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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, 1999
Commission File Number 0-21038
NETWORK SIX, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
RHODE ISLAND 05-0366090
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
475 KILVERT STREET 02886
WARWICK, RHODE ISLAND (Zip Code)
(Address of principal executive offices)
</TABLE>
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. / /
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of February 28, 2000 (computed by reference
to the closing price of such stock on The NASDAQ SmallCap Market) was
$2,786,294.
As of February 28, 2000, there were 796,084 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
DOCUMENT WHERE INCORPORATED
-------- ------------------
<S> <C>
Portions of the registrant's definitive Proxy
Statement regarding the 2000 Annual
Meeting of Stockholders Part III
</TABLE>
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<PAGE>
NETWORK SIX, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C> <C>
PART I
1 Business.................................................... 3
2 Properties.................................................. 10
3 Legal Proceedings........................................... 10
4 Submission of Matters to a Vote of Security Holders......... 12
PART II
Market for Registrant's Common Equity and Related
5 Stockholder Matters....................................... 12
6 Selected Financial Data..................................... 12
Management's Discussion and Analysis of Financial Condition
7 and Results of Operation.................................. 14
8 Financial Statements and Supplementary Data................. 19
Changes in and Disagreements With Accountants on Accounting
9 and Financial Disclosure.................................. 19
PART III
10 Directors and Executive Officers of the Registrant.......... 19
11 Executive Compensation...................................... 19
Security Ownership of Certain Beneficial Owners and
12 Management................................................ 20
13 Certain Relationships and Related Transactions.............. 20
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
14 8-K....................................................... 20
Signatures.................................................. 23
</TABLE>
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PART I
ITEM 1. BUSINESS.
GENERAL
Network Six, Inc. (the "Company") is a provider of information technology
solutions that enable its customers to operate more efficiently and effectively.
The Company's services include e-commerce planning and implementation,
technology consulting, applications development and support and network design
and implementation. Incorporated in 1976 under the name National E-F-T, Inc.,
the Company has historically focused on providing its services to state
governments, particularly health and human services agencies. Although the
Company has recently targeted additional markets (such as higher education,
health care and network services), the Company derived a substantial portion of
its revenues in 1999 from contracts with state government health and human
service agencies.
The Company is expanding its operations into the e-commerce space in order
to better meet the needs of its customers. Unlike many other e-commerce
companies, the Company can offer "end-to-end" support and leverage its
significant mainframe, client/server and network services experience to this
rapidly growing and changing marketplace. The Company's government customers are
logical candidates for this new business to consumer ("B2C") model. Private
sector clients, moreover, are candidates for the business to business ("B2B")
model, which, many analysts believe, will account for the lion's share of
Internet commerce prospectively.
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.
THE INFORMATION TECHNOLOGY 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, but 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 (routers, servers, etc.). 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 HEALTH AND HUMAN SERVICES AGENCIES
State government health and 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 and must maintain extensive
records. At the same time, they are required to increase the capacity and
enhance the capabilities of their information systems as the federal government,
which in most cases provides a
3
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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 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 increased 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 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. The federal
Personal Responsibility and Work Opportunity Reconciliation Act of 1996
("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 under what is now known as TANF (Temporary Assistance to Needy Families),
previously referred to as FAMIS (Family Assistance Management Information
Systems). 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, 1999:
<TABLE>
<CAPTION>
PROJECTED END DATE
PROGRAM FFP% OF CURRENT FFP%
- ------- -------- ----------------------------
<S> <C> <C>
CSE 66-80% None*
TANF Varies** None**
Food Stamps 50% None
Medicaid 50% None
Medicaid/Managed Care 50-90% Varies by program component
Child Welfare 50%-75% None
Other Health and Human Services Systems Varies Varies by program component
</TABLE>
- ------------------------
* Declines to 66% except for certain welfare reform initiatives, which would
be eligible for 80% FFP.
** States receive block grants and are permitted to use federal funds within
their discretion.
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 agency's existing system; and (iv) the provision of support
services with respect to an existing
5
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system. The following table sets forth information as of December 31, 1999
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>
Idaho CSE Support services May 1995 Completed
Rhode Island TANF/CSE Support services July 1995 Completed
Rhode Island Dept. of Health Develop new system May 1996 Completed
Maine Child Welfare Support services April 1998 In process
Rhode Island TANF/CSE Support services July 1999 In process
</TABLE>
CONTRACT PROCESS. Because most health and 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 $10,000 and $100,000, 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 between technically
acceptable proposals.
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.
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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 provides information technology services to the higher education
market. In 1999, the Company developed a web-based application in support of a
"Performance Based Transcript" system for a local university. The underlying
technology consists of the Oracle Application Server enabling end user access
through a browser while leveraging the existing technical knowledge base of
client/server developers. The application allows instructors, students and
employers to review a student's qualifications from more than a traditional
transcript as part of the job preparation and interview process. Instructors are
able to record measurement of a student's applied skills, track special
certifications received, apply weight to individual skills within a specific
course, as well as, provide traditional grade information. Employers are able to
use the outcome to better assess the candidate's aptitude for a specific
position.
In addition to using web-based technology to connect university instructors,
students and potential employers to information applicable to the employment
process, the Company assumed a major role in an Enterprise Resource Planning
(ERP) implementation project for a local college. The project is a two-year
endeavor to modify and integrate base ERP software to accommodate student
services, financial services and financial aid. A web-based component will be
included within the student services module. The Company intends to leverage its
knowledge base within the Higher Education market to other management
consulting, web-based design and development, and ERP implementations.
HEALTH CARE
The health care sector is undergoing tremendous change and consolidation.
Over the last several years, the Company has worked in the area of pharmacy
benefits, assisting a local customer develop and enhance its information
systems. This work has drawn upon many of the skills the Company's technical
staff developed supporting other client/server and mainframe systems. In
addition, however, the Company has played an important role web-enabling the
applications to allow clients easy access to important data.
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The Company envisions doing additional work in the health care arena.
Pharmacy benefits is particularly attractive since it represents a growth area
as the population ages and requires more prescriptions.
NETWORK SERVICES
The Company's Network Services Division, formed in 1997, offers consulting
and implementation services in local and wide area networking, electronic
messaging and network security. It focused its 1999 efforts in the public
sector, including state agencies, municipalities, school systems and libraries.
The Company's network services work with state agencies continued under
agreements with the Rhode Island Department of Human Services (DHS), the Rhode
Island Department of Mental Health, Retardation and Hospitals (MHRH) and the
Rhode Island Office of Libraries and Information Services (OLIS) providing
network management and support services to these agencies through full time
technical resources.
The Company also provided service to various Rhode Island municipalities and
school systems this past year. These services included technology needs
assessments, network implementations and contractual support agreements. The
Towns of Westerly, Rhode Island and North Kingstown, Rhode Island saw
substantial network systems implemented by the Company this year. Microsoft's
Windows NT, Exchange E-mail and Windows 95 were major components of these
projects. In addition, Cisco networking products were deployed for
telecommunications needs at these sites.
The Company intends to continue to focus on current technologies as well as
wide area networking, network security and Internet/Intranet/e-Business
integration services. The Division will continue to focus our services on
network consulting, implementation and support, offering resources under various
contractual agreements.
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, Dynamics Research Corporation, American Management
Systems, Complete Business Solutions, Inc., Keane and Deloitte & Touche LLP.
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.
With respect to other State agencies, higher education, health care,
non-profits and the private sector, there are numerous companies that provide
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. At December 31, 1999, the
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Company had the following contracts to provide services which, if fully
performed, would result in the revenues shown:
<TABLE>
<CAPTION>
AMOUNT RECOGNIZED AS
CONTRACT CONTRACT REVENUES BACKLOG
CONTRACT TITLE AMOUNT(1) EARNED THRU 12/31/99 AS OF 12/31/99(2)
- -------------- ---------- -------------------- -----------------
<S> <C> <C> <C>
Massachusetts Highway Department................ $ 274,995 $ -- $ 274,995
Rhode Island Support............................ 5,252,670 2,788,569 2,464,101
Maine Child Welfare (MACWIS).................... 2,550,966 1,136,683 1,414,283
MIM Corporation................................. 164,900 36,465 128,435
Others.......................................... 130,608 111,575 19,033
---------- ---------- ----------
Totals.......................................... $8,374,139 $4,073,292 $4,300,847
========== ========== ==========
</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,
1999 will be realized by the end of 2000. There can be no assurance,
however, that the Company will ultimately realize all of these revenues from
such contracts. See Note 9 to Financial Statements regarding concentration
of revenue.
EMPLOYEES
The Company believes that its future success will depend in large part upon
its continued ability to hire and retain qualified technical and project
management personnel. There can be no assurance that the Company will be
successful in attracting and retaining sufficient numbers of qualified personnel
to conduct its business in the future.
As of December 31, 1999, the Company had approximately 103 employees. None
of the Company's employees is represented by a labor union. The Company believes
its relations with its employees are excellent.
9
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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, 2000. 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 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 (the "Court") 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 alleged that 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 sought 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 might deem just and proper.
The Company denied the State's allegation and, on January 23, 1997, filed a
counter claim against the State alleging that the State had breached the
contract. The Company sought $70 million in damages and alleged 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.
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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 seeking $517,503, which the Company had previously
accrued, plus interest costs and attorney's fees. The Company disputed the
$517,503 owed to CBSI and filed a counterclaim against CBSI on January 13, 1997,
alleging, among other things, that CBSI failed to complete its duties required
under the subcontract with the Company in a timely manner, improperly engaged in
negotiations with the State of Hawaii to complete the project, hired and
attempted to hire employees of the Company in violation of its subcontract
agreement with the Company and obtained and utilized confidential information
and proprietary intellectual property inappropriately. Also, the Company alleged
that CBSI owed the Company $482,750 as of December 31, 1996, for which the
Company did not establish 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 had been the State of Hawaii's contract supervisor and advisor since the
inception of the Hawaii project. The allegations the Company made against CBSI
in this TPC were 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 that MAXIMUS was 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 sought
$70 million in damages.
Due to the significant uncertainty created by these events, the Company
ceased recognition of revenue on the Hawaii contract in 1996. It recorded an
adjustment of $1.8 million in the fourth quarter of 1996 to reverse revenue of
$1 million, $400 thousand and $400 thousand recorded previously in the first,
second and third quarters, respectively. In addition, the Company expensed
$1.96 million of costs incurred related to the Hawaii contract in 1996.
On May 11, 1999, the Company reached a settlement agreement with both the
State and CBSI, which was approved by the Court on July 22, 1999. All claims of
the Company, the State and CBSI were dismissed, except the Company's claims
against MAXIMUS. Per the settlement, the Company agreed to pay the State
$1 million over four years as follows: June 1999--$250,000, June 2000--
$250,000, June 2001--$250,000, June 2002--$125,000 and June 2003--$125,000. The
first payment was reduced by a $50,000 credit for the settlement of a lease
obligation on computer equipment. The equipment lessor, who had filed suit
against the Company, accepted $50,000 from the Company in full payment of that
obligation. CBSI agreed to pay the Company $300,000 immediately, which the
Company has received. No party to these settlement agreements admitted any
wrongdoing.
To facilitate the settlement, Lockheed agreed to modify certain aspects of a
promissory note issued to it by the Company in 1997. Lockheed agreed to extend
the note's maturity several years, to reschedule favorably certain principal
payments and to reduce the interest rate on the remaining principal, which is
$642,000 as of December 31, 1999.
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On October 29, 1999, the Company and MAXIMUS entered into a settlement
agreement whereby the Company released MAXIMUS from all claims and potential
claims in relation to the Hawaii contract and vice versa in exchange for a
payment to the Company of $50,000, which the Company received in November 1999.
As of December 31, 1999, the Company was not involved in any material
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded 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>
1999
First Quarter............................................... $6.25 $3.25
Second Quarter.............................................. 6.50 3.38
Third Quarter............................................... 6.75 3.50
Fourth Quarter.............................................. 5.19 3.13
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
</TABLE>
As of December 31, 1999, there were 294 holders of record of the Common
Stock, representing approximately 378 beneficial owners. The last reported sale
price for the Common Stock, as reported on The NASDAQ SmallCap Market on
February 28, 2000, was $3.50 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
12
<PAGE>
incorporated by reference in this Form 10-K. The selected financial data for
each of the five years in the period ended December 31, 1999, are derived from
the Company's audited financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Contract revenue earned....... $10,225,676 $10,399,979 $11,460,437 $ 7,344,380 $20,985,012
Cost of revenue earned........ 6,178,286 6,418,678 8,620,097 7,359,649 19,299,944
----------- ----------- ----------- ----------- -----------
Gross profit (loss)........... 4,047,390 3,981,301 2,840,340 (15,269) 1,685,068
Selling, general and
administrative expense...... 2,920,352 2,260,418 2,071,294 2,240,073 4,369,260
Research & development
expense..................... -- -- -- -- 185,235
Restructuring expense......... -- -- -- (119,436) 537,221
Litigation settlement......... 3,126,665
Income (loss) from
operations.................. (1,999,627) 1,720,883 769,046 (2,135,906) (3,406,648)
Income (loss) before income
taxes....................... (2,064,615) 1,674,006 534,950 (2,533,368) (3,792,521)
Net income (loss)............. (1,221,615) 1,061,006 406,950 (1,758,345) (2,427,440)
Net income (loss) per share
Basic....................... (1.96) 0.96 0.25 (2.71) (3.68)
Diluted..................... (1.96) 0.96 0.25 (2.71) (3.68)
Shares used in computing net
income (loss) per share
Basic....................... 787,638 758,547 729,927 719,317 709,841
Diluted..................... 787,638 758,547 729,927 719,317 709,841
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $2,853,369 $1,416,200 $ 22,117 $(1,073,671) $(2,075,339)
Hawaii contract receivables*..... -- 3,459,382 3,459,382 3,571,824 5,711,022
Total assets..................... 6,160,188 8,700,782 9,292,103 8,273,564 14,945,273
Long-term obligations............ 1,317,875 1,566,590 1,422,725 235,479 254,393
Total stockholders' equity....... 2,330,945 3,808,883 2,955,420 2,748,777 4,644,494
</TABLE>
* See Notes 10 and 11 in the notes to the financial statements.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following analysis of the financial conditions and results of operations
of the Company should be read in conjunction with the Company's Financial
Statements and Notes thereto included elsewhere in or incorporated by reference
in this Form 10-K.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements reflecting the Company's
expectations or beliefs concerning future events that could materially affect
Company performance in the future. All forward-looking statements are subject to
the risks and uncertainties inherent with predictions and forecasts. They are
necessarily speculative statements, and unforeseen factors, such as competitive
pressures, litigation, labor market changes, technology changes and regulatory
and state funding changes could cause results to differ materially from any that
may be expected. Actual results and events may therefore differ significantly
from those discussed in forward-looking statements. Moreover, forward-looking
statements are made in the context of information available as of the date
stated, and the Company undertakes no obligation to update or revise such
statements to reflect new circumstances or unanticipated events as they occur.
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 health and
human services agencies. Commencing in 1998, the Company began targeting its
marketing efforts at other state government agencies, as well as non-profit
organizations and the private commercial sector.
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 to enhance the State's InRHODES computer system. This
brought 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, formerly
Deputy Commissioner, Department of Children and Families, State of Florida,
joined the Company as Vice President of Governmental Services.
In April 1999, the Company announced that Peter C. Wallace, formerly an
executive with ITT World Directories, joined the Board of Directors. The Company
concurrently announced that Clifton C. Dutton, a Director of the Company since
1997, had resigned.
In June 1999, the Company announced that the State of Rhode Island,
Department of Administration, had awarded a contract to the Company valued at
approximately $5.25 million to support the State's InRHODES computer system,
used by the Department of Human Services and the Division of Taxation--Child
Support Enforcement. The State of Rhode Island has the option to renew the
contract for up to three additional years.
In July 1999, the Company announced that the State of Maine extended the
support contract for Maine's MACWIS child welfare system for another year
commencing July 1, 1999. The value of the contract, including enhancements to
the system, is approximately $2.6 million.
In November 1999, the Company announced a new one-year revolving line of
credit agreement with Fleet National Bank of Providence, RI. The $1 million
credit facility replaced the Company's
14
<PAGE>
existing credit facility with a New Jersey based finance company and includes
revolving loan financing and standby letters of credit.
In November 1999, the Company announced it had been tentatively selected by
the Director of Administration, State of Rhode Island, to maintain the Rhode
Island Children's Information System for the Department of Children, Youth and
Families (DCYF). The value of the one-year contract, which was subsequently
signed and began in February 1, 2000, is approximately $1.5 million. The State
has the option to extend the contract for up to two additional years at similar
levels of support and price.
In December 1999, the Company announced the appointment of James J. Ferry as
Vice President of Finance and Administration, Chief Financial Officer and
Treasurer. Mr. Ferry has over 20 years of financial management experience in
both the electronics and automotive industries.
In March 2000, the Company announced that three non-employee Directors of
the Board resigned. The three, Ralph Cote, Nicolas Supron and Peter Wallace, all
cited personal reasons as well as philosophical differences with the Company's
Chairman, President and CEO, Kenneth C. Kirsch. None of them expressed any
objection to any action of the Company or the Board.
In March 2000, the Company announced that Donna J. Guido, Vice President of
Information Systems for the Company, and Henry N. Huta, President/CEO of BIW
Tamaqua Cables were elected to the Board of Directors.
In March 2000, Edward J. Braks, Chief Financial Officer and Chair of the
Management Committee of Paul Arpin Van Lines was elected to the Board of
Directors.
YEAR 2000 DISCLOSURE
The "Year 2000 Issue" is the result of the use of two digits instead of four
to define the applicable year. The Company has completed its Year 2000 program
by testing and upgrading (when necessary) all software and hardware. At the time
of filing of this 10-K, the Company has not experienced, or anticipates
experiencing, any significant problems internally or externally to its
operations. Although the Company believes it has completed this upgrade program
successfully, there can be no assurance that this program will continue to be
successful in remediating the impact of the "Year 2000 Issue".
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,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Contract revenue earned................................ 100.0% 100.0% 100.0%
Cost of revenue earned................................. 60.4% 61.7% 75.2%
Gross profit........................................... 39.6% 38.3% 24.8%
Selling and administrative expenses.................... 28.6% 21.7% 18.1%
Income before income taxes............................. -20.2% 16.1% 4.7%
Net income (loss)...................................... -11.9% 10.2% 3.6%
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Contract revenue earned decreased $174,303, or 2%, from $10,399,979 in the
year ended December 31, 1998 to $10,225,676 in the year ended December 31, 1999.
This was primarily due to the completion of the installation of the Maine
Automated Child Welfare Information System ("MACWIS"), lower maintenance and
support services at MIM Corporation, and the completion of a contract with GTECH
Corporation. This decrease was offset by increased revenues from the
15
<PAGE>
installation of a web-based application and related work in support of a
"Performance Based Transcript" system for a local university.
Cost of revenue earned, consisting of direct employee labor, direct contract
expense and subcontracting expense, decreased $240,392, or 4%, from $6,418,678
in 1998 to $6,178,286 in 1999. 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 $66,089 from $3,981,301 in 1998 to $4,047,390 in
1999. Gross profit, as a percentage of revenue, was 38% for 1998 and 40% for
1999. This was primarily because of the Company's improved margins on the Maine
MACWIS support project compared to the initial Maine MACWIS development and
implementation project which included substantial subcontract labor.
Selling, general and administrative expenses increased $659,934, or 29%,
from $2,260,418 in 1998 to $2,920,352 in 1999 primarily due to an increase in
marketing and business development staff and related activities in an effort to
increase the revenue of the Company. On a percentage of contract revenue earned,
SG&A expenses increased from 22% in 1998 to 29% in 1999.
Interest expense increased $28,451, or 23%, from $125,314 in 1998 to
$153,765 in 1999 due to the imputed interest on the note payable to the State of
Hawaii. See Item 3--Legal Proceedings.
Income before income taxes decreased $3,738,621 from $1,674,006 in 1998 to a
loss of 2,064,615 in 1999 primarily due to settlement of the Company's Hawaii
related litigation. See Item 3--Legal Proceedings. The effect of the litigation
settlements consists of (1) the write-off of Hawaii related receivables, work in
process and liabilities of $2,607,708, (2) the present value of the $1,000,000
payment due to Hawaii of $868,957, (3) the receipt of a $300,000 payment from
CBSI and (4) a $50,000 payment from MAXIMUS is $3,126,665. See Item 3--Legal
Proceedings and Notes 10 and 11 in Notes to Financial Statements.
As a result of the foregoing, loss before income taxes was $2,064,615 in
1999, a decrease of $3,738,621 from income before taxes of $1,674,006 in 1998.
Net income decreased $2,282,621 in 1999 from $1,061,006 in 1998 to a net
loss of $1,221,615, primarily due to increased selling, general and
administrative expenses and the effect of settling the litigation with the State
of Hawaii and other parties.
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.
16
<PAGE>
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 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.
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 meet customer requirements.
The Company has historically not received its first contract progress
payments until approximately three to six months after contract award, which
itself was as much as 12 months after proposal preparation commences. The
Company was therefore required to fund substantial costs well before the receipt
of related income, including marketing and proposal costs and the cost of a
performance bond. 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 $1,584,094,
$1,066,014 and $1,854,052 in the years ended December 31, 1999, 1998, and 1997
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 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 BDC and SBLFC notes contain restrictive covenants, which require, among
other things, a minimum cash flow to debt service coverage ratio. As of
December 31, 1999, the Company was not in
17
<PAGE>
compliance with such covenant. The Company has obtained a waiver relating to
this default as it pertains to the 1999 financial statements.
On November 15, 1999, the Company entered into a revolving line of credit
with a commercial bank. This $1 million revolving line of credit is secured by
all of the assets of the Company. The Company can borrow up to 80% of certain
qualified accounts receivable at an interest rate of prime plus 1/4%. On
December 31, 1999, the revolving line of credit had an outstanding balance of
zero.
The Company believes that cash flow generated by operations will be
sufficient to fund continuing operations through the end of 2000. The Company
believes that inflation has not had a material impact on its results of
operations to date.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
There are no recently issued financial accounting standards that impact the
Company's financial statements.
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. The Company believes that it has successfully completed all
client year 2000 projects and as of the date of this filing is not aware of any
issues relating year 2000 projects undertaken by the Company on behalf of
clients.
18
<PAGE>
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 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-23 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
in the Company's 2000 Annual Meeting Proxy Statement ("2000 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 2000 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.
19
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company currently intends to include information required by Item 12 in
the Company's 2000 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 2000 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-22 of this
report:
Independent Auditors' Report of Sansiveri, Kimball & McNamee L.L.P.
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for the Years Ended December 31, 1999, 1998, and
1997
Statements of Stockholders' Equity for the Years Ended December 31, 1999,
1998, and 1997
Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and
1997
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.
20
<PAGE>
(3) LIST OF EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- ------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation of the Company, as amended
(incorporated by reference from the Company's Form 10, File
No. 0-21038)
3.2 Bylaws of the Company as amended (incorporated by reference
from the Company's Form 10, File No. 0-21038)
10.1 Stock Purchase Agreement dated October 29, 1992 between the
Company and Saugatuck Capital Company Limited Partnership
III (incorporated by reference from the Company Form 10,
exhibit 10.7, File No. 0-21038)
10.2 Registration Rights Agreement dated October 29, 1992 between
the Company and Saugatuck Capital Company Limited
Partnership III (incorporated by reference from the
Company's Form 10, exhibit 10.8, File No. 0-21038)
10.3 Incentive Stock Option Plan (incorporated by reference from
the Company's Form 10, exhibit 10.9, File No. 0-21038)
10.4 Deferred Compensation Agreement between the Company and Mr.
Robert E. Radican, as amended (incorporated by reference
from the Company's Form 10-K, exhibit 10.10, for the fiscal
year ended December 31, 1994)
10.5 1993 Employee Stock Purchase Plan (incorporated by reference
from the Company's Form 10-K, exhibit 10.12, for the fiscal
year ended December 31, 1994)
10.6 1993 Incentive Stock Option Plan (incorporated by reference
from the Company's Form 10-K, exhibit 10.18, for the fiscal
year ended December 31, 1993)
10.7 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)
10.8 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)
10.9 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 ending December 31, 1997)
10.10 Credit Agreement dated September 23, 1998 between the
Company and Small Business Loan Fund Corporation, a
subsidiary of the Rhode Island Economic Development
Corporation (incorporated by reference from the Company's
Form 10-K, exhibit 10.16, for the fiscal year ending
December 31, 1998)
10.11 Credit Agreement dated September 23, 1998 between the
Company and Business Development Corporation of Rhode Island
(incorporated by reference from the Company's Form 10-K,
exhibit 10.17, for the fiscal year ending December 31, 1998)
10.12 Employment Agreement between the Company and Mr. Kenneth C.
Kirsch dated January 1, 1999
10.13 Contract dated April 28, 1999 between then Company and
Complete Business Solutions, Inc. ("CBSI") dismissing all
outstanding claims between the Company and CBSI
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- ------------------------------------------------------------
<C> <S>
10.14 Contract dated May 1, 1999 between the Company and the State
of Hawaii dismissing all outstanding claims between the
Company and the State of Hawaii
10.15 Contract dated July 1, 1999 between the Company and the
State of Rhode Island Department of Human Services re:
support services
10.16 Loan Agreement dated November 15, 1999 between the Company
and Fleet National Bank
22.1 List of Subsidiaries (incorporated by reference from the
Company's Form 10, File No. 0-21038)
</TABLE>
(b) REPORTS ON FORM 8-K.
A current report on Form 8-K, dated December 2, 1999 was filed by the
Company and included a press release dated December 1, 1999 announcing the
appointment of James J. Ferry as Vice President of Finance and Administration,
Chief Financial Officer and Treasurer.
A current report on Form 8-K, dated November 30, 1999 was filed by the
Company and included the press release dated November 30, 1999 announcing a
tentative $1.5 million contract award to the Company by the State of Rhode
Island to maintain the Rhode Island Children's Information System (RICHST) for
the Department of Children, Youth and Families.
A current report on Form 8-K, dated November 23, 1999 was filed by the
Company and included a press release dated November 22, 1999 announcing a new
line of credit agreement with Fleet National Bank of Providence, Rhode Island.
The $1 million credit facility replaced the Company's credit facility with a New
Jersey based finance company.
A current report on Form 8-K, dated October 29, 1999 was filed by the
Company and included the press release dated October 29, 1999, announcing the
Company's results for the quarter ended September 30, 1999. A Statement of
Operations (without notes) for the quarters ended September 30, 1999 and, 1998
was included with the filing. A balance sheet as of September 30, 1999 and
December 31, 1998 was also included with the filing.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned on the 29th day of March 2000.
<TABLE>
<S> <C> <C>
NETWORK SIX, INC.
BY: /S/ KENNETH C. KIRSCH
-----------------------------------------
Kenneth C. Kirsch
President and Chief Executive Officer
</TABLE>
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
--------- ----- ----
<C> <S> <C>
Chairman of the Board,
/s/ KENNETH C. KIRSCH President, and Chief
------------------------------------------- Executive Officer (Principal March 29, 2000
Kenneth C. Kirsch Executive Officer)
Vice President of Finance and
Administration, Chief
/s/ JAMES J. FERRY Financial Officer, and
------------------------------------------- Treasurer (Principal March 29, 2000
James J. Ferry Financial and Accounting
Officer)
/s/ HENRY N. HUTA Director
------------------------------------------- March 29, 2000
Henry N. Huta
/s/ DONNA J. GUIDO Director
------------------------------------------- March 29, 2000
Donna J. Guido
/s/ EDWARD J. BRAKS Director
------------------------------------------- March 29, 2000
Edward J. Braks
</TABLE>
23
<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
Balance Sheets as of December 31, 1999 and 1998............. F-3-4
Statements of Operations for the Years Ended December 31,
1999, 1998, and 1997...................................... F-5
Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998, and 1997......................... F-6
Statements of Cash Flows for the Years Ended December 31,
1999, 1998, and 1997...................................... F-7-8
Notes to Financial Statements............................... F-9
</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, 1999 and 1998 and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1999, 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.
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, 1999 and 1998, and the results of its operations and its cash flows
for the years ended December 31, 1999, 1998 and 1997, in conformity with
generally accepted accounting principles.
Sansiveri, Kimball & McNamee, L.L.P.
/s/ Sansiveri, Kimball & McNamee, L.L.P.
Providence, Rhode Island
February 29, 2000
F-2
<PAGE>
NETWORK SIX, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $2,453,935 $1,442,035
Contract receivables, less allowance for doubtful accounts
of $49,000 in 1999 and $69,000 in 1998 (Note 2)......... 1,561,255 1,966,788
Costs and estimated earnings in excess of billings on
contracts (Note 3)...................................... 759,891 1,220,253
Refundable taxes on income (Note 6)....................... 150,640 --
Deferred taxes (Note 6)................................... 287,083 --
Other assets.............................................. 151,933 112,433
---------- ----------
Total current assets.................................... 5,364,737 4,741,509
---------- ----------
Property and equipment (Note 5):
Computers and equipment................................... 590,124 590,527
Furniture and fixtures.................................... 162,606 163,532
Leasehold improvements.................................... 20,191 20,191
---------- ----------
772,921 774,250
Less accumulated depreciation and amortization.............. 578,015 602,033
---------- ----------
Property and equipment, net............................. 194,906 172,217
Deferred taxes (Note 6)................................... 513,795 37,097
Contract receivables and costs in excess of billings on
Hawaii contract (Notes 3, 10 and 11).................... -- 3,459,382
Other assets.............................................. 86,750 290,577
---------- ----------
Total assets.............................................. $6,160,188 $8,700,782
========== ==========
</TABLE>
F-3
<PAGE>
NETWORK SIX, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installment of obligations under capital leases
(Note 5)................................................ $ 8,132 $ 89,483
Current portion of long-term debt (Note 4)
Vendors................................................. 100,000 200,000
Others.................................................. 349,141 91,997
Accounts payable.......................................... 202,195 58,456
Accrued salaries and benefits............................. 508,193 579,320
Accrued subcontractor expense............................. 12,843 24,950
Other accrued expenses.................................... 86,938 320,982
Billings in excess of costs and estimated earnings on
contracts (Note 3)...................................... 124,458 341,572
Income taxes payable (Note 6)............................. -- 780,066
Deferred taxes (Note 6)................................... -- 42,491
Preferred stock dividends payable (Note 7)................ 1,119,468 795,992
---------- ----------
Total current liabilities............................... 2,511,368 3,325,309
---------- ----------
Obligations under capital leases, excluding current
installments (Note 5)..................................... -- 38,090
Long-term debt, less current portion (Note 4)
Vendors................................................. 542,239 542,239
Others.................................................. 775,636 409,778
Hawaii Payable (Notes 10 and 11).......................... -- 576,483
---------- ----------
Total Liabilities....................................... 3,829,243 4,891,899
---------- ----------
Commitments (Notes 5, 8 and 10)
Other information (Note 9)
Stockholders' equity (Note 7):
Series A convertible preferred stock, $3.50 par value.
Authorized 857,142.85 shares; issued and outstanding
714,285.71 shares in 1999 and 1998; 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 794,306 shares in 1999 and
764,663 in 1998......................................... 79,430 76,466
Additional paid-in capital.................................. 1,888,652 1,796,284
Treasury stock, recorded at cost, 8,081 shares at December
31, 1999.................................................. (28,179) --
Retained earnings (accumulated deficit)..................... (1,844,632) (299,541)
---------- ----------
Total stockholders' equity.............................. 2,330,945 3,808,883
---------- ----------
Total Liabilities and Stockholders' Equity.............. $6,160,188 $8,700,782
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
NETWORK SIX, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Contract revenue earned (Note 9)...................... $10,225,676 $10,399,979 $11,460,437
Cost of revenue earned................................ 6,178,286 6,418,678 8,620,097
----------- ----------- -----------
Gross profit........................................ 4,047,390 3,981,301 2,840,340
Selling, general and administrative expenses.......... 2,920,352 2,260,418 2,071,294
Litigation settlement (Note 11)....................... 3,126,665 -- --
----------- ----------- -----------
Income (loss) from operations......................... (1,999,627) 1,720,883 769,046
Other deductions (income):
Interest expense.................................... 153,765 125,314 266,030
Interest earned..................................... (88,777) (78,437) (31,934)
----------- ----------- -----------
Income (loss) before income taxes..................... (2,064,615) 1,674,006 534,950
Income taxes (Note 6)................................. (843,000) 613,000 128,000
----------- ----------- -----------
Net income (loss)..................................... $(1,221,615) $ 1,061,006 $ 406,950
=========== =========== ===========
Net income (loss) per share:
Basic................................................. $ (1.96) $ 0.96 $ 0.25
=========== =========== ===========
Diluted............................................... $ (1.96) $ 0.96 $ 0.25
=========== =========== ===========
Shares used in computing net income (loss) per share:
Basic................................................. 787,638 758,547 729,927
=========== =========== ===========
Diluted............................................... 787,638 758,547 729,927
=========== =========== ===========
Preferred dividends declared.......................... $ 323,476 $ 335,925 $ 225,307
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
NETWORK SIX, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<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, 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 18,954
---------- ------- ---------- ----------- -------- ----------
Balance at December 31, 1997...................... 2,235,674 73,429 1,670,939 (1,024,622) -- 2,955,421
Net Income........................................ 1,061,006 1,061,006
Dividends declared on preferred stock
13.5%/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
Net Income (loss)................................. (1,221,615) (1,221,615)
Dividends declared on preferred stock
13.5%/share..................................... (323,476) (323,476)
Shares Issued in connection with exercise of
options 14,200 shares........................... 1,420 35,036 36,456
Purchase of 8,081 treasury shares................. (28,179) (28,179)
Sale of 15,443 shares of common stock............. 1,544 57,332 58,876
---------- ------- ---------- ----------- -------- ----------
Balance at December 31, 1999...................... $2,235,674 $79,430 $1,888,652 $(1,844,632) $(28,179) $2,330,945
========== ======= ========== =========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
NETWORK SIX, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss)...................................... ($1,221,615) $ 1,061,006 $ 406,950
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities:
Depreciation and amortization...................... 74,237 47,415 82,010
Litigation settlement, excluding cash received..... 3,476,665 -- --
Provision for doubtful accounts.................... 97,760 19,175 (47,856)
Loss on sale/disposal of fixed assets.............. 3,976 6,518 9,023
Provision (credit) for deferred taxes.............. (806,272) (149,000) 75,000
Accrued financing fee.............................. -- 20,000 --
Forgiveness of note payable to vendor.............. -- (50,036) --
Changes in operating assets and liabilities:
Contract receivables............................... 307,773 25,416 (434,765)
Cost and estimated earnings in excess of billings
on contracts..................................... 460,362 168,262 476,423
Income taxes receivable............................ (150,640) -- 516,046
Other current assets............................... (39,500) 131,824 (85,281)
Other noncurrent assets............................ 334,870 181,548 (261,785)
Long term amounts due from Hawaii.................. -- -- 112,442
Accounts payable................................... 143,739 (129,921) (1,543,955)
Accrued salaries and benefits...................... (71,127) 130,187 (21,634)
Accrued subcontractor exp.......................... (12,107) (1,327,443) 1,330,149
Other notes payable................................ -- -- 698,593
Hawaii payable..................................... -- -- 576,483
Other accrued expenses............................. (16,847) (21,483) (165,729)
Accrued restructuring............................. -- -- (5,383)
Billings in excess of costs and estimated earnings
on contracts..................................... (217,114) 185,818 123,983
Income taxes payable............................... (780,066) 766,728 13,338
----------- ----------- -----------
Net cash provided by operating activities........ $ 1,584,094 $ 1,066,014 $ 1,854,052
----------- ----------- -----------
</TABLE>
F-7
<PAGE>
NETWORK SIX, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from investing activities:
Capital expenditures................................. ($ 101,925) ($ 156,299) ($ 21,552)
Proceeds from the sale of assets..................... 1,023 -- 1,948
----------- ----------- -----------
Net cash used by investing activities............ (100,902) (156,299) (19,604)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations...... (61,447) (59,120) (54,745)
Net proceeds (payments) from note payable to bank.... -- (1,160,000) (640,000)
Proceeds from long-term debt......................... -- 500,000 --
Payments on long-term debt........................... (476,998) (132,060) --
Proceeds from issuance of common stock............... 95,332 91,576 18,593
Proceeds from sales (purchases) of treasury stock.... (28,179) -- 6,047
----------- ----------- -----------
Net cash provided (used) in financing activities... (471,292) (759,604) (670,105)
----------- ----------- -----------
Net increase in cash and cash equivalents............ 1,011,900 150,111 1,164,343
Cash and cash equivalents at beginning of year....... 1,442,035 1,291,924 127,581
----------- ----------- -----------
Cash and cash equivalents at end of year............. $ 2,453,935 $ 1,442,035 $ 1,291,924
=========== =========== ===========
Supplemental cash flow information:
Cash (received) paid during the year for:
Income taxes (net)............................... $ 893,977 ($ 4,788) ($ 467,781)
=========== =========== ===========
Interest (net)................................... $ 7,939 $ 89,030 $ 222,376
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Network Six, Inc. (the "Company"), 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
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.
F-9
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments with an original maturity of
approximately three months or less.
(D) OTHER ASSETS
Other assets consist of employee receivables, 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>
<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 equivalents
include stock options and warrants. For 1999, 1998 and 1997, 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.
F-10
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(H) COSTS OF MODIFYING SOFTWARE
The costs of modifying the Company's software for year 2000 compliance were
charged 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 as they are
incurred.
(J) FINANCIAL INSTRUMENTS
Financial Instruments consist of cash, certificates of deposit, contract
accounts receivable, leases receivable, accounts payable, lease obligations, and
notes payable. The carrying value of these financial instruments approximates
their fair value.
(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. Actual results could differ from those
estimates.
(2) CONTRACT RECEIVABLES
Contract receivables at December 31 consist of:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Time and materials and completed fixed price contracts...... $1,012,540 $ 816,338
Fixed price contracts in progress........................... 597,890 1,219,625
---------- ----------
1,610,430 2,035,963
Less allowance for doubtful accounts...................... 49,175 69,175
---------- ----------
$1,561,255 $1,966,788
========== ==========
</TABLE>
(3) COSTS AND ESTIMATED EARNINGS ON CONTRACTS
Costs and estimated earnings on contracts at December 31 consist of:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Beginning balance........................................... $ 878,681 $ 1,232,761
Costs incurred.............................................. 6,178,286 6,418,678
Estimated Earnings.......................................... 4,047,390 3,981,301
----------- -----------
11,104,357 11,632,740
Less billings............................................... 10,468,924 10,754,059
----------- -----------
$ 635,433 $ 878,681
=========== ===========
</TABLE>
F-11
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
Included in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
contracts................................................. $ 759,891 $1,220,253
Billings in excess of costs and estimated earnings on
contracts................................................. (124,458) (341,572)
--------- ----------
$ 635,433 $ 878,681
========= ==========
</TABLE>
Costs and estimated earnings on contracts at December 31, 1999 and 1998 are
expected to be billed and collected within one year.
(4) NOTES PAYABLE
(A) SECURED NOTES
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 non-current
assets on the accompanying balance sheet.
The BDC and SBLFC notes contain restrictive covenants, which require among
other things, a minimum cash flow to debt service coverage ratio. As of
December 31, 1999, the Company was not in compliance with such covenant. The
Company has obtained a waiver relating to this default as it pertains to the
1999 financial statements.
On November 15, 1999, the Company entered into a revolving line of credit
with a commercial bank. This $1 million revolving line of credit is secured by
all of the assets of the Company. The Company can borrow up to 80% of certain
qualified accounts receivable at an interest rate of prime plus 1/4%. On
December 31, 1999, the revolving line of credit had an outstanding balance of
zero.
(B) UNSECURED NOTES
On December 29, 1997, the Company restructured a $842,239 account payable
with Unisys to a four year unsecured note payable. After Unisys filed a claim
against the Company's Hawaii-related performance bond, the bonding company paid
Unisys, and then Lockheed Martin IMS Corporation ("Lockheed") reimbursed the
bonding company. Lockheed had guaranteed the Company's performance bond for the
Hawaii contract. The note is payable to Lockheed carries an initial interest
rate of five percent through 1998, and six percent from 1999 until December 29,
2004, with such interest to be paid monthly. Principal payments are to be made
annually as follows: December 1998--$100,000, December 1999--$100,000,
December 2000--$100,000, December 2001--$100,000, December 2002--$100,000,
December 2003--$150,000, December 2004--$192,239. The note has a discount
provision for early payment.
F-12
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
On May 11, 1999, the Company entered into a Settlement and Mutual Release
Agreement with the State of Hawaii to resolve the its long standing litigation.
The Company agreed to pay the State $1 million over four years as follows:
June 1999--$250,000, June 2000--$250,000, June 2001--$250,000,
June 2002--$125,000 and June 2003--$125,000. The first payment was reduced by a
$50,000 credit for the settlement of a lease obligation on computer equipment.
The equipment lessor, who had filed suit against the Company, accepted $50,000
from the Company in full payment of that obligation. As of December 31, 1999,
the remaining principal was $750,000.
Scheduled maturities of secured and unsecured long-term debt, including
annual deferred fee, as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ------------
<S> <C>
2000........................................................ $ 449,141
2001........................................................ 459,019
2002........................................................ 339,379
2003........................................................ 327,238
2004........................................................ 192,239
----------
$1,767,016
==========
</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, 1999, 1998 and 1997 was approximately
$216,000, $192,000, and $186,000, respectively. Rental obligations as of
December 31, 1999 for the remainder of the lease terms are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
2000 $8,235 $171,369
------ --------
Total lease payments............................ 8,235 $171,369
------ --------
Amount representing interest.................... 102
------
Net present value of payments................... 8,133
Less current portion............................ 8,133
------
Long term portion............................... --
======
</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 $402, $2,200 and $5,300, respectively for 1999, 1998 and 1997.
Over the life of these leases the Company will recognize approximately $107,000
of lease interest income. Approximately $5,100, $12,200 and $18,500 of lease
interest income was recognized in 1999, 1998 and 1997, respectively, and is
included in contract revenue in the statement of operations.
F-13
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
Future minimum lease payments to be received are as follows:
<TABLE>
<S> <C>
2000........................................................ $13,103
2001........................................................ 1,420
-------
14,523
Amount representing interest................................ 114
-------
Net present value of payments............................... 14,409
Less current portion........................................ 12,989
-------
Long term portion........................................... $ 1,420
=======
</TABLE>
(6) INCOME TAXES
The components of income tax expense (benefit) for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Current taxes:
Federal................................................... -- $ 599,000 $ 36,000
State..................................................... -- 163,000 17,000
--------- --------- ---------
Sub total................................................... -- 762,000 53,000
--------- --------- ---------
Deferred taxes:
Federal................................................... (666,000) (119,000) 53,000
State..................................................... (177,000) (30,000) 22,000
--------- --------- ---------
Sub total................................................... (843,000) (149,000) 75,000
--------- --------- ---------
Total....................................................... $(843,000) $ 613,000 $ 128,000
========= ========= =========
</TABLE>
F-14
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
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>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)................... $(701,969) $ 569,162 $ 181,883
Increase in income tax expense (benefit) resulting from
state and local taxes, net of federal income tax
benefit................................................... (115,618) 93,744 25,740
Change in beginning of the year balance of the valuation
allowance for deferred tax asset, allocated to income tax
expense................................................... -- (50,000) (84,000)
Other, net.................................................. (25,413) 94 4,377
--------- --------- ---------
Total income tax expense (benefit).......................... $(843,000) $ 613,000 $ 128,000
========= ========= =========
Effective tax rate (%)...................................... 41 37 24
========= ========= =========
</TABLE>
Deferred tax assets and liabilities at December 31 are comprised of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Deferred tax assets
Accounts receivable, principally due to
Allowance for doubtful accounts......................... $ 19,508 $ 27,396
Deferred compensation..................................... 43,089 61,592
Loss carryforward......................................... 429,497 --
Property and equipment depreciation....................... 1,043 13,017
Non-deductible loss on contract........................... -- 81,012
Hawaii settlement......................................... 247,580 --
Vacation expense.......................................... 54,765 58,295
Contingent liability...................................... -- 202,030
Stock bonus............................................... 20,146 31,580
Loan facility fee......................................... 7,933 9,901
-------- ---------
Total deferred tax assets............................... 823,561 484,823
Deferred tax liability
Retainage, due to deferral for tax reporting.............. 22,683 490,217
-------- ---------
Net deferred tax asset (liability)...................... $800,878 ($ 5,394)
======== =========
</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 Company believes their future taxable earnings
will be sufficient to support the recognition of deferred tax assets.
As of December 31, 1999, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $1,080,000. Such loss
carryforwards expire in 2019.
F-15
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(7) 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 the redemption option and increased the dividend rate to
the preferred stockholders beginning on October 1, 1997 as noted below. In
addition, the preferred shareholders have a right and option to require the
Company to buy back the preferred shares at a price of $5.60 per share upon a
greater than fifty percent change in the ownership of the Company's common
stock. Also, the Company has the right and option, anytime after October 30,
1997, to purchase no less than all of the preferred shares at the liquidation
value of $3.50 per share plus any accrued and unpaid dividends.
Each share of preferred stock may be converted at any time into common
stock, on a basis of four shares of preferred stock for one share of common
stock and the holders of preferred stock are entitled to one vote per four
shares on all matters on which stockholders are entitled to vote, including the
election of Directors. So long as there are at least 238,071 shares of preferred
stock outstanding, the holders thereof are entitled as a class to elect one
member of the Board of Directors. The affirmative vote of a majority of the
issued and outstanding shares of preferred stock is required: (i) for the
issuance of a class of equity securities with dividend rights superior to the
preferred stock; (ii) for the Company to engage in any transaction that would
materially impair the rights of the preferred stock; (iii) for the Company to
declare, pay or otherwise distribute any dividends except out of retained
earnings of the Company; (iv) to increase or decrease the size of the Company's
Board of Directors (v) or to issue Common Stock or rights to purchase common
stock to officers, employees, directors or consultants of the Company if the
total number of shares held by such persons would exceed 10% of the issued and
outstanding shares of Common Stock after giving effect to such issuance.
Until September 30, 1997, the holders of preferred stock are entitled to
receive dividends at the rate of 7.5% per share per annum payable quarterly in
arrears commencing on December 31, 1992. Effective October 1, 1997, the dividend
rate becomes the prime rate of interest as of the first business day following
the end of the quarter, plus five (5) percent. The Company is required to pay
such dividends before any dividends may be declared or paid for any of the
common stock. In the event the Company shall be in arrears in whole or in part
with respect to at least three quarterly dividend payments due to holders of
preferred stock, such holders voting as a class are entitled to elect two
members of the Board of Directors. Accrued and unpaid dividends as of
December 31, 1999 were $1,119,468, which equals $1.57 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, 1999 all of these warrants remain outstanding
and are exercisable until April 14, 2000.
F-16
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
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, 1999 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, 1999 all of these warrants remain outstanding and are exercisable
until September 20, 2003.
(C) STOCK OPTION PLANS
The Company's Board of Directors and stockholders adopted the Company's
Incentive Stock Option Plans (the "Stock Option Plans") on April 1, 1993 and
April 25, 1994, respectively. Options granted under the Stock Option Plans are
intended to qualify as incentive options under Section 422(a) of the Internal
Revenue Code of 1986, as amended. The Board of Directors administers the Stock
Option Plans. Subject to certain limitations, the Board of Directors has
authority to determine the exercise prices, vesting schedules and terms of the
options. The maximum term of any option outstanding is ten years.
The exercise price of options granted pursuant to the Stock Option Plans may
not be less than the fair market value of the Common Stock on the date of grant.
The exercise price of options granted to any participants who own stock
possessing more than 10% of the total combined voting power of all classes of
outstanding stock of the Company must be at least equal to 110% of the fair
market value of the Common Stock on the date of grant. Any options granted to
such participants must expire within ten years from the date of grant. Stock
options under the Stock Option Plans are not transferable, except by estate
succession.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting and Disclosure for Stock Based Compensation," which
provides for a fair value based methodology of accounting for all stock option
plans.
The Company applies APB Opinion 25 and related interpretations in accounting
for these plans. Since options were granted at fair market value at date of
grant, no compensation cost has been recognized. Had compensation cost been
determined pursuant to SFAS No. 123, the Company's net income (loss) and net
income (loss) per share would have been adjusted to the pro forma amounts
indicated in the table below. The effects on pro forma net income (loss)
obtained from applying SFAS No. 123 may not be representative of the effects on
reported net income (loss) for future years.
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C> <C>
Net income (loss):..................... As Reported $(1,221,615) $1,061,006
Pro Forma (1,299,742) 904,264
Net income (loss)
per share:............................. As Reported $ (1.96) $ 0.96
Pro Forma (2.06) 0.75
</TABLE>
F-17
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
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 1999 and 1998, respectively; no dividend yield;
expected volatility of 81.9% and 85.2%; risk-free interest rate of 5.1% and
4.9%; and expected lives of five years. The weighted-average fair market value
of options granted during 1999 and 1998 was $2.70 and $2.56, respectively.
A summary of the status of the Company's stock option plans as of
December 31, 1999, 1998 and 1997 and changes during the years on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------- WEIGHTED -------- WEIGHTED -------- WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............ 252,440 $2.66 136,225 $ 1.64 92,850 $1.71
Granted..................................... 53,000 3.93 131,410 3.65 71,600 1.58
Cancelled................................... -- -- -- -- -- --
Exercised................................... (14,200) 2.57 (6,275) 2.05 -- --
Forfeited................................... (75,955) 3.80 (8,920) 2.59 (28,225) 1.71
------- ------- --------
Outstanding at end of year.................. 215,285 2.57 252,440 2.66 136,225 1.64
======= ======= ========
Exercisable at year end..................... 113,379 2.04 80,750 1.88 46,392 1.82
======= ======= ========
</TABLE>
The following table summarizes information about the Company's stock
options, considered compensation under SFAS 123, outstanding at December 31,
1999:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------- -----------
NUMBER WEIGHTED AVG NUMBER
OUTSTANDING REMAINING EXERCISABLE
EXERCISE PRICE AT DEC 31, 1999 CONTRACTUAL LIFE AT DEC 31, 1999
- -------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
$1.125............................................. 18,750 7.1 12,500
1.500............................................. 29,700 6.9 29,700
1.750............................................. 34,450 7.3 22,967
2.000............................................. 21,125 6.9 21,125
3.000............................................. 39,510 8.4 12,337
3.125............................................. 18,750 8.1 6,250
3.188............................................. 2,500 9.9 --
3.250............................................. 6,000 9.9 --
3.750............................................. 5,000 9.4 5,000
3.813............................................. 4,000 9.0 1,000
4.125............................................. 33,000 9.3 --
4.250............................................. 2,500 9.2 2,500
------- -------
215,285 113,379
======= =======
</TABLE>
At December 31, 1999, 1998, and 1997, common shares reserved for issuance
under the Company's Incentive Stock Option plan was 275,000, 275,000 and
200,000, respectively. At December 31, 1999, 1998 and 1997, common shares
available under the Non-Employee Director Option Plan were 50,000, 50,000 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.
F-18
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(8) 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, 1999, 1998 and 1997.
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. Effective
January 1, 1999 the Company elected to match 50% of employee contributions, up
to 3% of each employee's annual total compensation. Company matching
contributions vest ratably over 5 years. The Company's matching contributions
totaled approximately $64,000 for the year ended December 31, 1999.
Pursuant to a consulting agreement and a deferred compensation agreement
with the former Chairman, the Company agreed to pay $48,000 per year for a fixed
number of consulting hours, and also fund $60,000 per year to a non-qualified
deferred compensation plan. The original term for the consulting agreement was
seven years and eight years for the deferred compensation agreement. Effective
September 1995, the consulting agreement was amended to eliminate the required
consulting payments of $48,000 per year. The payments to the deferred
compensation agreement will remain at $60,000 per year through the end of 2001.
Accordingly, in the third quarter of 1995, the Company was required to record a
liability and a related expense of approximately $245,000 for the present value
of the deferred compensation payments, which will be paid at $5,000 per month
through the end of 2001.
(9) CONCENTRATION OF REVENUE
During 1999, 1998 and 1997 the Company had the following sales from
customers whose individual sales exceeded 10% of the Company's total sales:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Rhode Island DHS......................... $5,617,033 $5,361,955 $4,222,923
Maine Dept of Human Services............. 2,111,323 2,651,893 5,721,103
MIM Corporation.......................... 798,926 1,188,327 --
---------- ---------- ----------
$8,527,282 $9,202,175 $9,944,026
========== ========== ==========
</TABLE>
(10) LITIGATION
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.
F-19
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
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 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 (the "Court") 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 alleged that 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 sought 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 might deem just and proper.
The Company denied 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 sought $70 million in damages and alleged 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 disputed the $517,503 owed
to CBSI and filed a counterclaim against CBSI on January 13, 1997, alleging,
among other things, that CBSI failed to complete its duties required under the
subcontract with the Company in a timely manner, improperly engaged in
negotiations with the State of
F-20
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
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 alleged that CBSI owed the Company $482,750
as of December 31, 1996, for which the Company did not establish 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 had been the State of Hawaii's contract supervisor and advisor since the
inception of the Hawaii project. The allegations the Company made against CBSI
in this TPC were 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 that MAXIMUS was 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 sought
$70 million in damages.
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 of 1996 to reverse revenue of
$1 million, $400 thousand and $400 thousand recorded previously in the first,
second and third quarters, respectively. In addition, the Company expensed
$1.96 million of costs incurred related to the Hawaii contract in 1996.
On May 11, 1999 the Company reached a settlement agreement with both the
State and CBSI, which was approved by the court on July 22, 1999. All claims of
the Company, the State and CBSI were dismissed, except the Company's claims
against MAXIMUS. Per the settlement, the Company agreed to pay the State
$1 million over four years as follows: June 1999--$250,000, June 2000--
$250,000, June 2001--$250,000, June 2002--$125,000 and June 2003--$125,000. The
first payment was reduced by a $50,000 credit for the settlement of a lease
obligation on computer equipment. The equipment lessor, who had filed suit
against the Company, accepted $50,000 from the Company in full payment of that
obligation. CBSI agreed to pay the Company $300,000 immediately, which the
Company has received. Neither party to these agreements admitted any wrongdoing.
To facilitate the settlement, Lockheed agreed to modify certain aspects of a
promissory note issued to it by the Company in 1997. Lockheed agreed to extend
the note's maturity several years, to reschedule favorably certain principal
payments and to reduce the interest rate on the remaining principal, which is
$642,000 as of December 31, 1999.
On October 29, 1999 the Company and MAXIMUS entered into a settlement
agreement whereby the Company released MAXIMUS from all claims and potential
claims in relation to the Hawaii contract and vice versa in exchange for a
payment to the Company of $50,000, which the Company received in November 1999.
As of December 31, 1999, the Company was not involved in any litigation.
F-21
<PAGE>
NETWORK SIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(11) LITIGATION SETTLEMENT
On May 11, 1999 the Company announced it had entered into a settlement
agreement with the State of Hawaii and Complete Business Solutions, Inc.
("CBSI"). See Note 10--Litigation. Prior to the settlement, the Company had
assets related to the Hawaii project of $3.46 million and liabilities of
$856,000. After tax considerations are taken into effect, the settlement will
result in a reduction of net assets of $1.85 million. The effect of the
settlement on net income for the twelve months ended December 31, 1999 was as
follows:
<TABLE>
<S> <C>
Write off of contract receivables and costs in excess of
billings on Hawaii contract............................... $(3,459,382)
Present value of litigation settlement...................... (868,957)
Payment received from CBSI.................................. 300,000
Payment received from MAXIMUS............................... 50,000
Hawaii payable.............................................. 576,483
Capital leases, short and long term portion................. 57,994
Other accrued expenses...................................... 217,197
-----------
Decrease in income before income taxes.................... (3,126,665)
Income tax effect........................................... 1,281,933
-----------
Decrease in net income.................................... $(1,844,732)
===========
</TABLE>
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly results from operations:
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------------
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1999:
Contract revenue earned....................... $2,688,400 $2,550,370 $2,575,188 $2,411,718
Gross profit.................................. 1,113,878 985,142 942,542 1,005,828
Net income (loss)............................. 257,198 (1,712,238) 149,725 83,700
Earnings per share............................ 0.23 (2.27) 0.09 0.00
Weight average shares outstanding............. 774,975 788,573 792,881 794,123
1998:
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 (loss)............................. 140,465 309,798 298,136 312,607
Earnings (loss) per share..................... 0.08 0.30 0.28 0.30
Weight average shares outstanding............. 794,503 756,176 763,880 764,630
</TABLE>
F-22
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), dated as of and effective
January 1, 1999 is made by and between KENNETH C. KIRSCH ("Employee") and
NETWORK SIX, INC., a Rhode Island corporation (the "Company").
W I T N E S S E T H:
WHEREAS, Employee and the Company wish to enter into this Agreement to
be effective as of the date hereof, which Agreement shall supersede any existing
employment arrangement between Employee and the Company.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and agreements herein contained, and intending to be legally bound,
Employee and the Company hereby agree as follows:
1. POSITION. The Company agrees to employ Employee and Employee agrees
to serve the Company during the term hereof as Chairman of the Board, President
and Chief Executive Officer of the Company, and in such other executive capacity
as the Board of Directors of the Company (the "Board") shall determine.
2. DUTIES. Employee agrees to assume such duties and responsibilities
as may be consistent with this Agreement, and as may be assigned to Employee by
the Board and in accordance with the by-laws of the Company from time to time.
Employee agrees to devote his full time and best efforts and such skill,
attention and energies as are necessary to the performance of his duties and
responsibilities under this Agreement, consistent with practices and policies
established from time to time by the Board.
3. TERM. The term of this Agreement (the "Term") shall commence as of
the date hereof and shall continue until December 31, 2001, or until terminated
by either party in accordance with the provisions of Section 5 hereof.
4. COMPENSATION.
4.1. BASE SALARY. For services rendered hereunder, Employee
shall be paid an annual base salary in the amount of One Hundred Seventy-Seven
Thousand Five Hundred Dollars ($177,500) during 1999, One Hundred Eighty-Seven
Thousand Five Hundred Dollars ($187,500) during 2000, and Two Hundred Two
Thousand Five Hundred Dollars ($202,500) during 2001. Employee's salary shall be
payable in a manner and at such times as is consistent with the payroll
practices of the Company.
4.2. FRINGE BENEFITS.
4.2.1 GENERAL FRINGE BENEFITS. Employee shall be provided
with fringe benefits, such as retirement or investment plans, vacation, sick
days, and health
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and dental insurance, that are provided to senior officers of the Company.
4.2.2 CAR. During the Term, the Company shall provide
Employee with a leased car, including maintenance, repairs, insurance, fuel
and all costs incident thereto up to an annual maximum of the annual costs
currently paid by the Company for Employee's car. Unless Employee has been
terminated by the Company pursuant to Section 5.1 hereof, Employee shall have
the option to assume the lease with the consent of the lessor, provided the
Company is released therefrom.
4.2.3 INSURANCE. During the Term, the Company shall pay
the premiums (or promptly reimburse Employee if he pays the premiums) for One
Million Five Hundred Thousand Dollars ($1,500,000) of term life insurance
with the Employee designating the beneficiary, such premiums not to exceed
Two Thousand Dollars ($2,000) per year.
4.2.4 TAX INDEMNITY. To the extent that Employee would
realize taxable income upon receipt of any of fringe benefits received
pursuant to this Section 4.2, the Company shall pay to Employee within ninety
(90) days of the close of each year an amount sufficient to pay the tax on
such income, grossed-up at Employee's aggregate state and federal marginal
tax rate.
4.3. REIMBURSEMENT OF EXPENSES. Subject to such conditions
as the Board may from time to time determine, Employee shall be reimbursed upon
presentation of vouchers or paid upon presentation of invoices for reasonable
expenses incurred by him in the performance of his duties in carrying out the
terms of this Agreement, including expenses for entertainment, travel, lodging,
business associations and service organizations.
4.4 BONUSES.
4.4.1 CALCULATION. Employee shall receive a bonus
of up to 125% of his Base Salary each year (the "Annual Bonus") based upon his
achievement of certain objectives for such year ("Annual Objectives").
Achievement of each Annual Objective will entitle Employee to receive a
percentage of the Annual Bonus. For each year, one Annual Objective will be an
increase from the prior fiscal year in both gross revenues and net income (less
any extraordinary gains and extraordinary losses) of at least 25% (the "Growth
Objective") as reported in the Company's year-end audited financial statements.
For each year, until achieved, other Annual Objectives will include a resolution
of the litigation with the State of Hawaii and related parties satisfactory to
the Board (the "Hawaii Objective") and hiring an executive officer, satisfactory
to the Board, who would be in charge of the Company's day to day operations in
Employee's absence (the "Hiring Objective"). Achievement of each of the Growth
Objective, Hawaii Objective or the Hiring Objective will entitle Employee to
receive 25% of his Annual Bonus for the year it is achieved. Prior to the end of
each year, the Company and Employee will use their best efforts to agree to one
or more other Annual Objectives and the percentage of the Annual Bonus allocable
to each Annual Objective which if
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achieved (as determined by the Board in its sole but reasonable discretion),
will entitle Employee to receive that portion of the Annual Bonus not previously
allocated to other Annual Objectives for that year. The Company and Employee
have agreed to Employee's 1999 Annual Objectives by a separate letter agreement.
4.4.2 PAYMENT. The Annual Bonus shall be paid
within ten (10) days after receipt by the Board of the signed audited year-end
financial statements for the prior fiscal year in any combination of cash,
restricted stock or incentive stock options, the combination of 50% of the
Annual Bonus to be determined by the Board and 50% by Employee. Within sixty
(60) days after the close of each year, the Board will notify Employee of the
form of payment of 50% of the Annual Bonus due and with ten (10) days thereafter
Employee will notify the Board of the form of payment of the remaining 50% of
the Annual Bonus due. The value of restricted stock granted as part of an Annual
Bonus shall be the price of the last trade on the last trading day of the fiscal
year of such class of stock as quoted on the exchange or system that such class
of stock is publicly traded, or if such class of stock is not then publicly
traded, at a price determined in the good faith judgment of the Board in its
sole discretion. The value of options granted as a part of an Annual Bonus shall
be determined by the Board using the Black-Scholes pricing model, as reasonably
adjusted if deemed necessary by the Board, and the exercise price of such
options shall be the average of the bid and ask price on the date of grant of
such class of stock underlying the options as quoted on the exchange or system
that such class of stock is publicly traded, or if such class of stock is not
then publicly traded, at a price determined in the good faith judgment of the
Board in its sole discretion.
5. TERMINATION.
5.1. COMPANY. The Company, by action of the Board, may terminate
this Agreement at any time for cause solely in the event of (i) the death or
permanent disability of Employee; (ii) the demonstrated continued failure by
Employee to perform his duties as set forth herein or as otherwise required
by the Board after written demand for performance is made by the Board, which
demand specifically identifies the manner in which the Board finds there has
been a failure to perform; provided, however, if, and only if, such failure
is capable of being cured, Employee shall be given twenty (20) days to cure
any such failure; (iii) a fraud, misappropriation, embezzlement or other
violation of the law or like nature or severity committed by Employee; (iv) a
material breach of this Agreement by Employee; or (v) the willful misconduct
of Employee having a material adverse effect on the business or prospects of
the Company; all as may be reasonably determined by the Board. For purposes
of this Agreement, "permanent disability" shall mean absence from work at the
Company's offices due to illness for sixty-five (65) business days, whether
or not consecutive, in a twelve (12) month period. Upon thirty (30) days
advance written notice, the Company may terminate this Agreement at any time
without cause.
5.2. EMPLOYEE.
(a) Upon thirty (30) days advance written notice,
Employee may terminate this Agreement at any time for cause solely in the
event of (i) the assignment to him of any duties materially inconsistent with
his position, duties and responsibilities as of the date of
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this Agreement; (ii) non-payment of his Base Salary for at least thirty (30)
days to which Employee did not consent; (iii) a transfer of Employee to an
office more than sixty (60) miles from Providence, Rhode Island; or (iv) one or
more transactions that are not approved by the Board prior thereto that in the
aggregate result in a change of ownership of 51% or more of the voting stock of
the Company or a sale or transfer of substantially all of the assets of the
Company. Anything in this Agreement notwithstanding, neither the filing of a
voluntary or involuntary petition in bankruptcy or for a receivership nor a
change in ownership resulting from a bankruptcy or receivership shall give
grounds for Employee to terminate this Agreement. The right of Employee to
terminate this Agreement shall not become effective if the breach by the Company
is cured within twenty (20) days after receipt of written notification of such
breach from Employee.
(b) Upon one hundred twenty (120) days advance
written notice (ninety (90) days, if the Hiring Objective has been achieved and
the person hired has been performing to the satisfaction of the Board for at
least six (6) months), Employee may terminate this Agreement at any time without
cause.
5.3. CONSEQUENCES.
(a) In the event that the Company terminates
this Agreement for any cause set forth in Section 5.1 hereof, or in the event
Employee terminates this Agreement without cause, all rights of Employee under
this Agreement shall terminate as of the date of the termination of this
Agreement, but Employee shall continue to be bound by the terms of Sections 7
through 10 hereof. In addition to forfeiting all his rights under this
Agreement, if Employee terminates this Agreement without cause giving less
notice than required in Section 5.2 hereof, Employee shall forfeit all stock
options vested (on a daily pro-rata basis) between six (6) months prior to the
effective date of termination and the date of receipt by the Company of
Employee's notice of termination.
(b) In the event that: (i) the Company
terminates this Agreement without cause; (ii) Employee terminates this Agreement
for any cause as set forth in Section 5.2 hereof; or (iii) the Company refuses
to enter into a new employment agreement with Employee with financial terms as
favorable as those afforded to Employee during the last year of this Agreement
after Employee's continuous employment with the Company through December 31,
2001, then: (1) Employee shall receive his Base Salary as provided in this
Agreement, until the later of December 31, 2001 or twelve (12) months from the
effective date of such termination (the "Severance Period"), net of all
applicable taxes that are required to be withheld; (2) the Board will issue
substantially equivalent non-qualified stock options or warrants in exchange for
incentive stock options held by Employee; (3) the Company will exchange
restricted shares of stock of the Company held by Employee for shares bearing
only such restrictions and legends as are required by law; and (4) Employee
shall receive, at the time payable pursuant to 4.4 hereof, the maximum Annual
Bonus payable with respect to such year during which the termination occurred,
but no subsequent years. In such event, Employee shall be treated as an employee
for the period during which he is receiving payments under this Section 5.3(b)
and shall be entitled to participate in the fringe benefit programs under
Section 4.2.1 (but not Sections 4.2.2, 4.2.3 or 4.2.4) for the duration of such
period, notwithstanding that any of such benefits were provided on
4
<PAGE>
a group basis prior to such termination.
(c) The compensation payable to Employee or his
estate or legal representative under this Section 5.3 shall be in addition to
any benefits payable in accordance with Section 4.2 hereof, but shall be in lieu
of other compensation ordinarily paid by the Company upon the termination, death
or disability of a senior officer of the Company. Employee agrees that in
consideration of the performance by the Company of its obligations under Section
5.3 hereof: (i) he will assert no claims arising out of his employment
relationship, or the non-renewal or termination thereof, against the Company or
its officers, directors, stockholders, employees, agents and representatives;
and (ii) he will cooperate with and assist his successor and other management of
the Company for the duration of the Severance Period at such times and amounts
of time as are reasonable for Employee and the Company given the Company's need
for such assistance and Employee's prior commitments and availability.
6. INDEMNIFICATION.
(a) The Company shall indemnify Employee and shall
save and hold Employee harmless from, against, for, and, in respect of
damages, losses, obligations, deficiencies, costs and expenses, including,
reasonable attorneys' fees and other costs and expenses, incident to, or
arising out of a threatened, pending or contemplated suit, action, claim or
proceeding, whether civil, criminal, administrative or investigative,
suffered, incurred or required to be paid by Employee by reason of being a
director, officer, employee or agent of the Company or by reason of service
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
(whether or not Employee continues to be a director, officer, employee or
agent of the Company or such corporation, partnership, joint venture, trust
or other enterprise at the time such action, suit or proceeding is brought or
threatened) if Employee's act or omission was taken or made in good faith and
in a manner reasonably believed to be in or not inconsistent with the best
interests of the Company; provided, that such act or omission did not
constitute gross negligence, willful misconduct or fraud. The foregoing right
of indemnification shall be in addition to any rights to which Employee may
otherwise be entitled under the Company's bylaws, certificate of
incorporation or applicable law and shall inure to the benefit of Employee's
heirs, executors or administrators. The Company shall pay the expenses
incurred by Employee in defending any action, suit or proceeding, upon
receipt of an undertaking by Employee to repay such payment if there shall be
a final adjudication or determination that it is not entitled to
indemnification as provided herein.
(b) During the term of this Agreement, the Company
shall use reasonably commercial efforts to maintain at least at current
levels, Directors and Officers liability and Errors and Omissions insurance.
7. COMPANY PROPERTY. All materials, information and data of any kind
furnished by the Company to Employee or developed by Employee on behalf of the
Company or at the Company's direction or for the Company's use or otherwise in
connection with Employee's employment hereunder, are and shall remain the sole
and confidential property of the Company. In the event that the Company requests
the return of such materials at any time during the term of
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<PAGE>
this Agreement or at or after the termination of this Agreement, Employee
shall as soon as possible deliver such material to the Company.
8. CONFIDENTIALITY. During the term of this Agreement and at all times
thereafter, Employee shall not use for his personal benefit, or disclose,
communicate or divulge to, or use for the direct or indirect benefit of any
person or entity other than the Company, any material referred to in Section 7
above or any information regarding the business methods or policies, procedures,
techniques, projects, trade secrets or other confidential knowledge relating to
the Company, its business or activities.
9. NON-COMPETE. During the term of this Agreement and for one (1) year
thereafter (or during the Severance Period in the case of Employee's termination
by the Company without cause or by Employee for any cause set forth in Section
5.2), Employee agrees that he shall not (a) engage or be interested in or
receive any compensation from any business that competes with or is in the same
business as the Company or its affiliates (affiliates for purposes hereof being
defined as any company that owns at least 10% of the voting stock of the
Company, or any company in which the Company owns 10% of the voting stock) as
then conducted or contemplated pursuant to any plan of management issued or
drafted at the request of or on behalf of the Board or (b) induce or attempt to
induce any employee, agent or customer of the Company or any of its affiliates
to terminate or reduce the scope of his, her or its relationship with the
Company or any of its affiliates. For the purposes of this Agreement, Employee
shall be deemed to be interested in a business if he is engaged or interested in
that business as a stockholder, director, officer, employee, salesman, sales
representative, agent, broker, partner, individual proprietor, lender,
consultant or otherwise, but not if that interest is limited solely to the
ownership of five percent (5%) or less of any class of the equity or debt
securities of a corporation whose shares are listed for trading on a national
securities exchange or traded in the over-the-counter market. Employee shall
not, directly or indirectly, engage in any other business enterprise, or have an
interest, financial or otherwise, in any other business enterprise which
interferes or is likely to interfere with Employee's employment hereunder.
10. EQUITABLE RELIEF. Employee acknowledges and agrees that the Company
may seek to enforce the covenants and restrictions pertaining to his obligations
in Sections 7, 8 and 9 hereof at law or in equity. The covenants and
restrictions pertaining to Employee's obligations in Sections 7, 8 and 9 hereof
shall remain in full force and effect, notwithstanding the fact that this
Agreement has been terminated. If a court determines that the restrictions in
Section 9 are too broad or otherwise unreasonable under applicable law,
including with respect to time or geographical scope, the court is hereby
requested and authorized by the parties hereto to revise the foregoing
restrictions to include the maximum restriction allowable under the applicable
law. If Employee violates any of the restrictions contained in Section 9, the
restrictive period shall not run in favor of Employee from the time of the
commencement of any such violation until such time as such violation shall be
cured by Employee to the satisfaction of the Company.
11. PRIOR AGREEMENTS. Employee represents and warrants to the Company
that there are no restrictions, agreements or understandings of any kind
whatsoever to which Employee is a party, or by which he is bound, which would
inhibit, prevent or make unlawful his execution or performance of this
Agreement, and that his execution and performance of this Agreement shall
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<PAGE>
not constitute a breach of any contract, agreement or understanding, whether
oral or written, to which he is a party or by which he is bound.
12. ACKNOWLEDGMENT. Employee hereby acknowledges and certifies that he
has read the terms of this Agreement, that he has been informed by the Company
that he should discuss it with an attorney of his choice, and that he
understands it terms and effects. Employee further acknowledges that based on
his training and experience, he has the capacity to earn a livelihood by
performing services as an employee or otherwise in a business that does not
violate the provisions of Section 9. Neither the Company, Employee nor their
respective agents, representatives or attorneys have made any representations to
the other concerning the terms or effects of this Agreement other than those
contained herein.
13. ASSIGNMENT. Without the prior written consent of the Company,
Employee shall have no right to exchange, convert, encumber or dispose of his
rights to receive benefits and payments under this Agreement, which payments,
benefits and rights thereto are non-assignable and non-transferable. In the
event of any attempted assignment or transfer, Employee shall forfeit his rights
to receive any payments or benefits, and the Company shall have no further
liability under this Agreement.
14. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the parties with respect to the subject matter contained
herein and supersedes any prior understandings and agreements between them
respecting such subject matter. This Agreement shall supersede any existing
employment agreement or arrangement between Employee and the Company, including,
without limitation, an Employment Agreement between the parties dated effective
January 1, 1997, and the parties' execution hereof shall serve to terminate any
such agreement or arrangement and the parties' respective rights and obligations
thereunder.
15. HEADINGS. The headings describing the provisions of this Agreement
are for convenience of reference only, and shall not affect its interpretation.
16. SEVERABILITY. If any provision of this Agreement is held illegal,
invalid or unenforceable, such illegality, invalidity, or unenforceability shall
not affect any other provision hereof. Such provision and the remainder of this
Agreement shall, in such circumstances, be modified to the extent necessary to
render enforceable the remaining provisions hereof.
17. NOTICES. All notices shall be in writing and shall be deemed to
have been given if presented personally, sent by recognized national overnight
carrier, or sent by certified or registered mail, postage prepaid, return
receipt requested, to the following addressees:
If to the Company:
NETWORK SIX, INC.
475 Kilvert Street
Warwick, RI 02886
Attention: Compensation Committee
Nicholas Supron
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With a copy to:
Charles H. Boisseau, Esq.
Boisseau Leonard & Dean LLP
155 South Main Street
Providence, RI 02903
and
Nicholas Supron
20 Fore Royal Court
Jamestown, RI 02835
If to Employee:
Kenneth C. Kirsch
106 Freeman Parkway
Providence, RI 02906
With a copy to:
E. Colby Cameron, Esq,
Cameron & Mittleman, LLP
56 Exchange Terrace
Providence, RI 02903
Notice to the parties to be copied shall be required for such notice to be
effective. Notice of any change in such addresses shall also be given in the
manner set forth above. Whenever the giving of notice is required, the giving of
such notice may be waived by the party entitled to receive such notice.
18. COUNTERPARTS. This Agreement may be executed in counterparts, all
of which taken together shall constitute one and the same instrument.
19. WAIVER. The failure of either party to insist upon strict
performance of any of the terms or conditions of this Agreement shall not
constitute a waiver of any of its rights hereunder.
20. SUCCESSORS AND ASSIGNS. This Agreement binds, inures to the benefit
of, and is enforceable by Employee and his heirs and personal representatives,
and the Company and its successors and permitted assigns, and does not confer
any rights on any other persons or entities. The duties, obligations, rights and
responsibilities of Employee under this Agreement are personal and shall not be
assigned by Employee without the prior written consent of the Company, as set
forth in Section 7 hereof.
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<PAGE>
21. SURVIVAL. The provisions of Sections 7 through 12 hereof shall
survive the termination of this Agreement for any reason whatsoever.
22. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Rhode Island.
23. AMENDMENTS. This Agreement may be amended and supplemented only by
a written instrument duly executed by both parties.
24. JOINT PARTICIPATION IN DRAFTING. Each party to this Agreement
participated in the drafting of this Agreement. As such, the language used
herein shall be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction will be applied
against any party to this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and date first above written.
/s/ Kenneth C. Kirsch
--------------------------------
KENNETH C. KIRSCH
NETWORK SIX, INC.
BY: /s/ Dorothy M. Cipolla, Secretary
----------------------------------
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Exhibit 99.4
SETTLEMENT AGREEMENT AND MUTUAL RELEASES
This Settlement Agreement and Mutual Releases ("Agreement") entered
into as of this 28th day of April, 1999, by and between Complete Business
Solutions, Inc., a Michigan corporation ("CBSI"), and Rajendra B. Vattikuti
("Vattikuti") (CBSI and Vattikuti being sometimes hereinafter collectively
referred to as "Claimants"), and Network Six, In., a Rhode Island corporation
("NSI").
WHEREAS, CBSI instituted a civil action in the Superior Court for the
State of Rhode Island against NSI, being Civil Action No. 96-6522 (hereinafter
the "Rhode Island Action"); and
WHEREAS, NSI thereafter asserted certain counterclaims against CBSI and
third-party claims against Vattikuti in the Rhode Island Action; and
WHEREAS, the State of Hawaii instituted a civil action against NSI and
others in the Circuit Court for the State of Hawaii, being Civil Action No.
96-4614-11 (hereinafter the "Hawaii Action"); and
WHEREAS, NSI thereafter asserted certain third-party claims against
Claimants in the Hawaii Action; and
WHEREAS, Claimants and NSI have reached agreement to settle and
compromise any and all claims and disputes by and between them on the terms
and conditions as set forth in this Agreement:
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and other good and valuable consideration, the receipt and
adequacy
<PAGE>
of which are hereby acknowledged, the parties hereto do hereby agree as follows:
1. Upon execution of this Agreement, CBSI shall pay to NSI the total
sum of Three Hundred Thousand ($300,000.00) Dollars, by check made payable to
Network Six, Inc.
2. Upon execution of this Agreement, the parties hereto, through their
respective counsel, shall cause to be executed and filed in the Rhode Island
Action and the Hawaii Action certain Stipulated Orders of Dismissal With
Prejudice, and without costs or attorneys' fees to any party, in the forms
attached hereto as Exhibits A and B, respectively.
3. It is expressly understood and agreed by all of the parties hereto
that the payment being made hereunder is in compromise and settlement of
disputed claims, and that no admission of liability is being made or shall be
inferred from the making of any such payment.
4. Claimants and NSI, on behalf of themselves and their respective
successors, heirs and assigns, hereby release, acquit, and forever discharge
each other, together with each other's respective current and former officers,
directors, predecessors, affiliates, subsidiaries, parent companies, agents,
employees, attorneys, partners, insurers, successors, heirs and assigns, of and
from any and all claims, causes, debts, liabilities, or causes of actions of any
kind or nature, known or unknown, suspected or unsuspected, liquidated or
contingent, at law or in equity, arising or accruing at any time up to and
through the date of this Agreement, or otherwise based on facts or circumstances
in existence as of the date of this Agreement, including but not limited to, all
claims asserted or which could have been asserted by any of the parties in the
<PAGE>
Rhode Island Action or the Hawaii Action.
NSI further agrees that this Agreement shall be a joint tortfeasor
release pursuant to the laws of the State of Hawaii and/or Rhode Island to the
extent of any alleged joint liability on the part of Claimants with any of the
other parties to the Hawaii Action or the Rhode Island Action, and shall reduce
NSI's claims against any other persons who are determined to be joint
tortfeasors with Claimants, to the extent of the pro rata share of the released
Claimants' alleged liability for any of NSI's claims against all other
tortfeasors. It is understood and agreed that this paragraph is intended to
further the full and complete release being provided to Claimants hereunder, so
that Claimants shall have no potential liability to make contribution to any
other joint tortfeasor.
5. This Agreement represents the entire agreement of the parties
relating in any way to the subject matter of the settlement of the Hawaii Action
and/or the Rhode Island Action, as well as any and all other claims or disputes
between the parties hereto, expressly superseding any and all prior oral
discussions or agreements of any kind or nature. This Agreement may only be
modified by a writing, signed by all of the parties hereto.
6. The persons executing this Agreement represent and warrant that they
have due and proper authority to execute this Agreement on behalf of their
respective principals and to bind them to the terms hereof. Said persons further
represent and warrant that they have read and fully understand the terms of this
Agreement, that they have received the benefit and advice of their own
independent counsel prior to executing this
<PAGE>
Agreement, and that they execute the same as their own free act and deed.
7. This Agreement shall be construed and enforced in accordance with
the laws of the State of Michigan.
8. This Agreement may be executed in any number of counterparts, each
of which shall constitute an original, but all of which together shall
constitute one and the same Agreement.
9. A signature by facsimile transmission shall be as binding and
effective as an original signature.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the year and date first above written.
COMPLETE BUSINESS SOLUTIONS, INC.
By: /s/ Timothy S. Mannez
-------------------------
Its: Executive Vice President
------------------------
/s/ Margaret A. Latke
- ---------------------
Witness
/s/ Rajendra B. Vattikuti
-------------------------
Rajendra B. Vattikuti
/s/ Thomas E. Sizemore
- ----------------------
Witness
NETWORK SIX, INC.
By: /s/ Kenneth C. Kirsch
----------------------
Its: President & CEO
---------------------
/s/ Dorothy M. Cipolla
- ----------------------
Witness
<PAGE>
Exhibit 99.2
SETTLEMENT AND MUTUAL RELEASE AGREEMENT
This Settlement and Mutual Release Agreement (hereinafter referred to
as the "Settlement Agreement"), is entered into and is effective this 12TH day
of MAY , 1999, by and between the STATE OF HAWAII (hereinafter referred to as
the "State") and NETWORK SIX, INC. (hereinafter referred to as "NSI").
WHEREAS, on or about August 24, 1993, NSI and the State entered into a
contract pertaining to a computer system for the Child Support Enforcement
Agency of the State of Hawaii, Hawaii contract number 36064, (hereinafter
referred to as the "Contract");
WHEREAS, the State has raised claims against NSI concerning the
Contract and on or about November 12, 1996 instituted litigation against NSI in
the First Circuit Court of the State of Hawaii entitled STATE OF HAWAII, BY AND
THROUGH MARGERY S. BRONSTER, ITS ATTORNEY GENERAL VS. NETWORK SIX, INC. FKA
NETWORK SOLUTIONS, INC., ET. AL, Civil No. 96-4614-11 (hereinafter referred to
as the "Lawsuit"), which claims NSI has denied and continues to deny;
WHEREAS, NSI has raised claims against the State concerning the
Contract and brought those claims in the form of a counterclaim against the
State in the Lawsuit, which claims the State has denied and continues to deny;
WHEREAS, NSI and the State wish to amicably settle the disputes between
them as a means to avoid the cost, expense and inconvenience of litigation;
<PAGE>
NOW, THEREFORE, NSI and the State agree as follows:
1. PAYMENT BY NSI
In consideration of the promises and covenants stated herein, NSI
agrees to pay the State the total sum of ONE MILLION AND NO/100 DOLLARS
($1,000,000.00) over five (5) installments as set forth below. The payments
shall be made payable to "Department of the Attorney General, State of Hawaii"
for the CSEA TRUST FUND, and shall be sent to the attention of the Supervising
Deputy Attorney General, Civil Recoveries Division, Department of the Attorney
General, State of Hawaii, 425 Queen Street, Honolulu, Hawaii 96813.
a. The first payment is to be TWO HUNDRED FIFTY THOUSAND AND NO/100
DOLLARS ($250,000.00) and is to be made thirty (30) days from the date of this
Settlement Agreement. The first payment, or a succeeding payment, will be
reduced by FIFTY THOUSAND AND NO/100 DOLLARS ($50,000.00) pursuant to the terms
in Section 4 below.
b. The second payment is to be TWO HUNDRED FIFTY THOUSAND AND NO/100
DOLLARS ($250,000.00) and is to be made within one (1) year from the date of
this Settlement Agreement.
c. The third payment is to be TWO HUNDRED FIFTY THOUSAND AND NO/100
DOLLARS ($250,000.00) and is to be made within two (2) years from the date of
this Settlement Agreement.
d. The fourth payment is to be ONE HUNDRED TWENTYFIVE THOUSAND AND
NO/100 DOLLARS ($125,000.00) and is to be made within three (3) years from the
date of this Settlement Agreement.
<PAGE>
e. The fifth payment is to be ONE HUNDRED TWENTYFIVE THOUSAND AND
NO/100 DOLLARS ($125,000.00) and is to be made within four (4) years from the
date of this Settlement Agreement.
2. FAILURE TO MAKE PAYMENT WHEN DUE
Any failure to make any payment when due means that the entire
remaining amount is due and payable immediately. To avoid any collection
problems, the State and NSI will simultaneously with the execution of this
Settlement Agreement execute, for filing with the Court, a stipulation for
dismissal in the form attached hereto as Exhibit A and further execute a
stipulated judgment (in the form attached hereto as Exhibit B) to be held by the
State of Hawaii. The State can file that judgment if any payment is missed.
3. ACCELERATION OF OBLIGATIONS
If NSI merges into another company, or if more than fifty percent (50%)
of the issued common stock of NSI is held by one party, the entire remaining
amount due is due and payable immediately.
4. INDEMNITY BY NSI
NSI shall indemnify and hold the State harmless from all liabilities
whatsoever, including attorney's fees, on account of any claim by Celtic Leasing
Corp. and/or its alleged successor in interest, NBD Equipment Leasing, or any
other lessor claiming through Celtic or NBC or any other lessor. The State will
reduce by FIFTY THOUSAND AND NO/100 DOLLARS ($50,000.00) the payment due from
NSI in exchange for this indemnity if NSI provides written evidence of the
satisfaction or release of the claims of NBD Equipment Finance Corp. against NSI
and the State and for payments alleged to be due for equipment originally
<PAGE>
leased to NSI by Celtic Leasing Corp. (which equipment is now in the possession
of the State) together with written evidence that NBD Equipment Finance Corp. is
the successor in interest to Celtic Leasing Corp., together with written
evidence which releases any and all claims in and to the equipment originally
leased by Celtic Leasing Corp. to NSI now in possession of the State. The State
asserts that at least some of the aforesaid equipment is presently owned by the
State. As a result of this agreement, NSI warrants all of the aforesaid
equipment in the possession of the State shall be free and clear of claims from
Celtic Leasing Corp., NSI, and any other party claiming through either or both
of them. This FIFTY THOUSAND AND NO/100 DOLLARS ($50,000.00) reduction will be
allowed against the first payment by NSI to the State made after the State's
receipt of that written evidence.
5. MUTUAL RELEASE OF CLAIMS
A. RELEASE BY NSI
In consideration of the promises and covenants herein, NSI, on
behalf of itself and all of its agents, representatives, subconsultants,
subcontractors, successors and assigns, hereby releases and forever discharges
the State and all of its employees, agents, representatives, successors and
assigns from and against any and all claims arising out of the Contract and the
Lawsuit. It is explicitly agreed that this release does not extend to NSI's
claims against Maximus, Inc.
B. RELEASE BY THE STATE
In consideration of the promises and covenants herein, the State,
on behalf of itself and all of its agents, representatives, successors and
assigns, hereby releases and forever discharges NSI and all of its
subconsultants, subcontractors, suppliers, insurers, sureties, officer,
<PAGE>
directors, agents, representatives, successors and assigns from and against any
and all claims arising out of the Lawsuit and any and all claims arising out of
the Contract to the extent that the State either knew or reasonably should have
known of such claims as of the date of this Settlement Agreement.
C. ADDITIONAL INDEMNITY BY NSI
NSI shall indemnify and hold the State harmless from all
liabilities, including attorneys' fees, on account of any claim against the
State made by any person, entity or organization claiming by, through or under
NSI and/or seeking indemnity, contribution or any other relief with respect to
any liability to NSI in connection with matters alleged in the lawsuit.
6. JOINT TORTFEASOR RELEASE
This Settlement Agreement is intended to be and have the effect of a
joint tortfeasor release pursuant to Hawaii Revised Statues PARA PARA 663-11
through 663-17. As such, it shall operate to reduce to the extent of the pro
rata share of any liability of the State, or by the amount of the consideration
paid by the State to NSI pursuant to this agreement, whichever is greater, NSI's
damages recoverable against all other tortfeasors by reason of the matters
alleged in the Lawsuit.
7. DISCLAIMER OF LIABILITY
The parties agree and acknowledge that the payments, releases of claims
and indemnity agreement stated above and the other terms, covenants and
conditions of this Settlement Agreement represent a full and complete compromise
of matters involving disputed issues; that the parties fully assume the risk
that the facts or law may be other than they believe; that neither the payments,
the releases, the indemnity, nor any event occurring during the
<PAGE>
negotiation for this settlement, nor any statement or communications made in
connection therewith, by the parties or their attorneys shall be considered an
admission by any party and that no past or present wrongdoing or culpability on
the part of the parties shall be implied therefrom. The parties both deny any
liability or wrongdoing.
8. DISPUTES
This Settlement Agreement shall be construed and interpreted according
to the laws of the State of Hawaii. No party shall be deemed the drafter of this
Settlement Agreement. In the event of any disagreement over the interpretation
or application of the provisions of this Settlement Agreement, the dispute shall
be presented to the Honorable Karen N. Blondin, or, if she is unwilling or
unable to serve, any other judge of the Circuit Court of the First Circuit,
State of Hawaii, for final and binding resolution. If the disputed issue is one
which could trigger the filing of a stipulated judgment pursuant to Paragraph 2
hereof, the State shall file such stipulated judgment only after the dispute has
been presented to and ruled on by Judge Blondin or another judge, and if the
ruling determines that the State is entitled to exercise the remedy of
stipulated judgment.
9. DATE OF EXECUTION OF AGREEMENT
This Settlement Agreement may be executed in counterparts, and, if so
executed, shall be in full effect as of the data of the last signature. A faxed
signature shall be effective as an original provided that the original signature
be immediately provided to the other party. All necessary documentation shall be
fully executed by both parties no later than July 1, 1999.
10. ENTIRE AGREEMENT
This Settlement Agreement contains the entire agreement between the
parties and
<PAGE>
supersedes and replaces any and all prior or contemporaneous agreements or
understanding, written or oral, with regard to the matters set forth in it. No
other promise, understanding or consideration has been promised or agreed to
other than as set forth herein. This Settlement Agreement may be amended or
modified in whole or in part at any time only by a written agreement executed in
the same manner as this Settlement Agreement.
11. BINDING AGREEMENT
This Settlement Agreement shall be binding upon and shall inure to the
benefit of the parties and their respective successors and assigns. In entering
into this Settlement Agreement, the parties represent that they have read this
Settlement Agreement and that the terms are fully understood and voluntarily
accepted by them. Furthermore, the parties represent that they have reviewed and
revised, or had the opportunity to revise, this Settlement Agreement, and
accordingly, the normal rule of construction to the effect that any ambiguities
are to be resolved against the drafting party shall not be employed in the
interpretation of this Settlement Agreement or any amendment of it.
<PAGE>
IN WITNESS WHEREOF, the parties, acting by and through their duly
authorized representatives, have executed this Settlement Agreement as of the
date written below.
DATED: Honolulu, Hawaii, MAY 12 , 1999
STATE OF HAWAII
By /s/ Thomas R. Keller
------------------------
THOMAS R. KELLER
Its Acting Attorney General
-----------------------
/s/ (ILLEGIBLE)
- ---------------------------
Approved as to form:
Deputy Attorney General
DATED: Warwick, Rhode Island, MAY 12 , 1999
NETWORK SIX, INC.
By /s/ Kenneth C. Kirsch
----------------------
Its President and CEO
---------------------
/s/ (ILLEGIBLE)
- ----------------------------
Approved as to form:
EDMUNDS MAKI VERGA & THORN
Attorneys for Network Six, Inc.
<PAGE>
Exhibit 99.5
AGREEMENT NO. INR 20-01
FROM THE
STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS
DEPARTMENT OF HUMAN SERVICES
TO
Network Six, Inc.
-----------------
NAME OF PROVIDER
<PAGE>
AGREEMENT
This agreement, including attached addenda, is hereby entered into this first
day of July 1999, by and between the State of Rhode Island acting by and through
the Rhode Island Department of Human Services, hereinafter referred to as the
DEPARTMENT, and Network Six, Inc. hereinafter referred to as the PROVIDER.
Whereas, the DEPARTMENT desires to engage the PROVIDER to offer services and
activities further described in ADDENDUM IV - RFP #1435 AND ADDENDUM I - PROGRAM
with respect to fiscal year 2000, and to reserve the options for fiscal years
2001, 2002, and 2003 contained therein. The order of governing authority for the
resolution of any conflict(s) arising between the parties in the execution of
this instrument is set by the following order of precedence: 1. Contract, 2.
RFP# 1435, 3. Network Six Bid Proposal
Now, therefore, the parties hereto do mutually agree as follows:
PAR. 1. PERFORMANCE
The PROVIDER shall in a satisfactory manner, perform all obligations
and duties as contained in ADDENDUM I - PROGRAM, with respect to fiscal
year 2000 and any option year exercised by the Department hereby
incorporated by reference into this agreement. Disputes concerning
PROVIDER's performance shall be addressed according to the procedure
defined in Par. 19 - Settlement of Disputes.
PAR. 2. TIME OF PERFORMANCE
The PROVIDER shall commence performance of this Agreement with respect
to fiscal year 2000 on the first day of July 1999, and shall complete
performance no
<PAGE>
later than the thirtieth day of June 2000, unless terminated prior to
that date by other provisions of this Agreement.
PAR. 3. BUDGET
Total payment for services to be provided under this Agreement for the
period July 1, 1999 through June 30, 2000 shall be as detailed in the
Purchase Requisition #17527 at the rates detailed in the budget
attached hereto and incorporated by reference in ADDENDUM II - BUDGET.
Expenditures exceeding budgeted line-item categories by ten percent
(10%) shall not be authorized unless prior written approval is first
obtained pursuant to PAR. 7. - CHANGES of this Agreement, subject to
the maximum amount of this Agreement as above stated.
PAR. 4. METHOD OF PAYMENTS AND REPORTS
The DEPARTMENT will make payments to the PROVIDER in accordance with
provisions of ADDENDUM III - PAYMENTS AND REPORTS SCHEDULE attached
hereto. The PROVIDER will complete and forward narrative and fiscal
reports as per ADDENDUM III - PAYMENTS AND REPORTS SCHEDULE.
PAR. 5. TERMINATION OF AGREEMENT
This Contract shall be subject to termination under any of the
following conditions:
a. MUTUAL AGREEMENT
The contracting parties mutually agree in writing to termination.
b. DEFAULT BY THE PROVIDER
The Rhode Island Department of Human Services may, by written
notice to the PROVIDER signed by the Contract Administrator,
terminate the PROVIDER's right to proceed as to the contract if
the PROVIDER:
<PAGE>
1. materially fails to perform the services within the time
specified or any extension thereof, or
2. so fails to make progress as to materially endanger
performance of the contract in accordance with its terms, or
3. otherwise fails to perform any other material provisions of
the contract; provided, however, that in any such event the
Rhode Island Department of Human Services, through the
Contract Administrator, shall give the PROVIDER at least
ninety (90) days prior written notice. Termination at the
option of the Rhode Island Department of Human Services shall
be effective ninety (90 days) after receipt of such notice,
unless the PROVIDER shall have corrected said failure(s)
within thirty (30) days after receipt by the PROVIDER of such
written notice; any such failure to perform which, in the
exercise of due diligence, cannot be cured in such thirty
(30) day period shall not be deemed a default so long as the
PROVIDER shall within such period commence and thereafter
continue diligently to cure each failure to perform.
c. TERMINATION IN THE INTEREST OF THE DEPARTMENT OF HUMAN SERVICES
The Contract Administrator, by ninety (90) days prior written
notice, may terminate performance of work under this contract, in
whole or in part, when it is in the best interest of the Rhode
Island Department of Human Services to do so. In the event of such
termination, the PROVIDER will be compensated for all work
performed prior to such termination date and for all reasonable
costs and liabilities to which the PROVIDER has, out of necessity,
obligated itself as a result of this contract which are applicable
to any period after such termination up to the term of the
contract as determined in accordance with the applicable provision
of 41 Code of Federal Regulations Section 108. Payment to PROVIDER
under this clause shall include reasonable profit on all
reasonable costs and liabilities described herein. The PROVIDER
shall
<PAGE>
use its best efforts to minimize the cost to the Rhode Island
Department of Human Services.
d. DEFAULT BY THE DEPARTMENT OF HUMAN SERVICES
This contract may be terminated by the PROVIDER, for cause, upon
the failure of the Rhode Island Department of Human Services to
perform any material provision required of it by the contract
provided the PROVIDER shall give the Contract Administrator at
least ninety (90) days prior written notice. Termination, at the
option of the PROVIDER shall be effective ninety (90) days after
receipt of such notice, unless the Rhode Island Department of
Human Services shall have corrected such failure(s) thirty (30)
days after the receipt by the Contract Administrator of such
written notice; any failure which, in the exercise of due
diligence, cannot be cured within such thirty (30) day period
shall not be deemed a default so long as the Rhode Island
Department of Human Services shall within such period commence and
thereafter continue diligently to cure such failure. The
competency of members of Rhode Island Department of Human
Services' staff shall not be a reason for finding the DHS in
default.
e. AVAILABILITY OF FUNDS
It is understood and agreed by the parties hereto that all
obligations of the Rhode Island Department of Human Services,
including the continuance of payments hereunder, are contingent
upon the availability and continued appropriation of State and
Federal funds, and in no event shall the Rhode Island Department
of Human Services be liable for any payments hereunder in excess
of such available appropriated and allocated funds. In the event
that the amount of any available or appropriated and allocated
funds provided by the State or Federal sources for the purchase of
services hereunder shall be reduced, terminated or shall not be
continued at an aggregate level sufficient to allow for the
purchase of the specified amount of
<PAGE>
services to be purchased hereunder for any reason whatsoever, the
Rhode Island Department of Human Services shall notify the
PROVIDER of such reduction of funds available and the Rhode Island
Department of Human Services shall be entitled to reduce its
commitment hereunder as it deems necessary.
None of the provisions of this paragraph shall entitle the PROVIDER to
compensation for anticipated profits for unperformed work.
PAR. 6. RESPONSIBILITIES UPON TERMINATION
If the contract is terminated for cause, the party terminating shall be
reimbursed by the other party for all reasonable costs and liabilities
which are applicable to any period after such termination and for all
excess costs which such party reasonably incurs as a direct result of
such termination; provided, however, that:
a. in the event of termination for default, the PROVIDER shall not
receive reimbursement for any loss of anticipated profits;
b. both parties hereto shall use best efforts to minimize the costs
of termination, and
c. in any event, the period during which such costs shall be computed
shall not extend beyond the then current date of expiration of the
contract and such costs shall not duplicate any payments made for
completed milestones and deliverables, nor exceed the amounts
which would otherwise have been due had they been completed.
Upon termination or expiration of the contract, the PROVIDER shall, if
requested by the Contract Administrator at least ninety (90) days prior
to such termination or expiration, provide reasonable training for the
Rhode Island Department of Human Services' personnel and/or continued
performance of the services
<PAGE>
specified herein for up to six (6) additional thirty (30) day periods
commencing with the date of termination or expiration and continuing
until given thirty days notice by the Contract Administrator to
discontinue such training and/or services. For providing such training
or continued performance after the term of the contract, the Rhode
Island Department of Human Services shall pay the PROVIDER at mutually
agreed rates for personnel and supplies used in providing such training
and/or services.
PAR. 7. CHANGES
The DEPARTMENT may permit changes in the scope of services, time of
performance, or approved budget of the PROVIDER to be performed
hereunder. Such changes, which are mutually agreed upon by the
DEPARTMENT and PROVIDER, must be in writing and shall be made a part of
the Agreement by numerically consecutive amendment.
PAR. 8. SUBCONTRACTS
It is expressly agreed the PROVIDER shall not enter into any
subcontracts to perform the services listed in ADDENDUM I - PROGRAM or
any other obligations to be performed by the PROVIDER pursuant to this
Agreement unless approved in writing by the Department, such approval
not to be unreasonably withheld.
PAR. 9. NONLIABILITY FOR PERSONAL INJURIES
The PROVIDER will hold the State of Rhode Island and its officials
harmless against claims for personal injuries of any kind which the
staff of PROVIDER may suffer directly or may cause to be suffered by
any person or persons in the performance of this contract.
PAR. 10. NONDISCRIMINATION IN EMPLOYMENT AND SERVICES
<PAGE>
The PROVIDER agrees to comply with the requirements of Title VI of the
Civil Rights Act of 1964 (42 USC 2000d et seq.); Section 504 of the
Rehabilitation Act of 1973, as amended (29 USC 794); Title IX of the
Education Amendments of 1972 (20 USC 1681 et seq.); the United States
Department of Health and Human Services Regulations found in 45 CFR,
parts 80 and 84; and the United States Department of Education
Implementing Regulations (34 CFR, Parts 104 and 106); which prohibit
discrimination on the basis of race, color, national origin, handicap,
or sex, in acceptance for or provision of services, employment, or
treatment in educational or other programs or activities. The PROVIDER
acknowledges receipt of ADDENDUM V - NOTICE TO DEPARTMENT OF HUMAN
SERVICES SERVICE PROVIDERS OF THEIR RESPONSIBILITIES UNDER TITLE VI OF
THE CIVIL RIGHTS ACT OF 1964 and ADDENDUM VI - NOTICE TO DEPARTMENT OF
HUMAN SERVICES SERVICE PROVIDERS OF THEIR RESPONSIBILITIES UNDER
SECTION 504 OF THE REHABILITATION ACT OF 1973 incorporated herein by
reference and made part of this Agreement.
The PROVIDER agrees to comply with all other provisions applicable to
law, including the Governor's Executive Order No. 85-11, which
prohibits discrimination on the basis of race, color, religion, sex,
age, national origin, political belief, sexual preference, or handicap.
The PROVIDER also agrees to comply with the requirements of the
Department of Human Services for safeguarding of client information.
Failure to comply with this item may be the basis for cancellation of
this Agreement.
PAR. 11. ASSIGNABILITY
The PROVIDER shall not assign any interest in this Agreement (whether
by
<PAGE>
assignment or novation) without the prior written consent of the
DEPARTMENT thereto; PROVIDED, HOWEVER, that claims or money due or to
become due to the PROVIDER from the DEPARTMENT under this Agreement may
be assigned to a bank, trust company, or other financial institution
without such approval. Notice of any such assignment or transfer shall
be furnished promptly to the DEPARTMENT.
PAR. 12. COPYRIGHTS
The PROVIDER is free to copyright any books, publications, or other
copyrightable materials developed in the course of or under this
agreement, but the DEPARTMENT shall reserve a royalty-free,
nonexclusive, and irrevocable right to reproduce, publish, or otherwise
use, and to authorize others to use, the work for government purposes.
PAR. 13. GOVERNING LAW
This Agreement is deemed executed and delivered in the City of
Cranston, State of Rhode Island, and all questions arising out of or
under this Agreement shall be governed by the laws of the State of
Rhode Island.
PAR. 14. PARTNERSHIP
It is understood and agreed that nothing herein is intended or should
be construed in any manner as creating or establishing the legal
relation of partnership between the parties hereto, or as constituting
the employees, agents, or representatives of the PROVIDER included in
this Agreement as employees, agents, or representatives of the
Department of Human Services.
PAR. 15. ACCESSIBILITY AND RETENTION OF RECORDS
The PROVIDER agrees to make accessible and to maintain all fiscal and
activity
<PAGE>
records relating to this Agreement to State and/or Federal officials.
This is also intended to include any auditing, monitoring, and
evaluation procedures, including on-site visits, performed individually
or jointly, by State or Federal officials or their agents. If such
records are maintained out of the State of Rhode Island, such records
shall be made accessible by the PROVIDER at a Rhode Island location.
Minutes of Board of Directors meetings, fiscal records, and narrative
records pertaining to activities performed will be retained for audit
purposes for a period of at least three (3) years following the
submission of the final expenditure report for this Agreement or, if
audit findings have not been received at the end of the three (3)
years, the records shall be retained until resolution of the audit
findings are made.
PAR. 16. SEVERABILITY
If any provision of this Agreement is held invalid, the remainder of
this Agreement shall not be affected thereby if such remainder would
then continue to conform to the terms and requirements of applicable
law.
PAR. 17. DRUG FREE WORK PLACE POLICY
The PROVIDER agrees to comply with the requirements of the Governor's
Executive Order No. 89-14 and the Federal Anti-Drug Abuse Act of 1988.
As a condition of contracting with the State of Rhode Island, the
PROVIDER hereby agrees to abide by ADDENDUM VII - THE STATE'S DRUG FREE
WORK PLACE POLICY, and in accordance therewith has executed ADDENDUM
VIII - DRUG FREE WORK PLACE POLICY CONTRACTOR CERTIFICATE OF
COMPLIANCE. Furthermore, the PROVIDER agrees to submit to DHS any
report or forms which may from time-to-time be required to determine
the PROVIDER's compliance with this policy.
The PROVIDER acknowledges that a violation of the Drug Free Work Place
<PAGE>
Policy may, at DHS' option, result in termination of this Agreement.
PAR. 18. ATTACHMENTS
Attached hereto and made part of this Agreement are the following
Addenda:
ADDENDUM I. Program
ADDENDUM II. Budget
ADDENDUM III. Payments and Reports Schedule
ADDENDUM IV. State's RFP #1435
ADDENDUM V. Notice to Department of Human Services Service
Providers of their Responsibilities under Title VI
of the Civil Rights Act of 1964
ADDENDUM VI. Notice to Department of Human Services Service
Providers of their Responsibilities under Section
504 of the Rehabilitation Act of 1973
ADDENDUM VII. Drug Free Work Place Policy
ADDENDUM VIII. Contractor Certificate of Compliance
ADDENDUM IX. Subcontractor Compliance
ADDENDUM X. Certification Regarding Environmental Tobacco Smoke
ADDENDUM XI. Instructions for Certifications Regarding
Debarment, Suspension, and Other Responsibility
Matters - Primary Covered Transactions
ADDENDUM XII. Certification Regarding Debarment, Suspension, and
Other Responsibility Matters - Primary Covered
Transactions
PAR. 19. SETTLEMENT OF DISPUTES
Any dispute concerning a question of fact arising under the contract
which is not
<PAGE>
disposed of by agreement between the DEPARTMENT's named liaison and the
PROVIDER's named liaison shall be decided by the following process:
Step 1 - The DEPARTMENT's Project Manager and the PROVIDER's
Project Manager will attempt to resolve the issue at
hand.
Step 2 - If the Step 1 process does not result in resolution,
then the issue shall be resolved by a Committee of three
consisting of the Associate Director of Management
Services (DHS), the President of the PROVIDER, and a
mutually agreed to third party.
The Committee's decision shall be final and conclusive subject only to
whatever rights, if any, the PROVIDER may have pursuant to Rhode Island
law. In connection with any appeal to the Contract Administrator under
this paragraph, the PROVIDER shall be afforded an opportunity to be
heard and to offer evidence in support of its appeal. Pending final
decision of a dispute, the PROVIDER shall proceed diligently with the
performance of the contract in accordance with the Contract
Administrator's direction.
PAR. 20. WORK REVIEWS
The PROVIDER agrees that all work performed under this agreement may be
reviewed by the Office of Information Processing, Department of
Administration, State of Rhode Island.
<PAGE>
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE HEREUNDER SET THEIR HANDS AS OF THE
DATE FIRST ABOVE WRITTEN AND THE AGREEMENT MADE LEGALLY BINDING AS FOLLOWS:
WITNESS: /s/ Donna J. Guido By: /s/ Kenneth C. Kirsch
------------------ -------------------------
(SIGNATURE) CHAIR OR AUTHORIZED
AGENT/SIGNATURE PROVIDER
Donna J. Guido Kenneth C. Kirsch
- ------------------------------------ -------------------------------------
(TYPE OR PRINT NAME) (TYPE OR PRINT NAME)
BY: /s/ (ILLEGIBLE)
---------------------------
DIRECTOR
DEPARTMENT OF HUMAN SERVICES
<PAGE>
ADDENDUM I
PROGRAM
NETWORK SIX PROPOSAL DATED MAY 13, 1999 SUBMITTED TO OFFICE OF PURCHASING,
DEPARTMENT OF ADMINISTRATION IN RESPONSE TO RFP #1435. SAID PROPOSAL IS
INCORPORATED HEREIN BY REFERENCE AS IF FULLY SET FORTH HEREIN.
<PAGE>
ADDENDUM II
BUDGET
NETWORK SIX, INC. COST PROPOSAL DATED MAY 13, 1999 SUBMITTED TO OFFICE OF
PURCHASING, DEPARTMENT FO ADMINISTRATION IN RESPONSE TO RFP #1435. SAID COST
PROPOSAL IS INCORPORATED HEREIN BY REFERENCE AS IF FULLY SET FORTH HEREIN.
<PAGE>
ADDENDUM III
PAYMENTS AND REPORTS SCHEDULE
1. Within twenty (20) working days after the termination of this Agreement, the
PROVIDER will submit an annual written report summarizing accomplishment of
goals and objectives as outlined in ADDENDUM I - PROGRAM.
2. Payments under this Agreement will be made semi-monthly upon submission of
the appropriate documentation.
3. Narrative and fiscal reports shall be sent to:
Department of Human Services
Contract Management
600 New London Avenue
Cranston, RI 02920
4. All reports are due ten (10) working days after the end of the reporting
period. Failure to provide required reports and data within the prescribed
time frame may result in a delay of payment of the withholding of funds to
the PROVIDER.
<PAGE>
ADDENDUM IV
REQUEST FOR PROPOSAL NUMBER 1435
REQUEST FOR PROPOSAL NUMBER 1435 ISSUED BY THE RHODE ISLAND DEPARTMENT OF
ADMINISTRATION / DIVISION OF PURCHASES, ON BEHALF OF THE RHODE ISLAND DEPARTMENT
OF HUMAN SERVICES ON 18 MARCH 1999. SAID REQUEST FOR PROPOSAL IS INCORPORATED
HEREIN BY REFERENCE AS IF FULLY SET FORTH HEREIN.
<PAGE>
ADDENDUM V
RHODE ISLAND DEPARTMENT OF HUMAN SERVICES
NOTICE TO DEPARTMENT OF HUMAN SERVICES SERVICE PROVIDERS OF
THEIR
RESPONSIBILITIES UNDER TITLE VI OF THE CIVIL RIGHTS ACT OF 1964
PUBLIC AND PRIVATE AGENCIES, ORGANIZATIONS, INSTITUTIONS, AND PERSONS THAT
RECEIVE FEDERAL FINANCIAL ASSISTANCE THROUGH THE DEPARTMENT OF HUMAN SERVICES
(DHS) ARE SUBJECT TO THE PROVISIONS OF TITLE VI OF THE CIVIL RIGHTS ACT OF 1964
AND THE IMPLEMENTING REGULATIONS OF THE UNITED STATES DEPARTMENT OF HEALTH AND
HUMAN SERVICES (DHHS), WHICH IS LOCATED AT 45 CFR, PART 80. DHS CONTRACTS WITH
SERVICE PROVIDERS INCLUDE A PROVIDER'S ASSURANCE THAT IN COMPLIANCE WITH TITLE
VI AND THE IMPLEMENTING REGULATIONS, NO PERSON SHALL BE EXCLUDED FROM
PARTICIPATION IN, DENIED THE BENEFITS OF, OR BE OTHERWISE SUBJECTED TO
DISCRIMINATION IN ITS PROGRAMS AND ACTIVITIES ON THE GROUNDS OF RACE, COLOR, OR
NATIONAL ORIGIN.
IN FISCAL YEAR 1983, DHS BEGAN TO REVIEW ITS SERVICE PROVIDERS TO ASSURE THAT
THEY ARE COMPLYING WITH THESE REQUIREMENTS.
IT IS THE RESPONSIBILITY OF EACH SERVICE PROVIDER TO ACQUAINT ITSELF WITH ALL OF
THE PROVISIONS OF THE TITLE VI REGULATIONS. A COPY OF THE REGULATIONS IS
AVAILABLE UPON REQUEST FROM THE COMMUNITY RELATIONS LIAISON OFFICER, DEPARTMENT
OF HUMAN SERVICES, 600 NEW LONDON AVENUE, CRANSTON, RI, 02910; TELEPHONE NUMBER:
(401) 462-2130.
THE REGULATIONS ADDRESS THE FOLLOWING TOPICS:
SECTION:
80.1 PURPOSE
80.2 APPLICATION OF THIS REGULATION
80.3 DISCRIMINATION PROHIBITED
80.4 ASSURANCES REQUIRED
80.5 ILLUSTRATIVE APPLICATIONS
80.6 COMPLIANCE INFORMATION
80.7 CONDUCT OF INVESTIGATIONS
80.8 PROCEDURE FOR EFFECTING COMPLIANCE
80.9 HEARINGS
80.10 DECISIONS AND NOTICES
80.11 JUDICIAL REVIEW
80.12 EFFECT ON OTHER REGULATIONS; FORMS AND INSTRUCTIONS
80.13 DEFINITION
JUNE 1999
<PAGE>
ADDENDUM VI
RHODE ISLAND DEPARTMENT OF HUMAN SERVICES
NOTICE TO DEPARTMENT OF HUMAN SERVICES SERVICE PROVIDERS OF
THEIR
RESPONSIBILITIES UNDER SECTION 504 OF THE REHABILITATION ACT OF 1973
PUBLIC AND PRIVATE AGENCIES, ORGANIZAITONS, INSTITUTIONS, AND PERSONS THAT
RECEIVE FEDERAL FINANCIAL ASSISTANCE THROUGH THE DEPARTMENT OF HUMAN SERVICES
(DHS) ARE SUBJECT TO THE PROVISIONS OF SECTION 504 OF THE REHABILITATION ACT OF
1973 AND THE IMPLEMENTING REGULATIONS OF THE UNITED STATES DEPARTMENT OF HEALTH
AND HUMAN SERVICES (DHHS), WHICH IS LOCATED AT 45 CFR, PART 84. DHS CONTRACTS
WITH SERVICE PROVIDERS INCLUDE THE PROVIDER'S ASSURANCE THAT IT WILL COMPLY WITH
SECTION 504 OF THE REGULATIONS, WHICH PROHIBITS DISCRIMINATION AGAINST
HANDICAPPED PERSONS IN PROVIDING HEALTH, WELFARE, OR OTHER SOCIAL SERVICES OR
BENEFITS.
IN FISCAL YEAR 1983, DHS BEGAN TO REVIEW ITS SERVICE PROVIDERS TO ASSURE THAT
THEY ARE COMPLYING WITH THESE REQUIREMENTS.
IT IS THE RESPONSIBILITY OF EACH SERVICE PROVIDER TO ACQUAINT ITSELF WITH ALL OF
THE PROVISIONS OF THE SECTION 504 REGULATIONS. A COPY OF THE REGULATIONS,
TOGETHER WITH AN AUGUST 14, 1978 POLICY INTERPRETATION OF GENERAL INTEREST TO
PROVIDERS OF HEALTH, WELFARE, OR TOHER SOCIAL SERVICES OR BENEFITS, IS AVAILABLE
UPON REQUEST FROM THE COMMUNITY RELATIONS LIAISON OFFICER, DEPARTMENT OF HUMAN
SERVICES, 600 NEW LONDON AVENUE, CRANSTON, RI, 02920; TELEPHONE NUMBER: (401)
462-2130.
PROVIDERS SHOULD PAY PARTICULAR ATTENTION TO SUBPARTS A, BA, C, AND F OF THE
REGULATIONS WHICH PERTAIN TO THE FOLLOWING:
SUBPART A - GENERAL PROVISIONS
SECTION:
84.1 PURPOSE
84.2 APPLICATIONS
84.3 DEFINITIONS
84.4 DISCRIMINATION PROHIBITED
84.5 ASSURANCE REQUIRED
84.6 REMEDIAL ACTION, VOLUNTARY ACTION, AND SELF-EVALUATION DESIGNATION OF
RESPONSIBLE EMPLOYEE AND ADOPTIVE GRIEVANCE PROCEDURES
84.7 NOTICE
84.8 ADMINISTRATIVE REQUIREMENTS FOR SMALL RECIPIENTS
84.9 EFFECT OF STATE OR LOCAL LAW OR OTHER REQUIREMENTS AND EFFECT OF
EMPLOYMENT OPPORTUNITIES
JUNE 1999
<PAGE>
ADDENDUM VII
DRUG-FREE WORKPLACE POLICY
DRUG USE AND ABUSE AT THE WORKPLACE OR WHILE ON DUTY ARE SUBJECTS OF IMMEDIATE
CONCERN IN OUR SOCIETY. THESE PROBLEMS ARE EXTREMELY COMPLEX AND ONES FOR WHICH
THERE ARE NO EASY SOLUTIONS. FROM A SAFETY PERSPECTIVE, THE USERS OF DRUGS MAY
IMPAIR THE WELL-BEING OF ALL EMPLOYEES. THE PUBLIC AT LARGE, AND RESULT IN
DAMAGE TO PROPERTY. THEREFORE, IT IS THE POLICY OF THE STATE THAT THE UNLAWFUL
MANUFACTURE, DISTRIBUTION, DISPENSATION, POSSESSION, OR USE OF A CONTROLLED
SUBSTANCE IS PROHIBITED IN THE WORKPLACE. ANY EMPLOYEE(S) VIOLATING THIS POLICY
WILL BE SUBJECT TO DISCIPLINE UP TO AND INCLUDING TERMINATION. AN EMPLOYEE MAY
ALSO BE DISCHARGED OR OTHERWISE DISCIPLINED FOR A CONVICTION INVOLVING ILLICIT
DRUG BEHAVIOR, REGARDLESS OF WHETHER HIS/HER ACTIONS WERE CONNECTED IN ANY WAY
WITH HIS OR HER EMPLOYMENT. THE SPECIFICS OF THIS POLICY ARE AS FOLLOWS:
1. ANY UNAUTHORIZED EMPLOYEE WHO GIVES OR IN ANY WAY TRANSFERS A CONTROLLED
SUBSTANCE TO ANOTHER PERSON OR SELLS OR MANUFACTURES A CONTROLLED SUBSTANCE
WHILE ON DUTY, REGARDLESS OF WHETHER THE EMPLOYEE IS ON OR OFF THE PREMISES
OF THE EMPLOYER WILL BE SUBJECT TO DISCIPLINE UP TO AND INCLUDING
TERMINATION.
2. THE TERM "CONTROLLED SUBSTANCE" MEANS ANY DRUGS LISTED IN 21 USC, SECTION
812 AND OTHER FEDERAL REGULATIONS. GENERALLY, ALL ILLEGAL DRUGS AND
SUBSTANCES ARE INCLUDED, SUCH AS MARIJUANA, HEROIN, MORPHINE, COCAINE,
CODEINE OR OPIUM ADDITIVES, LSD, DMT, STP, AMPHETAMINES, METHAMPHETAMINES,
AND BARBITURATES.
3. EACH EMPLOYEE IS REQUIRED BY LAW TO INFORM THE AGENCY WITHIN FIVE (5) DAYS
AFTER HE/SHE IS CONVICTED FOR COALITION OF ANY FEDERAL OR STATE CRIMINAL
DRUG STATUTE. A CONVICTION MEANS A FINDING OF GUILT (INCLUDING A PLEA OF
NOLO CONTENDERE) OR THE IMPOSITION OF A SENTENCE BY A JUDGE OR JURY IN ANY
FEDERAL OR STATE COURT.
4. THE EMPLOYER (THE HIRING AUTHORITY) WILL BE RESPONSIBLE FOR REPORTING
CONVICTIONS(S) TO THE APPROPRIATE FEDERAL GRANING SOURCE, WITHIN TEN (10)
DAYS AFTER RECEIVING NOTICE FROM THE EMPLOYEE OR OTHERWISE RECEIVES ACTUAL
NOTICE OF SUCH CONVICTIONS(S). ALL CONVICTIONS(S) MUST BE REPORTED IN
WRITING TO THE OFFICE OF PERSONNEL ADMINISTRATION (OPA) WITHIN THE SAME TIME
FRAME.
5. IF AN EMPLOYEE IS CONVICTED OF VIOLATION ANY CRIMINAL DRUG STATUTE WHILE ON
DUTY, HE/SHE WILL BE SUBJECT TO DISCIPLINE UP TO AND INCLUDING TERMINATION.
CONVICTION(S) WHILE OFF DUTY MAY RESULT IN DISCIPLINE OR DISCHARGE.
<PAGE>
6. THE STATE ENCOURAGES ANY EMPLOYEE WITH A DRUG ABUSE PROBLEM TO SEEK
ASSISTANCE FROM THE RHODE ISLAND EMPLOYEE ASSISTANCE PROGRAM (RIEAP). YOUR
DEPARTMENT PERSONNEL OFFICER HAS MORE INFORMATION ON RIEAP.
7. THE LAW REQUIRES ALL EMPLOYEES TO ABIDE BY THIS POLICY.
EMPLOYEE RETAIN THIS COPY JUNE 1999
<PAGE>
ADDENDUM VIII
DRUG-FREE WORKPLACE POLICY
CONTRACTOR CERTIFICATE OF COMPLIANCE
I, KENNETH C. KIRSCH, PRESIDENT & CEO, NETWORK SIX, INC., A CONTRACTOR DOING
BUSINESS WITH THE STATE OF RHODE ISLAND, HEREBY ACKNOWLEDGE THAT I HAVE RECEIVED
A COPY OF THE STATE'S POLICY REGARDING THE MAINTENANCE OF A DRUG-FREE WORKPLACE.
I HAVE BEEN INFORMED THAT THE UNLAWFUL MANUFACTURE, DISTRIBUTION, DISPENSATION,
POSSESSION, OR USE OF A CONTROLLED SUBSTANCE (TO INCLUDE BUT NOT LIMITED TO SUCH
DRUGS AS MARIJUANA, HEROIN, COCAINE, PCP, AND CRACK, AND MAY ALSO INCLUDE LEGAL
DRUGS WHICH MAY BE PRESCRIBED BY A LICENSED PHYSICIAN IF THEY ARE ABUSED), IS
PROHIBITED ON THE STATE'S PREMISES OR WHILE CONDUCTING STATE BUSINESS. I
ACKNOLEDGE THAT MY EMPLOYEES MUST REPORT FOR WORK IN A FIT CONDITION TO PERFORM
THEIR DUTIES.
AS A CONDITION FOR CONTRACTING WITH THE STATE, AS A RESULT OF THE FEDERAL
OMNIBUS DRUG ACT, I WILL REQUIRE MY EMPLOYEES TO ABIDE BY THE STATE'S POLICY.
FURTHER, I RECOGNIZE THAT ANY VIOLATION OF THIS POLICY MAY RESULT IN TERMINATION
OF THE CONTRACT.
/s/ Kenneth C. Kirsch 7/12/99
- --------------------------- -------
AUTHORIZED AGENT SIGNATURE DATE
PROVIDER
JUNE 1999
<PAGE>
ADDENDUM IX
SUBCONTRACTOR COMPLIANCE
I, NETWORK SIX, INC.
A CONTRACTOR DOING BUSINESS WITH THE STATE OF RHODE ISLAND, HEREBY CERTIFY
THAT ALL APPROVED SUBCONTRACTORS PERFORMING SERVICES UNDER THE TERMS OF THIS
AGREEMENT WILL HAVE EXECUTED WRITTEN CONTRACTS WITH THIS AGENCY, AND ALL
CONTRACTS WILL BE MAINTAINED ON FILE AND PRODUCED UPON REQUEST. ALL CONTRACTS
MUST CONTAIN LANGUAGE IDENTICAL TO THE PROVISIONS OF THIS AGREEMENT AS
FOLLOWS:
PAR. 8. NONLIABILITY FOR PERSONAL INJURIES
PAR. 9. NONDISCRIMINATION IN EMPLOYEMENT AND SERVICES
PAR. 20. DRUG-FREE WORKPLACE POLICY
<PAGE>
ADDENDUM X
CERTIFICATION REGARDING ENVIRONMENTAL TOBACCO SMOKE
PUBLIC LAW 103-227, PART C - ENVIRONMENTAL TOBACCO SMOKE, ALSO KNOWN AS THE
PRO-CHILDREN ACT OF 1994 (ACT), REQUIRES THAT SMOKING NOT BE PERMITTED IN ANY
PORTION OF ANY INDOOR FACILITY OWNED OR LEASED OR CONTRACTED FOR BY AN ENTITY
AND USED ROUTINELY OR REGULARLY FOR THE PROVISION OF HEALTH, DAY CARE,
EDUCATION, OR LIBRARY SERVICES TO CHILDREN UNDER THE AGE OF 18, IF THE SERVICES
ARE FUNDED BY FEDERAL GRANT, CONTRACT, LOAN, OR LOAN GUARANTEE. THE LAW DOES NOT
APPLY TO CHILDREN'S SERVICES PROVIDED IN PRIVATE RESIDENCES, FACILITIES FUNDED
SOLELY BY MEDICARE OR MEDICAID FUNDS, AND PORTIONS OF FACILITIES USED FOR
INPATIENT DRUG OR ALCOHOL TREATMENT. FAILURE TO COMPLY WITH THE PROVISIONS OF
THE LAW MAY RESULT IN THE IMPOSITION OF A CIVIL MONETARY PENALTY OF UP TO $1000
PER DAY AND/OR THE IMPOSITION OF AN ADMINISTRATIVE COMPLIANCE ORDER ON THE
RESPONSIBLE ENTITY.
BY SIGNING AND SUBMITTING THIS APPLICATION THE APPLICANT/GRANTEE CERTIFIES THAT
IT WILL COMPLY WITH THE REQUIREMENTS OF THE ACT. THE APPLICANT / GRANTEE FURTHER
AGREES THAT IT WILL REUIRE THE LANGUAGE OF THIS CERTIFICATION BE INCLUDED IN ANY
SUBAWARDS WHICH CONTAIN PROVISIONS FOR CHILDREN'S SERVICES AND THAT ALL
SUBGRANTEES SHALL CERTIFY ACCORDINGLY.
/s/ Kenneth C. Kirsch 7/12/99
- --------------------------- -------
AUTHORIZED AGENT SIGNATURE DATE
PROVIDER
<PAGE>
ADDENDUM XI
INSTRUCTIONS FOR
CERTIFICATION REGARDING DEBARMENT, SUSPENSION, AND OTHER RESPONSIBILITY
MATTERS - PRIMARY COVERED TRANSACTIONS
1. BY SIGNING AND SUBMITTING THIS PROPOSAL, THE PROSPECTIVE PRIMARY PARTICIPANT
IS PROVIDING THE CERTIFICATION SET OUT BELOW.
2. THE INABILITY OF A PERSON TO PROVIDE THE CERTIFICATION REQUIRED BELOW WILL
NOT NECESSARILY RESULT IN DENIAL OF PARTICIPATION IN THIS COVERED
TRANSACTION. IF NECESSARY, THE PROSPECTIVE PARTICIPANT SHALL SUBMIT AN
EXPLANATION OF WHY IT CANNOT PROVIDE THE CERTIFICATION. THE CERTIFICATION OR
EXPLANATION WILL BE CONSIDERED IN CONNECTION WITH THE DEPARTMENT'S'
DETERMINATION WHETHER TO ENTER INTO THIS TRANSACTION. HOWEVER, FAILURE OF
THE PROSPECTIVE PRIMARY PARTICIPANT TO FURNISH A CERTIFICATION OR
EXPLANATION SHALL DISQUALIFY SUCH PERSON FROM PARTICIPATION IN THIS
TRANSACTION.
3. THE CERTIFICATION IN THIS CLAUSE IS A MATERIAL REPRESENTATION OF FACT UPON
WHICH RELIANCE WAS PLACED WHEN THE DEPARTMENT DETERMINED THAT THE
PROSPECTIVE PRIMARY PARTICIPANT KNOWINGLY RENDERED AN ERRONEOUS
CERTIFICATION, IN ADDITION TO OTHER REMEDIES AVAILABLE TO THE DEPARTMENT.
THE DEPARTMENT MAY TERMINATE THIS TRANSACTION FOR CAUSE OR DEFAULT.
4. THE PROSPECTIVE PRIMARY PARTICIPANT SHALL PROVIDE IMMEDIATE WRITTEN NOTICE
TO THE DEPARTMENT IF AT ANY TIME THE PROSPECTIVE PRIMARY PARTICIPANT LEARNS
THAT ITS CERTIFICATION WAS ERRONEOUS WHEN SUBMITTED OR HAS BECOME ERRONEOUS
BY REASON OF CHANGED CIRCUMSTANCES.
5. THE TERMS "COVERED TRANSACTION," "DEBARRED," "SUSPENDED," "INELIGIBLE,"
"LOWER TIER COVERED TRANSACTION," "PARTICIPANT," "PERSON," "PRIMARY COVERED
TRANSACTION," "PRINCIPAL," "PROPOSAL," AND "VOLUNTARILY EXCLUDED," AS USED
IN THIS CLAUSE, HAVE THE MEANINGS SET OUT IN THE DEFINITIONS AND COVERAGE
SECTIONS OF THE RULES IMPLEMENTING EXECUTIVE ORDER 12549: 45 CFR PART 76.
6. THE PROSPECTIVE PRIMARY PARTICIPANT AGREES BY SUBMITTING THIS PROPOSAL THAT,
SHOULD THE PROPOSED COVERED TRANSACTION BE ENTERED INTO, IT SHALL NOT
KNOWINGLY ENTER INTO ANY LOWER TIER COVERED TRANSACTION WITH A PERSON WHO IS
DEBARRED, SUSPENDED, DECLARED INELIGIBLE, OR VOLUNTARILY EXCLUDED FROM
PARTICIPATION IN THIS COVERED TRANSACTION, UNLESS AUTHORIZED BY THE
DEPARTMENT.
7. THE PROSPECTIVE PRIMARY PARTICIPANT FURTHER AGREES BY SUBMITTING THIS
PROPOSAL THAT IT WILL INCLUDE THE CLAUSE TITLED "CERTIFICATION REGARDING
DEBARMENT, SUSPENSION, INELIGIBILITY AND VOLUNTARY EXCLUSION-LOWER TIER
COVERED TRANSACTIONS," PROVIDED BY DHS, WITHOUT MODIFICATION, IN ALL LOWER
TIER COVERED TRANSACTIONS AND IN ALL SOLICITATIONS FOR LOWER TIER COVERED
TRANSACTIONS.
8. A PARTICIPANT IN A COVERED TRANSACTION MAY RELY UPON A CERTIFICATION OF A
PROSPECTIVE PARTICIPANT IN A LOWER TIER COVERED TRANSACTION THAT IS NOT
DEBARRED, SUSPENDED, INELIGIBLE, OR VOLUNTARILY EXCLUDED FROM THE
<PAGE>
COVERED TRANSACTION, UNLESS IT KNOWS THAT THE CERTIFICATION IS ERRONEOUS. A
PARTICIPANT MAY DECIDE THE METHOD AND FREQUENCY BY WHICH IT DETERMINES THE
ELIGIBILITY OF ITS PRINCIPALS. EACH PARTICIPANT MAY, BUT IS NOT REQUIRED TO,
CHECK THE NONPROCUREMENT LIST OF EXCLUDED PARTIES.
9. NOTHING CONTAINED IN THE FOREGOING SHALL BE CONSTRUED TO REQUIRE
ESTABLISHMENT OF A SYSTEM OF RECORDS IN ORDER TO RENDER IN GOOD FAITH THE
CERTIFICATION REQUIRED BY THIS CLAUSE. THE KNOWLEDGE AND INFORMATION OF A
PARTICIPANT IS NOT REQUIRED TO EXCEED THAT WHICH IS NORMALLY POSSESSED BY A
PRUDENT PERSON IN THE ORDINARY COURSE OF BUSINESS DEALINGS.
10. EXCEPT FOR TRANSACTIONS AUTHORIZED UNDER PARAGRAPH 6 OF THESE INSTRUCTIONS,
IF A PARTICIPANT IN A COVERED TRANSACTION KNOWINGLY ENTERS INTO A LOWER TIER
COVERED TRANSACTION WITH A PERSON WHO IS SUSPENDED, DEBARRED, INELIGIBLE, OR
VOLUNTARILY EXCLUDED FROM PARTICIPATION IN THIS TRANSACTION, IN ADDITION TO
OTHER REMEDIES AVAILABLE TO THE FEDERAL GOVERNMENT, THE DEPARTMENT MAY
TERMINATE THIS TRANSACTION FOR CAUSE OF DEFAULT.
<PAGE>
ADDENDUM XII
CERTIFICATION REGARDING DEBARMENT, SUSPENSION, AND OTHER RESPONSIBILITY
MATTERS - PRIMARY COVERED TRANSACTIONS
1. THE PROSPECTIVE PRIMARY PARTICIPANT CERTIFIES TO THE BEST OF ITS KNOWLEDGE
AND BELIEF, THAT IT AND ITS PRINCIPALS:
a. ARE NOT PRESENTLY DEBARRED, SUSPENDED, PROPOSED FOR DEBARMENT, DECLARED
INELIGIBLE, OR VOLUNTARILY EXCLUDED FROM COVERED TRANSACTIONS BY ANY
FEDERAL DEPARTMENT OR AGENCY;
b. HAVE NOT WITHIN A THREE-YEAR PERIOD PRECEDING THIS PROPOSAL BEEN
CONVICTED OF OR HAD A CIVIL JUDGEMENT RENDERED AGAINST THEM FOR
COMMISSION OF FRAUD OR A CRIMINAL OFFENSE IN CONNECTION WITH OBTAINING,
ATTEMPTING TO OBTAIN, OR PERFORMING A PUBLIC (FEDERAL, STATE OR LOCAL)
TRANSACTION OR CONTRACT UNDER PUBLIC TRANSACTION; VIOLATIONS OF FEDERAL
OR STATE ANTITRUST STATUES OR COMMISSION OF EMBEZZLEMENT, THEFT,
FORGERY, BRIBERY, FALSIFICATION OR DESTRUCTION OF RECORDS, MAKING FALSE
STATEMENTS, OR RECEIVING STOLEN PROPERTY;
c. ARE NOT PRESENTLY INDICATED OR OTHERWISE CRIMINALLY OR CIVILLY CHARGED
BY A GOVERNMENTAL ENTITY (FEDERAL, STATE OR LOCAL) WITH COMMISSION OF
ANY OF THE OFFENSES ENUMERATED IN PARAGRAPH (1) (B) OF THIS
CERTIFICATION; AND
d. HAVE NOT WITHIN A THREE-YEAR PERIOD PRECEDING THIS APPLICATION/PROPOSAL
HAD ONE OR MORE PUBLIC TRANSACITONS (FEDERAL, STATE OR LOCAL)
TERMINATED FOR CAUSE OR DEFAULT.
2. WHERE THE PROSPECTIVE PRIMARY PARTICIPANT IS UNABLE TO CERTIFY TO ANY OF THE
STATEMENTS IN THIS CERTIFICATION, SUCH PROSPECTIVE PARTICIPANT SHALL ATTACH
AN EXPLANATION TO THIS PROPOSAL.
/s/ Kenneth C. Kirsch 7/12/99
- --------------------------- -------
AUTHORIZED AGENT SIGNATURE DATE
PROVIDER
<PAGE>
Exhibit 99.6
LOAN AGREEMENT
This Loan Agreement (this "Agreement" or "Loan Agreement") is entered
into as of the 15th day of November, 1999 by and between Network Six, Inc., a
Rhode Island corporation with its principal place of business at 475 Kilvert
Street, Warwick, Rhode Island 02886 ("Borrower" or the "Company") and Fleet
National Bank, a Rhode Island financial institution with its principal place of
business at 111 Westminster Street, Providence, Rhode Island 02903 ("Lender").
For good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING AND OTHER TERMS
SECTION 1.01. CERTAIN DEFINED TERMS. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"ACCOUNT RECEIVABLE" means and includes any and all accounts, contract
rights, notes, drafts, acceptances and all forms of obligations or receivables
now or hereafter owed or belonging to the Borrower for inventory or other goods
sold by it or for services rendered by it in the ordinary course of business of
the Borrower, all guarantees or other security therefor, all right, title and
interest of the Borrower in the inventory or other goods which gave rise
thereto, including, but not limited to, the right of stoppage in transit, and
all rights of the Borrower earned or yet to be earned under contracts to sell
inventory or other goods or render services, and all proceeds thereof.
"ADVANCE(S)" means each advance of proceeds of the Loan, including, but
not limited to future advances of the Credit Loan made or to be made by the
Lender pursuant to SECTION 2 of this Agreement.
"AFFILIATE" means singly and collectively any Person (other than any
Subsidiary) which directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with Borrower.
"AGREEMENT" means this Loan Agreement.
"A.M." means a time from and including 12 o'clock midnight to and
excluding 12 o'clock noon on any Business Day using Providence, Rhode Island
time.
"BORROWED MONEY" means any obligation to repay money, including but not
limited to any indebtedness evidenced by promissory notes, bonds, debentures,
guaranties or similar obligations, the Loan, any Subordinated Debt and any
Indebtedness under any obligation under a
<PAGE>
conditional sale or other title retention agreement, the net aggregate rentals
under any Capitalized Lease Obligation or any lease that is the substantial
equivalent of the financing of the property so leased and any reimbursement
obligation for any standby letter of credit.
"BORROWER" has the meaning assigned in the first paragraph of this
Agreement.
"BUSINESS DAY" means any day other than a day on which banks in
Providence, Rhode Island are authorized or required to close.
"CALCULATION AGENT" means Fleet National Bank or Fleet Treasury Group.
"CAPITALIZED LEASE OBLIGATION" means all lease obligations which have
been or should be, in accordance with GAAP, capitalized on the books of the
lessee.
"CASH EQUIVALENT INVESTMENTS" means any Investment in (i) direct
obligations of the United States or any agency, authority or instrumentality
thereof, or obligations guaranteed by the United States or any agency, authority
or instrumentality thereof, whether or not supported by the full faith and
credit of, a right to borrow from or the ability to be purchased by the United
States; (ii) commercial paper rated in the highest grade by a nationally
recognized statistical rating agency or which, if not rated, is issued or
guaranteed by any issuer with outstanding long-term debt rated A or better by
any nationally recognized statistical rating agency; (iii) demand and time
deposits with, and certificates of deposit and bankers acceptances issued by,
any office of the Lender or any other bank or trust company which is organized
under the laws of the United States or any state thereof and has capital,
surplus and undivided profits aggregating at least $500,000,000; (iv) any
short-term note which has a rating of MIG-2 or better by Moody's Investors
Service Inc. or a comparable rating from any other nationally recognized
statistical rating agency; (v) any municipal bond or other governmental
obligation (including, without limitation, any industrial revenue bond or
project note) which is rated A or better by any nationally recognized
statistical rating agency; or (vii) any repurchase agreement with any financial
institution described in clause (iii) above, relating to any of the foregoing
instruments and fully collateralized by such instruments. Each Cash Equivalent
Investment shall have a maturity of less than one year at the time of purchase;
provided that the maturity of any repurchase agreement shall be deemed to be the
repurchase date and not the maturity of the subject security and that the
maturity of any variable or floating rate note subject to prepayment at the
option of the holder shall be the period remaining (including any notice period
remaining) before the holder is entitled to prepayment.
"CLOSING DATE" means the date on which all of the conditions precedent
set forth in SECTION 3.01(A) of this Agreement have been satisfied, and the
initial Credit Loan is made.
"CODE" means the United States Internal Revenue Code and applicable
regulations promulgated thereunder, as amended from time to time.
"COMMITMENT" or "CREDIT COMMITMENT" means the Lender's commitments to
make the
<PAGE>
Credit Loan as set forth in SECTION 2 hereof up to the maximum outstanding
amounts set forth therein.
"COMMITMENT FEE" means Two Thousand Five Hundred Dollars ($2,500.00).
"COMMONLY CONTROLLED ENTITY" means a Person, whether or not
incorporated, which is under common control with the Borrower within the meaning
of Section 414(b) or (c) of the Code.
"CONTROL" and the terms "controlling", "controlled by" and "under
common control with" mean the possession, directly or indirectly of the power to
vote ten percent or more of the securities or other equity interests having
ordinary voting power for the election of directors or other managers of a
Person or cause the direction of the management and policies of a Person,
whether through ownership of equity or other interests, by contract or
otherwise.
"COST OF FUNDS RATE" means the rate per annum of interest which Lender
is required to pay, or is offering to pay, for wholesale liabilities, adjusted
for reserve requirements and such other requirements as may be imposed by
federal, state or local government and regulatory agencies, as determined by
Fleet Treasury Group.
"CREDIT LIMIT" is defined in SECTION 2.01(A)(ii) below.
"CREDIT LOAN" or "LOAN" means the revolving line of credit described
herein, and if the context so required, any Advance thereof.
"CREDIT NOTE" or "NOTE" means the Credit Note in the stated maximum
principal amount of $1,000,000.00 of even date herewith and all amendments,
extensions, substitutions and/or replacements therefor.
"DEFAULT" means an event or condition which with the giving of notice
or lapse of time or both would become an Event of Default.
"DEFAULT CONDITION" means a condition in which either a Default or
Event of Default exists.
"DOLLARS" and the sign "$" mean lawful money of the United States of
America.
"ELIGIBLE ACCOUNTS RECEIVABLE" means any and all Accounts Receivable of
Borrower (less sales, excise or similar taxes, if any are included therein, and
less returns, discounts, credits and allowances of any nature at any time
issued, owing, granted, outstanding or available with respect thereto) that (a)
are bona fide and collectible, (b) are subject to a first priority perfected
security interest in favor of Lender, (c) evidence Indebtedness for goods
actually delivered or services actually performed in the ordinary course of
business of the Borrower, which goods or services have been accepted as
satisfactory, (d) have been outstanding for less than the Permitted
<PAGE>
Time and (e) are not as described below:
(i) all Accounts Receivable from any Person in which Borrower and
its stockholders, or any of them, have an equity interest or
from any Person who has an equity interest in Borrower;
(ii) any Account Receivable which is subject to any right of
set-off or other defense or claim denying liability in favor
of any account debtor;
(iii) all Accounts Receivable past due under the original terms of
sale and deemed by Lender, in its discretion, exercised in
good faith and in a commercially reasonable manner, to be
difficult to collect or uncollectible;
(iv) any Account Receivable arising out of sales to customers
having no place of business in the United States of America;
(v) (a) any Account Receivable outstanding for more than the
Permitted Time, or (b) any Account Receivable, regardless of
the length of time outstanding, fifty percent (50%) or more
of whose outstanding balance with Borrower has been
outstanding beyond the Permitted Time; provided, however,
that with respect to any Account Receivable referred to in
this subsection (v)(b), to the extent such Account Receivable
is payable at the time of and as a condition to COD shipments
of goods by Borrower to the account debtor in question, such
Account Receivable shall not be ineligible solely by virtue
of the application of this subsection (v)(b).
(vi) any Account Receivable with respect to which goods are placed
on consignment, guaranteed sale, "bill and hold" or other
terms by reason of which the payment by the account debtor
may be conditional until the time, if any, such payment
becomes unconditional;
(vii) any Government Receivable unless (a) as to United States of
America or state Government Receivables or local government
Government Receivables with a remaining unpaid balance of
$100,000 or more, Borrower fully complies with the federal
Assignment of Claims Act or any similar state or local law
and Lender has a first-priority perfected security interest
in such Government Receivables or (b) as to United States of
America or state Government Receivables or local government
Government Receivables with a remaining unpaid balance of
less than $100,000, Borrower makes a written request to
Lender asking Lender to include such Government Receivables
as Eligible Accounts Receivable, in which case Lender may
determine, in its sole and absolute discretion, that such
Government Receivables are Eligible Accounts Receivable if
Lender is satisfied that Lender has a first-priority
perfected security interest in such Government Receivables by
virtue of Borrower's compliance with the federal Assignment
of Claims Act or any similar state or local law;
(viii) any Account Receivable for which a set-off, defense,
warranty, claim, credit, allowance or adjustment is claimed
by the account debtor (except normal discount for prompt
<PAGE>
payment), or as to which the debtor thereof has complained as
to its liability thereon or returned any of the subject
goods;
(ix) any Account Receivable subject to any Lien or encumbrance
other than as permitted hereby;
(x) any Account Receivable owing by any Person which is insolvent
and/or the subject of any bankruptcy, receivership or other
insolvency proceeding;
(xi) any Account Receivable from account debtors in any state or
jurisdiction where Borrower is not registered or qualified to
do business and where such failure to qualify could prevent
collection of Accounts Receivable in such state or
jurisdiction;
(xii) any Account Receivable for which Borrower has established a
"reserve" or "sinking fund"; or
(xiii) any Account Receivable for which the account debtor has
agreed to make incremental or progress payments over the
period of time during which Borrower provides goods or
services, a portion of which is withheld by the account
debtor pending full completion of Borrower's obligations to
deliver goods or provide services, but only the extent of
such withholding shall not be an Eligible Account Receivable.
"ELIGIBLE DATED ACCOUNTS" means Eligible Accounts Receivable which
provide for a specific payment date by the account debtor in question.
"ELIGIBLE INVENTORY" means the Inventory of the Borrower as to which
all manufacturing and assembly processes have been completed and which is ready
for sale and delivery to a customer of the Borrower, and the raw materials
inventory of the Borrower, in each case, valued at the lower of cost or fair
market value in accordance with GAAP on a first-in-first-out basis, (a) to the
extent in Borrower's possession (and, without limiting the foregoing, not in
transit or on consignment), (b) as to which Borrower has valid and marketable
title free and clear of any prior Lien or other encumbrance except Liens to the
Lender, (c) which is not evidenced by any document or instrument, (d) which is
not obsolete or unsalable; and (e) in which Lender has acquired a security
interest.
"ELIGIBLE UNDATED RECEIVABLES" means Eligible Accounts Receivable as to
which no specific required payment date by the account debtor in question is
specified.
"ERISA" means the Employment Retirement Income Security Act of 1974 as
amended from time to time.
"EVENTS OF DEFAULT" has the meaning assigned to that term in SECTION
6.01 of this Agreement.
<PAGE>
"EXHIBIT" means, when followed by a letter, the exhibit attached to
this Agreement bearing that letter and by such reference fully incorporated in
this Agreement.
"GAAP" means generally accepted accounting principles, consistently
applied, in effect from time to time in the United States of America.
"GOVERNMENT RECEIVABLE" means any Account Receivable owing by the
United States of America, any country other then the United States of America,
any state or local government, or any agency, department or instrumentality
thereof.
"GUARANTOR" means any Person who is, whether upon the execution of this
Loan Agreement or at any time thereafter, a guarantor or surety for the
Borrower's obligations under this Loan Agreement, including without limitation
the Borrower's obligations to repay the Credit Loan and pay all associated
interest, fees and COSTS."INDEBTEDNESS" means, for any Person, without
duplication, (i) all indebtedness or other obligations of said Person for
Borrowed Money or for the deferred purchase price of property or services, (ii)
all indebtedness or other obligations of any other Person ("Other Person") for
Borrowed Money or for the deferred purchase price of property or services, the
payment or collection of which said Person has guaranteed (except by reason of
endorsement of negotiable instruments for collection in the ordinary course of
business) or in respect of which said Person is liable, contingently or
otherwise, including without limitation, liable by way of agreement to purchase
or lease, to provide funds for payment, to supply funds to purchase, sell or
lease property or services primarily to assure a creditor of such Other Person
against loss or otherwise to invest in or make a loan to the Other Person, or
otherwise to assure a creditor of such Other Person against loss, (iii) all
indebtedness or other obligations of any Person for Borrowed Money or for the
deferred purchase price of property or services secured by (or for which the
holder of such indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien upon or in any property owned by said Person, whether or
not said Person has assumed or become liable for the payment of such
indebtedness or obligations, (iv) Capitalized Lease Obligations of said Person
and (v) all other liabilities or Obligations of said Person which would, in
accordance with GAAP, be classified as liabilities of such a Person including,
but not limited to, trade payables incurred in the ordinary course of business.
"INVENTORY" means all of Borrower's Inventory (as defined in the
Uniform Commercial Code of the State), all goods, merchandise or other personal
property held by Borrower for sale or lease or to be furnished under contracts
of service and all right, title and interest of Borrower therein and thereto,
all raw materials, work or goods in process or materials or supplies of every
nature used, consumed or to be used or consumed in Borrower's business, all
packaging and shipping materials, and all proceeds and products of any of the
foregoing (including, without limitation, proceeds consisting of Accounts
Receivable, chattel paper, and insurance proceeds), whether now owned or
hereafter acquired by Borrower, and wherever located.
"INVESTMENT" means any investment in any Person whether by means of a
purchase of, or any agreement or option to purchase, capital stock, notes,
bonds, debentures or other evidence of equity or Indebtedness and/or by means of
a capital or partnership contribution, loan, deposit,
<PAGE>
advance (or any agreement or option for any of the foregoing) or otherwise.
"LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest 1/32 of one percent) as determined on the basis of the offered rates for
deposits in U.S. dollars, for a period of time comparable to the payment period
selected by Borrower in its Request which appears on the Telerate page 3750 as
of 11:00 a.m. London time on the day that is two London Banking Days preceding
the first day of such LIBOR Advance; provided, however, if the rate described
above does not appear on the Telerate System on any applicable interest
determination date, the LIBOR rate shall be the rate (rounded upwards as
described above, if necessary) for deposits in dollars for a period,
substantially equal to the interest period on the Reuters Page "LIBO" (or such
other page as may replace the LIBO Page on that service for the purpose of
displaying such rates), as of 11:00 a.m. (London Time), on the day that is two
(2) London Banking Days prior to the beginning of such interest period. "London
Banking Day" shall mean any date on which commercial banks are open for business
in London.
If both the Telerate and Reuters system are unavailable, then the rate
for that date will be determined on the basis of the offered rates for deposits
in U.S. dollars for a period of time comparable to such LIBOR Advance which are
offered by four major banks in the London interbank market at approximately
11:00 a.m. London time, on the date that is two (2) London Banking Days
preceding the first day of such LIBOR Advance as selected by the Calculation
Agent. The principal London office of each of the four major London banks will
be requested to provide a quotation of its U.S. dollar deposit offered rate. If
at least two such quotations are provided, the rate for that date will be the
arithmetic mean of the quotations. If fewer than two quotations are provided as
requested, the rate for that date will be determined on the basis of the rates
quoted for loans in U.S. dollars to leading European banks for a period of time
comparable to such LIBOR Advance offered by major banks in New York City at
approximately 11:00 a.m. New York City time, on the day that is two London
Banking Days preceding the first day of such LIBOR Advance. In the event that
Lender is unable to obtain any such quotation as provided above, it will be
deemed that LIBOR cannot be determined and the requested Advance shall bear
interest at the Cost of Funds Rate. In the event that the Board of Governors of
the Federal Reserve System shall impose a Reserve Percentage with respect to
LIBOR deposits of Lender then for any period during which such Reserve
Percentage shall apply, LIBOR shall be equal to the amount determined above
divided by an amount equal to 1 minus the Reserve Percentage.
"LIBOR ADVANCE" means any Advance for which Borrower selects, in the
applicable Request, the LIBOR Rate as the applicable interest rate.
"LIBOR RATE" means an annual rate of interest equal to LIBOR for the
30, 60, 90, 120 or 180 day term selected by Borrower in its Request for a
particular Advance, plus three percent (3.00%).
"LIEN" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other) or other security agreement
or arrangement of any kind or nature whatsoever amounting, in substance, to a
lien (including without limitation any
<PAGE>
conditional sale or other title retention agreement and any Capitalized Lease
Obligation having substantially the same economic effect as any of the
foregoing) or the filing of any financing statement under the applicable Uniform
Commercial Code or comparable law of any jurisdiction in respect of any of the
foregoing.
"LOAN DOCUMENTS" means this Loan Agreement, the Credit Note, the
Security Instruments and any and all other documents, instruments or agreements
now or hereafter executed in connection herewith or therewith by Borrower and/or
any other Person.
"MORTGAGED PROPERTY" means any real property mortgaged to secure the
Loan.
"MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Title IV
of ERISA.
"OFFICER'S CERTIFICATE" means a certificate signed by the President or
Executive Vice President or the Chief Financial Officer of the Borrower and
delivered to Lender.
"OTHER LIABLE PARTY" means any Person now or hereafter liable,
absolutely, contingently, directly, indirectly or otherwise for all or any
portion of the obligations of Borrower as set forth herein or referred to
herein, including, without limitation, any Guarantor.
"OVERADVANCE" means any Advance which is beyond the borrowing formula
limitations set forth in SECTION 2.01(A).
"OVERLINE ADVANCE" means any Advance beyond the monetary limits set
forth in SECTION 2.01(A).
"PBGC" means the Pension Benefit Guarantee Corporation established
pursuant to subtitle A of Title 4 of ERISA.
"P.M." means a time from and including 12 o'clock noon on any Business
Day to the end of such Business Day using Providence, Rhode Island time.
"PERMITTED TIME" means as to Eligible Undated Receivables, not more
than ninety (90) days from the date of the invoice in question; and as to
Eligible Dated Accounts, the earlier to occur of thirty (30) days beyond the
stated due date of such Eligible Dated Accounts or ninety (90) days beyond the
date of the invoice in question.
"PERSON" means any person or entity including, but not limited to, any
individual, corporation, partnership, limited liability company, joint venture,
trust, trustee (in such capacity), unincorporated organization, or a government
or any agency or political subdivision thereof.
"PLAN" means an employee benefit plan or other plan maintained for
employees of the Borrower or any Commonly Controlled Entity and covered by Title
IV of ERISA.
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"PRIME RATE" means the variable per annum rate of interest so
designated from time to time by Lender as its prime rate. The Prime Rate is a
reference rate and does not necessarily represent the lowest or best rate being
charged to any customer.
"PROPERTIES" means any real estate and related appurtenances, fixtures
and rights owned by the Borrower or otherwise occupied (pursuant to a lease or
otherwise) by the Borrower as one or more of its business premises.
"REGISTERED AGENT" means Dana Gaebe, Esq., Gaebe & Kezirian, 128
Dorrance Street, Providence, Rhode Island 02903.
"REPAYMENT DATE" means November 15, 2000 (such date, as may be extended
pursuant to SECTION 2.07 being hereinafter referred to as, the "Trigger Date").
"REPORTABLE EVENT" shall have the meaning assigned to that term in
Title IV of ERISA.
"REQUEST" means both a telephonic and a telecopied request for an
Advance of the Credit Loan in the form of Exhibit B attached hereto, or
containing the information required by Exhibit B, fully completed, received by
Lender from Borrower in accordance with this Agreement and which request shall
be, if telephonic, promptly confirmed in writing.
"SAUGATUCK AGREEMENT" means an agreement anticipated to be entered into
by and between Borrower and Saugatuck Capital (a copy of which is to be
furnished to Lender by Borrower as soon as possible) pursuant to which Borrower
will issue Borrower's common stock to Saugatuck Capital in exchange for
Borrower's preferred stock currently held by Saugatuck Capital and Borrower will
issue a note to be subordinated in payment priority by an agreement in form and
substance satisfactory to Lender, to Saugatuck Capital not to exceed $750,000 in
amount representing prior dividends on Borrower's preferred stock which had been
declared but not paid; provided, however, that payments on the foregoing note
shall be payable in three equal installments payable over a period of not less
than two (2) years.
"SECTION" means, when followed by a number, the section or subsection
of this Agreement bearing that number, unless the context indicates otherwise.
"SECURITY INSTRUMENTS" means any and all mortgages, security
agreements, assignments, pledges, guarantees, and any and all other documents,
instruments and agreements now or hereafter providing security for the Loan,
and/or any other Indebtedness of the Borrower or any Guarantor to the Lender,
now existing or hereafter executed and/or delivered in connection with the Loan,
whether given by Borrower or any Guarantor, any subordination agreements
contemplated hereunder or now or hereafter executed in connection herewith;
title and casualty insurance policies providing coverage to Lender; UCC-I
financing statements or similar filings perfecting the above-referenced security
interests; all as executed, delivered to and accepted by Lender on or prior to
the Closing Date, as same may be amended in writing by Lender and the Borrower
as the case may be; and any other document, instrument or agreement now or
hereafter given as security for the Loan.
<PAGE>
"SINGLE EMPLOYER PLAN" means any Plan which is not a Multiemployer
Plan.
"STATE" means the State of Rhode Island.
"SUBORDINATED DEBT" means any Indebtedness and obligations of the
Borrower subordinated to Borrower's Indebtedness in connection with the Loans by
virtue of a subordination agreement executed by the subordinated creditor and
Lender, and acceptable to Lender in form and substance.
"SUBSIDIARY" means any corporation, if any of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors or other managers of such corporation
(irrespective of whether or not at the time capital stock of any other class or
classes of such corporation shall or might have voting power upon the occurrence
of any contingency) is at the time directly or indirectly owned by the Borrower
or its shareholders or by the Borrower, its shareholders and/or one or more
Subsidiaries or the management of which corporation is under control of the
Borrower, its shareholders and/or any other Subsidiary, directly or indirectly
through one or more Persons.
"VARIABLE ADVANCE" means any Advance for which Borrower selects, in the
applicable Request, the Variable Rate as the applicable interest rate.
"VARIABLE RATE" means an annual rate of interest equal to the Prime
Rate plus one-quarter of one percent (.25%).
"YIELD MAINTENANCE FEE" means the amount computed as follows: The
current rate for United States Treasury securities (bills on a discounted basis
shall be converted to a bond equivalent) with a maturity date closest to the
maturity date of the term chosen pursuant to the Request for the LIBOR Advance
as to which the prepayment is made, shall be subtracted from the "cost of funds"
component of the fixed rate in effect at the time of prepayment. If the result
is zero or a negative number, there shall be no yield maintenance fee. If the
result is a positive number, then the resulting percentage shall be multiplied
by the amount of the principal balance being prepaid. The resulting amount shall
be divided by 360 and multiplied by the number of days remaining in the term
chosen in the Request for the LIBOR Advance as to which the prepayment is made.
Said amount shall be reduced to present value calculated by using the number of
days remaining in the designated term and using the above-referenced United
States Treasury security rate and the number of days remaining in the term
chosen in the Request for the LIBOR Advance as to which the prepayment is made.
The resulting number shall be the yield maintenance fee due to Lender upon
prepayment of the fixed rate loan.
If by reason of an Event of Default, Lender elects to declare any LIBOR
Advance to be immediately due and payable, then any Yield Maintenance Fee with
respect to that LIBOR Advance shall become due and payable in the same manner as
though Borrower had exercised its right of prepayment.
<PAGE>
SECTION 1.02. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP, and all financial
data submitted pursuant to this Agreement shall be prepared in accordance with
GAAP.
SECTION 1.03. TERMS. The words "hereof", "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement.
SECTION 1.04. SUBSIDIARIES, AFFILIATES AND GUARANTOR. This Loan
Agreement contains references to "Subsidiaries". As of the date hereof, the
Borrower has no Subsidiaries. Each reference to Subsidiaries herein shall be
without meaning unless, until and during such time as such Subsidiary exists.
Nothing contained in this SECTION 1.04 shall be deemed to permit the creation,
acquisition, existence, sale, merger, dissolution, liquidation, termination of
existence or other action of or relating to any Subsidiary which would otherwise
violate the provisions of this Loan Agreement.
ARTICLE II
AMOUNT AND TERMS OF THE LOANS
SECTION 2.01.
(A) UNDERTAKING TO LEND--CREDIT LOAN. During the period commencing on
the Closing Date and ending on the Business Day immediately prior to the
Repayment Date, Lender will make Advances to the Borrower of the Credit Loan on
a revolving basis subject in all respects to the terms and conditions of this
Agreement, including, but not limited to, the conditions precedent described in
Article III hereof; provided, however, the aggregate outstanding principal
balance of Advances shall not in any event exceed at any one time the Credit
Limit, which is defined as the lesser of (i) the sum of eighty percent (80%) of
Eligible Dated Accounts Receivable and eighty percent (80%) of Eligible Undated
Accounts Receivable or (ii) One Million Dollars ($1,000,000).
The Credit Limit shall further be reduced by the amount of any letters
of credit issued and outstanding from time to time by Lender which have been
issued at the request of Borrower.
Notwithstanding anything to the contrary set forth in this SECTION
2.01, Lender shall have the right, in its sole and uncontrolled discretion to
permit Overline Advances or additional Overadvances as Lender shall in its sole
and uncontrolled discretion deem appropriate. Lender shall have no obligation
whatsoever to permit such Overline Advances or additional Overadvances. In the
event that Lender does so permit such Overline Advances or additional
Overadvances, any such Advances shall be subject to all terms and conditions of
the Loan Documents and the obligation to repay such Advances shall be evidenced
by the Note, notwithstanding that (in the case of Overline Advances), under
certain circumstances, the outstanding principal balance of the Loan may exceed
the stated principal balance of the Note.
(B) TERMINATION OF UNDERTAKING TO LEND. Notwithstanding anything to the
contrary
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set forth in this Agreement, and except as set forth in SECTION 2.07, Lender's
undertaking to make Advances shall terminate immediately on the Trigger Date or
at any time if there shall have occurred or there shall exist any Default
Condition.
(C) REQUESTS FOR ADVANCES. The Borrower shall obtain an Advance with a
written Request by telecopy transmission in the form of Exhibit "B" attached
hereto, or, if permitted by Lender, by telephonic Request. Any request for an
Advance made by Borrower shall be in an amount which is an integral multiple of
one thousand dollars ($1,000.00). Borrower shall state in each and every Request
whether Borrower is selecting the Variable Rate or LIBOR Rate for such Advance
and, if Borrower selects the LIBOR Rate, Borrower must also choose a thirty
(30), sixty (60), ninety (90), one hundred twenty (120) or one hundred eighty
(180) day payment term for such Advance. The Borrower accepts all the risks
inherent in such Request. The Borrower further absolves the Lender from any and
all damages, loss and liabilities of whatsoever nature which may result from an
unauthorized telephonic or telecopied Request for an Advance, a defective
transmission, or a telephonic or telecopied Request which is misunderstood by
the Lender's employee who is the recipient of such Request, unless the Lender is
grossly negligent or commits willful misconduct in connection therewith. It is
further agreed that neither the Lender nor any of its directors, officers or
employees shall be under any duty to pass upon the validity, accuracy,
authorization, effectiveness, or genuineness of any telephonic or telecopied
Request, and the Lender and its directors, officers and employees shall be
entitled to assume that any such telephonic or telecopied instructions are
valid, effective, accurate, genuine and authorized. The Borrower will forward to
Lender "hard copy" written evidence of such Request by mailing on the same day
an original letter in form acceptable to Lender.
(D) EVIDENCE OF THE LOAN. Each Advance made by Lender to Borrower under
this SECTION 2 and all payments made on account of the unpaid principal amount
thereof shall be recorded in Lender's internal records which may be introduced
in evidence in any court proceeding relating to this Agreement, the Loan or the
Note and shall be deemed presumptive evidence of the facts stated therein,
absent manifest error.
SECTION 2.02. AUTOMATIC DEBIT. All payments, prepayments and other
charges to be made by Borrower under the Loans may be made by Lender by debiting
the demand deposit or other account(s) Borrower maintains with Lender without
notice to or consent of Borrower, or in such other reasonable manner as may be
designated by the Lender in writing to the Borrower. Nothing contained in this
SECTION 2.02 shall be deemed to relieve Borrower of the obligation to make
payments as required under the Note, which obligation is absolute.
(A) INTEREST. Interest shall accrue and be paid on the Loan as provided
below and as further detailed in the Note:
(i) any Variable Advance shall bear interest at the Variable
Rate; and
(ii) any LIBOR Advance shall bear interest at the LIBOR Rate for
the applicable payment period which Borrower designates in
its Request for such LIBOR
<PAGE>
Advance.
All computations of interest under the Credit Note and this Loan
Agreement shall be made on the basis of a three hundred sixty (360) day year and
the actual number of days elapsed.
Upon Default or after maturity or after judgment has been rendered on
the Credit Note, or in the Event of Default as defined in Section 6.01 of the
Loan Agreement, Borrower's right to select pricing options shall cease and the
unpaid principal of all advances shall, at the option of the Lender, bear
interest at a rate which is four percent (4%) greater per annum than that which
would otherwise be applicable.
(B) INCREASED COSTS - CAPITAL. If, after the date hereof, Lender shall
have reasonably determined that the adoption of any applicable law, governmental
rule, regulation or order regarding capital adequacy of banks or bank holding
companies, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Lender with any policy, guideline, directive or request regarding capital
adequacy (whether or not having the force of law and whether or not failure to
comply therewith would be unlawful) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on the capital of Lender as a consequence of the obligations hereunder of Lender
to a level below that which Lender could have achieved but for such adoption,
change or compliance (taking into consideration the policies of Lender with
respect to capital adequacy immediately before such adoption, change or
compliance and assuming that the capital of Lender was fully utilized prior to
such adoption, change or compliance) by an amount reasonably deemed by Lender to
be material, the Borrower shall pay to Lender such additional amounts as shall
be sufficient to compensate Lender for such reduced return, each such payment to
be made by the Borrower within thirty (30) Business Days after each demand by
Lender. A certificate of Lender setting forth the amount to be paid to Lender
hereunder shall be presumptive evidence of the facts stated therein. In
determining such amount, Lender may use any reasonable averaging and attribution
methods. At the written request of Borrower, Lender shall provide Borrower with
a written explanation of the methods used in calculating such amount. Lender
will use its best efforts to inform the Borrower of any event occurring after
the date hereof which will require payments to be made under this SECTION
2.03(B) promptly after Lender becomes aware of such event, but the failure of
Lender so to inform the Borrower shall not affect any of the obligations of the
Borrower hereunder. Notwithstanding the foregoing provisions of this SECTION
2.03(B), the Borrower shall not be liable for any amounts relating to any
reduction of rate of return occurring more than ninety (90) days prior to
Borrower's receipt of written notice thereof from the Lender and shall not be
liable for any amount relating to any reduction of rate of return occurring in a
prior Borrower fiscal year.
(C) LIMITATION ON INTEREST RATE. If there is a maximum limit imposed by
applicable law and such limit is applicable to this transaction, then in no
event, whether by reason of acceleration of maturity of the Indebtedness
evidenced hereby, by the Credit Note or otherwise, shall the amount paid or
agreed to be paid to Lender hereunder and deemed interest under applicable law
exceed the maximum rate of interest on the unpaid principal balance of the
Credit
<PAGE>
Note allowed by applicable law (the "Maximum Allowable Rate"), which shall mean
the law in effect on the date of the Note, except that if there is a change in
such law which results in a higher Maximum Allowable Rate being applicable to
the Note, then the Note shall be governed by such amended law from and after its
effective date. In the event that fulfillment of any provision of the Note, this
Agreement or the Security Instruments results in the interest rate under the
Credit Note being in excess of the Maximum Allowable Rate, the interest
obligation to be fulfilled shall automatically be reduced to eliminate such
excess. If, notwithstanding the foregoing, Lender or any successor holder of the
Credit Note receives an amount which under applicable law would cause the
interest rate under the Credit Note to exceed the Maximum Allowable Rate, the
portion thereof which would be excessive shall automatically be applied to and
be deemed a prepayment of the unpaid principal balance of, and other outstanding
non-interest charges under, the Credit Note, this Agreement and the Security
Instruments, and not a payment of interest.
SECTION 2.04. PAYMENTS AND PREPAYMENTS.
(A) All or any portion of the unpaid principal balance of any Variable
Advance may be prepaid at any time, without premium or penalty of any kind. All
or any portion of the unpaid principal balance of any LIBOR Advance may be
prepaid at any time provided, however, that Borrower must also pay the Yield
Maintenance Fee associated with that LIBOR Advance or portion of LIBOR Advance
which is being prepaid.
(B) All payments and prepayments of principal, fees, interest and any
other amounts owed from time to time under this Agreement and/or under the Note
shall be made to Lender at the address referred to in SECTION 8.07 in Dollars
and in immediately available funds prior to 1:00 o'clock P.M. (12:00 o'clock
P.M. on the last Business Day of each month) on the Business Day that such
payment is due provided that the Borrower hereby authorizes and instructs Lender
to charge against the Borrower's accounts, if any, with Lender on each date on
which a payment is due hereunder and under the Note an amount up to the
principal, interest and fees due and payable to the Lender hereunder and under
the Note and such charge shall be deemed payment hereunder and under the Note to
the extent that immediately available funds are then in such accounts. In
addition, the Borrower hereby irrevocably authorizes Lender, if and to the
extent payment of any installment of principal, interest and/or fees hereunder
and/or under the Note is not made when due, to charge against the Borrower's
accounts, if any, with Lender, an amount equal to the amount thereof not paid
when due. Any such payment or prepayment which is received by Lender in Dollars
and in immediately available funds after 1 o'clock P.M. on a Business Day (12
o'clock P.M. on the last Business Day of each month) shall be deemed received
for all purposes of this Agreement on the next succeeding Business Day except
that solely for the purpose of determining whether a Default Condition exists,
any such payment or prepayment if received by Lender prior to the close of
Lender's business on a Business Day shall be deemed received on such Business
Day. If the entire amount of any required principal and/or interest is not paid
in full within ten (10) days after the same is due, Borrower shall pay to the
Lender a late fee equal to five percent (5%) of the required payment.
<PAGE>
(C) UNCONDITIONAL OBLIGATIONS AND NO DEDUCTIONS. The Borrower's
obligation to make all payments provided for in this Agreement and/or the Note
shall be unconditional. Each such payment shall be made without deduction for
any claim, defense or offset of any type, including, without limitation, any
withholdings and other deductions on account of income or other taxes and
regardless of whether any claims, defenses or offsets of any type exist.
(D) (Intentionally Omitted).
(E) PAYMENTS AND COLLECTIONS. (i) Borrower will cause its account
debtors for all Accounts Receivable to pay directly to a lock box controlled by
Lender, all checks, drafts, cash and other remittances that are proceeds of
Accounts Receivable. The Lender will credit all such payments (conditional upon
final collection) against principal, interest and other charges due in
connection with the Loan in such order as Lender shall determine.
(ii) Amounts shall be credited to the Loan as aforesaid on the
second business day following receipt of any item by Lender
at its main office.
(iii) Any check or any item received without endorsement shall be
deemed delivered and endorsed to Lender and Lender shall be
entitled to endorse such check on behalf of Borrower to
Lender pursuant to the power-of-attorney granted under
SECTION 8.03 hereof.
SECTION 2.05. SETOFF. Borrower and any Guarantor hereby grant to Lender
a lien, security interest and right of setoff as security for all liabilities
and obligations to Lender, whether now existing or hereafter arising, and
whether existing under this Loan Agreement, the Credit Note or otherwise, upon
and against all deposits, credits, collateral and property, now or hereafter in
the possession, custody, safekeeping or control of Lender or any entity under
the control of Fleet Financial Group, Inc., or in transit to any of them. At any
time, without demand or notice, Lender may set off the same or any part thereof
and apply the same to any liability or obligation of Borrower and any Guarantor
even though unmatured and regardless of the adequacy of any other collateral
securing the Credit Loan. ANY AND ALL RIGHTS TO REQUIRE LENDER TO EXERCISE ITS
RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE CREDIT
LOAN, PRIOR TO EXERCISING ITS RIGHT TO SETOFF WITH RESPECT TO SUCH DEPOSITS,
CREDITS OR OTHER PROPERTY OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY
KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED. Lender agrees to promptly notify
the Borrower after any such setoff and application; provided that the failure to
give such notice shall not affect the validity of such setoff and application.
The rights of Lender under this SECTION 2.05 are in addition to all other rights
and remedies (including, without limitation, other rights of setoff) which
Lender may have.
SECTION 2.06. USE OF CREDIT LOAN PROCEEDS. The proceeds of the Credit
Loan and all Advances thereunder shall be used for working capital needs of the
Borrower and/or to secure the repayment of letters of credit issued by Lender at
Borrower's request and for no other purposes whatsoever without the prior
written consent of Lender.
<PAGE>
SECTION 2.07. RENEWAL. The Credit Note provides that it is payable on
the Repayment Date, which is November 15, 2000. Borrower recognizes and agrees
that all principal, interest and other charges due under the Credit Note shall
be payable in full on the Trigger Date, unless Lender, in its sole discretion
and in writing, elects not to exercise its repayment on the Trigger Date, in
which case the Trigger Date shall be extended for an additional period of one
(1) year. Any such extension of the Credit Note hereafter granted shall not be
deemed to establish a course of conduct or any obligation on the part of Lender
to extend the commitment for any additional periods.
SECTION 2.08. PAYMENT FEES. Borrower shall pay the following fees in
connection with the Loan, payment of such fees to be secured by the Security
Instruments:
a. the Commitment Fee.
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. CONDITIONS PRECEDENT TO THE CREDIT. The obligation of
Lender to make any and all Advances is subject to performance by the Borrower of
all of its obligations under this Agreement and the Security Instruments and to
the satisfaction of the conditions precedent that all legal matters incident to
the transactions contemplated hereby or incidental to the Loan or any Advance
shall be satisfactory to counsel for Lender and Lender shall have received on or
before the Closing Date or another date acceptable to Lender, fully executed
originals of the Note, this Agreement, the Security Instruments, such other
documents, instruments, agreements and information as Lender shall require
incident to the closing of the Loan including, but not limited to, the
following:
(a) Certificates from the secretary or assistant secretary of the
Borrower certifying as to the resolutions and/or consent
votes of the board of directors, shareholders and/or partners
of the Person in question (or other parties whose approval is
required) authorizing and approving those Loan Documents to
which such Person is a party and other matters contemplated
hereby and certifying as to the names and signatures of each
Person authorized to sign each Loan Document to be executed
and delivered by or on behalf of the Person. Lender may
conclusively rely on each such certificate until Lender shall
receive a subsequent certificate with respect to such Person
canceling or amending the prior certificate and submitting
the signatures of the officers named in such subsequent
certificate;
(b) Favorable opinions of counsel for the Borrower and each
Guarantor, reasonably acceptable to Lender and Lender's
counsel, as Lender shall require;
(c) Certificates (if issued by such authority) of the Secretary
of State or analogous governmental authority of each state or
nation in which the Borrower is
<PAGE>
incorporated or is required to be qualified to transact
business, dated reasonably near the Closing Date, stating
that the Borrower is duly organized or qualified and in good
standing as a corporation in such state or nation except for
those states in which Borrower's failure to qualify to
transact business would not have a material adverse effect on
Borrower or its finances and operations;
(d) A Request;
(e) All documents, instruments and agreements necessary to
terminate, cancel or discharge the documents, instruments and
agreements evidencing or securing any and all existing
Indebtedness for Borrowed Money of the Borrower, including,
without limitation, Borrower's Indebtedness with Prinvest,
other than as permitted by this Agreement;
(f) If requested by Lender, an Officer's Certificate in form
acceptable to Lender reflecting, the Borrower's compliance,
after giving effect to the Advance being requested, with the
financial covenants provided for herein as of the date of
Lender's request;
(g) True copies of any revisions to the financial statements,
forecasts and other information provided pursuant to this
Agreement;
(h) Current fire and extended coverage insurance policies (or
certificates thereof on ACCORD Form 27) in form and substance
and with coverage satisfactory to Lender including, without
limitation, that each such policy shall name Lender, as
mortgagee and/or loss payee, copies of liability policies
also in form and substance and with coverages satisfactory to
Lender including, without limitation, that each such policy
shall name Lender as additional insured, all in accordance
with the Security Instruments and evidence of such other
insurance as may be required by Lender (received by Lender as
of Closing Date);
(i) Borrower's confirmation, in form and substance satisfactory
to Lender, that Borrower's litigation with the State of
Hawaii has been settled, including provision of a true and
correct copy of an original, fully executed and binding
settlement agreement which has received any and all necessary
court approval; and
(j) Such other documents, instruments, agreements and information
relating to Borrower, its operations, any of the Properties
or any collateral as Lender shall reasonably request or as
are specified in a closing agenda furnished to Borrower's
Counsel by Lender in connection with the Loan Documents.
(B) The obligation of Lender to make the Loan and each Advance is
subject to Borrower's performance of all of its obligations under this Agreement
and satisfaction of the
<PAGE>
following further conditions precedent:
(a) Immediately prior to and upon the making of each Advance, no
Event of Default or Default shall have occurred and be
continuing;
(b) The representations and warranties of the Borrower contained
in Article IV below are true and correct in all material
respects on and as of the date of each Advance except as such
representations and warranties may be altered as permitted by
the terms of this Loan Agreement . The Borrower's delivery of
the Credit Note to Lender and each of the Borrower's Requests
shall be deemed to be a representation and warranty by the
Borrower as of the date of such Advance as to the facts
specified in SECTION 3.01(B)(a) AND (b) and a restatement of
the representations and warranties contained in Article IV
below as of such date;
(c) Receipt by Lender of a Request delivered by a duly authorized
officer of the Borrower on behalf of the Borrower, stating
the amount of the Advance requested, whether the Advance will
be a Variable Advance or LIBOR Advance and, if a LIBOR
Advance, whether Borrower selects a thirty (30), sixty (60),
ninety (90), one hundred twenty (120) or one hundred eighty
(180) day payment period ; and
(d) That there exists no law or regulation by any governmental
authority having jurisdiction over Lender or Borrower which
would make it unlawful in any respect for Lender to fund such
portion of the Loan and there has been no material adverse
change to the financial condition or business of the Borrower
or the Guarantor.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants to Lender that, after giving effect to the Loan
(or any Advance) and the application of the proceeds thereof (which
representations and warranties shall survive the making of the Loan) as follows:
(A) ORGANIZATION AND EXISTENCE. Borrower and each Subsidiary is duly
organized, validly existing and in good standing under the laws of the state or
country or other jurisdiction of its incorporation or creation, is duly
qualified to do business and is in good standing in any state where such
qualification is required, except in those states in which Borrower's failure to
be qualified to do business would not have a material adverse effect on Borrower
or its finances or operations, and has all requisite power and authority to
conduct its business, to own its properties and to execute and deliver, and to
perform all of its obligations under this Agreement, the Security Instruments
and the Credit Note.
(B) AUTHORIZATION AND ABSENCE OF DEFAULTS. The execution, delivery to
Lender and
<PAGE>
performance by the Borrower of this Agreement, the Security Instruments and the
Credit Note have been duly authorized by all necessary corporate action of
Borrower and governmental action and do not and will not: (i) require any
consent or approval of the shareholders or board of directors of the Borrower
which has not been obtained, (ii) violate any provision of any law, rule,
regulation of any governmental authority having jurisdiction (including, without
limitation, Regulations G, T, U, or X of the Board of Governors of the Federal
Reserve System), order, writ, judgment, injunction, decree, determination or
award presently in effect having applicability to the Borrower, any Subsidiary
or any Guarantor and/or the articles of incorporation or by-laws, or other
organizational documents of the Borrower, any Subsidiary or any Guarantor, (iii)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which the
Borrower, any Subsidiary or any Guarantor is or are a party or parties or by
which it or they or its or their properties may be bound or affected; or (iv)
result in, or require, the creation or imposition of any Lien on any of its or
their respective properties. The Borrower, each Subsidiary and each Guarantor is
in compliance with each applicable law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award and any such indenture, agreement,
lease or instrument, except where the failure to be in compliance would not have
a material adverse effect on the Borrower, any Subsidiary and/or any Guarantor.
(C) ACQUISITION OF CONSENTS. No authorization, consent, approval,
license, exemption of or filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, other than those which have been obtained, is or will be necessary to
the valid execution and delivery to Lender or performance by the Borrower, any
Subsidiary or any Guarantor of any of the Loan Documents.
(D) VALIDITY AND ENFORCEABILITY. This Agreement and the Credit Note
constitute, and each of the Security Instruments to which the Borrower is a
party will constitute the legal, valid and binding obligations of the Borrower
or any Guarantor, enforceable in accordance with their respective terms and each
other document, instrument and agreement referred to in this Agreement to which
the Borrower or any Guarantor is a party is similarly legal, valid, binding and
enforceable against Borrower or any Guarantor party thereto; provided that the
enforceability of the documents, instruments and agreements referred to above is
subject to applicable bankruptcy or other laws affecting creditors rights
generally and general principles of equity.
(E) FINANCIAL INFORMATION. Each of the financial statements and other
financial information and supporting schedules and data delivered to Lender in
connection with the application for and closing of the Loan was prepared in
accordance with GAAP applied on a consistent basis and fairly presents the
financial condition and results of operations for the companies being reported
on as of the date thereof and is complete and correct in all material respects.
(F) NO LITIGATION. There are no actions, suits or proceedings pending
or, to the knowledge of the Borrower, threatened against or affecting the
Borrower, any Subsidiary or Affiliate and/or any Guarantor or any of their
properties before any court or governmental
<PAGE>
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, which if determined adversely would draw into question the legal
existence of the Borrower, or any such Guarantor and/or the validity,
authorization and/or enforceability of this Agreement, any of the Security
Instruments, or Credit Note or any provision thereof; or could have a material
adverse effect on the financial condition, properties, or operations of the
Borrower or any Guarantor.
(G) REGULATION U. Neither the Borrower, any Subsidiary or Affiliate nor
any Guarantor is engaged in the business of extending credit for the purpose of
purchasing or carrying "margin stock" within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System (12 CFR, Part 221), or has any
present intention of acquiring any such margin stock or a "margin security"
within the meaning of Regulation G of the Board of Governors of the Federal
Reserve System (12 CFR, Part 207). None of the proceeds of the Loan will be used
directly or indirectly for the purpose of purchasing or carrying, or for the
purpose of reducing or retiring any Indebtedness which was originally incurred
to purchase or carry, any such margin security or margin stock or for any other
purpose which might constitute the transaction contemplated hereby a "purpose
credit" within the meaning of said Regulation G or Regulation U, or cause this
Agreement to violate any other regulation of the Board of Governors of the
Federal Reserve System or the Securities and Exchange Act of 1934, as amended,
or any rules or regulations promulgated under either said statute.
(H) ABSENCE OF ADVERSE AGREEMENTS. Neither the Borrower, any Subsidiary
or Affiliate, nor any Guarantor is a party to any indenture, loan or credit
agreement or any lease or other agreement or instrument or subject to any
corporate restriction which would have a material adverse effect on the
business, properties, assets, operations or condition, financial or otherwise,
of the Borrower and/or any Guarantor or on the ability of the Borrower to carry
out its obligations under this Agreement, the Security Instruments or the Credit
Note.
(I) TAXES. The Borrower (and all Subsidiaries and Affiliates) and each
Guarantor have filed all tax returns (federal, state and local) required to be
filed and paid all taxes shown thereon to be due, including interest and
penalties, or provided adequate reserves for payment thereof.
(J) ERISA. Borrower and any commonly Controlled Entity do not maintain
or contribute to any Single Employer Plan which is not in substantial compliance
with ERISA and Title X of the Consolidated Omnibus Budget Reconciliation Act of
1986, as amended, or which has incurred any accumulated funding deficiency
within the meaning of Section 412 of the Code, or which has applied for or
obtained a waiver from the Internal Revenue Service of any minimum funding
requirement under Section 412 of the Code. Borrower and any Commonly Controlled
Entity have not incurred any liability to the PBGC in connection with any Plan
covering any employees of Borrower or any Commonly Controlled Entity in amount
exceeding Fifty Thousand and 00/100
<PAGE>
Dollars ($50,000.00) in the aggregate or ceased operations at any facility or
withdrawn from any Plan in a manner which could subject any of them to liability
under Section 4062(e), 4063 or 4064 of ERISA in amount exceeding Fifty Thousand
and 00/100 Dollars ($50,000.00) in the aggregate, and know of no fact or
circumstance which might give rise to any liability of Borrower or any Commonly
Controlled Entity to the PBGC under Title IV of ERISA in amount exceeding Fifty
Thousand and 00/100 Dollars ($50,000.00) in the aggregate. Borrower and any
Commonly Controlled Entity have not incurred any withdrawal liability in amount
exceeding Fifty Thousand and 00/100 Dollars ($50,000.00) in the aggregate
(including, but not limited, to any contingent or secondary withdrawal
liability) within the meaning of Sections 4201 and 4202 of ERISA to any
Multiemployer Plan and no event has occurred and there exists no condition or
set of circumstances, which presents a risk of the occurrence of any withdrawal
from or the partition, termination, reorganization or insolvency of any
Multiemployer Plan which could result in any liability to a Multiemployer Plan
in amount exceeding Fifty Thousand and 00/100 Dollars ($50,000.00) in the
aggregate.
Full payment has been made of all amounts which Borrower and any
Commonly Controlled Entity are required to have paid as contributions to any
Plan under applicable law or under any Plan or any agreement relating to any
Plan to which Borrower or any Commonly Controlled Entity is a party. Borrower
and each Commonly Controlled Entity have made adequate provision for reserves to
meet contributions that have not been made because they are not yet due under
the terms of any Plan or related agreements.
Neither Borrower nor any Commonly Controlled Entity has any knowledge,
nor do any of them have any reason to believe that any Reportable Event which
could result in a liability or liabilities of Fifty Thousand and 00/100 Dollars
($50,000.00) or more in the aggregate has occurred with respect to any Plan.
(K) OWNERSHIP OF PROPERTIES. The Borrower owns all of its properties
and assets free and clear of all Liens, except those shown in the title policies
or UCC-11 or similar reports delivered to Lender in connection with the closing
of the Loan or any Advance and except for those permitted by SECTION 5.02(A).
(L) ACCURACY OF REPRESENTATIONS AND WARRANTIES. None of the
representations or warranties set forth in this Agreement or in any document or
certificate furnished pursuant to this Agreement or in connection with the
transactions contemplated hereby contains any untrue statement of a material
fact or omits to state a material fact necessary to make any statement of fact
contained herein or therein, in light of the circumstances under which it was
made, not misleading; except that unless provided otherwise, any such document
or certificate which is dated speaks as of the date stated and not the date
hereof.
(M) NO INVESTMENT COMPANY. Neither the Borrower, any Guarantor nor any
Subsidiary is an "investment company" or to the best of their knowledge, a
company "controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.
(N) SOLVENCY, ETC. After giving effect to the consummation of the loans
outstanding and to be made under this Agreement as of each time this
representation and warranty is given,
<PAGE>
the Borrower: (a) will be able to pay its debts as they become due, (b) will
have funds and capital sufficient to carry on its business and all businesses in
which it is about to engage, and (c) will own property having a value both at
fair valuation and at fair salable value in the ordinary course of the
Borrower's business greater than the amount required to pay its Indebtedness,
including for this purpose unliquidated and disputed claims. Borrower will not
be rendered insolvent by the execution and delivery of this Agreement, the Notes
or the Security Instruments and the consummation of any transactions
contemplated herein.
(O) LICENSES, REGISTRATIONS, COMPLIANCE WITH LAWS, ETC. Each Borrower
and Subsidiary has all permits, governmental licenses, registrations and
approvals material to carrying out their respective businesses as presently
conducted and as required by law or the rules and regulations or any federal,
foreign governmental, state, county or local association, corporation or
governmental agency, body, instrumentality or commission having jurisdiction
over the Borrower or any Subsidiary, including, but not limited to, the United
States Environmental Protection Agency, the United States Department of Labor,
the United States Occupational Safety and Health Administration, the United
States Equal Employment Opportunity Commission and analogous and related state
and foreign agencies, except where failure to have such permits, license,
registrations and approvals would not have a material adverse effect on
Borrower. There is no violation or failure of compliance or allegation of such
violation or failure of compliance on the part of the Borrower with any of the
foregoing permits, licenses, registrations, approvals, rules or regulations and
there is no action, proceeding or investigation pending or to the knowledge of
the Borrower threatened nor has the Borrower received any notice of such which
might result in the termination or suspension of any such permit, license,
registration or approval, except with respect to such permits, licenses,
registrations and approvals the violation, failure of compliance, termination or
suspension of which would not have a material adverse effect on the Borrower.
(P) PRINCIPAL PLACE OF BUSINESS: BOOKS AND RECORDS. The Borrower's
principal place of business and chief executive office is 475 Kilvert Street,
Warwick, Rhode Island 02806. All of the Borrower's books and records are kept at
such location.
(Q) SUBSIDIARIES. The Borrower has no Subsidiaries.
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. AFFIRMATIVE COVENANTS OF THE BORROWER OTHER THAN
REPORTING REQUIREMENTS. From the date hereof and thereafter for so long as any
portion of the Loan is outstanding, or the Borrower is indebted to Lender under
the Note, any of the Security Instruments and/or this Agreement, the Borrower
will (unless Lender shall otherwise consent in writing):
(A) PAYMENT OF TAXES, ETC. Pay and discharge all taxes and assessments
and governmental charges or levies imposed upon it or upon its income or
profits, or upon any
<PAGE>
properties belonging to it, prior to the date on which penalties attach thereto,
and all lawful claims for the same which, if unpaid, might become a Lien upon
any of its properties, provided that (unless and until foreclosure, restraint,
sale or any similar proceeding shall have been commenced) the Borrower shall not
be required to pay any such tax, assessment, charge, levy or claim which is
being contested in good faith and by proper proceedings and for which proper
reserve acceptable to Lender or other provision has been made in accordance with
GAAP.
(B) MAINTENANCE OF INSURANCE. Maintain insurance in accordance with the
Security Instruments and, to the extent not covered by any of the Security
Instruments, with responsible and reputable insurance companies or associations
in such amounts and covering such risks as are usually carried by companies
engaged in similar businesses and owning similar properties and in accordance
with the requirements of any governmental agency having jurisdiction. The
Borrower shall provide Lender with such evidence as Lender may request from time
to time as to the maintenance of all such insurance.
(C) PRESERVATION OF EXISTENCE, ETC. Preserve and maintain in full force
and effect its corporate existence, rights, franchises and privileges in the
jurisdiction of its organization, preserve and maintain all licenses,
governmental approvals, trademarks, patents, trade secrets, copyrights and trade
names owned or possessed by it and which are necessary or, in its reasonable
business judgment, desirable in view of its business and operations or the
ownership of its properties.
(D) COMPLIANCE WITH LAWS, ETC. Comply with the requirements of all
present and future applicable laws, rules, regulations and orders of any
governmental authority having jurisdiction over it and/or its business, except
where the failure to comply would not have a material adverse effect on the
Borrower or any Subsidiary.
(E) VISITATION RIGHTS. Permit, during normal business hours, Lender or
any agents or representatives thereof, to examine and make copies of and
abstracts from the records and books of account of, and visit the properties of
the Borrower or any Subsidiary to discuss the affairs, finances and accounts of
the Borrower or any Subsidiary with any of its officers or employees and/or any
independent certified public accountant of the Borrower or any Subsidiary.
Without limiting the generality of the foregoing, Lender may, at its option,
conduct audits and field examination reviews on the books and records of
Borrower not to exceed four (4) times annually and more often after a Default
Condition if reasonably required by Lender, with the cost of all such
examinations and related expenses to be borne by Borrower at a maximum of $300
per inspection or such greater amount as shall be charged to Lender's other
similarly situated borrowers in the ordinary course of Lender's business.
(F) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep adequate records and
books of account, in which complete entries will be made in accordance with GAAP
and with applicable requirements of any governmental authority having
jurisdiction, reflecting all financial transactions.
<PAGE>
(G) MAINTENANCE OF PROPERTIES, ETC. Maintain and preserve all of their
properties necessary or useful in the proper conduct of its business, in good
working order and condition, ordinary wear and tear excepted, and in accordance
with each of the Security Instruments.
(H) ACCOUNTING SYSTEM. Maintain a standard system of accounting in
accordance with GAAP and in accordance with the requirements of any governmental
authority having jurisdiction over the borrower.
(I) OTHER DOCUMENTS, ETC. Pay, perform and fulfill all of its
obligations and covenants under each of the Security Instruments and any other
material document, instrument or agreement to which it is a party in accordance
with their respective terms, giving effect to any grace periods therein
specified unless such payment, performance or fulfillment would not be permitted
hereunder; provided, that with respect to documents, instruments and agreements
other than documents with or in favor of Lender, so long as Borrower is
contesting in good faith any alleged failure to pay, perform and fulfill such
obligations and covenants by proper proceedings and has made any proper reserve
or other provision in accordance with GAAP on account thereof and such alleged
failure has not resulted in any material adverse effect on Borrower any
Guarantor or any subsidiary and/or on Lender's interests under this Agreement,
the Credit Note and/or the Security Instruments, Borrower shall not be deemed in
violation of this SECTION 5.01(I).
(J) OFFICER'S CERTIFICATES AND REQUESTS Provide each Officer's
Certificate required under this Agreement and each Request so that the
statements contained therein are accurate and complete in all material respects.
(K) DEPOSITORY. Use Lender, or a bank designated by Lender, as the
principal depository of Borrower's funds.
(L) CHIEF EXECUTIVE OFFICER. Maintain Kenneth Kirsch as chief executive
officer.
(M) ADDITIONAL ASSURANCES. From time to time hereafter, execute and
deliver or cause to be executed and delivered, such certificate and documents
and take all such actions as Lender shall reasonably request for the purpose of
implementing or effectuating the provisions of the Loan Documents, and upon the
exercise by Lender of any power, right, privilege or remedy pursuant to the Loan
Documents which requires any consent, approval, registration, qualification or
authorization of any governmental authority or instrumentality, exercise and
deliver all applications, certifications, instruments and other documents and
papers that Lender may be so required to obtain.
(N) FINANCIAL COVENANTS. (i) maintain a Ratio of Cash Flow plus taxes
actually paid to Debt Service tested quarterly with the first test done as of
December 31, 1999 for the quarter then ended, of not less than 1.25 to 1.00; and
(ii) maintain a ratio of Indebtedness (other than Subordinated
Debt) to Tangible
<PAGE>
Capital Base of not more than 2.0 to 1 tested quarterly, with
the first test done as of December 31, 1999 for the quarter
then ended based upon the audited financial statements of
Borrower referenced in 5.03(B) of this Agreement, provided,
however, that if Borrower executes the Saugatuck Agreement,
the ratio required hereunder shall be 1.3 to 1; and
(iii) maintain a Tangible Capital Base of not less than $2,000,000,
tested quarterly, with the first test done as of December 31,
1999 for the quarter then ended, provided, however, that if
Borrower executes the Saugatuck Agreement, the Tangible
Capital Base required hereunder shall be $2,800,000; and
(iv) for the purposes of this subsection, the term "Tangible
Capital Base" shall mean the total of stockholder's equity
plus Subordinated Debt minus (a) all assets which would be
classified as intangible assets under GAAP, including,
without limitation, goodwill, patents, trademarks, trade
names, copyrights, franchises and deferred charges, (b)
treasury stock and interests of less than fifty-one (51%)
percent of any other corporation or business entity, (c) cash
set apart in a "sinking" or other analogous fund established
for the purpose of redemption or other retirement of capital
stock, (d) reserves for depreciation, depletion, obsolescence
and/or amortization of properties and all other reserves or
appropriations of retained earnings, which, in accordance
with GAAP should be established in connection with Borrower's
business, and notes and/or other obligations due or
receivable from officers and/or stockholders of Borrower; and
(v) for purposes of this subsection, the following terms shall
have the following meanings. "Cash Flow" means, with respect
to Borrower, for any relevant accounting period: (i) earnings
before interest and taxes ("EBIT"); PLUS (ii) depreciation,
amortization and other non-cash changes (excluding
extraordinary write downs of assets), each to the extent
accrued in the relevant accounting period and actually
deducted in determining EBIT; MINUS (iii) distributions and
dividends; MINUS (iv) non-financed capital expenditures; and
(vi) "Debt Service" means, for any relevant accounting period, the
aggregate amount of scheduled principal and interest payments
due from Borrower with respect to Borrowed Money.
SECTION 5.02. NEGATIVE COVENANTS OF THE BORROWER. From the date hereof
and thereafter for so long as any portion of the Loan is outstanding or the
Borrower is indebted to Lender under any of the Credit Note, any of the Security
Instruments and/or this Agreement, the Borrower will not, and will not cause or
permit any Subsidiary to, (without the prior written consent of Lender):
(A) LIENS, ETC. Create, incur, assume or suffer to exist any Lien of
any nature, upon or with respect to any of its properties, now owned or
hereafter acquired, or assign as collateral or otherwise convey as collateral,
any right to receive income, except that the foregoing restrictions
<PAGE>
shall not apply to any Liens:
(a) for taxes, assessments or governmental charges or levies an
property if the same shall not at the time be delinquent or
thereafter can be paid without penalty or interest, or (if
foreclosure, distraint, sale or other similar proceedings
shall not have been commenced) are being contested in good
faith and by appropriate proceedings diligently conducted and
for which proper reserve acceptable to Lender has been made
in accordance with GAAP;
(b) imposed by law, such as carriers', warehousemen's and
mechanics Liens, bankers setoff rights and other similar
Liens arising in the ordinary course of business for sums not
yet due or being contested in good faith and by appropriate
proceedings diligently conducted and for which proper reserve
acceptable to Lender or other provision acceptable to Lender
has been made in accordance with GAAP;
(c) arising in the ordinary course of business out of pledges or
deposits under worker's compensation laws, unemployment
insurance, old age pensions, or other social security or
retirement benefits, or similar legislation;
(d) those set forth in form UCC-11 Reports or title policies or
reports delivered to and approved by Lender in connection
with the Loan;
(e) those now or hereafter granted pursuant to the Security
Instruments or otherwise now or hereafter granted to Lender
as collateral for the loans and obligations under Borrower's
other obligations arising in connection with or under this
Agreement; and
(f) incurred as purchase money mortgages or other Liens or
retained security titles of a conditional vendor in the
ordinary course of the Borrower's or any of its Subsidiary's
business on property acquired or held by the Borrower and/or
any such Subsidiary to secure the purchase price of such
property; provided that the Liens or other charges or
encumbrances permitted by this clause (f) shall at all times
be confined solely to the item of property so purchased and
shall secure an obligation which does not exceed the lower of
the fair market value or the cost of the item of property so
purchased and that any such obligations shall not otherwise
be prohibited by the terms of this Agreement; or
(g) incurred on Accounts Receivable to secure surety bonds issued
as a prerequisite to Borrower's ability to obtain the work
out of which the Accounts Receivable so encumbered arise.
(B) ASSUMPTIONS, GUARANTIES, ETC., OF INDEBTEDNESS OF OTHER PERSONS.
Assume, guarantee, endorse or otherwise become directly or contingently liable
in connection with any obligation or Indebtedness of any other Person, except
guaranties by endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business;
(C) DISSOLUTION, ETC. Dissolve, liquidate, wind up, merge or
consolidate with another
<PAGE>
Person or sell, assign, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or a substantial part of its
assets (whether now owned or hereafter acquired), or any of its or their
interests in real property;
(D) CHANGE IN NATURE OF BUSINESS. Make any material change in the
nature of its business except changes of which Lender has been notified sixty
(60) days prior to such change and as to which Lender has not notified Borrower
in writing of its objection thereto.
(E) OWNERSHIP. Cause or permit any change in the structure of the
classes of capital stock of the Borrower or any Subsidiary.
(F) SALE AND LEASEBACK. Enter into any sale and leaseback arrangement
with any Person.
(G) SALE OF ACCOUNTS, ETC. 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; provided, however, Borrower may settle or
compromise Accounts Receivable in the ordinary course of its business which are
not Eligible Accounts Receivable as long as any discount is disclosed to Lender
in the immediately following report furnished hereunder.
(H) INDEBTEDNESS. Incur, create, become or be liable directly or
indirectly in any manner with respect to or permit to exist any Indebtedness
except:
(i) Indebtedness under this Agreement, any of the Security
Instruments and/or the Note;
(ii) Indebtedness with respect to trade obligations and other
normal accruals in the ordinary course of business not yet
due and payable in accordance with customary trade terms or
with respect to which the Borrower is contesting in good
faith the amount or validity thereof by appropriate
proceedings and then only to the extent such Person has set
aside on its books adequate reserves acceptable to Lender
therefor;
(iii) Indebtedness described on the most recent financial statement
of Borrower prior to the Closing Date;
(iv) Indebtedness permitted by SECTION 5.02(B);
(v) Indebtedness secured by Liens permitted under SECTION 5.02(A)
and Capitalized Lease Obligations (to the extent not included
in SECTION 5.02(A)) in an aggregate amount outstanding at any
time not in excess of one Hundred Fifty Thousand Dollars
($150,000.00);
(vi) Indebtedness to the Small Business Loan Fund and Business
Development Company of
<PAGE>
Rhode Island existing as of the date hereof provided that
such Indebtedness is subordinated to the Lender's rights
under this Agreement and the Credit Note, which
subordinations shall be in a form and substance satisfactory
to and approved by Lender;
(vii) Indebtedness, not to exceed in the aggregate $75,000, for the
purposes of capital expenditures financed by Borrower; and
(viii) Indebtedness pursuant to the Saugatuck Agreement.
(I) OTHER AGREEMENTS. Amend any of the terms or conditions of any
indenture, agreement, document, note or other instrument evidencing, securing or
relating to Indebtedness permitted hereunder, unless such amendment would not
have a material adverse effect on Borrower or its ability to comply with its
obligations under this Agreement and the other Loan Documents.
(J) PREPAYMENT OF OTHER INDEBTEDNESS. Make any prepayment of any
principal of or interest on, or any prepayment, redemption, defeasance, sinking
fund payment, other repayment of principal or deposit with respect to any
Indebtedness permitted hereunder, except any repayment which (i) is made during
such time as no Default Condition shall exist; (ii) does not cause any Default
Condition; and (iii) does not have a material adverse effect on the Borrower's
ability to comply with its obligations under this Agreement and the other Loan
Documents.
(K) DIVIDENDS, PAYMENTS AND DISTRIBUTIONS. Declare, except with respect
to Borrower's preferred stock outstanding as of the date hereof, or pay, except
with respect to the Saugatuck Agreement, any dividends or management or like
fees or make any other direct or indirect distribution of cash or property or
both to holders of its shares of capital stock or other equity interest or use
any of its assets for payment, purchase, retention, redemption, acquisition or
retirement of any shares of its capital stock or other equity interest, or set
aside or reserve assets for sinking or like funds for any of the foregoing
purposes or make any other distribution by reduction of capital or otherwise in
respect of any shares of any class of its capital stock or other equity interest
except for dividends in the form of Borrower's common stock.
(L) SALES, ETC. Sell, assign, lease (as lessor) or turn over the
management of or otherwise dispose of or permit the disposal of any interest in
real or personal property or of any material asset other than (i) inventory in
the ordinary course of its business; (ii) equipment which is immediately
replaced with equipment of equal or greater value; or (iii) obsolete equipment
or equipment with no material value.
(M) INVESTMENTS IN OR TO OTHER PERSONS. Take or commit to make any
Investment in or to any other Person other than (i) advances to employees for
reasonable and usual business expenses, (ii) Cash Equivalent Investments, (iii)
investments in accounts, contract rights and chattel paper (as defined in the
Uniform Commercial Code) and notes receivable, arising or acquired in the
ordinary course of business, (iv) investments by Subsidiaries in Borrower, (v)
<PAGE>
Investments by the Borrower or any Subsidiary in any Person (exclusive of
investments in Persons referred to in any other subsection of this SECTION
5.02(M) in an aggregate amount not to exceed one Hundred Thousand Dollars
($100,000), other Investments as to which the Lender shall have consented in
writing, which consent shall not be unreasonably withheld, and such Investments
existing as of the date hereof and shown on financial statements submitted to
the Lender prior to the Closing Date.
(N) TRANSACTIONS. Engage in any transaction or enter into any material
agreement with any Person, including, but not limited to, any Subsidiary: (i) on
other than an arm's length basis or (ii) which would result in the occurrence of
a Default or Event of Default.
(O) CHANGE OF FISCAL YEAR. Change its fiscal year, which fiscal year
currently ends December 31.
(P) SUBORDINATION OF CLAIMS. Subordinate or permit to be subordinated
any present or future claim against or obligation of another Person, except as
ordered in a bankruptcy or similar creditors' remedy proceeding of such other
person.
(Q) COMPLIANCE. With respect to Borrower and any Commonly Controlled
Entity, (a) terminate, or cease to have an obligation to contribute to, any
Multiemployer Plan so as to result in any material liability of the Borrower or
any Commonly Controlled Entity to PBGC or to any Multiemployer Plan, (b) engage
in any "prohibited transaction" (as defined in Section 4975 of the Code)
involving any Plan which would result in a material liability of the Borrower or
any Commonly Controlled Entity for an excise tax or civil penalty in connection
therewith, (c) incur or suffer to exist any material "accumulated funding
deficiency" (as defined in Section 302 of ERISA and Sections 412 and/or 418 of
the Code) of the Borrower or any Commonly Controlled Entity, whether or not
waived, involving any Single Employer Plan, (d) incur or suffer to exist any
Reportable Event or the appointment of a trustee or institution of proceedings
for appointment of a trustee for any Single Employer Plan if, in the case of a
Reportable Event, same continues unremedied for ten (10) days after notice of
such Reportable Event pursuant to Section 4043(a), (c) or (d) of ERISA is given,
if in the reasonable opinion of Lender any of the foregoing is likely to result
in a material liability of the Borrower or any Commonly Controlled Entity, (e)
allow or suffer to exist any event or condition, which presents a material risk
of incurring a material liability of the Borrower or any Commonly Controlled
Entity to PBGC by reason of termination of any such Plan, or (f) cause or permit
any Plan maintained by Borrower and/or any Commonly Controlled Entity to be out
of compliance with ERISA and/or Title X of the Consolidated Omnibus Budget
Reconciliation Act of 1986, as amended. For purposes of this SECTION 5.02(Q)
"material liability" shall be deemed to mean any liability of Fifty Thousand and
00/100 Dollars ($50,000.00) or more in the aggregate.
SECTION 5.03. REPORTING REQUIREMENTS. From the date hereof and
thereafter for so long as any portion of the Loan is outstanding or the Borrower
is indebted to Lender under the Credit Note, any of the Security Instruments
and/or this Agreement, the Borrower and Guarantor will, unless Lender shall
otherwise consent in writing, furnish or cause to be furnished to Lender:
<PAGE>
(A) As soon as possible and in any event upon acquiring knowledge of an
Event of Default or Default, continuing on the date of such statement, the
written statement setting forth details of such Event of Default or Default and
the action which the Borrower proposes to take with respect thereto;
(B) As soon as practicable after the end of each fiscal year and in any
event within one hundred twenty (120) days thereafter, a balance sheet of the
Borrower as of the end of such year and the preceding year and statements of
income and of cash flows for each of the years then ending such balance sheets,
statements of income and cash flows at and for the year then ended are to be
prepared on an audited basis, by a firm of independent certified public
accountants selected by the Borrower and reasonably acceptable to Lender.
Additionally, such accountants shall certify that they have examined SECTION
5.01(N) and that no Default or Event of Default exists on account of Borrower's
failure to have been in compliance therewith on the date of such statements;
(C) Within ninety (90) days after calendar year end, personal financial
statements together with all schedules, all in form acceptable to Lender with
respect to the Guarantor, if any;
(D) Within forty-five (45) days of each quarter's end, financial
statements in form satisfactory to Lender, including, but not limited to, a
balance sheet and income statement, prepared by and certified to as correct by
the chief financial offer of the Borrower;
(E) Within forty-five (45) days of each quarter's end, an accounts
receivable aging, accounts payable aging, work-in-progress and backlog report in
form satisfactory to Lender prepared and certified to by the Borrower's chief
financial officer;
(F) Within fifteen (15) days of each month's end, a Borrowing Base
Certificate in the form of Exhibit A, supported by an accounts receivable aging
report, both of which shall be in form satisfactory to Lender and prepared and
certified to by the Borrower's Chief financial officer;
(G) Such other information respecting the business, properties or the
condition or operations, financial or otherwise, of the Borrower, and/or any
Guarantor as Lender may from time to time reasonably request; and
(H) Prompt written notice of any material adverse change in the
Borrower's or any Guarantor's conditions financial or otherwise, and an
explanation thereof and of the actions Borrower and/or such Guarantor propose to
take with respect thereto.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. EVENTS OF DEFAULT. The Borrower shall be in default under
this Agreement, the Security Instruments and the Credit Note upon the occurrence
of any one or more of the
<PAGE>
following events:
(A) if Borrower shall fail to make due and punctual payment of any
fees, principal, interest or other amounts payable under this Agreement as
provided in the Credit Note, within ten (10) days after the date when the same
is due and payable, whether at the due date thereof or at a date fixed for
prepayment, or if Borrower shall fail to make any such payment of fees,
interest, principal and/or any other amount under this Agreement or the Credit
Note on the date when such payment becomes due and payable by acceleration; or
(B) if the Borrower or any Other Liable Party shall make an assignment
for the benefit of creditors, or shall fail generally to pay its or their debts
as they become due, or shall admit in writing its or their inability to pay its
debts as they become due or shall file a voluntary petition in bankruptcy, or
shall file any petition or answer seeking any reorganization, arrangement,
composition, adjustment, liquidation, dissolution or similar relief under the
present or any future federal bankruptcy laws or other similar applicable
federal, state or other statute, law or regulation, or shall seek or consent to
or acquiesce in the appointment of any trustee, receiver or liquidator for such
Person or of all or any substantial part of its or their properties, or if
corporate action shall be taken for the purpose of effecting any of the
foregoing; or
(C) to the extent not described in SECTION 6.01(B): (i) the Borrower or
any other Liable Party shall be the subject of a bankruptcy proceeding, or (ii)
if any proceeding against any of them seeking any reorganization, arrangement,
composition, adjustment, liquidation, dissolution or similar relief under the
present or any future federal bankruptcy law or other applicable federal,
foreign, state or other statute, law or regulation shall be commenced, or (iii)
if any trustee, receiver or liquidator of any of them or of all or any
substantial part of any or all of their properties shall be appointed without
their consent or acquiescence; provided that in any of the cases described above
in this SECTION 6.01(C), such proceeding or appointment shall not be an Event of
Default if the Person in question shall cause such proceeding or appointment to
be discharged, vacated, dismissed or stayed within sixty (60) days after
commencement thereof; or
(D) if final judgment or judgments aggregating more than $50,000 shall
be rendered against the Borrower or any other Liable Party and shall remain
undischarged, unstated or unpaid for an aggregate of thirty (30) days (whether
or not consecutive) after entry thereof except unless such judgment is being
contested by proper appeal proceedings in good faith and such Person has
established adequate reserves therefor; or
(E) if the Borrower or any Other Liable Party shall default (after
giving effect to any applicable grace period) in the due and punctual payment of
the principal of or interest on any other Indebtedness (other than the Loans),
or if any other default shall have occurred and be continuing after any
applicable grace period under any mortgage, note or other agreement evidencing,
securing or providing for the creation of such Indebtedness, which results in
the acceleration of such Indebtedness or which permits, or with the giving of
notice would permit, any holder or holders of any such Indebtedness to
accelerate payment thereof; or
<PAGE>
(F) if Borrower or any Other Liable Party shall fail to pay, perform or
observe any covenant or condition contained in, (or any "default" or "event of
default" shall occur under), this Agreement or in any of the other Loan
Documents to be observed or performed pursuant to the terms hereof, or thereof,
as the case may be, and such failure shall continue unremedied or unwaived: (i)
in the case of any covenant or condition contained in SECTION 5.03, for five (5)
Business Days, or (ii) in the case of any other covenant or condition for which
no other grace period is provided, for thirty (30) days. The grace periods
contained in this subsection (F) shall not be deemed to provide a grace period
for any Event of Default specifically listed elsewhere in this SECTION 6.01 or
in any of the other documents referred to above; or
(G) if there shall be any attachment of any deposits or other property
of the Borrower or any Other Liable Party in the possession of Lender or any
attachment of any other property of Borrowers in an amount exceeding $50,000
which shall not be discharged or effectively stayed within thirty (30) days of
the date of such attachment; or
(H) the dissolution, liquidation, termination of existence, death,
incompetence or incapacity of the Borrower or Guarantor; or
(I) any material portion of any real (if any) or personal property
securing the Loan is materially damaged or destroyed by fire or otherwise unless
such loss is fully covered by insurance as required in the Loan Documents (as
determined by the Lender in its discretion, exercised in good faith) and
Borrower has notified Lender of such casualty immediately after the occurrence
thereof; or
(J) the cancellation, lapse or termination of any insurance coverage
required to be maintained by Borrower under this Agreement or under any of the
Security Instruments; or
(K) Borrower attempts or purports to assign this Agreement or any
advance made or to be made hereunder or any interest herein; or
(L) except as permitted in SECTION 5.02(A) OR (L), any real or personal
property securing the Loan or any portion thereof or any direct or indirect
interest therein is conveyed, voluntarily encumbered or otherwise transferred in
any way without the prior written consent of Lender; or
(M) breach or the proving false or misleading, in any material respect,
of any representation or warranty now or hereafter made to Lender by, on behalf
of, or for the benefit of Borrower or any other Liable Party, or contained in:
(a) this Agreement or any of the other Loan Documents; or
(b) any loan application, statement, financial statement,
certificate or other document, agreement or instrument
furnished, signed or executed in connection herewith by, on
behalf of, or for the benefit of Borrower or any Other Liable
Party; or
<PAGE>
(N) any material adverse change in the financial condition of, or any
act or omission of Borrower or any Other Liable Party or any act or omission of
any officer, director, partner, member, manager or trustee of the Borrower or
any Other Liable Party which leads Lender reasonably to believe that performance
of any of the covenants, agreements, or conditions of this Agreement, or any
other Loan Document(s), is or may be substantially impaired; or
(O) the merger or consolidation of the Borrower with any Person.
ARTICLE VII
REMEDIES OF LENDER
Upon the occurrence of any one or more of the Events of Default Lender
may, by notice to the Borrower, declare its undertaking to make Advances to be
terminated, whereupon the same shall forthwith terminate, and Lender may, by
notice to the Borrower, declare the entire unpaid principal amount of the Credit
Note, all Advances and all fees and interest accrued and unpaid thereon
including, without limitation, any applicable Yield Maintenance Fee with respect
to one or more outstanding LIBOR Loans, shall and/or under this Agreement,
and/or any of the Security Instruments and any and all other Indebtedness under
this Agreement, the Credit Note and/or any of the Security Instruments of the
Borrower to Lender and/or to any holder of all or any portion of the Credit Note
to be forthwith due and payable, whereupon the Credit Note, and all such accrued
fees and interest payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by the Borrower;
provided, however that upon the occurrence of an Event of Default under SECTION
6.01(B) OR (C), all of the unpaid principal amounts of the Credit Note, all fees
and interest accrued and unpaid thereon and/or under this Agreement and/or under
the Security Instruments and any and all other such Indebtedness of the Borrower
to Lender and/or to any such holder shall thereupon be due and payable in full
without any need for Lender to make any such declaration or take any action and
Lender's understanding to make Advances shall simultaneously terminate.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. CONSENT TO JURISDICTION AND SERVICE OF PROCESS.
(A) Except to the extent prohibited by applicable law, the Borrower and
each Guarantor, if any, irrevocably:
(i) agrees that any suit, action, or other legal proceeding
arising out of this Agreement or any of the Loans may be
brought in the courts of record of the State or the courts of
the United States located in the State;
(ii) consents to the jurisdiction of each such court in any such
suit, action or proceeding; and
<PAGE>
(iii) waives any objection which it may have to the laying of venue
of such suit, action or proceeding in any of such courts.
For such time as any of the Indebtedness of the Borrower to Lender
shall be unpaid in whole or in part and/or the Commitment is in effect, the
Borrower for itself and each of its Subsidiaries, irrevocably designates the
Registered Agent as their registered agent for service of process in the State
and, in the absence thereof, the Secretary of State of the State as its agent to
accept and acknowledge on its behalf service of any and all process in any such
suit, action or proceeding brought in any such court and agrees and consents
that any such service of process upon such agent and written notice of such
service to the Borrower and/or any Subsidiary by registered or certified mail
shall be taken and held to be valid personal service upon the Borrower and/or
any Subsidiary regardless of where the Borrower and/or any Subsidiary shall then
be doing business and that any such service of process shall be of the same
force and validity as if service were made upon it according to the laws
governing the validity and requirements of such service in each such state and
waives any claim of lack of personal service or other procedural error by reason
of any such service. Any notice, process, pleadings or other papers served upon
the aforesaid designated agent shall, within three (3) Business Days after such
service, be sent by certified or registered mail to the Borrower at its address
set forth in this Agreement and to said agent for service.
SECTION 8.02. INDEMNIFICATION. The Borrower irrevocably agrees to and
does hereby indemnify and hold harmless Lender, its agents, employees,
directors, officers, attorneys, subsidiaries, affiliates and each Person, if
any, who controls Lender within the meaning of Section 15 of the Securities Act
of 1933, as amended, and their successors and assigns, and each and all and any
of them (the "Indemnified Parties"), against any and all losses, claims, actions
causes of action, damages or liabilities (including any amount paid in
settlement of any action commenced or threatened against any of the Indemnified
Parties), joint or several, to which they, or any of them, may become subject
under statutory law or at common law, arising out of the Loans, directly or
indirectly, including, but not limited to, third party claims naming Lender as a
defendant or other responsible party, governmental enforcement actions,
environmental liabilities, and to reimburse the Indemnified Parties for any
legal or other expenses reasonably incurred by it or them in connection with
investigating, preparing for or defending against any actions commenced or
threatened by a third party against any of the Indemnified Parties.
Promptly upon receipt of notice of the commencement of any such action,
or information as to any threatened action, against any of the Indemnified
Parties in respect of which indemnity or reimbursement may be sought from the
Borrower on account of the agreement contained in this SECTION 8.02, notice
shall be given to the Borrower in writing of the commencement or threatening
thereof, together with a copy of all papers served, but the omission so to
notify the Borrower of any such action shall not release the Borrower from any
liability which it may have to such Indemnified Parties otherwise than on
account of the indemnity agreement contained in this SECTION 8.02.
In case any such action shall be brought against any of the Indemnified
Parties, the Borrower shall be entitled to participate in (and, to the extent
that it shall wish, to select counsel
<PAGE>
and, to the extent required by Borrower's insurer, to direct) the defense
thereof at its own expense. Any of the Indemnified Parties shall have the right
to employ its or their own counsel in any such case, and the reasonable fees and
expenses of such counsel shall be at the expense of Borrower only if such
Indemnified Party employs its own counsel because such Indemnified Party
reasonably concludes that there are defenses available to it that are different
from or in addition to those available to the Borrower.
The provisions of this SECTION 8.02 shall be effective to the fullest
extent permitted by law, and shall survive repayment of the Loan and discharge
of the Security Instruments.
The provisions of this SECTION 8.02 shall not be deemed to require
Borrower to indemnify and hold harmless any Indemnified Party with respect to
any gross negligence or willful misconduct on the part of such Indemnified
Party.
SECTION 8.03. POWER OF ATTORNEY. Borrower hereby grants to Lender a
power of attorney, and appoints Lender as its attorney-in-fact, such appointment
being irrevocable and coupled with an interest, to pay, perform or observe or
otherwise take any action for or on behalf of Borrower which Borrower is
required to pay, perform, observe or take hereunder or under any other Loan
Documents or as may be otherwise required in order for Lender to fully assure
itself of its rights hereunder, including, without limitation, the right to
affix Borrower's endorsement to any or all checks or drafts paid to the lock box
referenced in Section 2.04(E) of this Agreement, under any of the Loan Documents
or under applicable law. Borrower hereby ratifies and approves all actions taken
by Lender in accordance with the foregoing.
SECTION 8.04. DELAY OR OMISSION NOT WAIVER. No delay by Lender in
exercising or failure by Lender to exercise any right or remedy accruing upon
any Event of Default shall impair any such right or remedy or constitute a
waiver of any such Event of Default or an acquiescence therein. Every right and
remedy given by this Agreement or by law to Lender may be exercised from time to
time, and as often as may be deemed expedient, by Lender.
SECTION 8.05. WAIVER OF STAY OR EXTENSION LAWS. Each of the Borrower
and Guarantor covenants (to the extent that it may lawfully do so) that it will
not at any time insist upon, or plead or in any manner whatsoever claim or take
the benefit or advantage of, any stay or extension law wherever enacted, now or
at any time hereafter in force, which may affect the covenants or the
performance of this Agreement; and (to the extent that it may lawfully do so)
hereby expressly waives all benefit and advantage of any such law and covenants
that it will not hinder, delay or impede the execution of any power herein
granted to Lender, but will suffer and permit the execution of every such power
as though no such law had been enacted.
SECTION 8.06. AMENDMENT, ETC. No amendment, modification, termination,
or waiver of any provision of this Agreement, or of the Credit Note nor consent
to any departure by the Borrower therefrom or consent hereunder or thereunder,
shall in any event be effective unless the same shall be in a written notice
given to the Borrower by Lender. Any amendment or modification of this Agreement
must be signed by the Borrower and Lender.
<PAGE>
SECTION 8.07. ADDRESSES FOR NOTICES, ETC. All notices, requests,
demands and other communications provided for hereunder (other than those which,
under the terms of this Agreement, may be given by telephone, which shall be
effective when received verbally) shall be in writing and personally delivered,
sent by certified mail, return receipt requested or sent by Federal Express or
other overnight courier, and delivered to the applicable party at the addresses
indicated below. Each notice shall be effective upon the earlier to occur of (i)
actual receipt, if personally delivered or otherwise received, (ii) the next
Business Day after deposit if sent by overnight courier or (iii) if deposited in
the United States mail, certified, return receipt requested, the earlier of
three (3) Business Days after such deposit and the date of receipt, as disclosed
on the return receipt. Rejection or other refusal to accept or the inability to
deliver because of changed address of which no notice was given shall be deemed
to be receipt of the notice sent. By giving at lease thirty (30) days' prior
written notice thereof, Lender or Borrower shall have the right, from time to
time and at any time during the term of the Loan to change their respective
addresses and each shall have the right to specify as its address any other
address within the United States of America. For the purposes of this Loan
Agreement, the address for notices shall be as follows:
<PAGE>
If to the Borrower:
Network Six, Inc.
475 Kilvert Street
Warwick, Rhode Island 02886
Attn: Kenneth Kirsch
President and CEO
Phone: (401) 732-9000
Fax: (401) 732-9009
With copies to:
Gaebe & Kezirian
128 Dorrance Street
Providence, Rhode Island 02903
Attn: Dana Gaebe, Esq.
Phone: (401) 331-0800
Fax: (401) 861-2260
If to Lender:
Fleet National Bank
Mail Stop: RI MO 254
111 Westminster Street
Providence, Rhode Island 02903
Attention: Robert Kent, Vice President
Phone: (401) 278-3604
Fax: (401) 278-6587
With a copy to:
Moses & Afonso, Ltd.
170 Westminster Street, Suite 201
Providence, Rhode Island 02903
Attn: Antonio Afonso, Jr., Esq.
Phone: (401) 453-3600
Fax: (401) 453-3604
Requests, certificates, items provided pursuant to SECTION 5.03, other than
subsection 5.03(A), and other routine mailings or notices need not be
accompanied by a copy to legal counsel for Lender or the Borrower.
SECTION 8.08. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on
demand all reasonable costs and expenses (including without limitation
reasonable attorneys' fees) incurred
<PAGE>
by Lender in connection with the preparation and enforcement of this Agreement,
the Security Instruments, the Note and the other instruments and documents to be
delivered under this Agreement and any amendments to this Agreement or in
connection with any amendments, waivers or consents of or under this Agreement,
any of the Security Instruments, the Note or any other such instruments and
documents. In addition, the Borrower shall pay on demand any and all stamp and
other taxes and fees payable or determined to be payable in connection with the
execution and delivery of this Agreement, the Security Instruments, the Note,
the Loan Documents and the other instruments and documents to be delivered
hereunder and agrees to save Lender harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes or fees.
SECTION 8.09. PARTICIPATION. "Lender shall have the unrestricted right
at any time and from time to time, and without the consent of or notice to
Borrower or any Guarantor, to grant to one or more banks or other financial
institutions (each, a "Participant") participating interests in Lender's
obligation to lend hereunder and/or any or all of the loans held by Lender
hereunder. In the event of any such grant by Lender of a participating interest
to a Participant, whether or not upon notice to Borrower, Lender shall remain
responsible for the performance of its obligations hereunder and Borrower shall
continue to deal solely and directly with Lender in connection with Lender's
obligations hereunder.
Lender may furnish any information concerning Borrower in its
possession from time to time to prospective Participants, provided that Lender
shall require any such prospective Participant to agree in writing to maintain
the confidentiality of such information.
SECTION 8.10. BINDING EFFECT; ASSIGNMENT; SURVIVAL.
(A) Lender shall have the right at any time or from time to time, and
without Borrower's or any Guarantor's consent, to assign all or any portion of
its rights and obligations hereunder to one or more banks or other financial
institutions (each, an "Assignee"), and Borrower and each Guarantor agrees that
it shall execute, or cause to be executed, such Loan Documents as Lender shall
deem necessary to effect the foregoing. In addition, at the request of Lender
and any such Assignee, Borrower shall issue one or more new promissory notes, as
applicable, to any such Assignee and, if Lender has retained any of its rights
and obligations hereunder following such assignment, to Lender, which new
promissory notes shall be issued in replacement of, but not in discharge of, the
liability evidenced by the promissory note held by Lender prior to such
assignment and shall reflect the amount of the respective commitments and loans
held by such Assignee and Lender after giving effect to such assignment. Upon
the execution and delivery of appropriate assignment documentation, amendments
and any other documentation required by Lender in connection with such
assignment, and the payment by Assignee of the purchase price agreed to by
Lender, and such Assignee, such Assignee shall be a party to this Agreement and
shall have all of the rights and obligations of Lender hereunder (and under any
and all other Loan Documents) to the extent that such rights and obligations
have been assigned by Lender pursuant to the assignment documentation between
Lender and such Assignee, and Lender shall be released from its obligations
hereunder and thereunder to a corresponding extent.
<PAGE>
(B) This Agreement shall be binding upon and inure to the benefit of the
Borrower and 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 Lender. This Agreement and all
covenants, representations and warranties made herein and/or in any
certificates, or documents or instruments now or hereafter delivered pursuant
hereto shall survive the making of the Loan, and the execution and delivery of
the Loan Documents and shall continue in effect so long as any amounts payable
under or in connection with this Agreement, any of the Security Instruments
and/or any of the Note or the other Loan Documents by the Borrower to the Lender
remains unpaid or Lender's undertaking to make Advances remains outstanding;
provided, however, that SECTION 8.02 (and any provisions specifically described
in the Security Instruments or other Loan Documents) shall survive and remain in
full force and effect after termination of this Agreement and repayment in full
of all amounts payable under or in connection with this Agreement, the other
Loan Documents and any other such Indebtedness.
SECTION 8.11. ACTUAL KNOWLEDGE. For the purposes of this Agreement,
Lender shall not be deemed to have actual knowledge of any fact or state of
facts unless the senior loan officer or any other officer responsible for the
Borrower's account established pursuant to this Agreement, shall, in fact, have
actual knowledge of such fact or stated facts or unless written notice of such
facts shall have been received by Lender in accordance with SECTION 8.07.
SECTION 8.12. REFERENCES JOINT AND SEVERAL. All obligations of Borrower
hereunder and under the Loan Documents are joint and several, and all references
to "Borrower" or "Borrowers" hereunder shall be deemed to refer to each of
Borrowers, all of Borrowers and any of Borrowers, if more than one Borrower
exists. All obligations of Guarantor hereunder and under the Loan Documents are
joint and several, and all references to "Guarantor" or "Guarantors" hereunder
shall be deemed to refer to each of Guarantors, all of Guarantors and any of
Guarantors, if more than one Guarantor exists.
SECTION 8.13. GOVERNING LAW. This Loan Agreement shall be governed by
the laws of the State, without resort to the State's conflict of laws rules.
SECTION 8.14. SEVERABILITY. The provisions of this Agreement and the
other Loan Documents are severable. Any provision of this Agreement or the other
Loan Documents which is prohibited or unenforceable will be ineffective to the
extent of such prohibition or unenforceability without invalidating or modifying
the remaining provisions of this Agreement of the other Loan Documents. Any such
prohibited or unenforceable provision will be reformed to the extent necessary
to make it enforceable in a manner carrying out the intention of the parties as
nearly as is possible.
SECTION 8.15. REMEDIES CUMULATIVE. The remedies which are set forth in
this Agreement and the other Loan Documents available to Lender under applicable
law are not exclusive, and either party will be entitled cumulatively to
exercise any remedies for breach of this Agreement and the other Loan Documents
available under applicable law and the election of one remedy will not be deemed
to exclude other remedies.
<PAGE>
SECTION 8.16. WAIVER OF JURY TRIAL. BORROWER AND LENDER MUTUALLY HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN
RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS LOAN AGREEMENT OR ANY OTHER LOAN DOCUMENTS CONTEMPLATED TO BE EXECUTED IN
CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A
MATERIAL INDUCEMENT FOR LENDER TO ACCEPT THIS LOAN AGREEMENT AND MAKE THE LOAN.
SECTION 8.17. CONFLICTING DOCUMENTS. If there is any conflict or
inconsistency between the terms of this Agreement and the terms of any other
Loan Documents, the terms of this Agreement will control so long as it remains
in effect, unless such other agreement is executed or consented to by all
parties hereto in writing, and such agreement expressly amends, modifies or
replaces this Agreement.
SECTION 8.18. NO THIRD PARTY BENEFICIARY. This Agreement and the other
Loan Documents are for the sole benefit of the parties hereto and are not
intended to confer any rights or benefits on any other Person.
SECTION 8.19. ENTIRE AGREEMENT. This Agreement and any exhibits and
schedules attached hereto constitute the entire agreement and understanding
between the parties hereto in respect of the subject matter hereof and supersede
any prior or contemporaneous agreement or understanding between the parties,
written or oral, which relates to the subject matter hereof.
SECTION 8.20. ASSIGNMENT TO FEDERAL RESERVE. Lender may at any time
pledge all or any portion of its rights under the Loan Documents including any
portion of the Credit Note to any of the twelve (12) Federal Reserve Banks
organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No
such pledge or enforcement shall release Lender from its obligations under any
of the Loan Documents.
SECTION 8.21. REPLACEMENT OF CREDIT NOTE. Upon receipt of an affidavit
of Lender as to the loss, destruction or mutilation of the Credit Note or any
other security document which is not of public record and, in the case of any
such loss, theft, destruction or mutilation, upon surrender and cancellation of
such Credit Note or other security document, Borrower will issue, in lieu
thereof, a replacement note or other security document in the same principal
amount thereof and otherwise of like tenor.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as a sealed instrument by their respective officers thereunto duly
authorized, as of the date first above written.
In the Presence of: NETWORK SIX, INC.
/s/ Illegible By: /s/ Dorothy M. Cipolla
- ----------------- ------------------------
Print Name: Dorothy M. Cipolla
Print Title: TREASURER
FLEET NATIONAL BANK
/s/ Illegible By: /s/ Robert R. Kent, Vice President
- ----------------- ----------------------------------
Robert R. Kent, Vice President
<PAGE>
EXHIBIT A
BORROWING BASE CERTIFICATE
Borrower: Network Six, Inc.
Date:
--------------------------
1. TOTAL ACCOUNTS RECEIVABLE $
-----------------------
2. LESS RECEIVABLES THAT ARE
NOT ELIGIBLE RECEIVABLES ($ )
-----------------------
3 EQUAL TOTAL ELIGIBLE ACCOUNTS RECEIVABLE: $
-----------------
4. X 80% EQUAL MAXIMUM ADVANCES UNDER
LOAN AGREEMENT $
-----------------
5. LESS TOTAL ADVANCES OUTSTANDING
AS OF TODAY'S DATE ($ )
-----------------
6. TOTAL AMOUNT OF AVAILABLE ADVANCES $
-----------------
The undersigned acknowledges that Fleet National Bank is relying on
this Certificate in the granting of Advances under the Loan Agreement by and
between Network Six, Inc. and Fleet National Bank, dated as of November 15,
1999, and hereby certifies that the information contained in this Certificate is
accurate as of the date written above.
Network Six, Inc.
By:
-------------------------------
Print Name:
Print Title:
Duly authorized
<PAGE>
EXHIBIT B
REQUEST FOR LOAN ADVANCE AND INTEREST RATE SELECTION/
PAYDOWN REQUEST
BORROWER: Network Six, Inc. DATE:
-------------------------
LOAN #:
CHECKING #: [ ]
Select one: ADVANCE PAYDOWN **
If requesting an Advance, select the interest rate:
INTEREST _____ Variable Rate (Prime Rate + 0.25%) _____ 90-day LIBOR Rate
RATE: _____ 30-day LIBOR Rate _____ 120-day LIBOR Rate
_____ 60-day LIBOR Rate _____ 180-day LIBOR Rate
AMOUNT: $ **
If requesting an Advance, the amount must be an integral multiple of $1,000.00
**If making a paydown of a LIBOR Rate Loan, the amount remitted to the Bank must
include any applicable Yield Maintenance Fee due under Section 2.04 of the Loan
Agreement by and between Borrower and Fleet National Bank ("Bank"), dated as of
November 15, 1999 (the "Loan Agreement"). Please contact the Bank to obtain the
applicable amount of the Yield Maintenance Fee.
THE UNDERSIGNED ACKNOWLEDGES THAT, IF BORROWER IS REQUESTING AN ADVANCE IN THIS
REQUEST, THE BANK IS RELYING ON THIS REQUEST AND THE INFORMATION CONTAINED
HEREIN IN MAKING SUCH ADVANCE. THE UNDERSIGNED CERTIFIES THAT, AS OF THE DATE OF
THIS REQUEST, ALL OF THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THE LOAN
AGREEMENT ARE AND CONTINUE TO BE TRUE, CORRECT AND NOT MISLEADING AND THAT
BORROWER IS NOT IN DEFAULT OF ANY COVENANT CONTAINED IN THE LOAN AGREEMENT OR
OTHERWISE IN DEFAULT AS DEFINED IN THE LOAN AGREEMENT.
Network Six, Inc.
BY:
Print Name:
Print Title:
Authorized Signatory
BORROWER INSTRUCTIONS: To borrow or pay down on loan:
1. Complete and sign the above form.
2. Telephone the request to Robert Kent, Vice
President or such other individual as Lender
may designate in writing to Borrower from time
to time at (401) 278-3604.
3. Mail the original signed confirmation to:
Robert Kent
Vice President
Fleet National Bank
111 Westminster Street
Providence, Rhode Island 02903
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 2,453,935 2,453,935
<SECURITIES> 0 0
<RECEIVABLES> 1,610,255 1,610,255
<ALLOWANCES> 49,000 49,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,364,737 5,364,737
<PP&E> 772,921 772,921
<DEPRECIATION> 578,015 578,015
<TOTAL-ASSETS> 6,160,188 6,160,188
<CURRENT-LIABILITIES> 2,511,368 2,511,368
<BONDS> 0 0
79,430 79,430
0 0
<COMMON> 2,235,674 2,235,674
<OTHER-SE> 15,841 15,841
<TOTAL-LIABILITY-AND-EQUITY> 6,160,188 6,160,188
<SALES> 2,411,718 10,225,676
<TOTAL-REVENUES> 2,411,718 10,225,676
<CGS> 1,405,890 6,178,286
<TOTAL-COSTS> 2,264,834 12,225,303
<OTHER-EXPENSES> (30,653) (88,777)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 34,253 153,765
<INCOME-PRETAX> 143,284 (2,064,615)
<INCOME-TAX> 59,584 (843,000)
<INCOME-CONTINUING> 83,700 (1,221,615)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 83,700 (1,221,615)
<EPS-BASIC> 0.00 (1.96)
<EPS-DILUTED> 0.00 (1.96)
</TABLE>
