UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934.
For the quarterly period ended June 30, 1999
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________, 19__, to _______, 19__.
Commission File Number: 0-22991
CUSIP NUMBER 64121L 10 3
NETWORK SYSTEMS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Charter)
Nevada 87-0460247
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
200 North Elm Street, Greensboro, North Carolina 27401
(Address of Principal Executive Offices, Including Zip Code)
(336) 271-8400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 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 has been subject to such
filing requirements for the past 90 days.
X YES ___ NO
There were 7,768,254 shares of the Registrant's $.001 par
value common stock and 4,035 shares of Registrants $.001 par
value preferred stock outstanding as of June 30, 1999.
Transitional Small Business Format (check one) Yes __ No X
NETWORK SYSTEMS INTERNATIONAL, INC.
Contents
Part I - Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet 3
Consolidated Statements of Operations
Three months ended June 30, 1999 and 1998 4
Nine months ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flow
Nine months ended June 30, 1999 and 1998 6
Consolidated Statement of Changes in
Stockholders' Equity 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Part II
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
Item 1. Financial Statements
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 1999
(Unaudited)
<CAPTION>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 162,007
Accounts receivable, trade, net of
allowance of $688,000 3,379,583
Contracts receivable, net of allowance
of $62,000 1,342,478
Accounts receivable, related parties 112,691
Note receivable, current 30,000
Income tax receivable 272,024
Other current assets 112,016
Total current assets 5,410,799
Property and equipment, net of accumulated
depreciation 1,561,385
Other Assets:
Note receivable, net of current portion 93,911
Software development costs, net of
accumulated amortization 3,036,733
Excess of costs over net assets
acquired, net of accumulated
amortization 4,453,333
Other 330,937
Total other assets 7,914,914
Total assets $ 14,887,098
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 1,971,285
Notes payable, current 35,000
Capital lease obligation, current 88,000
Other accrued liabilities 204,791
Unearned revenue 759,146
Revolving credit agreement, current
portion 200,000
Total current liabilities 3,258,222
Long Term Liabilities:
Revolving credit agreement 3,500,000
Deferred income taxes 975,725
Notes payable, net of current maturities 297,713
Capital lease obligation, net of
current maturities 41,317
Total long term liabilities 4,814,755
Stockholders' Equity:
Preferred Stock; $.001 par value;
authorized 12,500 shares; issued and
outstanding 4,035 shares 4
Common Stock; $.001 par value; authorized
100,000,000 shares; issued and outstanding
7,768,254 shares 7,768
Capital in excess of par value 3,377,996
Retained earnings 3,428,353
Total stockholders' equity 6,814,121
Total liabilities and stockholders' equity $14,887,098
The accompanying notes are an integral part of the
consolidated financial statements.
Network Systems International, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30,
1999 1998
Revenue:
Licensing and servicing revenue $ 2,379,948 1,718,295
Equipment revenue 2,198,966 1,703,906
Total revenue 4,578,914 3,422,201
Operating expenses:
Cost of sales and services 2,576,832 1,815,554
Research and development 861,977 485,743
Sales, general and administrative 1,339,911 330,017
Total operating expenses 4,778,720 2,631,314
Operating income (loss) (199,806) 790,887
Other income (expenses)
Interest, net 10,550 17,309
Other, net (9,980) 1,618
Total other income 570 18,927
Income (loss) before income tax
provision (benefit) (199,236) 809,814
Income tax provision (benefit) 48,800 263,100
Net income (loss) $ (248,036) 546,714
Dividends on preferred shares 10,125 18,388
Net income (loss) applicable to
common shares (258,161) 528,326
Earnings (loss) per common share $ (.03) $ .07
Earnings (loss) per common share-
Assuming dilution $ (.03) $ .07
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<CAPTION>
<S> <C>
Nine Months Ended June 30,
1999 1998
Revenue:
Licensing and servicing revenue $ 6,855,489 $ 5,559,667
Equipment revenue 4,906,158 4,288,249
Total revenue 11,761,647 9,847,916
Operating expenses:
Cost of sales and services 5,519,534 4,796,141
Research and development 1,830,838 1,436,037
Sales, general and administrative 2,609,719 1,009,740
Total operating expenses 9,960,091 7,241,918
Operating income 1,801,556 2,605,998
Other income (expenses)
Interest, net 28,280 31,037
Other, net (8,999) 16,624
Total other income 19,281 47,661
Income before income tax provision 1,820,837 2,653,659
Income tax provision 812,300 918,600
Net income $ 1,008,537 1,735,059
Dividends on preferred shares 39,468 73,289
Net income applicable to common shares 969,069 1,661,770
Earnings per common share $ .13 $ .22
Earnings per common share-
Assuming dilution $ .13 $ .22
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
<CAPTION>
Nine Months Ended June 30,
<S> <C> 1999 1998
OPERATING ACTIVITIES
Net income $ 1,008,537 $ 1,735,059
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,329,967 1,231,349
Promotional fees paid with stock - 72,000
Compensation expense on stock options 85,938
Provision for bad debts 250,000 273,014
Change in operating assets and
liabilities:
Accounts receivable and
contracts receivable (1,185,288) (2,694,204)
Prepaid assets, other
receivables, and other assets (70,730) 264,280
Income tax receivable (252,399) 318,476
Accounts payable and accrued
liabilities 1,146,137 1,462,686
Unearned revenue 428,668 41,977
Deferred income taxes 508,725 (226,300)
Total adjustments 2,241,018 743,278
Net cash provided by operating activities 3,249,555 2,478,337
INVESTING ACTIVITIES
Acquisition of property and equipment (515,499) (354,957)
Software development capitalized (2,782,916) (897,550)
Issuance of note receivable - (200,000)
Payment received on note receivable 17,362 220,432
Increase in cash surrender value
of life insurance (180,925) (34,473)
Acquisition of Vercom, net of
purchased research and development (4,463,220) -
Net cash (used in) investing
activities (7,925,198) (1,266,548)
FINANCING ACTIVITIES
Payment on notes payable and
capital lease obligations (51,776) (76,137)
Proceeds (payments) on revolving
credit agreement 3,700,000 (131,382)
Dividends paid (39,468) (73,289)
Net cash provided by (used in)
financing activities 3,608,756 (280,808)
Net (decrease) increase in cash and
cash equivalents (1,066,887) 930,981
Cash and cash equivalents at October 1: 1,228,894 491,413
Cash and cash equivalents at June 30: $ 162,007 1,422,394
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION AND NONCASH INVESTING AND
FINANCING ACTIVITIES
Cash paid during the period for:
Interest $ 25,600 $ 33,740
Taxes $ 1,084,800 $ 600,124
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<TABLE>
Network Systems International, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
Nine Months ended June 30, 1999
(Unaudited)
<CAPTION>
Common Stock Preferred Stock
Number $.001 Number $.001 Capital Retained Total
of Par of Par in excess Earnings
Shares Value Shares Value of par
value
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
October 1,
1998 7,661,754 $7,662 6,100 $ 6 $3,292,162 $2,459,284 $ 5,759,114
Issuance of
common stock 3,250 3 - - (3) - -
Conversion
of
preferred
stock 103,250 103(2,065) (2) (101) - -
Compensation
related to
grant
of stock
options - - - - 85,938 - 85,938
Dividends on
preferred
stock - - - - - (39,468) (39,468)
Net Income for
the nine
months ended
June 30, 1999 - - - - - 1,008,537 1,008,537
Balance June
30, 1999 7,768,254 $7,768 4,035 $ 4 $3,377,996 $3,428,353 $6,814,121
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
Network Systems International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Network Systems International, Inc. (the "Company"), a
Nevada corporation, is a vertical market company that is the
developer of the net collection(tm) and Primac software
systems. These products represent the premier suites of
supply chain management and enterprise-wide software
products for the textile, apparel, home furnishing, and
printing industries. The Company also offers hardware
products, consulting and implementation services providing a
complete solution to its customer's technology needs.
The Company and its four wholly owned subsidiaries: Network
Information Services, Inc. ("NIS"), Network Investment
Group, Inc. ("NIG"), Network Systems International, Inc. of
North Carolina ("NESI-NC") and Vercom Software Inc.
("Vercom") (see Note C) employs approximately 105 full-time
associates. The Company is headquartered in Greensboro,
North Carolina with offices in Dallas, Texas and Greenville,
South Carolina. All intercompany transactions have been
eliminated in consolidation.
On July 10, 1998 the Company was officially approved for
listing on NASDAQ and the Company's common stock began
trading on NASDAQ Small Cap under the symbol NESI on that
date.
Basis of Preparation:
The financial statements consolidate the accounts of Network
Systems International, Inc. and its wholly owned
subsidiaries Network Information Services, Inc., Network
Investment Group, Inc., Network Systems International, Inc.
of North Carolina and Vercom Software, Inc.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates.
The interim financial information included herein is
unaudited. Certain information and footnote disclosures
normally included in the financial statements have been
condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC), although
the Company believes that the disclosures made are adequate
to make the information presented not misleading. These
consolidated financial statements should be read in
conjunction with the consolidated financial statements and
related notes contained in the Company's Form 10-KSB filed
with the SEC on December 29, 1998. Other than indicated
herein, there have been no significant changes from the
financial data published in those reports. In the opinion
of management, such unaudited information reflects all
adjustments, consisting only of normal recurring accruals
and other adjustments, necessary for a fair presentation of
the unaudited information.
Results for interim periods are not necessarily indicative
of results expected for the full year.
Certain prior year amounts have been reclassified to conform
to the current year presentation.
B. Significant Accounting Policies
Software Development Cost:
The Company capitalizes the direct costs and allocated
overhead associated with the development of software
products. Initial costs are charged to operations as
research and development prior to the development of a
detailed program design or a working model. Capitalization
of computer software development costs begins upon the
establishment of technical feasibility for the product.
Costs incurred subsequent to the product release are charged
to operations. Capitalized software development costs
amounted to $1,382,915 and $897,550 for the nine months
ended June 30, 1999 and 1998, respectively. As part of the
Vercom acquisition, the Company recorded $1,400,000 in
software development costs.
Amortization of capitalized computer software development
costs begins when the products are available for general
release to customers, and is computed on a straight-line
basis over the economic life. The Company has estimated
that the useful economic life of its products is two to five
years. Amortization expense of capitalized software cost
amounts to $1,169,977 and $1,102,251 for the nine months
ended June 30, 1999 and 1998, respectively, and is included
in research and development.
Revenue Recognition:
The Company's revenue is recognized in accordance with the
American Institute of Certified Public Accountants Statement
of Position Number 97-2 "Software Revenue Recognition".
Revenue consists of primarily the following:
Revenue from the sale of software licenses is
recognized after shipment and fulfillment of all major
obligations under the terms of the licensing agreements.
The licensing agreements are typically for the use of
Company products and are usually restricted by the number of
copies, the number of users and the term.
Revenues from fixed price contracts are recognized
using the percentage-of-completion method, measured by
direct hours. Contract costs include direct labor combined
with allocations of operational overhead and other
direct costs. 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 that may result
in revisions to costs and revisions, are recognized in
the period in which the revenues are determined.
For the nine months ended June 30, 1999, there were no
revenues from fixed priced contracts.
Support agreements generally call for the Company to
provide technical support and certain software updates
to customers. Revenue on support and software updates
is recognized ratably over the term of the support
agreement.
The Company provides consulting and educational
services to its customers. Revenue from such services
is generally recognized as the services are performed.
Hardware revenue is recognized when the product is
shipped to the customer.
Earnings Per Share:
Basic earnings per share is computed using the weighted
average number of common shares outstanding during the
period. Diluted earnings per share reflect the potential
dilution from the exercise or conversion of preferred stock
and stock options into common stock using the "treasury
stock" method.
The following data shows the amounts used in computing
earnings per share and the effect on income and the weighted
average number of shares of dilutive potential common stock.
Three months ended
June 30,
1999 1998
Net income (loss) $ (248,036) 546,714
Less preferred stock dividends (10,125) (18,388)
Income (loss) applicable to
common shares (258,161) 528,326
Preferred stock dividends 10,125 18,388
Income (loss) applicable to
common shares after assumed
conversion of dilutive securities (248,036) 546,714
Weighted average number of common
shares used in basic EPS 7,757,260 7,545,553
Effect of dilutive convertible
preferred stock and stock options 230,451 383,701
Weighted average number of common
shares and dilutive potential
common shares used in diluted EPS 7,987,711 7,929,254
Nine months ended
June 30,
1999 1998
Net income $ 1,008,537 1,735,059
Less preferred stock dividends (39,468) (73,289)
Income applicable to common
shares 969,069 1,661,770
Preferred stock dividends 39,468 73,289
Income applicable to common
shares after assumed conversion
of dilutive securities 1,008,537 1,735,059
Weighted average number of common
shares used in basic EPS 7,700,320 7,398,110
Effect of dilutive convertible
preferred stock and stock options 273,420 515,485
Weighted average number of common
shares and dilutive potential
common shares used in diluted EPS 7,973,740 7,913,595
C. Business Combinations
On June 16, 1999, the Company acquired all of the
outstanding capital stock of Vercom Software, Inc.
("Vercom") a vertical market company offering a specialized
software solution for the complex requirements of the
printing industry for $6.8 million in cash. The Company
funded this acquisition through cash provided by operating
activities and bank borrowings (see Note D).
The Vercom acquisition has been accounted for by the
purchase method of accounting in accordance with APB 25
"Business Combinations" and, accordingly, the results of
operations of Vercom for the period from June 17, 1999 to
June 30, 1999 are included in the accompanying consolidated
financial statements. Assets acquired and liabilities
assumed have been recorded at their estimated fair values.
In addition, approximately $300,000 of the purchase price
was allocated to purchased in-process research and
development, which was charged to Research and Development
expense for the period ended June 30, 1999. Accordingly,
the Company recorded a non-recurring charge for this
purchased in-process research and development at the date of
acquisition. The excess cost over the estimated fair value
of net assets acquired and the purchased in-process research
and development was approximately $4.5 million of goodwill
and will be amortized on a straight-line basis over its
estimated useful life.
The following unaudited pro forma information presents the
results of operations of the Company as if the acquisition
had taken place on October 1, 1998 and excludes the write-
off of purchased in-process research and development of
$300,000.
Nine months ended
June 30, 1999
Revenues $ 15,268,733
Net earnings 1,577,850
Earnings per share .20
These pro forma results of operations have been prepared for
comparative purposes only and do not purport to be
indicative of the results of operations which actually would
have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
D. Long Term Debt
Note Payable
On January 21, 1999, the Company refinanced the mortgage on
its corporate office building. Monthly principal payments
on the new note are $2,896 plus interest at a fixed rate of
7.53% through January 2009. The building and substantially
all equipment collateralize the note. The note agreement
contains a covenant with respect to consolidated cash flow,
with which the Company was in compliance at June 30, 1999.
Aggregate maturities of note payable as of June 30, 1999
were as follows: 1999 - $35,000; 2000 - $35,000; 2001 -
$35,000; 2002 - $35,000; 2003 - $35,000; thereafter -
$157,713.
Revolving Credit Agreement
On June 16, 1999, the Company, in conjunction with the
acquisition Vercom Software, Inc., entered into a $4,500,000
revolving credit agreement with a bank which provided funds
to finance the acquisition (see Note C) and working capital
needs. As of June 30, 1999, the Company had $3,700,000
outstanding on this revolving credit agreement. The credit
agreement provides for interest at the Monthly LIBOR Index
plus 2.50% to 3.10% based on the Company's Consolidated Cash
Flow/Consolidated Funded Debt ratio. The revolver has the
following declining availability: $4.5 million through
September 30, 1999; $4.0 million through December 30, 1999;
$3.5 million through June 30, 2000; and $3.0 million through
June 30, 2001. The credit facility is collateralized by
substantially all of the assets of the Company. The term
of this agreement is for two years ending June 30, 2001 at
which time all unpaid principal and interest is due. The
credit facility includes financial covenants that impose
restrictions with respect to the maintenance of Consolidated
Cash Flow to Consolidated Funded Debt and Consolidated
Liabilities to Consolidated liabilities to consolidated
Tangible Net Worth that begins September 30, 1999.
E. Major Customers
For the three months ended June 30, 1999, sales to two
customers amounted to approximately $2,946,000. For the
three months ended June 30, 1998, sales to two customers
amounted to approximately $1,907,000. For the nine months
ended June 30, 1999, sales to one customer amounted to
approximately $6,740,000. For the nine months ended June
30, 1998, sales to two customers amounted to approximately
$4,041,000. The June 30, 1999 and 1998 accounts receivable
balances from these customers were approximately $1,928,000
and $2,109,000 respectively.
F. Stock Options
Employee Incentive Stock Option Agreements
Effective April 13, 1999, the Company granted 201,000 shares
in incentive stock options to its employees under the
Company's qualified Incentive Stock Option Plan. Under the
terms of the plan, the options will vest equally over a four-
year period, as long as the employees remain employed with
the Company. The options were granted at $4.00 per share,
the fair market value at April 13, 1999. As of June 30,
1999 none of the granted shares have vested.
Pursuant to SFAS #123 "Accounting for Stock Based
Compensation", the Company has elected to account for its
employees stock option plan under Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to
Employees". No compensation cost was recognize since the
exercise price was equal to the market price of the
underlying stock on the date of grant.
Executive Employment Agreement
On April 15, 1999 the Company entered into an employment
agreement with an executive of the Company. Among other
things, the agreement provides the executive a stock option
arrangement of 500,000 shares of the Company's stock to be
purchased at $1 and vest equally over a four-year period.
The fair market value of the Company's stock at the date of
the agreement was $3.75. During the quarter ended June 30,
1999, the Company recognized a non-cash compensation expense
of approximately $86,000. The Company will recognize this
non-cash compensation expense ratably each quarter for the
next four years based on this agreement.
G. Commitments
On June 1, 1999, the Company entered into a five year
consulting agreement with a former officer of the Company.
Among other things, the consultant has the right to sell
10,000 shares of restricted Company stock owned by the
consultant back to the Company each quarter. The Company
has the obligation to purchase those shares for four dollars
per share upon notification by the consultant. The
consultant, however, can elect to sell the quarterly
allotment on the open market relieving the Company of its
obligation to purchase the shares. The consultant may elect
to extend the term of the Company's obligation an additional
eight years or until a total of 500,000 shares have been
sold to the Company and/or on open market. During the
quarter ending June 30, 1999, the Consultant has placed all
amounts in the open markets.
H. Litigation
On June 17, 1999, the Company agreed to pay a former
customer $500,000 for full settlement of a dispute over fees
paid for licensing and servicing. The settlement payments
are to be paid out over a period of nine months with a final
payment due March 31, 2000. The Company has recorded the
entire settlement in the current quarter to general and
administrative expense.
The Company is currently and will continue to be involved in
routine legal proceedings that are incidental to the
business. In the opinion of management these routine
proceedings will not have a material adverse effect on the
Company's financial position or overall results of
operations.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD LOOKING INFORMATION
THIS MD&A CONTAINS FORWARD LOOKING INFORMATION. EXCEPT FOR
HISTORICAL DATA, THE MATTERS DISCUSSED IN THIS FORM 10-QSB
CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND
UNCERTAINTIES.
The Company would caution readers that in addition to the
important factors described elsewhere in this Form 10-QSB,
the following may contain forward looking statements that
involve risk and uncertainties, including without
limitations, continued acceptance of the Company's products
and services, increased levels of competition, new products
and technological changes, the Company's dependency on
financing third party suppliers, intellectual property
rights, material customers, the Company's business
concentration risks within the textile and printing
industries, business combinations, and other risks. The
Company's actual consolidated financial results during 1999,
and beyond, could differ materially from those expressed in
any forward looking statements made by, or on behalf of, the
Company. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events
and circumstances that arise after the date hereof.
RESULTS OF OPERATIONS
Results of the Company's newly acquired subsidiary, Vercom
Software Inc., are included in the financial statements
since its June 16, 1999 acquisition date. These results are
insignificant to the results of the Corporation for the
period presented.
The Company has reclassified certain costs to more
accurately reflect the proper classification of these costs.
All periods presented reflect these reclassifications.
Revenue. Total revenue for the three-month period ended
June 30, 1999 was $4,578,914. This revenue represents a 34%
increase over the Company's revenues for the three-month
comparable period in 1998. For the nine-month period ended
June 30, 1999, revenues were $11,761,647 as compared to
$9,847,916 for the same nine-month period in fiscal 1998, a
19.4% increases.
In the area of licensing and services revenues, the Company
experienced an increase of approximately 38% to $2,379,948
at the June 30, 1999 quarter end as compared to $1,718,295
in the same period ending 1998. During the nine-month period
ended June 30, 1999, licensing and services revenues
increased approximately 23% from $5,559,667 in fiscal 1998
to $6,855,489 in 1999. These increases are primarily
attributable to increases in service revenues. The software
industry as a whole, including the Company, anticipates a
temporary slowdown in sales of licenses and hardware as its
customers focus on their Year 2000 readiness and defer
purchases until year 2000.
Hardware revenue for the three-month period ended June 30,
1999 was $2,198,966 as compared to $1,703,906 or a 29%
increase over the same period in 1998. For the nine-month
period ended June 30, 1999, hardware revenues increased
approximately 14% from $4,288,249 in fiscal 1998 to
$4,906,158 in 1999. This increase in hardware revenue is
directly attributable to customer upgrades and increased
demand for radio frequency technology. Hardware revenues
will continue to be directly proportionate to software
licensing as the Company typically sells the majority of
hardware technology to its customers within a few months of
signing a licensing agreement.
Licensing and service revenue amounted to 52% of total
revenues for the Company compared to hardware revenues of
48% for the quarter ended June 30, 1999, and 58% and 42% for
the nine-months ended June 30, 1999.
Cost of Sales and Services. Cost of sales and services
amounted to $2,576,832 or 56% of total revenue during the
quarter ended June 30, 1999 as compared to $1,813,554 or 53%
of total revenue for the comparable period in fiscal 1998.
During the nine-month period, cost of sales and services
were $5,519,534 or 47% of total revenue in 1999 compared to
$4,796,144 or 49% in 1998. Margins vary based upon the mix
of revenues derived from software licenses, services and
hardware.
Software Development Costs. Software development costs
capitalized amounted to approximately $394,000 and $336,000
for the quarters ended June 30, 1999 and 1998, respectively.
During the nine-month period, software development costs
capitalized amounted to approximately $1,383,000 in fiscal
1999 as compared to $898,000 in 1998. The increase is
attributable to new development of products, technologies,
and enhancements. Additionally, as part of the Vercom
acquisition, the Company recorded $1,400,000 in software
development costs. It is anticipated that the Company will
continue software development at the current rate both
capitalized and expensed.
Sales, General and Administrative. Sales, general and
administrative expenses were 29% of revenue for the quarter
ended June 30, 1999 as compared to 10% in the comparable
period 1998. During the nine-month period ended June 30,
1999, sales, general and administrative expenses were 22%
compared to 10% for 1998. The Company incurred several one-
time charges that significantly increased sales, general and
administration for quarter ended June 30, 1999. These
charges include $130,000 for acquisition related costs,
$500,000 for a settlement of a dispute with a former
customer and $70,000 for other miscellaneous expenses.
Excluding these one-time costs, sales, general and
administrative expenses were 14% of revenue for the quarter
ended June 30, 1999 and 16% of revenue for the nine-months
ended June 30, 1999.
Research and Development. Research and development amounted
to $861,977 or 19% of total revenue during the quarter ended
June 30, 1999 as compared to $485,743 or 14% for the
comparable period in fiscal 1998. During the nine-month
period, research and development was $1,830,838 or 16% of
total revenue in 1999 compared to $1,436,037 or 15% in 1998.
During the quarter ended June 30, 1999, the Company wrote
off $300,000 of purchased in-process research and
development in connection with the acquisition of Vercom
Software, Inc.
Provisions for Income Taxes. The income tax provision for
the nine-months ended June 30, 1999 and June 30, 1998 was $
812,300 and $918,600, respectively. This represents an
effective tax rate of 45% and 35%, for the same periods. The
higher tax rate in 1999 is due to the write-off of purchased
in-process research and development that the Company does
not receive a tax benefit from.
Quarterly Results. Net income (loss) for the three months
ended June 30, 1999 and 1998 was $(248,036) and $546,714,
respectively. For the nine-month period, net income was $
1,008,537 in fiscal 1999 and $1,735,059 for 1998. On a per
share basis, earnings (losses) were $(.03) and $.07 for the
three months ended June 30, 1999 and 1998, respectively.
Per share earnings are $.13 for the nine-months ending June
30, 1999 in comparison to $.22 for the nine-months ending
June 30, 1998. The decrease in earnings is directly related
to the one-time charges the Company incurred during the
third quarter as described in the sales, general and
administrative and research and development notes above.
Without the one-time charges, the Company's earnings per
share would have been (tax adjusted) $ .06 for the quarter
ended June 30, 1999 and $ .22 for the nine months ended
June 30, 1999.
Liquidity and Capital Resources. Cash and Cash Equivalents
were $162,007, representing a decrease of approximately
$1,000,000 during the nine-months ended June 30, 1999. The
decrease is due to the acquisition of Vercom Software, Inc.
in which the Company utilized cash from operations and a
revolving credit arrangement with a bank. The revolver has
the following declining availability: $4.5 million through
September 30, 1999; $4.0 million through December 30, 1999;
3.5 million through June 30, 2000; and 3.0 million through
June 30, 2001.
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." The Statement requires
publicly owned companies to report certain financial
information about operation segments, as well as certain
information about those operating segment's products and
services, the geographic areas in which they operate, and
their major customers. The Statement was effective for
fiscal years beginning after December 15, 1997. The Company
adopted the provisions of SFAS No. 131 during fiscal year
ended 1998.
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement establishes
accounting and reporting standards for derivative
instruments and hedging activities. The Statement is
effective for fiscal years beginning after June 15, 1999.
The Financial Accounting Standards Board issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB
Statement No. 133" deferring the effective date to all
fiscal quarters of all fiscal years beginning after June 15,
2000. The Company's current policy is not to
enter into any derivative instruments or hedging activities.
OTHER MATTERS
Some of the key variables and other qualitative and
quantitative factors that might be deemed necessary to gain
an understanding of the Company's business and risks
associated therewith are as follows:
Rapid Technological Changes. The computer software industry
is characterized by rapid technological change and
uncertainty as to the impact of emerging software solutions
and services to the general process manufacturing industry.
The Company's success will depend upon its ability to
enhance its current products and develop new products that
address technological and market developments. Major changes
in technology and/or additional competition could negatively
impact the Company's future performance.
Long-term Investment Cycle. Developing software is
expensive and the investment in software development often
involves a long payback cycle. The Company plans to
continue to make significant investments in software
development. Expenditure of funds for research and
development may or may not generate anticipated revenues in
the event the final product developed does not meet market
expectations and acceptance.
Sales Cycle. Traditionally, the Company experiences a
significant period between the time a customer is introduced
to the Company's products and services and the final date
upon which actual contracts are signed. The period to
complete these efforts often takes up to twelve months. As
a result, it is difficult to build a firm foundation for
predicting revenues over an extended period of time.
Additionally, by the time prospects become customers, time
is usually of the essence and proper predictions for
staffing needs must be made well in advance of the time
implementation services are required. Although the Company
has historically achieved a significant level of success in
accurately predicting ongoing staffing needs, the
uncertainties stated above could ultimately create a
negative impact on the overall revenues and profitability of
the Company.
Material Customers. The Company could potentially face the
risks related to loss of material customers. Such loss of
customers would have an immediate negative impact on the
profitability of the Company.
Business Concentration Risk. The Company develops
enterprise-wide software products for complex manufacturers
to be utilized in all process manufacturing industries.
However, the Company's current customer base is
predominantly with companies in the textiles, apparel, home
fashions, and printing industries. A downturn in these
industries could cause a negative impact on the Company's
operating result.
Year 2000 Issues. Year 2000 compliance issues are currently
a grave concern throughout the software industry as a whole.
From a legal context, no case law has yet been established
that enables the industry to definitively address issues
before they arrive. As such, the uncertainties in this area
are significant and potentially devastating. Although the
Company has fully established internal Year 2000 compliance
committees to conduct a detailed analysis of its products
and believes that its products are fully compliant, there
can be no assurance that some unknown and unanticipated
negative event will not occur. The Company has made changes
to its internal systems to insure compliance and will
continually assess capability of its products throughout
1999 during 2000 and beyond.
The Company has contacted critical suppliers of hardware and
software to determine that the suppliers' operations and the
products and services they provide are Year 2000 compliant.
There can be no assurance that another company's failure to
ensure Year 2000 capability would not have an adverse effect
on the Company.
To date, the Company has incurred limited expenses
associated with its Year 2000 efforts in connection with
both internal systems and products, which are immaterial to
the Company's financial position. Management expects that
the future costs of the Year 2000 assessment will not have a
material effect on the Company's financial position.
Part II
Item 1. Legal Proceedings
The Company is currently and will continue to be involved in
routine legal proceedings that are incidental to the
business. In the opinion of management, these routine
proceedings will not have a material adverse effect on the
Company's financial position or overall results of
operations.
On June 17, 1999, the Company agreed to pay a former
customer $500,000 for full settlement of a dispute over fees
paid for licensing and servicing. The settlement payments
are to be paid out over a period of nine months with a final
payment due March 31, 2000. The Company has recorded the
entire settlement in the current quarter to general and
administrative expense.
The potential impact on the Company's financial position or
overall results of operations for the above legal
proceedings could change in the future.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits included herewith are:
( 2) Plan of Acquisition
(10) Material Contracts
(11) Schedule of Computation of Net Income Per Common
Share
(27) Financial Data Schedule
(b) Reports on Form 8-K
1. Form 8-K filed with the Securities and Exchange
Commission January 26, 1999 announcing the appointment of
KPMG LLP as the Company's independent accountants to audit
the Company's financial statements for the year-ended
September 30, 1999. This Form 8-K is incorporated by
reference.
2. Form 8-K filed with the Securities and Exchange
Commission April 14, 1999 announcing the hiring of
Christopher Baker as President and Chief Operating Officer.
This Form 8-K is incorporated by reference.
3. Form 8-K filed with the Securities and Exchange
Commission May 12, 1999 announcing the signing of a letter
of intent with a privately held Dallas, Texas based company.
This Form 8-K is incorporated by reference.
4. Form 8-K filed with the Securities and Exchange
Commission June 30, 1999 announcing the acquisition of
Vercom Software, Inc. This Form 8-K is incorporated by
reference.
SIGNATURES
In accordance with the requirements of the Securities
and Exchange Act, the registrant has caused this report to
be signed on its behalf by the undersigned, thereto duly
authorized.
NETWORK SYSTEMS INTERNATIONAL, INC.
Date: 08/16/1999 /s/ Robbie M. Efird
Robbie M. Efird, Chief Executive Officer
Date: 08/16/1999 /s/ Michael T. Spohn
Michael T. Spohn, Chief Financial Officer
EXHIBIT INDEX
Exhibit
( 2) Plan of Acquisition
2.1 Stock Purchase Agreement of Vercom Software, Inc.
(10) Material Contracts
10.1 Consulting Agreement Between Network Systems
International, Inc. and E. W. Miller, Jr.
10.2 Executive Employment Agreement Between Network Systems
International, Inc. and Christopher N. Baker
(11) Schedule of Computation of Net Income Per Share(Unaudited)
(27) Financial Data Schedule
Nine Months Ended June 30,
Primary 1999 1998
Net income $ 1,008,537 $ 1,735,059
Less - preferred stock
dividends (39,468) (73,289)
Net income applicable for
common shares $ 969,069 $ 1,661,770
Weighted average number of
common shares outstanding
during the year 7,700,320 7,398,110
Basic income per common share $ .13 $ .22
Fully Diluted
Net income applicable for
common share $ 969,069 $ 1,661,770
Add - dividends on
convertible preferred stock 39,468 73,289
Net income for fully diluted
net income per share $ 1,008,537 $ 1,735,059
Weighted average number of
shares used in calculating
primary income per common
share 7,700,320 7,398,110
Assuming conversion of
convertible preferred stock
and stock options (weighted
average) 273,420 515,485
Weighted average number of
common shares outstanding
as adjusted 7,973,740 7,913,595
Fully diluted earnings per
common share $ .13 $ .22
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<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 162,007
<SECURITIES> 0
<RECEIVABLES> 5,472,061
<ALLOWANCES> (750,000)
<INVENTORY> 0
<CURRENT-ASSETS> 5,410,799
<PP&E> 2,384,964
<DEPRECIATION> (823,519)
<TOTAL-ASSETS> 14,887,098
<CURRENT-LIABILITIES> 3,258,222
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<COMMON> 7,768
<OTHER-SE> 6,806,349
<TOTAL-LIABILITY-AND-EQUITY> 14,887,098
<SALES> 11,761,647
<TOTAL-REVENUES> 11,761,647
<CGS> 5,519,534
<TOTAL-COSTS> 9,960,091
<OTHER-EXPENSES> 8,999
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,280
<INCOME-PRETAX> 1,820,837
<INCOME-TAX> 812,300
<INCOME-CONTINUING> 1,008,537
<DISCONTINUED> 0
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STOCK PURCHASE AGREEMENT
AGREEMENT, made and entered into as of the 16th day of June,
1999, among NETWORK SYSTEMS INTERNATIONAL, INC., a Nevada
corporation (the "Buyer"); EVAN E. PRICE, DEBORAH J. DOBY and
ZIAD A. YAMOUT (each a "Seller" and collectively the "Sellers");
and VERCOM SOFTWARE, INC., a Texas corporation (the "Company").
The Sellers are the owners of all of the issued and
outstanding shares of the capital stock (the "Shares") of the
Company. The Sellers wish to sell all of their Shares and the
Buyer wishes to purchase such Shares upon the terms and
conditions of this Agreement.
Accordingly, the parties agree as follows:
1. SALE AND PURCHASE OF SHARES.
1.1 Sale of Shares. At the Closing (as defined in Section
2 hereof), and subject to the terms and conditions of this
Agreement, each Seller agrees to sell to the Buyer, and the Buyer
agrees to purchase, the Shares set forth opposite such Seller's
name on Exhibit A for an aggregate purchase price of Six Million
Eight Hundred Thousand Dollars ($6,800,000), payable as provided
in Section 1.2 (the "Purchase Price").
1.2 Payment at the Closing of the Purchase Price. At the
Closing, the Purchase Price shall be paid by the Buyer as
follows:
(i) The Buyer shall deliver to each Seller by wire
transfer to such Seller's designated account cash in the
amount set forth opposite such Seller's name on Exhibit A in
the aggregate amount of Six Million Five Hundred Fifty
Thousand Dollars ($6,550,000); and
(ii) The Buyer shall deliver to Smith Helms Mulliss &
Moore, L.L.P. (the "Escrow Agent") cash in an aggregate
amount of Two Hundred Fifty Thousand Dollars ($250,000),
such amount to be held in an escrow account (the "Escrow
Account") in accordance with the terms of the Escrow
Agreement substantially in the form of Exhibit B among the
Buyer, the Escrow Agent and each of the Sellers (the "Escrow
Agreement").
1.3 Delivery of Shares. At the Closing, each Seller shall
deliver or cause to be delivered to the Buyer stock certificates
representing the number of Shares set forth opposite such
Seller's name on Exhibit A, duly endorsed in blank, and with all
appropriate stock transfer tax stamps (if any) affixed. The cost
of all such tax stamps shall be borne by the Sellers.
1.4 Sellers' Representative. Each Seller hereby appoints
EVAN E. PRICE or, in the event of his death, a successor to be
appointed by his estate, to act as such Seller's attorney-in-fact
and representative (the "Sellers' Representative"), to do any
and all things and to execute any and all documents, in such
Seller's name, place and stead, in any way which such Seller
could do if personally present, in connection with this Agreement
and with the Escrow Agreement and the transactions contemplated
hereby and thereby, including, without limitation, to amend,
cancel or extend, or waive the terms of, the Escrow Agreement.
The Buyer shall be entitled to rely, as being binding upon such
Seller, upon any document or other paper believed by the Buyer to
be genuine and correct and to have been signed by the Sellers'
Representative, and the Buyer shall not be liable to any Seller
for any action taken or omitted to be taken by the Buyer in such
reliance. The Sellers' Representative shall have the sole and
exclusive right on behalf of the Sellers to give a Claims Notice
pursuant to Section 9.3(i) or take any other action pursuant to
Article 9.
2. CLOSING; CLOSING DATE.
The closing of the sale and purchase of the Shares
contemplated hereby shall take place at the offices of Gardere &
Wynne, L.L.P., 1601 Elm Street, Suite 3000, Dallas, Texas, at
9:00 a.m. central standard time, on June 16, 1999, or at such
other time or date as the Buyer and the Sellers agree in writing.
The closing provided for in this Section is herein called the
"Closing," and the time and date upon which the Closing occurs is
herein called the "Closing Date." At the Closing, the parties
shall take such actions as may be necessary or appropriate in
order to consummate the transactions provided for herein (the
"Contemplated Transactions") in accordance with the terms and
conditions hereof.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLERS.
The Sellers, jointly and severally, represent and warrant to
the Buyer as provided in this Article 3. Notwithstanding the
foregoing, with respect to Section 3.3 and Section 3.5 hereof,
each Seller represents and warrants to the Buyer the
representations and warranties contained therein only on behalf
of himself or herself.
3.1 Due Incorporation and Authority. The Company is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Texas and has all requisite
corporate power and lawful authority to own, lease and operate
its assets, properties and business and to carry on its business
as now being conducted. The Company has heretofore delivered to
the Buyer true and complete copies of its Articles of
Incorporation (certified by the Secretary of State of Texas) and
Bylaws (certified by its secretary or an assistant secretary) as
in effect on the date hereof.
3.2 Company Authorization and Validity of Agreement. The
Company has full legal right and all requisite corporate power
and authority to enter into this Agreement, and all other
agreements contemplated hereunder, and to perform its obligations
hereunder and thereunder. The execution, delivery and
performance of this Agreement by the Company and the consummation
by the Company of the Contemplated Transactions have been duly
and effectively authorized by the Company's Board of Directors,
the requisite vote of the Company's shareholders and all other
requisite corporate action. This Agreement has been duly
executed by the Company and constitutes a valid and legally
binding obligation of the Company enforceable in accordance with
its terms.
3.3 Sellers' Authorization and Validity of Agreement. Each
Seller has the full legal right and power and all authority and
approval required to enter into, execute and deliver this
Agreement and to perform fully such Seller's obligations
hereunder. This Agreement has been duly executed and delivered
by such Seller and is a valid and binding obligation of such
Seller enforceable in accordance with its terms.
3.4 Outstanding Capital Stock. The Company is authorized
to issue one hundred thousand (100,000) shares of common stock,
par value $.01 per share, of which seven hundred fifty (750)
shares are issued and outstanding, and no other class of capital
stock of the Company is authorized or outstanding. The Shares
are duly authorized, validly issued and fully paid and
nonassessable.
3.5 Title to the Shares. As of the Closing Date, each
Seller owns beneficially and of record, free and clear of any
lien, option or other encumbrance, and has full power and
authority to convey free and clear of any lien or other
encumbrance, the Shares set forth opposite such Seller's name on
Exhibit A, and, upon delivery of and payment for such Shares as
herein provided, such Seller will convey to the Buyer good and
valid title thereto, free and clear of any lien or other
encumbrance.
3.6 Options, Warrants or Other Rights. Except as set forth
on Schedule 3.6, there is no outstanding right, subscription,
warrant, call, unsatisfied preemptive right, option, or other
agreement of any kind to purchase or otherwise to receive from
the Company or any of the Sellers any of the outstanding,
authorized but unissued, unauthorized or treasury shares of the
capital stock or any other security of the Company, and there is
no outstanding security of any kind convertible into any such
capital stock.
3.7 Subsidiaries and Other Affiliates. The Company does
not, directly or indirectly, own any interest in or control any
other corporation, partnership, firm, joint venture, association,
joint-stock company, trust, unincorporated organization or other
entity.
3.8 Qualification in Other Jurisdictions. The Company is
duly qualified or otherwise authorized as a foreign corporation
to transact business and is in good standing in each jurisdiction
in which it is required to be so qualified or authorized.
3.9 No Breach. Except as set forth on Schedule 3.9, the
execution, delivery and performance of this Agreement and the
consummation of the Contemplated Transactions will not
(i) violate, conflict with or result in the breach of any
provision of the Articles of Incorporation or Bylaws of the
Company; or (ii) violate or result in the breach of any of the
terms of, result in a material modification of, or otherwise give
any other contracting party the right to terminate, or constitute
(or with notice or lapse of time or both constitute) a default
under, any material contract or other agreement to which the
Company or any of the Sellers are a party or by or to which the
Company or any of its assets or properties may be bound or
subject; or (iii) violate any order, writ, judgment, injunction,
award or decree of any court, arbitrator or governmental or
regulatory body against, or binding upon, the Company or any of
the Sellers or upon the assets of the Company; or (iv) violate
any statute, law or regulation of any jurisdiction, which
violation could have a material adverse effect upon the
Contemplated Transactions or upon the condition of the Company;
or (v) violate or result in the revocation or suspension of any
Permit (as defined in Section 3.24 hereof). The execution and
delivery by the Sellers and the Company of this Agreement, the
performance by the Sellers and the Company of their obligations
hereunder, the consummation by the Sellers and the Company of the
Contemplated Transactions and the continuance in full force and
effect following the consummation of the Contemplated
Transactions of all contracts and agreements set forth on
Schedule 3.23 do not require the Sellers or the Company to obtain
any consent, approval or action of, or make any filing with or
give any notice to, any person or any governmental or regulatory
body, except as set forth in Schedule 3.9. The consents,
approvals, filings and notices listed on Schedule 3.9 are
referred to herein as the "Sellers' Required Consents."
3.10 Financial Statements. Balance sheets of the Company
(prepared on an accrual basis) for fiscal years 1997 and 1998,
and the related income statements (prepared on a cash basis), are
set forth on Schedule 3.10 hereto. These balance sheets and
related income statements fairly present the financial position
of the Company as at such dates and the results of operations of
the Company for such respective periods, in each case in
accordance with generally accepted accounting principles
consistently applied for the periods covered thereby. (The
foregoing financial statements of the Company for fiscal years
1997 and 1998 are sometimes herein called the "Financials."
There are no notes to the Financials.) The balance sheet of the
Company (prepared on an accrual basis) as of May 31, 1999, and
the related income statement (prepared on a cash basis), which
have been delivered to the Buyer, fairly present the financial
position of the Company as at such date and the results of
operations of the Company for the five (5) months then ended, in
each case in conformity with generally accepted accounting
principles applied on a basis consistent with that of the
Financials. (The foregoing unaudited financial statements of the
Company as of May 31, 1999, and for the five (5) months then
ended are sometimes herein called the "Interim Financials," the
balance sheet included in the Interim Financials is sometimes
herein called the "Balance Sheet" and May 31, 1999, is sometimes
herein called the "Balance Sheet Date").
3.11 Liabilities. As of the Balance Sheet Date, the Company
did not have any indebtedness, liability, claim or loss,
liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise, of a kind required by
generally accepted accounting principles to be set forth on a
financial statement ("Liabilities") that were individually, or in
the aggregate, material to the condition of the Company and were
not fully and adequately reflected or reserved against on the
Balance Sheet or described on any Schedule hereto. Except as set
forth on Schedule 3.11, the Company has not, except in the
ordinary course of business, incurred any Liabilities since the
Balance Sheet Date.
3.12 No Material Adverse Change. Except as set forth on
Schedule 3.12, since the Balance Sheet Date, there has been no
material adverse change in the condition of the Company, and, to
the knowledge of the Company or any of the Sellers, no such
change is threatened or contemplated, nor has there been any
damage, destruction or loss which could have or has had a
material adverse effect upon the Contemplated Transactions or
upon the condition of the Company, whether or not covered by
insurance.
3.13 Tax Matters.
(i) The Company has paid all federal, state, local,
foreign and other taxes (including estimated taxes) (the
"Taxes") required to be paid by it through the date hereof,
and all deficiencies or other additions to tax, interest and
penalties owed by it, and shall timely pay any such Taxes,
including additions, interest and penalties, required to be
paid by it on or before the Closing Date, including, but not
limited to, all Taxes due or required to be paid in respect
of the Company's fiscal year ended December 31, 1998.
(ii) The Company has timely filed all federal, state,
local, foreign and other tax returns (the "Tax Returns")
required through the date hereof, and shall prepare and
timely file, in a manner consistent with prior years, all
Tax Returns required on or before the Closing Date.
(iii) Schedule 3.13 sets forth the status of
federal income tax audits of the returns of the Company for
each fiscal year for which the statute of limitations has
not expired, including the amounts of any deficiencies and
additions to tax, interest and penalties indicated on any
notices of proposed deficiency or statutory notices of
deficiency, and the amounts of any payments made by the
Company with respect thereto. Each return filed by the
Company for which the federal income tax audit has not been
completed accurately reflects the amount of its tax
liability for such period. Except as set forth on Schedule
3.13, the Company has not agreed to, nor is required to,
make any adjustments under section 481(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), by reason of
a change in accounting method or otherwise.
(iv) Schedule 3.13 sets forth the status of state and
local tax audits of the returns of the Company for each
fiscal year for which the statute of limitations has not
expired, including the amounts of any deficiencies or
additions to tax, interest and penalties that have been made
or proposed, and the amounts of any payments made by the
Company with respect thereto. Each state and local income
tax return filed by the Company for which the tax audit has
not been completed accurately reflects the amount of its tax
liability for such period. To the knowledge of the Company
or any of the Sellers, there has been no material adverse
change in the rates or basis of assessment of any tax
effective for the fiscal year ending December 31, 1998, of
the Company or of any unassessed tax deficiency proposed or
threatened against the Company.
(v) Schedule 3.13 sets forth all federal tax elections
under the Code that are in effect with respect to the
Company for the fiscal year ended December 31, 1998.
(vi) The Company has not at any time consented under
section 341(f)(1) of the Code to have the provisions of
section 341(f)(2) of the Code apply to any sale of its
stock.
3.14 Title to Assets. Except as set forth on Schedule 3.14,
the Company owns outright and has good and marketable title to
all of its assets, including, without limitation, all of the
assets reflected on the Balance Sheet or described in Section
3.15 (Real Estate), Section 3.16 (Tangible Property), Section
3.17 (Intellectual Property) and Section 3.21 (Receivables), in
each case free and clear of any lien or other encumbrance, except
for (i) assets disposed of, or subject to purchase or sales
orders, in the ordinary course of business since the Balance
Sheet Date; (ii) liens or other encumbrances securing taxes,
assessments, governmental charges or levies, all of which are not
yet due and payable or are being contested in good faith, so long
as such contest does not involve any danger of the sale,
forfeiture or loss of any assets material to the condition of the
Company; (iii) assets held or used pursuant to any lease or
license; or (iv) the rights of customers of the Company with
respect to inventory or work in progress under purchase orders or
contracts entered into by the Company in the ordinary course of
business. Schedule 3.14 sets forth a correct and complete list
of all of the Company's assets which are held or used pursuant to
any lease or license.
3.15 Real Estate. Schedule 3.15 sets forth a correct and
complete list of all real property owned in whole or in part by
the Company or leased by the Company (collectively, the "Real
Property"), and includes the name of the record title holder
thereof and a list and brief description of all indebtedness
secured by each mortgage, deed of trust or other lien or
encumbrance thereon. The Real Property set forth on Schedule
3.15 constitutes all of the real property used by the Company for
office, warehouse, storage, and any other uses. The buildings,
structures and improvements included within the Real Property
(collectively, the "Improvements") comply in all material
respects with all applicable restrictions, building ordinances
and zoning ordinances and all regulations of the applicable
health and fire departments, and no material alteration, repair,
improvement or other work has been performed in respect to such
Improvements within the last one hundred twenty (120) days. The
Improvements and the mechanical systems situated therein,
including, without limitation, the heating, electrical, air
conditioning and plumbing systems, are in good operating
condition and repair, ordinary wear and tear excepted, and are
adequate and suitable for the purposes for which they are
presently being used, and the roof of each Improvement is in
satisfactory condition and is not in need of material current
repair.
3.16 Tangible Property. The facilities, machinery,
equipment, furniture, leasehold improvements, fixtures, vehicles,
structures, any related capitalized items and other tangible
property material to the business of the Company (the "Tangible
Property") are in good operating condition and repair, subject to
continued repair and replacement in accordance with past
practice, and the Company has not received any notice that any of
the Tangible Property is in violation of any existing law or any
building, zoning, health, safety or other ordinance, code or
regulation which violation could have a material adverse effect
on the condition of the Company. During the past three (3) years
there has not been any significant interruption of the operations
of the Company due to inadequate maintenance of the Tangible
Property. All material leases, conditional sale contracts,
franchises or licenses pursuant to which the Company may hold or
use any interest owned or claimed by the Company (including,
without limitation, options) in or to Tangible Property are in
full force and effect and, with respect to the performance of the
Company, there is no default or event of default or event which
with notice or lapse of time or both would constitute a default.
3.17 Intellectual Property.
(i) Schedule 3.17(i) sets forth all of the
Intellectual Property (as defined below) and there are no
other patents, trademarks, copyrights, service marks, trade
names, other intellectual property rights, trade secrets,
know how, technology, blueprints, designs, works for hire,
inventions, or other proprietary information, processes or
formulae, which are material to the business of the Company
as presently conducted or as being developed. Except as
set forth on Schedule 3.17(i), neither the Company nor any
of the Sellers have any notice of any interest in the
Intellectual Property adverse to the Company's interest or
notice of any claim of any other person relating to any of
the property set forth on Schedule 3.17(i), and neither the
Company nor any of the Sellers knows of any basis for any
such charge or claim. All Intellectual Property is
adequately protected against the unauthorized or unlawful
use by other persons. There is no present or, to the
knowledge of the Company or any of the Sellers, threatened
use or encroachment of any Intellectual Property which could
have an adverse effect upon the Contemplated Transactions or
upon the condition of the Company.
(ii) Except for the rights and licenses validly and
effectively established by the Software Contracts (as
defined below), the Company owns, and shall retain on and
after the Closing, all the Intellectual Property.
(iii) Schedule 3.17(iii) sets forth the form and
placement of the proprietary legends and copyright notices
displayed in or on the Software Programs (as defined below).
In no instance has the eligibility of the Software Programs
for protection under applicable copyright law been forfeited
to the public domain by omission of any required notice or
any other action.
(iv) The Company has promulgated and used its
commercially reasonable best efforts to enforce a trade
secret protection program. To the knowledge of the Company
or any of the Sellers, there has been no material violation
of such program by any person or entity. The source code and
system documentation relating to the Software Programs (a)
have at all times been maintained in confidence, and (b)
have been disclosed by the Company or by any of the Sellers
only to employees and consultants having "a need to know"
the contents thereof in connection with the performance of
their duties to the Company.
(v) All personnel, including employees, agents,
consultants and contractors, who have contributed to or
participated in the conception and development of the
Software Programs, Technical Documentation (as defined
below), or Intellectual Property on behalf of the Company
either (a) have been party to a "work-for-hire" arrangement
or agreement with the Company, in accordance with applicable
federal and state law, that has accorded the Company full,
exclusive and original ownership of all tangible and
intangible property (including the Intellectual Property)
thereby arising, or (b) have executed appropriate
instruments of assignment in favor of the Company as
assignee that have conveyed to the Company full and
exclusive ownership of all tangible and intangible property
(including the Intellectual Property) thereby arising.
(vi) Whenever any of the terms set forth below is used
in this Article 3, it shall have the following meaning:
(a) "Intellectual Property" shall mean all
patents, trademarks, copyrights, service marks and
trade names (whether registered or not), all
applications for any of the foregoing, and all permits,
grants and licenses or other rights running to or from
the Company relating to any of the foregoing, and all
other intellectual property rights, trade secrets, know
how, technology, blueprints, designs, works for hire,
inventions, and other proprietary information,
processes and formulae used in the Company's business.
(b) "Software Contracts" shall mean all
contracts, agreements, licenses, sublicenses, and other
commitments and arrangements, oral or written, with any
person or entity respecting the ownership, license,
acquisition, design, development, distribution,
marketing, use or maintenance of computer program code,
related technical or user documentation, and databases,
in each case relating to or arising out of the
Company's business, including, without limitation, the
following: (1) licenses or sublicenses from third
parties (development and/or marketing), (2) licenses or
sublicenses from third parties (internal use only), (3)
development contracts, work-for-hire agreements, and
consulting and employment agreements, (4)
distributorships, dealerships, franchises, and
manufacturer's representative contracts, (5) licenses
and sublicenses to others, and (6) maintenance, support
or enhancement agreements;
(c) "Software Programs" shall mean the systems and
applications computer programs described in Schedule
3.17(vi); and
(d) "Technical Documentation" shall mean all
technical and descriptive materials relating to the
acquisition, design, development, use or maintenance of
computer code and program documentation and materials
in the Company's business.
3.18 Adequacy of Technical Documentation. The Technical
Documentation (as defined in Section 3.17(vi) hereof) includes
the source code, system documentation, statements of principles
of operation, and schematics for all Software Programs (as
defined in Section 3.17(vi) hereof), as well as any pertinent
commentary or explanation that may be necessary to render such
materials understandable and usable by a computer programmer
fully trained in the applicable source code language. The
Technical Documentation also includes any program (including,
without limitation, compilers), "workbenches," tools and higher
level (or "proprietary") language owned, licensed or used by the
Company for the development, maintenance and implementation of
the Software Programs.
3.19 Third-Party Components in Software Programs. The
Company has validly and effectively obtained the right and
license to use, copy, modify and distribute the third-party
programming and materials contained in the Software Programs and
Technical Documentation pursuant to the Software Contracts that
are "licenses or sublicenses from third parties (development
and/or marketing)" (as described in Section 3.17(vi)(b)(1)) or
that are "licenses or sublicenses from third parties (internal
use only)"(as described in Section 3.17(vi)(b)(2)). The Software
Programs and Technical Documentation contain no other programming
or materials in which any third party may claim superior, joint
or common ownership, including any right or license. Except as
set forth on Schedule 3.19, the Software Programs and Technical
Documentation do not contain derivative works of any programming
or materials not owned in their entirety by the Company.
3.20 Third-Party Interests or Marketing Rights in Software
Programs. Except as set forth on Schedule 3.20, the Company has
not granted, transferred or assigned any right or interest in the
Software Programs, the Technical Documentation or the
Intellectual Property to any person or entity, except pursuant to
the Software Contracts that are "distributorships, dealerships,
franchises, and manufacturer's representative contracts" (as
described in Section 3.17(vi)(b)(4)) or that are "licenses and
sublicenses to others" (as described in Section 3.17(vi)(b)(5)).
Except as set forth in Schedule 3.20, all Software Contracts that
are "licenses and sublicenses to others" (as described in Section
3.17(vi)(b)(5)) constitute only end-user agreements, each of
which grants the end-user thereunder solely the nonexclusive
right and license to use an identified Software Program and
related user documentation, for internal purposes only, on a
single central processing unit. There are no contracts,
agreements, licenses, sublicenses and other commitments and
arrangements in effect with respect to the marketing,
distribution, licensing or promotion of the Software Programs,
the Technical Documentation or the Intellectual Property by any
independent salesperson, distributor, sublicensor, or other
remarketer or sales organization, except for the Software
Contracts that are "distributorships, dealerships, franchises,
and manufacturer's representative contracts" (as described in
Section 3.17(vi)(b)(4)).
3.21 Receivables. All accounts and notes receivable as
reflected on the Balance Sheet, and all accounts and notes
receivable arising subsequent to the Balance Sheet Date and on or
prior to the Closing Date, (i) have arisen in the ordinary course
of business of the Company, (ii) represent valid obligations due
to the Company enforceable in accordance with their terms, and
(iii) have been collected or are collectible in the ordinary
course of business of the Company in the aggregate recorded
amounts thereof in accordance with their terms.
3.22 Actions and Proceedings. There are no outstanding
orders, judgments, injunctions, awards or decrees of any court,
arbitrator or governmental or regulatory body against the
Company. Except as set forth on Schedule 3.22, there are no
actions, suits or claims or legal, administrative or arbitral
proceedings or investigations (whether or not the defense thereof
or liabilities in respect thereof are covered by insurance)
pending, or to the knowledge of the Company or any of the
Sellers, threatened against or involving the Company or any of
its properties or assets which, individually or in the aggregate,
could have a material adverse effect upon the Contemplated
Transactions or upon the condition of the Company. All notices
required to have been given to any insurance company listed as
insuring against any action, suit or claim set forth on Schedule
3.22 have been timely and duly given and, except as set forth on
Schedule 3.22, no insurance company has asserted, orally or in
writing, that such claim is not covered by the applicable policy
relating to such claim. Except as set forth in Schedule 3.22,
there are no product liability or warranty claims against or
involving the Company or the Company Products (as defined in
Section 3.29).
3.23 Contracts and Other Agreements. Schedule 3.23 sets
forth all of the following contracts and other agreements to
which the Company is a party or by or to which it or its assets
or properties are bound or subject: (i) contracts and other
agreements with any current or former officer, director,
shareholder or other affiliate or with any other current employee
or consultant or with an entity in which any of the foregoing is
a controlling person; (ii) contracts and other agreements with
any labor union or association representing any employee;
(iii) contracts and other agreements with any person to sell,
distribute or otherwise market any of the Company Products (as
defined in Section 3.29); (iv) contracts and other agreements
with any person for the development, creation or manufacture of
any of the Company Products; (v) contracts and other agreements
for the sale of any of its assets other than in the ordinary
course of business or for the grant to any person of any option
or preferential rights to purchase any of its assets; (vi) joint
venture agreements; (vii) contracts and other agreements under
which it agrees to indemnify any party or to share tax liability
of any party; (viii) material contracts and other material
agreements which cannot be canceled without liability, premium or
penalty upon ninety (90) days notice or less notice;
(ix) contracts and other agreements with customers, distributors
or suppliers for the sharing of fees, the rebating of charges or
other similar arrangements; (x) contracts and other agreements
containing covenants of the Company not to compete in any line of
business or with any person in any geographical area or covenants
of any other person not to compete with the Company in any line
of business or in any geographical area; (xi) contracts and other
agreements relating to the acquisition by the Company of any
operating business or the capital stock of any other person;
(xii) contracts and other agreements requiring the payment to any
person of an override or similar commission or fee;
(xiii) contracts and other agreements relating to the borrowing
of money; (xiv) licenses; (xv) leases; (xvi) contracts and other
agreements with any person for the sale of any of the Company
Products (as defined in Section 3.29) that have not been fully
performed, and with respect to which the purchase price payable
to the Company for the unperformed portion is in excess of One
Hundred Fifty Thousand Dollars ($150,000); (xvii) any other
contracts and other agreements in excess of Five Thousand Dollars
($5,000) not made in the ordinary course of business; or
(xviii) any other contracts and other agreements pursuant to the
terms of which there is either a current or future obligation of
the Company to make payments in excess of Five Thousand Dollars
($5,000). There have been made available to the Buyer true and
complete copies of all of the contracts and other agreements set
forth on Schedule 3.23 or on any other Schedule. All of such
contracts and other agreements are valid and binding upon the
Company. The Company is not in default under any of such
agreements, nor, to the knowledge of the Company or any of the
Sellers, is any other party to any such contract or other
agreement in default thereunder, nor does any condition exist
that with notice or lapse of time or both would constitute a
default thereunder. Schedule 3.23 also lists all contracts and
other agreements currently in negotiation or proposed by the
Company of a type which if entered into by the Company would be
required to be listed on Schedule 3.23 or on any other Schedule.
The Company and the Sellers have made available to the Buyer true
and correct drafts or summaries of all contracts and other
agreements described in the preceding sentence and copies of all
documents relating thereto.
3.24 Compliance with Laws. Except as set forth on Schedule
3.24, the Company is not in violation of any applicable federal,
state, local or foreign law, ordinance, regulation, order,
judgment, injunction, award, decree or other requirement of any
governmental or regulatory body, court or arbitrator, including,
without limitation, (i) the Robinson-Patman Price Discrimination
Act of 1936, as amended, (ii) regulations and requirements of the
Occupational Safety and Health Administration, or (iii) laws
relating to pollution or protection of the environment (clauses
(ii) and (iii) hereinafter collectively referred to as the
"Safety and Environmental Laws"), including, without limitation,
laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes into the environment
(including, without limitation, ambient air, surface water,
ground water or land), or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, chemicals or
industrial, toxic or hazardous substances or wastes, which
violation could have a material adverse effect upon the
Contemplated Transactions or upon the condition of the Company
and neither the Company nor any of the Sellers have received
notice that any such violation is being alleged. The Company has
all licenses, permits, orders or approvals of, and has made all
required registrations with, any governmental or regulatory body
that are material to the conduct of the business of the Company
(collectively, "Permits"), including, without limitation, all
Permits relating to compliance with Safety and Environmental
Laws. All Permits are listed on Schedule 3.24 and are in full
force and effect; no material violations are or have been
recorded in respect of any Permit; and no proceeding is pending
or threatened to revoke or limit any Permit.
3.25 Suppliers, Distributors, Sales Agents and Customers.
Schedule 3.25 lists, by dollar volume paid for the twelve (12)
months ended on March 31, 1999, (i) the ten (10) largest
suppliers of the Company, (ii) all of the distributors and sales
agents for the Company Products (as defined in Section 3.29),
(iii) the ten (10) largest customers of the Company, and (iv) any
other supplier which is the Company's sole supplier of a product
of which the Company purchased in excess of Twenty Five Thousand
Dollars ($25,000) of such product during such twelve (12) month
period. To the knowledge of the Company or any of the Sellers,
except as set forth on Schedule 3.25, (A) no person listed on
Schedule 3.25 intends or within the last twelve (12) months has
threatened to cancel or otherwise terminate the relationship of
such person with the Company, (B) no such person intends to
modify materially its relationship with the Company or to
decrease materially or limit materially its services, supplies or
materials to the Company or its usage or purchase of the services
of the Company or Company Products, as the case may be, (C) no
such person has during the last twelve (12) months decreased
materially or threatened to decrease or limit materially, its
services, supplies or materials to the Company or its usage or
purchase of the services or products of the Company, as the case
may be, and (D) the acquisition of the Shares by the Buyer and
the Contemplated Transactions will not affect the relationship of
the Company with any supplier, distributor, sales agent or
customer listed on Schedule 3.25 to an extent that the condition
of the Company will be adversely affected in any material
respect.
3.26 Employee Benefit Plans.
(i) Schedule 3.26 sets forth a complete and correct
list of all Benefit Plans (as defined below).
(ii) The Company delivered to the Buyer complete and
accurate copies of all plan texts and other agreements
(including, without limitation, trust agreements and
agreements with third party administrators, actuaries,
investment managers, investment consultants and other
independent contractors) adopted in connection with each
Benefit Plan, and all amendments thereto; all summary plan
descriptions for each Benefit Plan and other material
employee communications relating thereto; the annual reports
for each Benefit Plan for each of the most recent three plan
years and financial statements (or similar reports)
therefor; a written description of any Benefit Plan that is
not otherwise in a writing provided to Buyer pursuant to
this Section 3.26; all notices or other filings given with
respect to each Benefit Plan to the IRS, the PBGC (as
defined below), or any participant or beneficiary, pursuant
to statute within the four years preceding the date of this
Agreement; all notices that were given by the IRS, the PBGC
or the United States Department of Labor with regard to any
Benefit Plan to the Company within the four years preceding
the date of this Agreement; and, with respect to each
Benefit Plan which is a Pension Plan (as defined below)
(i) the most recent actuarial valuation therefor (if any),
and (ii) the most recent determination letter received from
the Internal Revenue Service (if any).
(iii) No event has occurred, and there exists no
condition or set of circumstances relating, directly or
indirectly, to the Benefit Plans in connection with which
the Company or any Benefit Plan, directly or indirectly,
could be subject to any liability under ERISA (as defined
below) (including, but not limited to, sections 409, 502(i),
4062, 4063, 4064, 4069, 4201, 4242 or 4243 thereof), the
Code (including, but not limited to, sections 4971 or 4975
thereof) or any other applicable law.
(iv) With respect to each Benefit Plan: (i) full
payment of all amounts which the Company is or has been
required under the terms of each such plan to have paid as
contributions to such plan has been made; (ii) no
accumulated funding deficiency (as defined in section 302 of
ERISA and section 412 of the Code), whether or not waived,
exists with respect to any such plan; (iii) in all material
respects, each such plan conforms to, and its administration
is in compliance with, applicable plan documents and all
applicable laws and regulations, including, but not limited,
to ERISA and the Code; (iv) each such plan which is a
Pension Plan intended to qualify under section 401(a) or
403(a) of the Code has been determined by the Internal
Revenue Service to so qualify and nothing has occurred since
the date of any such determination which has adversely
affected such qualification; and (v) there are no actions,
suits or claims pending (other than routine claims for
benefits) or threatened against any such plan or against the
assets of any such plan.
(v) No unpaid or contingent liability to the PBGC (as
defined below) has been or is expected to be incurred,
directly or indirectly, by the Company (other than for
payment of PBGC premiums in the ordinary course). No event
has occurred, and there exists no condition or set of
circumstances which presents a material risk of the
termination or partial termination of any Pension Plan,
which could result, directly or indirectly, in a liability
on the part of the Company to the PBGC or any other person.
(vi) Except as set forth on Schedule 3.26, there is no
plan or arrangement which is a Benefit Plan and which
provides medical or death benefits (whether or not insured)
to employees beyond their retirement or other termination of
service (other than coverage mandated by statute).
(vii) Except as set forth on Schedule 3.26, there
are no trust accounts, reserves, assets, surplus or prepaid
premiums under any Benefit Plan which is a welfare plan (as
defined in section 3(1) of ERISA).
(viii) There are no unfunded pension benefit
obligations arising in any jurisdiction which are not
accounted for by reserves shown on the Company's financial
statements and established under generally accepted
accounting principles, or otherwise expressly noted on such
statements.
(ix) With respect to each Benefit Plan which is a
Pension Plan, the present value of liabilities for accrued
benefits as of the Closing Date, whether or not vested,
under any such plan shall not exceed the net assets of such
plan allocable to such liabilities.
(x) No transaction prohibited by Section 406 of ERISA
and no "prohibited transaction" under Section 4975(c) of the
Code have occurred with respect to any Benefit Plan.
(xi) All contributions and payments made or accrued
with respect to all Benefit Plans are deductible under
Section 162 or Section 404 of the Code. No amount nor any
asset of any Benefit Plan or related trust is subject to tax
as unrelated business taxable income.
(xii) Except as set forth on Schedule 3.26, each
Benefit Plan can be terminated within thirty (30) days,
without payment of any additional contribution or amount and
without the vesting or acceleration of any benefits
permitted by such plan.
(xiii) No event has occurred or circumstance exists
that could result in a material increase in premium costs of
Benefit Plans that are insured, or a material increase in
costs of Benefit Plans that are self-insured.
(xiv) No Benefit Plan is subject to Title IV of
ERISA.
(xv) The Company, and any other person that together
with the Company would be treated as a single employer under
Section 414 of the Code, have complied, in all material
respects, with the provisions of Section 601 et seq. of
ERISA and Section 4980B of the Code.
(xvi) Except as set forth on Schedule 3.26, the
consummation of the Contemplated Transactions will not
(A) entitle any employee of the Company to severance pay,
unemployment compensation or any similar payment, or
(B) accelerate the time of payment, vesting, or increase the
amount of any compensation due to any employee of the
Company.
(xvii) Except as set forth on Schedule 3.26, there
has been no contribution or obligation to contribute to any
multi-employer plan (as defined in section 4001(a)(3) of
ERISA) with respect to any employee of the Company.
(xviii) Whenever any of the terms set forth below is
used in this Section 3.26, it shall have the following
meaning: (A) "Benefit Plan" shall mean any plan, agreement,
arrangement or commitment which is an employment or
consulting agreement, executive compensation plan, bonus
plan, deferred compensation agreement, employee pension,
profit-sharing, savings or retirement plan, employee stock
option or stock purchase plan, group life, health, accident,
or disability insurance or other employee benefit plan,
agreement, arrangement or commitment, including, without
limitation, dental care, vision care, dependent care,
cafeteria plan, legal services, employee assistance program,
scholarship, severance, holiday, vacation, Christmas bonus
or other bonus practice (including, but not limited to,
employee benefit plans, as defined in section 3(3) of
ERISA), with respect to which the Company (1) currently has
or in the future may have some liability or obligation to
contribute or pay benefits and (2) which relates to current
or former employees of the Company or to current or former
employees of any other person that together with the Company
would be treated as a single employer under Section 414 of
the Code; (B) "ERISA" shall mean the Employee Retirement
Income Security Act of 1974, as amended; (C) "PBGC" shall
mean the Pension Benefit Guaranty Corporation; and
(D) "Pension Plan" shall mean an employee pension benefit
plan, as defined in section 3(2) of ERISA.
3.27 Insurance. Schedule 3.27 sets forth a list and brief
description (specifying the insurer, describing each pending
claim thereunder of more than Ten Thousand Dollars ($10,000) and
setting forth the aggregate amounts paid out under each such
policy through the date hereof) of all policies or binders of
fire, liability, product liability, workmen's compensation,
vehicular and other insurance held by or on behalf of the
Company. Such policies and binders are in full force and effect
and insure against risks and liabilities to an extent and in a
manner customary in the industries in which the Company
operates. Except for claims set forth on Schedule 3.27, there
are no outstanding unpaid claims under any such policy or binder;
the Company has not received any notice of cancellation or non-
renewal of any such policy or binder. To the knowledge of the
Company or any of the Sellers, there is no inaccuracy in any
application for such policies or binders, or any failure to pay
premiums when due. Except as set forth on Schedule 3.27, neither
the Company nor any of the Sellers have received any notice from
any of its insurance carriers that any insurance premiums will
be materially increased in the future or that any insurance
coverage listed on Schedule 3.27 will not be available in the
future on substantially the same terms as now in effect.
3.28 Books and Records. The minute books and stock issuance
and transfer records of the Company, as made available to the
Buyer and its representatives, contain complete and accurate
records of all meetings, and accurately reflect all other
corporate action, of the shareholders and the Board of Directors
of the Company, and accurately reflect all issues and transfers
of all of the capital stock of the Company.
3.29 Company Products. All express or implied warranties
that the Company has made with respect to any product developed,
manufactured, marketed, sold or distributed at any time by the
Company (the "Company Products") are described on Schedule 3.29
hereto. No events have occurred or facts exist that could result
in a significant increase in any future expense related to the
warranty obligations described on Schedule 3.27 from that
historically experienced by the Company.
3.30 Year 2000 Compliance. The Year 2000 Problem (as
defined below) has not been, and the Company has taken reasonably
appropriate actions to assure that the Year 2000 Problem will not
be, material and adverse to the business, properties, assets,
financial condition, results of operations or prospects of the
Company, including, but not limited to, the Company Products.
Schedule 3.30 sets forth all actions taken by the Company as of
the date of this Agreement and all actions remaining to be taken
to become Year 2000 Compliant (as defined below) on or prior to
January 1, 2000 in all computer-based systems (including all
software, embedded microchips and other processing capabilities)
used by or operated within the custody or control of the Company.
The Company has undertaken a review and assessment of the
products of all suppliers and vendors that are incorporated in or
delivered by the Company for use with the Company's Products,
with respect to which products the Year 2000 Problem could
reasonably be expected to have a material adverse effect upon the
Contemplated Transactions or upon the Company. The Company has
developed and implemented plans or procedures reasonably
appropriate to avoid or minimize any such material adverse effect
to the Contemplated Transactions or to the Company. For the
purposes of this Agreement, the "Year 2000 Problem" shall mean
the risk that computer applications used by, or operated within
the custody or control of the Company or products of any of its
material suppliers or vendors that are incorporated in or
delivered by the Company for use with the Company's Products may
be unable to recognize or properly perform date-sensitive
functions involving certain dates (including dates related to any
leap year) prior to, and any date after, December 31, 1999. For
purposes of this Agreement, "Year 2000 Compliant" shall mean,
with respect to the Company or any of its material suppliers or
vendors, all software, embedded microchips and other processing
capabilities utilized by the Company or any of its material
suppliers or vendors are able to interpret and manipulate data on
or involving all calendar dates (including dates related to any
leap year) correctly and without causing any abnormal ending
scenario, including in relation to dates (including dates related
to any leap year) immediately prior to, in and after the year
2000.
3.31 Officers, Directors and Key Employees. Schedule 3.31
sets forth the name and total current annual compensation of each
person who is now an officer or director of the Company, an
employee, consultant, agent or other representative of the
Company whose annual rate of compensation (including bonuses and
commissions) exceeds Seventy Five Thousand Dollars ($75,000).
With the exception of salary increases granted in the ordinary
course of business and in a manner and amount consistent with its
past practices, the Company has not made a commitment or
agreement to increase the compensation or to modify the
conditions or terms of employment of any such person. Except as
set forth on Schedule 3.31, none of such persons currently
holding such a position has indicated that he or she will cancel
or otherwise terminate such person's relationship with the
Company.
3.32 Operations of the Company. Except as set forth on
Schedule 3.32, since the Balance Sheet Date the Company has not:
(i) declared or paid any dividends or declared or made
any other distributions of any kind to its shareholders, or
made any direct or indirect redemption, retirement, purchase
or other acquisition of any shares of its capital stock;
(ii) except for short-term bank borrowings in the
ordinary course of business, incurred any indebtedness for
borrowed money;
(iii) reduced its cash or short term investments or
their equivalent, other than to meet cash needs arising in
the ordinary course of business, consistent with past
practices;
(iv) waived any material right under any contract or
other agreement of the type required to be set forth on any
Schedule hereto;
(v) made any material change in its accounting methods
or practices or made any material change in depreciation or
amortization policies or rates adopted by it;
(vi) materially changed any of its business policies,
including, without limitation, advertising, investment,
marketing, pricing, purchasing, personnel, sales, returns,
budget or product acquisition policies;
(vii) made any wage or salary increase or bonus, or
increase in any other direct or indirect compensation, or
any payment or commitment to pay any severance or
termination pay to any of its officers, directors,
employees, consultants, agents or other representatives, or
any accrual for or commitment or agreement to make or pay
the same, in each case, other than to persons other than its
officers, directors or shareholders made in the ordinary
course of business;
(viii) made any loan or advance to any of its
shareholders, officers, directors, employees, consultants,
agents or other representatives (other than travel advances
made in the ordinary course of business), or made any other
loan or advance other than in the ordinary course of
business;
(ix) except for inventory, supplies or equipment
acquired in the ordinary course of business, made any
acquisition of all or any part of the assets, properties,
capital stock or business of any other person;
(x) paid, directly or indirectly, any of its material
Liabilities before the same became due in accordance with
its terms or otherwise than in the ordinary course of
business;
(xi) terminated or failed to renew, or received any
threat to terminate or fail to renew, any contract or other
agreement that is or was material to the condition of the
Company;
(xii) entered into any Software Contracts (as
defined in Section 3.17(vi) hereof) other than in the
ordinary course of business and consistent with past
practices; or
(xii) engaged in any material transaction other
than in the ordinary course of business.
3.33 Potential Conflicts of Interest. Except as set forth
on Schedule 3.33, to the knowledge of the Company or any of the
Sellers, no officer, director or affiliate of the Company, no
Seller, no relative or spouse (or relative of such spouse) of any
such officer, director or affiliate or of a Seller and no entity
controlled by one (1) or more of the foregoing:
(i) owns, directly or indirectly, any interest in
(excepting less than one percent (1%) stock holdings for
investment purposes in securities of publicly held and
traded companies), or is an officer, director, employee or
consultant of, any person which is, or is engaged in
business as, a competitor, lessor, lessee, supplier,
distributor, sales agent or customer of the Company;
(ii) owns, directly or indirectly, in whole or in part,
any tangible or intangible property that the Company uses in
the conduct of business; or
(iii) has any cause of action or other claim
whatsoever against, or owes any amount to, the Company,
except for claims in the ordinary course of business such as
for accrued vacation pay, accrued benefits under employee
benefit plans, and similar matters and agreements existing
on the date hereof.
3.34 Banks, Brokers and Proxies. Schedule 3.34 sets forth
(i) the name of each bank, trust company, securities or other
broker or other financial institution with which the Company has
an account, credit line or safe deposit box or vaults; (ii) the
name of each person authorized by the Company to draw thereon or
to have access to any safe deposit box or vault; and (iii) the
names of all persons authorized by proxies, powers of attorney or
other instruments to act on behalf of the Company in matters
concerning its business or affairs.
3.35 Full Disclosure. All documents and other papers
delivered by or on behalf of the Sellers in connection with this
Agreement and the Contemplated Transactions are true, complete
and authentic in all material respects. Notwithstanding the
foregoing, this Section 3.35 does not apply to projections for
the future. No representation or warranty of the Sellers
contained in this Agreement contains an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary to make the statements made, in the
context in which made, not materially false or misleading.
3.36 Representations and Warranties on Closing Date. The
representations and warranties contained in this Article 3 shall
be true in all material respects on and as of the Closing Date
with the same force and effect as though such representations and
warranties had been made on and as of the Closing Date.
4. REPRESENTATIONS AND WARRANTIES OF THE BUYER.
The Buyer represents and warrants to the Sellers as follows:
4.1 Due Incorporation and Authority. The Buyer is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Nevada, and has all requisite
corporate power and authority to own, lease and operate its
assets and business and to carry on its business as now being and
as heretofore conducted.
4.2 Buyer Authorization and Validity of Agreement. The
Buyer has the full legal right and power and all authority and
approval required to enter into, execute and deliver this
Agreement and to perform fully its obligations hereunder. This
Agreement has been duly executed and delivered by the Buyer and
(assuming the due authorization, execution and delivery hereof by
the Sellers) is a valid and binding obligation of the Buyer
enforceable in accordance with its terms.
4.3 No Breach. Except as set forth on Schedule 4.3, the
execution and delivery by the Buyer of this Agreement, the
consummation of the Contemplated Transactions and the performance
by the Buyer of this Agreement in accordance with the terms and
conditions hereof, will not (i) require the approval or consent
of any foreign, federal, state, county, local or other
governmental or regulatory body or the approval or consent of any
other person; (ii) conflict with or result in any breach or
violation of any of the terms and conditions of, or constitute
(or with notice or lapse of time or both constitute) a default
under, any Articles of Incorporation or the Bylaws of the Buyer,
statute, regulation, order, judgment or decree of or applicable
to the Buyer, or any instrument, contract or other agreement to
which the Buyer is a party or by or to which the Buyer or any of
its properties is bound or subject; or (iii) result in the
creation of any lien or encumbrance on any of the properties of
the Buyer. The consents, approvals, filings and notices listed
on Schedule 4.3 (if any) are referred to herein as the "Buyer's
Required Consents."
4.4 Representations and Warranties on Closing Date. The
representations and warranties contained in this Article 4 shall
be true in all material respects on and as of the Closing Date
with the same force and effect as though such representations and
warranties had been made on and as of the Closing Date.
5. COVENANTS AND AGREEMENTS.
The parties covenant and agree as follows:
5.1 Conduct of Business. From the date hereof through the
Closing Date, the Company shall, and the Sellers shall cause the
Company to, conduct its business in the ordinary course,
consistent with past practice, and, without the prior written
consent of the Buyer, the Sellers will not cause or permit the
Company to take any action that would cause any of the
representations and warranties contained in Section 3.32 hereof
not to be true and correct immediately after the taking of such
action. From the date hereof through the Closing Date, the
Sellers shall cause the Company to, and the Company shall,
conduct its business in such a manner so that the other
representations and warranties contained in Article 3 hereof, in
addition to those contained in Section 3.32, shall continue to be
true and correct on and as of the Closing Date as if made on and
as of the Closing Date, and each Seller shall conduct such
Seller's affairs in such a manner so that the representations and
warranties contained in Article 3 hereof with respect to such
Seller shall continue to be true and correct on and as of the
Closing Date as if made on and as of the Closing Date.
5.2 Maintenance of Assets; Casualty Loss. From the date
hereof through the Closing Date, the Sellers and the Company
shall use their best efforts to maintain the assets of the
Company in customary repair, order and condition, reasonable wear
and tear excepted, and, in the event of a casualty, loss or
damage prior to the Closing Date to any of such assets for which
the Company is insured, the Company, at the option of the Buyer,
and subject to the requirements of any applicable loss payee or
mortgagee clauses, shall either repair or replace such damaged
assets or transfer the proceeds of such insurance to the Buyer on
the Closing Date.
5.3 Notice of Certain Events. The Company and each of the
Sellers hereby agree to give the Buyer prompt notice of (i) any
event, condition or circumstances occurring from the date hereof
through the Closing Date that would constitute a violation or
breach of any representation, warranty or covenant of the Company
or any of the Sellers contained in this Agreement, or (ii) any
event, occurrence, transaction or other item which would have
been required to have been disclosed in this Agreement or any
Schedule or statement delivered hereunder, had such event,
occurrence, transaction or item existed on the date hereof.
5.4 Corporate Examinations and Investigations. Prior to
the Closing Date, the Buyer shall be entitled, through its
employees, representatives and contractors, including, without
limitation, Smith Helms Mulliss & Moore, L.L.P., KPMG Peat
Marwick, LLP, and Arthur Andersen LLP to make such investigation
of the assets, properties, business and operations of the
Company, and such examination of the books, records and financial
condition of the Company as it wishes. Any such investigation
and examination shall be conducted at reasonable times and under
reasonable circumstances, and the Company and the Sellers shall
cooperate fully therein. No investigation by or on behalf of the
Buyer, however, shall diminish or obviate any of the
representations, warranties, covenants or agreements of the
Sellers under this Agreement. In order that the Buyer may have
full opportunity to make such physical, business, accounting and
legal review, examination or investigation as it may wish of the
business and affairs of the Company, the Sellers shall make
available and shall cause the Company to make available to the
representatives of the Buyer during such period all such
information and copies of such documents concerning the affairs
of the Company as such representatives may reasonably request,
shall permit the contractors and representatives of the Buyer
access to the properties of the Company and all parts thereof and
shall cause the officers, employees, consultants, agents,
accountants and attorneys of the Company to cooperate in all
reasonable respects with such contractors and representatives in
connection with such review and examination. If this Agreement
terminates, the Buyer and their employees, representatives and
contractors shall keep confidential and shall not use in any
manner any information or documents obtained from the Company
concerning its assets, business and operations, unless readily
ascertainable from public or published information, or trade
sources (in each such case unless as a result of a violation of
this Section 5.4), or already known or subsequently developed by
the Buyer independently of any investigation of the Company. If
this Agreement terminates, any documents obtained from the
Company, and all copies thereof, shall be returned.
5.5 Expenses. The Buyer and each of the Sellers shall bear
their own respective expenses incurred in connection with the
negotiation, preparation, execution, delivery and performance of
this Agreement and the consummation of the Contemplated
Transactions hereby, including, without limitation, all fees and
expenses of agents, representatives, counsel and accountants. No
such expenses of the Sellers shall be paid by or accrued as a
liability of the Company. The Sellers shall bear, in addition to
their own costs and expenses, all the costs and expenses of the
Company incurred in connection this Agreement and the
Contemplated Transactions. The Sellers specifically acknowledge
and agree that all costs and expenses of Hoak Breedlove Wesneski
& Co. (including, without limitation, a "success fee" of
approximately One Hundred Eighty Five Thousand Dollars
($185,000)) shall be the responsibility of and paid by the
Sellers on or before the Closing Date.
5.6 Indemnification of Brokerage. The Sellers jointly and
severally represent and warrant to the Buyers that no broker,
finder, agent or similar intermediary has acted on behalf of the
Company or any Seller in connection with this Agreement or the
transactions provided for herein, and that there are no brokerage
commissions, finder's fees or similar fees or commissions payable
with respect to this Agreement or such transactions based on any
agreement, arrangement or understanding with the Company or any
Seller, or any action taken by the Company or any Seller, other
than fees payable to Hoak Breedlove Wesneski & Co., whose fees
will be the sole responsibility of the Sellers. The Sellers
jointly and severally agree to indemnify and save the Buyer
harmless from any claim or demand for commission or other
compensation by any broker, finder, agent or similar intermediary
claiming to have been employed by or on behalf of the Company or
any of the Sellers, and to bear any and all costs, including,
without limitation, any legal fees and expenses incurred in
defending against any such claim.
5.7 Related Parties. The Sellers shall, prior to the
Closing, pay or cause to be paid to the Company all amounts owed
to the Company and reflected on the Balance Sheet or borrowed
from or owed to the Company since the Balance Sheet Date by any
of the Sellers or any affiliate of any of the Sellers. At and as
of the Closing, any debts of the Company owed to any of the
Sellers or to any affiliate of any of the Sellers shall be
canceled, except those debts owed to any Seller in respect of his
or her employment with the Company and incurred in the ordinary
course of business.
5.8 Exclusive Dealing. From the date hereof through June
30, 1999, the Sellers agree that they will not, and that they
will not permit the Company to, directly or indirectly,
encourage, initiate or engage in discussions or negotiations
with, or provide any information to, any corporation,
partnership, person or other entity or group, other than the
Buyer, concerning any purchase of the Shares or any equity
interest in the Company or any subsidiary, or any merger, sale of
substantial assets or similar transaction involving the Company.
5.9 Employment Agreement. Evan E. Price and the Company
agree to enter into an Employment Agreement concurrently with the
Closing substantially in the form of Exhibit C hereto (the "Price
Employment Agreement").
5.10 Covenants Not To Compete.
(i) Each Seller promises and agrees that until the
expiration of the later of (A) five (5) years from the
Closing Date, or (B) one (1) year following the termination
or expiration for any reason of such Seller's consulting or
employment relationship with the Company (if any), the
Seller will not, either directly or indirectly within the
United States:
(a) Own, manage, operate, control, be employed
by, render advisory services to, participate in or be
connected in any management or control of any business
that is then engaged, in competition with the Company
or any of its subsidiaries or affiliates, in the sale
of:
(I) any computer software products or
services developed, marketed, or sold by the
Company or any of its subsidiaries or affiliates,
(II) any computer hardware products or
services developed, marketed, or sold by the
Company or any of its subsidiaries or affiliates,
or
(III) any products or services sold by
the Company or any of its subsidiaries or
affiliates at the time of such termination,
unless his or her duties, responsibilities and
activities for or on behalf of such business are not
related in any way to the sale of any such products or
services;
(b) Influence or attempt to influence any
customer of the Company or any of its subsidiaries or
affiliates to discontinue its purchases of any product
or service sold by the Company or any of its
subsidiaries or affiliates at the time of termination
of his employment or to divert such purchases to any
other person, firm, or corporation;
(c) Interfere with, disrupt or attempt to disrupt
the relationship, contractual or otherwise, between the
Company or any of its subsidiaries or affiliates and
any of its respective suppliers, distributors, lessors,
or licensors; or
(d) Solicit any employee of the Company or any of
its subsidiaries or affiliates, whose base annual
salary at the time of the Employee's termination was
Thirty Thousand Dollars ($30,000) or more, to work for
any other person, firm or corporation.
(ii) For purposes of this Section 5.10, "competition
with the Company or any of its subsidiaries or affiliates"
shall mean direct competition for customers of products or
services of the kind described above in any geographic area
in which the Company or any of its subsidiaries or
affiliates is engaged, directly or indirectly, in selling or
attempting to sell such products or services.
(iii) Each of the Sellers understand and agree that
the Company and its affiliates conduct business throughout
the United States, and that each of the provisions of this
Section 5.10 (including, without limitation, its scope,
geographic limitations and time period covered) are
reasonable and necessary for the protection of the Company
and its affiliates and of their legitimate business
interests.
(iv) It is the desire and intent of the parties that
the provisions of this Section 5.10 shall be enforced to the
fullest extent permitted under the laws and public policies
of each jurisdiction in which enforcement is sought.
Accordingly, if any particular portion of this Section 5.10
shall be adjudicated to be invalid or unenforceable, such
adjudication shall apply only with respect to the operation
of that portion in the particular jurisdiction in which such
adjudication is made, and all other portions shall continue
in full force and effect.
5.11 Confidentiality. Each Seller covenants that he or she
will not disclose any confidential or proprietary information
concerning this Agreement, the Contemplated Transactions or any
other confidential information of the Company (including, without
limitation, information relating to the Company's business,
products, financial status, performance, operations, methods,
processes, techniques, shop practices, formulae, research data,
marketing and sales information, personnel data, customer lists,
financial data, plans, know-how, proprietary information or
Intellectual Property (as defined in Section 3.17(vi) hereof)
(the "Confidential Information") to any person not employed by
the Company, or not engaged to render services to the Company, or
use, for himself, herself or any other person, firm, corporation
or entity, any Confidential Information. However, this Section
5.11 shall not preclude any of the Sellers from:
(i) disclosing information generally available to the
public (other than information known generally to the public
as a result of a violation of this Section 5.11 by the
Sellers collectively or by any of the Sellers individually);
or
(ii) disclosing information required by law or court
order after promptly notifying the Buyer of the requirement
to disclose such information and permitting the Buyer a
reasonable period to obtain a protective order to prevent
such disclosure.
5.12 Injunctive Relief. The Sellers acknowledge and agree
that the Company would suffer irreparable injury in the event of
a breach by the Sellers collectively, or by any Seller
individually, of any of the provisions of Section 5.10 or Section
5.11 of this Agreement and that the Company shall be entitled to
an injunction restraining all of the Sellers collectively or any
Seller individually, as appropriate, from any breach or
threatened breach thereof. Nothing herein shall be construed,
however, as prohibiting the Company from pursuing any other
remedies at law or in equity which it may have for any such
breach or threatened breach of any provision of Section 5.10 or
Section 5.11 hereof, including the recovery of damages from the
Sellers collectively or from any Seller individually, as
appropriate.
5.13 Further Assurances. Each of the parties hereto shall
execute such agreements, certificates, documents and other
instruments and take such further action as may be reasonably
necessary or appropriate to carry out the provisions hereof and
the transactions provided for herein. Each such party shall use
its best commercially reasonable efforts to fulfill or obtain the
fulfillment of all conditions to the Closing.
6. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE BUYER TO
CLOSE.
The obligation of the Buyer to enter into and complete the
Closing is subject, at the option of the Buyer acting in
accordance with the provisions of this Agreement with respect to
termination hereof, to the fulfillment on or prior to the Closing
Date of the following conditions, any one or more of which may be
waived by it:
6.1 Representations and Covenants. The representations and
warranties of each of the Sellers contained in this Agreement
shall be true in all material respects on and as of the Closing
Date with the same force and effect as though made on and as of
the Closing Date. Each of the Sellers and the Company shall have
performed and complied in all material respects with all
covenants and agreements required by this Agreement to be
performed or complied with by such Seller or the Company on or
prior to the Closing Date. Each Seller shall have delivered to
the Buyer a certificate, dated the Closing Date and signed by
such Seller, to the foregoing effect.
6.2 Consents and Approvals. All of Sellers' Required
Consents shall have been obtained and be in full force and
effect, and the Buyer shall have been furnished with appropriate
evidence of the granting of such approvals, authorizations and
consents.
6.3 Opinion of Counsel to the Company. The Buyer shall
have received the opinion of Gardere & Wynne, L.L.P., counsel to
the Company and the Sellers, dated the date of the Closing,
addressed to the Buyer, in the form of Exhibit D.
6.4 Releases. Each officer and director of the Company,
and such other persons and entities related to or affiliated with
the Company as the Buyer may reasonably designate prior to the
Closing, shall have executed and delivered to the Company and the
Buyer duplicate counterparts of a Release, dated the date of the
Closing, in the form of Exhibit E, or other form satisfactory to
the Buyer.
6.5 Employment Agreements. Evan E. Price shall have
entered into and delivered the Price Employment Agreement.
Additionally, the Company shall enter into Employment Agreements
in form and substance acceptable the Buyer with certain key
personnel of the Company, to be determined by the Buyer in its
sole discretion (the "Key Employment Agreements").
6.6 Financing. The Buyer shall have entered into a loan
agreement and other related agreements with a lender pursuant to
which such lender shall agree to make such loans to the Buyer as
the Buyer may require to enable it to consummate the Contemplated
Transactions and to provide the Buyer with working capital to
conduct the business previously conducted by the Company. The
proceeds of such loans shall be available to the Buyer at the
Closing.
6.7 Escrow Agreement. Concurrently with the Closing, the
Buyer, each of the Sellers and the Escrow Agent shall enter into
the Escrow Agreement.
6.8 Resignations. All resignations from directors of the
Company which have been previously requested in writing by the
Buyer shall have been delivered to the Buyer.
6.9 No Proceeding or Litigation. No action, suit, claim,
proceeding or investigation before any federal or state court or
any federal or state governmental or regulatory authority shall
have been threatened or commenced against any Seller, the
Company, any subsidiary or affiliate of the Company, or the Buyer
seeking to restrain, prevent or change the transactions
contemplated by this Agreement or seeking damages in connection
with any of such transactions.
7. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE
SELLERS TO CLOSE.
The obligation of the Sellers to enter into and complete the
Closing is subject, at the option of the Sellers acting in
accordance with the provisions of this Agreement with respect to
termination hereof, to the fulfillment on or prior to the Closing
Date of the following conditions, any one (1) or more of which
may be waived by the Sellers' Representative:
7.1 Representations and Covenants. The representations and
warranties of the Buyer contained in this Agreement shall be true
in all material respects on and as of the Closing Date with the
same force and effect as though made on and as of the Closing
Date. The Buyer shall have performed and complied in all material
respects with all covenants and agreements required by this
Agreement to be performed or complied with by it on or prior to
the Closing Date. The Buyer shall have delivered to the Sellers
a certificate, dated the Closing Date and signed by an officer of
the Buyer, to the foregoing effect.
7.2 Opinion of Counsel to the Buyer. The Sellers shall
have received the opinion of Smith Helms Mulliss & Moore, L.L.P.,
counsel to the Buyer, dated the date of the Closing, addressed to
the Sellers, in the form of Exhibit F.
7.3 Consents and Approvals. All of Buyer's Required
Consents (as defined in Section 4.3, hereof) shall have been
obtained and be in full force and effect.
7.4 Employment Agreements. Concurrently with the Closing,
the Company and the appropriate employees shall have entered into
the Price Employment Agreement and the Key Employee Agreements.
7.5 Escrow Agreement. Simultaneously with the Closing
hereunder, the Buyer, each of the Sellers and the Escrow Agent
shall enter into the Escrow Agreement.
8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
8.1 Sellers' Representations and Warranties.
Notwithstanding any right of the Buyer fully to investigate the
affairs of the Company, and notwithstanding any knowledge of
facts determined or determinable by the Buyer pursuant to such
investigation or right of investigation, the Buyer has the right
to rely fully upon the representations, warranties, covenants and
agreements of the Sellers and the Company contained in this
Agreement or in any certificate deliverable pursuant to this
Agreement. All such representations, warranties, covenants and
agreements shall survive the execution and delivery of this
Agreement and the Closing hereunder and shall continue in full
force and effect thereafter; subject, however, to the following:
(i) All representations and warranties of the Sellers
contained in this Agreement or made pursuant hereto,
except for the representations and warranties of the
Sellers in respect of the Tax Returns (as defined in
Section 3.13 above) and Taxes (as defined in Section
3.13 above), and except for the representations and
warranties of the Sellers contained in Section 3.2
(Company Authorization and Validity of Agreement),
Section 3.3 (Sellers Authorization and Validity of
Agreement), Section 3.4 (Outstanding Capital Stock),
Section 3.5 (Title to the Shares), and Section 3.6
(Options, Warrants or Other Rights), shall terminate
and expire two (2) years after the Closing Date, except
with respect to any matter as to which a Claims Notice
(as defined in Section 9.3(i)) is given prior to
expiration of such two (2) year period, in which event
all representations and warranties that relate to the
subject matter of such Claims Notice shall continue in
full force and effect until final resolution of the
matter in question.
(ii) The representations and warranties of the Sellers
in respect of the Tax Returns and Taxes shall continue
in effect after the Closing until expiration of the
applicable statute of limitations relating to the Tax
Returns and Taxes and until final resolution of any
indemnification claim by the Buyer in respect of the
Tax Returns and Taxes, and such representations and
warranties shall not otherwise be limited as to time.
(iii) The representations and warranties of Sellers
contained in Section 3.2 (Company Authorization and
Validity of Agreement), Section 3.3 (Sellers Authority
to Execute and Perform Agreement), Section 3.4
(Outstanding Capital Stock), Section 3.5 (Title to the
Shares), and Section 3.6 (Options, Warrants or Other
Rights) shall continue after the Closing without
limitation pursuant to this Agreement as to time.
8.2 Buyer's Representations and Warranties.
Notwithstanding any right of the Sellers fully to investigate the
affairs of the Buyer, and notwithstanding any knowledge of facts
determined or determinable by the Sellers pursuant to such
investigation or right of investigation, the Sellers have the
right to rely fully upon the representations, warranties,
covenants and agreements of the Buyer contained in this Agreement
or in any certificate deliverable pursuant to this Agreement.
All such representations, warranties, covenants and agreements
shall survive the execution and delivery of this Agreement and
the Closing hereunder and shall continue in full force and effect
thereafter; provided, however, that all representations and
warranties of the Buyer contained in this Agreement or made
pursuant hereto, shall terminate and expire two (2) years after
the Closing Date, except with respect to any matter as to which a
Claims Notice (as defined in Section 9.3(i)) is given prior to
expiration of such period, in which event all representations and
warranties that relate to the subject matter of such Claims
Notice shall continue in full force and effect until final
resolution of the matter in question.
9. INDEMNIFICATION.
9.1 Obligation of the Sellers to Indemnify. The Sellers
jointly and severally agree to indemnify, defend and hold
harmless the Buyer (and its respective directors, officers,
affiliates, successors and assigns) from and against all losses,
liabilities, damages, deficiencies, costs or expenses (including
interest, penalties and reasonable attorneys' fees and
disbursements) (a "Loss" or "Losses") based upon, arising out of
or otherwise in respect of any inaccuracy in or any breach of any
representation, warranty, covenant or agreement of the Sellers or
the Company contained in this Agreement or in any agreement,
certificate, document or other instrument delivered by the
Company or any of the Sellers pursuant to this Agreement.
9.2 Obligation of the Buyer to Indemnify. The Buyer agrees
to indemnify, defend and hold harmless the Sellers from and
against any Losses based upon, arising out of or otherwise in
respect of any inaccuracy in or any breach of any representation,
warranty, covenant or agreement of the Buyer contained in this
Agreement or in any agreement, certificate, document or other
instrument delivered by the Buyer pursuant to this Agreement.
9.3 Notice and Opportunity to Defend.
(i) Notice of Asserted Liability. Promptly after
receipt by any party hereto (the "Indemnitee") of notice of
any demand, claim or circumstances which, with the lapse of
time, would or might give rise to a claim or the
commencement (or threatened commencement) of any action,
proceeding or investigation (an "Asserted Liability") that
may result in a Loss, the Indemnitee shall give notice
thereof (the "Claims Notice") to any other party (or
parties) obligated to provide indemnification pursuant to
Section 9.1 or Section 9.2 (the "Indemnifying Party"). The
Claims Notice shall describe the Asserted Liability in
reasonable detail, and shall indicate the amount (estimated,
if necessary and to the extent feasible) of the Loss that
has been or may be suffered by the Indemnitee.
(ii) Opportunity to Defend. The Indemnifying Party may
elect to compromise or defend, at his, her or its own
expense and by his, her or its own counsel, any Asserted
Liability. If the Indemnifying Party elects to compromise
or defend such Asserted Liability, he, she or it shall
within thirty (30) days (or sooner, if the nature of the
Asserted Liability so requires) notify the Indemnitee of
his, her or its intent to do so, and the Indemnitee shall
cooperate, at the expense of the Indemnifying Party, in the
compromise of, or defense against, such Asserted Liability.
If the Indemnifying Party elects not to compromise or defend
the Asserted Liability, fails to notify the Indemnitee of
his, her or its election as herein provided or contests his,
her or its obligation to indemnify under this Agreement, the
Indemnitee may pay, compromise or defend such Asserted
Liability. Notwithstanding the foregoing, neither the
Indemnifying Party nor the Indemnitee may settle or
compromise any claim over the objection of the other;
provided, however, that consent to settlement or compromise
shall not be unreasonably withheld; provided, however, that,
if the Sellers are the Indemnifying Party, the Indemnifying
Party may settle any claim without the prior written consent
of the Buyer if the judgment or proposed settlement involves
only the payment of any money damages by the Indemnifying
Party and does not impose any injunctions or other equitable
relief upon the Buyer or the Company or otherwise adversely
impact the ongoing business of the Buyer or the Company. In
any event, the Indemnitee and the Indemnifying Party may
participate, at their own expense, in the defense of any
Asserted Liability. If the Indemnifying Party chooses to
defend any claim, the Indemnitee shall make available to the
Indemnifying Party any books, records or other documents
within his, her or its control that are necessary or
appropriate for such defense.
(iii) Disputes with Customers, Distributors, Sales
Agents or Suppliers. Anything in Section 9.3(ii) to the
contrary notwithstanding, in the case of any Asserted
Liability by any supplier, distributor, sales agent or
customer of the Company with respect to the business
conducted by the Company prior to the Closing in connection
with which the Buyer may make a claim against the Sellers
for indemnification pursuant to Section 9.1, the Buyer shall
give a Claims Notice with respect thereto but, unless the
Buyer and the Indemnifying Party otherwise agree, the Buyer
shall have the exclusive right and option to defend any such
matter, subject to the duty of the Buyer to consult with the
Indemnifying Party and his or her attorneys in connection
with such defense and provided that no such matter shall be
compromised or settled by the Buyer without the prior
consent of the Indemnifying Party, which consent shall not
be unreasonably withheld; provided, however, that the
Indemnifying Party may settle any claim without the prior
written consent of the Buyer if the judgment or proposed
settlement involves only the payment of only money damages
by the Indemnifying Party and does not impose an injunction
or other equitable relief upon the Buyer or the Company or
otherwise adversely impact the ongoing business of the Buyer
or the Company. The Indemnifying Party shall have the right
to recommend in good faith to the Buyer proposals to
compromise or settle claims brought by a supplier,
distributor, sales agent or customer, and the Buyer agrees
to present such proposed compromise or settlements to such
supplier, distributor, sales agent or customer. All amounts
required to be paid in connection with any such Asserted
Liability pursuant to the determination of any court,
governmental or regulatory body or arbitrator, and all
amounts required to be paid in connection with any such
compromise or settlement consented to by the Indemnifying
Party, shall be borne and paid by the Indemnifying Party.
The parties agree to cooperate fully with one another in the
defense, compromise or settlement of any such Asserted
Liability and, except as provided in this Section 9.3(iii),
the indemnification provisions hereof shall be fully
applicable with respect thereto.
9.4 Accounts Receivable. With respect to any accounts
receivable of the Company as to which the Buyer may assert a
claim for indemnification hereunder, upon satisfaction of such
claim by payment by the Sellers, the Buyer or the Company shall
then assign to Sellers the account receivable with respect to
which the indemnification claim was made. Any monies thereafter
received by the Company or the Buyer in payment of any such
assigned receivable shall be remitted to the Sellers. Unless the
account debtor otherwise indicates, all payments received by the
Company on accounts receivable shall be applied first to the
oldest receivable from that account debtor.
9.5 Limitations on Indemnification. The indemnification
provided for in this Article 9 shall be subject to the following
limitations:
(i) The Sellers shall not be obligated to pay any
amounts for indemnification under this Article 9,
except in respect of those claims based upon, arising
out of or otherwise in respect of (A) Section 3.1 (Due
Incorporation and Authority), Section 3.2 (Company
Authorization and Validity of Agreement), Section 3.3
(Sellers Authorization and Validity of Agreement),
Section 3.4 (Outstanding Capital Stock), Section 3.5
(Title to the Shares), Section 3.6 (Options, Warrants
or Other Rights), Section 5.5 (Expenses) or Section 5.6
(Indemnification of Brokerage) hereof, (collectively,
the "Basket Exclusions"), or (B) the Receivables
Exclusion (as defined in Section 9.5(ii) below), until
the aggregate amount for which indemnification has been
claimed pursuant to Article 9 hereof, exclusive of the
Basket Exclusions and the Receivables Exclusion,
exceeds Thirty Thousand Dollars ($30,000) (the "Basket
Amount"), whereupon the Sellers shall be obligated to
pay in full all amounts due pursuant to this Article 9,
including the entire Basket Amount.
(ii) The Sellers shall not be obligated to pay any
amounts for indemnification with respect to a
particular account receivable of the Company, until
that account receivable is in excess of ninety (90)
days past due, and the Company has not been able to
collect such receivable using means consistent with the
Company's past practices in the ordinary course of
business. In addition to the foregoing, the Sellers
shall not be obligated to pay any amounts for
indemnification under this Article 9 for claims based
upon, arising out of or otherwise in respect of Section
3.21 (Receivables) (the "Receivables Exclusion") until
the aggregate amount for which indemnification has been
claimed pursuant to Article 9 hereof exceeds Seventy
Five Thousand Dollars ($75,000) (the "Receivables
Basket Amount"), whereupon the Sellers shall be
obligated to pay in full all amounts in excess of the
Receivables Basket Amount.
(iii) Except as otherwise provided in this
Section 9.5, Sellers shall be obligated to pay the
Basket Exclusions without regard to the individual or
aggregate amounts thereof and without regard to whether
the aggregate of all other indemnification payments
shall have exceeded, in the aggregate, the Basket
Amount.
(iv) No Seller shall be obligated to pay any
amount for indemnification under this Article 9 in
excess of the portion of the Purchase Price received by
such Seller pursuant to Section 1.2 hereof (with
respect to each Seller, the "Individual Indemnification
Cap"). The Buyer shall be entitled to enforce the full
indemnification obligation of the Sellers pursuant to
this Article 9 from any individual Seller, all of the
Sellers collectively, or any combination of the
Sellers; provided, however, that in no event shall any
Seller be obligated to pay any amount for
indemnification in excess of such Seller's Individual
Indemnification Cap. The Buyer shall not be required
to enforce such indemnification obligation of the
Sellers against the Sellers collectively on a pro-rata
basis, or to pursue or join any other Seller in an
action to enforce its indemnification rights pursuant
to this Article 9.
9.6 Remedies. The rights and remedies provided for in this
Agreement and in the other agreements contemplated hereby are
cumulative and shall be the exclusive remedies of the parties
hereto (except rights and remedies in respect of claims for
fraud) with respect to claims for monetary damages related to the
matters addressed herein and with respect to the Contemplated
Transactions and the parties shall have no other liability for
monetary damages to each other, under any statutory or common law
right; provided, however, that nothing herein shall be construed
as limiting the right of a party hereto to equitable relief,
other than monetary damages, for a breach of this Agreement or of
the other agreements contemplated hereby, including, without
limitation, specific performance of the terms of such agreements.
Any election of one remedy by a party hereto shall not constitute
a waiver of any other available remedy.
10. TERMINATION OF AGREEMENT.
10.1 Termination. This Agreement may be terminated prior to
the Closing as follows:
(i) At the election of Sellers' Representative, if any
one (1) or more of the conditions to the obligation of
the Sellers to close has not been fulfilled as of June
30, 1999 and such noncompliance shall not have been
caused by Sellers;
(ii) At the election of the Buyer, if any one (1) or
more of the conditions to its obligation to close has
not been fulfilled as of June 30, 1999 and such
noncompliance shall not have been caused by the Buyer;
(iii) At the election of Sellers' Representative,
if the Buyer has breached any material representation,
warranty, covenant or agreement contained in this
Agreement, which breach cannot be or is not cured by
June 30, 1999;
(iv) At the election of the Buyer, if any of the
Sellers has breached any material representation,
warranty, covenant or agreement contained in this
Agreement, which breach cannot be or is not cured by
June 30, 1999;
(v) At any time on or prior to the Closing Date, by
mutual written consent of the Sellers' Representative
and the Buyer. If this Agreement so terminates, it
shall become null and void and have no further force or
effect, except as provided in Section 10.2.
10.2 Survival. If this Agreement is terminated and the
transactions contemplated hereby are not consummated as described
above, this Agreement shall become void and of no further force
and effect, except for the provisions of Section 5.4 relating to
the obligation of the Buyer to keep confidential and not to use
certain information and data obtained by it from the Company and
to return documents to the Company and except for the provisions
of Section 5.5 (Expenses) and Section 5.6 (Indemnification of
Brokerage). No party hereto shall have any liability to any
other party in respect of a termination of this Agreement except
pursuant to Section 5.4, Section 5.5, and Section 5.6.
11. MISCELLANEOUS.
11.1 Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered
personally, sent by facsimile transmission, sent by certified,
registered or express mail, or by Federal Express or other
overnight courier, postage or other charges prepaid. Any such
notice shall be deemed given on the date so delivered personally,
or sent by facsimile transmission, or, if mailed, two days after
the date of deposit in the United States mail, or, if sent by
overnight courier, the day after delivery to the overnight
courier for next day delivery, addressed as follows:
If to the Buyer or to the Company after the Closing, to:
Network Systems International, Inc.
200 North Elm Street
Greensboro, North Carolina 27401
Attention: President
With a copy to:
Smith Helms Mulliss & Moore, L.L.P.
300 N. Greene St., Suite 1400
Post Office Box 21927
Greensboro, North Carolina 27420
Attention: W. Alexander Audilet
If to Evan E. Price, to the Sellers' Representative, or to
the Company prior to the Closing:
Evan E. Price
5915 Club Hill Place
Dallas, Texas 75248
With a copy to:
Gardere & Wynne, L.L.P.
1601 Elm Street, Suite 3000
Dallas, Texas 75201
Attention: C. Robert Butterfield
If to Deborah J. Doby, to:
Deborah J. Doby
6801 Raintree Place
Flower Mound, Texas 75028
If to Ziad A. Yamout, to:
Ziad A. Yamout
6316 Twinhill Drive
Arlington, Texas 76016
Any party may by notice given in accordance with this
Section 11.2 to the other parties designate another address or
person for receipt of notices hereunder.
11.3 Entire Agreement. This Agreement (including the
Exhibits and Schedules hereto) and the collateral agreements
executed in connection with the consummation of the transactions
provided for hereby contain the entire agreement among the
parties with respect to the purchase of the Shares and supersedes
all prior agreements, written or oral, if any there be, with
respect thereto, other than the Escrow Agreement.
11.4 Waivers and Amendments; Preservation of Remedies. This
Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written
instrument signed by the Buyer and the Sellers, or in the case of
a waiver, by the party waiving compliance. No delay on the part
of any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof. Nor shall any
waiver on the part of any party of any such right, power or
privilege, nor any single or partial exercise of any such right,
power or privilege, preclude any further exercise thereof or the
exercise of any other such right, power or privilege. The rights
and remedies of any party based upon, arising out of or otherwise
in respect of any inaccuracy in or breach of any representation,
warranty, covenant or agreement contained in this Agreement shall
in no way be limited by the fact that the act, omission,
occurrence or other state of facts upon which any claim of any
such inaccuracy or breach is based may also be the subject matter
of any other representation, warranty, covenant or agreement
contained in this Agreement (or in any other agreement between
the parties) as to which there is no inaccuracy or breach.
11.5 Governing Law; Arbitration. This Agreement shall be
governed and construed in accordance with the laws of the State
of North Carolina applicable to agreements made and to be
performed entirely within such state. Any controversy arising out
of or relating to this Agreement or any of the documents provided
for herein (including any modifications hereof or thereof) shall
be settled by arbitration in Greensboro, North Carolina, in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon any award may be
entered in any court of competent jurisdiction. The arbitrators
in any such controversy (the "Arbitration") shall have no power
to alter or modify any express provision of this Agreement or any
of the documents provided for herein or to render any award that
directly or indirectly effects any such alteration or
modification. The parties consent to the application of North
Carolina or Federal arbitration statutes and to the jurisdiction
of the court of North Carolina or the Federal District Courts in
North Carolina, as the case may be, for all purposes in
connection with this agreement to arbitrate. Each party to any
such arbitration or court proceeding shall bear its own
attorneys' fees and other costs. Each party hereto shall also
have all rights to provisional remedies that he, she or it would
have at law or equity, notwithstanding the existence of this
agreement to arbitrate.
11.7 Binding Effect; No Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties and their
respective successors and legal representatives. This Agreement
is not assignable except by operation of law, except that the
Buyer may assign its rights hereunder to the banks or other
financial institutions providing the financing for the
Contemplated Transactions.
11.8 Variations in Pronouns. All pronouns and any
variations thereof refer to the masculine, feminine or neuter,
singular or plural, as the context may require.
11.9 Counterparts. This Agreement may be executed by the
parties hereto in any number of counterparts, each of which when
so executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a copy hereof
containing multiple signature pages, each signed by less than
all, but together signed by all of the parties hereto.
11.10 Schedules. The Schedules are a part of this
Agreement as if fully set forth herein. All references herein to
sections, subsections, clauses, Exhibits and Schedules shall be
deemed references to such parts of this Agreement, unless the
context shall otherwise require.
11.11 Headings. The headings in this Agreement are for
reference only and shall not affect the interpretation of this
Agreement.
11.12 Severability of Provisions. If any provision or
any portion of any provision of this Agreement or the application
of any such provision or any portion thereof to any person or
circumstance shall be held invalid or unenforceable, the
remaining portion of such provision and the remaining provisions
of this Agreement, or the application of such provision or
portion of such provision as is held invalid or unenforceable to
persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby.
[Remainder of page intentionally left blank.
Signature page to follow.]
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first above written.
BUYER:
NETWORK SYSTEMS INTERNATIONAL, INC.
(Corporate Seal) /s/ Christopher N. Baker
By: Christopher N. Baker
Title: President
ATTEST:
/s/ William C. Ray
William C. Ray, Secretary
SELLERS:
/s/ Evan E. Price (SEAL)
Evan E. Price
/s/ Deborah J. Doby (SEAL)
Deborah J. Doby
/s/ Ziad A. Yamout (SEAL)
Ziad A. Yamout
COMPANY:
VERCOM SOFTWARE, INC.
(Corporate Seal) /s/ Evan E. Price
By: Evan E. Price
Title: Chairman/CEO
ATTEST:
/s/ Deborah J. Doby
Deboroh J. Doby, Secretary
Index of Exhibits and Schedules
Exhibit A Ownership of Shares/Allocation of Purchase Price
Exhibit B Escrow Agreement
Exhibit C Employment Agreement
Exhibit D Opinion Letter from Seller's Attorney
Exhibit E General Release
Exhibit F Opinion Letter from Buyer's Attorney
Schedule 3.6 Options, Warrants and Other Rights
Schedule 3.9 No Breach
Schedule 3.10 Financial Statements
Schedule 3.11 Liabilities
Schedule 3.12 No Material Adverse Change
Schedule 3.13 Tax Matters
Schedule 3.14 Title to Assets
Schedule 3.15 Real Estate
Schedule 3.17(i) Intellectual Property
Schedule 3.17 (iii) Proprietary Legends
Schedule 3.17 (vi) Software Programs
Schedule 3.19 Third Party Components in Software Programs
Schedule 3.20 Third Party Interests or Marketing Rights in
Software Programs
Schedule 3.22 Actions & Proceedings
Schedule 3.23 Contracts & Other Agreements
Schedule 3.24 Compliance with Laws
Schedule 3.25 Suppliers, Customers
Schedule 3.26 Employee Benefit Plans
Schedule 3.27 Insurance
Schedule 3.29 Company Product Warranties
Schedule 3.30 Year 2000 Compliance
Schedule 3.31 Officer and Directors
Schedule 3.32 Operations of the Company
Schedule 3.33 Conflicts of Interest
Schedule 3.34 Banks, Brokers and Proxies
Schedule 4.3 No Breach
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement ("Agreement"), dated as
of April 15, 1999, is between Network Systems International,
Inc., a Nevada corporation (the "Company"), and Christopher N.
Baker ("Executive"). The Company and Executive are collectively
referred to in this Agreement as the "Parties."
The Company desires to retain the services of Executive, and
Executive desires to be employed by the Company, in accordance
with this Agreement.
In consideration of the mutual covenants set forth herein
and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties agree
as follows:
1. Employment. Executive shall be employed by the
Company, and the Company shall employ Executive, on the terms and
conditions set forth in this Agreement.
(a) Duties. During the Term (as defined herein),
Executive shall be employed as the President and Chief
Operating Officer of the Company. Executive shall have such
authority and shall perform such duties as are customary for
such positions and as may be specified by the Bylaws of the
Company including responsibility for the following
departments of the Company: accounting/finance, human
resources, legal, investor relations, and strategic
planning. Executive shall, subject to the direction and
instruction of the Chairman (the "Chairman") of the Board of
Directors (the "Board"), (a) perform all duties incident to
Executive's employment hereunder; (b) promote the interests
of the Company; and (c) perform such other duties
appropriate for Executive's position as the Chairman may
from time to time reasonably direct.
(b) Full-Time Executive. Executive shall devote his
full time (except for permitted vacation time and absence
for any illness or disability), attention, and efforts to
the performance of his duties under this Agreement.
Executive may, however, engage in civic, charitable,
investing, and professional or trade activities so long as
those activities do not interfere with the performance of
his duties under this Agreement.
2. Term. The term of Executive's employment under this
Agreement (the "Term") shall be as follows:
(a) Initial Term. The Term shall commence on the date
of this Agreement and shall expire at 11:59:59 p.m., Eastern
Time, April 15, 2002, as may be extended pursuant to Section
2(b), unless Executive's employment hereunder is earlier
terminated pursuant to Section 6.
(b) Extended Term. Upon the expiration of the Term
described in Section 2(a), or of any subsequent extension of
the Term described in this Section 2(b), the Term shall be
extended, without the need for any action by either Party,
for additional consecutive one-year terms, (i) unless the
Company notifies Executive, at least 180 days before the
expiration date, that the Company does not wish to extend
the Term, or (ii) Executive notifies the Company, at least
90 days before the expiration date, that Executive does not
wish to extend the Term. If such a notice of non-extension
is timely given, the Term will expire at the end of the
initial Term or renewal Term in effect at the time of that
notice.
3. Compensation.
(a) Base Salary. During the Term, the Company shall
pay Executive for his services an annual base salary of
$200,000.00, payable in substantially equal installments in
accordance with the Company's normal payroll procedures.
Executive's base salary will be reviewed annually by the
Chairman or the Compensation Committee of the Board and may
be increased at the discretion of the Chairman or the
Compensation Committee of the Board. Executive's annual
base salary in effect from time to time, exclusive of any
other compensation hereunder, is hereinafter called the
"Base Salary."
(b) Annual Bonus. In addition to the Base Salary
payable to Executive, Executive shall be entitled to
receive additional cash compensation, as of the end of each
fiscal year of the Company during the Term, as an incentive
bonus. The additional cash compensation will be dependent
upon Executive's achieving stated performance objectives for
the fiscal year. The Chairman or the Compensation Committee
of the Board, in consultation with Executive, will determine
the performance objectives and bonus opportunity in
accordance with the Company's annual budgeting and planning
process. The bonus shall be earned upon satisfaction of the
performance objectives and shall be payable promptly after
the end of the fiscal year, but in no event later than
December 31 of each calendar year for the prior fiscal year
of the Company.
(c) Participation in Executive-Benefit Plans.
Executive shall be entitled to participate in any and all
health and insurance, disability (including the Long-Term
Disability Plan for Senior Executives as may be amended from
time to time), and other welfare benefit plans; profit-
sharing plans; long-term incentive compensation plans; stock
award, stock option, or other stock-related compensation
plans; and other benefits, plans, or arrangements provided
or available generally to senior executives of the Company
in effect during the Term (collectively, "Benefit Plans").
Executive's participation in any or all of the Benefit Plans
will be subject to the terms and conditions of the Benefit
Plans as they may hereafter be amended or restated (or
discontinued) by the Company, including the satisfaction of
all applicable eligibility requirements and vesting
provisions of the Benefit Plans. Notwithstanding and in
addition to the foregoing, Executive shall be entitled to
the following benefits during the Term:
(i) The Company shall provide Executive an
automobile consistent with the automobiles provided to
other senior executives of the Company.
(ii) The Company shall reimburse Executive for all
regular monthly dues and charges of a Greensboro, North
Carolina area country club chosen by Executive.
However, Executive shall remain responsible for payment
of any initiation fee and all personal charges.
(iii) The Company shall reimburse Executive
for all costs and expenses incurred in connection with
Executive's relocation to the Greensboro, North
Carolina area, including, real estate commissions and
closing costs (both on the sale of Executive's existing
home and the purchase of new home), moving expenses for
household goods, expenses of temporary living pending
purchase of a new home, travel expenses to look for
housing. Executive shall receive an additional payment
from the Company in an amount such that after payment
by Executive of all taxes imposed upon Executive as a
result of the relocation payments and reimbursements in
this Section 3(c)(iii), Executive will retain a net
after-tax benefit that is equal to the amount of such
payments and reimbursements.
(iv) The Company shall provide Executive with a
term life insurance policy (with premiums thereon paid
by the Company) with a face amount of at least $500,000
payable to the beneficiaries designated by Executive.
(d) Vacation. Executive will be entitled to paid
vacation, in accordance with the Company's vacation
policies, practices, and procedures, of at least three weeks
each calendar year.
(e) Tax Withholding. The Company may deduct from any
compensation or other amount payable to Executive under
this Agreement social security (FICA) taxes and all federal,
state, municipal, or other such taxes or governmental
charges as may now be in effect or that may hereafter be
enacted or required.
4. Stock Options. In connection with the execution of
this Agreement, Company and Executive are entering into that
certain Stock Option Agreement, of even date herewith, between
the Company and Executive (the "Stock Option Agreement"),
pursuant to which the Company is granting Executive the right to
purchase up to 500,000 shares of the Company's common stock on
the terms provided therein. The parties acknowledge that such
option agreement is a material inducement to Executive entering
into this Agreement.
5. Reimbursement; Indemnification.
(a) Reimbursable Expenses. Executive shall be
entitled to reimbursement from the Company, in accordance
with the relevant policies, practices, and procedures of the
Company, for all reasonable business expenses incurred by
Executive in performing his duties under this Agreement.
(b) Indemnification. Executive shall have rights to
indemnification and advancement of expenses to the maximum
extent allowed by applicable law. The Company shall
maintain directors' and officers' liability coverage for
Executive to the same extent as provided generally to other
executive officers of the Company.
6. Cessation of Employment. The Company may terminate
Executive's employment at any time, either with or without Cause;
provided the Company complies with this Section 6 and the other
provisions of this Agreement. Executive may terminate his
employment at any time with Good Reason or upon 90 days notice
without Good Reason; provided Executive complies with this
Section 6 and the other provisions of this Agreement. The
Parties' respective rights and obligations upon a Termination
Date (as hereinafter defined) are as provided in this Section 6.
(a) Definitions. As used in this Agreement, the
following terms shall have the meanings indicated:
(i) "Disability" means a permanent and total
disability, which shall be deemed to exist (y) if
Executive is unable reasonably to perform his duties
under this Agreement because of any medically
determinable physical or mental incapacity that has
lasted or can reasonably be expected to last for at
least 180 consecutive days and (z) a qualified
independent physician selected by or acceptable to the
Chairman and Executive (or his legal representative)
confirms such disability. If Executive (or his legal
representative) and the Company cannot agree as to a
qualified independent physician, each shall appoint
such a physician, and those two physicians shall select
a third. The determination of Disability by such third
physician, made in writing to the Company and
Executive, shall be final and conclusive for all
purposes of this Agreement. All costs of the
physician(s) shall be borne by the Company. In this
circumstance, Executive shall, if there is any question
about his Disability, submit to a physical examination.
(ii) "Cause" means any of the following:
(A) The continued failure of Executive to
substantially or satisfactorily perform his
duties under this Agreement in accordance
with the Company's reasonable performance
standards for Executive, other than any such
failure resulting from death or a Disability.
(B) (i) The conviction of Executive for,
Executive's pleading nolo contendre to an
allegation of, fraud, embezzlement, theft or
another felony (excluding a traffic
violation), or (ii) the Executive's
commission of, fraud, embezzlement, theft, or
another felony (excluding a traffic
violation) in the performance of his duties
to the Company.
(C) Any willful and continued act or omission by
Executive that, in the good-faith judgment of
the Board, is demonstrably and materially
injurious to the Company's business or
reputation.
(D) A willful and continued breach of any of
Sections 8, 9, and 10.
No act or omission under any of subsections (A), (C)
and (D) of this Section 6(a)(ii) shall constitute
"Cause" (and will not be considered "willful and
continued") unless such act or omission continues after
the Board (x) provides Executive written notice
describing the particular act(s) or omission(s) which
the Board believes in good faith to constitute Cause,
(y) provides Executive an opportunity, as soon as
reasonably possible, but in no event greater than 30
days following that notice, to meet in person with the
Board to explain or defend the alleged act(s) or
omission(s) and, to the extent practicable, to cure
such act(s) or omission(s), and (z) following the
expiration of such notice and cure period, determines
that such act(s) or omission(s) have not been cured.
Executive shall further have the right to contest an
allegation of Cause by requesting arbitration of that
issue in accordance with Section 12.
(iii) "Good Reason" means any of the
following:
(A) Executive is not elected or appointed to, or
is removed from, the position of either
President or Chief Operating Officer of the
Company by the Board for any reason, other
than for Cause or by reason of Executive's
death or Disability;
(B) Executive is assigned duties and
responsibilities that are inconsistent, in
any material respect, with the scope of
duties and responsibilities associated with
Executive's position of President and Chief
Operating Officer of the Company;
(C) the Company fails to timely pay Executive any
amounts otherwise vested and due hereunder,
including any bonus, and such failure
continues for ten business days following
written notice of nonpayment to the Company;
provided Executive shall not be required to
give the Company more than one such notice in
any twelve consecutive month period;
(D) the taking of any action by the Company which
would adversely affect Executive's
participation in, or materially reduce
Executive's benefits under any Benefit Plans
(other than stock, stock option, or other
incentive compensation plans), unless reduced
in the same proportion for all other
executives of the Company; or
(E) the failure of the Company to provide
Executive with the number of paid vacation
days or the other perquisites to which
Executive is entitled under Sections 3(c)(i),
(ii) or (iv).
Nothing described above in this Section 6(a)(iii) shall
constitute "Good Reason" unless Executive (x) provides
the Board written notice of the occurrence of any
act(s) or omissions(s) described above that may
constitute Good Reason describing the particular act(s)
or omission(s) which Executive believes in good faith
to constitute Good Reason, (y) provides the Board an
opportunity, within 30 days following delivery of that
notice, for the Board to explain or defend the alleged
act(s) or omission(s) and to cure such act(s) or
omission(s), and (z) following the expiration of such
notice and cure period, determines that such act(s) or
omission(s) have not been cured. The Company shall
have the right to contest an allegation of Good Reason
by requesting arbitration of that issue in accordance
with Section 12.
(iv) "Change of Control" means a change of control
of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") whether or not the
Company in fact is required to comply with Regulation
14A. Notwithstanding the foregoing, a change of
control shall be deemed to have occurred if:
(A) Any "person" (as used in Section 13(d) of the
Exchange Act), other than Robbie Efird,
becomes the "beneficial owner" (as determined
pursuant to Rule 13d-3 under the Exchange
Act), directly or indirectly, of equity
securities of the Company representing 35% or
more of the combined voting power of the
Company's then outstanding equity securities.
(B) The Company shall reorganize or merge with or
consolidate into any other entity, other than
a reorganization, merger, or consolidation
which would result in the holders of the
voting securities of the Company outstanding
immediately prior thereto holding immediately
thereafter securities representing more than
60% of the combined voting power of the
voting securities of the Company or such
surviving entity outstanding immediately
after such reorganization, merger, or
consolidation.
(C) The shareholders of the Company approve a
plan of complete liquidation of the Company
or an agreement for the sale or disposition
of all or substantially all of the Company
assets.
(D) During any period of 24 consecutive months
(not including any period before the date of
this Agreement), at least a majority of the
Board ceases to consist of individuals who
have served continuously on the Board since
the beginning of such 24-month period unless
the election of directors during such period,
or nomination for election by the Company's
shareholders, was approved by a vote of at
least two-thirds of the directors then still
in office who shall at that time have served
continuously on the Board since the beginning
of such 24-month period.
(v) "Successor" means any person who or which
acquired all or substantially all of the assets or
business or all or substantially all of the equity
securities of the Company, whether by purchase,
reorganization, merger, consolidation, or otherwise, in
a transaction or series of transactions constituting or
causing a Change of Control.
(vi) "Termination Date" means (A) the date the
Term expires without termination upon notice of a Party
pursuant to Section 2(b), (B) the date of Executive's
death, (C) the third business day after the date on
which the Company gives notice of termination of
Executive's employment because of Disability, or (D)
the date of termination specified in any other Notice
of Termination (as hereinafter defined) of Executive's
employment, or if not specified in the Notice of
Termination, the date that Notice of Termination is
given.
(vii) For purposes of the definition of
"Change of Control," a person has "control" over
another person if that first person has the power,
direct or indirect, to direct the management and
policies of that other person.
(viii) No act or omission shall be considered
"willful" if Executive believed in good faith that such
acts or omissions were in, or at least not opposed to,
the best interests of the Company.
(b) Expiration or Termination Generally. Upon the
occurrence of a Termination Date, the Company shall pay or
provide Executive the following:
(i) Any Base Salary earned by, but not yet paid
to, Executive through the Termination Date;
(ii) Any annual bonus (as described in Section
3(b)) that has been earned by, but not yet been paid
to, Executive through the Termination Date;
(iii) All benefits, or (at the Company's
option) the cash equivalent of all benefits, that have
been earned by or vested in, and are payable to,
Executive under, and subject to the terms (including
all eligibility requirements) of, the Benefit Plans in
which Executive participated through the Termination
Date;
(iv) All reimbursable expenses due, but not yet
paid, to Executive as of the Termination Date under
Section 5; and
(v) An amount equal to Executive's accrued and
unused vacation in accordance with Company policy.
Any amounts due under Section 6(b)(ii) shall be paid in the
same manner and on the same date(s) as would have occurred
if Executive's employment under this Agreement had not
ceased. The amounts or benefits due under Section 6(b)(iii)
shall be paid or provided in accordance with the terms of
the Benefit Plans under which such amounts or benefits are
due to Executive. The amounts due under Sections 6(b)(iv)
and 6(b)(v), if any, shall be paid in accordance with the
terms of the Company's policies, practices, and procedures
regarding reimbursable expenses and accrued and unused
vacation, respectively. Except as expressly provided in the
following subsections of this Section 6, upon paying or
providing Executive the preceding amounts or benefits, the
Company shall have no further obligation or liability under
this Agreement for Base Salary or any other cash
compensation or for any benefits under any of the Benefit
Plans. Upon the occurrence of a Termination Date, and
without any written resignation, Executive shall be deemed
to have resigned from any position as an officer or
director, or both, of any subsidiary, division, or affiliate
of the Company or any other entity in which the Company
holds an equity interest or which it sponsors that Executive
then holds.
(c) Termination Upon Disability. If a Termination
Date occurs due to notice by the Company because of
Disability, Executive (or his legal representative) shall be
entitled to receive from the Company any benefits under the
Long Term Disability Plan for Senior Executives, as may be
amended from time to time.
(d) Termination Without Cause or for Good Reason. If
Executive's employment is terminated either by the Company
without Cause or by Executive for Good Reason, then
Executive shall be entitled to receive the following from
the Company, as liquidated damages (the "Severance
Payment"):
(i) an amount equal to the greater of (y)
Executive's Base Salary, as in effect at the
Termination Date, paid for the remainder of the Term,
or (z) the Base Salary, as in effect on the Termination
Date (i.e., one year's salary);
(ii) the insurance required by Section 6(g); and
(iii) the amount incurred by Executive for all
legal fees and expenses as a result of such termination
incurred in successfully seeking to obtain or enforce
any right or benefit provided by this Agreement or the
Stock Option Agreement.
The portion of the Severance Payment described in clause (i)
above shall be paid in a lump-sum payment. The Severance
Payment shall be in addition to the amounts or benefits to
which Executive is entitled under Section 6(b) and any
rights Executive may have under the Benefit Plans. The
Company will promptly make the Severance Payment within ten
business days after the Termination Date.
(e) Termination for Cause or Without Good Reason. If
Executive's employment is terminated either by the Company
for Cause or by Executive without Good Reason, or a
Termination Date occurs due to Executive's death, then
Executive shall not be entitled to any payments other than
the amounts or benefits to which Executive is entitled under
Section 6(b).
(f) Change of Control. If a Successor does not assume
this Agreement, such event shall be considered a termination
without Cause by the Company. If Executive's employment is
terminated by notification to Executive from the Company or
a Successor under Section 2(b) that it does not wish to
extend the Term, and the Termination Date associated with
such notice occurs within 18 months following a Change of
Control, Executive shall be entitled to receive the
Severance Payment as liquidated damages on such Termination
Date.
(g) Insurance. Unless Executive is terminated for
Cause, the Company shall maintain or cause to be maintained
in full force and effect for a period of two years from the
Termination Date all health and dental insurance in which
Executive participated or was entitled to participate
immediately prior to the Termination Date, provided that
Executive's continued participation is possible under the
general terms and provisions of such plans and programs. If
Executive's participation in any such plan or program is
barred, the Company shall arrange to provide Executive with
benefits substantially similar to those which Executive is
entitled to receive under such plan or program. At the end
of such two year period, Executive will be entitled to take
advantage of any conversion privileges applicable to the
benefits available under any such plans or programs. The
Company shall pay any and all premiums associated with
maintaining such insurance coverage.
(i) No Mitigation. Executive will not be obligated to
seek or secure new employment or to become self-employed
after the Termination Date, and there will be no offset
against any Severance Payment or other severance benefit
under this Agreement on account of any remuneration or
benefits from any subsequent employment (including self-
employment) that Executive may obtain after the Termination
Date.
(j) Notice of Termination. Any purported termination
by the Company or by Executive shall be communicated by
written Notice of Termination to the other party. A "Notice
of Termination" shall mean a notice indicating the specific
termination provision in this Agreement relied upon and
setting forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of
Executive's employment under the provision so indicated.
7. Excise Tax. Solely for purposes of this Section 7, the
term "Termination Payment" includes not only the Severance
Payment and other amounts described in Section 6 but also any
other payment or benefit received or to be received by the
Executive in the nature of compensation within the meaning of
section 280G(b)(2) of the Internal Revenue Code of 1986, as
amended (the "Code") and the Treasury Regulations thereunder,
specifically including any benefit received by the Executive from
the accelerated vesting of any stock options. If any Termination
Payment becomes subject to the excise tax (the "Excise Tax")
imposed under section 4999 of the Code, the Company shall pay to
Executive an additional amount (the "Gross-Up Payment") such that
the net amount retained by Executive, after deduction of any
Excise Tax on any Termination Payment (and Excise Tax upon the
payment provided for by this Section 7), shall be equal to the
Termination Payments. For purposes of determining whether any of
the Termination Payments will be subject to the Excise Tax and
the amount of such Excise Tax,
(a) any other payment or benefit received or to be
received by Executive in connection with a Change of Control
of the Company and Executive's subsequent termination of
employment (whether pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with the
Company, any person whose actions resulted in the Change of
Control of the Company or any person affiliated with the
Company or such person) shall be treated as a "parachute
payment" within the meaning of section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning
of section 280G(b)(1) of the Code shall be treated as
subject to the Excise Tax, unless in the opinion of tax
counsel selected by the Company's independent auditors and
reasonably acceptable to Executive such other payments or
benefits (in whole or in part) do not constitute parachute
payments, including by reason of section 280G(b)(4)(A) of
the Code, or such excess parachute payments (in whole or in
part) represent reasonable compensation for services
actually rendered, within the meaning of section
280G(b)(4)(B) of the Code, in excess of the "base amount"
(as such term is defined in section 280G(b)(3) of the Code)
allocable to such reasonable compensation, or are otherwise
not subject to the Excise Tax,
(b) the amount of the Termination Payments which
shall be treated as subject to the Excise Tax shall be equal
to the lesser of (1) the total amount of the Termination
Payments and (2) the amount of excess parachute payments
within the meaning of section 280G(b)(1) of the Code (after
applying clause (a) above), and
(c) the value of any non-cash benefit, deferred
payment or other benefit shall be determined by the
Company's independent auditors in accordance with the
principles of sections 280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-Up Payment,
Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar
year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in
the state and locality of Executive's residence on the
Termination Date, net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state and
local taxes. If the Excise Tax is subsequently determined to be
less than the amount taken into account hereunder at the time of
Executive's termination of employment, Executive shall repay to
the Company, at the time that the amount of such reduction in
Excise Tax is finally determined, the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the
Gross-Up Payment attributable to the Excise Tax and federal,
state and local income tax imposed on the Gross-Up Payment being
repaid by Executive to the extent that such repayment results in
a reduction in Excise Tax and/or a federal, state or local income
tax deduction) plus interest on the amount of such repayment at
the rate provided in section 1274(b)(2)(B) of the Code. If the
Excise Tax is determined to exceed the amount taken into account
hereunder at the time of the termination of Executive's
employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up
Payment), the Company shall make an additional Gross-Up Payment
in respect of such excess (plus any interest, penalties or
additions payable by Executive with respect to such excess) at
the time that the amount of such excess is finally determined.
Executive and the Company shall each reasonably cooperate with
the other in connection with any administrative or judicial
proceedings concerning the existence or amount of liability for
Excise Tax with respect to the Termination Payments.
8. Confidential Information. The Company will provide
Executive, during the Term, access to various trade secrets,
confidential information, and proprietary information of the
Company (which, in this Section 8 as well as in Sections 9 and
10, shall include the Company's subsidiaries and affiliates)
which are valuable and unique to the Company ("Confidential
Information"). Confidential Information includes the Company's
compilations of and analyses and other records regarding its
customers and prospective customers and the terms (including
pricing) of products and services offered and sold by the Company
and other information concerning the Company's business, methods,
processes, research data, marketing, personnel and finances.
Executive shall not, either during the Term or at any time
thereafter, use any of the Confidential Information or disclose
any of the Confidential Information to any person who is not an
employee or agent of or engaged to render services to the
Company, except to perform his duties under this Agreement or
otherwise with the Company's prior written consent. Nothing in
this Section 8 shall preclude Executive from the use or
disclosure of information that (a) is or becomes publicly
available other than as a result of a disclosure by Executive,
(b) is in the possession of or known to Executive, prior to his
receipt from the Company, or (c) is or becomes available to
Executive on a non-confidential basis from a source (other than
Executive) which, to the best of Executive's knowledge after due
inquiry, is not prohibited from disclosing such information to
Executive by a legal, contractual or fiduciary obligation to the
Company. All Confidential Information and all other files,
records, documents, information, data, and similar items relating
to the business or affairs of the Company, whether prepared by
Executive or otherwise coming into his possession, and all other
items belonging to the Company, shall remain the exclusive
property of the Company and shall not be removed from the
Company's premises, except in the ordinary course of business as
part of Executive's performance of his duties under this
Agreement, and (in any event) shall be promptly returned or
delivered to the Company (without Executive's retaining any
copies) upon the occurrence of a Termination Date.
9. Non-Solicitation and Non-Competition. Executive shall
not, at any time during the Term and, subject to the provisions
of Section 9(c), within the 12 consecutive months following the
Termination Date, either directly or indirectly, on his own
behalf or in the service or on behalf of others:
(a) Intentionally solicit, recruit, or hire, or
intentionally attempt to solicit, recruit, or hire, any
employee of the Company, or in any other manner attempt to
induce any employee of the Company to leave the employ of
the Company. References in this Section 9(a) to "any
employee" shall include any person who was an employee of
the Company at any time within the six consecutive months
preceding the Termination Date.
(b) Anywhere in, into, or from the United States,
intentionally solicit, divert, or appropriate to or for, or
intentionally attempt to solicit, divert, or appropriate to
or for, any business that competes with the Company in the
development and marketing of enterprise-wide software
products for complex manufacturers emphasizing sales order
processing, enterprise resource planning, manufacturing
execution, and distribution management (a "Competing
Business"). For the purpose of this Section 9(b), Executive
acknowledges, represents, and agrees that (i) the Company
has provided and agreed to provide him, and he has received
and will receive from the Company, special experience and
knowledge, including the Confidential Information, (ii)
because the Confidential Information is valuable to the
Company, its protection constitutes a legitimate interest to
be protected by the Company by enforcement of the
restrictions in this Section 9(b), (iii) the enforcement of
the restrictions in this Section 9(b) would not be unduly
burdensome to Executive and, to induce the Company to enter
into this Agreement, Executive is willing and able to engage
in activities that are not subject to restriction pursuant
to this Section 9(b), (iv) this Section 9(b) is, and will be
construed as, ancillary to and independent of any other
provision of this Agreement, and (v) the restrictions in
this Section 9(b) regarding duration, geographic area, and
scope of activity are reasonable.
(c) The non-solicitation and non-competition
provisions of Sections 9(a) and 9(b) shall apply only if
either of the following conditions is satisfied:
(i) If Executive's employment is terminated either by
the Company without Cause or by Executive, whether
or not for Good Reason, and the Company elects to
pay Executive an amount equal to the Base Salary
(i.e., one year's salary), as in effect at the
Termination Date (the "Non-Compete Payments") for
the 12 consecutive months following the
Termination Date (the "Post-Termination Non-
Competition Period"). The Non-Compete Payments
shall be paid, at the Company's discretion, either
(x) at the dates on which Executive's Base Salary
would have been payable if Executive's employment
under this Agreement had not been terminated, (y)
in a lump-sum payment, or (z) in a combination of
clause (x) and clause (y) above. The Non-Compete
Payments shall be in addition to the amounts or
benefits to which Executive is entitled under
Section 6. The Company shall notify Executive in
writing within 15 days after the Termination Date
of its election to make the Non-Compete Payments
and extend the provisions of Sections 9(a) and
9(b) to the Post-Termination Non-Compete Period.
If the Company elects to make the Non-Compete
Payments and notifies Executive of such election
within such 15-day period, such election shall be
irrevocable and the Company shall be obligated to
make the Non-Compete Payments to Executive. If the
Company fails to notify Executive within such 15-
day period, the Company shall be deemed to have
rejected the option and the provisions of Sections
9(a) and 9(b) shall not apply (subject to Section
9(c)(ii) below). The Company will commence or
make the Non-Compete Payments within 20 days after
the Termination Date. At any time on or after the
Company begins to pay the portion of the Non-
Compete Payment in intervals under clause (x)
above, the Company may make a lump-sum payment of
all remaining amounts of the Non-Compete Payment.
(ii) Executive's employment is terminated by the
Company for Cause.
10. Developments.
(a) Disclosure of Developments. Executive shall
promptly disclose to the Company all inventions,
discoveries, improvements, processes, formulas, ideas, know-
how, methods, research, compositions, and other
developments, whether or not patentable or copyrightable,
that Executive, by himself or in conjunction with any other
person, conceives, makes, develops, or acquires during the
Term that (i) are or relate to the properties, assets, or
existing or contemplated business or research activities of
the Company, or (ii) arise out of or result from, directly
or indirectly, the use of the Company's time, labor,
materials, facilities, or other resources ("Developments").
(b) Assignment and Cooperation. Executive hereby
assigns, transfers, and conveys to the Company, and hereby
agrees to assign, transfer, and convey to the Company during
or after the Term, all of his right and title to and
interest in all Developments. Executive shall, from time to
time upon the request of the Company during or after the
Term, execute and deliver any and all instruments and
documents and take any and all other actions that, in the
reasonable judgment of the Company or its counsel, are or
may be necessary or desirable to document any such
assignment, transfer, and conveyance to the Company or to
enable the Company to file and process applications for, and
to acquire, maintain, and enforce, any and all patents,
trademarks, registrations, or copyrights with respect to any
of the Developments, or to obtain any extension, validation,
re-issue, continuance, or renewal of any such patent,
trademark, registration, or copyright. The Company will be
responsible for the preparation of any such instrument or
document and for the implementation of any such proceedings
and will reimburse Executive for all reasonable expenses
incurred by him in complying with this Section 10.
11. Reformation and Severability. The Parties intend all
provisions of Sections 8, 9, and 10 to be enforced to the fullest
extent permitted by law. Accordingly, should a court of
competent jurisdiction determine that the scope of any provision
of Section 8, Section 9, or Section 10 is too broad to be
enforced as written, the Parties intend that the court reform the
provision to such narrower scope as it determines to be
reasonable and enforceable. In addition, however, Executive
agrees that each of the agreements set forth in Sections 8, 9,
and 10 constitutes a separate agreement independently supported
by good and adequate consideration, shall be severable from the
other provisions of this Agreement, and (with this Section 11)
shall survive the occurrence of a Termination Date. If any
provision of this Agreement is held to be illegal, invalid, or
unenforceable under present or future laws, (i) such provision
shall be fully severable, (ii) this Agreement shall be construed
and enforced as if such illegal, invalid, or unenforceable
provision never constituted a part of this Agreement, and (iii)
the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance herefrom.
Furthermore, in lieu of such illegal, invalid, or unenforceable
provision, there shall be added as part of this Agreement a
provision as similar in its terms to such illegal, invalid, or
unenforceable provision as may be possible and be legal, valid,
and enforceable.
12. Dispute Resolution.
(a) Arbitration. The exclusive remedy or method of
resolving all disputes or questions arising out of or
relating to this Agreement or the expiration or termination
of Executive's employment hereunder shall be arbitration
held in Greensboro, North Carolina. Nevertheless, although
disputes or questions arising out of or relating to any of
Sections 8, 9, and 10 shall be subject to arbitration, the
Company may seek and obtain injunctive relief from any court
of proper jurisdiction to enforce or protect its rights
under Sections 8, 9, and 10 pending such arbitration. Any
arbitration may be requested or initiated by a Party by
written notice to the other Party specifying the subject of
the requested arbitration and appointing the notifying
Party's arbitrator ("Arbitration Notice").
(b) Arbitrators. Arbitration shall be before three
arbitrators, one to be appointed by the Company, a second to
be appointed by Executive, and a third to be appointed by
the two arbitrators chosen by the Company and Executive.
All such arbitrators shall be selected from a list of
potential arbitrators provided by the American Arbitration
Association. The third arbitrator shall act as chairman.
If either Party fails to appoint an arbitrator by written
notice to the other Party within ten days after the
Arbitration Notice is given or the two arbitrators appointed
by the Parties fail to appoint a third arbitrator within ten
days after the date of the appointment of the second
arbitrator, then the American Arbitration Association in
Greensboro, North Carolina, upon application of a Party
shall appoint an arbitrator to fill that position.
(c) Award and Costs. The arbitration proceeding shall
be conducted in accordance with the Commercial Arbitration
Rules of the American Arbitration Association. A
determination or award made or approved by at least two of
the arbitrators shall be the valid and binding action of the
arbitrators. The costs of arbitration shall be borne by the
Company and/or Executive as determined by the arbitrators.
The arbitration determination or award shall be final and
conclusive on the Parties, and judgment upon such award may
be entered and enforced in any court of competent
jurisdiction.
13. Miscellaneous.
(a) Notices. Any notice, consent, demand, request,
approval, or other communication to be given under this
Agreement by one Party to the other must be in writing and
must be either (i) personally delivered, (ii) mailed by
registered or certified mail, postage prepaid with return
receipt requested, (iii) delivered by overnight express
delivery service or same-day or overnight local courier
service, or (iv) delivered by facsimile transmission, in any
event to the address or number set forth below or to such
other address or number as may be designated by either or
both of the Parties from time to time in accordance with
this Section 13(a):
If to the Company: Network Systems International,
Inc.
200 North Elm Street
Greensboro, North Carolina 27401
Attention: Robbie M. Efird
Fax No.: (336) 217-0852
If to Executive: Mr. Christopher N. Baker
200 North Elm Street
Greensboro, North Carolina 27401
Notices delivered personally or by overnight express
delivery service or by local courier service shall be deemed
given and received as of actual receipt. Notices mailed as
described above shall be deemed given and received three
business days after mailing or upon actual receipt,
whichever is earlier. Notices delivered by facsimile
transmission shall be deemed given and received upon receipt
by the sender of the transmission confirmation.
(b) Entire Agreement. This Agreement and the option
agreement referred to in Section 4 replace and supersede any
and all other agreements and understandings of any kind,
either oral or written, between the Parties with respect to
the subject matter of this Agreement and contain all of the
covenants and agreements between the Parties with respect to
the subject matter of this Agreement.
(c) Modification. No change or modification of this
Agreement will be valid or binding upon the Parties, nor
will any waiver of any term or condition be so binding,
unless the change or modification or waiver is in writing
and signed by both Parties.
(d) Governing Law and Venue. This Agreement and the
obligations and undertakings of the Parties under this
Agreement are performable in Greensboro, North Carolina.
This Agreement and all matters related hereto shall be
governed by, and construed in accordance with, the laws of
the State of North Carolina.
(e) Counterparts. This Agreement may be executed in
counterparts, each of which constitutes an original, but all
of which constitute one document.
(f) Estate. If Executive dies during his employment
hereunder, any amounts due him from the Company under this
Agreement as of the date of his death shall be paid to his
estate or heirs.
(g) Assignment. The Company shall not have the right
to assign this Agreement, except to a Successor. The
rights, duties, and benefits to Executive hereunder are
unique and personal to him, and no such right, duty, or
benefit may be assigned by him.
(h) Binding Effect; Survival. This Agreement is
binding upon the Parties, together with their respective
executors, administrators, successors, personal
representatives, heirs, and permitted assigns. The
respective rights and obligations of the Parties under this
Agreement shall survive the expiration or termination of the
Term to the extent necessary to give full effect to those
rights and obligations.
(i) Waiver of Breach. Any waiver by a Party of a
breach of any provision of this Agreement by the other Party
will not operate or be construed as a waiver of any other or
any subsequent breach.
(j) Certain Defined Terms. As used in this Agreement,
(i) "Section" means a Section of this Agreement unless
otherwise indicated, (ii) except as otherwise defined in
Section 6(a)(iv)(A), "person" means an individual or any
corporation, partnership, trust, unincorporated association,
or other legal entity, whether acting in an individual,
fiduciary, or other capacity, and any government, court, or
other governmental agency, (iii) "include" and "including"
shall not denote or signify any limitation, (iv) "herein,"
"hereof," "hereunder," and similar terms are references to
this Agreement as a whole and not to any particular
provision of this Agreement, and (v) "business day" means
any Monday through Friday other than any such weekday on
which the executive offices of the Company are closed.
IN WITNESS WHEREOF, the Parties have executed this Agreement
as of the date first set forth above.
NETWORK SYSTEMS INTERNATIONAL, INC.
/s/ Robbie M. Efird
By: Robbie M. Efird, Chief
Executive Officer
/s/ Christopher N. Baker
CHRISTOPHER N. BAKER
NETWORK SYSTEMS INTERNATIONAL, INC.
CONSULTING AGREEMENT
AGREEMENT, dated as of the 1st day of June, 1999, by and
between NETWORK SYSTEMS INTERNATIONAL, INC., a Nevada corporation
with its principal office at 200 North Elm Street, Greensboro,
North Carolina (the "Company"), and E. W. MILLER, JR., a resident
of Greensboro, North Carolina (the "Consultant").
W I T N E S S E T H:
WHEREAS, the Consultant is currently employed by Network
Information Services, Inc., a wholly owned subsidiary of the
Company (the "Subsidiary"; the Company and the Subsidiary shall
hereinafter be collectively referred to as the "Affiliated
Companies"), under the terms of an employment agreement between
the Subsidiary and the Consultant dated the 19th day of April,
1996 (the "Employment Agreement"); and
WHEREAS, the Subsidiary and the Consultant desire to
terminate the Employment Agreement; and
WHEREAS, the Company and the Consultant desire to enter into
an agreement for the Consultant to render consulting and advisory
services to the Company; and
WHEREAS, the Consultant is willing to provide such
consulting and advisory services to the Company, and the Company
is willing to retain the Consultant to render such consulting and
advisory services, pursuant to the terms and conditions contained
herein.
NOW, THEREFORE, in consideration of the mutual covenants
contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the
Company and the Consultant agree as follows:
1. Engagement as Consultant. The Company hereby engages
the Consultant to render consulting and advisory services, and
the Consultant hereby accepts such engagement, under the terms
and conditions hereinafter set forth.
2. Services. The Consultant agrees that he will furnish
to the Company such consulting and advisory services pertaining
to the business of the Company as the Board of Directors (the
"Board") or the Chairman of the Board of the Company may
reasonably request. It is understood and agreed that the
services to be rendered by the Consultant hereunder will include,
without limitation, services similar to the Affiliated Companies'
past operating procedures, relationships with customers and
suppliers, and sales and marketing activities. During the term
of this Agreement, the Consultant shall devote such time as may
be reasonably requested from time to time by the Board or the
Chairman of the Board to the business and affairs of the Company
and shall use his best efforts to discharge such
responsibilities. The Consultant also agrees to continue to
serve as a member of the Board during the term of this Agreement
as long as the Consultant is nominated and elected to such
position by the shareholders of the Company in accordance with
the Articles of Incorporation and the Bylaws of the Company.
3. Term. The term of this Agreement shall commence as of
the date hereof and shall continue in effect for a period of five
(5) years; provided, however, that this Agreement may be
terminated pursuant to paragraph 9 hereof.
4. Termination of Employment Agreement; Release.
(a) Termination. The Consultant and the Subsidiary hereby
agree to terminate the Employment Agreement.
(b) Release. The Consultant hereby releases the Affiliated
Companies and all other persons from any and all liability or
anything done or not done by the Affiliated Companies or by
anyone acting for the Affiliated Companies, prior to and
including the date of this Agreement, and the Consultant hereby
agrees not to sue the Affiliated Companies or anyone who acted or
failed to act for the Affiliated Companies to enforce any such
liability or to seek damages for any such act or failure to act
(the "Release"). The Consultant understands that this Release
covers, but is not limited to, all contract claims, all claims
for wages or other compensation, and all claims based on
allegations of discrimination whether based on race, color,
religion, sex, national origin, handicap, disability or age,
whether arising under the Age Discrimination in Employment Act of
1967, as amended, 29 U.S.C. Section 621, et seq., the Americans
with Disabilities Act, 42 U.S.C. Section 12101, et seq., the
North Carolina Handicapped Persons Protection Act, N.C.G.S.
Section 168A-1, et seq., or any other state or federal statute or
the common law. The Consultant also understands that this Release
applies to any and all other claims that he may have arising out
of any of the terms and conditions of his employment with the
Subsidiary, including the termination of that employment. The
Consultant understands that the parties hereby released admit
absolutely no liability of any sort, but specifically deny that
they have discriminated against him in any of the terms and
conditions of his employment, whether on grounds of race, color,
religion, sex, national origin, age, disability, or otherwise, or
have otherwise violated his statutory, common law or
constitutional rights, and they have made no agreement or promise
to do or omit to do any act or thing not herein set forth. The
Consultant further understands that the consideration provided
for pursuant to this Agreement is provided to address any
controversy and claims whatsoever, whether known or unknown, in
any way growing out of or connected with anything done, omitted
or suffered to be done by and of the parties hereby released,
prior to and including the date hereof.
5. Compensation.
(a) Put Right. During the term of this Agreement, for
each period of twelve (12) days that begins on the third day
after the Company announces its quarterly earnings from the
previous fiscal quarter of the Company (each an "Earnings
Announcement") and ends two (2) weeks after the Company makes
such an Earnings Announcement, the Consultant shall have the
right, exercisable by notice in writing to the Company (each an
"Exercise Notice"), to require the Company to purchase from the
Consultant up to a maximum of ten thousand (10,000) shares of the
capital stock of the Company owned by the Consultant (the
"Consultant Shares") at a purchase price of Four Dollars ($4.00)
per share. Each Exercise Notice shall set forth the number of
the Consultant Shares, up to a maximum of ten thousand (10,000)
Consultant Shares per Exercise Notice, that the Consultant
requires the Company to purchase pursuant to this paragraph 5(a)
(the "Put Shares"). If so requested pursuant to an Exercise
Notice, the Company agrees to purchase the Put Shares. A failure
by the Consultant to give an Exercise Notice during such period
of twelve (12) days period shall be deemed a rejection by the
Consultant of his right for such fiscal quarter to require the
Company to purchase the Put Shares. Notwithstanding the
foregoing, if the Consultant sells, transfers or otherwise
disposes of (other than by gift to a Family Member or to a
Charity) any of the Consultant Shares in an open market
transaction (including, without limitation, in any transaction on
the NASDAQ Exchange) during any fiscal quarter of the Company,
then the number of Consultant Shares which the Consultant shall
have the right to require the Company to purchase under this
paragraph 5(a) for such fiscal quarter shall be reduced by the
number of Consultant Shares which were sold, transferred or
otherwise disposed of.
(b) Initial Put. Notwithstanding the foregoing, for
the period related to the fiscal quarter of the Company ended
March 31, 1999, the Consultant shall have the right, exercisable
by notice in writing to the Company (the "Initial Exercise
Notice"), to require the Company to purchase from the Consultant
up to a maximum of ten thousand (10,000) shares of the Consultant
Shares at a purchase price of Four Dollars ($4.00) per share.
The Consultant must exercise his rights pursuant to this
paragraph 5(b), if at all, by giving the Company the Initial
Exercise Notice no later than July 15, 1999. The Initial
Exercise Notice shall set forth the number of the Consultant
Shares, up to a maximum of ten thousand (10,000) Consultant
Shares, that the Consultant requires to Company to purchase
pursuant to this paragraph 5(b) (the "Initial Put Shares"). If
so requested pursuant to the Initial Exercise Notice, the Company
agrees to purchase the Initial Put Shares. A failure by the
Consultant to give the Initial Exercise Notice by July 15, 1999,
shall be deemed a rejection by the Consultant of his right to
require the Company to purchase the Initial Put Shares for the
period related to the fiscal quarter of the Company ended March
31, 1999.
(c) Conditions. Notwithstanding the foregoing, the
Company's obligation to purchase the Put Shares from the
Consultant pursuant to this paragraph 5 is expressly conditioned
upon the following:
(i) Such purchase will not contravene, result in any breach
of, or constitute a default under, or result in the creation of
any lien in respect of any property of the Company or any of its
subsidiaries or affiliates under any indenture, mortgage, deed of
trust, loan, purchase or credit agreement, lease, partnership
agreement, corporate charter or bylaws, or any other agreement or
instrument to which the Company or any of its subsidiaries or
affiliates is bound or by which the Company or any of its
subsidiaries or affiliates or any of their respective properties
may be bound or affected (a "Breach"); provided that the Company
shall have used its reasonable efforts to obtain a waiver of any
such contravention, breach or default or an amendment of any such
instruments (a "Waiver");
(ii) The Company shall have secured financing for the
purchase of such Put Shares on terms reasonably acceptable to the
Company (the inability to satisfy this condition being referred
to as a "Lack of Financing"); provided that the Company shall
have used its reasonable, good faith efforts to secure financing
for the purchase on terms reasonably acceptable to the Company
("Purchase Financing"); and
(iii) Such purchase, at the time made, shall not be
prohibited by law.
In connection with the condition described under paragraph
5(c)(i) above and the Breach referred to therein, the Company
warrants and represents to the Consultant that, to the best
knowledge of the Company's officers, at the time of entering into
this Agreement, the purchase of ten thousand (10,000) shares of
Consultant Shares per fiscal quarter will not cause a Breach
under any indenture, mortgage, deed of trust, loan, purchase or
credit agreement, lease, partnership agreement, corporate charter
or bylaws, or any other agreement or instrument by which any of
the Affiliated Companies is currently bound. The Company also
represents and warrants to the Consultant that it is not in the
process of entering into any such arrangement and has no current
plans to enter into any arrangement that will result in a Breach.
In the event that the Company signs any loan agreement or enters
into any other arrangement that will result in a Breach, the
Company will immediately notify the Consultant in writing of such
agreement or arrangement.
(d) Postponement of Purchase. Notwithstanding the
foregoing, the Company shall be entitled to postpone the purchase
of the Put Shares during the existence of any of the following
conditions: (i) a Registration Period (as defined below), (ii) a
Quiet Period (as defined below), (iii) a Breach would occur as a
result of the purchase, or (iv) a Lack of Financing. Within
thirty (30) days after such Registration Period or Quiet Period
expires, or within thirty (30) days after the Company obtains a
Waiver or Purchase Financing which removes the Breach or Lack of
Financing condition, the Company shall purchase from the
Consultant that number of Put Shares specified in any applicable
Exercise Notice given to the Company, if the Exercise Notice
otherwise satisfies the terms of paragraph 5(a) hereof.
(e) Assignment. After the Company has received the
Exercise Notice from the Consultant for a fiscal quarter, the
Company shall have the right, in its sole discretion, to assign
its obligation to purchase all or any portion of the Put Shares
applying to such fiscal quarter to any person or entity desiring
to purchase such Put Shares (the "Assignee"); provided, however,
that the following shall be conditions to any such assignment:
(i) there shall be no assignment to any such person or entity
unless the Company makes a good faith determination that such
person or entity has the financial ability to meet the obligation
to purchase the Put Shares; (ii) within five (5) business days
after the date of any such assignment, the Company shall give to
the Consultant written notice of such assignment, including the
name and address of the Assignee; (iii) the Assignee shall be
required to purchase such Put Shares in accordance with the terms
of conditions of this paragraph 5 (excluding the conditions of
paragraphs 5(c)(i) and 5(c)(ii) above and excluding any right to
postpone the purchase under paragraph 5(d)), to the same extent
as the Company would have been required to purchase the Put
Shares under this paragraph 5; (iv) notwithstanding any
assignment, the place of closing shall continue to be as
specified in paragraph 5(f); (v) in the event that the Assignee
fails to purchase the Put Shares and deliver the entire purchase
price to the Consultant within three (3) weeks from the date that
the Company receives the Exercise Notice, then the Company shall
be required to purchase the Put Shares within five (5) days of
the date that the Assignee was required to complete the purchase
(provided, however, that the Company's obligation to purchase the
Put Shares is subject to the provisions of paragraph 5(c) above);
and (vi) the Company may only assign its obligation to purchase
Put Shares with respect to any fiscal quarter after the
Consultant delivers the Exercise Notice to the Company with
respect that particular fiscal quarter.
(f) Closing. The closing of the purchase and sale
transaction of the Initial Put Shares pursuant to paragraph 5(b)
hereof shall be held at the principal office of the Company on a
date designated by the Company; provided, however, that the
closing date shall be no more than one (1) week from the date the
Company receives the Initial Exercise Notice. The closing of any
purchase and sale transaction of Put Shares pursuant to paragraph
5(a) hereof shall be held at the principal office of the Company
on a date designated by the Company; provided, however, that the
closing date shall occur before the later of: (i) three (3) weeks
from the date the Company receives the Exercise Notice, or (ii)
thirty (30) days from the expiration of any applicable
Registration Period or Quiet Period, or (iii) thirty (30) days
from the date the Company obtains a Waiver or Acceptable
Financing which removes a Breach or Lack of Financing condition
as specified in paragraph 5(c) above. At the closing of any
purchase and sale transaction as provided in this paragraph 5,
the Consultant shall deliver to the purchaser, upon tender of the
purchase price, certificates evidencing the Put Shares or the
Initial Put Shares (as appropriate), duly endorsed for transfer
and with any necessary documentary stamps attached, and such
other documentation as may be reasonably requested by the
purchaser for the purpose of effecting the purchase.
(g) Separate Put Agreement Upon Termination. Upon
termination or expiration of this Agreement due to the
Consultant's disability pursuant to paragraph 9(b) hereof or due
to the expiration of the term of this Agreement pursuant to
paragraph 3 hereof, the Consultant or his personal representative
shall have the right, exercisable by notice in writing to the
Company within sixty (60) days of such termination or expiration,
to require the Company to enter into a separate put agreement
(the "Put Agreement") with the Consultant with terms and
conditions substantially similar to those as provided for in
paragraphs 5, 9(e), 15, 16, 17, 18, 19, 20, 21 and 22 hereof. In
addition to the foregoing, the Put Agreement shall specifically
provide that it shall terminate and the Consultant's put option
shall expire at the earlier of: (i) eight (8) years from the date
of the Put Agreement, (ii) the death of the Consultant, or (iii)
the date on which the Consultant has sold, transferred, or
otherwise disposed of (other than by gifts to Family Members
and/or Charities) after the date of this Agreement a total of
more than five hundred thousand (500,000) shares of the
Consultant Shares (including, without limitation, the sale of Put
Shares in accordance with the terms of the Consultant's rights
pursuant to this paragraph 5).
(h) Definitions. Whenever any of the terms set forth
below is used in this paragraph 5, it shall have the following
meaning:
(i) "Registration Period" shall mean, with
respect to the Company, that there has been an
organizational meeting with underwriters regarding a
proposed public offering of the Company's securities,
and the Company is actively pursuing the consummation
of such public offering.
(ii) "Quiet Period" shall mean any
period of time during which insiders of the Company
(including, but not limited to, officers and directors
of the Company) are precluded from trading shares of
the Company's capital stock. Such period shall be
determined by reference to: (A) the rules or guidelines
of any public exchange upon which the Company's shares
are traded (including, but not limited to, the NASDAQ
Exchange), (B) the advice of legal counsel to the
Company concerning a provision of any applicable law or
regulation (including, but not limited to, the
Securities Act of 1933, the Securities Exchange Act of
1934, or the regulations promulgated thereunder), or
(C) any Company insider trading policy of general
applicability to Company insiders (including, but not
limited to, officers and directors of the Company).
(iii) "Family Member" shall include (A) the
spouse, any lineal descendant, any sibling and any ancestor
of the Consultant and the spouses of any such persons; (B)
any trust which is created for the sole lifetime benefit of
any one or more of such persons; and (C) any charitable
remainder trust or charitable lead trust under which all of
the beneficiaries are either the Consultant or a Family
Member.
(iv) "Charity" shall mean any organization
described in Sections 170(b)(1)(A), 170(c), 2055(a) and
2522(a) of the Internal Revenue Code of 1986, as amended.
6. Benefits. During the period of his engagement under
this Agreement, the Consultant shall be entitled to the following
benefits:
(a) The Company shall provide the Consultant a leased
automobile consistent with the automobiles provided to the senior
executives of the Company. The Company shall pay for expenses
associated with the operation of such automobile pursuant to the
Company's existing leased automobile plan for senior executives,
as may be revised from time to time by the Company.
(b) The Consultant shall be entitled to reimbursement
for all reasonable, out-of-pocket expenses incurred by him
associated with the Consultant's use of: (i) a separate home
telephone line, and (ii) a cellular telephone. The Consultant
shall be entitled to such reimbursement upon presentation by the
Consultant to the Company, from time to time, of an itemized
account of such expenses and appropriate documentation therefor.
(c) The Company shall provide the Consultant with the
use of: (i) a personal computer, (ii) a computer printer, and
(iii) a facsimile machine (collectively, the "Office Equipment")
for use at Consultant's home or at such other locations as he may
choose. The Company shall pay for the purchase of such Office
Equipment, as well as the business expenses associated with the
Consultant's use of such Office Equipment.
(d) The Company shall provide the Consultant with a
term life insurance policy (with premiums thereon paid by the
Company) with a face amount of at least One Million Dollars
($1,000,000) payable to the beneficiaries designated by the
Consultant on terms consistent with the term life insurance
policies provided to the senior executives of the Company.
Company agrees to cooperate with the Consultant in connection
with his personal estate planning as it relates to such life
insurance policy and to take such actions as the Consultant may
reasonably request regarding the ownership of and beneficiary
designation under such policy, including, but not limited to,
transferring all ownership rights in such policy to a third party
(such as an irrevocable life insurance trust). At the
termination of this Agreement, Company shall cooperate with the
Consultant in arranging for him to exercise any rights to
continue such life insurance policy at the Consultant's expense
or to purchase such policy.
(e) The Company shall provide the Consultant with a
health and dental insurance policy (with premiums thereon paid by
the Company) in accordance with the terms of the Company's
existing health and dental insurance benefits plan, as may be
revised from time to time by the Company. At such time as this
Agreement terminates, Company shall continue to provide health
and dental insurance coverage for the Consultant (with premiums
paid by the Company) until he attains age sixty-five (65) under
the Company's then existing health and dental insurance plan or
under another plan with comparable benefits; provided, however,
that Consultant shall reimburse the Company for the actual cost
of coverage for any dependents of Consultant covered under any
such policy.
(f) The Company shall provide the Consultant with a
disability insurance policy (with premiums thereon paid by the
Company) in accordance with the terms of the Company's existing
group disability insurance benefits plan, as may be revised from
time to time. In addition, the Company shall pay the premiums
for the Consultant's individual disability policy as it now
exists.
(g) The Company shall pay on behalf of the Consultant
the reasonable legal fees (but not more than the attorneys' usual
hourly charges for actual work performed) and other reasonable
expenses associated with revising and updating the personal
estate plan of the Consultant and his spouse, including wills
and/or revocable living trusts (with credit shelter provisions),
durable powers of attorney, health care powers of attorney,
living wills, irrevocable life insurance trust and family limited
partnership, if deemed appropriate. Such benefit will pay for
costs incurred within one (1) year after the date of this
Agreement by any attorney selected by the Consultant.
7. Business Expense Reimbursements. During the period of
his engagement under this Agreement, the Consultant shall be
entitled to reimbursement for all reasonable, out-of-pocket
expenses incurred by him in performing services hereunder,
provided that such expenses are incurred in accordance with the
applicable policies of the Company and at the request of the
Company. The Consultant shall be entitled to such reimbursement
upon presentation by the Consultant to the Company, from time to
time, of an itemized account of such expenses and appropriate
documentation therefor.
8. Indemnification. The Consultant shall have rights to
indemnification and advancement of expenses to the maximum extent
allowed by applicable law. The Company shall maintain directors'
and officers' liability coverage for the Consultant to the same
extent as provided generally to other directors of the Company.
9. Termination of Consulting Relationship.
(a) Death. In the event of the death of the
Consultant during his engagement as a consultant under this
Agreement, this Agreement shall terminate and any rights and
benefits the Consultant or his estate or any other person may
have under benefit plans and programs of the Company described in
paragraph 6 hereof shall be determined in accordance with the
terms of such plans and programs. Except as provided in this
paragraph 9(a), neither the Consultant's estate nor any other
person shall have any rights or claims against the Company in the
event of the death of the Consultant during the term of this
Agreement.
(b) Long-Term Disability. In the event of the
Consultant's disability (as that term is hereinafter defined)
during his engagement as a consultant under this Agreement, the
engagement of the Consultant to render consulting and advisory
services to the Company and this Agreement may be terminated by
the Company. Upon termination of the Consultant's engagement
under this Agreement by reason of disability pursuant to this
paragraph 9(b), the Consultant shall be entitled to benefits
pursuant to paragraph 6 hereof in accordance with and subject to
the terms and provisions of the Company's disability plans in
effect at the time of the commencement of disability. For
purposes of this Agreement, "disability" shall have the same
meaning as given that term under the Company's long-term
disability plan as in effect from time to time; provided,
however, that if the Company does not have such a long-term
disability plan in effect at the time of the Consultant's
disability, the term "disability" shall mean the determination in
good faith by the Board, after written notice and opportunity to
be heard has been given to the Consultant, that the Consultant
has become disabled or incapacitated and as a result he is unable
to perform his duties under this Agreement. Any rights and
benefits the Consultant may have pursuant to paragraph 6 hereof
under benefit plans and programs of the Company in the event of
the Consultant's disability shall be determined in accordance
with the terms of such plans and programs. Except as provided in
this paragraph 9(b), neither the Consultant nor his estate, or
any other person, shall have any rights or claims against the
Company in the event of the termination of this Agreement by
reason of disability.
(c) Termination for Cause. Nothing herein shall
prevent the Company from terminating the Consultant's engagement
as a consultant under this Agreement for Cause (as that term is
hereinafter defined). Upon termination for Cause, any rights and
benefits the Consultant may have pursuant to paragraph 6 hereof
under benefit plans and programs of the Company following a
termination of this Agreement for Cause shall be determined in
accordance with the terms of such plans and programs. For
purposes of this Agreement, termination for Cause shall mean:
(i) termination due to (x) willful or gross
neglect of duties for which engaged, or (y) willful
misconduct in the performance of duties for which
engaged, in either such instance so as to cause
material harm to the Company, all such facts to be
determined in good faith by the Board;
(ii) termination due to the Consultant's
committing fraud, misappropriation or embezzlement in
the performance of his duties as a consultant of the
Company; or
(iii) termination due to the Consultant's
committing any felony for which he is convicted and
which, as determined in good faith by the Board,
constitutes a crime involving moral turpitude.
(d) Voluntary Termination. The Consultant may
terminate this Agreement at any time upon ninety (90) days prior
written notice to the Company; provided, however, that the
Company, in its discretion, may cause such termination to be
effective at any time during the ninety (90) day period. In the
event of such a voluntary termination of this Agreement, neither
the Consultant nor any other person shall have any rights or
claims against the Company.
(e) Company Option to Terminate. In the event that,
during the term of this Agreement, the Consultant sells, assigns,
transfers, makes a gift of or otherwise disposes of (other than
by gifts to Family Members and/or Charities) a total of more than
five hundred thousand (500,000) shares of the Consultant Shares
(including, without limitation, sales of Put Shares pursuant to
paragraph 5 hereof), the Company shall have the option to
terminate this Agreement upon written notice to the Consultant.
10. Covenant Not to Compete.
(a) The Consultant promises and agrees that until the
expiration of one (1) year following the termination or expira
tion for any reason of his engagement by the Company as a
consultant, he will not, either directly or indirectly within the
United States:
(i) Own, manage, operate, control, be
employed by, render consulting or advisory services to,
participate in or be connected in any management or
control of any business that is then engaged, in
competition with the Company or any of its subsidiaries
or affiliates, in the sale of any products or services
sold by the Company or any of its subsidiaries or
affiliates at the time of such termination (including,
but not limited to, the development and marketing of
enterprise software products for complex manufacturers
emphasizing sales order processing, enterprise resource
planning, manufacturing execution, and distribution
management), unless his duties, responsibilities and
activities for or on behalf of such business are not
related in any way to the sale of any such products or
services;
(ii) Influence or attempt to influence any
customer of the Company or any of its subsidiaries or
affiliates to discontinue its purchases of any product
or service sold by the Company or any of its
subsidiaries or affiliates at the time of termination
of his engagement by the Company as a consultant or to
divert such purchases to any other person, firm, or
corporation;
(iii) Interfere with, disrupt or attempt
to disrupt the relationship, contractual or otherwise,
between the Company or any of its subsidiaries or
affiliates and any of its respective suppliers,
distributors, lessors, or licensors; or
(iv) Solicit any employee of the Company or
any of its subsidiaries or affiliates, whose base
annual salary at the time of the Consultant's
termination was Thirty Thousand Dollars ($30,000) or
more, to work for any other person, firm or
corporation.
For purposes of this paragraph 10(a), "competition with the
Company or any of its subsidiaries or affiliates" shall mean
direct competition for customers of products or services of the
kind described above in any geographic area in which the Company
or any of its subsidiaries or affiliates is engaged, directly or
indirectly, in selling or attempting to sell such products or
services.
The Consultant understands and agrees that the Company and
its affiliates conduct business throughout the United States, and
that each of the provisions of this paragraph 10 (including
without limitation, its scope, geographic limitations and time
period covered) are reasonable and necessary for the protection
of the Company and its affiliates and of their legitimate
business interests.
(b) It is the desire and intent of the parties that
the provisions of this paragraph 10 shall be enforced to the
fullest extent permitted under the laws and public policies of
each jurisdiction in which enforcement is sought. Accordingly,
if any particular portion of this paragraph 10 shall be
adjudicated to be invalid or unenforceable, such adjudication
shall apply only with respect to the operation of that portion in
the particular jurisdiction in which such adjudication is made,
and all other portions shall continue in full force and effect.
11. Confidential Information; Rights to Materials.
(a) Confidential Information. The Consultant
recognizes and acknowledges that in his prior relationship with
the Affiliated Companies as an employee under the Employment
Agreement and during the performance of his consulting and
advisory services under this Agreement, the Consultant had and
will have ready access to certain proprietary and confidential
information and know-how of the Affiliated Companies relating to
the Affiliated Companies' business, products, financial status,
performance and operations, and that the Consultant's engagement
to render consulting and advisory services to the Company creates
a relationship of confidence and trust with respect to such
proprietary and confidential information and know-how. The
Consultant promises and agrees that he will not, either during
the term of this Agreement or at any time thereafter, disclose to
any person not employed by the Affiliated Companies, or not
engaged to render services to the Affiliated Companies, or use,
for himself or any other person, firm, corporation or entity, any
confidential information of the Affiliated Companies obtained by
him while in the employ of the Subsidiary or while engaged by the
Company to render consulting and advisory services, including,
without limitation, any of the Affiliated Companies' methods,
processes, techniques, shop practices, formulae, research data,
marketing and sales information, personnel data, customer lists,
financial data, plans, know-how, trade secrets, and proprietary
information of the Affiliated Companies; provided, however, that
this provision shall not preclude the Consultant from use or
disclosure of information known generally to the public (other
than information known generally to the public as a result of a
violation of this paragraph 11(a) by the Consultant), from use or
disclosure of information acquired by the Consultant outside of
his affiliation with the Affiliated Companies, from disclosure
required by law or court order, or from disclosure or use
appropriate and in the ordinary course of carrying out the
consulting and advisory services hereunder. The Consultant
agrees that he will not copy any such information or materials or
divulge the same or any part thereof to any person, firm,
corporation or organization or use such information or materials,
either for himself or for the benefit of any third party, whether
in competition with the Affiliated Companies or otherwise, except
as is necessary in the ordinary course of the Consultant's
engagement by the Company. Upon termination of this Agreement,
for whatever reason, or upon the prior demand of the Company, the
Consultant will immediately return to the Company all
confidential information and material then in the Consultant's
possession or control relating to the Affiliated Companies'
business, financial status, performance or operations.
(b) Rights to Materials. The Consultant further
promises and agrees that, upon termination of his engagement as a
consultant for whatever reason and at whatever time, he will not
take with him, without the prior written consent of an officer
authorized to act in the matter by the Board, any records, files,
memoranda, reports, price lists, customer lists, drawings, plans,
sketches, documents, specifications, and the like (or any copies
thereof) relating to the business of the Company or any of its
subsidiaries or affiliates.
12. New Developments. The Consultant hereby further agrees
that during the course of his engagement as a consultant
hereunder, he will promptly disclose to the Company any and all
improvements, inventions, developments, discoveries, innovations,
systems, techniques, ideas, processes, programs, and other things
that may be of assistance to the Company, whether patentable or
unpatentable, that (a) relate to the Company's business or actual
or demonstrably anticipated research or development, or
(b) result from any work performed by the Consultant for the
Company, or (c) are developed on the Company's time or using the
Company's equipment, supplies, facilities or trade secret
information, and that is made or conceived by the Consultant,
alone or with others, while engaged to render consulting and
advisory services for the Company (collectively referred to
hereinafter as the "New Developments"). The Consultant
acknowledges and agrees that New Developments shall include any
and all improvements, inventions, developments, discoveries,
innovations, systems, techniques, ideas, processes, programs, and
other things that may be of assistance to the Company, whether
patentable or unpatentable, developed by the Company, the
Subsidiary and/or the Consultant prior to the date hereof. The
Consultant further agrees that all New Developments shall be and
remain the sole and exclusive property of the Company and that he
shall, upon the request of the Company, and without further
compensation, do all things reasonably necessary to insure the
Company's ownership of such New Developments, including, without
limitation, the execution of any necessary documents assigning
and transferring to the Company and its assigns all of the
Consultant's rights, title and interest in and to such New
Developments, and the execution of all necessary documents
required to enable the Company to file and obtain patents in the
United States and foreign countries on any of such New
Developments. The Consultant agrees that his obligations
pursuant to this paragraph 12 shall continue beyond the
termination of the Consultant's engagement to render consulting
and advisory services to the Company. In the event that the
Consultant is unable or unavailable or shall unreasonably refuse
to sign any lawful or necessary document required in order for
the Company to apply for and obtain a patent or patents with
respect to a New Development (including applications therefor or
renewals, extensions, divisions or continuations thereof), the
Consultant hereby irrevocably designates and appoints the Company
and its duly authorized officers and agents as the Consultant's
agents and attorneys-in-fact to act for and in the Consultant's
behalf, and in his place and stead, to execute and file any such
applications and to do all other lawfully permitted acts to
further the prosecution and issuance of patents with respect to
such New Developments with the same legal force and effect as if
executed by the Consultant.
13. Injunctive Relief. The Consultant acknowledges and
agrees that the rights of the Company under paragraphs 10, 11 and
12 of this Agreement are of a specialized and unique character
and that immediate and irreparable damage will result to the
Company if the Consultant fails or refuses to perform his
obligations under this Agreement, and notwithstanding any
election by the Company to claim damages from the Consultant as a
result of such failure or refusal, the Company may, in addition
to any such other remedies and damages available, seek an
injunction in a court of competent jurisdiction to restrain any
such failure or refusal by the Consultant to perform or comply
with the Consultant's obligations hereunder.
14. Relationship Created. It is understood and agreed that
in acting pursuant to this Agreement, the Consultant shall be an
independent contractor and not an employee of the Company.
Accordingly, the Company shall not withhold any state or federal
income taxes, social security or other taxes from amounts paid to
the Consultant, nor shall it make any workers' compensation or
unemployment benefit payments, contributions or payroll tax
payments on behalf of the Consultant. The Consultant agrees to
hold the Company harmless for any and all expense, liability or
responsibility arising from failure to withhold such taxes and
social security payments or make any such workers' compensation
or unemployment benefit payments, contributions or payroll tax
payments.
15. Capital Adjustments; Antidilution. In the event
that, by reason of any merger, consolidation, combination,
liquidation, reorganization, recapitalization, stock dividend,
stock split, split-up, split-off, spin-off, combination of
shares, exchange of shares or other like change in capital
structure of the Company (collectively, a "Reorganization"), the
common stock of the Company is substituted, combined, or changed
into any cash, property, or other securities, or the common stock
is changed into a greater or lesser number of shares of common
stock, (i) the number and/or kind of shares and/or interests
subject to the Consultant's put right as provided for in
paragraph 5 hereof, (ii) the number and/or kind of shares and/or
interests subject to the Company's option to terminate pursuant
to paragraph 9(e) hereof, and (iii) the per share price or value
thereof, shall be appropriately and equitably adjusted by the
Company to give appropriate effect to such Reorganization. Any
fractional shares or interests resulting from such adjustment
shall be eliminated.
16. Jurisdiction. Any action or proceeding seeking to
enforce any provision of, or based on any right arising out of,
this Agreement may be brought against any of the parties in the
courts of the State of North Carolina, County of Guilford, or, if
it has or can acquire jurisdiction, in the United States District
Court for the Middle District of North Carolina, and each of the
parties consents to the jurisdiction of such courts (and of the
appropriate appellate courts) in any such action or proceeding
and waives any objection to venue laid therein.
17. Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the Consultant and
his personal representatives, estate and heirs and the Company
and its successors and assigns, including without limitation any
corporation or other entity to which the Company may transfer all
or substantially all of its assets and business (by operation of
law or otherwise) and to which the Company may assign this
Agreement. The Consultant may not assign this Agreement or any
part hereof without the prior written consent of the Company,
which consent may be withheld by the Company for any reason it
deems appropriate.
18. Entire Agreement. This Agreement contains the entire
agreement of the parties with respect to the engagement of the
Consultant by the Company to render consulting and advisory
services and supersedes and replaces all other understandings and
agreements, whether oral or in writing, previously entered into
by the parties with respect to such engagement.
19. Amendment; Waiver. No provision of this Agreement may
be amended, modified or waived unless such amendment, modifica
tion or waiver is agreed to in writing and signed by the
Consultant and by a duly authorized officer of the Company. No
waiver by either party of any breach by the other party of any
provision of this Agreement shall be deemed a waiver of any other
breach.
20. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered
personally, sent by facsimile transmission, sent by certified,
registered or express mail, or by Federal Express or other
overnight courier, postage or other charges prepaid. Any such
notice shall be deemed given on the date so delivered personally,
or sent by facsimile transmission, or, if mailed, two days after
the date of deposit in the United States mail, or, if sent by
overnight courier, the day after delivery to the overnight
courier, addressed as follows:
If to the Company:
Network Systems International, Inc.
200 North Elm Street
Greensboro, North Carolina 27401
Attention: President
If to the Consultant:
E. W. Miller, Jr.
200 North Elm Street
Greensboro, North Carolina 27401
Either party may change its address for purposes of this
Agreement by notice given in compliance with this paragraph 20.
21. Severability. If any one or more of the provisions
contained in this Agreement shall be invalid, illegal, or
unenforceable in any respect under any applicable law, the
validity, legality and enforceability of the remaining provisions
shall not in any way be affected or impaired thereby.
22. Governing Law; Arbitration. This Agreement shall be
governed and construed in accordance with the laws and judicial
decisions of the State of North Carolina applicable to agreements
made and to be performed entirely within such state. Any
controversy arising out of or relating to this Agreement or any
of the documents provided for herein (including any modifications
hereof or thereof) shall be settled by arbitration in Greensboro,
North Carolina, in accordance with the Commercial Arbitration
Rules of the American Arbitration Association, and judgment upon
any award may be entered in any court of competent jurisdiction.
The arbitrators in any such controversy (the "Arbitration") shall
have no power to alter or modify any express provision of this
Agreement or any of the documents provided for herein or to
render any award that directly or indirectly effects any such
alteration or modification. The parties consent to the
application of North Carolina or Federal arbitration statutes
and to the jurisdiction of the court of North Carolina or the
Federal District Courts in North Carolina, as the case may be,
for all purposes in connection with this agreement to arbitrate.
Each party to any such arbitration or court proceeding shall bear
his or its own attorneys' fees and other costs; provided,
however, that the arbitrators may award attorneys' fees and other
costs to the prevailing party, if deemed appropriate. Each party
hereto shall also have all rights to provisional remedies that he
or it would have at law or equity, notwithstanding the existence
of this agreement to arbitrate.
23. Consultation with Counsel, Acceptance and Right to
Revoke. The Consultant hereby acknowledges that he understands
that he has up to twenty-one (21) days to review this Consulting
Agreement (including, but not limited to, the terms and
conditions of paragraph 4 hereof) and that he is aware of his
right to consult with an attorney of his choosing before signing
this Consulting Agreement. Should the Consultant choose to sign
this document within the twenty-one (21) day period, he
acknowledges that he has carefully read this Consulting Agreement
(including, but not limited to, the terms and conditions of
paragraph 4 hereof), that he knows and understands the contents
of this Consulting Agreement, that he has had ample opportunity
to review the terms of this Consulting Agreement, that he is
under no pressure to execute this Consulting Agreement, and that
he executes this Consulting Agreement of his own free will. The
Consultant also acknowledges that he has the option to revoke
this Consulting Agreement within seven (7) days following its
execution.
24. Survival. The terms of Sections 10, 11, 12 and 13
hereof shall survive termination for any reason of this
Agreement.
25. Expenses. In the event of any litigation between
the parties hereto regarding a breach of this Agreement, the
prevailing party shall be entitled to award of costs and
attorneys fees.
26. Counterparts. This Agreement may be executed by the
parties hereto in any number of counterparts, each of which when
so executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a copy hereof
containing multiple signature pages, each signed by less than
all, but together signed by all of the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first above written.
THE COMPANY:
NETWORK SYSTEMS INTERNATIONAL, INC.
(Corporate Seal) /s/ Christopher N. Baker
By: Christopher N. Baker
Title: President
ATTEST:
/s/ Michael T. Spohn
Michael T. Spohn, Chief Financial Officer
THE CONSULTANT:
/s/ E. W. Miller, Jr. (SEAL)
E. W. Miller, Jr.
AGREED TO AND ACCEPTED BY:
NETWORK INFORMATION SERVICES, INC.
/s/ Christopher N. Baker
By: Christopher N. Baker
Title: President
