UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and Exchange
Act of 1934
Date of Report: July10, 2000
NETWORK SYSTEMS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Nevada 0-22991 87-0460247
(State or other jurisdiction (Commission File Number)
of incorporation or organization) (I.R.S. Employer
(Identification Number)
200 North Elm Street, Greensboro, North Carolina 27401
(Address of principal executive officer) (Zip Code)
(336) 271-8400
(Registrants telephone number, including area code)
Item 5. Other Events
On July 10, 2000, Network Systems International, Inc. (the
"Company") issued a press release announcing that the Company
entered into a Stock Purchase Agreement dated July 10, 2000 (the
"Stock Purchase Agreement") with Richard T. Clark, Joel C. Holt,
D. Mark White, George D. Gordon, Bryan John, John Signorello and
Steven Elias (the "Initial Investors"). A copy of the Stock
Purchase Agreement is included as Exhibit 2 to this Current
Report on Form 8-K and incorporated herein by reference. Subject
to the terms and conditions of the Stock Purchase Agreement, the
Company will issue 1,666,667 new, restricted shares of the
Company's common stock at $0.60 per share to the Initial
Investors in a private placement organized by Millennium Holdings
Group, Inc. ("Millennium"). The sale under the Stock Purchase
Agreement is subject to the satisfaction of the following
conditions, which are discussed in more detail below: (i)
certain of the Company's current management shareholders must
agree to sell 2,700,000 shares of the Company's common stock to
accredited investors arranged by Millennium, (ii) these current
management shareholders must grant the Company a put option
giving the Company the right to require such management
shareholders to purchase substantially all of the assets
associated with the Company's business as currently conducted for
$3,000,000, (iii) all of the Company's current directors must
resign and a designated representative of the Initial Investors
must be appointed to replace the former directors effective as of
the closing date of the stock sale, and (iv) the Company must
receive the consent of its current revolving credit lender,
Wachovia Bank, N.A. ("Wachovia"). The sale under the Stock
Purchase Agreement is expected to close on or about July 21,
2000. After completion of the sale under the Stock Purchase
Agreement, the Initial Investors will collectively own 1,666,667
shares, or approximately 17.6%, of the Company's outstanding
common stock.
During the past nine (9) months, the Company has experienced
a substantial reduction in revenues and has suffered large
operating losses. As a result of these two factors, the Company
is in default of its financial loan covenants contained in its
revolving credit agreement with Wachovia. As stated in the
Company's Quarterly Report on Form 10-QSB filed with the
Securities and Exchange Commission on May 15, 2000: "Until the
Company can renegotiate its current revolving credit agreement or
secure refinancing with another lender, the Company's principle
sources of liquidity are funds generated by operations. These
matters, along with the slowdown in software license sales, raise
doubt about the ability of the Company to continue as a going
concern." The Company has been unable to arrange for adequate
financing to replace the Wachovia credit facility. After
pursuing a number of other alternatives, the Board of Directors
of the Company reached the conclusion that the transactions
contemplated by the Stock Purchase Agreement is the best
alternative available to the Company at this time. On June 26,
2000, the Company's Board of Directors approved the Company's
issuance of 1,666,667 new shares at $0.60 per share to the
Initial Investors pursuant to the terms of the Stock Purchase
Agreement.
The issuance of the new shares by the Company will generate
$1,000,000, and the Company intends to use these proceeds to
reduce a portion of its outstanding indebtedness to Wachovia.
The funds necessary to complete the sale of the shares sold under
the Stock Purchase Agreement will be escrowed pending closing. A
copy of the Escrow Agreement is included as Exhibit 99A to this
Current Report on Form 8-K and incorporated herein by reference.
As required by the Company's revolving credit agreement, the
Company will seek Wachovia's consent to this transaction and
other related matters.
On July 10, 2000, the Company sent a letter to its
shareholders discussing the Company's omission to seek
shareholder approval of the issuance of the new shares that would
otherwise be required under the Nasdaq Marketplace Rules pursuant
to the Company's reliance upon an exception contained in the
Nasdaq Marketplace Rules. A copy of the Company's July 10, 2000
letter to its shareholders is included as Exhibit 20 to this
Current Report on Form 8-K and incorporated herein by reference.
As a condition to the Initial Investors' obligations
pursuant to the terms of the Stock Purchase Agreement, four of
the Company's current management shareholders, Robbie M. Efird,
E. W. "Sonny" Miller, Jr., David F. Christian and James W.
Moseley (collectively, the "Selling Shareholders") will enter
into Investment Agreements dated July 10, 2000 (the "Investment
Agreements") to collectively sell 2,700,000 shares to Herbert
Tabin, a managing partner with Millennium, (the "Investment
Agreement Investor") for $1,500,000 (approximately $0.56 per
share) in a second private placement arranged by Millennium.
Additional information regarding Mr. Tabin is set forth below.
Copies of the Investment Agreements are included as Exhibit 99B
to this Current Report on Form 8-K and incorporated herein by
reference. The sales under the Investment Agreements are
expected to close immediately after the closing of the sale
pursuant to the Stock Purchase Agreement. After completion of
the sale under the Investment Agreements, the Initial Investors
and the Investment Agreement Investor (the "Millennium
Investors") will collectively own 4,366,667 shares, or
approximately 46.1%, of the Company's outstanding common stock.
Mr. Tabin will own 2,700,000 or approximately 28.5% of the
Company's common stock.
As a further condition to the Initial Investors' obligations
under the Stock Purchase Agreement, the Selling Shareholders will
grant the Company a put option, expiring forty-five (45) days
after the closing date, giving the Company the right to require
the Selling Shareholders to purchase substantially all of the
Company's operating assets and liabilities (the "Company Assets")
and substantially all of the operating assets and liabilities of
Vercom Software, Inc., a wholly-owned subsidiary corporation of
the Company ("Vercom") (the "Vercom Assets"; the Company Assets
and the Vercom Assets shall collectively be referred to as the
"Assets") for $3,000,000. The Assets include all of the
operating assets related to the Company's business as currently
conducted. During this 45-day period, the Company will
determine the value of the Assets and evaluate whether it is in
the best interests of the Company and its shareholders for the
Company to sell the Assets to the Selling Shareholders at the put
price, to sell the Assets to a third party, to retain the Assets
or to take other appropriate action.
In order to facilitate the Company's potential exercise of
the put option, prior to the closing of the sale under the Stock
Purchase Agreement, the Company will contribute the Company
Assets to a recently formed wholly-owned subsidiary corporation,
Network Systems International of North Carolina, Inc. ("NSI-NC").
As part of this process, the Company intends to assign its rights
and obligations under substantially all of its current agreements
(including its software license agreements, service agreements
and employment agreements) to NSI-NC. The Company, however, will
not assign its right and obligations under the Stock Option
Agreement between the Company and Christopher N. Baker, the
Company's current president, dated April 15,1999 (the "Baker
Option"). Under the terms of the Baker Option, consummation of
the anticipated change of control discussed above would trigger a
vesting of Mr. Baker's right to purchase 500,000 shares of the
Company's common stock at $1.00 per share. Mr. Baker and
Millennium have agreed that Millennium or its assigns will lend
Mr. Baker $500,000, which Mr. Baker would use to exercise the
option to purchase the 500,000 shares. In consideration for the
$500,000 loan, Mr. Baker will transfer 275,000 shares of the
Company's common stock to Millennium or its assigns and grant
Millennium or its assigns an option expiring one hundred twenty
(120) days from the date Mr. Baker resigns from the Company's
Board of Directors to purchase the remaining 225,000 shares
acquired pursuant to the Baker Option for a purchase price of
$3.00 per share.
The Stock Purchase Agreement also provides that, as a
condition to the Initial Investors' obligations, all of the
Company's current directors must resign effective as of the
closing date. The current officers of the Company also plan to
resign as of the closing date. The Stock Purchase Agreement
further provides that Herbert Tabin will be appointed as the sole
member of the Company's Board of Directors to replace the former
directors as of the closing date.
Mr. Tabin is currently a managing partner of Millennium and
a co-founder of International Internet, Inc., a Delaware
corporation ("IINN"), and has served as its Vice President since
its inception. Prior to starting IINN, Mr. Tabin was a Vice
President of Marketing with LBI Group, Inc., a merchant banking
and venture capital group, from April, 1995 to December, 1996.
Mr. Tabin received a Bachelor of Science in Business Economics
from the State University of New York in 1989, and has been
involved in financial consulting and investment counseling since
1989.
If the Company elects to exercise the put option and require
the Selling Shareholders to purchase the Assets for $3,000,000,
the Selling Shareholders will make an initial cash payment of
$1,500,000 to the Company. The Selling Shareholders will deliver
a non-recourse promissory note in the principal amount of
$1,500,000, payable in one hundred twenty (120) days, for the
remaining purchase price. The Selling Shareholders will pledge
all of their remaining 2,925,856 shares of the Company's common
stock (the "Pledged Shares") as security for the payment of the
promissory note. The Company's right to exercise the put option
will be conditioned upon the Company using $2,000,000 of the
sales price received for the Assets to reduce the obligation
under the revolving credit arrangement with Wachovia. The
Company plans to use $1,250,000 from the Selling Shareholders'
initial cash payment and $750,000 from the sale, if any, of the
Pledged Shares to reduce the outstanding indebtedness. The sale
of the Pledged Shares is discussed below. As a further condition
to the Company's right to exercise the put option, the Company
will also agree to change its name on its corporate charter, to
discontinue the use of the name "Network Systems International"
and to transfer all rights to the name "Network Systems
International" to the Selling Shareholders.
The Company understands that Millennium will use its best
efforts to place the Pledged Shares with accredited investors on
behalf of the Selling Shareholders for at least $1,500,000, or
approximately $0.513 per share. Millennium will remit the
proceeds generated by the sale of the Pledged Shares, up to
$1,500,000, to the Company to satisfy the remaining balance of
the purchase price for the Assets. If Millennium arranges the
sale of all of the Pledged Shares to other accredited investors,
these other accredited investors and the Millennium Investors
will collectively own 7,292,523 shares, or approximately 77.0%,
of the Company's outstanding common stock .
If all of the Pledged Shares are sold for an amount greater
than $1,500,000, Millennium will retain the excess. If
Millennium cannot sell all of the Pledged Shares for at least
$1,500,000, Millennium will use its best efforts to place as many
of the Pledged Shares as possible with accredited investors on
behalf of the Selling Shareholders for approximately $0.513 per
share. Pursuant to the terms of the put option, the Company will
use the first $750,000 from the sale of the Pledged Shares to
reduce the obligation under the revolving credit arrangement with
Wachovia. If Millennium is unable to sell all of the Pledged
Shares, the Company will extinguish the promissory note at
maturity and retain any remaining shares in satisfaction of the
outstanding purchase price for the sale of the Subsidiaries to
the Selling Shareholders.
Millennium has informed the Company's current
management that the Millennium Investors plan to expand the
business through acquisitions after the transactions discussed
above are completed.
A copy of the press release discussing the above and certain
related matters is included as Exhibit 99C to this Current Report
on Form 8-K and incorporated herein by reference.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
(a) Exhibits
The following exhibits are filed herewith in accordance with the
provisions of Item 601 of Regulation S-B:
Exhibit No. Description of Exhibit
2 Stock Purchase Agreement dated July 10, 2000 between the
Initial Investors and the registrant
20 Letter to the registrant's shareholders dated July 10, 2000
regarding the exception to the shareholder approval requirement
in the Nasdaq Marketplace Rules
99A Escrow Agreement dated July 10, 2000 between Millennium
Holdings Group, Inc., G. David Gordon & Associates,
P.C. as escrow agent and the registrant
99B Investment Agreements dated July 10, 2000 between
Robbie M. Efird, E. W. "Sonny" Miller, Jr., David F.
Christian, James W. Moseley, and Herbert Tabin
99C Press Release issued by the registrant on July 10, 2000
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
NETWORK SYSTEMS INTERNATIONAL, INC.
(Registrant)
By: /s/ Michael T. Spohn
Michael T. Spohn,
Chief Financial Officer
Date: July 10, 2000
