporation, and the Maker hereof dated
December 31, 1997 any successor bank or institutional lender for financing to be
used by the Borrower in conjunction with its day to day business operations,
which financing is or may be secured by Borrower's grant of a first position
security interest in all accounts receivable and work in progress of the
Borrower.
2. Any and all equipment leases presently existing and any other equipment
leases entered into by the Borrower after the date hereof.
3. An assignment of certain litigation proceeds by Borrower to Lockhead
Martin IMS Corporation dated December 24, 1997.
4. A financing arrangement between the Borrower and Unisys Corporation
relating to a contract between Borrower and the State of Maine dated April 11,
997 which is identified as the "Maine Automated Child Welfare Information System
Contract" and evidenced by financing statement 665667 and 665719 filed with the
Rhode Island Secretary of State.
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4.2 All warranties, representations, statements and other information
furnished to Secured Party by Debtor or on behalf of Debtor at the Debtor's
request, are and will be when the same are made or furnished by Debtor accurate
and complete in all material respects.
4.3 The chief executive office of Debtor is as stated above, and Debtor
will not change such chief executive office without thirty (30) days prior
written notice to Secured Party.
4.4 The Collateral is and will be kept at Debtor's address listed above,
and that Debtor will not remove any of the Collateral from said location without
the prior written consent of Secured Party, except Inventory, sold in the
ordinary course of business.
4.5 Except as indicated in Section 4.1 above, no financing statement, tax
lien or other lien, claim or encumbrance covering any of the Collateral or any
proceeds thereof is on file in any public office, and that at the request of
Secured Party, Debtor will join with Secured Party in executing one or more
financing statements pursuant to the Uniform Commercial Code in form
satisfactory to Secured Party and will pay the cost of filing the same in all
public offices wherever filing is deemed by Secured Party to be necessary or
desirable; and Debtor hereby irrevocably constitutes and appoints any officer of
Secured Party, Debtor's attorney-in-fact to execute and file in the name and on
behalf of Debtor such financing statement or statements in the event Debtor
refuses or fails to do so, provided that the Secured Party shall subordinate the
same to all Senior Liens.
4.6 Debtor will not sell, pledge, hypothecate, encumber, assign, or offer
to sell or otherwise transfer the Collateral or any interest therein after the
date hereof without the prior written consent of Secured Party, except in the
ordinary course of business, and except that the Debtor may at any time
refinance Senior Lien with PrinVest to obtain new financing as provided on
Exhibit A as a Senior Lien for which the Debtor may give a first priority
security interest Accounts Receivables and work in progess without the prior
written consent of Secured Party. A sale in the ordinary course of business does
not include, inter alia a transfer in partial or total satisfaction of a debt.
Lender agrees to subordinate its intent in the accounts receivable and work in
progress to any such bank or institutional Lender.
4.7 Debtor shall maintain insurance at all times with respect to the
Collateral loss by fire (including so-called extended coverage), theft, and such
other casualties as Secured Party may require in a sum not less than the
replacement cost of the Collateral. In addition Debtor will have and maintain,
in such form and with such companies and in such amounts as shall be reasonably
satisfactory to Secured Party, insurance against such other losses as may be
reasonably required by Secured Party or as are customarily maintained by similar
businesses operating in similar localities and under similar conditions as
Debtor, including by way of illustration and not of limitation, flood, public
liability, personal property, theft, workmens' compensation and collision
insurance. Each and every policy of insurance (except workman's compensation)
shall insure Secured Party's interest regardless of any breach or violation by
Debtor of any warranties, declarations or conditions contained in such policies.
All policies of such insurance shall be in such form as shall be
reasonably satisfactory to Secured Party, shall be made payable in case of loss
to Secured Party, shall provide that the same may not be altered or cancelled by
the insurer except after thirty (30) days prior written notice to
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Secured Party, and such certificates as Secured Party may from time to time
request, shall be delivered to Secured Party, to be held as collateral security
for the Obligations. Debtor shall have free choice of agent and insurer through
or by which such insurance is to be placed or written provided said insurer is
authorized to write such insurance in the State in which the Collateral is
located, as a licensed resident agent in said state, and has, at all times while
this Agreement is in effect, a general policy-holder's rating of A or A+ in
Best's latest rating guide. If any proceeds under any insurance policies are
paid to Secured Party while any Obligations are outstanding, Secured Party
shall, unless Event of Default has occurred and is continuing, pay over such
proceeds to Debtor for the purpose of replacing the lost, damaged, or destroyed
Collateral with respect to which such proceeds are paid. Upon an Event of
Default, payment may be made to Debtor at the option of the Secured Party or
shall be applied to Debtor's Obligation. Upon Event of Default, Secured Party,
in its discretion, may act as attorney for Debtor in obtaining, adjusting,
settling, and cancelling such insurance. If Debtor fails to procure or maintain
such insurance, Secured Party shall have the right, but not the obligation, to
effect such insurance, in which event Debtor shall repay to Secured Party the
cost thereof immediately upon demand, and until repaid these amounts shall be
added to the unpaid principal balance of the Note, shall bear interest at rate
of interest set forth in the Note and together with such interest shall be
secured by this Agreement and by any other agreements securing the Note.
4.8 Except as indicated in Section 4.1 above, the Collateral is now in
good order and repair, and that Debtor will keep the Collateral in good order
and repair and free from any adverse lien, security interest and encumbrance
(except Senior Liens) and will not waste or destroy the Collateral or operate or
use the Collateral in violation of any statute or ordinance.
4.9 Debtor will pay promptly when due all taxes and assessments upon the
Collateral or for its use or operation or upon any note or notes evidencing the
Obligations.
4.10 Debtor will permit Secured Party, through its authorized attorneys,
accountants and representatives, to inspect and examine the Collateral and/or
books, accounts, records, ledgers and assets of every kind and description of
Debtor with respect to the Collateral at all reasonable times upon reasonable
notice, and to make copies and extracts from such books, accounts, records and
ledgers.
4.11 Debtor will, at all times and from time to time at the request of
Secured Party, do, make, and execute and deliver all such additional and further
acts, things, deeds, assurances and instruments as Secured Party reasonably
deems necessary or appropriate to more completely perfect or maintain perfected
its security interest in the Collateral subject to Senior Liens and/or to
otherwise further vest in and assure to Secured Party its rights hereunder and
in or to the Collateral and the proceeds and products thereof.
4.12 Debtor hereby authorizes Secured Party to file financing and
continuation statements with respect to the Collateral in accordance herewith
without the signature of Debtor whenever lawful.
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EXHIBIT A
Senior Liens shall include:
1. Any and all liens resulting from a loan agreement entered into between
PrinVest Financial Corp., a New Jersey corporation, and the Maker hereof dated
December 31, 1997 any successor bank or institutional lender for financing to be
used by the Borrower in conjunction with its day to day business operations,
which financing is or may be secured by Borrower's grant of a first position
security interest in all accounts receivable and work in progress of the
Borrower.
2. Any and all equipment leases presently existing and any other equipment
leases entered into by the Borrower after the date hereof.
3. An assignment of certain litigation proceeds by Borrower to Lockhead
Martin IMS Corporation dated December 24, 1997.
4. A financing arrangement between the Borrower and Unisys Corporation
relating to a contract between Borrower and the State of Maine dated April 11,
997 which is identified as the "Maine Automated Child Welfare Information System
Contract" and evidenced by financing statement 665667 and 665719 filed with the
Rhode Island Secretary of State.
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<PAGE>
NETWORK SIX, INC.
CERTIFICATE OF SECRETARY
I, Dorothy M. Cipolla, do hereby certify that I am the duly elected,
qualified and acting Secretary of Network Six, Inc. (the "Corporation"), a Rhode
Island corporation, and that the resolutions set forth in this certificate were
adopted by the written consent of all of the Board of Directors of the
Corporation dated September 21, 1998:
RESOLVED: That the Corporation is hereby authorized to borrow from Small
Business Loan Fund Corporation of Rhode Island (the "Lender") the aggregate
principal amount of up to Two Hundred Fifty Thousand Dollars ($250,000.00) and,
in connection therewith, to execute, deliver and perform a term loan agreement
between the Corporation and Lender pursuant to which the Lender will lend to the
Corporation up to Two Hundred and Fifty Thousand Dollars ($250,000.00) (the
"Loan Agreement"), a Two Hundred Fifty Thousand Dollar ($250,000.00) Term
Promissory Note (the "Note"), and a Security Agreement securing repayment of the
same (the "Security Agreement").
RESOLVED: That the President or Treasurer of the Corporation be, and each
of them acting alone hereby is authorized to execute in the name and deliver on
behalf of the Corporation one or more counterparts of the Loan Agreement, the
Note, and the Security Agreement, to be in form and substance as may be approved
by the officer executing the same, his or her execution thereof to be deemed
conclusive evidence of such approval and of his or her authority hereunder.
RESOLVED: That the several officers of the Corporation be and each of them
acting alone hereby is authorized to execute such instruments and take such
other actions in the name and on behalf of the Corporation as they or any one of
them may deem necessary or appropriate to carry out the terms of the Loan
Agreement, the Note, and the Security Agreement, including without limitation,
the execution, acknowledgment and delivery of any and all agreements,
certificates, instruments and other documents as they or any one of them shall
deem necessary or appropriate.
And I do hereby certify that the following are the officers of the
Corporation and that they have been elected to serve in the capacities set forth
opposite their names until such time as their successors have been duly elected
and qualified:
Kenneth C. Kirsch - President
<PAGE>
Donna J. Guido - Vice President
Dorothy M. Cipolla - Secretary and Treasurer
IN WITNESS WHEREOF, I have executed this Certificate of Secretary on the
21st day of September, 1998.
/s/ Dorothy M. Cipolla
------------------------------
Secretary
<PAGE>
CERTIFICATE OF SECRETARY
OF
NETWORK SIX, INC.
The undersigned, being the duly elected Secretary of Network Six, Inc., a
Rhode Island corporation (the "Corporation"), hereby certifies that the copy of
the by-laws of the Corporation attached hereto as Exhibit A is a true and
accurate copy of said by-laws as of this date, the originals being kept with the
Corporation's minutes in the offices of Gaebe & Kezirian, 128 Dorrance Street,
Providence, RI 02903.
IN WITNESS WHEREOF, the undersigned has set her hand this 21 day of
September, 1998.
/s/ Dorothy M. Cipolla
------------------------------
Dorothy M. Cipolla, Secretary
<PAGE>
INTERCREDITOR AGREEMENT BETWEEN
BUSINESS DEVELOPMENT COMPANY
OF RHODE ISLAND AND
SMALL BUSINESS LOAN FUND CORPORATION
Agreement entered into this 21st day of September, 1998, by and between
Business Development Company of Rhode Island, a Rhode Island corporation with
its office at 40 Westminster Street, Suite 702, Providence, Rhode Island 02903
("BDC") and Small Business Loan Fund Corporation, a Rhode Island governmental
instrumentality with an office at One West Exchange Street, Providence, Rhode
Island 02903 ("SBLFC")
WITNESSETH:
WHEREAS, NETWORK SIX, INC., a Rhode Island corporation with offices at 475
Kilvert Street, Warwick, Rhode Island 02886 ("Borrower"), has obtained term loan
financing in the original principal sum of $250,000 from BDC ("BDC Term Loan"),
such BDC Term Loan to be secured by a lien interest in all of the Borrower's
presently owned and hereafter acquired fixtures, tangible and intangible
personal property (the "Collateral"); and
WHEREAS, the Borrower has obtained financing in the original aggregate
principal amount of $250,000 from SBLFC (the "SBLFC Loan"), such SBLFC Loan to
be secured by a lien interest in all of the Collateral; and
WHEREAS, BDC and SBLFC agree that it is in their best interest to enter
into an Intercreditor Agreement governing their relationship;
NOW, THEREFORE, in consideration of the foregoing and other
<PAGE>
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Consent to Grant of Security Interest. SBLFC consents to the granting
by the Borrower to BDC of a security interest in and to all the Collateral
and the proceeds thereof, as security for the BDC Term Loan. BDC consents
to the granting by the Borrower to SBLFC of a security interest in and to
all the Collateral and the proceeds thereof, as security for the SBLFC
Loan.
2. Pari Passu. In consideration of the premises, BDC and SBLFC hereby
agree that BDC's security interest in the Collateral and products and
proceeds thereof, shall be and hereby is pari passu with the security
position for the SBLFC Loan.
3. Primary Debt. BDC and SBLFC agree that each of their security documents
and any amendments thereto will not, at any time, secure an amount greater
than the Primary Debt. For purposes of this Agreement, the term "Primary
Debt" shall mean:
(a) with respect to BDC, the amount of the BDC Term Loan,
plus: (i) accrued and unpaid interest on and fees related to the BDC
Term Loan; (ii) amounts advanced by BDC on behalf of the Borrower
for taxes, insurance, maintenance or repairs relating to the
Collateral; and (iii) other costs incurred by BDC, including but not
limited to attorneys' fees, in protecting or realizing upon its
liens or security interest
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under the documents, instruments, agreements, or other writings
evidencing or securing the BDC Term Loan; and (b) with respect to
SBLFC, the amount of the SBLFC Loan plus (i) accrued and unpaid
interest on and fees related to the SBLFC Loan; (ii) amounts
advanced by SBLFC on behalf of the Borrower for taxes, insurance,
maintenance or repairs relating to the Collateral; and (iii) other
costs incurred by SBLFC, including but not limited to attorneys'
fees, in protecting or realizing upon its liens or security interest
under the documents, instruments, agreements, or other writing
evidencing or securing the SBLFC Loan.
4. Relative Priorities. BDC and SBLFC agree that despite their respective
secured positions concerning the Collateral, they wish to establish, as
between them, and only between them, the order of priority as to the
application of proceeds realized from any disposition of any secured
party, or otherwise, of the Collateral. BDC and SBLFC agree that such
proceeds shall be applied on a pari passu basis based upon the then
outstanding respective amounts of the BDC Primary Debt and the SBLFC
Primary Debt.
Each of the parties hereto shall execute such instruments including,
without limitation, those forms commonly referred to as "UCC-1" and/or
"UCC-3" with respect to the priorities described and established in
Paragraph 4, above, as the other reasonably may request from time to time.
5. Exchange of Notices. Each of the parties shall provide
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<PAGE>
the other with a copy of any notices of demand or default given the
Borrower and shall provide the other with written notice of any
acceleration in each event as and when effected or made by that party;
provided, however, the failure to provide such notice shall not have
adverse effect upon such demand, default, and/or acceleration.
6. Exercise of Rights. BDC and SBLFC hereby agree:
(a) Each party shall upon request of the other party provide
financial and/or audit information that has been obtained from the
Borrower, directly or indirectly, unless prohibited by applicable
law.
(b) The within Agreement is intended to reflect and restate
the relative priorities and rights of the parties hereto, and is not
intended to amend or modify any of the provisions of the instruments
executed in connection with the loan arrangements between either BDC
or SBLFC and the Borrower.
7. Insurance Proceeds. The respective rights and priorities of the parties
in and to any proceeds realized on account of any insured loss to all or
any portion of the Borrower's assets are the same as the priorities set
forth in Paragraph 4. above. Subject to the foregoing, in the event of any
insured loss, the parties shall agree concerning their respective interest
in the insurance proceeds arising therefrom, shall cooperate concerning
the adjustment and collection of such loss, and shall cooperate concerning
the
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<PAGE>
collection of any check, draft, or other item which represents such
insurance proceeds and the distribution of such proceeds amongst the
parties.
8. Duration. This Agreement and all obligations hereunder or with respect
hereto, of the Borrower, BDC and SBLFC shall continue in full force and
effect until payment in full of the SBLFC Loan.
9. Notices. Notices and other correspondence concerning the within
Agreement shall be given to the following addresses, each of which may be
changed upon seven (7) days prior written notice to all others by
certified mail, return receipt requested:
If to SBLFC:
Small Business Loan Fund Corporation
One West Exchange Street
Providence, RI 02903
Attention: John F. Sheehan
If to BDC:
Business Development Company of Rhode Island
40 Westminster Street, Suite 702
Providence, RI 02903
Attention: Peter C. Dorsey, Jr.
Vice President
10. Independent Parties. BDC and SBLFC each acknowledge that the other
party maintains and manages its own independent relationship with the
Borrower and that neither BDC nor SBLFC is the agent of any other party.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed the within Agreement on the
date first above written.
BUSINESS DEVELOPMENT
COMPANY OF RHODE ISLAND
("BDC")
By: /s/ [ILLEGIBLE]
----------------------------------
Title: President
-------------------------------
SMALL BUSINESS LOAN FUND
CORPORATION
By: /s/ [ILLEGIBLE]
----------------------------------
Title: Administrator
-------------------------------
Borrower hereby consents to the terms of the above Agreement and
specifically consents to the provisions contained in Paragraph 6(a) and 6(b).
NETWORK SIX, INC.
("Borrower")
By: /s/ Dorothy M. Cipolla
----------------------------------------
Title: TREASURER
-------------------------------------
6
<PAGE>
EXHIBIT-10.17
TERM LOAN AGREEMENT
AGREEMENT made this 21st day of September, 1998, by and between
BUSINESS DEVELOPMENT COMPANY OF RHODE ISLAND, a Rhode Island corporation with
its principal place of business at 40 Westminster Street, Suite 702, Providence,
Rhode Island 02903 (the "Lender"), and NETWORK SIX, INC., a Rhode Island
corporation with its principal address at 475 Kilvert Street, Warwick, Rhode
Island 02886 (the "Borrower").
I. GENERAL TERMS
Section 1.01. Loan:
The Borrower agrees to borrow from the Lender the principal sum of
up to Two Hundred Fifty Thousand Dollars ($250,000) on a term basis (the
"Loan"), and the Lender has agreed to make the Loan to the Borrower, subject to
all the terms and conditions of this Agreement.
Section 1.02. Note:
The Loan shall be evidenced by the Borrower's $250,000 Term
Promissory Note (the "Note") in the form attached hereto as Exhibit A, which
Note is hereby incorporated herein by reference and made a part hereof.
Section 1.03. Prepayment.
Subject to the provisions hereof, the Borrower may prepay the
principal of the Note, in whole at any time, or in part, as long as any
prepayment is equal to at least 5% of any outstanding principal balance from
time to time, and tendered on any principal payment date upon not less than ten
(10) business days prior written notice to the Lender. Each such notice shall
specify the prepayment date and the principal amount of the Note to be prepaid.
If prepayment is made on
<PAGE>
the Note at any time between the date hereof and five (5) years from the date
hereof, the prepayment penalty shall be equal to five percent (5%) of the
prepaid amount.
All prepayments shall be applied to the payment of installments of
principal of the Note in the inverse order of maturity thereof. Each prepayment
shall be accompanied by the interest accrued on the principal amount so prepaid
through the date of prepayment.
Section 1.04. Use of Proceeds:
The proceeds of the Loan shall be used to hire additional marketing
staff, purchase computer equipment and software, and provide working capital.
Loan proceeds shall not be used for any other purpose including the financing of
legal expenses.
Section 1.05. Security for the Note:
The Note and the Borrower's obligations thereunder shall be secured
by:
(a) a second (behind only a senior lender's lien on accounts
receivable and work-in-process and other senior liens set forth on Exhibit C
hereto) priority security interest (shared on a pari passu basis with the Small
Business Loan Fund Corp. ("SBLFC")) in all of the tangible and intangible
personal property of the Borrower pursuant to the terms of a Security Agreement
of even date (the "Security Agreement");
(b) reserved.
All agreements and instruments described in this Section 1.05,
together with any and all other agreements and instruments heretofore or
hereafter securing the Note, are sometimes hereinafter
2
<PAGE>
referred to collectively as the "Security Documents" and individually as a
"Security Document".
Section 1.06. Loan Commitment Deferred Fee:
The Borrower, subject to the terms and conditions of this Agreement
and of the Note, shall pay to the Lender a loan commitment deferred fee of
Twenty-Five Thousand Dollars ($25,000) (the "Deferred Fee") in five (5)
consecutive annual payments, each in the sum of Five Thousand Dollars ($5,000),
beginning on the 1st day of September, 1999, and payable on the same day of each
successive year or the next business day thereafter, with a final payment being
due and payable on September 1, 2003; provided, however, that if the Borrower
prepays the principal of the Note in whole at any time, then the Deferred Fee
shall be due and payable immediately upon such prepayment. Further, the Borrower
agrees that the Deferred Fee, if not paid when due, shall bear interest at the
rate provided for in the Note on the entire unpaid balance of the Deferred Fee,
and shall in all events be secured by the lien of the Security Agreement.
II. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender (which
representations and warranties shall survive the delivery of the Note and the
making of the Loan) that:
Section 2.01. The Borrower has heretofore furnished to the Lender a
balance sheet of the Borrower and profit and loss and surplus statements of the
Borrower for its most recently completed fiscal year or other period then ended,
together with supporting schedules, all prepared by certified public
accountants, together with supporting
3
<PAGE>
schedules, prepared by the Borrower. Said balance sheet and statements have been
prepared in accordance with generally accepted principles of accounting ("GAAP")
applied on a basis consistent with that of preceding periods and are complete
and correct and fairly present the financial condition of the Borrower as at
said dates, and the results of its operations for the year or other period ended
on said dates. To the best of the Borrower's knowledge and belief, the Borrower
has no contingent obligations, liabilities for taxes or unusual forward or
long-term commitments except as in the foregoing financial statements
specifically mentioned. Since the date(s) of said financial statements, there
has been no material adverse change in the financial condition of the Borrower,
nor any material decrease in sales or order backlog, and since that date no
dividends or other distributions on common stock have been paid or made to the
stockholders of the Borrower except as may be otherwise stated in a letter of
the Borrower to the Lender dated the date of this Agreement and acknowledged in
writing by the Lender.
Section 2.02. The Borrower (a) is duly organized, validly existing
and in good standing under the laws of its state of incorporation, (b) has the
corporate power and authority to own its properties and to carry on business as
now being conducted and is qualified to do business in every jurisdiction where
to Borrower's knowledge such qualification is necessary and (c) has the
corporate power to execute and deliver, and perform its obligations under this
Agreement, the Note and the Security Documents.
4
<PAGE>
Section 2.03. The execution and delivery and performance by the
Borrower of its obligations under this Agreement, the Note and each of the
Security Documents have been duly authorized by all requisite corporate action
and will not violate any provision of law, any order of any court or other
agency of government, the corporate charter or by-laws of the Borrower or any
indenture, agreement or other instrument to which it is a party, or by which it
is bound, or be in conflict with, result in a breach of, or constitute (with due
notice or lapse of time or both) a default under, or except as may be provided
by this Agreement, result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever upon any of the property or assets of the
Borrower pursuant to, any such indenture, agreement or instrument. The Borrower
is not required to obtain any consent, approval or authorization from, or to
file any declaration or statement with, any governmental instrumentality or
other agency in connection with or as a condition to the execution, delivery or
performance of this Agreement, the Note or the Security Documents.
Section 2.04. Except as previously disclosed in writing to Lender,
there is no action, suit or proceeding at law or in equity or by or before any
governmental instrumentality or other agency now pending or, to the knowledge of
the Borrower, threatened against or affecting the Borrower which, if adversely
determined, would have a material adverse effect on the business, operations,
properties, assets or condition, financial or otherwise, of the Borrower.
5
<PAGE>
Section 2.05. The Borrower is not a party to any agreement or
instrument or subject to any charter or other corporate restriction materially
adversely affecting its business, properties or assets, operations or
conditions, financial or otherwise, other than has been previously disclosed to
the Lender. The Borrower is not in default in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in any
agreement or instrument to which it is a party, other than as previously
disclosed in writing to the Lender.
Section 2.06. The Borrower has good title to all of its properties
and assets, free and clear of all mortgages, security interests, restrictions,
liens and encumbrances of any kind, except liens permitted hereunder and
restrictions, easements and minor irregularities in title which do not and will
not materially interfere with the occupation, use and enjoyment by the Borrower
of such properties and assets in the normal course of its business as presently
conducted or materially impair the value of such properties and assets for the
purpose of such business.
Section 2.07. Any borrowings made by the Borrower under this
Agreement do not and will not render the Borrower insolvent; the Borrower is not
contemplating either the filing of a petition by it under any state or federal
bankruptcy or insolvency laws or the liquidating of all or a major portion of
its property, and the Borrower has no knowledge of any person contemplating the
filing of any such petition against it, including the properties and assets
6
<PAGE>
reflected in the financial statements referred to in Section 2.01 hereof.
Section 2.08. No statement of fact made by or on behalf of the
Borrower in this Agreement or in any certificate or schedule furnished to the
Lender pursuant hereto, contains any untrue statement of a material fact or
omits to state any material fact necessary to make statements contained therein
or herein not misleading. There is no fact presently known to the Borrower which
has not been disclosed to the Lender which materially affects adversely, nor as
far as the Borrower can foresee, will materially affect adversely the property,
business, operations or condition (financial or otherwise) of the Borrower.
Section 2.09. The Borrower is not an "investment company", or a
company "controlled" by an "investment company", as such terms are defined in
the Investment Company Act of 1940, as amended.
Section 2.10. The Borrower has filed all federal, state and local
tax returns required to be filed and has paid or made adequate provision for the
payment of all federal, state and local taxes, charges and assessments.
Section 2.11. The Borrower does not have a pension, profit sharing
or other similar plan providing for a program of deferred compensation to any
employee except as set forth in a separate letter to the Lender of even date
herewith and acknowledged by the Lender in writing. With respect to such
plan(s), if any, Borrower covenants and agrees to cause to be paid when due all
amounts necessary to fund in accordance with its terms all such plan(s) and will
take no action
7
<PAGE>
which could result in liability to the Pension Benefit Guaranty Corporation, or
any of its successors or assigns, or to the entity which provides funds for such
plan(s).
III. CONDITIONS OF MAKING THE LOAN
The obligation of the Lender to make the Loan hereunder is subject
to the following conditions precedent:
Section 3.01. The representations and warranties set forth in
Article II hereof shall be true and correct on and as of the date hereof and the
date the Loan is made.
Section 3.02. The Borrower shall have executed and delivered to the
Lender, upon the execution of this Agreement, the following:
(a) The Note.
(b) The Security Documents, together with any other documents
required by the terms thereof.
(c) A certificate of the Secretary or Assistant Secretary of
the Borrower certifying to the votes of the Borrower's Board of Directors
authorizing the execution and delivery of this Agreement, the Note and the
Security Documents.
(d) A certificate of the Secretary or Assistant Secretary of
the Borrower which shall certify the name of the officer of the Borrower
authorized to sign this Agreement, the Note, the Security Documents and
any other documents or certificates to be delivered pursuant to this
Agreement by the Borrower or its designated officer,
8
<PAGE>
together with the true signatures of such officer. The Lender may
conclusively rely on such certificate until it shall receive a further
certificate of the Secretary or an Assistant Secretary of the Borrower
cancelling or amending the prior certificate and submitting the signatures
of the officers named in such further certificate.
(e) Certificates of the Secretary of State and the Division of
Taxation or other equivalent authorities, dated reasonably near the date
of the Loan, of the state of incorporation or organization of the Borrower
stating that the Borrower is duly incorporated and in good standing in
such state and has filed all annual reports and has paid all franchise and
other taxes required to be filed or paid to the date of such certificate.
A letter from the Borrower's certified public accountants may be
substituted for the certificate of the Division of Taxation.
(f) The financial statements of the Borrower as set forth in
Section 2.01 hereof.
(g) The Borrower shall have issued to the Lender a warrant to
purchase up to 11,500 shares of the common stock of the Borrower at the
price per share equal to the average market price per share at the opening
of trading for the five (5) days prior to the date hereof, which warrant
shall be exercisable in whole or in part upon written notice to the
Borrower on a date or dates as set forth therein. The warrant shall be
substantially in form attached hereto as Exhibit D.
9
<PAGE>
(h) Proof of insurance obtained by the Borrower on the
collateral described in Section 1.05 hereof in an amount reasonably
satisfactory to the Lender and which shall name the Lender as mortgagee,
loss payee and an additional insured party as its interests may appear and
provide for not less than thirty (30) days' advance notice to the Lender
of cancellation or nonrenewal thereof.
(i) Such other supporting documents and certificates as the
Lender or its special counsel may request.
Section 3.03. The Lender shall have received the favorable written
opinion of Gaebe & Kezirian, counsel for the Borrower, dated the date of the
Loan, reasonably satisfactory to the Lender and its counsel in scope and
substance.
Section 3.04. All legal matters incident to the transactions hereby
contemplated shall be satisfactory to counsel for the Lender.
Section 3.05. No event of default as specified in Article VI hereof,
nor any event which upon notice or lapse of time or both would constitute such
an event of default, shall have occurred and be continuing.
Section 3.06. The Borrower shall contemporaneously close on a
$250,000 term loan from SBLFC on terms reasonably satisfactory to the Lender.
10
<PAGE>
IV. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that, from the date hereof and
until payment in full of the principal of, and interest on, the Note and any
other indebtedness of the Borrower to the Lender, whether now existing or
arising hereafter, the Borrower will:
Section 4.01. (a) Do or cause to be done all things necessary to
preserve, renew and keep in full force and effect its corporate existence,
rights, licenses, permits and franchises and comply with all laws and
regulations applicable to it; at all times maintain, preserve and protect all
franchises and trade names and preserve all the remainder of its property used
or useful in the conduct of its business and keep the same in good repair,
working order and condition, and from time to time, make, or cause to be made,
all needful and proper repairs, renewals, replacements, betterments and
improvements thereto, so that the business carried on in connection therewith
may be properly and advantageously conducted at all times; and keep its
insurable properties adequately insured at all times, by financially sound and
reputable insurers, to such extent and against such risks, including fire and
other risks insured against by extended coverage, and maintain liability and
such other insurance as is customarily maintained by companies engaged in
similar businesses.
(b) Comply with all applicable laws and regulations, whether now in
effect or hereafter enacted or promulgated by any governmental authority having
jurisdiction in the premises.
Section 4.02. Pay and discharge or cause to be paid and discharged
all taxes, assessments and governmental charges or levies
11
<PAGE>
imposed upon it or upon its respective income and profits or upon any of its
property, real, personal or mixed, or upon any part thereof, before the same
shall become in default, as well as all lawful claims for labor, materials and
supplies or otherwise, which, if unpaid, might become a lien or charge upon such
properties or any part thereof; provided that the Borrower shall not be required
to pay and discharge or cause to be paid and discharged any such tax,
assessment, charge, levy or claim so long as the validity thereof shall be
contested in good faith by appropriate proceedings and it shall have set aside
on its books adequate reserves with respect to any such tax, assessment, charge,
levy or claim, so contested; and provided, further, that payment with respect to
any such tax, assessment, charge, levy or claim shall be made before any of its
property shall be seized or sold in satisfaction thereof.
Section 4.03. Give prompt written notice to the Lender of any
proceedings instituted against it by or in any Federal or state court or before
any commission or other regulatory body, whether Federal, state or local, which,
if adversely determined, would have a material adverse effect upon its business,
operations, properties, assets, or condition, financial or otherwise.
Section 4.04. Furnish to the Lender:
(a) Within one hundred twenty (120) days of the end of each
fiscal year, balance sheets and statements of income and surplus, together
with supporting schedules, audited by independent certified public
accountants selected by the Borrower and acceptable to the Lender, showing
the
12
<PAGE>
financial condition of the Borrower at the close of such fiscal year, the
results of operations during such year and containing a statement to the
effect that such accountants have examined the provisions of the Agreement
and that, based on information which has been provided by the Borrower to
such accountants, none of the events of default, as specified in Article
VI hereof, nor any event which upon notice or lapse of time or both would
constitute such an event of default, has occurred. Such statements shall
be accompanied by a qualified, going concern opinion of such accountants
stating that such statements have been prepared in accordance with GAAP
and disclose all contingent liabilities of Borrower.
(b) Within sixty (60) days after the end of each quarter,
balance sheets and statements of income and surplus, together with
supporting schedules, together with agings reports of accounts receivable
and accounts payable, prepared by the Borrower in accordance with GAAP and
certified by its chief financial officer, such balance sheets to be as of
the close of such quarter and such statements of income and surplus to be
for the period from the beginning of the then current fiscal year to the
end of such quarter, in each case subject to year-end adjustments.
(c) Concurrently with the delivery of all financial statements
required by Section 4.04 (a) and (b), a certificate in the form attached
hereto as Exhibit B by the
13
<PAGE>
President or chief financial officer of the Borrower calculating the
financial covenants and certifying as to the fact that he has examined
the provisions of this Agreement and that none of the Events of Default,
as specified in Article VI hereof, nor any event which upon notice or
lapse of time, or both, would constitute such an Event of Default, has
occurred and is continuing.
(d) Within thirty (30) days of the end of each fiscal year, an
annual forecasted financial statement (prepared on a month-by-month basis)
prepared by the Borrower and satisfactory to the Lender in form and
substance.
(e) Promptly, from time to time such other information
regarding its operations, assets, business, affairs and financial
condition, as the Lender may reasonably request.
Section 4.05. Permit agents or representatives of the Lender, at
Borrower's expense, and at reasonable times and upon reasonable notice, to
inspect its books and records and to make abstracts or reproductions thereof.
Section 4.06. Promptly advise the Lender of any material adverse
change in its condition, financial or otherwise, or of the occurrence of any
Event of Default by the Borrower of the type described in Article VI hereof, or
of the occurrence of any event which upon notice or lapse of time or both would
constitute such an Event of Default.
14
<PAGE>
Section 4.07. Maintain a standard system of accounting in accordance
with GAAP.
Section 4.08. Maintain at all times a "Cash Flow to Debt Service
Coverage Ratio" which is defined as (i) earnings (after all legal expenses)
before interest and taxes ("EBIT"); plus (ii) depreciation and amortization,
each to the extent accrued in the relevant accounting period and actually
deducted in determining EBIT; minus (iii) taxes actually paid (and not merely
accrued), dividends actually paid (and not merely accrued) and unfinanced
capital expenditures; all divided by interest expense on all indebtedness plus
required principal payments of both long term debt and capital leases for the
relevant accounting period, which when determined in accordance with GAAP shall
be not less than 1.25 to 1.00.
Section 4.09. Reserved.
Section 4.10. (a) In the event of any discharge, spill, leakage or
release of hazardous material affecting the Borrower's premises located at 475
Kilvert Street, Warwick, Rhode Island (the "Real Property"), in violation of any
applicable law, whether or not the same originates or emanates from the Real
Property or any contiguous real estate onto the Real Property, prior to or while
this Loan is outstanding ("Release"), Borrower agrees to contain, remove or
mitigate the same on the Real Property immediately and in accordance with all
Federal, state or local laws, regulations, orders or directives.
(b) The Borrower will dispose of or cause to be disposed of any
hazardous material used on the Real Property in strict compliance with all
applicable Federal, state or local laws and regulations.
15
<PAGE>
(c) Borrower will give Lender prompt written notice (i) of any
threatened or actual notice of any violation given by any Federal state or local
agency or department relating to hazardous material (1) on the Real Property, or
(2) being generated by the Borrower in violation of any applicable law, or (ii)
upon learning of the presence of hazardous material on or contiguous to the Real
Property in violation of any applicable law. Borrower will take prompt action
for the containment of such hazardous material on and the removal of such
hazardous material from the Real Property (except for hazardous material found
and stored on the Real Property in accordance with applicable law) in accordance
with all applicable laws, orders and regulations.
(d) Borrower shall indemnify Lender and hold Lender harmless from
and against all loss, liability, damage and expenses, including reasonable
attorney's fees suffered or incurred by Lender with respect to any Release or
any violation of the warranties, representations or covenants in this Section
4.10 hereof, whether as successor in interest to Borrower or otherwise.
V. NEGATIVE COVENANTS
The Borrower covenants and agrees that, until payment in full of the
principal of, and interest on, the Note and any other indebtedness of the
Borrower to the Lender, whether now existing or arising hereafter, unless the
Lender shall otherwise consent in writing, it will not hereafter, directly or
indirectly:
Section 5.01. Incur, create, assume, become or be liable in any
manner with respect to, or permit to exist, any indebtedness or liability,
except:
(a) indebtedness to the Lender;
16
<PAGE>
(b) indebtedness with respect to trade obligations and other
normal accruals in the ordinary course of business not yet due and
payable, or with respect to which it is contesting in good faith the
amount or validity thereof by appropriate proceedings, and then only to
the extent it has set aside on its books adequate reserves therefor; and
(c) indebtedness to Lockheed Martin IMS Corporation pursuant
to that certain Settlement Agreement and Assignment dated in or around
December, 1997, and to one (1) bank or institutional lender (including but
not limited to Prinvest Financial Corp.) for financing to be used by the
Borrower in conjunction with its day to day business operations, which
financing is or may be secured by Borrower's grant of a first position
security interest in all of the accounts receivable and work in process of
the Borrower. Lender agrees to subordinate its interest in the accounts
receivable and work in process of the borrower to any such bank or
institutional lender, provided that there shall be no more than one (1)
such lender at any time and provided further that nothing herewith will
require Lender to subordinate its interest in any collateral other than
accounts receivable and work in process of Borrower; and
(d) indebtedness to SBLFC.
Section 5.02. Create, incur, assume or suffer to exist any mortgage,
pledge, lien, charge or other encumbrance of any nature whatsoever on any of its
assets, now or hereafter owned, other than:
17
<PAGE>
(a) liens securing the payment of taxes, either not yet due or the
validity of which is being contested in good faith by appropriate proceedings,
and as to which it shall have set aside on its books adequate reserves;
(b) deposits under worker's compensation, unemployment insurance and
social security laws, or to secure the performance of bids, tenders, contracts
(other than for the repayment of borrowed money) or leases, or to secure
statutory obligations or surety or appeal bonds, or to secure indemnity,
performance or other similar bonds in the ordinary course of business;
(c) liens imposed by law, such as carriers', warehousemen's or
mechanics' liens, incurred by it in good faith in the ordinary course of
business, and liens arising out of a judgment or award (other than in the
pending litigation in and against the State of Hawaii in the event that such
judgment or award is less than or equal to $750,000 (the "Hawaii Litigation"))
against it with respect to which it shall currently be prosecuting an appeal, a
stay of execution pending such appeal having been secured;
(d) liens in favor of the Lender;
(e) liens existing on the date hereof and described in Exhibit C
attached hereto and made a part hereof, or replacement liens as set forth in
Section 5.01(c) hereof;
(f) liens fully subordinated to Lender; and
(g) liens in favor of SBLFC.
18
<PAGE>
Section 5.03. Guarantee, endorse or otherwise in anyway become or be
responsible for obligations of any other person, except endorsements of
negotiable instruments for collection in the ordinary course of business.
Section 5.04. Sell, lease, transfer or otherwise dispose of its
properties, assets, rights, licenses and franchises to any person, except in the
ordinary course of its business (including the purchase and sale of repossessed
equipment), or turn over the management of, or enter a management contract with
respect to, such properties, assets, rights, licenses and franchises, except as
otherwise permitted herein.
Section 5.05. Enter into any arrangement, directly or indirectly,
with any person whereby it shall sell, pledge or transfer any property, real,
personal or mixed, used or useful in its business, whether now owned or
hereafter acquired, and thereafter rent or lease such property other than in the
ordinary course of business.
Section 5.06. Except in the ordinary course of its business,
purchase, invest in or otherwise acquire or hold securities, including, without
limitation, capital stock and evidences of indebtedness of, or make loans or
advances to, or enter into any arrangement for the purpose of providing funds or
credit to, any other person, except:
(a) advances to employees for business expenses or for personal
needs not to exceed Five Thousand Dollars ($5,000) in the case of any one (1)
employee and not to
19
<PAGE>
exceed Twenty-Five Thousand Dollars ($25,000) in the aggregate to all such
employees outstanding at one time; and
(b) investments in short-term obligations of the United States.
Section 5.07. Dissolve, liquidate, consolidate with or merge with,
form a new business entity or otherwise acquire all or substantially all of the
assets or properties of, any corporation, or make any substantial change in its
executive management.
Section 5.08. Engage, directly or indirectly, in a business
substantially different from the business now being conducted.
Section 5.09. Sell, assign, discount or dispose in any way of any
accounts receivable, promissory notes or trade acceptances held by the Borrower,
with or without recourse, except for collection (including endorsements) in the
ordinary course of business or pursuant to financing permitted pursuant to
Section 5.01(c) hereof.
Section 5.10. Intentionally Omitted.
Section 5.11. Maintain its principal place of business outside the
State of Rhode Island.
Section 5.12. Pay any dividends, or make any distribution of cash or
property, or both, to holders of shares of its capital stock, whether common or
preferred, or directly or indirectly, redeem, purchase or otherwise acquire for
a consideration any shares of its capital stock.
20
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VI. DEFAULTS
In each case of happening of any of the following events (each of
which is herein and in the Note sometimes called an "Event of Default"):
(a) any representation or warranty made herein, or in any report,
certificate, financial statement or other instrument furnished in connection
with this Agreement, or the borrowing hereunder, shall prove to be false or
misleading in any material respect;
(b) default in the payment of any installment of the principal of,
or interest on, the Note or any other indebtedness of the Borrower to the Lender
for more than ten (10) days after the date when the same shall become due and
payable, whether at the due date thereof or at a date fixed for prepayment or by
acceleration or otherwise;
(c) default in the due observance or performance of any covenant,
condition or agreement contained in Articles IV or V hereof, in the Note or in
any instrument granting security to the Lender for the Note and such default
shall continue for twenty (20) days after notice thereof from the Lender to the
Borrower;
(d) default in the due observance or performance of any other
covenant, condition or agreement, on the part of the Borrower to be observed or
performed pursuant to the terms hereof and such default shall continue for
twenty (20) days after notice thereof from the Lender to the Borrower;
(e) default with respect to any evidence of indebtedness in excess
of $50,000 of the Borrower (other
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than to the Lender), if the effect of such default is to accelerate the maturity
of such indebtedness or to permit the holder thereof to cause such indebtedness
to become due prior to the stated maturity thereof, or if any indebtedness of
the Borrower in excess of $50,000 (other than to the Lender and other than the
Hawaii Litigation as set forth in Section 5.02(c) hereof) is not paid, when due
and payable, including any applicable grace periods, whether at the due date
thereof or a date fixed for prepayment or otherwise;
(f) the Borrower shall (i) apply for or consent to the appointment
of a receiver, trustee, custodian or liquidator of it or any of its property,
(ii) admit in writing its inability to pay its debts as they mature, (iii) make
a general assignment for the benefit of creditors, (iv) be adjudicated a
bankrupt or insolvent or be the subject of an order for relief under Title 11 of
the United States Code, (v) file a voluntary petition in bankruptcy, or a
petition or an answer seeking reorganization or an arrangement with creditors or
to take advantage of any bankruptcy, reorganization, insolvency, readjustment of
debt, dissolution or liquidation law or statute, or an answer admitting the
material allegations of a petition filed against it in any proceeding under any
such law or if corporate action shall be taken for the purpose of effecting any
of the foregoing;
(g) an order, judgment or decree shall be entered, without the
application, approval or consent of the Borrower by any court of competent
jurisdiction, approving a
22
<PAGE>
petition seeking reorganization of the Borrower or appointing a receiver,
trustee, custodian or liquidator of the Borrower of all or a substantial part of
the assets of the Borrower, and such order, judgment or decree shall continue
unstayed and in effect for any period of thirty (30) days;
(h) final judgment for the payment of money in excess of an
aggregate of Fifty Thousand Dollars ($50,000) shall be rendered against the
Borrower, and the same shall remain undischarged for a period of thirty (30)
consecutive days, during which execution shall not be effectively stayed;
provided, however, that such aggregate amount shall be exclusive of the pending
Hawaii Litigation in which case, and for such case only, such aggregate amount
shall be increased to Seven Hundred Fifty Thousand Dollars ($750,000);
(i) the occurrence of any attachment of any deposits or other
property of the Borrower in the hands or possession of the Lender, or the
occurrence of any attachment of any other property of the Borrower, other than
in the Hawaii Litigation as set forth in Section 5.02(c) hereof, in an amount
exceeding Fifty Thousand Dollars ($50,000) which shall not be discharged within
thirty (30) days of the date of such attachment; and
(j) for any reason Kenneth Kirsch shall cease to be or function as
President of the Borrower and (i) a successor is not appointed within sixty (60)
days of such cessation and (ii) the Lender shall not have approved in
23
<PAGE>
writing of such successor within ten (10) days of such appointment;
then and in every such Event of Default and at any time thereafter during
the continuance of such event, the Note and any and all other
indebtedness of the Borrower to the Lender, shall immediately become due
and payable, both as to principal and interest, without presentment,
demand, protest or notice of any kind, all of which are hereby expressly
waived, anything contained herein or in the Note or other evidence of
such indebtedness to the contrary notwithstanding.
VII. MISCELLANEOUS
Section 7.01. This Agreement and all covenants, agreements,
representations and warranties made herein and in the certificates delivered
pursuant hereto, shall survive the making by the Lender of the Loan, the
execution and delivery to the Lender of the Note, and shall continue in full
force and effect so long as the Note and any other indebtedness of the Borrower
to the Lender is outstanding and unpaid. Whenever in this Agreement any of the
parties hereto is referred to, such reference shall be deemed to include the
successors and assigns of such party; and all covenants, promises and agreements
in this Agreement contained, by or on behalf of the Borrower, shall inure to the
benefit of the respective successors and assigns of the Lender.
Section 7.02. The Borrower will reimburse the Lender upon demand for
all reasonable out-of-pocket costs, charges and expenses of the Lender
(including reasonable fees and disbursements of counsel to the Lender) in
connection with (i) the preparation, execution and
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<PAGE>
delivery of this Agreement, the Note and any security instrument securing the
Note, (ii) any brokers' or finders' commissions associated with this loan
transaction between the Borrower and the Lender, (iii) the making of the Loan,
(iv) any amendments, modifications, consents or waivers in respect thereof and
(v) any enforcement thereof.
Section 7.03. This Agreement and the Note shall be construed in
accordance with and governed by the laws of the State of Rhode Island.
Section 7.04. No modification or waiver of any provision of this
Agreement, or of the Note, nor consent to any departure by the Borrower
therefrom, shall in any event be effective unless the same shall be in writing,
and then such waiver or consent shall be effective only in the specific
instance, and for the purpose, for which given. No notice to, or demand, on the
Borrower, in any case, shall entitle the Borrower to any other or future notice
or demand in the same, similar or other circumstances.
Section 7.05. Neither any failure nor any delay on the part of the
Lender in exercising any right, power or privilege hereunder, or under the Note,
or any other instrument given as security therefor, shall operate as a waiver
thereof, nor shall a single or partial exercise thereof preclude any other or
future exercise, or the exercise of any other right, power or privilege.
Section 7.06. All notices, requests, demands and other
communications provided for hereunder shall be in writing and mailed via
certified mail or Federal Express (overnight delivery) or delivered to the
applicable party at the addresses indicated below.
25
<PAGE>
If to the Lender:
Business Development Company of Rhode Island
40 Westminster Street, Suite 702
Providence, RI 02903
Attention: Peter C. Dorsey, Jr., Vice President
with a copy to:
Richard Nadeau, Jr., Esquire
NADEAU & SIMMONS, P.C.
1250 Turks Head Building
Providence, RI 02903
If to the Borrower:
NETWORK SIX, INC.
475 Kilvert Street
Warwick, RI 02886
Attention: Kenneth Kirsch, President
with a copy to:
Wayne M. Kezirian, Esquire
Gaebe & Kezirian
128 Dorrance Street
Providence, RI 02903
or, as to each party, at such other address as shall be designated by such
parties in a written notice to the other party complying as to delivery with the
terms of this Section. All such notices, requests, demands and other
communication shall, when mailed, be effective three (3) days after the date
when deposited in the mails, addressed as aforesaid, or delivered to Federal
Express for overnight delivery.
Section 7.07. This Agreement shall be binding upon and inure to the
benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
hereunder or any interest herein without the prior written consent of the
Lender.
Section 7.08, The Borrower, to the extent that it may lawfully do
so, hereby consents to the jurisdiction of the courts of the State of Rhode
Island and the United States District Court for the
26
<PAGE>
District of Rhode Island, as well as to the jurisdiction of all courts from
which an appeal may be taken from such courts, for the purpose of any suit,
action or other proceeding arising out of any of its obligations arising
hereunder or with respect to the transactions contemplated hereby, and expressly
waives any and all objections it may have as to venue in any of such courts. THE
LENDER AND THE BORROWER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING,
CLAIM, OR COUNTERCLAIM, WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY,
ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT, THE NOTE, THE SECURITY
DOCUMENTS, OR ANY DOCUMENTS RELATED THERETO.
Section 7.09. The Lender shall not be liable for any claims,
demands, losses, or damages made, claimed, or suffered by the Borrower,
excepting such as may arise through or could be caused by the Lender's willful
or gross negligence.
Section 7.10. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
Section 7.11. Any Article and Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose. As used in this Agreement, the
term "person" shall include any individual, corporation, partnership, joint
venture, trust, or unincorporated organization, or a government or any agency or
political subdivision thereof.
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<PAGE>
Section 7.12. The Borrower hereby grants to the Lender permission to
use the fact of the Lender's making the Loan and the amount of the Loan in the
Lender's advertising and other public relations, provided that the Lender shall
not make public the specific terms of the Loan, including but not limited to the
terms of Article VI(h).
IN WITNESS WHEREOF, the Lender and the Borrower have caused this
Agreement to be duly executed by their duly authorized officers, all as of the
day and year first above written.
WITNESS: BUSINESS DEVELOPMENT COMPANY
OF RHODE ISLAND
/s/ [ILLEGIBLE] By: /s/ Gurrett B. Hunter
- -------------------------------- -------------------------------
Title: President
----------------------------
WITNESS: NETWORK SIX, INC.
/s/ [ILLEGIBLE] By: /s/ Dorothy M. Cipolla
- -------------------------------- -------------------------------
Title: Treasurer
----------------------------
28
<PAGE>
EXHIBIT A
$250,000 Promissory Note
<PAGE>
TERM PROMISSORY NOTE
$250,000.00 Providence, Rhode Island
September 21, 1998
FOR VALUE RECEIVED, NETWORK SIX, INC., a Rhode Island corporation
with its principal office at 475 Kilvert Street, Warwick, Rhode Island 02886
(herein called the "Maker"), hereby promises to pay to the order of BUSINESS
DEVELOPMENT COMPANY OF RHODE ISLAND, a Rhode Island corporation (herein called
the "Payee"), at its office located at 40 Westminster Street, Suite 702,
Providence, Rhode Island 02903, the principal sum of Two Hundred Fifty Thousand
and 00/100 Dollars ($250,000.00), with interest at the effective rate of ten and
one-quarter percent (10.25%) per annum (the "Interest Rate"). Principal payments
shall be made in fifty-nine (59) consecutive monthly payments ("Installments")
in the sum of Four Thousand One Hundred Sixty-Seven and 00/100 Dollars
($4,167.00), beginning on the 1st day of November, 1998, and payable on the same
day of each successive month or the next business day, and with a sixtieth
(60th) Installment being equal to the remaining unpaid principal plus accrued
interest being due and payable on October 1, 2003.
Interest on the unpaid principal balance shall be payable monthly,
beginning on the 1st day of November, 1998, and continuing on the same day of
each successive month or the next business day thereafter if such day is not a
business day until the principal has been repaid in full. Each monthly
Installment shall be applied first to the payment of accrued interest owing to
the date received and the remainder to the reduction of principal.
<PAGE>
Monthly Installments shall be automatically debited on each due date
from the Maker's operating checking account with the bank or financial
institution with which the Maker maintains its accounts.
Interest shall be calculated and payable whether before or after
maturity of this Note. Interest shall be calculated on the basis of a year
consisting of three hundred sixty (360) days counting the actual number of days
elapsed.
All past due Installments, or any portion thereof, not paid when
due, if permitted by law, shall bear interest from such due date at the Interest
Rate plus three hundred (300) basis points per annum ("Default Rate"). During
the existence of any Event of Default, as defined in the hereinbelow referenced
Loan Agreement, and after acceleration of this Note by the holder hereof, the
entire unpaid balance of principal and interest of this Note shall bear interest
at the Default Rate.
If the Maker fails to pay any Installment due hereunder when such
Installment is due and payable, whether at the due date thereof or due to
acceleration or otherwise, a late fee equal to five percent (5.0%) of the
overdue payment shall be immediately due and payable with respect to each late
Installment by the Maker to the Payee hereunder.
This Note is the "Note" referred to in that certain Term Loan
Agreement of even date herewith between the Payee and the Maker (the "Loan
Agreement") and is subject to optional prepayments and to acceleration of the
maturity hereof, all as provided in said Loan Agreement, which is hereby
incorporated by reference herein and made a
2
<PAGE>
part hereof. This Note, including but not limited to amounts owed pursuant to
the principal balance and interest, is secured, inter alia, by certain "Security
Documents" referred to in said Loan Agreement, and is entitled to the benefits
thereof.
In case an Event of Default, as defined in said Loan Agreement,
shall occur and be continuing, this Note, including the principal balance and
all interest accrued hereon and thereon, shall at the option of the holder of
this Note become due and payable in the manner and with the effect provided in
said Loan Agreement.
In the event that the holder of this Note shall exercise or endeavor
to exercise any of its remedies hereunder or under said Loan Agreement or any
agreements securing this Note, the Maker shall pay all reasonable costs and
expenses incurred in connection therewith, including without limitation,
reasonable attorneys' fees, and the holder hereof may take judgment for all such
amounts in addition to all other sums due hereunder.
The Maker hereby waives presentment, dishonor, protest and demand,
diligence, notice of protest, demand and of dishonor, and any other notice
otherwise required to be given under the law in connection with the delivery,
acceptance, performance, default, enforcement or collection of this Note, and
expressly agrees that this Note or any payment hereunder may be extended or
subordinated, by forbearance or otherwise, from time to time, without in any way
affecting the liability of the Maker. No consent or waiver by the holder hereof
with respect to any action or failure to act which, without such consent or
waiver, would constitute a breach of any
3
<PAGE>
provision of this Note, shall be valid and binding unless in writing and signed
by both the Maker and the holder hereof.
All agreements between the Maker and the Payee are hereby expressly
limited so that in no contingency or event whatsoever whether by reason of
acceleration of maturity of the indebtedness evidenced hereby or otherwise shall
the amount paid or agreed to be paid to the Payee for the use, forbearance or
detention of the indebtedness evidenced hereby exceed the maximum permissible
interest rate under applicable law. As used herein, the term "applicable law"
shall mean the law in effect as of the date hereof, provided, however, that in
the event there is a change in the law which results in a higher permissible
rate of interest, then this Note shall be governed by such new law as of its
effective date. If, from any circumstance whatsoever, fulfillment of any
provision hereof or of the Loan Agreement or of any agreements securing this
Note at the time performance of such provision shall be due, shall involve
transcending the limit of validity prescribed by law, then ipso facto, the
obligation to be fulfilled shall be reduced to the limit of such validity, and
if from any circumstance the Payee should ever receive as interest an amount
which would exceed the highest lawful rate, such amount which would be excessive
interest shall be applied to the reduction of the principal balance evidenced
hereby and not to the payment of interest. This provision shall control every
other provision of all agreements between the Maker and the Payee.
This Note shall be construed in accordance with and governed by the
laws of the State of Rhode Island, except to the extent that such laws are
superseded by Federal enactments.
4
<PAGE>
THE MAKER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING,
CLAIM, OR COUNTERCLAIM, WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY,
ARISING OUT OF OR IN ANY WAY RELATED TO THIS NOTE.
IN WITNESS WHEREOF, the Maker has caused this Note to be executed by
its duly authorized officer as of the day and year first above written.
NETWORK SIX, INC.
By:
-------------------------------
Title:
----------------------------
5
<PAGE>
EXHIBIT B
Certificate as to No Events of Default
Business Development Company
of Rhode Island
40 Westminster Street, Suite 702
Providence, Rhode Island 02903
Re: Compliance Certificate required by Section 4.04 of Loan Agreement by and
between Business Development Company of Rhode Island and NETWORK SIX, INC.
(the "Agreement")
Gentlemen:
This certificate is submitted by the undersigned pursuant to Section 4.04
of the Agreement. Capitalized terms used herein have the same meaning as in the
Agreement.
The undersigned has calculated the financial covenants set forth in
Article IV as follows:
Debt Service Coverage Ratio _______ to 1.00
The undersigned hereby certifies that the balance sheet and statement of
income and surplus as of ( ) are true, accurate and complete. The
undersigned further certifies that he has examined the financial statements
delivered in connection herewith and the provisions of the Agreement, and that
as of the date hereof no Event of Default, nor any event which upon notice or
lapse of time, or both, would constitute an Event of Default, has occurred and
is continuing.
NETWORK SIX, INC.
By:
-------------------------------
Title:
----------------------------
<PAGE>
EXHIBIT C
Liens Existing as of the Date Hereof
1. Liens set forth on the UCC-11 Search Report attached hereto and
incorporated by reference herein.
2. Lockheed Martin IMS Corporation pursuant to that certain Settlement
Agreement and Assignment dated in or around December, 1997.
3. Small Business Loan Fund Corporation (to be created as of the date
hereof).
<PAGE>
EXHIBIT "A"
COLLATERAL DESCRIPTION
In the account, contract rights, rights to payment, intangibles, and cash and
non-cash proceeds including but not limited to instruments, documents, chattel
paper, warrants and any other indicia of payment in respect to the Debtor's
contract dated on or about April 1, 1997 with the State of Maine and identified
as the "Maine Automated Child Welfare Information System Contract For Special
Services" or "MACWIS."
<PAGE>
EXHIBIT "A"
COLLATERAL DESCRIPTION
A purchase money security interest in all inventory of goods obtained by Debtor
from Unisys Corporation ("Unisys") including Unisys and third party computer
products for the Debtor's contract dated on or about April 1, 1997 with the
State of Maine which is identified as the "Maine Automated Child Welfare
Information System Contract for Special Services" or "MACWIS," and all cash or
non-cash proceeds therefrom.
<PAGE>
SCHEDULE "A"
CONTINUATION OF DESCRIPTION OF COLLATERAL PAGE
UCC-1 FILING STATEMENT FORM FOR
Rhode Island
This Financing Statement covers the following types or items of property of
Debtor, whether now owned or hereafter acquired; all Accounts and accounts
receivable listed in Schedule 1 of a certain Financing end Security Agreement
dated on or about 1997 by and between PrinVest Financial Corp ("PrinVest") and
Network Six, Inc. (attached hereto), as may be amended from time to time, or as
relate to Accounts due pursuant to contracts or purchase orders subsequently
assigned to PrinVest, the proceeds thereof presently existing or hereafter
arising, all interest of the Debtor in said Accounts, accounts receivable and/or
proceeds thereof, and all books and records pertaining thereto. Capitalized
terms used herein shall have the meanings given them in the Uniform Commercial
Code.
PURSUANT TO AN AGREEMENT BETWEEN DEBTOR AND SECURED PARTY, DEBTOR HAS
AGREED NOT TO FURTHER ENCUMBER THE COLLATERAL DESCRIBED ABOVE.
DEBTOR: Network Six, Inc.
475 Kilvert Street
Warwick, RI 02886
/s/ Kenneth C. Kirsch 12/31/97
- -----------------------------------------------------
Debtor's Signature Date
Kenneth C. Kirsch President & CEO
- -----------------------------------------------------
Print Name and Title
SECURED PARTY: PrinVest Financial Corp
3 Princess Rad
Lawrenceville, NJ 08648
/s/ Robert W. Vera Jr. 12-31-97
- -----------------------------------------------------
Secured Party's Signature Date
Robert W. Vera Jr.
- -----------------------------------------------------
Print Name and Title
<PAGE>
EXHIBIT D
Warrant
<PAGE>
WARRANT TO PURCHASE COMMON STOCK
OF
NETWORK SIX, INC.
This is to certify that, FOR VALUE RECEIVED, Business Development Company
of Rhode Island, a Rhode Island corporation, ("Holder"), is entitled to
purchase, subject to the provisions of this Warrant, from Network Six, Inc., a
Rhode Island corporation ("Company"), 11,500 shares ("Warrant Shares") of common
stock, par value 10 cents per share, of the Company ("Common Stock") at a price
per share equal to Four and 50/100 Dollars ($4.50) (the "Exercise Price"), at
any time from the date a loan agreement is entered into by and between the
Holder and the Company for a Two Hundred Fifty Thousand Dollar ($250,000.00)
term loan through but not later than 5:00 p.m. Providence, Rhode Island Time, on
the 20th day of September, 2003.
(1) EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part
at any time or from time to time until it expires by presentation and surrender
hereof to the Company at its principal office at 475 Kilvert Street, Warwick,
Rhode Island, with the Purchase Form annexed hereto duly executed and
accompanied by payment of the Exercise Price for the number of shares specified
in such form. If this Warrant should be exercised in part only, the Company
shall, upon surrender of this Warrant for cancellation, execute and deliver a
new Warrant evidencing the rights of the Holder thereof to purchase the balance
of the shares purchasable thereunder. Upon receipt by the Company of this
Warrant at its office in proper form for exercise, the Holder shall be deemed to
be the holder of record of the shares of Common Stock issuable upon such
exercise, notwithstanding that the stock transfer books of the Company shall
then be closed or that certificates representing such shares of Common Stock
shall not then be actually delivered to the Holder.
(2) RESERVATION OF SHARES. The Company hereby agrees that at all times
until expiration of this Warrant there shall be reserved for issuance and/or
delivery upon exercise of this Warrant such number of shares of its Common Stock
as shall be required for issuance and delivery upon exercise of this Warrant.
(3) FRACTIONAL SHARES. No fractional shares may be issued upon the
exercise of this Warrant.
(4) EXCHANGE OR LOSS OF WARRANT. This Warrant is exchangeable, without
expense, at the option of the Holder, upon presentation and surrender hereof to
the Company for other warrants of different denominations entitling the holder
thereof to purchase in the aggregate the same number of shares of Common Stock
purchasable hereunder. The term "Warrant" as used herein includes any Warrants
into which this Warrant may be divided or exchanged. Upon receipt by the Company
of evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and of reasonably satisfactory indemnification, and upon surrender
and cancellation of this Warrant, if mutilated, the
<PAGE>
Company will execute and deliver a new Warrant of like tenor and date.
(5) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
(6) ANTI-DILUTION RIGHTS. The number of Warrant Shares and/or the Exercise
Price shall be automatically adjusted to give effect to any and all stock
dividends or stock splits. Whenever the number of Warrant Shares or the Exercise
Price shall be adjusted as required by the provisions of this Warrant, the
Company shall forthwith file in the custody of its Secretary or an Assistant
Secretary at its principal office an officer's certificate showing the adjusted
number of Warrant Shares and Exercise Price determined as herein provided,
setting forth in reasonable detail the facts requiring such adjustment,
including a statement of the number of additional shares of Common Stock, if
any, and such other facts as shall be necessary to show the reason for and the
manner of computing such adjustment. Each such officer's certificate shall be
made available at all reasonable times for inspection by the Holder and the
Company shall, forthwith after each such adjustment, mail a copy by certified
mail of such certificate to the Holder.
(7) RESTRICTIONS ON TRANSFER. All stock certificates issued pursuant to
any exercise of this Warrant shall bear the following restrictive legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE TRANSFERRED UNTIL (i) A REGISTRATION
STATEMENT UNDER THE ACT AND REGISTRATION OR QUALIFICATION FOR SALE UNDER
APPROPRIATE STATE SECURITIES LAWS SHALL BECOME EFFECTIVE WITH RESPECT
THERETO, OR (ii) RECEIPT OF AN OPINION OF COUNSEL TO THE COMPANY OR OTHER
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT
REGISTRATION OR QUALIFICATION UNDER THE ACT AND APPROPRIATE STATE
SECURITIES LAWS ARE NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER.
(8) EXPIRATION DATE. This Warrant shall expire and shall be returned to
the Company and shall be and become null and void at 5:00 P.M. Providence, Rhode
Island Time, on the 20th day of September, 2003.
(10) GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of Rhode Island (without giving effect to
the conflict of law principles thereof). Any suit, action or proceeding relating
to this
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<PAGE>
Warrant shall be brought in Rhode Island state courts or Federal courts sitting
in Rhode Island.
NETWORK SIX, INC.
By: /s/ Dorothy M. Cipolla
----------------------------
Treasurer
Dated:
Attest:
/s/ Dorothy M. Cipolla
- ------------------------------
Secretary
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<PAGE>
PURCHASE FORM
Dated ________________________
The undersigned hereby irrevocably elects to exercise the within Warrant
to the extent of purchasing _________________ shares of Common Stock and hereby
makes payment of________________ in payment of the actual exercise price
thereof.
________________
INSTRUCTIONS FOR STOCK TRANSFER AGENT
Name____________________________________________________________________________
(Please typewrite or print in block letters)
Address_________________________________________________________________________
SS# or Federal I.D.#____________________________________________________________
Signature________________________________________________________________
________________
4
<PAGE>
TERM PROMISSORY NOTE
$250,000.00 Providence, Rhode Island
September 21, 1998
FOR VALUE RECEIVED, NETWORK SIX, INC., a Rhode Island corporation
with its principal office at 475 Kilvert Street, Warwick, Rhode Island 02886
(herein called the "Maker"), hereby promises to pay to the order of BUSINESS
DEVELOPMENT COMPANY OF RHODE ISLAND, a Rhode Island corporation (herein called
the "Payee"), at its office located at 40 Westminster Street, Suite 702,
Providence, Rhode Island 02903, the principal sum of Two Hundred Fifty Thousand
and 00/100 Dollars ($250,000.00), with interest at the effective rate of ten and
one-quarter percent (10.25%) per annum (the "Interest Rate"). Principal payments
shall be made in fifty-nine (59) consecutive monthly payments ("Installments")
in the sum of Four Thousand One Hundred Sixty-Seven and 00/100 Dollars
($4,167.00), beginning on the 1st day of November, 1998, and payable on the same
day of each successive month or the next business day, and with a sixtieth
(60th) Installment being equal to the remaining unpaid principal plus accrued
interest being due and payable on October 1, 2003.
Interest on the unpaid principal balance shall be payable monthly,
beginning on the 1st day of November, 1998, and continuing on the same day of
each successive month or the next business day thereafter if such day is not a
business day until the principal has been repaid in full. Each monthly
Installment shall be applied first to the payment of accrued interest owing to
the date received and the remainder to the reduction of principal.
<PAGE>
Monthly Installments shall be automatically debited on each due date
from the Maker's operating checking account with the bank or financial
institution with which the Maker maintains its accounts.
Interest shall be calculated and payable whether before or after
maturity of this Note. Interest shall be calculated on the basis of a year
consisting of three hundred sixty (360) days counting the actual number of days
elapsed.
All past due Installments, or any portion thereof, not paid when
due, if permitted by law, shall bear interest from such due date at the Interest
Rate plus three hundred (300) basis points per annum ("Default Rate"). During
the existence of any Event of Default, as defined in the hereinbelow referenced
Loan Agreement, and after acceleration of this Note by the holder hereof, the
entire unpaid balance of principal and interest of this Note shall bear interest
at the Default Rate.
If the Maker fails to pay any Installment due hereunder when such
Installment is due and payable, whether at the due date thereof or due to
acceleration or otherwise, a late fee equal to five percent (5.0%) of the
overdue payment shall be immediately due and payable with respect to each late
Installment by the Maker to the Payee hereunder.
This Note is the "Note" referred to in that certain Term Loan
Agreement of even date herewith between the Payee and the Maker (the "Loan
Agreement") and is subject to optional prepayments and to acceleration of the
maturity hereof, all as provided in said Loan Agreement, which is hereby
incorporated by reference herein and made a
2
<PAGE>
part hereof. This Note, including but not limited to amounts owed pursuant to
the principal balance and interest, is secured, inter alia, by certain "Security
Documents" referred to in said Loan Agreement, and is entitled to the benefits
thereof.
In case an Event of Default, as defined in said Loan Agreement,
shall occur and be continuing, this Note, including the principal balance and
all interest accrued hereon and thereon, shall at the option of the holder of
this Note become due and payable in the manner and with the effect provided in
said Loan Agreement.
In the event that the holder of this Note shall exercise or endeavor
to exercise any of its remedies hereunder or under said Loan Agreement or any
agreements securing this Note, the Maker shall pay all reasonable costs and
expenses incurred in connection therewith, including without limitation,
reasonable attorneys' fees, and the holder hereof may take judgment for all such
amounts in addition to all other sums due hereunder.
The Maker hereby waives presentment, dishonor, protest and demand,
diligence, notice of protest, demand and of dishonor, and any other notice
otherwise required to be given under the law in connection with the delivery,
acceptance, performance, default, enforcement or collection of this Note, and
expressly agrees that this Note or any payment hereunder may be extended or
subordinated, by forbearance or otherwise, from time to time, without in any way
affecting the liability of the Maker. No consent or waiver by the holder hereof
with respect to any action or failure to act which, without such consent or
waiver, would constitute a breach of any
3
<PAGE>
provision of this Note, shall be valid and binding unless in writing and signed
by both the Maker and the holder hereof.
All agreements between the Maker and the Payee are hereby expressly
limited so that in no contingency or event whatsoever whether by reason of
acceleration of maturity of the indebtedness evidenced hereby or otherwise shall
the amount paid or agreed to be paid to the Payee for the use, forbearance or
detention of the indebtedness evidenced hereby exceed the maximum permissible
interest rate under applicable law. As used herein, the term "applicable law"
shall mean the law in effect as of the date hereof, provided, however, that in
the event there is a change in the law which results in a higher permissible
rate of interest, then this Note shall be governed by such new law as of its
effective date. If, from any circumstance whatsoever, fulfillment of any
provision hereof or of the Loan Agreement or of any agreements securing this
Note at the time performance of such provision shall be due, shall involve
transcending the limit of validity prescribed by law, then ipso facto, the
obligation to be fulfilled shall be reduced to the limit of such validity, and
if from any circumstance the Payee should ever receive as interest an amount
which would exceed the highest lawful rate, such amount which would be excessive
interest shall be applied to the reduction of the principal balance evidenced
hereby and not to the payment of interest. This provision shall control every
other provision of all agreements between the Maker and the Payee.
This Note shall be construed in accordance with and governed by the
laws of the State of Rhode Island, except to the extent that such laws are
superseded by Federal enactments.
4
<PAGE>
THE MAKER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING,
CLAIM, OR COUNTERCLAIM, WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY,
ARISING OUT OF OR IN ANY WAY RELATED TO THIS NOTE.
IN WITNESS WHEREOF, the Maker has caused this Note to be executed by
its duly authorized officer as of the day and year first above written.
NETWORK SIX, INC.
By: _________________________________
Title:_______________________________
5
<PAGE>
SECURITY AGREEMENT
THIS AGREEMENT made as of the 21st day of September, 1998, by and between
NETWORK SIX, INC., a Rhode Island corporation (the "Debtor") and BUSINESS
DEVELOPMENT COMPANY OF RHODE ISLAND, a Rhode Island corporation (the "Secured
Party").
WITNESSETH THAT:
WHEREAS, the Debtor and the Secured Party are parties to a certain Term
Loan Agreement (the "Loan Agreement") of even date; and
WHEREAS, pursuant to the Loan Agreement, the Secured Party has agreed to
lend to the Debtor the principal amount of $250,000 which is to be repaid with
interest in accordance with the terms of a certain Term Promissory Note of even
date in the face amount of $250,000 (the "Note"); and
WHEREAS, the Debtor has agreed to enter into this Security Agreement in
order to induce the Secured Party, inter alia, to enter into the Loan Agreement
and to make the loan(s) to be evidenced by the Note;
NOW, THEREFORE, for good and valuable consideration, the receipt whereof
is hereby acknowledged, the parties hereto agree as follows:
<PAGE>
Section 1. The Security Interests.
(A) In order (i) to secure the due and punctual payment of the Note, (ii)
to secure the performance of all the obligations of the Debtor contained herein,
and in the Loan Agreement, and (iii) to secure the payment of all other future
advances to the Debtor by the Secured Party and all other indebtedness,
liabilities and obligations of the Debtor to the Secured Party of every kind and
description, direct, indirect or contingent, now or hereafter existing, due or
to become due (all of the foregoing hereinafter called the "Obligations"), the
Debtor hereby grants to the Secured Party a continuing security interest in the
following described fixtures and personal property (hereinafter collectively
called the "Collateral"):
All fixtures and all tangible and intangible personal property
of the Debtor, whether now owned or hereafter acquired by the Debtor, or
in which the Debtor may now have or hereafter acquire an interest,
including without limitation, (a) all equipment (including all machinery,
tools and furniture), inventory (including all merchandise, raw materials,
work in process, finished goods and supplies), and goods, whether now
owned or hereafter acquired by the Debtor, or in which the Debtor may now
have or hereafter acquire an interest (the "Tangible Collateral"); (b) all
accounts, accounts receivable, other receivables, contract rights, chattel
paper, and general intangibles of the Debtor (including, without
limitation, goodwill, patents, trademarks, tradenames, blueprints,
designs, product lines and research and development), whether now owned or
hereafter acquired by the Debtor, or in which the Debtor may now have or
hereafter acquire an interest; (c) all instruments, documents of title,
policies and certificates of insurance, securities, bank deposits, deposit
accounts, checking accounts and cash now or hereafter owned by the Debtor,
or in which the Debtor may now have or hereafter acquire an interest; (d)
all accessions, additions or improvements to, all replacements,
substitutions and parts for, and all proceeds and products
2
<PAGE>
of, all of the foregoing; and (e) all books, records and documents
relating to all of the foregoing.
(B) All Collateral consisting of accounts, contract rights, chattel paper
and general intangibles of the Debtor arising from the sale, delivery or
provision of goods and/or services are sometimes hereinafter collectively called
the "Customer Receivables".
(C) The security interests granted pursuant to this Section 1 (the
"Security Interests") are granted as security only and shall not subject the
Secured Party to, or transfer or in any way affect or modify, any obligation or
liability of the Debtor under any of the Collateral or any transaction which
gave rise thereto.
Section 2. Chattel Paper.
Subject to the rights of senior lien holders as defined in Section 5.02 of
and in Exhibit C to the Loan Agreement, and upon the occurrence of an Event of
Default hereunder, the Secured Party may at any time or from time to time, at
its sole discretion, require the Debtor to cause any chattel paper included in
the Customer Receivables to be delivered to the Secured Party or any agent or
representative designated by it, or to cause a legend referring to the Security
Interests to be placed on such chattel paper and upon any ledgers or other
records concerning the Customer Receivables.
3
<PAGE>
Section 3. Filing; Further Assurances.
The Debtor will, at its expense, execute, deliver, file and record (in
such manner and form as the Secured Party may require), or permit the Secured
Party to file and record, any financing statements, any carbon, photographic or
other reproduction of a financing statement or this Security Agreement (which
shall be sufficient as a financing statement hereunder), any specific
assignments or other paper that may be reasonably necessary or desirable, or
that the Secured Party may request, in order to create, preserve, perfect or
validate any Security Interest or to enable the Secured Party to exercise and
enforce its rights hereunder with respect to any of the Collateral. The Debtor
hereby appoints Secured Party as Debtor's attorney-in-fact to execute in the
name and behalf of Debtor such additional financing statements as Secured Party
may reasonably request in order to create, preserve, perfect or validate any
Security Interest.
Section 4. Representations and Warranties of Debtor.
The Debtor hereby represents and warrants as follows:
(A) That except as permitted by the Loan Agreement, the Debtor is,
or to the extent that certain of the Collateral is to be acquired after the date
hereof, will be, the owner of the Collateral free from any adverse lien,
security interest or encumbrance.
4
<PAGE>
(B) That except for such financing statements as may be described on
Exhibit A attached hereto and made a part hereof, no financing statement
covering the Collateral is on file in any public office, other than the
financing statements filed pursuant to this Security Agreement.
(C) That all additional information, representations and warranties
contained in Exhibit B attached hereto and made a part hereof are true, accurate
and complete on the date hereof.
Section 5. Covenants of Debtor.
The Debtor hereby covenants and agrees as follows:
(A) That the Debtor will defend the Collateral against all claims
and demands of all persons at any time claiming any interest therein, excepting
only the legitimate claims of senior lien holders.
(B) That the Debtor will provide the Secured Party with prompt
written notice of (i) any change in the executive office of the Debtor or the
office where the Debtor maintains its books and records pertaining to the
Customer Receivables, and (ii) the movement or location of Collateral to or at
any address other than as set forth in said Exhibit B or in the ordinary course
of business to any other office or work site of the Borrower.
(C) That the Debtor will promptly pay any and all taxes, assessments
and governmental charges upon the Collateral prior to the date penalties are
attached thereto, except to the
5
<PAGE>
extent that such taxes, assessments and charges shall be contested in good faith
by the Debtor.
(D) That the Debtor will immediately notify the Secured Party of any
event causing a substantial loss or diminution in the value of all or any
material part of the Collateral and the amount or an estimate of the amount of
such loss or diminution.
(E) That the Debtor will have and maintain insurance at all times
with respect to the Tangible Collateral as set forth in the Loan Agreement.
(F) That Debtor will not sell or offer to sell or otherwise assign,
transfer or dispose of the Collateral or any interest therein, without the
written consent of the Secured Party, except in the ordinary course of its
business.
(G) That, except for liens permitted by the Loan Agreement, the
Debtor will keep the Collateral free from any adverse lien, security interest or
encumbrance and in good order and repair, reasonable wear and tear excepted, and
will not waste or destroy the Collateral or any part thereof.
(H) Debtor will not use the Collateral in violation of any statute
or ordinance.
Section 6. Records Relating to Collateral.
The Debtor will keep its records concerning the Collateral, including the
Customer Receivables and all chattel paper included in the Customer Receivables,
at its office at 475 Kilvert Street,
6
<PAGE>
Warwick, Rhode Island, or at such other place or places of business as the
Secured Party may approve in writing. The Debtor will hold and preserve such
records and chattel paper and will permit representatives of the Secured Party
at any time during normal business hours upon reasonable notice to examine and
inspect the Collateral and to make abstracts from such records and chattel
paper, and will furnish to the Secured Party such information and reports
regarding the Collateral as the Secured Party may from time to time reasonably
request.
Section 7. Collections with Respect to Customer Receivables
Subject to the rights of senior lien holders, the Debtor will, at its
expense, and subject at all times to the Secured Party's right following the
occurrence and during the continuation of an Event of Default to give directions
and instructions:
(i) endeavor to collect or cause to be collected from customers
indebted on Customer Receivables, as and when due, any and all amounts,
including interest, owing under or on account of each Customer Receivable;
and
(ii) take or cause to be taken such appropriate action to repossess
goods, the sale or rental of which gave rise to any Customer Receivable,
or to enforce any rights or liens under Customer Receivables, as the
Debtor or the Secured Party may deem proper, and in the name of the
Debtor, or the Secured Party, as the Secured Party may deem proper;
7
<PAGE>
provided that (x) the Debtor will use its best judgment to protect the interests
of the Secured Party and (y) the Debtor shall not be required under this Section
7 to take any action which would be contrary to any applicable law or court
order or inconsistent with the requirements of any senior lien holder. Subject
to the rights of senior lien holders, the Debtor shall, at the request of the
Secured Party following the occurrence of an Event of Default, notify the
account debtors of the Security Interests of the Secured Party in any of the
Customer Receivables and the Secured Party may itself at any such time so notify
account debtors. The Secured Party shall have full power at any time after such
notice to collect, compromise, endorse, sell or otherwise deal with any or all
outstanding Customer Receivables or the proceeds thereof in the name of either
the Secured Party or the Debtor. In the event that, after notice to any account
debtors to pay the Secured Party, Debtor receives any payment on a Customer
Receivable, any such payments shall be held by Debtor in trust for Secured Party
and immediately turned over to Secured Party as aforesaid.
Section 8. General Authority.
The Debtor hereby irrevocably appoints the Secured Party the Debtor's true
and lawful attorney, with full power of substitution, in the name of the Debtor,
the Secured Party or otherwise, for the sole use and benefit of the Secured
Party,
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<PAGE>
but at the Debtor's expense, to the extent permitted by law to exercise, at any
time and from time to time after any Event of Default has occurred and is
continuing, all or any of the following powers with respect to all or any of the
Collateral (which power shall be in addition and supplemental to any powers,
rights and remedies of the Secured Party described herein):
(i) to demand, sue for, collect, receive and give acquittance for
any and all monies due or to become due upon or by virtue thereof,
(ii) to receive, take, endorse, assign and deliver any and all
checks, notes, drafts, documents and other negotiable and non-negotiable
instruments and chattel paper taken or received by the Secured Party in
connection therewith,
(iii) to settle, compromise, compound, prosecute or defend any
action or proceeding with respect thereto,
(iv) to sell, transfer, assign or otherwise deal in or with the same
or the proceeds or avails thereof or the related goods securing the
Customer Receivables, as fully and effectually as if the Secured Party
were the absolute owner thereof,
(v) to extend the time of payment of any or all thereof and to make
any allowance and other adjustments with reference thereto, and
9
<PAGE>
(vi) to discharge any taxes, liens, security interests or other
encumbrances at any time placed thereon;
provided that the Secured Party shall give the Debtor not less then ten (10)
days' prior written notice of the time and place of any sale or other intended
disposition of any of the Collateral, except any Collateral which is perishable
or threatens to decline speedily in value or is of the type customarily sold on
a recognized market. The Secured Party and the Debtor agree that such notice
constitutes "reasonable notification" within the meaning of Section 9-504(3) of
the Uniform Commercial Code.
Section 9. Events of Default.
The Debtor shall be in default under this Security Agreement upon the
occurrence of any one of the following events (herein referred to as an "Event
of Default"):
(a) default by the Debtor in the due observance or performance of
any covenant or agreement contained herein or breach by the Debtor of any
representation or warranty herein contained and such non-observance or
non-performance shall have continued for more than twenty (20) days after
written notice thereof by the Secured Party to the Debtor;
(b) any default in the payment when due, after any applicable grace
period of the principal of, or interest on, any Obligations; or
(c) the occurrence of any event of default, after any applicable
grace period, under the provisions of the Loan
10
<PAGE>
Agreement or any agreements now or hereafter securing the Note.
Section 10. Remedies Upon Event of Default
If any Event of Default shall have occurred, the Secured Party may
exercise all the rights and remedies of a Secured Party under the Uniform
Commercial Code (whether or not the Uniform Commercial Code is in effect in the
jurisdiction where such rights and remedies are exercised) and, in addition, the
Secured Party may, without being required to give any notice, except as herein
provided or as may be required by mandatory provisions of law, (i) apply the
cash, if any, then held by it as Collateral in the manner specified in Section
12, and (ii) if there shall be no such cash or if such cash shall be
insufficient to pay all the Obligations in full, sell the Collateral, or any
part thereof, at public or private sale or at any broker's board or on any
securities exchange, for cash, upon credit or for future delivery, and at such
price or prices as the Secured Party may reasonably deem satisfactory. The
Secured Party may require the Debtor to assemble all or any part of the
Collateral and make it available to the Secured Party at a place to be
designated by the Secured Party which is reasonably convenient. Any holder of an
Obligation may be the purchaser of any or all of the Collateral so sold at any
public sale (or, if the Collateral is of a type customarily sold in a recognized
market or is of a type which is
11
<PAGE>
the subject of widely distributed standard price quotations, at any private
sale) and thereafter hold the same, absolutely, free from any right or claim of
whatsoever kind. Upon any such sale the Secured Party shall have the right to
deliver, assign and transfer to the purchaser thereof the Collateral so sold.
Each purchaser at any such sale shall hold the Collateral so sold absolutely,
free from any claim or right of whatsoever kind, including any equity or right
of redemption of the Debtor. Debtor to the extent permitted by law hereby
specifically waives all rights of redemption, stay or appraisal which it has or
may have under any rule of law or statute now existing or hereafter adopted. At
any such sale the Collateral may be sold in one lot as an entirety or in
separate parcels, as the Secured Party may determine. The Secured Party shall
not be obligated to make such sale pursuant to any such notice. The Secured
Party may, without notice or publication, adjourn any public or private sale or
cause the same to be adjourned from time to time by announcement at the time and
place fixed for the sale, and such sale may be made at any time or place to
which the same may be adjourned. In case of any sale of all or any part of the
Collateral on credit or for future delivery, the Collateral so sold may be
retained by the Secured Party until the selling price is paid by the purchaser
thereof, but the Secured Party shall not incur any liability in case of the
failure of such purchaser to take up and pay for the Collateral so sold and, in
case of any such failure, such Collateral may again be sold upon like notice.
The Secured
12
<PAGE>
Party, instead of exercising the power of sale herein conferred upon it, may
proceed by a suit or suits at law or in equity to foreclose the Security
Interests and sell the Collateral, or any portion thereof, under a judgment or
decree of a court or courts of competent jurisdiction.
Section 11. Right of Secured Party to Use and Operate Tangible
Collateral, Etc.
Upon the occurrence and during the continuation of an Event of Default, to
the extent permitted by law, the Secured Party shall have the right and power to
take possession of all or any part of the Tangible Collateral, and to exclude
the Debtor and all persons claiming under the Debtor wholly or partly therefrom,
and thereafter to hold, store, and/or use, operate, manage and control the same.
Upon any such taking of possession, the Secured Party may, from time to time, at
the expense of the Debtor, make all such repairs, replacements, alterations,
additions and improvements to and of the Tangible Collateral as the Secured
Party may deem proper. In such case, the Secured Party shall have the right to
manage and control the Tangible Collateral and to carry on the business and to
exercise all rights and powers of the Debtor in respect thereto as the Secured
Party shall deem best, including the right to enter into any and all such
agreements with respect to the leasing and/or operation of the Tangible
Collateral or any part thereof as the Secured Party may see fit; and the Secured
Party shall be entitled to collect and receive all rents, issues, profits, fees,
revenues
13
<PAGE>
and other income of the same and every part thereof. Such rents, issues,
profits, fees, revenues and other income shall be applied to pay the expenses of
holding and operating the Tangible Collateral and of conducting the business
thereof, and of all maintenance, repairs, replacements, alterations, additions
and improvements, and to make all payments which the Secured Party may be
required or may elect to make, if any, for taxes, assessments, insurance and
other charges upon the Tangible Collateral or any part thereof, and all other
payments which the Secured Party may be required or authorized to make under any
provision of this Security Agreement (including reasonable legal costs and
attorney's fees). The remainder of such rents, issues, profits, fees, revenues
and other income shall be applied to the payment of the Obligations in such
order or priority as the Secured Party shall determine (subject to the
provisions of Section 12 hereof) and, unless otherwise provided by law or by a
court of competent jurisdiction, any surplus shall be paid over to the Debtor.
Section 12. Application of Collateral and Proceeds.
The proceeds of any sale of, or other realization upon, all or any part of
the Collateral shall be applied in the following order of priorities:
(a) first, to pay the expenses of such sale or other realization,
including reasonable commission to the Secured Party's agent, and any
other unreimbursed expenses for which
14
<PAGE>
the Secured Party is to be reimbursed pursuant to Section 13 as the
Secured Party in its sole discretion reasonably exercised shall determine;
(b) second, to the payment of the Obligations in such other manner
as the Secured Party, in its sole discretion, shall determine; and
(c) finally, to pay to the Debtor, or its successors or assigns, or
to a court of competent jurisdiction, or as directed by a court of
competent jurisdiction, and surplus then remaining from such proceeds.
Section 13. Expenses: Secured Party's Lien.
The Debtor will forthwith upon demand pay to the Secured Party:
(i) the amount of any taxes which the Secured Party may have been
required to pay by reason of the Security Interests (including any
applicable transfer taxes) or to free any of the Collateral from any lien
thereon, excepting senior liens and liens set forth on Exhibit C to the
Loan Agreement, and
(ii) the amount of any and all reasonable out-of-pocket expenses,
including the reasonable fees and disbursements of its counsel and of any
agents not regularly in its employ, which the Secured Party reasonably may
incur in connection with (w) the preparation and administration of this
Security Agreement, (x) the collection, sale or other
15
<PAGE>
disposition of any of the Collateral, (y) the exercise by the Secured
Party of any of the powers conferred upon it hereunder, or (z) any default
on the Debtor's part hereunder.
Section 14. Termination of Security Interests; Release of Collateral.
Upon the repayment and performance in full of all the Obligations, the
Security Interests shall terminate and all rights to the Collateral shall revert
to the Debtor. Upon any such termination of the Security Interests or release of
Collateral, the Secured Party will, at the Debtor's expense to the extent
permitted by law, execute and deliver to the Debtor such documents as the Debtor
shall reasonably request to evidence the termination of the Security Interests
or the release of such Collateral, as the same may be.
Section 15. Notices
All notices, communications and distributions hereunder shall be given or
made to the parties as set forth in the Loan Agreement.
Section 16. Waivers, Non-Exclusive Remedies.
No failure on the part of the Secured Party to exercise, and no delay in
exercising, and no course of dealing with respect to, any right, power or remedy
under this Security Agreement shall operate as a waiver thereof; nor shall any
single or partial
16
<PAGE>
exercise by the Secured Party of any right, power or remedy under this Security
Agreement preclude any other right, power or remedy. The remedies in this
Security Agreement are cumulative and are not exclusive of any other remedies
provided by law. The Debtor and the Secured Party each also waives trial by jury
in any action brought on or with respect to this Security Agreement.
Section 17. Changes in Writing.
Neither this Security Agreement nor any provision hereof may be changed,
waived, discharged or terminated orally but only by a statement in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
Section 18. Rhode Island Law; Meaning of Terms.
This Security Agreement shall be construed in accordance with and governed
by the laws of the State of Rhode Island, except as otherwise required by
mandatory provisions of law and except to the extent that remedies provided by
the laws of any State other than Rhode Island are governed by the laws of said
State. Unless otherwise defined herein, or unless the context otherwise
requires, all terms used herein which are defined in the Rhode Island Uniform
Commercial Code have the meanings therein stated.
17
<PAGE>
Section 19. Separability.
If any provision hereof is invalid or unenforceable in any jurisdiction,
the other provisions hereof shall remain in full force and effect in such
jurisdiction and shall be liberally construed in favor of the Secured Party.
Section 20. Headings.
The headings in this Security Agreement are for the purposes of reference
only and shall not limit or otherwise affect the meaning hereof.
IN WITNESS WHEREOF, this Security Agreement has been executed by the
parties hereto all as of the day and year first above written.
NETWORK SIX, INC.
("Debtor")
By: /s/ Dorothy M. Cipolla
--------------------------------
Title: Treasurer
-----------------------------
BUSINESS DEVELOPMENT COMPANY OF
RHODE ISLAND
("Secured Party")
By: /s/ Gurrett B. Hunter
--------------------------------
Title: President
-----------------------------
18
<PAGE>
Exhibit "A"
to
UNIFORM COMMERCIAL CODE - FINANCING STATEMENT - FORM UCC-1
Debtor Corporate Address: 475 Kilvert Street, Warwick, RI 02888
Property Location: As described below
Description of Property Covered:
ITEM QTY SERIAL NO. DESCRIPTION
- ---- --- ---------- -------------------------------------------------------
VENDOR: Unisys
EQUIPMENT LOCATION: Oahu ICSD, 1151 Punch Bowl Street, Kalanimoku,
Honolulu, HI 96813
1. (01) CISCO Pre-FSP4-V.35 4-Port Interface
2. (01) CISCO CX-TRIP2 2-Port Token Ring
3. (01) CISCO 7010 Chassis and Power
4. (01) CISCO Pre-FSIP8-V.35 Interface
EQUIPMENT LOCATION: Child Support Enforcement Agency, State of Hawaii,
Dole Building, 680 Iwilei Road Suite 490,
Honolulu, HI 96817
1. (01) Sun Sparc Station W/64MB Mem
Including all attachments and accessories thereto, and all proceeds thereof,
including proceeds in the form of goods, [ILLEGIBLE] chattel paper, documents,
instruments, contract rights and general intangibles.
Debtor: NETWORK SIX, INC. Secured Party: CELTIC LEASING CORP.
------------------------ --------------------------
Signature: /s/ Bryan Gleason Signature: /s/ Bruce W. Atkinson
--------------------- ------------------------------
Name: Bryan Gleason Name: Bruce W. Atkinson
-------------------------- -----------------------------------
Title: Chief Financial Officer Title: Assistant Vice President - Credit
------------------------- ----------------------------------
<PAGE>
EXHIBIT "A"
COLLATERAL DESCRIPTION
In the account, contract rights, rights to payment, intangibles, and cash and
non-cash proceeds including but not limited to instruments, documents, chattel
paper, warrants and any other indicia of payment in respect to the Debtor's
contract dated on or about April 1, 1997 with the State of Maine and identified
as the "Maine Automated Child Welfare Information System Contract For Special
Services" or "MACWIS."
<PAGE>
EXHIBIT-23.1
[LETTERHEAD OF SANSIVERI, KIMBALL & MCNAMEE, L.L.P.]
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 February 19, 1999
relating to the balance sheet of Network Six, Inc. as of December 31, 1998 and
1997 and the related statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1998 and 1997 which report appears in the
December 31, 1998 annual report on Form 10-K of Network Six, Inc.
/s/ Sansiveri, Kimball & McNamee, L.L.P.
Providence, Rhode Island
February 19, 1999
<PAGE>
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 statements of operations, stockholders' equity and cash flows of
Network Six, Inc. for the year ended December 31, 1996, which report appears in
the December 31, 1998 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 financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ KPMG LLP
Providence, Rhode Island
March 16, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 1,442,035 1,442,035
<SECURITIES> 0 0
<RECEIVABLES> 2,035,963 2,035,963
<ALLOWANCES> 69,175 69,175
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,741,509 4,741,509
<PP&E> 774,250 774,250
<DEPRECIATION> 602,033 602,033
<TOTAL-ASSETS> 8,700,782 8,700,782
<CURRENT-LIABILITIES> 3,325,309 3,325,309
<BONDS> 0 0
73,429 73,429
0 0
<COMMON> 2,235,674 2,235,674
<OTHER-SE> 1,499,780 1,499,780
<TOTAL-LIABILITY-AND-EQUITY> 8,700,782 8,700,782
<SALES> 10,399,979 2,262,063
<TOTAL-REVENUES> 10,399,979 2,262,063
<CGS> 6,418,678 1,278,106
<TOTAL-COSTS> 8,679,096 1,800,943
<OTHER-EXPENSES> (78,437) (15,060)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 125,314 71,025
<INCOME-PRETAX> 1,674,006 405,155
<INCOME-TAX> 613,000 92,548
<INCOME-CONTINUING> 1,061,006 312,607
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,061,006 312,607
<EPS-PRIMARY> 0.96 0.3
<EPS-DILUTED> 0.96 0.3
</TABLE>
