-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FDkI5PAJzzBdxFuFJLot1oLYnF2TkN9F4FQl/SiAeucPRPu8zKGXena7KTmf1ORa L1yLsdgvGtdZZoV0IgAEuA== 0000842722-99-000049.txt : 19990817 0000842722-99-000049.hdr.sgml : 19990817 ACCESSION NUMBER: 0000842722-99-000049 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK SYSTEMS INTERNATIONAL INC CENTRAL INDEX KEY: 0000842722 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 870460247 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-22991 FILM NUMBER: 99693645 BUSINESS ADDRESS: STREET 1: 200 NORTH ELM STREET CITY: GREENSBORO STATE: NC ZIP: 27401 BUSINESS PHONE: 6024648900 MAIL ADDRESS: STREET 1: 200 N ELM ST CITY: GREENSBORO STATE: NC ZIP: 27401 FORMER COMPANY: FORMER CONFORMED NAME: AQUA AUSTRALIS INC DATE OF NAME CHANGE: 19940322 10QSB 1 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 Network Systems International, Inc. and Subsidiaries Consolidated Balance Sheet June 30, 1999 (Unaudited)
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.
Network Systems International, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited)
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.
Network Systems International, Inc. and Subsidiaries Consolidated Statements of Cash Flow (Unaudited)
Nine Months Ended June 30, 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.
Network Systems International, Inc. and Subsidiaries Consolidated Statement of Changes in Stockholders' Equity Nine Months ended June 30, 1999 (Unaudited)
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 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.
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 EX-27 2
5 9-MOS SEP-30-1999 JUN-30-1999 162,007 0 5,472,061 (750,000) 0 5,410,799 2,384,964 (823,519) 14,887,098 3,258,222 0 0 4 7,768 6,806,349 14,887,098 11,761,647 11,761,647 5,519,534 9,960,091 8,999 0 28,280 1,820,837 812,300 1,008,537 0 0 0 1,008,537 0.13 0.13
EX-2 3 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 EX-10 4 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 EX-10 5 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 -----END PRIVACY-ENHANCED MESSAGE-----