As filed with the Securities and Exchange Commission on October 20, 1997
Registration No. 333-33449
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
TEKGRAF, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------
Delaware 5045 58-2326488
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation) Classification Code Number) Identification Number)
2979 Pacific Drive, Suite B
Norcross, Georgia 30071
phone # (770) 441-1107
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
----------
Phillip C. Aginsky, Chairman
Tekgraf, Inc.
2979 Pacific Drive, Suite B
Norcross, Georgia 30071
phone # (770) 441-1107
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
----------
Copies to:
FRAN STOLLER, ESQ. BARRY A. BROOKS, ESQ.
Bachner, Tally, Polevoy & Misher LLP Paul, Hastings, Janofsky & Walker LLP
380 Madison Avenue, 18th Floor 399 Park Avenue
New York, New York 10017 New York, New York 10022
(212) 687-7000 (212) 318-6000
----------
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. |_|
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
(Continued on following page)
<PAGE>
(Continued from preceding page)
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================
Proposed
Maximum Maximum
Offering Aggregate Amount of
Title of Each Class of Amount to Price Per Offering Registration
Securities to be Registered be Registered Unit (1) Price (1) Fee
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, each consisting of one share 2,415,000(2) $6.00 $14,490,000 $4,391.00
of Class A Common Stock, $.001
par value, and one Warrant
- -------------------------------------------------------------------------------------------------------------------
Class A Common Stock, $.001 2,415,000 8.40 20,286,000 6,147.00
par value(3)
- -------------------------------------------------------------------------------------------------------------------
Unit Purchase Option (4) 210,000 .001 210 --
- -------------------------------------------------------------------------------------------------------------------
Units, each consisting one share 210,000 7.80 1,638,000 496.00
of Class A Common Stock, $.001
par value, and one Warrant(5)
- -------------------------------------------------------------------------------------------------------------------
Class A Common Stock, 210,000 8.40 1,764,000 535.00
$.001 par value(5)
- -------------------------------------------------------------------------------------------------------------------
Total $38,178,210 $11,569.00(6)
===================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 315,000 Units subject to the Underwriters' over-allotment option.
(3) Issuable upon exercise of the Warrants.
(4) To be issued to the Representative of the Underwriters and its designees.
(5) Issuable upon exercise of the Unit Purchase Option and/or the Warrants
issuable thereunder.
(6) $11,439 was previously paid. No additional payment is required pursuant to
the provisions of Rule 457 under the Securities Act of 1933.
Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are also being registered such additional shares of Common Stock as may become
issuable pursuant to anti-dilution provisions upon exercise of the Warrants and
the Unit Purchase Option.
----------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION - DATED OCTOBER 20, 1997
PROSPECTUS
TEKGRAF, INC.
2,100,000 Units
Consisting of 2,100,000 Shares of Class A Common Stock
and 2,100,000 Redeemable Warrants
Each unit ("Unit") offered by Tekgraf, Inc. (the "Company") consists of one
share of Class A common stock, $.001 par value ("Class A Common Stock") and one
redeemable warrant ("Warrant"). The components of the Units will be separately
transferable immediately upon issuance. Each Warrant entitles the holder to
purchase one share of Class A Common Stock at an exercise price of $8.40,
subject to adjustment, at any time through the fifth anniversary of the date of
this Prospectus. Commencing one year from the date hereof, the Warrants are
subject to redemption by the Company at a redemption price of $.05 per Warrant
on 30 days' written notice, provided the closing bid price of the Class A Common
Stock averages in excess of $11.75 per share for any 30 consecutive trading days
ending within 15 days of the notice of redemption. See "Description of
Securities." Certain officers, directors and principal stockholders of the
Company have agreed to purchase an aggregate of 100,000 Units in this offering
(the "Offering").
As of the date hereof, 3,333,333 shares of Class B common stock, $.001 par
value ("Class B Common Stock") of the Company are outstanding. The Class A
Common Stock and the Class B Common Stock are substantially identical on a
share-for-share basis, except that the holders of Class B Common Stock have five
votes per share and the holders of Class A Common Stock have one vote per share
on each matter considered by stockholders. See "Description of Securities."
Prior to the Offering, there has been no public market for the Units, Class
A Common Stock or Warrants and there can be no assurance that such a market will
develop. The Class A Common Stock and Warrants have been approved for quotation
on The Nasdaq National Market ("Nasdaq") under the symbols TKGFA and TKGFW,
respectively. The Units will trade on the Nasdaq SmallCap Market under the
symbol TKGFU. The initial public offering of the Units and the exercise price
and other terms of the Warrants were arbitrarily determined by negotiation
between the Company and D. H. Blair Investment Banking Corp. (the
"Representative"), as Representative of the several underwriters (the
"Underwriters"). For information concerning a Securities and Exchange Commission
investigation relating to the Representative, see "Risk Factors" and
"Underwriting."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 7 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
Underwriting Discounts
and
Price to Public Commissions (1) Proceeds to Company (2)
- --------------------------------------------------------------------------------
Per Unit..... $6.00 $.45 $5.55
- --------------------------------------------------------------------------------
Total (3).... $12,600,000 $945,000 $11,655,000
================================================================================
(1) Does not include additional compensation to be received by the
Representative in the form of (i) a non-accountable expense allowance of
$378,000, or $.18 per Unit ($434,700 if the over-allotment option is
exercised in full); and (ii) an option, exercisable over a period of three
years commencing two years from the date of this Prospectus, to purchase
up to 210,000 Units at $7.80 per Unit (the "Unit Purchase Option"). The
Company has also agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated expenses of $1,350,000 payable by the Company,
including the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters a 30-day option (which may be
exercised by the Representative, individually) to purchase up to 315,000
additional Units on the same terms and conditions as set forth above,
solely to cover over-allotments, if any. If the over-allotment option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $14,490,000, $1,086,750 and
$13,403,250, respectively. See "Underwriting."
The Units are being offered on a "firm commitment" basis by the
Underwriters when, as and if delivered to and accepted by the Underwriters,
subject to their right to reject orders in whole or in part and subject to
certain other conditions. It is expected that the delivery of the certificates
representing the Units will be made against payment at the offices of D.H. Blair
Investment Banking Corp., 44 Wall Street, New York, New York on or about
____________, 1997.
D.H. BLAIR INVESTMENT BANKING CORP.
The date of this Prospectus is ______________, 1997
<PAGE>
[PHOTOS OF SAMPLE PRODUCTS]
The Company intends to furnish its stockholders and holders of Warrants
with annual reports containing consolidated financial statements audited by its
independent accountants.
----------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, THE CLASS A
COMMON STOCK AND/OR THE WARRANTS. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF
SECURITIES FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT
POSITION IN THE UNITS, THE CLASS A COMMON STOCK AND/OR THE WARRANTS OR FOR THE
PURPOSE OF MAINTAINING THE PRICE OF THE UNITS, THE CLASS A COMMON STOCK AND/OR
THE WARRANTS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
Except as otherwise noted, all information in this Prospectus (i) assumes no
exercise of (a) the Underwriters' over-allotment option; (b) the Warrants; (c)
the Unit Purchase Option; or (d) options granted or available for grant under
the Company's stock option plan; and (ii) gives effect to (a) a stock split
effected in May 1997; (b) the reincorporation of the Company by merger under the
laws of the State of Delaware and a recapitalization effected in June 1997; (c)
a .83333325-for-one reverse stock split effected in October 1997; and (d) the
Acquisitions. See "The Acquisitions and Recapitalization," "Capitalization," and
"Management - Stock Option Plan."
The Company
The Company is engaged in the manufacture, configuration, distribution and
servicing of computers and computer peripherals, hardware and software. The
operations of the Company are conducted through its Graphics Division and its
Technology Division.
The Graphics Division currently consists of five regional distributors
which specialize in marketing, sales, support and wholesale distribution of
high-end computer graphics technologies (i.e. peripherals, software, subsystems
and consumable products) to value-added resellers ("VARs"), dealers and systems
integrators in the digital prepress, presentation graphics, professional color
desktop publishing, large format display graphics, digital imaging, electronic
drawing management ("EDMS"), computer-aided design ("CAD") and other emerging
computer graphics technologies markets. Among the products the Graphics Division
distributes and sells are color scanners, color digital film recorders, digital
cameras, color laser printers, color-calibrated monitors, audio-visual
presentation systems, raster image processors ("RIPs"), ink jet printers,
plotters, pre-press software, image setters, color proofers and mass storage
devices. With the exception of Southern California, Arizona, New Mexico and New
England, the Graphics Division gives computer graphics manufacturers a national
distribution presence with the benefits of local, technical sales and support
through facilities located in Chicago, Baltimore, Oakland, Atlanta and Houston.
The Graphics Division was established as a result of the Company's recent
acquisition of five operating companies. See "The Acquisitions and
Recapitalization" below. The establishment of this division reflects the
Company's overall business strategy to become a nationally-recognized,
vertically-integrated provider of computer products and services.
The activities of the Technology Division consist primarily of the
configuration, design and assembly of custom designed network and internet
servers and workstations in the form of personal computers ("PCs") under the
Crescent Computer brand and the resale of Digital Equipment Corporation ("DEC")
equipment to the nationwide DEC-installed customer base. The Crescent Computer
is a PC which can be assembled in a number of different configurations using
standard component parts. Customization enables the Company to accommodate
customer computer needs with respect to storage capacity, speed, price,
applications, size, configuration and a range of other considerations that can
be accommodated in whole or in part by the selection of appropriate components.
The Company also provides services to its customers, including system
architecture design, customization, hardware consulting and continuing support
and assistance in the maintenance and operations of Company purchased products.
Crescent Computers are currently being used to operate non-sterile heart
catheterization diagnostic equipment, as voice mail/auto attendant controllers,
in informational kiosks and in other process-control applications.
The Company will seek to expand its operations through internal growth of
both of its operating divisions. Additionally, the Company will seek to increase
the customer base of the Technology Division by increased marketing of its
products utilizing the marketing and distribution structure established by the
Graphics Division. Further, the Company intends to expand the Graphics
Division's national marketing network.
The Company also intends to continue to expand its operations through the
acquisition of complementary businesses. The Company will focus its acquisition
activities on profitable technology companies that can be consolidated into the
Company's existing divisional structure, increase divisional revenues, expand
the geographic
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
and technical scope of the Company's operations, and offer a greater range of
products and services to existing and potential customers. Although the Company
continually explores acquisition possibilities and has targeted a number of
computer graphics distributors, including New England Computer Graphics ("NECG")
in Westford, Massachusetts, it is not currently involved in any active
discussions or negotiations with respect to any potential acquisitions. There
can be no assurance that the Company's acquisition program will be successful,
that the NECG or any other acquisition will be successfully completed, that any
entities acquired will be successfully integrated into the Company or will
result in significant additional revenues or profits to the Company.
The Company was incorporated in the State of Georgia in February 1993 under
the name Crescent Computers, Inc. ("Crescent") and was the successor to Crescent
Computer Services which was founded in 1988. Crescent acquired a controlling
interest in Prisym Technologies, Inc., a Georgia corporation ("Prisym"), upon
the inception of such company in December 1994. In June 1997, the Company
completed the acquisition of all of the outstanding capital stock of each of G&R
Marketing, Inc., an Illinois corporation ("G&R"), Microsouth, Inc., a Georgia
corporation ("Microsouth"), tekgraf, inc., a Texas corporation ("tekgraf
Texas"), Computer Graphics Distributing Company, a Maryland corporation ("CGD"),
Intelligent Products Marketing, Inc. ("IPM") and IG Distribution, Inc. ("IG"),
each a California corporation and together doing business as Intelligent
Graphics Distribution ("IGD"). See "The Acquisitions and Recapitalization"
below. Subsequent to the Acquisitions (as defined below), the Company
reincorporated by merger under the laws of the State of Delaware into a
wholly-owned Delaware subsidiary (the "Merger") thereby changing its name to
Tekgraf, Inc. The Company's executive offices are located at 2979 Pacific Drive,
Norcross, Georgia, 30071 and its telephone number is (770) 441-1107. Unless
otherwise indicated, all references herein to the Company include Crescent,
Prisym, G&R, Microsouth, tekgraf Texas, CGD and IGD.
The Acquisitions and Recapitalization
In June 1997, Crescent completed the acquisition (the "Acquisitions") of
the outstanding capital stock of G&R, Microsouth, tekgraf Texas, CGD, IPM and IG
(collectively, the "Subsidiaries" and each a "Subsidiary") in exchange for the
issuance of an aggregate of 2,192,000 shares of its Class B Common Stock (giving
effect to the Merger and a 400-for-one stock split and recapitalization effected
in June 1993 and a .83333325-for-one reverse stock split effected in October
1997 (collectively, the "Recapitalization")). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions - The Acquisitions." The Acquisitions are being accounted for under
the purchase method of accounting. See "Unaudited Pro Forma Combined Financial
Statements."
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
The Offering
Securities Offered........................... 2,100,000 Units, each Unit
consisting of one share of Class
A Common Stock and one Warrant.
Each Warrant entitles the holder
to purchase one share of Class A
Common Stock at an exercise
price of $8.40, subject to
adjustment, at any time through
the fifth anniversary of the
date of this Prospectus. The
Warrants are subject to
redemption in certain
circumstances. Holders of Class
A Common Stock are entitled to
one vote per share on all
matters while holders of Class B
Common Stock are entitled to
five votes per share. See
"Description of Securities."
Common Stock Outstanding Before Offering (1):
Class A Common Stock..................... 0 shares
Class B Common Stock..................... 3,333,333 shares (2)
---------
Total ................................. 3,333,333 shares (2)
=========
Common Stock Outstanding After Offering (1):
Class A Common Stock..................... 2,100,000 shares (3)
Class B Common Stock..................... 3,333,333 shares (2)
---------
Total ................................. 5,433,333 shares (2)(3)
=========
Use of Proceeds.............................. For repayment of bank and other
debt; purchase price adjustments
in connection with the
Acquisitions; future
acquisitions; consolidation
expenses; sales and marketing;
and for working capital. See
"Use of Proceeds."
Proposed Nasdaq Symbols...................... Units -- TKGFU
Class A Common Stock-- TKGFA
Warrants--TKGFW
Risk Factors................................. The securities being sold in the
Offering involve a high degree
of risk and immediate
substantial dilution. See "Risk
Factors" and "Dilution."
- ----------
(1) For a description of the Class A Common Stock and Class B Common Stock
(collectively, the "Common Stock"), see "Description of Securities - Common
Stock."
(2) Includes an aggregate of 166,667 shares of Class B Common Stock (the
"Escrow Shares") which have been deposited into escrow by the holders
thereof. The Escrow Shares are subject to cancellation and will be
contributed to the capital of the Company if the Company does not attain
certain earnings levels or the market price of the Company's Class A Common
Stock does not achieve certain levels. If such earnings or market price
levels are met, the Company will record a substantial non-cash charge to
earnings, for financial reporting purposes, as compensation expense
relating to the value of the Escrow Shares released to Company officers,
directors and employees. See "Risk Factors - Charge to Income in the Event
of Release of Escrow Shares and Escrow Options," "Capitalization" and
"Principal Stockholders." Also includes an aggregate of 1,333,333 shares of
Class B Common Stock (the "Indemnification Shares") which were deposited in
escrow by the holders thereof to cover potential claims for indemnification
by the Company under the stock purchase agreements entered into in
connection with the Acquisitions. See "Certain Transactions - The
Acquisitions."
(3) Excludes (i) up to 630,000 shares of Class A Common Stock issuable upon
exercise of the Underwriters' over-allotment option and the Warrants
included in such option; (ii) 2,100,000 shares of Class A Common Stock
issuable upon exercise of the Warrants included in the Units offered
hereby; (iii) 420,000 shares of Class A Common Stock issuable upon exercise
of the Unit Purchase Option and the Warrants included in such option; and
(iv) 300,000 shares of Class A Common Stock reserved for issuance under the
Company's 1997 Stock Option Plan. See "Management - Stock Option Plan,"
"Certain Transactions" and "Description of Securities."
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Summary Selected Pro Forma Combined Financial Data
Effective June 2, 1997, Crescent acquired all of the outstanding common
stock of the Subsidiaries. The following summary unaudited pro forma combined
financial data presents certain actual, pro forma and as adjusted data for the
combined Company. As set forth in the footnotes to the following table, the pro
forma data gives effect to adjustments which are reflective of the combined
entity going forward. All amounts are presented in thousands except share and
per share data.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, --------------------------
1996 1996 1997
------------ -------- --------
<S> <C> <C> <C>
Combined Pro Forma Statement of Income Data(1):
Net sales(2)................................................. $ 68,902 $33,928 $ 34,684
Cost of goods sold(3)........................................ 57,643 28,217 28,582
Gross profit................................................. 11,259 5,710 6,103
Selling, general and administrative(4).................... 7,500 4,141 4,166
Depreciation.............................................. 162 98 95
Amortization(5)..................................... 401 200 200
Operating income............................................. 3,197 1,271 1,641
Other income(6)........................................... 116 98 57
Interest expense(7)....................................... 431 193 171
Income before taxes, minority interest and
extraordinary gain.................................... 2,883 1,176 1,527
Provision for income taxes(8)................................ 1,281 537 674
Income before minority interest and extraordinary gain....... 1,603 639 853
Minority interest............................... -- 25 15
Income before extraordinary gain........................ 1,603 614 839
Pro forma income per share before extraordinary
gain - primary and fully diluted.......................... $ .51 $ .14 $ .26
============ ========= ========
Estimated pro forma weighted average shares
outstanding - primary and fully diluted (9)............... 3,166,666 3,166,666 3,166,666
============ ========= =========
</TABLE>
At June 30, 1997
--------------------------
Actual As Adjusted(10)
Balance Sheet Data:
Working capital ....................... $2,512 $14,495
Total assets .......................... 23,587 29,638
Total debt ............................ 5,984 --
Stockholders' equity .................. 9,163 20,877
- ----------
(1) See "Unaudited Pro Forma Combined Financial Statements" for the year ended
December 31, 1996 and the six months ended June 30, 1997.
(2) Adjusted to reflect the Acquisitions and the elimination of revenue related
to affiliated entities of the Subsidiaries not acquired by the Company.
(3) Adjusted to reflect the Acquisitions and the elimination of expenses of
affiliated entities of the Subsidiaries not acquired by the Company.
(4) Adjusted to reflect the Acquisitions and the reductions in compensation
levels that certain former stockholders of the Subsidiaries and officers of
the Company have contractually agreed to receive from the Company
subsequent to the Acquisitions.
(5) Adjusted to reflect the amortization of the estimated goodwill recorded in
connection with the Acquisitions.
(6) Adjusted to reflect the elimination of expenses between IPM and IG.
(7) Adjusted for the elimination of pro rata interest expense on capital to be
contributed by the pre-Acquisition stockholders of the Company.
(8) Gives effect to the estimated provision to reflect federal and state income
taxes as if all of the Subsidiaries had been C Corporations and the
incremental provision for the pro forma adjustments.
(9) Gives effect to the Acquisitions and subsequent Recapitalization. Weighted
average shares outstanding excludes the Escrow Shares.
(10) Adjusted to reflect (i) the sale of 2,100,000 Units offered hereby; (ii)
the repayment, upon completion of the Offering, of bank debt ($2,598,650 at
June 30, 1997); (iii) the repayment, upon completion of the Offering, of
outstanding indebtedness to current and former stockholders (an aggregate
of $2,299,000 at June 30, 1997); (iv) the contribution to capital, upon
completion of the Offering, of an aggregate of $990,000 by the
pre-Acquisition stockholders; and (v) the payment and collection, after the
Offering, of estimated purchase price adjustments relating to the
Acquisitions. See "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Certain
Transactions."
- --------------------------------------------------------------------------------
6
<PAGE>
RISK FACTORS
The securities offered hereby are speculative in nature and an investment
in the Units offered hereby involves a high degree of risk. Statements in this
Prospectus that are not historical facts are forward-looking statements that are
subject to risks and uncertainties. Statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future are based
on information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statements. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in this Prospectus. In evaluating the Company's
business and an investment in the Units offered hereby, prospective investors
should carefully consider the following risk factors in addition to the other
information included in this Prospectus.
No Prior Combined Operating History and Risks Associated with Combined
Operations. The Company has no operating history as a combined entity. Although
the members of the Graphics Division in the past several years have cooperated
in a number of business ventures in connection with their membership in certain
trade organizations, each of G&R, Microsouth, tekgraf Texas, CGD and IGD have
operated as independent businesses with independent management for more than the
past eight years. The Company's success will depend, in part, on its ability to
manage and combine the operations of these companies in a single organizational
structure. There can be no assurance that the businesses of such companies can
be successfully integrated or that the combination into one larger entity will
not place a significant strain on the management and key technical resources of
the Company. The Company has only recently commenced planning for the
centralization of certain administrative functions from the existing six
locations to its executive offices in Georgia, and there can be no assurance
that unanticipated delays in consolidation will not occur. There can be no
assurance that the Company will be able to implement its business plans as a
consolidated entity or continue to achieve profitable operations.
Risk of Expansion. The sales of the Company's Graphics Division are
currently derived from sales in most geographic regions of the United States,
with the exception of Southern California, Arizona, New Mexico and New England.
The Company is seeking to expand its market for computer graphics technology
sales to include the remainder of the United States and Canada, and to increase
both the number of product lines it resells from manufacturers for whom it
currently performs outsourcing and the number of manufacturers whose products it
offers for resale. While the Company's sales force is established in its
existing market areas, there can be no assurance that the Company's efforts to
establish a national sales force will be successful. Further, there can be no
assurance that the Company will be successful in the transition from separate
companies operating in distinct regional areas into one entity servicing a large
portion of the United States. If the Company were unable to make the necessary
adjustments in its methods of operations and in its orientation and focus, it
would have an adverse effect on the ability of the Company's Graphics Division
to achieve successful national expansion. See "Business - Strategy."
Competition; Technological Change and Obsolescence. The business of
manufacturing and selling computers and computer peripheral equipment is
intensely competitive and rapidly changing. The Company believes that the
principal competitive factors in this industry include relative price and
performance, product availability, technical expertise, financial stability,
service, support and reputation. The Crescent Computers manufactured by the
Company's Technology Division are constructed with standardized parts which are
available to others in the market. The Technology Division's competitors include
established computer product manufacturers, some of which supply products to the
Company, computer resellers, distributors and service providers. Some of the
Technology Division's current and potential competitors have substantially
greater financial, managerial, development, sales, marketing, technical and
other competitive resources than those of the Company. As a result, the
Technology Division's competitors may be able to devote greater resources than
the Company to the sales and service of their computer products. As the computer
market in which the Technology Division competes has matured, product price
competition has intensified and is likely to continue to intensify, which may
make it too costly for the Company to continue its "made-to-order" method of
doing business. One of the results of this competition may be to lower sales
prices and decrease profit margins.
Technological competition from other and more established computer hardware
manufacturers and software developers is significant and expected to increase.
The Company's Technology Division expects that hardware manufacturers and
software developers will continue to enter the market to provide and package
integrated
7
<PAGE>
information distribution solutions to the same customer base served by the
Company's Technology Division. All such market participants will compete
intensely to maintain or improve their market shares and revenues. Most of the
companies with which the Company's Technology Division competes have
substantially greater capital resources, research and development staffs,
marketing and distribution programs, and facilities, and many of them have
substantially greater experience in the production and marketing of products
than that of the Company.
In the development market for network servers and workstations, the Company
experiences competition from hundreds of small companies and a number of
significant competitors, including such major industry participants as IBM,
Compaq Computers, Inc. and Dell Computer Corp. Accordingly, there is no
assurance that the Crescent Computer will continue to achieve sufficient market
acceptance to assure the Company's future success and long range profitability
in the face of competition with such significantly larger and better capitalized
companies.
The Company's Graphics Division competes primarily with computer equipment
manufacturers that either utilize an in-house sales force to market their
products to resellers and directly to end-users or utilize the services of
large, national fulfillment distributors. See "Business - Competition."
Risks Relating to Acquisitions; Charge to Earnings for Amortization of
Goodwill from Acquisitions; Possible Issuance of Additional Common Stock in
Acquisitions. A key element of the Company's strategy is to continue to expand
through acquisitions of companies engaged in the distribution and/or marketing
of computers and/or computer hardware, software and peripherals. The Company
believes that its future growth depends, in part, upon the successful
implementation of this program. See "Business - Strategy." The failure of the
acquisition program could have a material adverse effect on the Company. The
Company has allocated a substantial portion of the proceeds of the Offering to
pursue potential acquisition opportunities, although there can be no assurance
that the Company will consummate such acquisitions or, if any such acquisitions
do occur, that they will be successful in enhancing the Company's business.
Acquisitions may adversely affect the Company's operations in the short-term,
depending on many factors, including capital requirements and the accounting
treatment of such acquisitions. For example, the Company estimates that
approximately $6.01 million of goodwill will be recognized relating to the
Acquisitions, which will be charged to earnings as it is amortized over the next
15 years. In addition to the amortization of acquired intangible assets (such as
goodwill), the Company's acquisition strategy could pose a number of special
risks, including the diversion of management's attention, the assimilation of
the operations and personnel of the acquired companies, the incorporation of
acquired products into existing product lines, adverse short-term effects on
reported operating results, the loss of key employees and the difficulty of
presenting a unified corporate image. There can be no assurance that the Company
will successfully identify, complete or integrate acquisitions or that any
acquisitions, if completed successfully, will perform as expected, will not
result in significant unexpected liabilities or will ever contribute significant
revenues or profits to the Company. The failure to successfully integrate the
business of any entity acquired by the Company would have a material adverse
affect on the Company.
Further, the consideration for acquisitions may involve cash, notes and a
significant number of shares of Common Stock or warrants to purchase shares of
Common Stock, depending on the size of the acquisition. The Company may issue a
substantial number of additional shares of Common Stock if it consummates
several acquisitions, which may result in dilution to investors in the Offering
and may not be accretive in earnings per share.
Broad Discretion as to Use of Proceeds; Absence of Substantive Disclosure
Relating to, and Inability of Stockholders to Evaluate, Future Acquisitions. The
Company has broad discretion with respect to the specific application of a
significant portion of the net proceeds of the Offering, as approximately 16.1%
of the net proceeds will be applied to working capital and approximately 35.9%
of the net proceeds are intended to be applied towards consummating
acquisitions. Further, if all or a portion of the Underwriters' over-allotment
option is exercised, it is anticipated that the net proceeds therefrom will be
utilized for acquisitions and working capital purposes. Although the Company
continually explores acquisition possibilities and has targeted a number of
companies, including NECG, an entity owned by certain officers and stockholders
of the Company, it is not currently negotiating any acquisitions and has no
agreements, arrangements or understandings regarding potential acquisitions. See
"- Potential Conflicts of Interest; Transactions with Affiliates." There can be
no assurance that the acquisition of NECG will be successfully completed, that
the Company will make any additional acquisitions or, if made, that any such
acquisitions will be successful. A Company decision to utilize a substantial
portion of the net proceeds of the
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Offering for acquisitions reduces the resources available to complete its other
expansion and growth objectives. In such event, the Company may be required to
obtain additional financing to achieve such objectives. There can be no
assurance that such financing will be available, or, if available, will be on
terms acceptable to the Company. Although management of the Company will
endeavor to evaluate the risks inherent in any particular acquisition, there can
be no assurance that the Company will properly ascertain all such risks.
Management of the Company will have virtually unrestricted flexibility in
identifying and selecting prospective acquisition candidates. The Company does
not intend to seek stockholder approval for any acquisitions unless required by
applicable law or regulations and stockholders will most likely not have an
opportunity to review financial information on an acquisition candidate prior to
consummation of an acquisition. See "Use of Proceeds" and "Business - Strategy."
Dependence of Graphics Division on Distribution Arrangements with
Manufacturers; Risk of Termination of Agreements. The Company's relationships
with computer product manufacturers are based substantially on mutual
satisfaction with the relationships in addition to the terms of the contractual
arrangements between the parties. The Company's distribution agreements
generally provide for termination by either party without cause on either 30 or
60 days' notice and for the Company to act as a distributor on a non-exclusive
basis for specified geographic territories. The Company's Graphics Division
relies on a limited number of suppliers of computer products for a significant
portion of its revenues. There can be no assurance that some or any of the
Company's suppliers will not elect to change distributors or their method of
distribution, e.g., utilize an in-house sales force. The loss of any significant
supplier or the loss of any significant product line could adversely affect the
Company's ability to service customers and, as a result, could have a material
adverse effect on the Company's operating results. There can be no assurance
that the Company would be able to fully replace the loss of any significant
supplier. Further, although part of the Company's growth strategy after the
Offering will be to expand the number of manufacturers whose products it
distributes and the number of product lines it distributes generally, there can
be no assurance that the Company will achieve such expansion. See "Business -
The Company's Divisions and Products."
Dependence of Technology Division on Suppliers; Reliance on DEC. The
Company assembles the Crescent Computer principally from standardized components
from outside sources and relies on such outside sources to manufacture the
components of the Crescent Computer, none of which are contractually obligated
to meet the long-term requirements of the Company. In the event that any of the
Company's current suppliers suffer quality control problems or financial
difficulties, the Company would be required to find alternative sources of
supply. While the Company is aware of a number of sources of supply for most
components, there can be no assurance that current or alternative sources will
be able to supply all of the Company's demands on a timely basis or that the
Company would be able to locate alternative sources of supply to deliver high
quality components on a timely basis or at all. Further, substitution of
alternative suppliers could result in delays in the delivery of any such
components, temporary business dislocations and a decline in sales. In addition,
reliance on outside sources reduces the Company's control over production costs.
The Company, through its Prisym subsidiary, is an authorized DEC reseller.
During the year ended December 31, 1996 and the six months ended June 30, 1997,
revenues derived from the sale of DEC and DEC-related products accounted for
37.5% and 41.7%, respectively, of the Technology Division's revenues. Prisym has
no written supply agreement with DEC. In addition, DEC has historically
experienced production problems which have led to supply shortages. The
termination of the Company's relationship with DEC or the inability to obtain
product supplies when needed could have a material adverse effect on the
Company's financial condition and results of operations. See "Business - The
Company's Divisions and Products - Technology Division."
Customer Concentration in Technology Division. The Company's Technology
Division typically sells significant amounts of equipment to a small number of
customers, the composition of which changes from year to year as customer
equipment needs vary. Therefore, at any one time, a large portion of the
Technology Division's sales may be derived from a limited number of customers.
During the year ended December 31, 1996 and the six months ended June 30, 1997,
three customers accounted for an aggregate of approximately 14% and 10.1% of the
Technology Division's sales, respectively. The loss of such customers could have
a material adverse effect on the Company's operations if the Company does not
replace such customers on a timely basis. See "Business - The Company's
Divisions and Products."
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Possible Need for Additional Financing. Although the Company believes that
the net proceeds from the Offering, together with available funds, will enable
it to fund its operations and acquisition strategy for at least 12 months, in
the event the Company fails to generate sufficient revenues during such period,
the Company may be required to seek substantial additional financing to continue
its activities and to implement its acquisition plan, which may include debt
financing. Significant growth could also require the Company to seek additional
financing. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business - Strategy."
Fluctuations in Financial Results. The Company's sales and operating
results may vary significantly from year to year and from quarter to quarter as
a result of a variety of factors, including the introduction of new products by
competitors, pricing pressures, the timing of the completion or the cancellation
of projects, the evolving and unpredictable nature of the markets in which
computer products are sold and economic conditions generally or in certain
geographic areas in which the Company's customers do business. Furthermore, the
Company may be unable to control spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, there can be no assurance that
sales and net income, if any, in any particular quarter will not be lower than
sales and net income, if any, in a preceding or comparable quarter or quarters.
In addition, sales and net income, if any, in any particular quarter are not
likely to be indicative of the results of operations for the Company for any
other quarter or for the full year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The trading prices of the
Company's securities may fluctuate significantly in response to variations in
the Company's quarterly or annual results of operations.
Potential Conflicts of Interest; Transactions with Affiliates. William
Rychel, the Co-President and a director of the Company, is a principal
stockholder of NECG, a distributor of computer graphic products located in
Massachusetts. Thomas Gust, a principal stockholder of the Company, and A.
Lowell Nerenberg, a stockholder and employee of the Company, are also principal
stockholders of NECG. The Company has targeted NECG as an entity it may seek to
acquire after the completion of the Offering, although the terms and conditions
of such acquisition have not yet been negotiated.
Benefits of the Offering to Current Stockholders. After completion of the
Offering, the Company intends to make certain distributions and payments to, or
for the benefit of, certain officers, directors and stockholders of the Company
as follows: approximately (i) $1,086,000 in cash will be distributed to Martyn
L. Cooper and J. Thomas Woolsey, the former stockholders of Microsouth and
tekgraf Texas and currently officers and directors of the Company, as purchase
price adjustments in connection with the Acquisitions to reflect differences
between such Subsidiaries' guaranteed and actual net asset values (such
payments, together with other payments to be made to or collected from the
former stockholders of the Subsidiaries, the "Purchase Price Adjustments"); (ii)
$2,161,000 will be paid to Alongal Extrusions, Inc. ("Alongal"), a company owned
by Anita, Ltd. ("Anita"), a principal stockholder of the Company, in repayment
of working capital advances; (iii) $2,598,650 will be used to repay amounts
outstanding under bank lines of credit currently maintained by G&R, CGD and IGD
which are personally guaranteed by certain of the Company's stockholders,
including William M. Rychel, Co-President and a director of the Company; (iv)
$90,000 of outstanding indebtedness will be repaid to two former stockholders of
CGD; and (v) $125,000 of outstanding indebtedness will be repaid to a former
stockholder of IPM and IG. The foregoing payments will be funded by excess cash
of approximately $419,000 to be contributed in connection with the Acquisitions,
contributions to capital of $990,000 to be made by certain stockholders of the
Company and net proceeds of the Offering of approximately $3,642,000. Current
stockholders of the Company will also benefit by the creation of a public market
for the Company's Common Stock. See "--Immediate Dilution; Recent Exchange of
Common Stock at Prices Substantially Below Initial Public Offering Price," "Use
of Proceeds," "Dividends and Distributions" and "Certain Transactions."
Lack of Patents; Reliance on Proprietary Rights. The Company has no patents
and its success will depend, in part, on its ability to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties. The Company seeks to protect its trade secrets and proprietary
know-how, in part, by confidentiality agreements with employees, consultants,
advisors, and others. There can be no assurance that such employees,
consultants, advisors, or others will maintain the confidentiality of such trade
secrets or proprietary information, or that the trade secrets or proprietary
know-how of the Company will not otherwise become known or be independently
developed by competitors in such a manner that the Company will have no
practical recourse.
Dependence on Key Personnel. The Company is highly dependent on the
services of its Chairman, Phillip C. Aginsky, and its Co-Presidents, Dan I.
Bailey and William M. Rychel, as well as the other principal members of
management and technical staff of the Company. The future success of the Company
depends in large part upon its
10
<PAGE>
ability to attract and retain highly qualified personnel. The Company faces
intense competition for such highly qualified personnel from other technology
companies and may have to pay higher salaries to attract and retain such
personnel. There can be no assurance that sufficient qualified personnel can be
hired on a timely basis or retained. The loss of such key personnel or failure
to recruit additional key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. Messrs.
Aginsky, Bailey and Rychel have entered into employment agreements with the
Company which contain non-competition provisions. Such provisions may be
unenforceable in certain states. See "Management."
Control by Insiders; Potential Anti-Takeover Effect of Shares Having
Disproportionate Voting Rights. Upon completion of the Offering, the existing
stockholders of the Company, as the holders of Class B Common Stock, will
beneficially own approximately 61.3% of the outstanding Common Stock (including
the Escrow Shares and the Indemnification Shares) of the Company, representing
approximately 88.8% of the voting power and will be able to elect the Company's
directors and thereby direct the policies of the Company. Furthermore, the
disproportionate vote afforded the Class B Common Stock could also serve to
impede or prevent a change of control of the Company. As a result, potential
acquirers may be discouraged from seeking to acquire control of the Company
through the purchase of Class A Common Stock, which could have a depressive
effect on the price of the Company's securities. See "Principal Stockholders"
and "Description of Securities."
Immediate Dilution; Recent Exchange of Common Stock at Prices Substantially
Below Initial Public Offering Price. In connection with the Acquisitions,
William M. Rychel, J. Thomas Woolsey and Martyn L. Cooper, officers and
directors of the Company, and the other stockholders of G&R, Microsouth, tekgraf
Texas, CGD and IGD were issued an aggregate of 2,192,000 shares of Class B
Common Stock (including the Escrow Shares) at an effective purchase price of
$4.33 per share. Accordingly, such shareholders will realize a per share
increase in the value of such shares of $1.67, or 38.6%, upon the Offering
(allocating no value to the Warrants included in the Units). The purchasers of
the Units in the Offering will incur an immediate dilution of approximately
$3.26, or 54.3%, in the pro forma per share net tangible book value of their
Class A Common Stock, allocating no value to the Warrants included in the Units
($3.14, or 52.3%, if the Underwriters' over-allotment option is exercised in
full). Additional dilution to public investors, if any, may result to the extent
that the Warrants and/or the Representative's Unit Purchase Option are exercised
at a time when the net tangible book value per share of Common Stock exceeds the
exercise price of any such securities. See "Dilution."
Charge to Earnings in the Event of Release of Escrow Shares. In the event
any shares are released from escrow to the holders who are officers, directors,
employees or consultants of the Company, a compensation expense will be recorded
for financial reporting purposes. Accordingly, in the event of the release of
the Escrow Shares, the Company will recognize during the period in which the
earnings thresholds are probable of being met or such stock levels achieved, a
substantial non-cash charge to earnings equal to the fair market value of such
shares and options on the date of their release, which would have the effect of
significantly increasing the Company's loss or reducing or eliminating earnings,
if any, at such time. The recognition of such compensation expense may have a
depressive effect on the market price of the Company's securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Release of Escrow Shares," "Principal Stockholders" and
"Description of Securities." Notwithstanding the foregoing discussion, there can
be no assurance that the Company will attain the targets which would enable the
Escrow Shares to be released from escrow.
Potential Adverse Effects of Preferred Stock. The Company's Certificate of
Incorporation authorizes the issuance of shares of "blank check" preferred
stock, which will have such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval (but subject to
applicable government regulatory restrictions), to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the Common Stock. In
the event of such issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention to issue
any shares of preferred stock, there can be no assurance that the Company will
not do so in the future. See "Description of Securities Preferred Stock."
No Dividends. The Company does not expect to declare or pay any cash or
other dividends on its Common Stock in the foreseeable future. See "Dividends
and Distributions."
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<PAGE>
No Public Market for Securities; Possible Volatility of Market Price;
Arbitrary Determination of Offering Price. Prior to the Offering, there has not
been any market for any of the Company's securities, and there can be no
assurance that an active trading market will develop or be sustained after the
Offering. The initial public offering price of the Units and the exercise price
and other terms of the Warrants have been determined by negotiation between the
Company and the Representative and are not necessarily related to the Company's
asset value, net worth, results of operations or any other criteria of value and
may not be indicative of the prices that may prevail in the public market. The
market prices of the Units, Class A Common Stock and Warrants could also be
subject to significant fluctuations in response to variations in the Company's
operations, expansion plans, general trends in the industry and other factors,
including extreme price and volume fluctuations which have been experienced by
the securities markets from time to time. See "Underwriting."
Outstanding Warrants and Options; Exercise of Registration Rights. Upon
completion of the Offering, the Company will have outstanding (i) 2,100,000
Warrants to purchase an aggregate of 2,100,000 shares of Class A Common Stock;
and (ii) the Unit Purchase Option to purchase an aggregate of 420,000 shares of
Class A Common Stock, assuming exercise of the underlying Warrants. The Company
also has 300,000 shares of Class A Common Stock reserved for issuance upon
exercise of options under its 1997 Stock Option Plan, of which options to
purchase 15,000 shares will be granted on the date of this Prospectus.
Holders of such warrants and options are likely to exercise them when, in all
likelihood, the Company could obtain additional capital on terms more favorable
than those provided by warrants and options. Further, while such warrants and
options are outstanding, the Company's ability to obtain additional financing on
favorable terms may be adversely affected. The holders of the Unit Purchase
Option have certain demand and "piggy-back" registration rights with respect to
their securities. Exercise of such rights could involve substantial expense to
the Company. See "Management - Stock Option Plan," "Description of Securities"
and "Underwriting."
Potential Adverse Effect of Redemption of Warrants. Commencing one year
from the date of this Prospectus, the Warrants may be redeemed by the Company at
a redemption price of $.05 per Warrant upon not less than 30 days' prior written
notice if the closing bid price of the Common Stock shall have averaged in
excess of $11.75 per share for 30 consecutive trading days ending within 15 days
of the notice of redemption. Redemption of the Warrants could force the holders
to (i) exercise the Warrants and pay the exercise price therefor at a time when
it may be disadvantageous for the holders to do so, (ii) sell the Warrants at
the then current market price when they might otherwise wish to hold the
Warrants, or (iii) accept the nominal redemption price which, at the time the
Warrants are called for redemption, is likely to be substantially less than the
market value of the Warrants. The Company has agreed not to redeem the Warrants
unless a prospectus covering the shares of Class A Common Stock underlying the
Warrants is in effect through the date fixed for redemption. See "Description of
Securities - Redeemable Warrants."
Current Prospectus and State Registration to Exercise Warrants. Holders of
Warrants will be able to exercise the Warrants only if (i) a current prospectus
under the Securities Act relating to the securities underlying the Warrants is
then in effect and (ii) such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of Warrants reside. Although the Company has undertaken and
intends to use its best efforts to maintain a current prospectus covering the
securities underlying the Warrants following completion of the Offering to the
extent required by Federal securities laws, there can be no assurance that the
Company will be able to do so. The value of the Warrants may be greatly reduced
if a prospectus covering the securities issuable upon the exercise of the
Warrants is not kept current or if the securities are not qualified, or exempt
from qualification, in the states in which the holders of Warrants reside.
Persons holding Warrants who reside in jurisdictions in which such securities
are not qualified and in which there is no exemption will be unable to exercise
their Warrants and would either have to sell their Warrants in the open market
or allow them to expire unexercised. If and when the Warrants become redeemable
by the terms thereof, the Company may exercise its redemption right even if it
is unable to qualify the underlying securities for sale under all applicable
state securities laws. See "Description of Securities - Redeemable Warrants."
Possible Adverse Effect on the Liquidity of the Company's Securities Due to
Securities and Exchange Commission Investigation of the Representative and Blair
& Co. and Recent Settlement by Blair & Co. with NASD. The Securities and
Exchange Commission (the "Commission") is conducting an investigation concerning
various business activities of the Representative and D.H. Blair & Co., Inc., a
selling group member which will distribute a substantial portion of the Units
offered hereby ("Blair & Co."). The Company has been advised by the
Representative that the investigation has been ongoing since at least 1989 and
that it is cooperating with the investigation. The Representative cannot predict
whether this investigation will ever result in any type of formal enforcement
action against the Representative or Blair & Co.
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<PAGE>
In July 1997, Blair & Co., its Chief Executive Officer and its head trader
consented, without admitting or denying any violations, to a settlement with
NASD Regulation, Inc. ("NASDR"), the regulatory oversight subsidiary of the
National Association of Securities Dealers, Inc. ("NASD"), District Business
Conduct Committee for District No. 10 to resolve allegations of NASD rule and
securities law violations in connection with mark-up and pricing practices and
adequacy of disclosures to customers regarding market-making activities of Blair
& Co. in connection with certain securities issues during the period from June
1993 through May 1995 where Blair & Co. was the primary selling group member.
NASDR alleged the firm dominated and controlled after-market trading, thereby
causing the firm to charge its customers excessive mark-ups. NASDR also alleged
the firm did not make adequate disclosure to customers about its market-making
activities in two issues. As part of the settlement, Blair & Co. has consented
to a censure and has agreed to pay a $2 million fine, make $2.4 million in
restitution to retail customers, employ an independent consultant for two years
to review and make recommendations to strengthen the firm's compliance
procedures, and has undertaken for 12 months not to sell to its retail customers
(excluding banks and other institutional investors) more than 60% of the total
securities sold in any securities offering in which it participates as an
underwriter or selling group member. The Chief Executive Officer of Blair & Co.
has agreed to settle failure to supervise charges by consenting to a censure,
the imposition of a $225,000 fine and a 60-day suspension from associating with
any NASD member firm and to take a requalification examination. The firm's head
trader has agreed to settle charges against him by consenting to a censure, the
imposition of a $300,000 fine and a 90-day suspension from associating with any
member firm and has undertaken to take certain requalification examinations. The
settlement with NASDR does not involve or relate to the Representative, its
chief executive officer or any of its other officers or directors.
The Company has been advised that Blair & Co. intends to make a market in
the Company's securities after the Offering. The Company is unable to predict
whether Blair & Co.'s settlement with the NASDR or any unfavorable resolution of
the Commission's investigation will have any effect on such firm's ability to
make a market in the Company's securities and, if so, whether the liquidity or
price of the Company's securities would be adversely affected. See
"Underwriting."
Possible Restrictions on Market-Making Activities in Company's Securities.
The Representative has advised the Company that Blair & Co. intends to make a
market in the Company's securities. Regulation M under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), may prohibit Blair & Co. from
engaging in any market-making activities with regard to the Company's securities
for the period of up to five business days (or such other applicable period as
Regulation M may provide) prior to any solicitation activities or the
termination (by waiver or otherwise) of any right that the Representative may
have to receive a fee for the exercise of Warrants following such solicitation.
As a result, Blair & Co. may be unable to provide a market for the Company's
securities during certain periods while the Warrants are exercisable. Any
temporary cessation of such market-making activities could have an adverse
effect on the market price of the Company's securities. See "Shares Eligible for
Future Sale" and "Underwriting."
Shares Eligible for Future Sale. Future sales of Common Stock by existing
stockholders pursuant to Rule 144 under the Securities Act or otherwise, could
have an adverse effect on the price of the Company's securities. Upon the sale
of the 2,100,000 Units offered hereby, the Company will have outstanding
2,100,000 shares of Class A Common Stock, 3,333,333 shares of Class B Common
Stock and 2,100,000 Warrants (2,415,000 shares of Class A Common Stock and
2,415,000 Warrants if the Underwriters' over-allotment option is exercised in
full). The 3,333,333 outstanding shares of Class B Common Stock are "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be sold publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. Of such shares,
1,141,333 are currently eligible for sale in the public market pursuant to Rule
144 and the remainder will become so eligible commencing June 1998 (subject to
the restrictions on transferability relating to the Escrow Shares and volume
limitations). However, all the holders of the shares of Class B Common Stock
outstanding prior to the Offering have agreed not to sell or otherwise dispose
of any securities of the Company for a period of 13 months from the date of this
Prospectus without the Representative's prior written consent and for the 10
months thereafter not to sell more than 10% of their holdings in any month on a
cumulative basis without such consent. The holders of the Unit Purchase Option
have certain demand and "piggy-back" registration rights with respect to their
securities. The exercise of such rights could involve significant expense to the
Company. Sales of Common Stock, or the possibility of such sales, in the public
market may adversely affect the market price of the securities offered hereby.
See "Description of Securities," "Shares Eligible for Future Sale" and
"Underwriting."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,100,000 Units
offered hereby, after deducting underwriting discounts and commissions and other
expenses of the Offering, are estimated to be approximately $10,305,000
($11,996,550 if the Underwriters' over-allotment option is exercised in full).
The Company expects the net proceeds to be utilized approximately as follows:
Approximate
Amount
Application of Net Proceeds
---------------------- ---------------
Repayment of Bank Debt (1) ........................... $1,600,000
Repayment of Debt to Affiliated Entities, net (2) .... 1,385,000
Purchase Price Adjustments, net (3) .................. 657,000
Future Acquisitions .................................. 3,700,000
Consolidation Expenses (4) ........................... 800,000
Sales and Marketing (5) .............................. 500,000
Working Capital (6) .................................. 1,663,000
------------
Total ........................................... $ 10,305,000
============
- ----------
(1) Represents amounts incurred for working capital purposes under bank lines
of credit currently maintained by CGD, G&R and IGD which bear interest at
prime plus 2%, prime plus .5% and prime plus .75%, respectively, and mature
on November 30, 1997, December 31, 1997 and January 10, 1998, respectively.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
(2) Represents outstanding indebtedness to Alongal and certain other
stockholders of the Company in the aggregate amount of approximately
$2,375,000 which was incurred by the Company and certain of the
Subsidiaries for working capital purposes, net of an aggregate of $990,000
of capital contributions to be made by the pre-Acquisition stockholders of
the Company upon consummation of the Offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources" and "Certain Transactions."
(3) Represents an estimated aggregate of $1,086,000 due to the former
stockholders of tekgraf Texas and Microsouth, net of an estimated aggregate
amount of $419,000 due from the former stockholders of CGD and G&R, related
to the guaranteed net asset values provided for in the stock purchase
agreements entered into in connection with the Acquisitions. The actual
amounts to be paid and collected are subject to final adjustment for the
collection of receivables and inventory. See "Certain Transactions - The
Acquisitions."
(4) Includes installation of high speed telecommunications lines and an MIS
System. See "Business - Facilities and Administrative Functions."
(5) Includes implementation of a national promotional campaign. See "Business -
Customers, Sales and Marketing."
(6) Represents amounts for general corporate purposes, including inventory
purchases, the financing of receivables, and general and administrative
expenses.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering during the next approximately 12 months. This
estimate is based on certain assumptions, including that the consolidation of
the acquired companies is successfully completed, revenues from operations do
not fall below anticipated levels, no events occur which would cause the Company
to abandon any particular efforts and that competitive conditions remain stable.
The amounts actually expended for each purpose may vary significantly in the
event any of these assumptions prove inaccurate. The Company reserves the right
to change its use of proceeds as unanticipated events may cause the Company to
redirect its priorities and reallocate the proceeds accordingly.
Any additional proceeds received upon exercise of the Underwriters'
over-allotment option will be added to working capital. Pending utilization, the
net proceeds of the Offering will be invested in short-term, interest-bearing
investments.
DIVIDENDS AND DISTRIBUTIONS
After completion of the Offering, approximately $1,086,000 in cash will be
distributed to Martyn Cooper and J. Thomas Woolsey, officers and directors of
the Company, as Purchase Price Adjustments in connection with the acquisitions
of tekgraf Texas and Microsouth. See "Use of Proceeds" and "Certain Transactions
- - The Acquisitions."
The Company does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. The Company currently intends to retain all earnings,
if any, for use in the expansion of the Company's business. The declaration and
payment of future dividends, if any, will be at the sole discretion of the Board
of Directors and will depend upon the Company's profitability, financial
condition, cash requirements, future prospects and other factors deemed relevant
by the Board of Directors. The Company is not a party to any agreement which
effectively restricts the payment of cash dividends.
14
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1997 and the as adjusted capitalization of the Company as of June
30, 1997 giving effect to (i) the sale of 2,100,000 Units offered hereby; (ii)
the repayment, upon completion of the Offering, of bank debt ($2,598,650 at June
30, 1997); (iii) the repayment, upon completion of the Offering, of outstanding
indebtedness to current and former stockholders (an aggregate of $2,249,000 at
June 30, 1997); (iv) the contribution to capital, upon completion of the
Offering, of an aggregate of $990,000 by the pre-Acquisition stockholders; and
(v) the payment and collection, after the Offering, of the estimated Purchase
Price Adjustments. This table should be read in conjunction with the audited
historical consolidated financial statements of the Company, and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
--------------------
Actual As Adjusted
------ -----------
(in thousands, except share data)
<S> <C> <C>
Due to related entities, net .......................................... $ 2,159 $ --
Minority interest ..................................................... 15 15
Due to stockholders (1) ............................................... 1,226 --
Bank debt ............................................................. 2,599 --
-------- -------
Stockholders' Equity:(2)
Preferred Stock, $.001 par value; 5,000,000 shares authorized; no
shares issued and outstanding actual and as adjusted ............ -- --
Class A Common Stock, $.001 par value, 31,666,667 shares authorized;
no shares issued and outstanding actual; 2,100,000 shares issued
and outstanding as adjusted (3) ................................. -- 2
Class B Common Stock, $.001 par value, 3,333,333 shares authorized,
issued and outstanding actual and as adjusted (4) .............. 3 3
Additional paid-in capital ......................................... 10,422 19,316
Due from stockholders (5) ............................................. (419) --
Due from stockholders as capital contributions (6) .................... (990) --
Retained earnings ..................................................... 147 147
-------- -------
Total stockholders' equity ......................................... 9,163 19,468
-------- -------
Total capitalization ............................................... 15,162 19,483
======== =======
</TABLE>
- ----------
(1) Represents (i) estimated amounts owed to the former stockholders of
Microsouth and tekgraf Texas as Purchase Price Adjustments and (ii) notes
payable to shareholders of $140,000. See "Certain Transactions."
(2) Shares authorized reflects an amendment to the Company's Certificate of
Incorporation filed in October 1997.
(3) Excludes (i) up to 630,000 shares issuable upon exercise of the
Underwriters' over-allotment option and the Warrants included in such
option; (ii) 2,100,000 shares issuable upon exercise of the Warrants
included in the Units offered hereby; (iii) 420,000 shares issuable upon
exercise of the Unit Purchase Option and the Warrants included in such
option; and (iv) 300,000 shares reserved for issuance under the Company's
1997 Stock Option Plan. See "Management - Stock Option Plan," "Certain
Transactions" and "Description of Securities."
(4) Includes the Escrow Shares and the Indemnification Shares. See "Principal
Stockholders - Escrow Shares" and "Certain Transactions - The
Acquisitions."
(5) Represents estimated amounts owed by the former stockholders of G&R and CGD
as Purchase Price Adjustments. See "Certain Transactions - The
Acquisitions."
(6) Represents amounts owed by the pre-Acquisition stockholders of the Company.
See "Certain Transactions - The Acquisitions."
15
<PAGE>
DILUTION
The following discussion and tables allocate no value to the Warrants
contained in the Units. Such discussion and tables should be read in conjunction
with the historical consolidated financial statements of the Company and the
notes thereto included elsewhere in this Prospectus.
Dilution represents the difference between the initial public offering
price paid by the purchasers in the Offering and the net tangible book value per
share immediately after completion of the Offering. Net tangible book value per
share represents the amount of the Company's total assets minus the amount of
its intangible assets and liabilities, divided by the number of shares of Common
Stock outstanding. At June 30, 1997, the Company had a net tangible book value
of approximately $3,185,000, or $.96 per share ($1.01 per share excluding the
Escrow Shares). After giving retroactive effect to the sale of 2,100,000 Units
offered hereby, and the Company's receipt of the net proceeds therefrom less
underwriting discounts, commissions and other estimated expenses of the Offering
(anticipated to aggregate $1,350,000), the net tangible book value of the
Company, as adjusted, at June 30, 1997 would have been $14,899,000 or $2.74 per
share ($2.83 per share excluding the Escrow Shares). This would result in an
immediate dilution to the public investors of $3.26 per share ($3.17 per share
excluding the Escrow Shares) and the aggregate increase in the pro forma net
tangible book value to present stockholders would be $1.78 per share ($1.82 per
share if the Escrow Shares were excluded). The following table illustrates this
pro forma per share dilution:
Assumed public offering price per share ......................... $6.00
Pro forma net tangible book value per share
before Offering ........................................... $ .96
Increase per share attributable to new investors ............. $1.78
-----
Pro forma net tangible book value per share after Offering ...... $2.74
-----
Dilution per shares to new investors (1) ........................ $3.26
=====
- ----------
(1) If the over-allotment option is exercised in full, the net tangible book
value after the Offering would be approximately $2.89 per share, resulting
in dilution to new investors in the Offering of $3.11 per share.
The following table summarizes the differences between the pre-Acquisition
stockholders, the Acquisition stockholders and new investors with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by the
pre-Acquisition stockholders of the Company, by the Acquisition stockholders and
by new investors:
<TABLE>
<CAPTION>
Total
Consideration Average
Shares Purchased Paid Price
--------------------- ----------------------- Per
Number Percent Amount Percent Share
--------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Pre-Acquisition Stockholders 1,141,333(1) 21.01% $ 990,000(2) 7.28% $ .87(2)
Acquisition Stockholders ... 2,192,000(1) 40.34 --(3) -- --(3)
New Investors .............. 2,100,000 38.65 $12,600,000 92.72 6.00
--------- ------ ----------- ------ ------
Total ...................... 5,433,333 100.00% $13,590,000 100.00%
========= ====== =========== ======
</TABLE>
- ----------
(1) Includes the Escrow Shares and Indemnification Shares.
(2) Represents amounts to be contributed to the capital of the Company prior to
the Offering by Anita, a principal stockholder of the Company, and the
other pre-Acquisition stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions - Other Transactions."
(3) Exclusive of the consideration provided in connection with the
Acquisitions. See "Certain Transactions." The effective purchase price of
these shares was $4.33 per share (excluding the Escrow Shares).
The foregoing table does not give effect to exercise of any outstanding
options or warrants. To the extent such options or warrants are exercised there
will be further dilution to new investors. See "Management - Stock Option Plan"
and "Description of Securities."
16
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Effective June 2, 1997, Crescent acquired the outstanding common stock of
G&R, Microsouth, tekgraf Texas, CGD, IPM and IG. Based upon the provisions of
APB 16 "Accounting for Business Combinations" and SAB 97, the Acquisitions will
be accounted for as purchases. APB16 and SAB 97 provide technical accounting
guidance on business combinations, business combinations prior to an initial
public offering, and the determination of the acquiring company. In accordance
with this guidance, Crescent was determined to be the accounting acquiror. The
unaudited pro forma combined statements of operations give effect to the
Acquisitions as if they had occurred at the beginning of the earliest period
presented. The pro forma adjustments are based on preliminary estimates,
available information and certain assumptions that management deems appropriate.
The pro forma financial data does not purport to represent what the Company's
financial position or results of operations would actually have been if such
transactions in fact had occurred on those dates or to project the Company's
financial position or results of operations for any future period. See "Risk
Factors" included elsewhere herein.
The accompanying unaudited pro forma combined statements of operations
present Crescent combined with the Subsidiaries and give effect to the following
pro forma adjustments: (i) the elimination of expenses related to affiliated
entities of the Subsidiaries not acquired by Crescent; (ii) the reductions in
compensation levels that certain former stockholders of the Subsidiaries and
officers of Crescent have contractually agreed to receive subsequent to the
Acquisitions; (iii) the amortization of the estimated goodwill recorded in
connection with the Acquisitions; (iv) the elimination of interest expense on
capital to be contributed by the pre-Acquisition stockholders of Crescent; and
(v) gives effect to the estimated provision to reflect federal and state income
taxes as if all of the Subsidiaries had been C Corporations and the incremental
provision for the pro forma adjustments. These statements are derived from the
historical financial statements of the Company and the Subsidiaries which are
included elsewhere.
The Company has performed a preliminary analysis of the savings that it
expects to realize as a result of (i) consolidating certain general and
administrative functions; (ii) the interest earned on the net proceeds of the
Offering remaining after payment of the expenses of the Offering and cash to pay
outstanding debt; and (iii) efficiencies in other general and administrative
areas. The Company has not and cannot accurately quantify these savings. It is
anticipated that these savings will be partially offset by costs of being a
public company. However, these costs, like the savings that they offset, cannot
be quantified accurately. Accordingly, neither item has been included in the
accompanying pro forma financial information.
These pro forma combined statements of operations should be read in
conjunction with other information contained elsewhere under the heading
"Selected Financial and Operating Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the historical financial
statements of Crescent and the Subsidiaries. See "Index to Financial
Statements."
17
<PAGE>
Tekgraf, Inc.
Unaudited Pro Forma Combined Statement of Operations
for the year ended December 31, 1996
<TABLE>
<CAPTION>
Intelligent Computer
Tekgraf, Inc Products IG Distri- Graphics G&R Combined
(formerly Crescent Microsouth, tekgraf, inc. Marketing, bution Distributing Marketing, Acquired
Computers, Inc.) Inc. (Texas) Inc. Inc. Company Inc. Companies
----------- ------------ ----------- ---------- ------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ................ $13,414,131 $ 10,325,373 $ 4,062,901 $9,058,790 $44,715 $11,002,868 $21,038,228 $ 55,532,875
Cost of goods sold ....... 10,951,551 8,594,719 3,380,486 7,578,307 -- 9,143,743 18,117,338 46,814,593
----------- ------------ ----------- ---------- ------- ----------- ----------- ------------
Gross profit .......... 2,462,580 1,730,654 682,415 1,480,483 44,715 1,859,125 2,920,890 8,718,282
Operating expenses:
Selling, general and
administrative ...... 2,244,924 1,256,356 317,909 1,333,230 474 1,608,903 2,551,281 7,068,153
Depreciation .......... 16,999 8,566 9,858 42,961 -- 26,787 56,549 144,721
Amortization .......... -- (66,990) (31,412) -- -- -- -- (98,402)
----------- ------------ ----------- ---------- ------- ----------- ----------- ------------
Income from operations 200,657 532,722 386,060 104,292 44,241 223,435 313,060 1,603,810
Other income (expense) ... 14,916 27,625 -- (25,903) -- 54,861 182(6) 56,765
Interest expense ......... 159,500 60,000 15,000 -- -- 123,675 140,194 338,869
----------- ------------ ----------- ---------- ------- ----------- ----------- ------------
Income before provision
for income taxes ...... 56,073 500,347 371,060 78,389 44,241 154,621 173,048 1,321,706
Provision for income taxes 13,000 -- -- 22,064 7,782 50,758 3,600 84,204
----------- ------------ ----------- ---------- ------- ----------- ----------- ------------
Net income ............... $ 43,073 $ 500,347 $ 371,060 $ 56,325 $36,459 $ 103,863 $ 169,448 $ 1,237,502
=========== ============ =========== ========== ======= =========== =========== ============
Pro forma net income
per share --primary and
fully diluted
Estimated pro forma
weighted average
shares outstanding --
primary and fully diluted
</TABLE>
Pro Forma Adjustments Pro Forma
---------------------------- -----------
Net sales ................ -- $ (44,715)(6) $68,902,291
Cost of goods sold ....... $ (123,338)(1) -- 57,642,806
----------- ----------- -----------
Gross profit .......... 123,338 (44,715) 11,259,485
Operating expenses:
Selling, general and
administrative ...... (1,671,428)(2) (142,002)(1) 7,499,647
Depreciation .......... -- -- 161,720
Amortization .......... 98,402(3) 400,739(7) 400,739
----------- ----------- -----------
Income from operations 1,696,364 (303,452) 3,197,379
Other income (expense) ... 44,715(6) 116,396
Interest expense ......... (67,860)(4) -- 430,509
----------- ----------- -----------
Income before provision
for income taxes ...... 1,764,224 (258,737) 2,883,266
Provision for income taxes -- 1,183,558(5) 1,280,762
----------- ----------- -----------
Net income ............... $ 1,764,224 $(1,442,295) $ 1,602,504
=========== =========== ===========
Pro forma net income
per share --primary and
fully diluted ......... $.51
====
Estimated pro forma
weighted average
shares outstanding --
primary and fully diluted 3,166,666(8)
=========
- ----------
(1) Reflects the elimination of expenses related to affiliated entities of the
Subsidiaries which were not acquired by the Company.
(2) Adjusted to reflect the reductions in compensation levels that certain
former stockholders of the Subsidiaries and officers of the Company have
contractually agreed to receive from the Company subsequent to the
Acquisitions. This estimate is based on the elimination of (i) base
compensation in excess of the specified amounts included in employment
contracts signed by the aforementioned individuals, (ii) bonuses, based on
a determination by the Board of Directors that bonuses will not be granted
by the Company during the fiscal years ended December 31, 1997 and 1998,
and (iii) various compensation related expenses which, effective June 2,
1997, were no longer allowed pursuant to expense policies approved by the
Board of Directors of the Company.
(3) Reflects the elimination of amortization related to negative goodwill.
(4) Reflects the elimination of the pro rata interest expense incurred on
capital to be contributed by the pre-Acquisition stockholders of the
Company.
(5) Gives effect to the estimated provision to reflect federal and state income
taxes as if all of the Subsidiaries had been C Corporations and the
incremental provision for the pro forma adjustments. This adjustment
records income tax expense at an effective combined tax rate of 39%,
adjusted for non-deductible goodwill amortization.
(6) Reflects the elimination of transactions between IPM and IG.
(7) Adjusted to reflect the amortization of the estimated goodwill recorded in
connection with the Acquisitions. Goodwill is being amortized over 15
years.
(8) Gives effect to the Acquisitions and subsequent Recapitalization. Weighted
average shares outstanding excludes the 166,667 Escrow Shares. The Escrow
Shares will be released from escrow only in the event that one or more of
the following conditions are met:
(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (all as audited by the
Company's independent public accountants) (the "Minimum Pretax
Income") amounts to at least $8,700,000 for the fiscal year ended
December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $13,000,000 for the
fiscal year ending December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $17,900,000 for the
fiscal year ending December 31, 2000;
(iv) the Closing Price (as defined in the Escrow Agreement) of the Class A
Common Stock averages in excess of $16.25 per share for 30 consecutive
business days during the 18-month period commencing on the date of
this Prospectus;
(v) the Closing Price of the Class A Common Stock averages in excess of
$20.00 per share for 30 consecutive business days during the 18-month
period commencing 18 months from the date of this Prospectus. See
"Principal Stockholders - Escrow Shares."
18
<PAGE>
Tekgraf, Inc.
Unaudited Pro Forma Combined Statement of Operations
for the six months ended June 30, 1997
<TABLE>
<CAPTION>
Intelligent Computer
Tekgraf, Inc Products IG Graphics G&R
(formerly Crescent Microsouth, tekgraf, inc. Marketing, Distribution Distributing Marketing,
Computers, Inc.) Inc. (Texas) Inc. Inc. Company Inc.
---------------- ----------- ------------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ...................... $6,830,960 $ 5,886,966 $ 2,039,816 $3,824,183 $ 13,531 $6,223,966 $9,907,544
Cost of goods sold ............. 5,590,055 4,907,177 1,665,708 2,809,596 -- 5,159,778 8,492,645
---------- ----------- ----------- ---------- --------- ---------- ----------
Gross profit ............... 1,240,905 979,789 374,108 1,014,587 13,531 1,064,188 1,414,899
Operating expenses:
Selling, general and
administrative .......... 834,255 542,753 141,555 885,850 451 859,511 1,123,633
Depreciation ............... 20,736 12,000 10,321 10,736 14,651 27,000
Amortization ............... -- (27,911) (13,088) -- -- -- --
---------- ----------- ----------- ---------- --------- ---------- ----------
Income from
operations ............ 385,914 452,947 235,320 118,001 13,080 190,026 264,266
Other income ................... 14,410 14,452 5,752 22,120
Interest expense ............... 80,000 64,281 63,090
---------- ----------- ----------- ---------- --------- ---------- ----------
Income before income
taxes and extraordinary
gain ....................... 305,914 467,357 235,320 132,453 13,080 131,497 223,296
Provision for income taxes ..... 116,800 93,452 9,673 46,024
---------- ----------- ----------- ---------- --------- ---------- ----------
Income before minority
interest and
extraordinary gain ......... 189,114 467,357 235,320 39,001 3,407 85,473 223,296
Minority interest .............. 14,629 -- -- -- -- -- --
---------- ----------- ----------- ---------- --------- ---------- ----------
Income before extraordinary
gain ....................... $ 174,485 $ 467,357 $ 235,320 $ 39,001 $ 3,407 $ 85,473 $ 223,296
========== =========== =========== ========== ========= ========== ==========
Pro forma income before
extraordinary gain per
share -- primary and
fully diluted ..............
Estimated pro forma weighted
average shares outstanding
-- primary and fully diluted
</TABLE>
<TABLE>
<CAPTION>
Combined
Acquired
Companies Pro Forma Adjustments Pro Forma
------------ --------------------------- ---------
<S> <C> <C> <C> <C>
Net sales ...................... $ 27,896,006 $ (42,484)(1) $ 34,684,482
Cost of goods sold ............. 23,034,904 -- (43,097)(1) 28,581,862
------------ --------- ------------ -----------
Gross profit ............... 4,861,102 (42,484) 43,097 6,102,620
Operating expenses:
Selling, general and
administrative .......... 3,553,753 (222,348)(2) -- 4,165,660
Depreciation ............... 74,708 95,444
Amortization ............... (40,999) (40,999)(3) 200,369(6) 200,369
------------ --------- ------------ -----------
Income from
operations ............ 1,273,640 138,865 (157,272) 1,641,147
Other income ................... 56,734 56,734
Interest expense ............... 127,371 (36,676)(4) -- 170,695
------------ --------- ------------ -----------
Income before income
taxes and extraordinary
gain ....................... 1,203,003 175,541 (157,272) 1,527,186
Provision for income taxes ..... 149,149 407,796(5) -- 673,745
------------ --------- ------------ -----------
Income before minority
interest and
extraordinary gain ......... 1,053,854 (232,255) (157,272) 853,441
Minority interest .............. -- -- -- 14,629
------------ --------- ------------ -----------
Income before extraordinary
gain ....................... $ 1,053,854 $(232,255) $ (157,272) $ 838,812
============ ========= ============ ===========
Pro forma income before
extraordinary gain per
share -- primary and
fully diluted .............. $ .26
-----------
Estimated pro forma weighted
average shares outstanding
-- primary and fully diluted 3,166,666(7)
=========
</TABLE>
- ----------
(1) Reflects the elimination of expenses related to affiliated entities of the
Subsidiaries which were not acquired by the Company and the elimination of
revenue and expenses between IPM and IG.
(2) Adjusts to reflect the reductions in the compensation level that certain
former stockholders of the Subsidiaries and officers of the Company have
contractually agreed to receive from the Company subsequent to the
Acquisitions. This estimate is based on the elimination of (i) base
compensation in excess of the specified amounts included in employment
contracts signed by the aforementioned individuals, (ii) bonuses, based on
a determination by the Board of Directors that bonuses will not be granted
by the Company during the fiscal years ended December 31, 1997 and 1998,
and (iii) various compensation related expenses which, effective June 2,
1997, were no longer allowed pursuant to expense policies approved by the
Board of Directors of the Company.
(3) Reflects the elimination of amortization related to negative goodwill.
(4) Reflects the elimination of the pro rata interest expense incurred on
capital to be contributed by the pre-Acquisition stockholders of the
Company.
(5) Gives effect to the estimated provision to reflect federal and state income
taxes as if all of the Subsidiaries had been C Corporations and the
incremental provision for the pro forma adjustments. This adjustment
records income tax expense at an effective combined tax rate of 39%,
adjusted for non-deductible goodwill amortization.
(6) Adjusted to reflect the amortization of the estimated goodwill recorded in
connection with the Acquisitions. Goodwill is being amortized over 15
years.
(7) Gives effect to the Acquisitions and subsequent Recapitalization. Weighted
average shares outstanding excludes the 200,000 Escrow Shares. The Escrow
Shares will be released from escrow only in the event that one or more of
the conditions specified in Note (8) to "Unaudited Pro Forma Combined
Financial Statements" for the year ended December 31, 1996 are met.
19
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
Effective June 2, 1997, Crescent acquired all of the outstanding common
stock of G&R, Microsouth, tekgraf Texas, CGD, IPM and IG. The financial
information presented below represents selected historical data for Crescent and
the Subsidiaries. For a discussion of the pro forma combined operating results,
see the "Unaudited Pro Forma Combined Statements of Operations" of the Company
and related notes thereto. The following selected financial and operating data
selected by the Company should be read in conjunction with the historical
financial statements of Crescent and the Subsidiaries and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The selected financial data of Crescent as of December 31, 1995 and 1996
and for each of the three years in the period ended December 31, 1996, of G&R
and CGD for each of the three years in the period ended December 31, 1996, of
IPM and IG for the years ended December 31, 1995 and 1996, of Microsouth for the
six month period ended December 31, 1995 and for the year ended December 31,
1996, and of tekgraf Texas for the year ended December 31, 1996, have been
derived from financial statements audited by Coopers & Lybrand L.L.P. which
appear elsewhere. The audited historical financial statements have been included
in accordance with Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 80. SAB 80 provides technical guidance on the application of Rule
3-05 of Regulation S-X in an initial public offering of a business built by the
aggregation of discrete businesses that remain substantially intact after the
acquisitions. Rule 3-05 establishes the financial statement requirements for
businesses acquired.
All other selected financial data have been derived from unaudited
financial statements which have been prepared on the same basis as the audited
financial statements and, in the opinion of management of Crescent and the
Subsidiaries, reflect all adjustments, consisting only of normal, recurring
adjustments, necessary for a fair presentation of such data. The selected data
for Crescent for the six month period ended June 30, 1997 excludes operations of
the Subsidiaries for the period from June 3, 1997 through June 30, 1997 for
which the Company operated as a combined entity. The selected data for the
Subsidiaries includes operations from June 3, 1997 through June 30, 1997. All
amounts are presented in thousands except share and per share data.
Crescent
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
-------------------------------------------- ---------------------
1993 1994 1995 1996 1996 1997
-------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data(1):
Net sales $4,943 $6,340 $12,277 $13,414 $6,850 $6,831
Cost of goods sold 4,214 5,228 10,368 10,952 5,698 5,590
-------- ------- -------- --------- -------- ---------
Gross profit 729 1,111 1,910 2,463 1,152 1,241
Operating expenses:
Selling, general and
administrative 772 1,082 1,761 2,245 916 834
Depreciation 4 8 28 17 15 21
-------- ------- -------- --------- -------- ---------
Operating income (loss) (47) 21 120 201 220 386
Other income 39 -- -- 15 40 --
Interest expenses 3 40 126 160 60 80
-------- ------- -------- --------- -------- ---------
Income (loss) before taxes and
minority interest (11) (19) (5) 56 200 306
Provision (benefit) for income taxes (4) (4) (2) 13 13 117
-------- ------- -------- --------- -------- ---------
Income (loss) before minority (15) (15) (4) 43 187 189
Minority interest -- -- -- -- 25 15
-------- ------- -------- --------- -------- ---------
Net income (loss) $ (15) $ (15) $ (4) $ 43 $ 163 $ 174
======== ======= ======== ========= ======== =========
</TABLE>
December 31, December 31, June 30,
1995 1996 1997
------------ ------------ --------
Balance Sheet Data:
Working capital ....................... $ (51) $ (104) $ (17)
Total assets .......................... 2,264 3,007 3,792
Due to stockholders, net .............. 1,616 2,211 2,159
Due to related entities ...............
Stockholders' equity (deficit) ........ (33) 10 199
- ----------
(1) Crescent began operations in March of 1993. Accordingly, data is provided
only for fiscal years 1993 through 1996.
20
<PAGE>
Microsouth
<TABLE>
<CAPTION>
Six Months Ended
Six Month Period Year Ended June 30,
Ended December 31, December 31, --------------------
1995 1996 1996 1997
------------------ ------------ ------- -------
<S> <C> <C> <C> <C>
Statement of Income Data:
Net sales ............................ $ 4,636 $ 10,325 $ 4,746 $ 5,887
Cost of goods sold ................... 3,933 8,595 3,901 4,907
------- -------- ------- -------
Gross profit ......................... 703 1,731 845 980
Selling, general and administrative 590 1,256 548 543
Depreciation ...................... 2 9 6 12
Amortization ...................... (33) (67) (33) (28)
------- -------- ------- -------
Operating income ..................... 145 533 325 453
Other income ...................... 16 28 26 14
Interest expenses ................. 5 60 25 --
------- -------- ------- -------
Income before extraordinary gain ..... 156 500 326 467
Extraordinary gain ................... -- -- -- 210
------- -------- ------- -------
Net income ........................... $ 156 $ 500 $ 326 $ 677
======= ======== ======= =======
</TABLE>
tekgraf Texas
Six Months Ended
Year Ended June 30,
December 31, ---------------------
1996 1996 1997
------ ------ ------
Statement of Income Data:
Net sales ............................ $ 4,063 $ 1,948 $ 2,040
Cost of goods sold ................... 3,380 1,632 1,666
------- ------- -------
Gross profit ......................... 682 315 374
Selling, general and administrative 318 131 142
Depreciation ...................... 10 10 10
Amortization ...................... (31) (16) (13)
------- ------- -------
Operating income ..................... 342 190 235
Interest expenses ................. 15 10 --
------- ------- -------
Income before extraordinary gain ..... 371 180 235
Extraordinary gain ................... -- -- 70
------- ------- -------
Net income ........................... $ 371 $ 180 $ 305
======= ======= =======
CGD
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ............................ $12,948 $11,095 $11,003 $5,130 $6,224
Cost of goods sold ................... 11,110 9,192 9,144 4,338 5,160
------- ------- ------- ------ ------
Gross profit ......................... 1,838 1,903 1,859 792 1,064
Selling, general and administrative 1,564 1,670 1,609 742 860
Depreciation ...................... 20 19 27 9 15
------- ------- ------- ------ ------
Operating income ..................... 255 214 223 41 190
Other income ...................... 23 17 55 32 6
Interest expense .................. 154 145 124 53 64
------- ------- ------- ------ ------
Income before taxes .................. 123 87 155 20 131
Provision for income taxes ........... 45 20 51 6 46
------- ------- ------- ------ ------
Net income ........................ $ 79 $ 66 $ 104 $ 13 $ 85
======= ======= ======= ====== ======
</TABLE>
21
<PAGE>
IGD (IPM and IG)
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------ -------------------------
1995 1996 1996 1997
------- ------- ------ ------
<S> <C> <C> <C> <C>
Statement of Income Data:
IPM(1):
Net sales ............................ $ 7,647 $ 9,059 $5,441 $3,824
Cost of goods sold ................... 6,344 7,578 4,187 2,810
------- ------- ------ ------
Gross profit ......................... 1,303 1,480 1,255 1,015
Selling, general and administrative 1,052 1,333 1,154 886
Depreciation ...................... 46 43 30 11
------- ------- ------ ------
Operating income (loss) .............. 205 104 70 118
Other income (expense) ............ (65) (26) 27 14
------- ------- ------ ------
Income (loss) before taxes ........... 140 78 98 132
Provision for income taxes ........... 46 22 12 93
------- ------- ------ ------
Net income (loss) .................... $ 94 $ 56 $ 86 $ 39
======= ======= ====== ======
IG:
Revenue .............................. $ 35 $ 45 $ 26 $ 14
Selling, general and administrative .. 1 1 -- 1
Operating income ..................... 34 44 26 13
Provision for income taxes ........... 10 8 6 10
------- ------- ------ ------
Net income ........................... $ 25 $ 36 $ 20 $ 3
======= ======= ====== ======
</TABLE>
- ----------
(1) The results of operations include the operations of a division not acquired
by the Company.
G&R
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ............................ $21,317 $20,784 $21,038 $ 9,787 $9,908
Cost of goods sold ................... 18,677 17,990 18,117 8,389 8,493
------- ------- ------- ------- ------
Gross profit ......................... 2,640 2,794 2,921 1,398 1,415
Selling, general and administrative 2,281 2,387 2,551 1,175 1,124
Depreciation ...................... 48 67 57 27 27
------- ------- ------- ------- ------
Operating income ..................... 311 339 313 195 264
Other income (expense) ............ -- 1 -- (60) 22
Interest expense .................. 137 166 140 69 63
------- ------- ------- ------- ------
Income before taxes .................. 174 174 173 66 223
Provision for income taxes ........... 3 3 4 -- --
------- ------- ------- ------- ------
Net income ........................ $ 170 $ 171 $ 169 $ 66 $ 223
======= ======= ======= ======= ======
</TABLE>
22
<PAGE>
Combined Companies
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1996 1997
------------ ----------------
<S> <C> <C>
Combined Pro Forma Statement of Income Data(1):
Net sales(2) ................................................................... $ 68,902 $ 34,684
Cost of goods sold(3) .......................................................... 57,643 28,582
---------- ----------
Gross profit ................................................................... 11,259 6,103
Selling, general and administrative(4) ...................................... 7,500 4,165
Depreciation ................................................................ 162 95
Amortization(5) ............................................................. 401 200
---------- ----------
Operating income: .............................................................. 3,197 1,641
Other income(6) ............................................................. 116 57
Interest expense ............................................................ 431 171
---------- ----------
Income before taxes minority interest
and extraordinary gain(7) ................................................ 2,883 1,527
Provision for income taxes(8) ............................................... 1,281 674
---------- ----------
Income before minority interest and extraordinary gain ...................... $ 1,603 $ 853
---------- ----------
Minority interest ........................................................... -- 15
---------- ----------
Income before extraordinary gain ............................................... $ 1,603 $ 839
---------- ----------
Pro forma income per share before extraordinary gain - primary and fully diluted $ .51 $ .26
========== ==========
Estimated pro forma weighted average shares outstanding - primary
and fully diluted(9) ........................................................ 3,166,666 3,166,666
========== ==========
</TABLE>
- ----------
(1) See "Unaudited Pro Forma Combined Financial Statements" of the Company for
the year ended December 31, 1996 and the six months ended June 30, 1997.
(2) Adjusted to reflect the Acquisitions, the elimination of revenue between
IPM and IG, and the elimination of expenses related to affiliated entities
of the Subsidiaries not acquired by the Company.
(3) Adjusted to reflect the Acquisitions and the elimination of expenses
related to affiliated entities of the Subsidiaries not acquired by the
Company.
(4) Adjusted to reflect the Acquisitions and the reductions in compensation
level that certain former stockholders of the Subsidiaries and officers of
the Company have agreed to receive from the Company subsequent to the
Acquisitions.
(5) Adjusted to reflect the amortization of the estimated goodwill recorded in
connection with the Acquisitions.
(6) Adjusted to reflect the elimination of expenses between IPM and IG.
(7) Adjusted for the elimination of the pro rata interest expense on capital to
be contributed by the pre-Acquisition stockholders of the Company.
(8) Gives effect to the estimated provision to reflect federal and state income
taxes as if all of the Subsidiaries been C Corporations and the incremental
provision for the pro forma adjustments.
(9) Gives effect to the Acquisitions and subsequent Recapitalization.
Fully-diluted weighted average shares outstanding excludes the Escrow
Shares.
June 30, 1997
-------------------------------
Actual As Adjusted(1)
------- --------------
Balance Sheet Data:
Working capital ........................ $ 2,512 $14,495
Total assets ........................... 23,587 29,368
Total debt ............................. 5,984 --
Stockholders' equity ................... 9,163 20,877
- ----------
(1) Adjusted to reflect (i) the sale of 2,100,000 Units offered hereby; (ii)
the repayment, upon completion of the Offering, of bank debt ($2,598,650 at
June 30, 1997); (iii) the repayment, upon completion of the Offering, of
outstanding indebtedness to current and former stockholders (an aggregate
of $2,249,000 at June 30, 1997); (iv) the contribution to capital, upon
completion of the Offering, of an aggregate of $990,000 by the
pre-Acquisition stockholders; and (v) the payment and collection, after the
Offering, of the estimated Purchase Price Adjustments. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Certain Transactions."
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's unaudited pro forma combined financial statements and the audited
financial statements of the Company and the Subsidiaries, and the notes thereto,
appearing elsewhere in this Prospectus.
Results of Operations
Overview
Crescent was incorporated in Georgia in February 1993. In December 1994,
Crescent completed the acquisition of a 60% interest in Prisym. In June 1997,
Crescent completed the acquisition of a 100% interest in each of the
Subsidiaries. The Acquisitions of each of the Subsidiaries has been accounted
for using the purchase method of accounting. Subsequent to the Acquisitions, the
Company completed the Merger pursuant to which it reincorporated in the State of
Delaware and effected a recapitalization pursuant to which each share of common
stock of the Georgia entity was exchanged for 400 shares of Class B Common Stock
of the Delaware entity.
The Subsidiaries have operated throughout the periods presented as
independent private companies, and, as such, their results of operations reflect
two structures, S Corporations and C Corporations. The particular corporate
structure of each Subsidiary has influenced, among other things, the historical
levels of compensation paid to its principals. Certain of such individuals have
contractually agreed to a reduction in their compensation and benefits in
connection with the Acquisitions. The compensation differential and the related
income tax effects have been reflected in the pro forma adjustments in the
accompanying pro forma information provided elsewhere in this Prospectus.
Net sales reflect the sale of the Company's products, net of allowances for
returns and other adjustments and include minimal revenues related to services
performed at the Company's premises. Sales are generated from the sale of
products in both the domestic and international markets. No individual customer
accounted for more than 6% of sales during 1996 or during the six months ended
June 30, 1997 on a combined basis.
Cost of goods sold consists primarily of product costs (cost of manufacture
or acquisition) and freight charges. Cost of sales also includes direct
expenses, such as labor and inventory, obtaining FCC certification of products
where required, the cost of shipping and delivery charges to bring the product
to the Company's premises, as well as overhead allocated to direct expenses,
incurred in manufacturing products sold by the Company. The direct cost
associated with providing services performed by the Company for its customers is
also included in the cost of goods sold.
Sales and gross profits depend in part on the volume and mix of components
and finished goods contained in the Company's inventory from time to time.
Manufactured product sales have a higher gross profit margin with a relatively
lower volume of sales per customer, while component sales have a comparably low
gross profit with a relatively high volume of sales per customer. The Company
expects that gross margins will continue at the levels experienced in 1996.
A large portion of the Company's operating expenses is relatively fixed.
Since the Company does not obtain long-term purchase orders or commitments from
its customers, it must anticipate the future volume of orders based upon
historical purchasing practices of its customers as to their future
requirements. Cancellations, reductions or delays in orders by a customer or
group of customers could have a material adverse effect on the Company's
business, financial condition and results of operations.
Selling, general and administrative ("SG&A") expenses include costs related
to the Company's sales force, which are comprised of both direct employees of
the Company and independent sales representatives. Included are direct labor
costs for in-house sales representatives as well as commissions paid to both
in-house and independent sales personnel. Costs associated with marketing and
advertising of the Company's products are also included in SG&A expenses, along
with expenses relating to corporate and administrative functions that serve to
support the existing products and service business of the Company, as well as to
provide the infrastructure for future growth. Also reflected as SG&A expenses
are certain management, supervisory and staff salaries and employee benefits,
data processing, training, rent, and office supply costs.
24
<PAGE>
Interest expense includes costs and expenses associated with working
capital indebtedness, as evidenced by outstanding balances on the Company's
principal credit facilities, and working capital advances made by certain
current and former stockholders.
Economies of scale and elimination of duplicate overhead and administrative
costs are expected to reduce future operating costs. Offsetting these
anticipated benefits are anticipated increases in personnel costs and expenses
to be incurred in developing the Company's corporate infrastructure and the
costs associated with being a public company. The Company does not believe these
costs can be accurately quantified. Accordingly, neither the anticipated savings
nor the anticipated costs have been included in the pro forma financial
information included herein. As a result, historical combined results may not be
comparable to, or indicative of, future performance.
The following financial information has been rounded in order to simplify
its presentation. However, the percentages provided below are calculated using
the detailed financial information contained in the financial statements, the
notes thereto and the other financial data included elsewhere in the Prospectus.
Year-end comparisons are only presented for the periods for which full year
financial statements are included herein.
Crescent
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
Net Sales. Net sales decreased $19,000, or .3%, to $6.83 million for the
six months ended June 30, 1997 (the "1997 six months") compared to $6.85 million
for the six months ended June 30, 1996 (the "1996 six months"). The decrease in
net sales was primarily attributable to a shift in focus to higher margin sales
and a decrease in lower margin sales.
Gross Profit. Gross profit increased $89,000, or 7.7%, to $1.24 million
for the 1997 six months compared to $1.15 million for the 1996 six months. Gross
margin increased to 18.2% for the 1997 six months compared to 16.82% for the
1996 six months. The increases were primarily attributable to the shift to
higher margin sales.
SG&A Expenses. SG&A expenses decreased $82,000, or 9%, to $834,000 for
the 1997 six months compared to $916,000 for the 1996 six months. SG&A expenses
as a percentage of net sales decreased to 12.1% for the 1997 six months compared
to 13.4% for the 1996 six months. This change was primarily attributable to the
elimination of management fees charged by Alongal.
Operating Income. Operating income increased $100,000 to $386,000 for the
1997 six months compared to $220,000 for the 1996 six months.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Net sales. Net sales increased $1.14 million, or 9.3%, to $13.41 million
for the year ended December 31, 1996 ("1996") compared to $12.28 million for the
year ended December 31, 1995 ("1995"). The increase in net sales was primarily
attributable to strong sales in the OEM sector to both established and new OEM
customers as a result of a focus on systems sales and increased market
penetration by Prisym resulting from an expanded sales force.
Gross Profit. Gross profit increased $553,000, or 29%, to $2.46 million for
1996 compared to $1.91 million for 1995. Gross margin increased to 18.4% for
1996 compared to 15.6% for 1995, primarily as a result of the growth in system
sales to specialized OEMs.
SG&A Expenses. SG&A expenses increased $484,000, or 27.5%, to $2.24 million
for 1996 compared to $1.76 million for 1995. This increase was primarily
attributable to increased infrastructure and higher commissions. SG&A expenses
as a percentage of net sales increased to 16.7% for 1996 compared to 14.3% for
1995.
Operating Income. Operating income increased $81,000, or 68%, to $201,000
for 1996 compared to $120,000 for 1995.
Year Ended December 31, 1995 Compared With Year Ended December 31, 1994
Net Sales. Net sales increased $5.94 million, or 94%, to $12.28 million for
1995 compared to $6.34 million for the year ended December 31, 1994 ("1994").
The increase in net sales was primarily attributable to the acquisition of
Prisym in December 1994.
25
<PAGE>
Gross Profit. Gross profit increased $799,000, or 72%, to $1.91 million for
1995 compared to $1.11 million for 1994. Gross margin decreased to 15.6% for
1995 compared to 17.5% for 1994, primarily as a result of an increase in sales
by Prisym which operates at lower margins.
SG&A Expenses. SG&A expenses increased $679,000, or 62.8%, to $1.77 million
for 1995 compared to $1.08 million for 1994. This increase was primarily
attributable to the addition of the costs of Prisym. SG&A expenses as a
percentage of net sales decreased to 14.3% for 1995 compared to 17.1% for 1994.
Operating Income. Operating income increased $99,000 to $120,000 for 1995
compared to $21,000 for 1994.
tekgraf Texas
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
Net Sales. Net sales increased $90,000, or 4.6%, to $2.04 million for the
1997 six months compared to $1.95 million for the 1996 six months. The increase
resulted primarily from a broadening of tekgraf Texas' customer base combined
with greater market acceptance of certain of the company's principal products.
Gross Profit. Gross profit increased $59,000, or 18.7%, to $374,000 for the
1997 six months compared to $315,000 for the 1996 six months. Gross margin
increased to 18.3% for the 1997 six months compared to 16.2% for the 1996 six
months, primarily as a result of a shift in the company's business to the sale
of higher margin systems.
SG&A Expenses. SG&A expenses increased $11,000, or 8.4%, to $142,000 for
the 1997 six months compared to $131,000 for the 1996 six months. This increase
was primarily attributable to higher commissions associated with the increase in
higher margin sales. SG&A expenses as a percentage of net sales increased to 7%
for the 1997 six months compared to 6.7% for the 1996 six months, primarily as a
result of an increase in outside sales expenses.
Operating Income. Operating income increased $45,000 to $235,000 for the
1997 six months compared to $190,000 for the 1996 six months.
Included in the statement of operations for the 1997 six months was an
extraordinary gain of $70,000 resulting from the early extinguishment of a note
payable with the former parent of Tekgraf Texas. See "Certain Transactions -
Pre-Acquisition Transactions Between the Subsidiaries and Their Respective
Affiliates."
IGD (IPM and IG)
General
The following analysis includes operations of a division of IPM not
acquired by the Company and, accordingly, period to period comparisons may not
be meaningful.
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
Net Sales. Net sales decreased by $1.63 million, or 29.8%, to $3.84 million
for the 1997 six months compared to $5.47 million for the 1996 six months. The
decrease in IGD's net sales was primarily attributable to a reduction in demand
for low and mid-range scanner products and increased competition in the sale of
high-end proofing systems. In addition, an aggressive sale promotion run by a
vendor in the 1996 six months was not repeated in the 1997 six months.
Gross Profit. Gross profit decreased $250,000, or 19.5%, to $1.03 million
for the 1997 six months compared to $1.28 million for the 1996 six months, in
line with the decline in sales. Gross margin increased to 26.8% for the 1997 six
months compared to 23.4% for the 1996 six months, reflecting a shift in product
mix to higher margin sales.
SG&A Expenses. SG&A expenses decreased $269,000, or 23.3%, to $886,000 for
the 1997 six months compared to $1.15 million for the 1996 six months, primarily
as a result of reductions of costs in line with reduced sales. As a result of
the decrease in revenues, SG&A expenses as a percentage of net sales increased
to 23.1% for the 1997 six months compared to 21.1% for the 1996 six months.
Operating Income. Operating income increased $35,000 to a gain of $131,000
for the 1997 six months compared to income of $96,000 for the 1996 six months.
Year Ended December 31 ,1996 Compared With Year Ended December 31, 1995
Net Sales. Net sales increased $1.42 million, or 18.5%, to $9.10 million
for 1996 compared to $7.68 million for 1995. The increase in net sales was
primarily attributable to increased sales in certain product lines and an
expanded customer base.
26
<PAGE>
Gross Profit. Gross profit increased $187,000, or 14%, to $1.52 million
for 1996 compared to $1.34 million for 1995. Gross margin decreased to 16.7% for
1996 compared to 17.4% for 1995, primarily as a result of an increase in lower
margin sales.
SG&A Expenses. SG&A expenses increased $282,000, or 26.8%, to $1.33 million
for 1996 compared to $1.05 million for 1995. This increase was primarily
attributable to an increase in personnel and higher commissions. SG&A expenses
as a percentage of net sales increased to 14.7% for 1996 compared to 13.7% for
1995.
Operating Income. Operating income decreased $91,000 to $148,000 for 1996
compared to $239,000 for 1995.
CGD
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30,
1996.
Net Sales. Net sales increased $1.09 million, or 21.2%, to $6.22 million
for the 1997 six months compared to $5.13 million for the 1996 six months. The
increase in net sales was primarily attributable to the introduction of new
products and increased sales of one of the Company's existing product lines. In
addition, bad weather conditions adversely impacted sales during the first
quarter of 1996.
Gross Profit. Gross profit increased $272,000, or 34.3%, to $1.06 million
for the 1997 six months compared to $792,000 for the 1996 six months. Gross
margin increased to 17.1% for the 1997 quarter compared to 15.4% for the 1996
six months, primarily as a result of an increase in sales of higher margin
product lines.
SG&A Expenses. SG&A expenses increased $118,000, or 15.9%, to $860,000 for
the 1997 six months compared to $742,000 for the of 1996 six months. This
increase was primarily attributable to a net increase in personnel and sales
commissions. SG&A expenses as a percentage of net sales decreased to 13.8% for
the 1997 six months compared to 14.5% for the 1996 six months.
Operating Income. Operating income increased $149,000 to $190,000 for the
1997 six months compared to $41,000 for the 1996 six months.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Net Sales. Net sales decreased $92,000, or 1%, to $11.00 million for 1996
compared to $11.10 million for 1995. The decrease in 1996's net sales was
primarily attributable to an approximately $2.0 million decrease in sales of one
of the Company's product lines as its competitive advantages declined, which was
offset by an increase in net sales from a different product line.
Gross Profit. Gross profit decreased $44,000, or 2.3%, to $1.86 million for
1996 compared to $1.90 million for 1995. Gross margin decreased to 16.9% for
1996 compared to 17.2% for 1995, primarily as a result of the loss of a higher
margin product line and the increase in sales of lower margin products.
SG&A Expenses. SG&A expenses decreased $61,000, or 3.7%, to $1.61 million
for 1996 compared to $1.67 million for 1995. This decrease was primarily
attributable to decreases in commissions and profit sharing contributions. SG&A
expenses as a percentage of net sales decreased to 14.6% for 1996 compared to
15.1% for 1995.
Operating Income. Operating income increased $9,000 to $223,000 for 1996
compared to $214,000 for 1995.
Year Ended December 31, 1995 Compared With Year Ended December 31, 1994
Net Sales. Net sales decreased $1.85 million, or 14.3%, to $11.10 million
for 1995 compared to $12.95 million for 1994. The decrease in 1995's net sales
was primarily attributable to the loss of one product line as a result of the
applicable vendor's loss of its marketing rights to its top product. This
product line had accounted for in excess of $2.5 million in net sales in 1994.
Gross Profit. Gross profit increased $65,000, or 3.5%, to $1.90 million for
1995 compared to $1.84 million for 1994. Gross margin increased to 17.2% for
1995 compared to 14.2% for 1994. The increases primarily resulted from the
discontinuation of low margin product lines such as color monitors and the
introduction of higher margin graphic arts related lines.
27
<PAGE>
SG&A Expenses. SG&A expenses increased $106,000, or 6.8%, to $1.67 million
for 1995 compared to $1.56 million for 1994, primarily as a result of an
increase in bad debt write-offs. SG&A expenses as a percentage of net sales
increased to 15.1% for 1995 compared to 12.1% for 1994.
Operating Income. Operating income decreased $41,000 to $214,000 for 1995
compared to $254,000 for 1994.
G&R
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996
Net Sales. Net sales increased $120,000, or 1.2%, to $9.91 million for the
1997 six months compared to $9.79 million for the 1996 six months, primarily as
a result the addition of new product lines from existing vendors.
Gross Profit. Gross profit increased $10,000, or .7%, to $1.41 million for
the 1997 six months compared to $1.40 million for the 1996 six months. Gross
margin was 14.3% in both the 1997 and 1996 six months. The increase in gross
profit was primarily attributable to the increase in sales.
SG&A Expenses. SG&A expenses decreased $60,000, or 5.1%, to $1.12 million
for the 1997 six months compared to $1.18 million for the 1996 six months,
primarily as a result of a decrease in the sales commission rate. SG&A expenses
as a percentage of net sales decreased to 11.3% for the 1997 six months compared
to 12.0% for the 1996 six months.
Operating Income. Operating income increased $69,000 to $264,000 for the
1997 six months compared to $195,000 for the 1996 six months.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Net Sales. Net sales increased $254,000, or 1.2%, to $21.0 million for 1996
compared to $20.78 million for 1995, primarily as a result of the addition of
new product lines which offset the discontinuance of other product lines.
Gross Profit. Gross profit increased $127,000, or 4.5%, to $2.9 million for
1996 compared to $2.79 million for 1995. Gross margin increased to 13.9% for
1996 compared to 13.4% for 1995, primarily as a result of sales of higher margin
products.
SG&A Expenses. SG&A expenses increased $164,000, or 6.9%, to $2.55 million
for 1996 compared to $2.39 million for 1995, primarily as a result of a
commission rate change for 1996, and the addition of sales personnel. SG&A
expenses as a percentage of net sales increased to 12.1% for 1996 compared to
11.5% for 1995.
Operating Income. Operating income decreased $26,000 to $313,000 for 1996
compared to $339,000 for 1995.
Year Ended December 31, 1995 Compared With Year Ended December 31, 1994
Net Sales. Net sales decreased $533,000, or 2.5%, to $20.78 million for
1995 compared to $21.32 million for 1994, primarily as a result of the loss or
discontinuance of product lines.
Gross Profit. Gross profit increased $154,000, or 5.8%, to $2.79 million
for 1995 compared to $2.64 million for 1994. Gross margin increased to 13.4% for
1995 compared to 12.4% for 1994, primarily as a result of a shift to higher
margin product line sales.
SG&A Expenses. SG&A expenses increased $106,000, or 4.6%, to $2.39 million
for 1995 compared to $2.28 million for 1994. This increase was primarily
attributable to increased overhead associated with a facilities expansion. SG&A
expenses as a percentage of net sales increased to 11.5% for 1995 compared to
10.7% for 1994.
Operating Income. Operating income increased $28,000 to $339,000 for 1995
compared to $311,000 for 1994.
28
<PAGE>
Microsouth
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
Net Sales. Net sales increased $1.14 million, or 24.1%, to $5.89 million
for the 1997 six months compared to $4.75 million for the 1996 six months,
primarily as a result of the expansion of Microsouth's graphics product lines
from existing vendors. Microsouth also benefited by an increase in product sales
to one of its customers and the establishment of new vendor relationships.
Gross Profit. Gross profit increased $135,000, or 15.9%, to $980,000 for
the 1997 six months compared to $845,000 for the 1996 six months. Gross margin
decreased to 16.6% for the 1997 six months compared to 17.8% for the 1996 six
months, primarily as a result of increased sales of lower margin products to one
of its customers.
SG&A Expenses. SG&A expenses decreased $5,000, or 1.0%, to $543,000 for the
1997 six months compared to $548,000 for the 1996 six months. SG&A expenses as a
percentage of net sales decreased to 9.2% for the 1997 six months compared to
11.5% for the 1996 six months due to increased sales levels while costs remained
constant.
Operating Income. Operating income increased $128,000 to $453,000 for the
1997 six months compared to $325,000 for the 1996 six months.
Included in the statement of operations for the 1997 six months was an
extraordinary gain of $210,000 resulting from the early extinguishment of a note
payable with the former parent of Microsouth. See "Certain Transactions -
Pre-Acquisition Transactions Between the Subsidiaries and Their Respective
Affiliates."
Future Adoption of Recently Issued Accounting Standards
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of an Enterprise and
Related Information ("SFAS 131"), No. 130, Reporting Comprehensive Income ("SFAS
130"), No. 129, Disclosure of Information About Capital Structure ("SFAS 129"),
and No. 128, Earnings Per Share ("SFAS 128"). SFAS 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS 129 consolidates the existing requirements to disclose certain
information about an entity's capital structure, and SFAS 128 specifies the
computation, presentation, and disclosure requirements for earnings per share.
These Standards are effective for periods ending after December 31, 1997.
The Company believes that the impact of these Standards, when adopted, will
not have a material impact on the Company's financial statements and financial
statement presentation when presented on a comparable basis.
Impact of Inflation
Management believes that inflation has not had a material impact on the
Company's business.
Liquidity and Capital Resources
Since inception, the Company has financed its operations through a
combination of cash flow from operations, bank borrowings and equity capital.
The Company's capital requirements have arisen primarily in connection with
purchases of fixed assets, including acquisitions.
The Company maintains several bank lines of credit that provide for
borrowings up to $4.5 million. The Company has a revolving credit facility with
LaSalle Bank - Illinois (the "LaSalle Facility") that provides for borrowings up
to $2,000,000 based on a percentage of certain accounts receivable which matures
on December 31, 1997 and bears interest at the lender's prime rate plus .5%. The
LaSalle Facility is secured by G&R's accounts receivable, inventory, equipment
and fixtures and a portion is guaranteed by stockholders of the Company. At June
30, 1997, the outstanding balance on the LaSalle Facility was approximately
$1.29 million. The Company also has a revolving credit facility with NationsBank
of Maryland, N.A. (the "NationsBank Facility") that provides for borrowings up
to $2,250,000 based on a percentage of certain accounts receivable and inventory
which matures on November 30, 1997 and bears interest at the lender's prime rate
plus 2%. The NationsBank Facility is secured by
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CGD's accounts receivable, inventory and general intangibles and is guaranteed
by stockholders of the Company. At June 30, 1997, the outstanding balance on the
NationsBank Facility was approximately $757,000. The Company also has a
revolving line of credit with Wells Fargo Bank, National Association (the "Wells
Fargo Facility") in the principal amount of $250,000 which matures on January
10, 1998 and bears interest at the lender's prime rate plus .75%. The Wells
Fargo Facility is unsecured and is guaranteed by a stockholder of the Company.
At June 30, 1997, the outstanding balance on the Wells Fargo Facility was
$51,000.
The Company intends to repay the outstanding amounts on the LaSalle
Facility, the NationsBank Facility and the Wells Fargo Facility upon completion
of the Offering. It is anticipated that the Company will utilize proceeds of the
Offering, together with available cash, to repay such existing bank facilities.
See "Use of Proceeds."
The Company has guaranteed $496,000 of bank borrowings incurred by a
company owned by affiliates of the Company. See "Certain Transactions."
From time to time since the Company's inception, Alongal has made advances
to the Company for working capital purposes. At December 31, 1996 and June 30,
1997, amounts owed to Alongal were $2,109,000 and $2,161,000, respectively. Such
advances bear interest at the rate of 8% per annum and are payable on demand.
After completion of the Offering, the Company intends to repay such
indebtedness. At such time, the pre-Acquisition stockholders of the Company will
contribute an aggregate of $990,000 to the capital of the Company. See "Certain
Transactions."
After completion of the Offering, the Company will make payments in the
aggregate amount of approximately $1,086,000 to the stockholders of Microsouth
and tekgraf Texas, reflecting Purchase Price Adjustments in connection with the
Acquisitions. See "Dividends and Distributions" and "Certain Transactions - The
Acquisitions."
The Company's principal commitments at June 30, 1997 consisted primarily of
debt of (i) the Purchase Price Adjustments described above; (ii) approximately
$2,299,000 to Alongal and other related persons; (iii) leases of premises; and
(iv) the lines of credit described above. See "Certain Transactions."
After the application of the net proceeds of the Offering as set forth in
"Use of Proceeds," the Company believes that its cash balances, and cash flows
from operations will be sufficient to meet its working capital and capital
requirements for at least the next 12 months.
A key element of the Company's strategy is to continue to expand through
acquisitions of companies engaged in the distribution and/or marketing of
computers and/or computer hardware, software and peripherals. See "Business -
Strategy." Such acquisitions are expected to involve the issuance of stock,
cash, debt or a combination thereof.
Release of Escrow Shares
In connection with the Offering, the holders of the Company's Class B
Common Stock are placing a portion of their shares into escrow pending the
Company's attainment of certain earnings or market price goals. See "Principal
Stockholders." In the event the Escrow Shares are released from escrow to
directors, officers, employees or consultants of the Company, the release will
be treated, for financial reporting purposes, as compensation expense to the
Company. Accordingly, the Company will, in the event of the release of the
Escrow Shares recognize during the period in which the earnings or market price
targets are met, what could be a substantial one-time charge which would
substantially increase the Company's loss or reduce or eliminate earnings, if
any, at such time. The amount of compensation expense recognized by the Company
will not affect the Company's total stockholders' equity.
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BUSINESS
Overview
The Company commenced operations in February 1993 to engage in the
manufacture of custom or "made-to order" premium servers and network
workstations under the Crescent Computer brand name. In December 1994, the
Company acquired a controlling interest in Prisym, an authorized DEC Reseller.
In June 1997, the Company completed the acquisition of all of the outstanding
capital stock of G&R, Microsouth, tekgraf Texas, CGD, IPM and IG, all of which
are regional distributors specializing in computer graphics technologies.
Subsequent to the Acquisitions and in connection with the Merger, the Company
changed its name to Tekgraf, Inc. and organized its operations into two
divisions: the Graphics Division, a wholesale distribution network of high-end
computer graphics products; and the Technology Division, which is engaged in the
manufacture, sale and support of the Crescent Computer and distribution of
related components and DEC Reseller activities.
Strategy
The Company's overall business strategy is to become a
nationally-recognized, vertically-oriented provider of computer products and
services. The Company intends to accomplish this goal through internal growth of
its operating divisions, acquisitions of complementary businesses and expansion
into selected international markets.
Internal Growth. The Company anticipates that it will be able to expand its
operations through internal growth of each of its operating divisions. The
Company will seek to increase the customer base of the Technology Division by
utilizing the consolidated marketing and distribution structure of the Graphics
Division achieved as a result of the Acquisitions, by increased marketing of the
Crescent Computer to selected markets, and through enhanced product and service
offerings. The Company believes that the increased technical personnel and
capabilities will enable Prisym to achieve higher certifications with DEC,
thereby broadening the product mix it can make available to its customers.
Acquisitions. The Company intends to expand its operations through
acquisitions of complementary businesses. The Company intends to focus its
acquisition activities on profitable technology companies that can be integrated
into the Company's existing divisional structure, increase divisional revenues,
expand the geographic and technical scope of the Company's operations and offer
a greater range of products and services to existing and potential customers.
Although the Company continually explores acquisition possibilities and has
targeted a number of computer graphics distributors, including NECG in Westford
Massachusetts, it is not currently engaged in active discussions or negotiations
with respect to any potential acquisitions and has no agreements, arrangements
or understandings regarding any potential acquisitions. There can be no
assurance that the Company's acquisition program will be successful, that the
acquisition of NECG or any other company will be completed or that, if
completed, any companies acquired will be profitable, or will result in revenues
to the Company.
International Expansion. The Company intends to market the Crescent
Computer and components, as well as products and services distributed by the
Graphics Division, to selected international markets, such as Canada, the United
Kingdom, South Africa and Australia.
The Company's Divisions and Products
The Graphics Division
General
The Graphics Division currently consists of five regional wholesale
distributor subsidiaries which specialize in computer graphics technologies --
G&R, Microsouth, tekgraf Texas, CGD and IGD. The Graphics Division sells and
supports products in the digital prepress, presentation graphics, color desktop
publishing, large format display graphics, digital imaging, electronic drawing
management, CAD and other emerging computer graphics technologies markets. The
Company provides value-added sales, marketing, fulfillment, and logistics
support for more than 30 manufacturers of a broad array of complex computer
graphics hardware and software. See "-Products and Markets."
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Although initially comprised of six individual companies, central to the
business model of the Graphics Division and a core motivation for the
Acquisitions and the resulting business combination were the pre-existing
relationships among such companies and their principals. The desire to provide
manufacturers with national sales and marketing programs fostered close
cooperation among these regional firms, ultimately leading to the formation of
two trade associations, the David Group and the Vision Group. The purpose of
these associations was to facilitate joint marketing and promotion, product line
acquisitions, the sharing of technical resources and sales strategies, and the
transfer of excess inventory. All of the companies that make up the Graphics
Division are current or former members of one or both of such trade
associations.
The goal of the Graphics Division is to build on the aforementioned
historic inter-company cooperation and function as a single entity with respect
to sales, marketing, advertising, public relations, technical support and
technology evaluation. With the current exception of the areas of Southern
California, Arizona, New Mexico and New England, the Graphics Division is in a
position to provide computer graphics manufacturers a national distribution
presence with the key benefit of local technical sales and support. See "-
Customers, Sales and Marketing." After completion of the Offering, the Company
intends to acquire additional regional distributors of computer graphics
technology in order to increase the geographic scope of the operations of the
Graphics Division. There can be no assurance, however, that the Company will
successfully complete any such acquisitions.
During the year ended December 31, 1996 and the six months ended June 30,
1997, revenues from the Graphics Division accounted for 80.5% and 80.3%,
respectively, of the Company's total revenues on a pro forma combined basis.
Products and Markets
The Company's Graphics Division distributes and supports products of over
30 manufacturers, including Agfa Division of Bayer Corporation, Electronics For
Imaging (EFI) Encad, Inc., Epson America, Inc., Mitsubishi Electronics America,
Inc., Scitex America Corporation and Vidar Systems Corporation. Among the
products the Graphics Division distributes and sells are color scanners, color
digital film recorders, digital cameras, color laser printers, color-calibrated
monitors, audio-visual presentation systems, raster image processors (RIPs), ink
jet printers, plotters, pre-press software, image setters, color proofers, mass
storage devices and the consumable products used in many of such products.
Prices typically range from less than $100 to in excess of $100,000.
The Company's agreements with manufacturers are generally non-exclusive,
provide for wholesale distribution to dealers and resellers in specified
geographic territories and are terminable by either party without cause on
either 30 or 60 days' notice.
It is the intention of the Graphics Division to initially operate in the
following four vertical markets:
o Digital Pre-Press
o Computer-Aided Design (CAD)
o Electronic Drawing Management Systems (EDMS)
o Display Graphics
Digital Pre-Press. Over the last three years, there has been a dramatic
shift in the process printing industry from manual, analog production of printed
materials to the use of computers. Historically the production of a printed
brochure, magazine or catalog involved hundreds of manual steps using
photographic materials to produce the final press-ready copy.
With rapid advances in software and hardware, much of today's printed
materials are produced digitally. The print production process now allows a
printed piece to go from concept to imaged printing plate in a fully digital
environment. Copywriting, proofing and revisions all take place on a desktop
computer, increasing the speed and efficiency of the pre-press process, and
streamlining personnel requirements in the process. The Company believes this
market is in a period of rapid transition regarding the manner in which
electronics products are delivered to the traditional printing customer. When
digital pre-press systems sold for $200,000 per seat (user), most manufacturers
used a captive direct sales force to sell to the end-user. Today, the typical
seat sells for under $20,000, forcing manufacturers to utilize a reseller
channel to deliver their products.
The Graphics Division sells input, proofing, networking, color management
software and output devices, which are integral parts of a digital pre-press
system. These products are typically sold through two classes of resellers:
graphic arts dealers who have traditionally sold film, chemicals, printing
plates and other analog pre-press supplies, and graphics VARs who have
specialized in pre-press workflow technologies and the automation of the
pre-press process.
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Computer Aided Design (CAD). Over the last ten years, traditional drafting
tables have given way to the desktop computer. Today, most architectural and
engineering design and drafting in the United States is done using a desktop
computer or workstation.
The CAD market is a more mature digital market than digital pre-press. As a
result, the delivery mechanism for products into this market has adapted to the
combination of less expensive products and more informed buyers. According to
industry sources, over 90% of all CAD software and peripherals are delivered
using a multi-tiered reseller channel.
The Graphics Division sells primarily processing and output products in
this market, with plotters, high-resolution graphics displays and optical
storage representing the majority of sales.
Electronic Drawing Management Systems (EDMS). The use of CAD systems in the
engineering and architectural community has created a workflow problem for those
firms which have embraced CAD - what to do with the archive of manually drafted
drawings.
EDMS allow these customers to capture (i.e., scan) paper drawings and store
them digitally. When needed, they can be retrieved, annotated, printed or
converted to CAD format for further revision. Since most of these functions can
be performed using existing CAD workstations or PC's, the cost of converting to
an EDMS systems is relatively low, and the demand for such systems is growing
dramatically.
The Graphics Division sells all of the components necessary for the
installation of an EDMS system, including large format scanners, archiving and
manipulation software, optical storage systems and output devices.
Display Graphics. The most rapidly growing segment of the computer graphics
output market is display graphics. Display graphics, or large format graphics
describes a process that allows computer-generated or captured images to be
printed in sizes up to 60" wide.
Historically, these images could only be printed on color electrostatic
printers costing over $120,000. However, over the last three years, significant
advances in ink-jet technology, software, specialty inks and media have placed
the cost of entry for display graphics systems starting at under $10,000, and
market acceptance has been rapid. End-users of this technology include a wide
range of industries and markets, such as:
o Trade-show graphics - production of booth and arcade displays
o Point of Sale graphics - floor displays
o Sign Shops - traditional signage, fleet graphics
o Print-for-Pay (e.g., Kinkos, Sir Speedy)
o Package Design - package prototyping
o Graphic Arts - imposition proofing
Products sold to this market include large-format ink-jet printers (ENCAD),
faster image processing software (Amiable Technologies, EFI, Onyx Graphics,
PISA), lamination systems (Seal Products, a division of Hunt Manufacturing) and
a wide range of inks, papers and other specialty media.
Customers, Sales and Marketing
The Graphics Division's customers are principally value-added resellers
(VARs) and systems integrators (SIs), as well as, for certain products,
retailers, mass merchandisers and direct marketers. VARs typically focus on
sales to users in specific vertical markets where the selling organization has
unique knowledge and expertise concerning the prospective customer's
application. These customers purchase products from the Company and resell them
as an integrated solution bundled with installation services and post-sales
support. SIs typically purchase products from the Company for further
integration into a much larger solution comprised of components from many
sources. These solutions typically are very large in scale and may involve an
integration contract between the SI and the end-user customer. The Graphics
Division utilizes the retail, mass merchant and direct marketing sales channels
when product demand is firmly established and a lower cost mechanism of delivery
to the end user is warranted.
Currently, the Graphics Division has 21 outside and 18 inside sales
representatives and seven technical support representatives. The Company
believes that this constitutes the highest concentration of sales and technical
support professionals in the country devoted to the sales, marketing, and
support of high-end computer graphics products.
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The Company's sales representatives receive commissions based on sales. During
each of the years ended December 31, 1995 and 1996 and the six months ended June
30, 1997, compensation paid to outside sales representative amounted to less
than 5% of the Company's sales.
Each regional office of the Graphics Division maintains and has training
and demonstration facilities equipped with its manufacturers' hardware and
applications software. These resources are made available to prospects and
customers for product evaluations, product training, demonstrations, benchmark
testing and in-house and in-the-field seminars. In addition, the Graphics
Divisions' sales force and technical sales representatives are trained to
demonstrate the technology it distributes and the applications of such
technology. Inside and outside technical sales representatives are also trained
to understand their manufacturers' products, the competitors' products, related
applications, software and the relevant end-user markets.
The Company believes the service offered by the Graphics Division is unique
in providing face-to-face sales, marketing, and distribution of mid- to high-end
computer graphics products sold through vertical reseller channels. Typically,
products carried by the Graphics Division are relatively complex, requiring
technical sales training, product demonstrations, product training, pre-sale and
post-sale technical support and immediate product availability. Selling and
supporting products in these markets requires knowledge of many distinct types
of hardware and software as well as communications protocols, networking
architecture, file formats, compression techniques, and other systems
integration issues. Manufacturers of products with such a level of complexity
often need to leverage their own limited resources by selling and distributing
through reseller organizations. Similarly, reseller organizations are often
severely limited in the technical sales and marketing resources they can devote
to the sale of specific products. To address this problem, each regional office
of the Graphics Division augments both the manufacturer's and the reseller's
staff, capitalizing on its ongoing relationships with the local resellers and
end user community. Resellers are trained and assisted by Graphics Division
staff in all aspects of sales, marketing, distribution and installation of its
products.
The Company believes that the Acquisitions and the consolidation of the
operations of G&R, Microsouth, tekgraf Texas, CGD and IGD into the Graphics
Division will enable it to establish a national distribution network. In
addition to economies of scale achieved by the Company, the Company believes
that it will be more cost-effective for certain manufacturers of computer
graphics technology and peripheral equipment to utilize the Company as a
distributor than to maintain their own extensive internal sales forces.
The Technology Division
General
The operations of the Technology Division currently consist of the
manufacture of the Crescent Computer and the DEC Reseller activities of Prisym.
The Company custom designs, assembles and sells custom or "made-to-order"
premium servers or workstations (Crescent Computers) and related technology to
VARs, vertical solution providers ("VSPs"), corporations, universities and the
government. See "-- Customers, Sales and Marketing." The Company also provides
services to its customers, including system architecture design, hardware
consulting and customer support.
Products
The Crescent Computer is a PC which can be assembled in a number of
different configurations using standard component parts. Although many of the
Crescent Computers are based on standard configurations, customization enables
the Company to accommodate customer computer needs with respect to storage
capacity, speed, price, applications, size, configuration and a range of other
considerations that can be accommodated in whole or in part by the selection of
appropriate components. The Company works with SIs on network configuration. The
Company also provides its customers with continuing technical support and
assistance in the maintenance and operations of Company purchased products.
Crescent Computers are currently being used to operate non-sterile heart
catheterization diagnostic equipment, as voice mail/auto-attendant controllers,
in informational kiosks and in other process-control applications. The Company
also sells servers and RAID storage systems to VARs and other companies seeking
to create Internet websites, internal networks, graphics and CAD workstations
and application servers.
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Through Prisym, the Company provides DEC's Alpha-based Workstations and
servers, mass storage, printers, components and computer peripherals and
supplies to the nationwide installed base of DEC customers. Prisym's customers
include Fortune 500 companies, governmental agencies and educational
institutions.
During the year ended December 31, 1996 and the six months ended June 30,
1997, sales by the Technology Division accounted for 19.5% and 19.7% of the
Company's revenues, respectively, on a pro forma combined basis.
Manufacturing and Suppliers
The Company's manufacturing operations consist of the assembly of Crescent
Computers at its facility in Norcross, Georgia and the testing of the electronic
and mechanical components incorporated into its products.
The Company has elected to assemble its products utilizing principally
off-the-shelf electronic components parts available from multiple sources. The
Company believes that this practice helps to ensure better quality control and
pricing by allowing the Company to select the best manufactured and best
performing components available on the market (rather than a proprietary product
that may fall behind the "curve" in terms of either such characteristic), and to
purchase such components from marketplace sources that offer the best prices at
the time the particular components are needed for production (rather than to
have prices dictated by the limited sources able to provide a proprietary
component). The Company obtains component parts on a purchase order basis and
does not have long-term contracts with any of its suppliers. To date, the
Company has not experienced significant interruptions in the supply of such
component parts, and believes that numerous qualified suppliers are available.
The Company believes that the inability of any of its current suppliers, except
as specified below, to provide component parts to the Company would not
adversely affect the Company's operations and that alternate sources could be
readily established.
The Company currently obtains the motherboards (a primary component of the
PC) from two sources. Certain of the Company's file server products incorporate
a motherboard which is currently purchased from a sole supplier. Although the
Company has to date been able to obtain adequate supplies of this component and
does not anticipate any related sourcing problems, the inability in the future
to obtain sufficient numbers of such components or to develop alternative
sources could result in delays in product introductions or shipments. Such
delays could have a material and adverse effect on the Company's results of
operations. The Company plans to attempt development of additional alternative
sources to limit any adverse impact on the Company's result of operations.
The Company has established a comprehensive testing and qualification
program to ensure that all subassemblies meet the Company's specifications and
standards before final assembly and testing. The Company's quality control
program includes diagnostic tests, assembly, burn-in, final configuration and
final quality assurance tests and the employment of process controls at its
manufacturing facility. The Company has also implemented quality control
policies that are reviewed and accepted by the Company's major customers. The
Company believes that this procedure helps ensure a high-quality product.
The Company's own manufacturing facility totals approximately 4,000 square
feet. The Company believes that additional manufacturing facilities, if
necessary, are available. The Company is currently operating at approximately
50% of capacity at this facility. See "- Facilities and Administrative
Functions."
Customers, Sales and Marketing
Customers for the Crescent Computer include OEMs, other vertical market
computer resellers, computer dealers, universities, government entities and
corporations. The Technology Division does not market to individual end-users,
focusing instead on establishing relationships with entities which will
constitute repeat sales and have internal computer support personnel capable of
handling local issues prior to involvement of Company personnel.
Prisym markets to the current installed base of DEC customers. Such
customers primarily include Fortune 500 and other large corporations,
governmental agencies and educational institutions.
The Company currently distributes Technology Division products principally
through the efforts of its internal direct sales force. In the future, the
Company intends to offer Technology Division products through its recently
acquired Graphics Division sales force. Following completion of the Offering,
the Company will continue to expand its marketing efforts and seek to (i) expand
the customer base for the Crescent Computer, (ii) expand the geographic market
serviced by the Graphics Division and (iii) increase both the number of products
distributed and the number of manufacturers whose products are distributed by
the Graphics Division.
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Service and Support
The Company believes that customer service and support is a significant
competitive factor in the network systems market in which it sells the Crescent
Computer and will become more important as local area networks ("LANs") become
more complex and as more enterprises implement business-critical applications on
their networks. The Company supports its customers by providing rapid problem
resolutions both during and after the installation process. The Company
maintains a technical support organization that assists customers in
troubleshooting problems and providing replacement parts. The Company provides a
toll-free hotline to help diagnose and correct system interruptions as they
occur at customer sites and its support staff is available during normal
business hours.
The Company warrants all of its Crescent Computer servers and workstations
against defects in materials and workmanship for two years. During the warranty
period, the Company will repair or replace any Crescent Computer, or component
thereof, which the Company identifies as defective. The Company will, under
certain circumstances, send replacement parts to the customer site prior to
return of the defective component in order to minimize down time. The Company
has contracted with a service provider to furnish on-site service of Crescent
Computers to customers which choose that option.
The Company's product warranties do not materially differ from those
generally available in the industry. In most instances, the Company receives
warranties on its products from its vendors which are at least equivalent to
those it provides to its customers. To date, the Company has not experienced
significant claims under its warranties.
Backlog
The Company does not have significant backlog because (i) the Technology
Division is able to manufacture and deliver products generally within a few days
of order receipt and it has no long-term contracts to supply products to
customers (but rather manufactures and sells products on the basis of individual
purchase orders as and when received) and (ii) the Graphics Division generally
receives orders for shipment the same or next day. Accordingly, backlog at the
beginning of a quarter may not represent a significant percentage of the
products anticipated to be sold in that quarter. Quarterly revenues and
operating results depend on the volume and timing of bookings received during
the quarter, which are difficult to forecast. Therefore, management of the
Company does not consider order backlog a significant indicator of the Company's
future revenues.
Competition
The business of manufacturing and selling computers and computer peripheral
equipment is intensely competitive and rapidly changing. The Company believes
that the principal competitive factors in this industry include relative price
and performance, product availability, technical expertise, financial stability,
service, support and reputation.
The Company's Graphics Division competes primarily with computer equipment
manufacturers that either utilize an in-house sales force to market their
products to resellers and end-users or utilize the services of large, national
fulfillment distributors. The Company believes that its primary competition will
come from the latter category whose specialty is order fulfillment. The Company
believes that the key factors differentiating it from such competitors lies in
its ability to provide technical sales training, product demonstrations, product
training, pre- and post-sale technical support and evaluation units.
The Company's Crescent Computers are constructed with standardized parts
which are available to others in the market. The Company's competitors include
established computer product manufacturers, some of which supply products to the
Company, computer resellers, distributors and service providers. Some of the
Company's current and potential competitors have substantially greater
financial, sales, marketing, technical and other competitive resources than
those of the Company. As a result, the Company's competitors may be able to
devote greater resources than the Company to the sales and service of their
computer products. As the computer market in which the Company competes has
matured, product price competition has intensified and is likely to continue to
intensify, which may make it too costly for the Company to continue its "made to
order" method of doing business. One of the results of this competition may be
to lower sales prices and decrease profit margins.
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Technological competition from other and longer established computer
hardware manufacturers and software developers is significant and expected to
increase. The Company expects that hardware manufacturers and software
developers will continue to enter the market to provide and package integrated
information distribution solutions to the same customer base served by the
Company's Technology Division. All such market participants will compete
intensely to maintain or improve their market shares and revenues. Most of the
companies with which the Company's Technology Division competes have
substantially greater capital resources, research and development staffs,
marketing and distribution programs and facilities, and many of them have
substantially greater experience in the production and marketing of products.
In the development market for network servers and workstations, the Company
experiences competition from hundreds of small companies and a number of
significant competitors, including such major industry participants as IBM,
Microsoft Corporation, Novell, Inc. and Compaq Computers, Inc. Accordingly,
there is no assurance that the Crescent Computer will continue to achieve
sufficient market acceptance to assure the Company's future success and long
range profitability in the face of competition with such significantly larger
and better capitalized companies.
With respect to the Technology Division's DEC reseller activities, the
Company faces competition from several national and regional companies, many of
which are substantially larger and more established than the Company and have
national sales forces.
Intellectual Property
The Company has no patents and its success will depend, in part, on its
ability to preserve its trade secrets and proprietary know-how, and to operate
without infringing the proprietary rights of third parties.
The Company seeks to protect trade secrets and proprietary know-how, in
part, by confidentiality agreements with employees, consultants, advisors, and
others. There can be no assurance that such employees, consultants, advisors, or
others, will maintain the confidentiality of such trade secrets or proprietary
information, or that the trade secrets or proprietary know-how of the Company
will not otherwise become known or be independently developed by competitors in
such a manner that the Company will have no practical recourse.
Product Research and Market Development
The market for the Company's products is characterized by rapid
technological change and evolving industry standards, and it is highly
competitive with respect to timely product innovations. The introduction of
products embodying new technology and the emergence of new industry standards
can render existing products obsolete and unmarketable. The Company believes
that its future success will depend upon its ability to develop, manufacture and
market new products and enhancements to existing products on a cost-effective
and timely basis.
If the Company is unable for technological or other reasons to develop
products in a timely manner in response to changes in the industry, or if
products or product enhancements that the Company develops do not achieve market
acceptance, the Company's business will be materially and adversely affected.
The Company has in the past experienced delays in introducing certain of its
products and enhancements, and there can be no assurance that it will not
encounter technical or other difficulties that could in the future delay the
introduction of new products or enhancement. Such delays in the past have
generally resulted from the Company's need to obtain a requisite component from
a third-party vendor whose own development process has been delayed (e.g., the
RAID controller card for the Company's server products).
Employees
As of September 30, 1997, the Company had 94 full-time employees, 28 in the
Technology Division and 66 in the Graphics Division, and 10 part-time employees.
The Company intends to hire additional management, administrative, technical and
sales personnel upon completion of the Offering. None of the Company's employees
is represented by a labor union and the Company believes its relations with its
employees are satisfactory.
Facilities and Administrative Functions
The Company's executive offices and manufacturing and warehousing
facilities are located in approximately 7,600 square feet in Norcross, Georgia
pursuant to a lease expiring October 31, 1998 which provides for an annual
rental of $30,600. Prisym currently occupies space in a building owned by PDP,
Inc. ("PDP"), a corporation which
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<PAGE>
is beneficially owned by certain officers, directors and stockholders of the
Company or members of their immediate families, for an annual rental of $36,000.
See "Certain Transactions." PDP has entered into an agreement for the sale of
such building. Prior to completion of such sale, Prisym will relocate to as yet
unidentified space in Norcross, Georgia.
The table below sets forth certain information with respect to leased
properties of the Graphics Division, all of which are leased from non-affiliated
lessors:
<TABLE>
<CAPTION>
Lease Terms
--------------------------
Approximate Square Expiration Annual
Location Footage Date Rental(1)
--------- ------------------ ---------- ---------
<S> <C> <C> <C> <C>
980 Corporate Woods Parkway
Vernon Hills, Illinois....................... 14,935 5/31/00 $159,058
645 Hembree Parkway
Roswell, Georgia............................. 10,447 4/30/98 $47,012
620 East Diamond Avenue
Gaithersburg, Maryland....................... 8,993 6/30/99 $91,368
7020 Knoll Center Parkway
Pleasanton, California....................... 7,892 12/8/01 $96,888(2)
6721 Port West
Houston, Texas............................... 5,495 2/28/98 $45,000
</TABLE>
- ----------
(1) Certain of these leases provide for moderate annual rental increases.
(2) A portion of these premises is being subleased to a company affiliated with
IGD for an annual rental of approximately $39,000.
The Company also maintains five regional warehouses for the Graphics
Division. As part of its ongoing consolidation, the Company is examining the
feasibility of reducing the number of warehouses to three.
The Company has recently begun examining centralization of administrative
and marketing functions from the existing seven locations to its executive
offices in Georgia. Management is currently evaluating accounting systems and
integrated Management Information Systems ("MIS") that will provide inventory
management, billing and collection management, accounts receivable and accounts
payable management and streamlined consolidated financial reporting. See "Use of
Proceeds." In addition, the MIS system being evaluated is intended to increase
the Company's customer service and sales capabilities by providing contact
management, customized management reports, facilitating order tracking and
automating sales projections.
Legal Proceedings
The Company is not involved in any material legal proceedings.
38
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company:
Name Age Position
------ ---- -------
Phillip C. Aginsky(1)(2) . 44 Chief Executive Officer and
Chairman of the Board of Directors
Dan I. Bailey ............ 42 Co-President-Technology Division and Director
William M. Rychel(2) ..... 46 Co-President-Graphics Division and Director
Martyn L. Cooper ......... 48 Chief Operating Officer and Director
Peter C. Armstrong(4) .... 50 Chief Financial Officer
J. Thomas Woolsey ........ 48 Director
Albert E. Sisto(3) ....... 48 Director
Frank X. Dalton, Jr.(3) .. 40 Director
- ----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Such individual will join the Board upon completion of the Offering and
will serve on the Audit Committee
(4) Such individual has agreed to join the Company effective November 1, 1997.
Phillip C. Aginsky has served as Chairman of the Board of Directors of the
Company since March 1993 and as Chief Executive Officer since October 1997. From
September 1990 to February 1992, Mr. Aginsky was the Chairman and Chief
Executive Officer of Bennett & Fountain PLC, an electrical and electronic
wholesaler. In 1981, he joined ElCentre Holdings Limited ("ElCentre"), South
Africa's largest electrical manufacturer and distributor, serving as Group
Administrative Director until 1989, and served in the same capacity at Voltex
Holding Limited, ElCentre's operating subsidiary, until the sale of such entity
in 1990. After the sale until joining the Company, Mr. Aginsky enjoyed a brief
respite from working while overseeing his personal investments. Mr. Aginsky
earned a Bachelor of Commerce, a Certificate in the Theory of Accounting, Higher
Diplomas in Tax Law and Company Law and a Master of Business Administration from
the University of Witwatersrand in Johannesburg, South Africa.
Dan I. Bailey has served as Co-President -- Technology Division and a
director of the Company since March 1993. He joined the Company's predecessor
entity as Sales Manager in September 1990. From April 1990 to September 1990,
Mr. Bailey owned Datanet, a computer hardware sales company. Prior thereto, he
was a police officer for ten years.
William M. Rychel became Co-President - Graphics Division and a director of
the Company upon completion of the Acquisitions in June 1997. Prior thereto, he
served as the President of G&R, a company he co-founded in 1985.
Martyn L. Cooper became a Regional Sales Director and a director of the
Company upon completion of the Acquisitions in June 1997 and Chief Operating
Officer in October 1997. Prior thereto, he served as the President of tekgraf
Texas, a company he founded in 1987. Mr. Cooper earned a bachelor of science
degree in mathematics from the University of Surrey in England.
Peter C. Armstrong, a Certified Public Accountant, has provided business
planning, accounting and financial management consulting services to businesses
in the technology and entertainment industries since April 1997. From September
1995 to April 1997, Mr. Armstrong served as Vice President and Chief Financial
Officer of Media Marketing Services, Inc., an incentive travel company based in
Georgia. From January 1994 until July 1995, he was employed as Senior Vice
President and Corporate Controller of First Data Corporation (formerly, First
Financial Management Corporation), a publicly-held information services company.
Prior thereto, from August 1992 to January 1994, Mr. Armstrong served as Vice
President and Chief Financial Officer of Premier Pharmacy, Inc. in Georgia. From
1986 until August 1992, he served as Vice President and Corporate Controller of
The Portman Companies, a real estate development and management company. Mr.
Armstrong earned a bachelor of science degree in business administration from
the University of Florida and attended the Stonier Graduate School of Banking at
Rutgers University.
J. Thomas Woolsey became a Regional Sales Director and a director of the
Company upon completion of the Acquisitions in June 1997. Prior thereto, he
served as the President and General Manager of Microsouth from 1989 to June
1997. From 1983 to 1989, Mr. Woolsey was an outside sales and product marketing
specialist for
39
<PAGE>
Microsouth and a Professor of Engineering Technology at Walters State Community
College. Mr. Woolsey earned a bachelor of science degree in industrial
engineering and a master's degree in finance and marketing from the University
of Tennessee, Knoxville.
Albert E. Sisto has served as President, Chairman and Chief Executive
Officer of DocuMagix, Inc., a computer software company specializing in personal
content management, since October 1994. From September 1989 to October 1994, Mr.
Sisto was the President and Chief Executive Officer of PixelCraft, Inc.
(formerly BarneyScan Corporation), a manufacturer and marketer of prepress
scanners, image management software and color separation software for open
systems. Mr. Sisto earned a bachelor of science degree in engineering from the
Stevens Institute of Technology. Mr. Sisto also serves on the Board of Directors
of Insignia Solutions, plc., a computer software company.
Frank X. Dalton, Jr. has served as a Principal of Cordova Capital, a
venture capital firm, since November 1996. From January 1996 to November 1996,
Mr. Dalton was an Executive Vice President of Ambassador Capital Corporation, an
investment banking firm. From November 1989 to January 1996, Mr. Dalton was
employed by BDO Seidman, LLP, a public accounting firm, with his last position
being Partner. Mr. Dalton earned a bachelor of science in accounting from the
University of South Carolina and is a Certified Public Accountant.
Directors serve until the next annual meeting or until their successors are
elected and qualified. Officers serve at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment. See
"Management -Employment Agreements."
The Delaware General Corporation Law permits a corporation through its
Certificate of Incorporation to eliminate prospectively the personal liability
of its directors to the corporation or its stockholders for damages for breach
of fiduciary duty of care as a director, with certain exceptions. The exceptions
include acts or omissions in bad faith or which involve intentional misconduct
or knowing violations of law, improper declaration of dividends, and
transactions from which the director personally gained a financial profit or
other advantage to which he was not legally entitled. The Company's Certificate
of Incorporation eliminates personal liability of its directors to the extent
permitted by this statutory provision.
The Company has been advised that it is the position of the Securities and
Exchange Commission that insofar as the foregoing provision may be invoked to
disclaim liability for damages arising under the Securities Act, such provision
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
Board Committees and Designated Directors
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee makes recommendations to the Board concerning
salaries and incentive compensation for officers and employees of the Company
and may administer the Company's 1997 Stock Option Plan. See "Management - Stock
Option Plan." The Audit Committee reviews the results and scope of the audit and
other accounting related matters.
The Company has agreed, if requested by the Representative, to nominate a
designee of the Representative to the Company's Board of Directors for a period
of five years from the date of this Prospectus. See "Underwriting."
Director Compensation
After completion of the Offering, non-employee directors will receive $500
for each Board and committee meeting attended and will be reimbursed for their
expenses in attending such meetings. Directors are not precluded from serving
the Company in any other capacity and receiving compensation therefor. Directors
are also entitled to receive options under the Company Stock Option Plan.
40
<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation
awarded to, earned by, or paid for services rendered to the Company and its
Subsidiaries in all capacities during the fiscal year ended December 31, 1996,
by (i) the Company's principal executive officer and (ii) the Company's and the
Subsidiaries' most highly compensated executive officers whose salary and bonus
for such year exceeded $100,000.
Summary Compensation Table
Annual Compensation
----------------------- All Other
Name and Principal Position Salary($) Bonus($) Compensation($)
- --------------------------- --------- -------- ---------------
Phillip C. Aginsky (1) ............. -- 369,137 3,338(2)
Chairman of Crescent
Dan I. Bailey ...................... 60,000 131,000 1,820(2)
President of Crescent
Peter Goletz ....................... 60,000 131,000 1,820(2)
Vice President of Crescent
William M. Rychel .................. 120,000 50,000 67,889(3)
President of G&R
Patrick J. McLaughlin .............. 64,000 108,937 1,629(2)
Vice President of IGD
- ----------
(1) Includes $135,000 paid to Alongal as a management fee for providing Mr.
Aginsky's services to the Company. See "Certain Transactions." Mr. Aginsky
serves as President of Alongal.
(2) Consists of health insurance premiums paid by the Company.
(3) Includes $16,182 of life and health insurance premiums paid by G&R and
$51,707 of other perquisites, including club membership fees, automobile
allowances and personal travel.
Employment Agreements
In June 1997, the Company entered into two-year employment agreements with
each of Messrs. Aginsky, Bailey, Rychel, Cooper and Woolsey, as well as with
Patrick J. McLaughlin and A. Lowell Nerenberg, who serve as Regional Sales
Directors, each of which provides for a base annual compensation of $125,000.
On November 1, 1997, the Company will enter into a two-year employment
agreement with Peter C. Armstrong to serve as Chief Financial Officer for a base
annual compensation of $120,000. Mr. Armstrong will be granted options to
purchase 15,000 shares of Common Stock at an exercise price of $6.00 per share
on the date of this Prospectus. He will also be granted incentive options to
purchase 15,000 shares of Common Stock on each of the first and second
anniversaries of the date of this Prospectus. See "-- Stock Option Plan."
All of the agreements also contain two-year post-termination
confidentiality and non-competition provisions. Public policy limitations and
the difficulty of obtaining injunctive relief may impair the Company's ability
to enforce the non-competition and nondisclosure covenants made by its
employees. The Company has determined that it will implement a bonus plan during
the year ending December 31, 1999 pursuant to which the foregoing individuals
will be eligible to participate in a bonus pool equal to a percentage of the
Company's pre-tax profits, if any, in excess of $3,000,000.
The Company has agreed with the Representative that the compensation of the
Company's executive officers, division managers and regional operating managers
will not exceed $125,000 for any of such individuals for a period of 13 months
from the closing of the Offering.
The Company has applied for key-person life insurance in the amount of
$2,000,000 on the lives of each of Messrs. Aginsky, Bailey and Rychel.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1996, Phillip C. Aginsky, Dan I.
Bailey and Peter Goletz participated in deliberations of the Company's Board of
Directors concerning executive officer compensation.
Key Personnel
A. Lowell Nerenberg became a Regional Sales Director of the Company upon
completion of the Acquisitions. Prior thereto, he served as President of CGD, a
company he founded in 1986.
Patrick J. McLaughlin became a Regional Sales Director of the Company upon
completion of the Acquisitions. Prior thereto, he served as Vice President of
IPM and IG, companies he co-founded in 1989.
41
<PAGE>
Stock Option Plan
In August 1997, the Board of Directors adopted and the Company's
stockholders approved, the 1997 Stock Option Plan (the "Plan") covering 300,000
shares of the Company's Class A Common Stock pursuant to which employees,
officers and directors of, and consultants or advisers to, the Company and any
subsidiary corporations are eligible to receive incentive stock options
("incentive options") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") and/or options that do not qualify as
incentive options ("non-qualified options"). The Plan, which expires in August
2007, will be administered by the Board of Directors or a committee of the Board
of Directors, provided, however, that with respect to "officers" and
"directors," as such terms are defined for the purposes of Rule 16b-3 ("Rule
16b-3") promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"), such committee shall consist of "disinterested" directors as defined in
Rule 16b-3, but only if at least two directors meet the criteria of
"disinterested" directors as defined in Rule 16b-3. The purposes of the Plan are
to ensure the retention of existing and future executive personnel, key
employees, directors, consultants and advisors who are expected to contribute to
the CompanyOs future growth and success and to provide additional incentive by
permitting such individuals to participate in the ownership of the Company, and
the criteria to be utilized by the Board of Directors or the committee in
granting options pursuant to the Plan will be consistent with these purposes.
The Plan provides for automatic grants of options to certain directors in the
manner set forth below.
Options granted under the Plan may be either incentive options or
non-qualified options. Incentive options granted under the Plan are exercisable
for a period of up to 10 years from the date of grant at an exercise price which
is not less than the fair market value of the Class A Common Stock on the date
of the grant, except that the term of an incentive option granted under the Plan
to a stockholder owning more than 10% of the outstanding voting power may not
exceed five years and its exercise price may not be less than 110% of the fair
market value of the Class A Common Stock on the date of the grant. To the extent
that the aggregate fair market value, as of the date of grant, of the shares for
which incentive options become exercisable for the first time by an optionee
during the calendar year exceeds $100,000, the portion of such option which is
in excess of the $100,000 limitation will be treated as a non-qualified option.
Options granted under the Plan to officers, directors or employees of the
Company may be exercised only while the optionee is employed or retained by the
Company or within 90 days of the date of termination of the employment
relationship or directorship. However, options which are exercisable at the time
of termination by reason of death or permanent disability of the optionee may be
exercised within 12 months of the date of termination of the employment
relationship or directorship. Upon the exercise of an option, payment may be
made by cash or by any other means that the Board of Directors or the committee
determines. No option may be granted under the Plan after August 2007.
Options may be granted only to such employees, officers and directors of,
and consultants and advisors to, the Company or any subsidiary of the Company as
the Board of Directors or the committee shall select from time to time in its
sole discretion, provided that only employees of the Company or a subsidiary of
the Company shall be eligible to receive incentive options. An optionee may be
granted more than one option under the Plan. The Board of Directors or the
committee will, in its discretion, determine (subject to the terms of the Plan)
who will be granted options, the time or times at which options shall be
granted, and the number of shares subject to each option, whether the options
are incentive options or non-qualified options, and the manner in which options
may be exercised. In making such determination, consideration may be given to
the value of the services rendered by the respective individuals, their present
and potential contributions to the success of the Company and its subsidiaries
and such other factors deemed relevant in accomplishing the purpose of the Plan.
To date, no options have been granted under the Plan. The Company will
grant options to purchase 15,000 shares to Peter Armstrong on the date of this
Prospectus. Such options will be exercisable at $6.00 per share and will vest in
full one year from the date of grant.
Certain Statutory and Charter Provisions
Section 203 of the Delaware General Corporation Law provides, in general,
that a stockholder acquiring more than 15% of the outstanding voting shares of a
corporation subject to the statute (an "Interested Stockholder") but less than
85% of such shares may not engage in certain "Business Combinations" with the
corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder unless (i) prior to such date the
corporation's Board of Directors approved either the Business Combination or the
transaction in which
42
<PAGE>
the stockholder became an Interested Stockholder or (ii) the Business
Combination is approved by the corporation's Board of Directors and authorized
by a vote of at least two-thirds of the outstanding voting stock of the
corporation not owned by the Interested Stockholder.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive a benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholders,
transactions with the corporation which increase the proportionate interest of
the Interested Stockholder or transactions in which the Interested Stockholder
receives certain other benefits.
These provisions could have the effect of delaying, deferring or preventing
a change of control of the Company. The Company's stockholders, by adopting an
amendment to the Certificate of Incorporation or bylaws of the Company, may
elect not to be governed by Section 203, effective 12 months after adoption.
Neither the Certificate of Incorporation nor the bylaws of the Company currently
excludes the Company from the restrictions imposed by Section 203.
The General Corporation Law of Delaware permits a corporation through its
Certificate of Incorporation to eliminate the personal liability of its
directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty of loyalty and care as a director, with certain exceptions.
The exceptions include a breach of the director's duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, improper declarations of dividends, and transactions from
which the directors derived an improper personal benefit. The Company's
Certificate of Incorporation exonerates its directors from monetary liability to
the fullest extent permitted by this statutory provision.
Limitation of Liability and Indemnification Matters
The Company intends to enter into indemnification agreements
("Indemnification Agreement(s)") with each of its directors and officers after
the Offering. Each such Indemnification Agreement will provide that the Company
will indemnify the indemnitee against expenses, including reasonable attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or officer.
Such indemnification will be available if the indemnitee acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Company, and, with respect to any criminal action, had no reasonable
cause to believe his conduct was unlawful. The Indemnification Agreements will
also require that the Company indemnify the director or other party thereto in
all cases to the fullest extent permitted by applicable law. Each
Indemnification Agreement will permit the director or officer that is party
thereto to bring suit to seek recovery or amounts due under the Indemnification
Agreement and to recover the expenses of such a suit if he is successful.
The Company's By-laws provide that the Company shall indemnify its
directors, officers, employees or agents to the full extent permitted by the
laws of Delaware, and the Company shall have the right to purchase and maintain
insurance on behalf of any such person whether or not the Company would have the
power to indemnify such person against the liability. The Company has not
currently purchased any such insurance policy on behalf on any of its directors,
officers, employees or agents.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for indemnification.
43
<PAGE>
CERTAIN TRANSACTIONS
Transactions with Alongal and Anita
Alongal Extrusions, Inc. is a Georgia corporation which is wholly-owned by
Anita, Ltd. ("Anita"), a principal stockholder of the Company. Anita is
wholly-owned by the New Freedom Trust, a trust for the benefit of the father of
Phillip C. Aginsky, Chairman of the Board of the Company. See "Principal
Stockholders." Mr. Aginsky serves as President of Alongal.
From time to time since the Company's inception, Alongal has made advances
to the Company for working capital purposes. During the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1997, the Company made
interest payments to Alongal of approximately $40,000, $126,000, $160,000 and
$80,000, respectively. At June 30, 1997, the amount owed to Alongal was
approximately $2,161,000. Such advances bear interest at the rate of 8% per
annum and are payable on demand. Prior to completion of the Offering, the
Company intends to repay such indebtedness. At the same time, Anita will
contribute $495,000 to the capital of the Company. See " - Other Transactions."
During the years ended December 31, 1994 and 1996, the Company paid Alongal
management fees of $45,000 and $135,000, respectively, for providing the
services of Mr. Aginsky. See OManagement - Executive Compensation.O The Company
does not intend to pay management fees to Alongal after completion of the
Offering.
Pre-Acquisition Transactions Between the Subsidiaries and Their Respective
Affiliates
William M. Rychel, Co-President and a director of the Company and the
President of G&R, and Thomas Gust, a principal stockholder of the Company, are
the co-owners, together with Mr. Gust's brother, of G/B Marketing, Inc. ("G/B"),
a manufacturers' representative in the computer graphics business which shares
office space with G&R. G&R makes payments on behalf of G/B for such firm's
portion of certain overhead expenses, including rent, telephone and facilities
maintenance. G/B generally reimburses G&R for such costs on a monthly basis.
During the years ended December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1997, the total amount of such payments made on behalf of G/B were
$115,000, $134,000, $82,000 and $40,000, respectively. From time to time G&R
also advances funds to G/B for working capital purposes. At December 31, 1996
and June 30, 1997, amounts owed by G/B to G&R were $72,000 and $0, respectively.
From time to time, G&R has sold inventory at cost to NECG. NECG is owned
15% by each of Messrs. Rychel and Thomas Gust, 30% by A. Lowell Nerenberg, an
officer and stockholder of the Company, and the balance by unaffiliated parties.
During the years ended December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1997, such transactions amounted to $785,000, $678,000, $521,000 and
$206,000, respectively.
J. Thomas Woolsey, a director of the Company and the former President of
Microsouth, was the owner of Americad, Inc. ("Americad"), a mail order computer
sales company which was in operation from April 1995 through April 1997.
Americad purchased products from various distributors, including Microsouth, for
resale to the end user. During the years ended December 31, 1995 and 1996 and
the six months ended June 30, 1997, Americad's purchases from Microsouth
aggregated $110,000, $103,000 and $8,000, respectively.
Prior to completion of the Acquisitions, Microsouth performed certain
software development services on behalf of JTW Acquisitions, L.P., an entity
owned by Mr. Woolsey, for which it was not reimbursed. During the years ended
December 31, 1995 and 1996 and the six months ended June 30, 1997, Microsouth
incurred charges of $42,000, $85,000 and $31,000, respectively, relating to this
project.
In March 1993, J. Thomas Woolsey and Martyn L. Cooper sold their 100%
interests in Microsouth and tekgraf Texas, respectively, to Network Imaging
Corporation, a publicly-held company ("NIC"). During the next several years,
such individuals continued to run their businesses as separate subsidiaries of
NIC. In June 1995, Messrs. Woolsey and Cooper repurchased their respective
companies from NIC for $1,000,000 and $375,000, respectively, which purchase
prices were represented by a combination of cash and promissory notes. In
connection with such repurchases, Messrs. Woolsey and Cooper borrowed $250,000
and $125,000, respectively, from their respective companies pursuant to five
year promissory notes bearing interest at 110% of the Applicable Federal Funds
Rate (8.25% at December 31, 1996) (the "NIC Notes"). In July 1995, the NIC Notes
were offset and cancelled in connection with a restructuring of Microsouth and
tekgraf Texas. In December 1996, tekgraf Texas paid $180,000
44
<PAGE>
to NIC in consideration of the cancellation of its $250,000 note. Microsouth
paid $540,000 to NIC in cancellation of its $750,000 note. As a result of such
repurchases, tekgraf Texas and Microsouth recognized extraordinary gains of
$70,000 and $210,000, respectively. See "Selected Financial and Operating Data."
From time to time, Edward H. L. Mason, the former President of IGD, made
working capital advances to IGD. At September 30, 1997, the principal amount
owed to Mr. Mason was $125,000. Such advances bear interest at the rate of 9.25%
per annum and will be repaid prior to or upon completion of the Offering.
From time to time, Beverly and A. Lowell Nerenberg, former officers of CGD,
made working capital advances to CGD. At September 30, 1997, the principal
amount owed to the Nerenbergs was $90,000, $50,000 of which is subordinated to
amounts owed under the NationsBank Facility. Such advances bear interest at the
rate of 12% per annum and will be repaid after the Offering at such time as the
Purchase Price Adjustment to be collected from such individuals, if any, is
determined, See "- The Acquisitions."
The Acquisitions
In May 1997, the Company entered into stock purchase agreements (the
OAgreementsO) with each of the Subsidiaries pursuant to which the Company issued
an aggregate of 2,192,000 shares of its Class B Common Stock in exchange for all
of the outstanding capital stock of each of the Subsidiaries. Pursuant to the
terms of the Agreements, the Subsidiaries agreed to deliver a defined guaranteed
net asset value ("NAV") as of the closing date of June 2, 1997. In certain
cases, the excess net book value over the warranted NAV actually delivered by
the Subsidiaries will be distributed to the former stockholders of the
Subsidiaries as Purchase Price Adjustments. In other cases, former stockholders
of the Subsidiaries will be required to pay the Company any shortfall in NAV
actually delivered.
After completion of the Offering, the Company will make payments in the
approximate aggregate amount of $1,086,000 to the former stockholders of the
Subsidiaries, reflecting such Purchase Price Adjustments. Other former
stockholders will be required to pay the Company an approximate aggregate amount
of $419,000 as Purchase Price Adjustments. See "Use of Proceeds," "Dividends and
Distributions" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The following sets forth (i) the number of shares of Class B Common Stock
received in the Acquisitions by executive officers, directors and principal
stockholders of the Company and (ii) the estimated dollar amount to be paid to
or received from such individuals as a result of Purchase Price Adjustments:
Amount of Amount of
Adjustment to Adjustment to be
Number of be Paid to Received from
Name Shares(1) Stockholder(2) Stockholder(2)
----- --------- ------------ ------------
William M. Rychel .............. 409,000 $ -- $126,000
J. Thomas Woolsey .............. 528,667 $819,000 $ --
Martyn L. Cooper ............... 278,000 $267,000 $ --
Thomas A. Gust ................. 426,000 $ -- $121,000
- ----------
(1) Includes such individuals' Escrow Shares and Indemnification Shares.
(2) The Agreements provide that the actual amounts owed, as adjusted for the
collection of receivables and inventory, will be determined within 180 days
of the acquisition date and, accordingly, are expected to be paid or
collected in December 1997.
The Agreements provide that the representations and warranties contained
therein shall survive for a period of two years from the date of the Agreements.
An aggregate of 1,333,333 of the shares of Class B Common Stock issued pursuant
to the Agreements have been placed in escrow to cover potential claims for
indemnification by the Company under the Agreements.
Transactions with PDP
PDP is a Georgia corporation owned 24.5% by each of Dan I. Bailey,
Co-President and a director of the Company, and Peter Goletz, a principal
stockholder of the Company, and 51% by the wife of Phillip Aginsky. Prisym
currently occupies offices in a building owned by PDP. See "Business--Facilities
and Administrative Functions." In connection with the acquisition of the
aforementioned building, PDP incurred bank indebtedness of $496,000. The bank
loan was guaranteed by Messrs. Bailey and Goletz and Alongal. The Company has
also guaranteed repayment of such debt. PDP will repay such loan from the
proceeds of the sale of the building.
45
<PAGE>
Other Transactions
Certain stockholders of the Company, including Dan I. Bailey, Co-President
and a director of the Company, have made non-interest bearing working capital
advances to the Company over the past several years. At December 31, 1994, 1995
and 1996 and June 30, 1997, amounts owed to Mr. Bailey aggregated approximately
$35,000, $30,000, $64,000 and $16,000, respectively. Such advances are payable
on demand.
Prior to completion of the Offering, the pre-Acquisition stockholders of
the Company will contribute an aggregate of $990,000 to the capital of the
Company. Of such amount, Anita will contribute $495,000 and Dan I. Bailey,
Co-President and a director of the Company, and Peter Goletz, a principal
stockholder of the Company, will each contribute $247,000.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company has adopted a policy that all future
transactions, including loans, between the Company and its officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will continue to
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of Common Stock by (i) each person known by the Company to own beneficially more
than 5% of the outstanding Common Stock, (ii) each director of the Company,
(iii) each executive officer of the Company, and (iv) all executive officers and
directors of the Company as a group, (a) prior to the Offering and (b) as
adjusted to give effect to the sale of the 2,100,000 Units offered hereby:
<TABLE>
<CAPTION>
Percent of Shares
Beneficially Owned
Shares ---------------------- Percent of
Beneficially Before After Voting Power
Name and Address of Beneficial Owner(1) Owned(2) Offering Offering(3) After Offering(3)
- ------------------------------------- ------------ ------- ------- -------------
<S> <C> <C> <C> <C>
Anita, Ltd. ............................... 582,000(5)(6) 17.46% 10.71% 15.51%
Phillip C. Aginsky ........................ 582,000(4) 17.46% 10.71% 15.51%
Dan I. Bailey ............................. 257,000(5)(6) 7.71% 4.73% 6.85%
William M. Rychel ......................... 409,000(5) 12.27% 7.53% 10.90%
Martyn Cooper ............................. 278,000(5) 8.34% 5.12% 7.41%
Peter Goletz .............................. 257,000(5)(6) 7.71% 4.73% 6.85%
Thomas A. Gust ............................ 426,000(5) 12.78% 7.84% 11.35%
Beverly Nerenberg ......................... 213,333(5)(7) 6.40% 3.93% 5.68%
J. Thomas Woolsey ......................... 528,667(5) 15.86% 9.73% 14.08%
Peter Armstrong -- -- -- --
All executive officers and directors
as a group (six persons) ............... 2,054,667(2)(5) 61.64% 37.82% 54.74%
</TABLE>
- ----------
(1) Unless otherwise indicated, the address of such individual is c/o the
Company
(2) All of such shares are Class B Common Stock. See "Description of
Securities." Includes such individuals' Escrow Shares and the
Indemnification Shares. See "- Escrow Shares" below and "Certain
Transactions - The Acquisitions."
(3) Does not include the shares of Class A Common Stock or Warrants underlying
an aggregate of 100,000 Units that certain officers, directors and
principal stockholders will purchase in the Offering. Such Units may not be
sold or transferred for one year from the date of this Prospectus.
(4) Consists of the shares owned by Anita, Ltd., a company owned by the New
Freedom Trust, a trust for the benefit of Mr. Aginsky's father. The trustee
of the New Freedom Trust, appointed by Mr. Aginsky's father-in-law, as
Protector, is Riverbank, Ltd. Mr. Aginsky disclaims beneficial ownership of
the shares held by Anita, Ltd.
(5) Includes shares which are being held in escrow to cover potential claims
for indemnification in connection with the Acquisitions. See "Certain
Transactions."
(6) Messrs. Bailey and Goletz have each pledged all of their shares and granted
an irrevocable proxy to Anita in consideration for personal loans. See note
(3) above.
(7) Includes shares held by her husband.
Escrow Shares
In connection with the Offering, the holders of the CompanyOs Class B
Common Stock have agreed to place an aggregate of 166,667 shares into escrow
pursuant to an escrow agreement (the "Escrow Agreement") with American Stock
Transfer & Trust Company, as escrow agent. The Escrow Shares may be voted, but
are not transferable or assignable other than to a permitted transferee (as
defined) who agrees to be bound by the Escrow Agreement.
The Escrow Shares will be released from escrow if, and only if, one or more
of the following conditions is/are met:
(a) the Company's net income before provision for income taxes and exclusive of
any extraordinary earnings (all as audited by the Company's independent
public accountants) (the "Minimum Pretax Income") amounts to at least
$8,700,000 for the fiscal year ending December 31, 1998;
(b) the Minimum Pretax Income amounts to at least $13,000,000 for the fiscal
year ending December 31, 1999;
(c) the Minimum Pretax Income amounts to at least $17,900,000 for the fiscal
year ending December 31, 2000;
(d) the Closing Price (as defined in the Escrow Agreement) of the Class A
Common Stock averages in excess of $16.25 per share for 30 consecutive
business days during the 18-month period commencing on the date of this
Prospectus;
(e) the Closing Price of the Class A Common Stock averages in excess of $20.00
per share for 30 consecutive business days during the 18-month period
commencing 18 months from the date of this Prospectus.
47
<PAGE>
The Minimum Pretax Income amounts set forth above will be calculated
exclusive of any extraordinary earnings, including any charge to income
resulting from release of the Escrow Shares and any property distributed in
respect of such shares. Minimum Pretax Income will be calculated assuming
release of the Escrow Shares and conversion or exercise of all outstanding
equity securities of the Company convertible into or exchangeable for Common
Stock, whether or not convertible or exchangeable at the time of computation and
after adjustment for any stock dividends, stock splits or similar events. The
Closing Price amounts set forth above are subject to adjustment in the event of
any stock splits, reverse stock splits or other similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Shares, including any property distributed as dividends or pursuant to
any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Shares. If none of the applicable Minimum Pretax Income or Closing Price levels
set forth above have been met by March 31, 2001, the Escrow Shares, as well as
any dividends or other distributions made with respect thereto, will be
cancelled and contributed to the capital of the Company. The release of the
Escrow Shares to officers, directors, employees and consultants of the Company
will be deemed compensatory and, accordingly, will result in a substantial
charge to reportable earnings, which would equal the fair market value of such
shares on the date of release. Such charge could substantially reduce or
eliminate the Company's net income, if any, for financial reporting purposes for
the period during which such shares are, or become probable of being, released
from escrow. Although the amount of compensation expense recognized by the
Company will not affect the Company's total stockholders' equity, it may have a
negative effect on the market price of the Company's securities.
The Minimum Pretax Income and Closing Price levels set forth above were
determined by negotiation between the Company and the Representative and should
not be construed to imply or predict any future earnings by the Company or any
increase in the market price of its securities.
48
<PAGE>
DESCRIPTION OF SECURITIES
Units
Each Unit consists of one share of Class A Common Stock and one redeemable
Warrant. Each Warrant entitles the holder to purchase one share of Class A
Common Stock. The Class A Common Stock and Warrants comprising the Units are
transferable separately immediately upon issuance.
Common Stock
Class A Common Stock
The Company is authorized to issue 31,666,667 shares of Class A Common
Stock, $.001 par value, none of which are currently issued and outstanding.
Holders of Class A Common Stock have the right to cast one vote for each share
held of record on all matters submitted to a vote of holders of Class A Common
Stock. The Class A Common Stock and Class B Common Stock vote together as a
single class on all matters on which stockholders may vote, except when class
voting is required by applicable law.
Holders of Class A Common Stock are entitled to dividends, together with
the holders of Class B Common Stock, pro rata based on the number of shares
held, when, as and if declared by the Board of Directors, from funds legally
available therefor subject to the rights of holders of preferred stock. In the
case of dividends or other distributions payable in stock of the Company,
including distributions pursuant to stock splits or division of stock of the
Company, only shares of Class A Common Stock will be distributed with respect to
Class A Common Stock. In the event of liquidation, dissolution or winding up of
the affairs of the Company, all assets and funds of the Company remaining after
the payment to creditors and to holders of preferred stock shall be distributed,
pro rata, among the holders of the Class A Common Stock and the Class B Common
Stock. Holders of Class A Common Stock are not entitled to preemptive,
subscription, cumulative voting or conversion rights, and there are no
redemption or sinking fund provisions applicable to the Class A Common Stock.
All shares of Class A Common Stock to be offered by the Company hereby, when
issued, will be fully paid and non-assessable.
Class B Common Stock
The Company is authorized to issue 3,333,333 shares of Class B Common
Stock, $.001 par value, all of which are issued and outstanding and held by 14
stockholders of record. Each share of Class B Common Stock is entitled to five
votes on all matters on which stockholders may vote, including the election of
directors. The Class A Common Stock and Class B Common Stock vote together as a
single class on all matters on which stockholders may vote, except when class
voting is required by Delaware law.
Holders of Class B Common Stock are entitled to participate together with
the holders of Class A Common Stock, pro rata based on the number of shares
held, in the payment of cash dividends and in the liquidation, dissolution and
winding up of the Company subject to the rights of holders of Preferred Stock.
In the case of dividends, or other distributions payable in stock of the
Company, including distributions pursuant to stock splits or divisions of stock
of the Company, only shares of Class A Common Stock shall be distributed with
respect to Class B Common Stock.
Each share of Class B Common Stock is automatically converted into one
share of Class A Common Stock upon (i) its sale, gift or transfer, except in the
case of a transfer to a trust for which the original holder acts as sole trustee
or to any other holder of Class B Common Stock; (ii) the death of the original
holder thereof, including in the case of the original holder having transferred
the Class B Common Stock to a trust for which the original holder served as
trustee during his or her lifetime; or (iii) the conversion of an aggregate of
75% of the authorized shares of Class B Common Stock into Class A Common Stock.
The difference in voting rights increases the voting power of the holders
of Class B Common Stock and accordingly has an anti-takeover effect. The
existence of the Class B Common Stock may make the Company a less attractive
target for a hostile takeover bid or render more difficult or discourage a
merger proposal, an unfriendly tender offer, a proxy contest, or the removal of
incumbent management, even if such transactions were favored by the stockholders
of the Company other than the holders of Class B Common Stock. Thus, the
stockholders may be deprived of an opportunity to sell their shares at a premium
over prevailing market prices in the event of a hostile takeover bid. Those
seeking to acquire the Company through a business combination will be compelled
to consult
49
<PAGE>
first with the holders of Class B Common Stock in order to negotiate the terms
of such business combination. Any such proposed business combination will have
to be approved by the Board of Directors, which may be under the control of the
holders of Class B Common Stock, and if stockholder approval were required, the
approval of the holders of Class B Common Stock will be necessary before any
such business combination can be consummated.
Redeemable Warrants
Each Warrant entitles the registered holder to purchase one share of Class
A Common Stock at an exercise price of $8.40 at any time until 5:00 P.M., New
York City time, on , 2002. Commencing one year from the date of this Prospectus,
the Warrants are redeemable by the Company on 30 days' written notice at a
redemption price of $.05 per Warrant if the "closing price" of the CompanyOs
Class A Common Stock for any 30 consecutive trading days ending within 15 days
of the notice of redemption averages in excess of $11.75 per share. "Closing
price" shall mean the closing bid price if listed in the over-the-counter market
on Nasdaq or otherwise or the closing sale price if listed on the Nasdaq
National Market or a national securities exchange. The Company has agreed not to
redeem the Warrants unless a prospectus covering the shares of Class A Common
Stock underlying the Warrants is in effect through the date fixed for
redemption. All Warrants must be redeemed if any are redeemed.
The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") among the Company, the Representative and American Stock Transfer &
Trust Company, New York, New York, as warrant agent (the "Warrant Agent"), and
will be evidenced by warrant certificates in registered form. The Warrants
provide for adjustment of the exercise price and for a change in the number of
shares issuable upon exercise to protect holders against dilution in the event
of a stock dividend, stock split, combination or reclassification of the Common
Stock or upon issuance of shares of Common Stock at prices lower than the market
price of the Common Stock, with certain exceptions.
The exercise prices of the Warrants were determined by negotiation between
the Company and the Representative and should not be construed to be predictive
of or to imply that any price increases in the Company's securities will occur.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Class A Common Stock for issuance upon the
exercise of the Warrants. A Warrant may be exercised upon surrender of the
Warrant certificate on or prior to its expiration date (or earlier redemption
date) at the offices of the Warrant Agent, with the "Subscription Form" on the
reverse side of the Warrant certificate completed and executed as indicated,
accompanied by payment of the full exercise price (by certified or bank check
payable to the order of the Company) for the number of shares with respect to
which the Warrant is being exercised. Shares issued upon exercise of Warrants
and payment in accordance with the terms of the Warrants will be fully paid and
non-assessable.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market value of the Class A Common Stock, with a
resulting dilution in the interest of all other stockholders. So long as the
Warrants are outstanding, the terms on which the Company could obtain additional
capital may be adversely affected. The holders of the Warrants might be expected
to exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital by a new offering of securities on terms more
favorable than those provided for by the Warrants.
The Warrants do not confer upon the Warrantholder any voting or other
rights of a stockholder of the Company. Upon notice to the Warrantholders, the
Company has the right to reduce the exercise price or extend the expiration date
of the Warrants.
Unit Purchase Option
The Company has agreed to grant to the Representative and its designees,
upon the closing of the Offering, the Unit Purchase Option to purchase up to
210,000 Units. These Units will be identical to the Units offered hereby except
that the Warrants included in the Unit Purchase Option will only be subject to
redemption by the Company after the Unit Purchase Option has been exercised and
the underlying Warrants are outstanding. The Unit Purchase Option cannot be
transferred, sold, assigned or hypothecated for two years, except to any officer
of the Underwriters or members of the selling group or their respective
officers. The Unit Purchase Option is exercisable during the three-year period
commencing two years from the date of this Prospectus at an exercise price of
$7.80 per Unit (130% of the initial public offering price) subject to adjustment
in certain events to protect against dilution. The holders of the Unit Purchase
Option have certain demand and piggyback registration rights. See
"Underwriting."
50
<PAGE>
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of "blank-check"
preferred stock (the "Preferred Stock"). The Board of Directors will have the
authority to issue this Preferred Stock in one or more series and to fix the
number of shares and the relative rights, conversion rights, voting rights and
terms of redemption (including sinking fund provisions) and liquidation
preferences, without further vote or action by the stockholders. If shares of
Preferred Stock with voting rights are issued, such issuance could affect the
voting rights of the holders of the Company's Common Stock by increasing the
number of outstanding shares having voting rights, and by the creation of class
or series voting rights. If the Board of Directors authorizes the issuance of
shares of Preferred Stock with conversion rights, the number of shares of Common
Stock outstanding could potentially be increased by up to the authorized amount.
Issuance of Preferred Stock could, under certain circumstances, have the effect
of delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Common Stock. Also, Preferred Stock could have
preferences over the Common Stock (and other series of preferred stock) with
respect to dividend and liquidation rights. The Company currently has no plans
to issue any Preferred Stock.
Anti-Takeover Protections
The voting provisions of the Class A Common Stock and Class B Common Stock
and the broad discretion conferred upon the Board of Directors with respect to
the issuance of series of Preferred Stock (including with respect to voting
rights) could substantially impede the ability of one or more stockholders
(acting in concert) to acquire sufficient influence over the election of
directors and other matters to effect a change in control or management of the
Company, and the Board of Directors' ability to issue Preferred Stock could also
be utilized to change the economic and control structure of the Company. As a
result, such provisions, together with certain other provisions of the By-Laws
summarized in the succeeding paragraph, may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in such stockholder's best interest, including
attempts that might result in a premium over the market price for the Common
Stock hold by stockholders.
Transfer Agent
American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
Registration Rights
The holders of the Unit Purchase Option will have demand and piggy-back
registration rights relating to such options and the underlying securities. See
"Underwriting."
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering the Company will have outstanding 2,100,000
shares of Class A Common Stock, 3,333,333 shares of Class B Common Stock and
2,100,000 Warrants. The 3,333,333 outstanding shares of Class B Common Stock are
"restricted securities" within the meaning of Rule 144 under the Securities Act
and may not be sold publicly unless they are registered under the Securities Act
or are sold pursuant to Rule 144 or another exemption from registration.
1,141,333 of such shares are currently eligible for sale in the public market
pursuant to Rule 144 and the remainder will become so eligible commencing June
1998 (subject to the restrictions on transferability relating to the Escrow
Shares and volume limitations). However, all the holders of the shares of Class
B Common Stock outstanding prior to the Offering have agreed not to sell or
otherwise dispose of any securities of the Company for a period of 13 months
after the date of this Prospectus without the Representative's prior written
consent and for the 10 months thereafter not to sell more than 10% of their
holdings in any month on a cumulative basis without such consent.
In general, under Rule 144 a person (or persons whose shares are
aggregated), including persons who may be deemed to be "affiliates" of the
Company as that term is defined under the Securities Act, is entitled to sell
within any three-month period a number of restricted shares beneficially owned
for at least one year that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) an amount equal to the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. However, a person who is not deemed an affiliate and has
beneficially owned such shares for at least three years is entitled to sell such
shares without regard to the volume or other resale requirements.
The Representative has demand and "piggy-back" registration rights with
respect to the securities underlying the Unit Purchase Option. See
"Underwriting."
Prior to the Offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below have severally agreed to purchase from the Company on a
"firm commitment" basis, if any are purchased, the respective number of Units
set forth opposite their names.
Underwriter Number of Units
----------- ---------------
D. H. Blair Investment Banking Corp. ....................
------------
Total .............................. 2,100,000
=============
It is expected that Blair & Co. will distribute as a selling group member a
substantial portion (up to approximately 52%, including the over-allotment
option) of the Units offered hereby. It is also expected that Blair & Co. will
make a market in the Company's securities. Blair & Co. is substantially owned by
family members of J. Morton Davis. Mr. Davis is the sole stockholder of the
Representative.
The Underwriters have advised the Company that they propose to offer the
Units to the public at the public offering price set forth on the cover page of
this Prospectus and to certain dealers who are members of the NASD, at such
prices less concessions of not in excess of $________ per Unit, of which a sum
not in excess of $____ per Unit may in turn be reallowed to other dealers who
are members of the NASD. After the commencement of the Offering, the public
offering price, the concession and the reallowance may be changed by the
Underwriters.
The Company has granted to the Underwriters (or, at is option, the
Representative, individually) an option, exercisable during the 30-day period
commencing on the date of this Prospectus, to purchase from the Company at the
public offering price, less underwriting discounts, up to 315,000 additional
Units for the purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriters a non-accountable expense allowance equal
to 3% of the gross proceeds derived from the sale of Units offered hereby,
including any Units purchased pursuant to the Underwriters' over-allotment
option, $40,000 of which has been paid to date.
Holders of all of the Company's outstanding shares of Class B Common Stock
have agreed not to sell, assign, transfer or otherwise dispose of any of their
shares for a period of 13 months from the date of this Prospectus without the
prior written consent of the Representative and for the 10 months thereafter not
to sell more than 10% of their holdings in any month on a cumulative basis
without such consent.
During the five-year period from the date of this Prospectus, in the event
the Representative originates a financing or a merger, acquisition or
transaction to which the Company is a party, the Representative will be entitled
to receive a finder's fee in consideration for origination of such transaction.
The fee is based on a percentage of the consideration paid in the transaction
ranging from 7% of the first $1,000,000 to 21/2% of any consideration in excess
of $9,000,000.
The Company has agreed not to solicit Warrant exercises other than through
the Representative, unless the Representative declines to make such
solicitation. Upon any exercise of the Warrants after the first anniversary of
the date of this Prospectus, the Company will pay the Representative a fee of 5%
of the aggregate exercise price of the Warrants, if (i) the market price of the
Company's Common Stock on the date the Warrants are exercised is greater than
the then exercise price of the Warrants; (ii) the Warrant holder designates in
writing that the exercise of the Warrants was solicited by a member of the NASD
and designates in writing the broker-dealer to receive compensation for such
exercise; (iii) the Warrants are not held in a discretionary account; (iv)
disclosure of compensation arrangements was made both at the time of the
Offering and at the time of exercise of the Warrants; and (v) the solicitation
of exercise of the Warrant was not in violation of Regulation M promulgated
under the Exchange Act. The Representative may reallow a portion of such fee to
members of the NASD. The costs of the RepresentativeOs solicitation of exercise
or redemption of the Warrants will be borne by the Company.
53
<PAGE>
Regulation M of the Exchange Act may prohibit Blair & Co. from engaging in
any market-making activities with regard to the Company's securities for the
period of up to five business days (or such other applicable period as
Regulation M may provide) prior to any solicitation by the Representative of the
exercise of Class A Warrants until the later of the termination of such
solicitation activity or the termination (by waiver or otherwise) of any right
that the Representative may have to receive a fee for the exercise of Class A
Warrants following such solicitation. As a result, Blair & Co. may be unable to
provide a market for the Company's securities during certain periods while the
Warrants are exercisable.
The Company has agreed to sell to the Representative and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 210,000 Units,
substantially identical to the Units being offered hereby, except that the
Warrants included therein are subject to redemption by the Company at any time
after the Unit Purchase Option has been exercised and the underlying warrants
are outstanding. The Unit Purchase Option will be exercisable during the
three-year period commencing two years from the date of this Prospectus at an
exercise price of $7.80 per Unit, subject to adjustment in certain events to
protect against dilution, and are not transferable for a period of two years
from the date of this Prospectus except to officers of the Underwriters or to
members of the selling group or their respective officers. The Company has
agreed to register during the four-year period commencing one year from the date
of this Prospectus, on two separate occasions, the securities issuable upon
exercise thereof under the Securities Act, the initial such registration to be
at the Company's expense and the second at the expense of the holders. The
Company has also granted certain "piggy-back" registration rights to holders of
the Unit Purchase Option.
The Representative has informed the Company that it does not expect to make
sales of the Units offered hereby to discretionary accounts.
The Securities and Exchange Commission (the "Commission") is conducting an
investigation concerning various business activities of the Representative. The
investigation appears to be broad in scope, involving numerous aspects of the
Representative's compliance with the Federal securities laws and compliance with
the Federal securities laws by issuers who securities were underwritten by the
Representative, or in which the Representative made over-the-counter markets,
persons associated with the Representative, such issuers and other persons. The
Company has been advised by the Representative that the investigation has been
ongoing since at least 1989 and that it is cooperating with the investigation.
The Representative cannot predict whether this investigation will ever result in
any type of formal enforcement action against the Representative, or, if so,
whether any such action might have an adverse effect on the Representative or
the securities offered hereby.
In connection with the Offering, the Underwriters and certain selling group
members may engage in certain transactions that stabilize, maintain or otherwise
affect the market price of the Units, the Class A Common Stock and the Warrants.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase the Units, the Class A Common Stock and the Warrants for the purpose of
pegging, fixing or maintaining the market price of such securities. The
Underwriters may also create a short position in the Units by selling more Units
in connection with the Offering than they are committed to purchase from the
Company, and in such case the Underwriters may reduce all or a portion of that
short position by purchasing the Units, the Class A Common Stock and the
Warrants in the open market. The Underwriters also may also elect to reduce any
short position by exercising all or any portion of the over-allotment option
described herein. In addition, the Representative may impose "penalty bids"
whereby selling commissions allowed to syndicate members or other broker-dealers
in respect of the Units sold in the Offering for their account may be reclaimed
by the Representative if the securities comprising the Units are repurchased by
the Representative or any syndicate member in stabilizing or covering
transactions. Any of the transactions described in this paragraph may stabilize
or maintain the market price of the Units, the Class A Common Stock and the
Warrants at a level above that which might otherwise prevail in the open market.
Neither the Company nor the Representative may make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Units, the Class A Common Stock and
the Warrants. In addition, neither the Company nor the Representative makes any
representation that the Representative or any syndicate member will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
54
<PAGE>
Prior to the Offering, there has been no public market for any of the
securities offered hereby. Accordingly, the public offering price of the Units
offered hereby and the terms of the Warrants have been determined by negotiation
between the Company and the Representative and are not necessarily related to
the CompanyOs asset value, net worth or other established criteria of value.
Factors considered in determining such prices and terms, in addition to
prevailing market conditions, include the history of and the prospects for the
industry in which the Company competes, the present state of the Company's
development and its future prospects, an assessment of the Company's management,
the Company's capital structure, demand for similar securities of comparable
companies and such other factors as were deemed relevant.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York. Certain
legal matters will be passed upon for the Underwriters by Paul, Hastings,
Janofsky & Walker LLP, New York, New York. Bachner, Tally, Polevoy & Misher LLP
represents the Representative in other matters.
EXPERTS
The financial statements of Tekgraf, Inc. (formerly Crescent Computers,
Inc.), G&R Marketing, Inc. and Computer Graphics Distributing Company as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, of Intelligent Products Marketing, Inc. and IG Distribution,
Inc. as of December 31 ,1996 and 1995 and for the years then ended, of
Microsouth, Inc. as of December 31, 1996 and 1995 and for the year ended
December 31, 1996 and the six month period ended December 31, 1995, and of
tekgraf, inc. as of December 31, 1996 and for the year then ended appearing in
this Prospectus and Registration Statement have been audited by Coopers &
Lybrand L.L.P., independent accountants, as set forth in their reports thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company is not a reporting company under the Exchange Act. The Company
has filed a Registration Statement on Form S-1 under the Securities Act with the
Commission in Washington, D.C. with respect to the Units offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Units
offered hereby, reference is hereby made to the Registration Statement and such
exhibits, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at 500 West Madison (Suite 1400), Chicago, Illinois 60661. Copies
of such material may also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. In addition, the Commission maintains a Website
on the Internet that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's Website is http://www.sec.gov.
Following the Offering, the Company will be subject to the reporting and
other requirements of the Exchange Act and intends to furnish to its
stockholders annual reports containing audited financial statements and may
furnish interim reports as it deems appropriate.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Historical Financial Statements of Tekgraf, Inc.
(formerly Crescent Computers, Inc.) and the Subsidiaries
Page
----
Tekgraf, Inc. (Formerly Cresent Computers, Inc.)
Report of Independent Accountants.................................... F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statements of Changes in Stockholder's Equity(Deficit).. F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7
Microsouth, Inc.
Report of Independent Accountants.................................... F-14
Balance Sheets....................................................... F-15
Statements of Income................................................. F-16
Statements of Changes in Stockholder's Equity........................ F-17
Statements of Cash Flows............................................. F-18
Notes to Financial Statements........................................ F-19
Computer Graphics Distributing Company
Report of Independent Accountants.................................... F-22
Balance Sheets....................................................... F-23
Statements of Income................................................. F-24
Statements of Changes in Stockholders' Equity........................ F-25
Statements of Cash Flows............................................. F-26
Notes to Financial Statements........................................ F-27
tekgraf, inc.
Report of Independent Accountants.................................... F-31
Balance Sheets....................................................... F-32
Statements of Income................................................. F-33
Statements of Changes in Stockholder's Equity........................ F-34
Statements of Cash Flows............................................. F-35
Notes to Financial Statements........................................ F-36
Intelligent Prouducts Marketing Inc.
Report of Independent Accountants.................................... F-39
Balance Sheets....................................................... F-40
Statements of Operations............................................. F-41
Statements of Changes in Stockholders' Equity........................ F-42
Statements of Cash Flows............................................. F-43
Notes to Financial Statements........................................ F-44
IG Distribution, Inc.
Report of Independent Accountants.................................... F-47
Balance Sheets....................................................... F-48
Statements of Income................................................. F-49
Statements of Changes in Stockholders' Equity........................ F-50
Statements of Cash Flows............................................. F-51
Notes to Financial Statements........................................ F-52
G&R Marketing, Inc.
Report of Independent Accountants.................................... F-53
Balance Sheets....................................................... F-54
Statements of Income................................................. F-55
Statements of Changes in Stockholders' Equity........................ F-56
Statements of Cash Flows............................................. F-57
Notes to Financial Statements........................................ F-58
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Tekgraf, Inc. (formerly Crescent Computers, Inc.)
We have audited the accompanying consolidated balance sheets of Tekgraf,
Inc. (formerly Crescent Computers, Inc.) as of December 31, 1995 and 1996, and
the related consolidated statements of operations, changes in stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tekgraf, Inc. (formerly Crescent Computers, Inc.) as of December 31, 1995 and
1996, and the results of their consolidated operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P .
Atlanta, Georgia
June 2, 1997 except for
Note 9 as to which the
date is October 9, 1997
F-2
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1995 1996 1997
----------- ------------ ----------
(Unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 305,821 $ 633,027 $ 971,696
Accounts receivable, less allowance for doubtful accounts of $17,000
and $35,000 at December 31, 1995 and 1996, respectively ......... 1,382,673 1,621,180 10,182,348
Inventories, net ................................................... 549,274 636,019 5,254,338
Other receivables .................................................. 154,120
Due from related entities .......................................... 44,539
Prepaid expenses and other assets .................................. 120,598
Deferred income taxes .............................................. 8,400 1,500 26,910
--------- --------- ----------
Total current assets ........................................... 2,246,168 2,891,726 16,754,549
--------- --------- ----------
Property and equipment:
Furniture and fixtures ............................................. 44,531 83,294 719,640
Computer equipment ................................................. 5,946 36,225 578,462
--------- --------- ----------
50,477 119,519 1,298,102
Less accumulated depreciation ...................................... (45,766) (62,765) (871,970)
--------- --------- ----------
4,711 56,754 426,132
Goodwill, net ......................................................... 5,977,685
Deferred income taxes ................................................. 800
Other assets .......................................................... 12,732 58,629 428,957
--------- --------- ----------
Total assets .................................................... $ 2,264,411 $ 3,007,109 $ 23,587,323
========= ========= ==========
LIABILITIES
Current liabilities:
Current debt ....................................................... $ 2,486,404
Due to acquisition stockholders (See Note 9) ....................... 1,086,000
Notes payable, stockholders ........................................ 90,000
Due to stockholders, net ........................................... $ 1,615,864 $ 2,211,164
Due to related entities, net ....................................... 2,159,424
Accounts payable ................................................... 649,206 711,125 8,016,289
Accrued expenses ................................................... 32,302 69,408 202,871
Income taxes payable ............................................... 4,100 201,168
--------- --------- ----------
Total current liabilities ....................................... 2,297,372 2,995,797 14,242,156
--------- --------- ----------
Debt, less current maturities ...................................... 112,246
Note payable, stockholder .......................................... 50,000
Deferred income taxes .............................................. 1,200 5,327
Minority interest .................................................. 14,629
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT)
Class A Common Stock $.001 par value, 31,666,667 shares
authorized; no shares issued and outstanding at December
31, 1995 and 1996; holders of Class A Common Stock are
entitled to one vote per share (See Note 9)
Class B Common Stock, $.001 par value, 3,333,333 shares
authorized; 1,141,333 shares issued and outstanding at
December 31, 1995 and 1996, respectively; holders of
Class B Common Stock are entitled
to five votes per share (See Note 9) ............................ 1,141 1,141 3,333
Preferred Stock, $.001 par value, 5,000,000 shares authorized;
no shares issued and outstanding at December 31, 1995 and 1996
Due from acquisition stockholders (See Note 9) ..................... (419,000)
Due from pre-acquisition stockholders .............................. (990,000)
Additional paid in capital..................................... 10,421,806
Retained earnings (deficit) ................. (34,102) 8,971 146,826
--------- --------- ----------
Total stockholders' equity (deficit) ..... (32,961) 10,112 9,162,965
--------- --------- ----------
Total liabilities and stockholders' equity $ 2,264,411 $3,007,109 $23,587,323
========= ========= ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
---------------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ------------ ----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales ........................................... $ 6,339,574 $ 12,277,340 $13,414,131 $6,850,330 $12,451,881
Cost of goods sold .................................. 5,228,141 10,367,789 10,951,551 5,698,376 10,606,313
----------- ------------ ----------- ---------- -----------
Gross profit .................................. 1,111,433 1,909,551 2,462,580 1,151,954 1,845,568
Operating expenses:
Selling, general and administrative .............. 1,082,370 1,760,957 2,244,924 916,147 1,415,233
Depreciation ..................................... 8,450 28,349 16,999 15,346 34,449
Amortization ..................................... 33,395
----------- ------------ ----------- ---------- -----------
Income from operations ........................ 20,613 120,245 200,657 220,461 362,491
Other income ........................................ 14,916 40,021 20,847
Interest expense .................................... 39,743 125,566 159,500 60,000 108,270
----------- ------------ ----------- ---------- -----------
Income (loss) before provision (benefit) for
income taxes taxes and minority interest ... (19,130) (5,321) 56,073 200,482 275,068
Provision (benefit) for income taxes ................ (3,900) (1,600) 13,000 13,000 122,584
----------- ------------ ----------- ---------- -----------
Income (loss) before minority interest ........ (15,230) (3,721) 43,073 187,482 152,484
Minority interest ................................... 24,580 14,629
----------- ------------ ----------- ---------- -----------
Net income (loss) ............................. $ (15,230) $ (3,721) $ 43,073 $ 162,902 $ 137,855
=========== ============ =========== ========== ===========
Primary and fully diluted weighted average shares
outstanding ...................................... 1,141,333 1,141,333 1,141,333 1,141,333 1,244,011
=========== ============ =========== ========== ===========
Primary and fully diluted net income (loss) per share $ (.01) $ -- $ .04 $ .14 $ .11
=========== ============ =========== ========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Class B
Common Due from Additional Retained
Number of Stock Stockholders Paid in Earnings
Shares (Note 9) (Note 9) Capital (Deficit) Total
--------- ------ ----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Balances, January 1, 1994 .............. 1,141,333 $1,141 $ (15,151) $ (14,010)
Net loss ............................ (15,230) (15,230)
--------- ------ ----------- ----------- --------- -----------
Balances, December 31, 1994 ............ 1,141,333 1,141 (30,381) (29,240)
Net loss ............................ (3,721) (3,721)
--------- ------ ----------- ----------- --------- -----------
Balances, December 31, 1995 ............ 1,141,333 1,141 (34,102) (32,961)
Net income .......................... 43,073 43,073
--------- ------ ----------- ----------- --------- -----------
Balances, December 31, 1996 ............ 1,141,333 1,141 8,971 10,112
Issuances of stock for
acquisitions (unaudited) ......... 2,192,000 2,192 9,012,806 9,014,998
Due from acquisition stockholders
(unaudited) ...................... (419,000) 419,000
Due from pre-acquisition stockholders
(unaudited) ...................... (990,000) 990,000
Net income (unaudited) .............. 137,855 137,855
--------- ------ ----------- ----------- --------- -----------
Balances, June 30, 1997 (unaudited) .... 3,333,333 $3,333 $(1,409,000) $10,421,806 146,826 $ 9,162,965
========= ====== =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- --------- ----------- --------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................. $ (15,230) $ (3,721) $ 43,073 $ 162,902 $ 137,855
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation ......................................... 8,450 28,349 16,999 15,346 34,449
Minority interest .................................... 24,580 14,629
Amortization ......................................... 33,395
Provision for doubtful accounts receivable ........... 8,474 2,800 18,000 11,000
Deferred income taxes ................................ (3,900) (1,600) 8,900 (4,200)
Changes in assets and liabilities,
net of the effects of the acquisitions:
Accounts receivable .................................. (487,281) (417,787) (256,507) (276,762) (1,995,720)
Inventories .......................................... (151,321) (137,289) (86,745) (43,944) (716,012)
Other assets ......................................... 4,090 1,456 (45,897) (7,012) (53,972)
Other receivables .................................... 23,455
Accounts payable and accrued expenses ................ 203,660 357,377 99,025 101,594 2,155,172
Income taxes payable ................................. 4,100 13,000 87,103
----------- --------- ----------- --------- ------------
Net cash provided (used) by operating activities .. (433,058) (170,415) (199,052) (10,296) (272,846)
----------- --------- ----------- --------- ------------
Cash flows from investing activities:
Cash acquired from acquisitions, net of acquisition
costs of $88,677 .................................. 349,482
Payments for purchase of property and equipment ...... (8,450) (33,060) (69,042) (153,286) (49,950)
----------- --------- ----------- --------- ------------
Net cash used by investing activities ............. (8,450) (33,060) (69,042) (153,286) 299,532
----------- --------- ----------- --------- ------------
Cash flows from financing activities:
Advance from stockholders ............................ 1,150,752 472,2721, 1,115,957 375,122 36,009
Repayment of advance from stockholders
and related entities .............................. (449,869) (280,130) (520,657) (15,731)
Proceeds from debt ................................... 327,714
----------- --------- ----------- --------- ------------
Net cash provided (used) by financing activities .. 700,883 192,142 595,300 375,122 311,983
----------- --------- ----------- --------- ------------
Increase (decrease) in cash and cash equivalents ........ 259,375 (11,333) 327,206 211,540 338,669
Cash and cash equivalents, beginning of period .......... 57,779 317,154 305,821 305,821 633,027
----------- --------- ----------- --------- ------------
Cash and cash equivalents, end of period ................ $ 317,154 $ 305,821 $ 633,027 $ 517,361 $ 971,696
=========== ========= =========== ========= ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ............... $ 39,743 $ 120,109 $ 159,500
=========== ========= ===========
Supplemental non-cash investing and financing activities:
June 2, 1997 acquisitions:
Fair value of stock issued ........................ $ 9,485,537
Other acquisition costs ........................... 88,677
Fair value of liabilities assumed ................. 8,982,850
Fair value of assets acquired ..................... (12,545,984)
------------
Goodwill ........................................... $ 6,011,080
============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Basis of Presentation and Nature of Operations:
Organization
The consolidated financial statements of Tekgraf, Inc., formerly Crescent
Computers, Inc. ("the Company" or "Tekgraf") include the accounts of Prisym
Technologies of Georgia, Inc. ("Prisym"), a 60% owned subsidiary. Minority
interest, if any, represents minority stockholder's proportionate share of the
equity in Prisym. All significant intercompany balances, transactions and
profits have been eliminated in consolidation.
Basis of Presentation
The consolidated financial statements are prepared on the basis of
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at December 31, 1995 and 1996 and reported amounts of
revenues and expenses for each of the three years in the period ended December
31, 1996. Significant estimates include primarily those made for the allowance
for doubtful accounts. Actual results could differ from those estimates made by
management.
Nature of Operations
Tekgraf is a manufacturer, integrator and distributor of premium personal
computers, workstations, and internet/intranet servers. Tekgraf's operations are
located in Atlanta, Georgia and products are sold either directly or through
distributors. Prisym markets workstations, printers, mass storage, components
and peripherals of a major U.S. manufacturer. Prisym has offices located in
Atlanta, Georgia and Greenville, South Carolina.
Inherent in the accompanying consolidated financial statements are certain
risks and uncertainties. These risks and uncertainties include, but are not
limited to: the impact of competitive products, competition, available sources
of supply and various technology related risks.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim consolidated financial statements as of
June 30, 1997 and for The accompanying notes are an integral part of the
consolidated financial statements. the six months ended June 30, 1996 and 1997
have not been audited by independent accountants. However, they have been
prepared in conformity with the accounting principles stated in the audited
financial statements for the three years in the period ended December 31, 1996
and include all adjustments, which were of a normal and recurring nature which,
in the opinion of management are necessary to present fairly the financial
position of the Company and the results of operations and cash flows for each of
the periods presented. The operating results for the interim periods are not
necessarily indicative of results for the full year.
As described in Note 9, the Company completed the acquisition of six
companies on June 2, 1997. Accordingly, the results of operations of the
acquired businesses have been included in the accompanying consolidated
financial statements from the date of acquisition.
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents. The
Company maintains cash balances at financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out method) or market. Inventory is comprised primarily of raw
materials and the Company maintains a reserve for its estimate of excess,
obsolete and damaged goods. In most instances, the Company receives warranties
on its products from its vendors which are at least equivalent to those it
provides to its customers.
F-7
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives which
range from 3 to 7 years. Amounts expended for maintenance and repairs are
charged to expense as incurred. Upon disposition, both the related cost and
accumulated depreciation accounts are relieved and the related gain or loss is
credited or charged to operations.
Goodwill
Goodwill is amortized over its estimated economic life or period of future
benefit. The Company is currently amortizing goodwill, associated with the
acquisitions described in Note 9, on a straight-line basis of 15 years. This
estimated life is a composite of many factors which are subject to change
because of the nature of the Company's operations. This is particularly true
because goodwill reflects value attributable to the going concern nature of
acquired businesses, the stability of their operations, market presence and
reputation. Accordingly, at each reporting period, the Company evaluates the
continued appropriateness of this life and recoverability of the carrying value
of the goodwill based upon current and future levels of income and cash flows as
well as the latest available economic factors and circumstances. Impairment of
value, if any, is recognized in the period in which it is determined. The
Company does not believe that there are any facts or circumstances indicating
impairment of goodwill at June 30, 1997.
Revenue
Sales are recognized upon the shipment of products to the customer or
distributor.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred tax liabilities and assets are determined based
on temporary differences between the bases of certain assets and liabilities for
income tax and financial reporting purposes. The deferred tax assets and
liabilities are classified according to the financial statement classification
of the assets and liabilities generating the differences. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Tekgraf and Prisym file separate federal income tax returns.
Fair Value of Financial Instruments
The Company's financial instruments include its debt obligations.
Management believes that substantially all of these instruments bear interest at
rates which approximate prevailing market rates for instruments with similar
characteristics and, accordingly, that the carrying values for these instruments
are reasonable estimates of fair value.
3. Related Party Transactions:
Included in the due to stockholder balance at December 31, 1995 and 1996
are advances from the Company's majority stockholder of $1,553,975 and
$2,109,325 (see Note 9), respectively, and advances from other stockholders of
$61,889 and $101,840, respectively. During each of the three years in the period
ended December 31, 1996, the Company recognized interest expense on the advances
from the majority stockholder of approximately $40,000, $126,000, and $160,000,
respectively. The advances from the majority stockholders bear interest at 8%.
The advances from other stockholder do not bear interest. All advances from
stockholders are due on demand. During January 1997, the Company's majority
stockholder transferred ownership of the outstanding common stock of the Company
to its parent. Accordingly, amounts previously classified as due to stockholders
in the consolidated balance sheet have been reported as amounts due to a related
entity in the consolidated balance sheet as of June 30, 1997.
F-8
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Related Party Transactions, continued:
During the years ended December 31, 1994 and 1996, the Company paid
management fees to the majority stockholder of $45,000 and $135,000,
respectively. During the six months ended June 30, 1996, the Company paid
management fees of approximately $149,000. During the six month period ended
June 30, 1997, no management fees were paid.
At December 31, 1996, the Company has guaranteed debt of an entity owned by
certain stockholders of the Company of $496,000.
The Company is affiliated through common ownership with entities whose
operating expenses, such as rent, utilities, insurance and other expenses were
shared with the subsidiaries of the Company prior to June 2, 1997. Amounts due
from these related entities under this arrangement were $44,539 at June 30,
1997.
The notes payable to stockholders, at June 30, 1997, bear interest at 12%
and 9.25% and have no stated maturity date.
4. Income Taxes:
The provision (benefit) for income taxes for the years ended December 31,
is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current ................................................................... $ -- -- $ 4,100
Deferred .................................................................. (3,900) $ (1,600) 8,900
-------- -------- --------
$ (3,900) $ (1,600) $ 13,000
======== ======== ========
</TABLE>
A reconciliation of federal statutory and effective income tax rates is as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate .................................... 15.0% 15.0% 15.0%
Effect of: State income taxes, net of federal benefit ..................... 5.0 5.0 5.0
Non-deductible meals and entertainment .................................... 8.0 1.5
Stockholder life insurance ................................................ 1.5
Other, net ................................................................ 2.0
-------- -------- --------
Effective rate ............................................................ 20.0% 30.0% 23.0%
======== ======== ========
</TABLE>
Benefits of approximately $8,400 were recognized due to operating loss
carryforwards during 1996.
An analysis of the deferred income tax assets and liabilities at December
31, is as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current deferred income tax assets:
Net operating loss carryforwards .................................... $ 8,400 $ 1,500
-------- --------
Total current deferred income tax assets ...................... $ 8,400 $ 1,500
======== ========
Non-current deferred income tax assets:
Net operating loss carryforwards .................................... $ 800
-------- --------
Total non-current deferred income tax assets .................... $ 800
======== ========
Non-current deferred income tax liabilities:
Property and equipment .............................................. $ (1,200)
-------- --------
Total non-current deferred income tax liabilities .............. $ (1,200)
======== ========
</TABLE>
The net operating loss carryforwards expire in 2011. Management believes
that realization of the net deferred tax assets is more likely than not due
primarily to anticipated future taxable income and the reversal of existing
taxable temporary differences.
F-9
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Debt
At June 30, 1997 debt consists of the following:
Line of credit with a bank totaling $ 2,250,000,
bearing interest at the bank's prime rate
(8.5% at June 30, 1997) plus 2%,
collateralized by accounts receivable and
inventory, subject to certain loan covenant
restrictions, and expires September 30, 1997 ........ $ 1,090,465
Various installment notes payable with banks bearing
interest at rates ranging from 7.5% to 8.5%,
payable in monthly installments through 1998,
collateralized by certain equipment ................. $ 51,547
Line of credit with a bank totaling $250,000, bearing
interest at the bank's prime rate (8.5% at June
30, 1997) plus .75%, guaranteed by certain
stockholders of the Company and expires
January 9, 1998 ..................................... $ 228,196
Line of credit with a bank totaling $3,000,000, bearing
interest at the bank's prime rate (8.5% at June
30, 1997) plus .5%, guaranteed by certain
stockholders of the Company, collateralized by
certain assets, and expires January 9, 1998 ........ $ 1,228,442
-----------
$ 2,598,650
Less current maturities ................................... $(2,486,404)
-----------
$ 112,246
===========
6. Commitments and Contingencies:
Operating Lease
The Company leases office space under an operating lease expiring in 1998.
At December 31, 1996 minimum rentals due under the lease were as follows:
1997 ...................................................... $27,216
1998 ...................................................... 22,680
-------
$49,896
=======
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
approximately $60,000, respectively.
An additional building is currently being leased from affiliated entity on
a month-to-month basis with monthly rentals of approximately $3,000.
Litigation
The Company is involved from time to time in litigation on matters which
are routine to the conduct of its business. Although the outcome of any
litigation cannot be predicted with certainty, the Company does not believe that
any outstanding litigation will have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
7. Net Income (Loss) Per Common Share:
Primary and fully diluted net income (loss) per common share are computed
by dividing net income (loss) by the weighted average number of common shares
and common share equivalents outstanding during the period.
F-10
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Net Income (Loss) Per Common Share, continued:
There were no common stock equivalents during each of the periods presented. At
June 30, 1997, the fully diluted weighted average shares exclude the Escrow
shares (Note 9) and was determined as follows:
Shares outstanding from beginning of period .......... 1,141,333
Weighted average shares issued on June 2, 1997
in connection with the acquisitions ............... 168,153
Escrow shares (Note 9) ............................... (65,475)
----------
1,244,011
==========
8. Future Adoption of Recently Issued Accounting Standards:
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of an Enterprise and
Related Information ("SFAS 131"), No. 130, Reporting Comprehensive Income ("SFAS
130"), No. 129, Disclosure of Information About Capital Structure ("SFAS 129"),
and No. 128, Earnings Per Share ("SFAS 128"). SFAS 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS 129 consolidates the existing requirements to disclose certain
information about an entity's capital structure, and SFAS 128 specifies the
computation, presentation, and disclosure requirements for earnings per share.
These Standards are effective for years beginning after December 15, 1997.
The Company believes that the impact of these Standards, when adopted, will
not have a material impact on the Company's consolidated financial statements.
9. Subsequent Events
Acquisitions
Effective June 2, 1997, the Company completed the acquisition of 100% of
the outstanding common stock of G&R Marketing, Inc. ("G&R"), Microsouth, Inc.
("Microsouth"), tekgraf, inc. ("tekgraf"), Computer Graphics Distributing
Company ("CGD"), Intelligent Products Marketing, Inc. ("IPM"), and IG
Distribution, Inc. ("IGD") (collectively the "Subsidiaries") in exchange for the
issuance of 2,192,000 (adjusted for the stock splits, reverse stock split and
including the 166,667 shares to be placed in escrow as required by the letter of
intent described below which if released will be accounted for as compensation)
shares of common stock of the Company and an aggregate of 1,333,333 shares which
were placed in escrow by the stockholders of the subsidiaries to cover potential
claims for indemnification by the Company pursuant to the stock purchase
agreements ("the Agreements"). Each stockholder of the Company has deposited 40%
of his shares in escrow. These subsidiaries are regional distributors and
marketers of computer graphics hardware and software. Customers consist
primarily of value added resellers and vertical solution providers.
Pursuant to the terms of the Agreements, the Subsidiaries are required to
deliver a defined guaranteed net asset value ("NAV"). The Subsidiaries
preliminary excess net book value over the NAV of $1,086,000 will be distributed
in cash to the stockholders of the Subsidiaries. It is anticipated that the
excess NAV will be distributed during December 1997 from cash balances or a line
of credit the Company expects to obtain. The subsidiaries preliminary deficit
NAV over the net book value of $419,000 will be collected from the former
stockholders of the subsidiaries. It is anticipated that these amounts will be
collected after the final calculation is completed during December 1997.
Pursuant to the terms of the Agreements, pre-acquisition Tekgraf
stockholders will contribute approximately $990,000 to capital. This
contribution is expected to occur during October 1997.
The Acquisitions were recorded under the purchase method of accounting; and
accordingly the results of operations of the Acquisitions for the period June 3,
1997 through June 30, 1997 are included in the accompanying unaudited
consolidated financial statements of the Company. The purchase prices have been
allocated to assets
F-11
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Subsequent Events, continued:
acquired and liabilities assumed based on the fair market value of the Company's
common stock at the dates of acquisition. The fair market value of the Company's
stock was estimated based on the proposed initial public offering price of the
Company's Units, a discount for lack of marketability, a premium for the voting
rights of the Class B Common Stock issued in connection with the acquisitions,
and the value of the warrants contained in the Units using the Black Scholes
model. The unaudited fair value of assets acquired and liabilities assumed,
after giving effect to the excess NAV, is summarized as follows:
<TABLE>
<CAPTION>
Microsouth tekgraf G&R CGD IPM/IGD Total
----------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fair value of stock issued and other
acquisition costs .................. $ 2,309,109 $ 1,214,248 $ 3,647,112 $ 1,093,406 $1,310,340 $9,574,214
Fair value of liabilities assumed ..... 1,780,956 830,361 3,848,415 2,355,314 167,804 8,982,850
Fair value of tangible and identifiable
assets acquired .................... (2,619,227) (1,134,757) (4,968,400) (3,249,229) (574,371) (12,545,984)
----------- ----------- ----------- ----------- ---------- ----------
Goodwill .............................. $ 1,470,838 $ 909,852 $ 2,527,127 $ 199,491 $ 903,773 $6,011,080
=========== =========== =========== =========== ========== ==========
</TABLE>
The following unaudited pro forma summary combines the consolidated
results of the Company and the Acquisitions as if the combination had occurred
at the beginning of the earliest period presented, after giving effect to
certain adjustments, including elimination of expenses related to affiliated
entities of the Acquisitions which were not acquired by the Company, adjustments
in compensation levels that have contractually agreed to, elimination of
amortization related to negative goodwill, elimination of the pro rata interest
expense incurred on capital to be contributed by the pre-combination
stockholders of the Company, related income tax effects, elimination of
transactions between the Acquisitions, and amortization of intangible assets. In
addition, the earnings per share amounts give effect to the combination,
subsequent recapitalization and the weighted average shares outstanding exclude
166,667 of escrow shares. The pro forma summary does not purport to represent
what the Company's results of operations would actually have been if such
transaction in fact had occurred at the beginning of the earliest period
presented or to project the Company's results of operations for any future
period.
For the For the
year ended six months ended
December 31, 1996 June 30, 1997
----------------- ----------------
Net sales ................................ $68,902,291 $34,684,482
Gross profit ............................. 11,259,485 6,102,620
Income from operations ................... 3,197,379 1,641,147
Income before taxes ...................... 2,883,266 1,527,186
Net income ............................... 1,602,504 853,441
Primary and fully diluted income per share .51 .26
Weighted average shares outstanding ...... 3,166,666 3,166,666
Stock Splits and Recapitalization
Class A Common Stock - On June 2, 1997, in connection with a
reincorporation in Delaware, the Company authorized 31,000,000 shares of Class A
Common Stock, $.001 par value, none of which are currently issued and
outstanding. Holders of Class A Common Stock have the right to cast one vote for
each share held of record on all matters submitted to a vote of holders of Class
A Common Stock. The Class A Common Stock and Class B Common Stock vote together
as a single class on all matters on which stockholders may vote, except when
class voting is required by applicable law. Holders of Class A Common Stock are
entitled to dividends, together with the holders of Class B Common Stock, pro
rata based on the number of shares held, when, as and if declared by the Board
of Directors, from funds legally available therefor subject to the rights of
holders of preferred stock. In the case of dividends or other distributions in
stock of the Company, including distributions pursuant to stock splits or
division of stock of the Company, only shares of Class A Common Stock will be
distributed with respect to Class A Common Stock. In the event of liquidation,
dissolution or winding up of the affairs of the Company, all assets and funds of
the Company remaining after the payment of creditors and to holders of the Class
A Common Stock and the Class B Common Stock. Holders of the Class A Common Stock
are not entitled to preemptive, subscription, cumulative voting or conversion
rights, and there are no redemption or sinking fund provisions applicable to the
Class A Common Stock.
F-12
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Subsequent Events, continued:
Class B Common Stock - On May 1, 1997 the Company increased the outstanding
shares from 100 to 3,424 by declaring a 34.24 for 1 stock split of the Company's
common stock (par value of $1.00). On June 2, 1997, in connection with a
reincorporation in Delaware, the Company declared a 400 for 1 stock split of the
Company's common stock pursuant to which all of the Company's outstanding common
stock were exchanged for 4,000,000 shares of Class B Common Stock with a par
value of $.001. During October 1997, the Company effected a .83333325 for 1
reverse stock split pursuant to which the outstanding shares of Class B Common
Stock were exchanged for 3,333,333 shares of Class B Common Stock. At such time,
the Company authorized 31,666,667 shares of Class A Common Stock and 3,333,333
shares of Class B Common Stock. Each share of Class B Common Stock is entitled
to five votes on all matters on which stockholders may vote, including the
election of directors. The Class A Common Stock, described below, and Class B
Common Stock vote together as a single class on all matters on which
stockholders may vote, except when class voting is required by Delaware law.
Holders of Class B Common Stock are entitled to participate together with the
holders of Class A Common Stock, pro rata based on the number of shares held, in
the payment of cash dividends and the liquidation, dissolution and winding up of
the Company subject to the rights of holders of Preferred Stock. In the case of
dividends, or other distributions payable in stock of the Company, including
distributions pursuant to stock splits or divisions of stock of the Company,
only shares of Class A Common Stock shall be distributed with respect to Class B
Common Stock. Each share of Class B Common Stock is automatically converted into
one share of Class A Common Stock upon (i) its sale, gift of transfer, except in
the case of a transfer to a trust for which the original holder acts as sole
trustee or to any other holder of Class B Common Stock, (ii) the death of the
original holder thereof, including in the case of the original holder having
transferred the Class B common Stock to a trust for which the original holder
served as trustee during his or her lifetime, or (iii) the conversion of an
aggregate of 75% of the authorized shares of Class B Common Stock.
Preferred Stock - On June 2, 1997, in connection with a reincorporation in
Delaware, the Company authorized 5,000,000 shares of preferred stock. The Board
of Directors will have the authority to issue the preferred stock in one or more
series and to fix the number of shares and the relative rights, conversion
rights, voting rights and terms of redemption and liquidation preferences,
without further vote or action by the stockholders.
The consolidated balance sheets as of December 31, 1995 and 1996 have been
retroactively adjusted for these events. As part of the reincorporation, the
Company changed its name to Tekgraf, Inc.
Employment Agreements
Certain stockholders of the Company have entered into employment agreements
which provide for a set base salary, participation in future incentive bonus
plans, stock option plans, certain other benefits, and a covenant not to compete
following termination for such person's employment.
Letter of Intent
On June 17, 1997, the Company signed a non-binding letter of intent for an
initial public offering of its securities.
In connection with the Company's proposed registration of its securities,
the Company intends to offer 2,100,000 Units consisting of one share of Class A
Common Stock and one r
edeemable warrant. Each warrant would entitle the holder
to purchase one share of Class A Common Stock at an exercise price of $8.40,
which is subject to adjustment.
F-13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder
Microsouth, Inc.
We have audited the accompanying balance sheets of Microsouth, Inc. as of
December 31, 1995 and 1996, and the related statements of income, changes in
stockholder's equity and cash flows for the six month period ended December 31,
1995 and for the year ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Microsouth, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the six month period ended December 31, 1995 and for the year ended December
31, 1996 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
June 2, 1997
F-14
<PAGE>
Microsouth, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 2, 1997
1995 1996 (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 538,138 $ 519,568 $ 20,093
Accounts receivable, less allowance for doubtful
accounts of $94,966 and $12,616 at December 31, 1995
and 1996 ..................................................... 1,258,667 1,299,620 1,415,999
Inventories, net ............................................... 1,044,787 1,147,504 952,990
Due from related entity ........................................ 16,360 10,229 38,803
Prepaid expenses ............................................... 7,158 6,443 5,329
----------- ----------- -----------
Total current assets .................................. 2,865,110 2,983,364 2,433,214
----------- ----------- -----------
Property and equipment:
Furniture and equipment ........................................ 17,916 67,743 71,432
Less accumulated depreciation .................................. (1,792) (10,358) (19,358)
----------- ----------- -----------
16,124 57,385 52,074
Other assets ...................................................... 2,751 2,751 54,099
----------- ----------- -----------
Total assets .......................................... $ 2,883,985 $ 3,043,500 $ 2,539,387
=========== =========== ===========
LIABILITIES
Current liabilities:
Current maturities of long-term debt ........................... $ 225,000
Accounts payable ............................................... $ 1,312,705 1,557,229 $ 930,338
Accrued expenses ............................................... 29,166 35,800 31,618
Due to pre-acquisition stockholder (See Note 7) ................ 819,000
----------- ----------- -----------
Total current liabilities ............................. 1,341,871 1,818,029 1,780,956
----------- ----------- -----------
Long-term debt, less current maturities ........................ 750,000
Negative goodwill, net ......................................... 636,401 569,411 541,500
Commitments and contingencies
STOCKHOLDER'S EQUITY
Common stock, $.10 par value, 1,000,000 shares
authorized, 1,000 shares issued and outstanding at
December 31, 1995 and 1996 ...................................... 100 100 100
Retained earnings ................................................. 155,613 655,960 216,831
----------- ----------- -----------
Total stockholder's equity ............................ 155,713 656,060 216,931
----------- ----------- -----------
Total liabilities and stockholder's equity ............ $ 2,883,985 $ 3,043,500 $ 2,539,387
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
Microsouth, Inc.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the
Six Month Six Months Period January 1,
Period Ended Year Ended Ended 1997 through
December 31, December 31, June 30, June 2,
1995 1996 1996 1997
----------- ------------ ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales .............................. $ 4,636,127 $ 10,325,373 $ 4,745,813 $ 4,792,858
Cost of goods sold ..................... 3,933,444 8,594,719 3,900,605 4,026,223
----------- ------------ ----------- -----------
Gross profit .................. 702,683 1,730,654 845,208 766,635
Operating expenses:
Selling, general and administrative . 589,729 1,256,356 547,764 467,264
Depreciation ........................ 1,792 8,566 6,000 9,000
Amortization ........................ (33,495) (66,990) (33,495) (27,911)
----------- ------------ ----------- -----------
Income from operations .............. 144,657 532,722 324,939 318,282
Other income ........................... 15,956 27,625 26,080 8,389
Interest expense ....................... 5,000 60,000 25,000
----------- ------------ ----------- -----------
Income before extraordinary gain 155,613 500,347 326,019 326,671
Extraordinary gain .................... 210,000
----------- ------------ ----------- -----------
Net income .................... $ 155,613 $ 500,347 $ 326,019 $ 536,671
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE>
Microsouth, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Number
of Common Retained
Shares Stock Earnings Total
----- ---- --------- ---------
Balances, July 1, 1995 ................. 1,000 $100 $ $ 100
Net income .......................... 155,613 155,613
----- ---- --------- ---------
Balances, December 31, 1995 ............ 1,000 100 155,613 155,713
Net income .......................... 500,347 500,347
----- ---- --------- ---------
Balances, December 31, 1996 ............ 1,000 100 655,960 656,060
----- ---- --------- ---------
Stockholder distributions (unaudited) (975,800) (975,800)
Net income (unaudited) .............. 536,671 536,671
----- ---- --------- ---------
Balances, June 2, 1997 (unaudited) ..... 1,000 $100 $ 216,831 $ 216,931
===== ==== ========= =========
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE>
Microsouth, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Six Month Six Months Period January 1,
Period Ended Year Ended Ended 1997 through
December 31, December 31, June 30, June 2,
1995 1996 1996 1997
------------ ----------- ---------- -----------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ................................... $ 155,613 $ 500,347 $ 326,019 $ 536,671
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization .............. (30,703) (58,424) (10,749) (18,911)
Provision for doubtful accounts receivable . 94,966 22,350 15,000 17,384
Provision for inventory obsolescence ....... 21,000 10,000 8,000 14,000
Extraordinary gain ......................... (210,000)
Changes in assets and liabilities:
Accounts receivable .......................... (76,936) (63,303) (281,499) (133,763)
Inventories .................................. (178,373) (112,717) 188,420 180,514
Due from related entity ...................... (16,360) 6,131 (47,814) (28,574)
Prepaid expenses and other assets ............ 15,449 715 (1,654) (50,234)
Accounts payable and accrued expenses ........ 555,715 251,158 (304,056) (631,073)
--------- --------- --------- ---------
Net cash provided (used) by operating
activities ................................. 540,371 556,257 (108,333) (323,986)
--------- --------- --------- ---------
Cash flows from investing activities:
Payments for purchase of property and
equipment .................................. (17,916) (49,827) (15,448) (3,689)
--------- --------- --------- ---------
Net cash used by investing activities .... (17,916) (49,827) (15,448) (3,689)
--------- --------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt .................. (525,000) (15,000)
Stockholder distributions .................... (156,800)
--------- --------- --------- ---------
Net cash used by financing activities .... (525,000) (171,800)
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents 522,455 (18,570) (123,781) (499,475)
Cash and cash equivalents, beginning of period .. 15,683 538,138 538,138 519,568
--------- --------- --------- ---------
Cash and cash equivalents, end of period ........ $ 538,138 $ 519,568 $ 414,357 $ 20,093
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ..... $ 5,000 $ 60,000
========= =========
</TABLE>
Supplemental non-cash financing activities:
During 1997, the stockholder of the Company declared a distribution equal
to its estimated excess net asset value as described in Note 7.
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
Microsouth, Inc.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and Nature of Operations:
Basis of Presentation
The financial statements are prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1995 and 1996 and reported amounts of revenues and
expenses for the six month period ended December 31, 1995 and for the year ended
December 31, 1996. Significant estimates include those made for the allowance
for doubtful accounts and inventory reserves for excess, obsolete and damaged
products. Actual results could differ from those estimates made by management.
Nature of Operations
The Company is a distributor and marketer of a broad array of complex
computer graphics hardware and software in the southeastern United States.
Customers consist primarily of value added resellers and vertical solution
providers. The Company also provides technical support and training to its
customers.
Inherent in the accompanying financial statements are certain risks and
uncertainties. These risks and uncertainties include, but are not limited to:
the impact of competitive products, competition, and available sources of
supply.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 2, 1997
and for the six months ended June 30, 1996 and for the period January 1, 1997
through June 2, 1997 have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements for the six month period ended December 31,
1995 and for the year ended December 31, 1996 and include all adjustments, which
were of a normal and recurring nature, which in the opinion of management are
necessary to present fairly the financial position of the Company and the
results of operations and cash flows for each of the periods presented. The
operating results for the interim periods are not necessarily indicative of
results for the full year.
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents.The
Company maintains cash balances at financial institutions. Accounts a teach
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out method) or market. Inventory is comprised primarily of
finished goods and the Company maintains a reserve for its estimate of excess,
obsolete and damaged goods.
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives which
range from 3 to 7 years.
Amounts expended for maintenance and repairs are charged to expense as
incurred. Upon disposition, both the related cost and accumulated depreciation
accounts are relieved and the related gain or loss is credited or charged to
operations.
F-19
<PAGE>
Microsouth, Inc.
NOTES TO FINANCIAL STATEMENTS, Continued
Revenue
Sales are recognized upon the shipment of products to the customer.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations.
Income Taxes
Microsouth has elected S corporation status as defined by the Internal
Revenue Code. Under this election, taxable income and any applicable tax credits
are included in the income tax return of the stockholder, and any federal and
state income tax liability is borne by the stockholder.
Fair Value of Financial Instruments
The Company's financial instruments include its debt obligation. During
December of 1996 the Company renegotiated the terms of the debt obligation. See
Note 4. Accordingly, the fair value of the debt is approximately $15,000.
3. Negative Goodwill:
Effective June 30, 1995, TW Acquisitions ("TW") acquired all of the common
stock of Microsouth in exchange for $250,000 in cash and a note payable of
$750,000. The fair value of the assets acquired was approximately $2,454,152 and
liabilities assumed totaled $784,256. TW was a holding company with no
operations. In July 1995, TW and Microsouth were legally consolidated and their
name changed to Microsouth, Inc. As a result of the acquisition on June 30,
1995, negative goodwill of $669,896 was recognized as the purchase price was
less than the fair value of the net assets acquired. Negative goodwill is being
amortized, on a straight-line basis, over its estimated economic life of 10
years. Accumulated amortization amounted to approximately $33,495 and $100,485
at December 31, 1995 and 1996, respectively.
4. Note Payable:
Long-term debt at December 31, 1995 and 1996 consists of a note payable
with the former parent of Microsouth. This note was issued in connection with
the 1995 acquisition. The note bears interest at 8%, is collateralized by the
common stock of the Company, and the original terms required monthly principal
and quarterly interest payments beginning in January of 1997.
During December 1996, the Company entered into an agreement with the former
parent to renegotiate the terms of the original note. As a result, the Company
made payments to the former parent of $525,000 during December 1996 and the
remaining $15,000 during March 1997 which resulted in the recognition of an
extraordinary gain of $210,000 during the three month period ended March 31,
1997.
5. Related Party Transactions:
The Company is affiliated through common ownership with an entity whose
operating expenses, such as rent, utilities, insurance and other expenses are
shared with the Company. Amounts due from the related entity under this
arrangement were $16,360 and $10,229 at December 31, 1995 and 1996,
respectively.
F-20
<PAGE>
Microsouth, Inc.
NOTES TO FINANCIAL STATEMENTS, Continued
6. Commitments and Contingencies:
Operating Lease
The Company leases office space under an operating lease expiring in 1998.
At December 31, 1996 minimum rentals due under the lease were as follows:
1997 .......................................... $46,419
1998 .......................................... 15,671
-------
$62,090
=======
Rent expense for the six month period ended December 31, 1995 and for the
year ended December 31, 1996 was $22,322, and $44,644, respectively.
Litigation
The Company is involved from time to time in litigation on matters which
are routine to the conduct of its business. Although the outcome of any
litigation cannot be predicted with certainty, the Company does not believe that
any outstanding litigation will have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
7. Subsequent Events:
On June 2, 1997, the Company closed on a stock purchase agreement
(the"Agreement") completing the sale of all of the outstanding common stock of
Microsouth, Inc. in exchange for 1,586 shares of common stock of Tekgraf, Inc.
(formerly Crescent Computers, Inc.). The acquisition by Tekgraf, Inc. will be
accounted for under the purchase method of accounting. Pursuant to the
Agreement, the Company is required to deliver a defined guaranteed net asset
value ("NAV"). The Company's excess net book value over the NAV, of
approximately $819,000, will be distributed in cash to the Company's
stockholder. It is anticipated that the distribution will occur during December
1997. In addition, and also pursuant to the Agreement, the stockholder of the
Company has entered into an employment agreement with Tekgraf, Inc. which
provides for a set base salary, participation in future incentive bonus plans,
certain other benefits, and a covenant not to compete following termination of
such person's employment.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Computer Graphics Distributing Company
We have audited the accompanying balance sheets of Computer Graphics
Distributing Company as of December 31, 1995 and 1996, and the related
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Computer Graphics Distributing
Company as of December 31, 1995 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
McLean, Virginia
May 12, 1997, except for
Note 9 as to which the date
is September 30, 1997
F-22
<PAGE>
Computer Graphics Distributing Company
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 2, 1997
1995 1996 (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 400 $ 3,809 $ 400
Accounts receivable, less allowance for doubtful
accounts of $46,889 and $38,196 at December 31,
1995 and 1996, respectively ............................... 1,818,736 1,810,341 1,958,491
Inventories, net ............................................. 964,701 1,132,089 730,739
Prepaid expenses and other assets ............................ 78,745 63,060 79,686
Current deferred income taxes ................................ 16,438 17,180 20,410
----------- ----------- -----------
Total current assets ...................................... 2,879,020 3,026,479 2,789,726
----------- ----------- -----------
Property and equipment:
Furniture and equipment ...................................... 206,514 223,745 225,548
Automobiles .................................................. 47,020 109,565 109,565
----------- ----------- -----------
253,534 333,310 335,113
Less accumulated depreciation ................................ (184,089) (210,689) (221,936)
----------- ----------- -----------
69,445 122,621 113,177
Other assets .................................................... 55,837 65,828 115,867
----------- ----------- -----------
Total assets .............................................. $ 3,004,302 $ 3,214,928 $ 3,018,770
=========== =========== ===========
LIABILITIES
Current liabilities:
Current maturities of long-term debt and line of credit ...... $ 1,043,473 $ 1,371,241 $ 854,452
Note payable, stockholders ................................... 40,000 40,000
Accounts payable ............................................. 1,223,581 977,555 1,275,593
Accrued expenses ............................................. 193,542 123,622 73,182
Income taxes payable ......................................... 29,217 33,737
----------- ----------- -----------
Total current liabilities ................................. 2,460,596 2,541,635 2,276,964
----------- ----------- -----------
Long-term debt, less current maturities ...................... 13,661 36,258 25,023
Note payable, stockholders ................................... 50,000 50,000 50,000
Deferred income taxes ........................................ 200 3,327 3,327
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, no par value, 5,000 shares authorized; 3,730 shares
issued and outstanding ....................................... 18,762 18,762 18,762
Additional paid in capital ...................................... 172,000
Due from pre-aquisition stockholders (See Note 9) ............... (172,000)
Retained earnings ............................................... 461,083 564,946 644,694
----------- ----------- -----------
Total stockholders' equity ................................ 479,845 583,708 663,456
----------- ----------- -----------
Total liabilities and stockholders' equity ................ $ 3,004,302 $ 3,214,928 $ 3,018,770
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE>
Computer Graphics Distributing Company
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended Six months For the period
December 31 ended January 1,1997
------------------------------------------- June 30, through June 2,
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales .................................... $12,947,702 $11,095,229 $11,002,868 $5,129,621 $5,183,325
Cost of goods sold ........................... 11,109,707 9,192,033 9,143,743 4,337,898 4,272,780
----------- ----------- ----------- ---------- ----------
Gross profit ........................... 1,837,995 1,903,196 1,859,125 791,723 910,545
Operating expenses:
Selling, general and administrative ....... 1,563,669 1,669,761 1,608,903 741,736 725,184
Depreciation .............................. 19,613 19,356 26,787 8,550 11,247
----------- ----------- ----------- ---------- ----------
Income from operations ................. 254,713 214,079 223,435 41,437 174,114
Other income, net ............................ 22,750 17,070 54,861 31,899 4,670
Interest expense ............................. 153,967 144,620 123,675 53,279 56,095
----------- ----------- ----------- ---------- ----------
Income before provision for income taxes 123,496 86,529 154,621 20,057 122,689
Provision for income taxes ................... 44,815 20,328 50,758 6,618 42,941
----------- ----------- ----------- ---------- ----------
Net income ............................. $ 78,681 $ 66,201 $ 103,863 $ 13,439 $ 79,748
=========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
Computer Graphics Distributing Company
Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Due from
Additional Pre-aqusition
Number of Common Paid-in Stockholders Retained
Shares Stock Capital (Note 9) Earnings Total
----- ------- -------- --------- -------- --------
<S> <C> <C> <C> <C>
Balances, January 1, 1994 .... 3,630 $ 8,762 $316,201 $324,963
Net income ................ 78,681 78,681
----- ------- -------- --------- -------- --------
Balances, December 31, 1994 .. 3,630 8,762 394,882 403,644
Common stock issued ....... 100 10,000 10,000
Net income ................ 66,201 66,201
----- ------- -------- --------- -------- --------
Balances, December 31, 1995 .. 3,730 18,762 461,083 479,845
Net income ................ 103,863 103,863
----- ------- -------- --------- -------- --------
Balances, December 31, 1996 .. 3,730 18,762 564,946 583,708
Due from pre-acquisition
stockholders (unaudited) $172,000 $(172,000)
Net income (unaudited) .... 79,748 79,748
----- ------- -------- --------- -------- --------
Balances, June 2, 1997 (unaudited) 3,730 $18,762 $172,000 $(172,000) $644,694 $663,456
===== ======= ======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
Computer Graphics Distributing Company
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Six Months For the Period
December 31, Ended January 1,1997
----------------------------------------- June 30, Through June 2,
1994 1995 1996 1996 1997
--------- --------- --------- ---------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ................................... $ 78,681 $ 66,201 $ 103,863 $ 20,257 $ 79,748
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation ................................. 19,613 19,356 26,787 8,550 11,247
Provision for doubtful accounts receivable ... (73,173) 22,401 (8,693) 14,116
Provision for inventory obsolescence ......... 20,533 (51,334) 13,547 6,774 2,171
Deferred income taxes ........................ 14,862 8,145 2,385 369 (3,230)
Loss on disposal of equipment ................ 11,639 250
Changes in assets and liabilities:
Accounts receivable .......................... (746,779) 614,504 17,088 207,718 (162,266)
Inventories .................................. (214,240) 288,460 (184,738) (304,187) 399,179
Prepaid expenses ............................. (38,606) (1,338) 22,263 17,202 (20,576)
Other assets ................................. (4,576) (48,191) (16,569) 21,596 (46,089)
Accounts payable and accrued expenses ........ 349,318 135 (303,171) (24,918) 25,351
Income taxes payable ......................... 4,513 (13,462) 29,217 44,617 4,520
--------- --------- --------- --------- ---------
Net cash provided (used) by
operating activities .................... (589,854) 916,516 (297,771) (2,022) 304,171
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of equipment .............. 3,000 795
Payments for purchase of equipment ........... (2,864) (47,802) (77,205) (6,094) (1,803)
--------- --------- --------- --------- ---------
Net cash used by investing activities ..... (2,864) (44,802) (76,410) (6,094) (1,803)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in line of credit ........ 741,554 (928,814) 307,721 (271,404) (515,816)
Proceeds from long-term debt ................. 30,523 60,152
Repayment of long-term debt .................. (25,000) (6,922) (17,508) (4,861) (12,208)
Proceeds from note payable, stockholders ..... 40,000
Proceeds from issuance of common stock ....... 10,000
Bank overdraft ............................... (113,112) 12,775 (12,775) 284,381 222,247
--------- --------- --------- --------- ---------
Net cash provided (used) by
financing activities .................... 603,442 (882,438) 377,590 8,116 (305,777)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents 10,724 (10,724) 3,409 -- (3,409)
Cash and cash equivalents, beginning of period .. 400 11,124 400 400 3,809
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period ........ $ 11,124 $ 400 $ 3,809 $ 400 $ 400
========= ========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ..... $ 148,580 $ 151,351 $ 119,461
Cash paid during the period for income taxes . $ 35,372 $ 32,853 $ 1,618
</TABLE>
Supplemental non-cash investing and financing activities:
During 1994, 1995 and 1996, the Company transferred $3,688, $5,845 and $3,803,
respectively, from inventory to property and equipment.
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE>
Computer Graphics Distributing Company
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and Nature of Operations:
Basis of Presentation
The financial statements are prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1995 and 1996, and reported amounts of revenues and
expenses for each of the three years in the period ended December 31, 1996.
Significant estimates include those made for the allowance for doubtful accounts
and inventory reserves for excess, obsolete and damaged products. Actual results
could differ from those estimates made by management.
Nature of Operations
Computer Graphics Distributing Company ("the Company") is a distributor and
marketer of a broad array of complex computer graphics hardware and software in
the mid-Atlantic and northeastern United States. Customers consist primarily of
value added resellers and vertical solution providers.
Inherent in the accompanying financial statements are certain risks and
uncertainties. These risks and uncertainties include, but are not limited to:
the impact of competitive products, competition, and available sources of
supply.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 2, 1997
and for the six months ended June 30, 1996 and for the period January 1, 1997
through June 2, 1997, have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements for the three years in the period ended
December 31, 1996 and include all adjustments, which were of a normal and
recurring nature which, in the opinion of management, are necessary to present
fairly the financial position of the Company and the results of operations and
cash flows for the periods presented. The operating results for the interim
periods are not necessarily indicative of results for the full year.
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents. The
Company maintains cash balances at financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out method) or market. Inventory is comprised primarily of
finished goods. The Company maintains a reserve for its estimate of excess,
obsolete and damaged goods.
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives which
range from 3 to 7 years.
Amounts expended for maintenance and repairs are charged to expense as
incurred. Upon disposition, both the related cost and accumulated depreciation
accounts are relieved and the related gain or loss is credited or charged to
operations.
F-27
<PAGE>
Computer Graphics Distributing Company
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Revenue
Sales are recognized upon the shipment of products to the customer.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred tax liabilities and assets are determined based
on temporary differences between the bases of certain assets and liabilities for
income tax and financial reporting purposes. The deferred tax assets and
liabilities are classified according to the financial statement classification
of the assets and liabilities generating the differences. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Fair Value of Financial Instruments
The Company's financial instruments include its debt obligations.
Management believes that these instruments bear interest at rates which
approximate prevailing market rates for instruments with similar characteristics
and, accordingly, that the carrying values for these instruments are reasonable
estimates of fair value.
3. Long-Term Debt and Line of Credit:
Long-term debt and line of credit at December 31, 1995 and 1996 consists of
the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Line of credit with a bank totaling $2,250,000 bearing
interest at the bank's prime rate (8.25% at
December 31, 1996) plus 2%, collateralized by
accounts receivable and inventory, subject to
certain loan covenant restrictions relating
to minimum capital, and expires June 30, 1997
(see Note 9) ................................... $ 1,033,533 $ 1,341,254
Various installment notes payable with banks bearing
interest at rates ranging from 7.5% to 8.5%,
payable in monthly principal and interes
installments through 1998, collateralized
by certain equipment with a net book value of
$78,000 at December 31, 1996 ................... 23,601 66,245
Note payable to stockholders (see Note 5) ............ 50,000 90,000
----------- -----------
1,107,134 1,497,499
Less current maturities ........................... (1,043,473) (1,411,241)
----------- -----------
$ 63,661 $ 86,258
=========== ===========
</TABLE>
At December 31, 1996, aggregate maturities of long-term debt and line of
credit are as follows:
1997 .......................... $1,411,241
1998 .......................... 73,494
1999 .......................... 12,764
----------
$1,497,499
==========
F-28
<PAGE>
Computer Graphics Distributing Company
NOTES TO FINANCIAL STATEMENTS, Continued
4. Income Taxes:
The provision for income taxes for the years ended December 31, is as
follows:
Federal State Total
------- ------- -------
1994
Current ............... $22,575 $ 7,378 $29,953
Deferred .............. 12,633 2,229 14,862
------- ------- -------
$35,208 $ 9,607 $44,815
======= ======= =======
1995
Current ............... $ 8,778 $ 3,405 $12,183
Deferred .............. 6,923 1,222 8,145
------- ------- -------
$15,701 $ 4,627 $20,328
======= ======= =======
1996
Current ............... $40,523 $ 7,850 $48,373
Deferred .............. 2,027 358 2,385
------- ------- -------
$42,550 $ 8,208 $50,758
======= ======= =======
The sources and tax effects of the temporary differences comprising the
Company's net deferred tax assets at December 31, 1995 and 1996 are as follows:
1995 1996
-------- --------
Allowance for doubtful accounts receivable ..... $ 14,067 $ 11,459
Allowance for inventory obsolescence ........... -- 4,064
Allowance for sales returns .................... 2,371 1,657
Property and equipment ......................... (200) (3,327)
-------- --------
Net deferred tax assets ........................ $ 16,238 $ 13,853
======== ========
Management believes that realization of the net deferred tax assets is more
likely than not primarily on the basis of its evaluation of the Company's
anticipated profitability over the period of years that the temporary
differences are expected to become tax deductions. It believes that sufficient
book and taxable income will be generated to realize the benefit of these tax
assets.
The Company's effective income tax rate for the years ended December 31,
1994, 1995 and 1996 varied from the federal statutory income rate as a result of
the tax effect of the following factors:
1994 1995 1996
----- ---- ----
Statutory rate ................................. 25% 20% 28%
State income taxes, net of federal benefit ..... 6 4 4
Permanent differences .......................... 2 -- 1
Other .......................................... 3 (1) --
-- --- --
Effective tax rate ............................. 36% 23% 33%
== === ==
5. Related Party Transactions:
Included in long-term debt at December 31, 1995 and 1996 is a note payable
to stockholders of the Company amounting to $50,000 and $90,000, respectively.
The note bears interest at 12% and has no stated maturity date; however, the
stockholders have agreed not to require repayment of $50,000 of the balance
prior to January 1, 1999. The note payable is subordinate to the line of credit.
F-29
<PAGE>
Computer Graphics Distributing Company
NOTES TO FINANCIAL STATEMENTS, Continued
6. Commitments and Contingencies:
Operating Lease
The Company leases office space under an operating lease expiring in 1999.
At December 31, 1996 minimum rentals due under the lease were as follows:
$86,077 for 1997, $95,015 for 1998 and $49,408 for 1999.
Litigation
The Company is involved from time to time in litigation on matters which
are routine to the conduct of its business. Although the outcome of any
litigation cannot be predicted with certainty, the Company does not believe that
any outstanding litigation will have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
7. Employee Benefit Plan:
The Company has a profit-sharing plan for eligible employees as defined by
the plan, and participants are allowed to make voluntary non-forfeitable
contributions. The Company made discretionary contributions to the plan of
$35,367, $93,134 and $17,641 in 1994, 1995 and 1996, respectively.
8. Other Income, Net
Other income for the years ended December 31, 1994, 1995 and 1996 consists
of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Interest income ................................. $15,526 $ 13,842 $ --
Increase in cash surrender value-- life insurance 7,061 14,867 10,045
Loss on sale of equipment ....................... -- (11,639) (250)
Other ........................................... 163 -- 45,066
------- -------- --------
$22,750 $ 17,070 $ 54,861
======= ======== ========
</TABLE>
In 1996, the Company earned $45,000 by assisting a customer in completing
the necessary procedures required to have the customer's products added to
certain General Services Administration supply schedules.
9. Subsequent Events:
On June 2, 1997, the Company closed on a stock purchase agreement (the
"Agreement") completing the sale of all of the outstanding common stock of
Computer Graphics Distributing Company in exchange for 751 shares of common
stock of Tekgraf, Inc. (formerly Crescent Computers, Inc.). The acquisition by
Tekgraf, Inc. will be accounted for under the purchase method of accounting.
Pursuant to the Agreement, the Company is required to deliver a defined
guaranteed net asset value ("NAV"). The Company's NAV over the net book value,
of approximately $172,000, is expected to be contributed in cash or satisfied
with the Company's stock by the Company's stockholders. It is anticipated that
the distribution will occur during December 1997. In addition, and also pursuant
to the Agreement, the stockholders of the Company have entered into employment
agreements with Crescent which provide for a set base salary, participation in
future incentive bonus plans, certain other benefits, and a covenant not to
compete following termination of such person's employment.
During September, 1997, the Company extended the line of credit with a bank
through November 30, 1997.
F-30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder
tekgraf, inc.
We have audited the accompanying balance sheet of tekgraf, inc. as of
December 31, 1996, and the related statements of income, changes in stockholder
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of tekgraf, inc. as of December
31, 1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 2, 1997
F-31
<PAGE>
tekgraf, inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, June 2, 1997
1996 (Unaudited)
--------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................... $ 386,680 $ 414,154
Accounts receivable, less allowance for doubtful
accounts of $5,956 at December 31, 1996 ....................... 316,126 311,211
Inventories, net .................................................. 227,814 330,010
Prepaid expenses and other assets ................................. 4,866 27,361
--------- -----------
Total current assets ........................................... 935,486 1,082,736
--------- -----------
Property and equipment:
Furniture and equipment ........................................... 68,629 61,007
Leasehold improvements ............................................ 425 425
Automobiles ....................................................... 25,188 25,188
--------- -----------
94,242 86,620
Less accumulated de preciation .................................... (65,543) (69,079)
--------- -----------
28,699 17,541
Employee note receivable .......................................... 14,585
Other assets, net ................................................. 8,260 8,180
--------- -----------
Total assets ................................................... $ 987,030 $ 1,108,457
========= ===========
LIABILITIES
Current liabilities:
Note payable ..................................................... $ 75,000
Accounts payable .................................................. 396,996 $ 563,361
Accrued expenses .................................................. 508
Due to pre-acquisition stockholder (see Note 6) ................... 267,000
--------- -----------
Total current liabilities ...................................... 472,504 830,361
--------- -----------
Negative goodwill, net ............................................ 271,367 263,405
Commitments and contingencies
STOCKHOLDER'S EQUITY
Common stock, $.10 par value, 1,000,000 shares
authorized; 1,000 shares issued and outstanding ................... 100 100
Retained earnings ................................................. 243,059 14,591
--------- -----------
Total stockholder's equity ..................................... 243,159 14,691
--------- -----------
Total liabilities and stockholder's equity ..................... $ 987,030 $ 1,108,457
========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-32
<PAGE>
tekgraf, inc.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six months For the period
Year Ended ended January 1, 1997
December 31, June 30, through June 2,
1996 1996 1997
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Net sales ............................ $ 4,062,901 $ 1,947,646 $ 1,629,457
Cost of goods sold ................... 3,380,486 1,632,336 1,328,399
----------- ----------- -----------
Gross profit ................... 682,415 315,310 301,058
Operating expenses:
Selling, general and administrative .. 317,909 131,215 111,626
Depreciation ......................... 9,858 9,881 9,448
Amortization ......................... (31,412) (15,706) (13,088)
----------- ----------- -----------
Income from operations ......... 342,398 189,920 193,072
Interest expense ..................... 15,000 10,000 (11,289)
----------- ----------- -----------
Income before extraordinary item 371,060 179,920 204,361
Extraordinary gain ................... 70,000
----------- ----------- -----------
Net income ........................ $ 371,060 $ 179,920 $ 274,361
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE>
tekgraf, inc.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Retained
Number of Common Earnings
Shares Stock (Deficit) Total
----- ---- --------- ---------
<S> <C> <C> <C> <C>
Balances, January 1, 1996 ............. 1,000 $100 $ (28,001) $ (27,901)
Stockholder distribution ........... (100,000) (100,000)
Net income ......................... 371,060 371,060
----- ---- --------- ---------
Balances, December 31, 1996 ........... 1,000 100 243,059 243,159
Stockholder distribution (unaudited) (502,829) (502,829)
Net income (unaudited) ............. 274,361 274,361
----- ---- --------- ---------
Balances, June 2, 1997 (unaudited) .... 1,000 100 14,591 14,691
===== ==== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-34
<PAGE>
tekgraf, inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months For the Period
Year Ended Ended January 1, 1997
December 31, June 30, Through June 2,
1996 1996 1997
----------- ---------- --------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................... $ 371,060 $ 179,920 $ 274,361
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............. (21,554) (10,717) (3,640)
Provision for doubtful accounts receivable . 5,966
Extraordinary gain ......................... (70,000)
Changes in assets and liabilities:
Accounts receivable ........................... 1,915 105,476 4,915
Inventories ................................... (53,974) 113,536 (102,196)
Prepaid expenses .............................. (4,866) (4,965)
Employee notes receivable ..................... (14,585)
Other assets .................................. (2,422) (8,260)
Accounts payable and accrued expenses ......... 189,760 44,316 166,100
--------- --------- ---------
Net cash provided by operating activities .. 471,300 427,566 261,280
--------- --------- ---------
Cash flows from investing activities:
Payments for purchase of property and equipment (10,824) (4,430) (2,491)
--------- --------- ---------
Net cash used by investing activities ...... (10,824) (4,430) (2,491)
--------- --------- ---------
Cash flows from financing activities:
Distribution to stockholder ................... (100,000) (225,529)
Repayment of debt ............................. (175,000) (5,000)
--------- --------- ---------
Net cash used by financing activities ...... (275,000) (230,529)
--------- --------- ---------
Increase in cash and cash equivalents ............ 185,476 423,136 28,260
Cash and cash equivalents, beginning of period ... 201,204 201,204 386,680
--------- --------- ---------
Cash and cash equivalents, end of period ......... $ 386,680 $ 624,340 $ 414,940
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ... $ 15,000
=========
</TABLE>
Supplemental non-cash financing activities:
During 1997, the stockholder of the Company declared a distribution equal
to its estimated excess net asset value as described in Note 6.
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE>
tekgraf, inc.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and Nature of Operations:
Basis of Presentation
The financial statements are prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1996 and reported amounts of revenues and expenses
for the year then ended. Significant estimates include those made for the
allowance for doubtful accounts. Actual results could differ from those
estimates made by management.
Nature of Operations
tekgraf, inc. (the "Company") is a distributor and marketer of a broad
array of complex computer graphics hardware and software in the southwestern
United States. Customers consist primarily of value added resellers and vertical
solution providers. Inherent in the accompanying financial statements are
certain risks and uncertainties. These risks and uncertainties include, but are
not limited to: the impact of competitive products, competition, and available
sources of supply.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 2, 1997
and for the six months ended June 30, 1996 and for the period January 1, 1997
through June 2, 1997 have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements for the year ended December 31, 1996 and
include all adjustments, which were of a normal and recurring nature which, in
the opinion of management, are necessary to present fairly the financial
position of the Company and the results of operations and cash flows for the
periods presented. The operating results for the interim periods are not
necessarily indicative of results for the full year.
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents. The
Company maintains cash balances at financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out method) or market. Inventory is comprised primarily of
finished goods and the Company maintains a reserve for its estimate of excess,
obsolete and damaged goods.
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives which
range from 3 to 7 years.
Amounts expended for maintenance and repairs are charged to expense as
incurred. Upon disposition, both the related cost and accumulated depreciation
accounts are relieved and the related gain or loss is credited or charged to
operations.
Revenue
Sales are recognized upon the shipment of products to the customer.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations.
F-36
<PAGE>
tekgraf, inc.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. Summary of Significant Accounting Policies, continued:
Income Taxes
The Company has elected S corporation status as defined by the Internal
Revenue Code. Under this election, taxable income and any applicable tax credits
are included in the income tax return of the stockholder, and any federal and
state income tax liability is borne by the stockholder.
Fair Value of Financial Instruments
The Company's financial instruments include its note payable and employee
note receivable. Management believes that the employee notes receivable bear
interest at rates which approximate prevailing market rates for instruments with
similar characteristics and, accordingly, that the carrying value is a
reasonable estimate of fair value. During December of 1996 the Company
renogiated the terms of the note payable. See Note 4. Accordingly, the fair
value of the note payable at December 31, 1996 is approximately $5,000.
3. Negative Goodwill:
Effective June 30, 1995, MC Acquisitions ("MC") acquired all of the common
stock of tekgraf in exchange for $125,000 in cash and a note payable of
$245,000. MC was a holding company with no operations. In July 1995, MC and
tekgraf were legally consolidated and their name changed to tekgraf, inc. As a
result of the acquisition on June 30, 1995 negative goodwill of $318,486 was
recognized as the purchase price was less than the fair value of the net assets
acquired. Negative goodwill is being amortized, on a straight-line basis, based
its estimated economic life of 10 years. Accumulated amortization amounted to
approximately $47,119 at December 31, 1996.
4. Notes Payable:
Long-term debt at December 31, 1996 consists of a note payable with the
former parent of the Company. This note was issued in connection with the 1995
acquisition. The note bears interest at 8%, is collateralized by the common
stock of the Company, and the original terms required monthly principal and
interest payments beginning in July of 1997.
During December 1996, the Company entered into an agreement with the former
parent to renegotiate the terms of the original note. As a result, the Company
made payments to the former parent of $170,000 during December 1996 and the
remaining $5,000 during March 1997 which resulted in the recognition of an
extraordinary gain of $70,000 during the three month period ended March 31,
1997.
5. Commitments and Contingencies:
The Company leases office space under an operating lease expiring in 1998.
At December 31, 1996 minimum rentals due under the lease were as follows:
1997 ................................................. $44,094
1998 ................................................. 7,500
-------
$51,594
=======
Rent expense for the year ended December 31, 1996 was $41,089
F-37
<PAGE>
tekgraf, inc.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. Subsequent Events:
On June 2, 1997, the Company closed on a stock purchase agreement (the
"Agreement") completing the sale of all of the outstanding common stock of
tekgraf in exchange for 834 shares of common stock of Tekgraf, Inc. (formerly
Crescent Computers, Inc.). The acquisition by Tekgraf, Inc. will be accounted
for under the purchase method of accounting. Pursuant to the Agreement, the
Company is required to deliver a defined guaranteed net asset value ("NAV"). The
Company's excess net book value over the NAV of $267,000 will be distributed in
cash to the Company's stockholder. It is anticipated that the distribution will
occur during December 1997. In addition, and also pursuant to the Agreement, the
stockholder of the Company has entered into an employment agreement with
Tekgraf, Inc. which provide for a set base salary, participation in future
incentive bonus plans, certain other benefits, and a covenant not to compete
following termination of such person's employment.
F-38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Intelligent Products Marketing, Inc.
We have audited the accompanying balance sheets of Intelligent Products
Marketing, Inc. as of December 31, 1995 and 1996, and the related statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Intelligent Products
Marketing, Inc. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 2, 1997
F-39
<PAGE>
Intelligent Products Marketing, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 2, 1997
1995 1996 (Unaudited)
----------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 140,821 $ 700 $ 2,591
Accounts receivable, less allowance for
doubtful accounts of $34,850 at December 31, 1996 ........... 942,956 1,405,044 431,554
Inventories, net ............................................... 649,591 428,086
Other receivables .............................................. 27,087 38,595
Prepaid expenses ............................................... 10,003 6,201
Deferred income taxes .......................................... 42,874 58,228
----------- ----------- ---------
Total current assets ........................................ 1,813,332 1,936,854 434,145
----------- ----------- ---------
Property and equipment:
Furniture and equipment ........................................ 388,665 412,747 184,033
Leasehold improvements ......................................... 4,674 4,675
----------- ----------- ---------
393,339 417,422 184,033
Less accumulated depreciation .................................. (284,164) (327,125) (135,512)
----------- ----------- ---------
109,175 90,297 48,521
Other assets ...................................................... 4,930 5,315
----------- ----------- ---------
Total assets ................................................ $ 1,927,437 $ 2,032,466 $ 482,666
=========== =========== =========
LIABILITIES
Current liabilities:
Accounts payable ............................................... $ 832,376 $ 801,681
Accrued expenses ............................................... 136,069 146,243
Due to related entities ........................................ 181,335 127,829
Bank overdraft ................................................. 109,789
Income taxes payable ........................................... 33,524 45,286 $ 76,166
Deferred income taxes .......................................... 2,780 3,960
----------- ----------- ---------
Total current liabilities ................................... 1,186,084 1,234,788 76,166
----------- ----------- ---------
Long-term Debt .................................................... 91,638
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, no par value, 1,000 shares
authorized; 500 shares issued and outstanding at
December 31, 1995 and 1996 respectively ........................ 125,005 125,005 125,005
Retained earnings ................................................. 616,348 672,673 189,857
----------- ----------- ---------
Total stockholders' equity ..................................... 741,353 797,678 314,862
----------- ----------- ---------
Total liabilities and stockholders' equity ..................... $ 1,927,437 $ 2,032,466 $ 482,666
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE>
Intelligent Products Marketing, Inc.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
Years Ended Six Months January 1,
December 31, Ended 1997
---------------------------- June 30, Through June 2,
1995 1996 1996 1997
----------- ----------- ---------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales .................................. $ 7,646,803 $ 9,058,790 $5,441,239 $2,684,693
Cost of goods sold ......................... 6,343,894 7,578,307 4,186,533 1,789,662
----------- ----------- ---------- ----------
Gross profit ........................... 1,302,909 1,480,483 1,254,706 895,031
Operating expenses:
Selling, general and administrative ...... 1,051,974 1,333,230 1,154,283 795,321
Depreciation ............................. 46,210 42,961 30,000 8,800
----------- ----------- ---------- ----------
Income from operations ..................... 204,725 104,292 70,423 90,910
Other income (expense), net ................ (64,906) (25,903) 27,888 14,410
----------- ----------- ---------- ----------
Income before provision for income taxes 139,819 78,389 98,311 105,320
Provision for income taxes ................. 45,946 22,064 12,420 93,452
----------- ----------- ---------- ----------
Net income ............................. $ 93,873 $ 56,325 $ 85,891 $ 11,868
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE>
Intelligent Products Marketing, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Common Retained
Shares Stock Earnings Total
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Balances, January 1, 1995 .............. 500 $125,005 $522,475 $647,480
Net income .......................... 93,873 93,873
--- -------- -------- --------
Balances, December 31, 1995 ............ 500 125,005 616,348 741,353
Net income .......................... 56,325 56,325
--- -------- -------- --------
Balances, December 31, 1996 ............ 500 125,005 672,673 797,678
Stockholder distributions (unaudited) (494,684) (494,684)
Net income (unaudited) .............. 11,868 11,868
--- -------- -------- --------
Balances, June 2, 1997 (unaudited) ..... $500 $125,005 $189,857 $314,862
=== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE>
Intelligent Products Marketing, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Six Months For the Period
December 31, Ended January 1, 1997
------------------------ June 30, Through June 2,
1995 1996 1996 1997
--------- --------- ---------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................... $ 93,873 $ 56,325 $ 85,891 $ 11,868
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation .................................. 46,210 42,961 30,000 12,980
Provision for doubtful accounts receivable .... (31,878) 34,850
Provision for obsolete inventories ............ 34,333 (7,641)
Deferred income taxes ......................... (3,085) (14,174) 3,083 54,268
Changes in assets and liabilities net of effects
of distribution:
Accounts receivable .......................... (327,288) (496,938) (404,637) 353,725
Inventories .................................. (163,789) 229,146 (67,473) (368,369)
Other receivables ............................ 9,066 (11,508) 38,595
Prepaid expenses ............................. 8,756 3,802 (8,051) (40,404)
Other assets ................................. (150) (385) 490 150
Accounts payable and accrued expenses ........ 51,910 (20,521) 106,170 (210,140)
Due to related entities ...................... 181,335 (53,506)
Income taxes payable ......................... 27,314 11,762 15,363 35,673
--------- --------- --------- ---------
Net cash provided (used) by operating
activities ................................ (73,393) (225,827) (239,164) (111,654)
--------- --------- --------- ---------
Cash flows from investing activities:
Payments for purchase of property and equipment . (30,586) (24,083) (22,155) (13,821)
--------- --------- --------- ---------
Net cash used by investing activities ....... (30,586) (24,083) (22,155) (13,821)
--------- --------- --------- ---------
Cash flows from financing activities:
Payment on debt ................................. (92,901) (127,829)
Increase in line of credit ...................... 214,099 146,242
Bank overdraft .................................. 109,789 108,953
--------- --------- --------- ---------
Net cash provided by financing
activities ................................ 109,789 121,198 127,366
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents ... (103,979) (140,121) (140,121) 1,891
Cash and cash equivalents, beginning of period ..... 244,800 140,821 140,821 700
--------- --------- --------- ---------
Cash and cash equivalents, end of period ........... $ 140,821 $ 700 $ 700 $ 2,591
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ..... $ 21,717 $ 24,476
========= =========
Cash paid during the period for interest ......... $ 1,965 $ 5,214
========= =========
</TABLE>
Supplemental non-cash activity:
During 1997, the stockholders distributed assets and liabilities with a net
book value at approximately $1,511,000 and $1,016,000, respectively.
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE>
Intelligent Products Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and Nature of Operations:
Basis of Presentation
The financial statements are prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1995 and 1996 and reported amounts of revenues and
expenses for the years then ended. Significant estimates include those made for
the allowance for doubtful accounts and inventory reserves for excess, obsolete
and damaged products. Actual results could differ from those estimates made by
management.
Nature of Operations
Intelligent Products Marketing, Inc. ("the Company") is a distributor and
marketer of a broad array of complex computer graphics hardware and software in
the western United States. Customers consist primarily of value added resellers
and vertical solution providers. Distribution and representation contracts with
manufacturers are primarily held by two affiliated companies, IG Distribution,
Inc. and IP Marketing, Inc., which have granted the rights to execute these
contracts to the Company in exchange for a percentage of gross profit. Inherent
in the accompanying financial statements are certain risks and uncertainties.
These risks and uncertainties include, but are not limited to: the impact of
competitive products, competition, and available sources of supply.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 2, 1997
and for the six months ended June 30, 1996 and for the period January 1, 1997
through June 2, 1997 have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements for the year ended December 31, 1995 and 1996
and include all adjustments, which were of a normal and recurring nature which,
in the opinion of management, are necessary to present fairly the financial
position of the Company and the results of operations and cash flows for the
periods presented. The operating results for the interim periods are not
necessarily indicative of results for the full year.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. The
Company maintains cash balances at financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories are stated at the lower of cost, using the average method, or
market. Inventory is comprised primarily of finished goods and the Company
maintains a reserve for its estimate of excess, obsolete and damaged goods.
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives which
primarily range from 5 to 7 years. Amounts expended for maintenance and repairs
are charged to expense as incurred. Upon disposition, both the related cost and
accumulated depreciation accounts are relieved and the related gain or loss is
credited or charged to operations.
F-44
<PAGE>
Intelligent Products Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
2. Summary of Significant Accounting Policies, continued:
Revenue
Sales are recognized upon the shipment of products to the customer.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred tax liabilities and assets are determined based
on temporary differences between the bases of certain assets and liabilities for
income tax and financial reporting purposes. The deferred tax assets and
liabilities are classified according to the financial statement classification
of the assets and liabilities generating the differences. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments
including cash equivalents, accounts receivable, accounts payable and other
accrued liabilities approximate fair value due to their short maturities.
3. Line of Credit:
The Company has available a line of credit of $250,000 of which no amounts
were outstanding at December 31, 1996 and 1995. Interest is payable monthly at
the bank's prime lending rate (8.25% at December 31, 1996) plus .75% and expires
January 9, 1997. The line of credit is guaranteed by two stockholders of the
Company, and has been extended under the same conditions for an additional year.
4. Income Taxes:
The provision (benefit) for income taxes for the years ended December 31,
is as follows:
1995 1996
---- ----
Current .......................... $ 49,031 $ 36,238
Deferred ......................... (3,085) (14,174)
-------- --------
$ 45,946 $ 22,064
======== ========
The temporary differences between the tax bases of assets and liabilities
for income tax and financial reporting which give rise to deferred taxes at
December 31, 1995 and 1996 consist primarily of reserves for inventory and
accounts receivable and accrued bonuses. Management believes that realization of
the net deferred tax assets is more likely than not primarily due to anticipated
future taxable income. The Company's effective income tax rate varied from the
federal statutory income rate due primarily to state income taxes, net of the
federal income tax benefit, non-deductible meals and entertainment expenses and
federal sur-tax exemptions.
5. Related Party Transactions:
As of December 31, 1995 and 1996, amounts due to affiliated companies were
$181,335 and $127,829, respectively. In addition, commission expense related to
the execution of distribution contracts on behalf of an affiliated company is
$34,768 and $44,715 in 1995 and 1996, respectively.
F-45
<PAGE>
Intelligent Products Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
6. Commitments and Contingencies:
Operating Lease
The Company leases office space under noncancelable operating leases
expiring in 2001. At December 31, 1996 minimum rentals due under the lease were
as follows:
1997 ............................ $ 96,888
1998 ............................ 96,888
1999 ............................ 96,888
2000 ............................ 96,888
2001 ............................ 89,199
--------
$476,751
========
Rental expense under operating leases for 1995 and 1996 is $60,495 and
$60,507, respectively.
Litigation
The Company is involved from time to time in litigation on matters which
are routine to the conduct of its business. Although the outcome of any
litigation cannot be predicted with certainty, the Company does not believe that
any outstanding litigation will have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
7. Employee Benefit Plan:
The Company maintains a Profit Sharing Plan ("the Plan") under section
401(k) of the Internal Revenue Code. The Company's contributions to the Plan for
eligible employees are a percentage of compensation, up to a maximum of 15%,
depending on profitability. Total Company contributions under the Plan during
1995 and 1996 were $145,000 and $120,000, respectively.
8. Subsequent Events:
On June 2, 1997, the Company closed on a stock purchase agreement (the
"Agreement") completing the sale of all of the outstanding common stock of
Intelligent Products Marketing, Inc. and an affiliated company, IG Distribution,
Inc., in exchange for 900 shares of common stock of Tekgraf, Inc. (formerly
Crescent Computers, Inc.). The acquisition by Tekgraf, Inc. will be accounted
for under the purchase method of accounting. Pursuant to the Agreement, the
Company is required to deliver a defined guaranteed net asset value ("NAV"). The
Company's excess net book value over the NAV will be distributed in cash to the
Company's stockholders. It is anticipated that the distribution, if any, would
occur during December 1997. Management of the Company expects this amount to be
insignificant. In addition, and also pursuant to the Agreement, the stockholders
of the Company have entered into employment agreements with Tekgraf, Inc. which
provide for a set base salary, participation in future incentive bonus plans,
certain other benefits, and a covenant not to compete following termination of
such person's employment.
F-46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders
IG Distribution, Inc.
We have audited the accompanying balance sheets of IG Distribution, Inc. as of
December 31, 1995 and 1996, and the related statements of income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IG Distribution, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 2, 1997
F-47
<PAGE>
IG Distribution, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 2,
1995 1996 1997
------- ------- -------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Due from affiliate ............................ $49,006 $85,531 $91,639
Prepaid expenses .............................. 131 65 65
------- ------- -------
Total assets ................................ $49,137 $85,596 $91,704
======= ======= =======
STOCKHOLDERS' EQUITY
Common stock, no par value, 100,000
shares authorized; 1,000 shares issued and
outstanding at December 31, 1995 and 1996 ..... $ 1,000 $ 1,000 $ 1,000
Retained earnings ................................ 48,137 84,596 90,704
------- ------- -------
Total stockholders' equity .................. 49,137 $85,596 $91,704
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-48
<PAGE>
IG Distribution, Inc.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six For the
Years Ended Months Period
December 31, Ended January 1,
------------------- June 30, 1997 Through
1995 1996 1996 June 2, 1997
------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue ........................... $34,768 $44,715 $26,138 $13,531
Selling, general and administrative 482 474 399 451
------- ------- ------- -------
Income from operations ......... 34,286 44,241 25,739 13,080
Provision for income taxes, current 9,744 7,782 5,782 6,972
------- ------- ------- -------
Net income ........................ $24,542 $36,459 $19,957 $ 6,108
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-49
<PAGE>
IG DISTRIBUTION, INC.
Statements of Changes in Stockholders' Equity
Number of Common Retained
Shares Stock Earnings Total
--------- ------- -------- -------
Balances, January 1, 1995 ......... 1,000 $1,000 $23,595 $24,595
Net income ..................... 24,542 24,542
----- ------ ------- -------
Balances, December 31, 1995 ....... 1,000 1,000 48,137 49,137
Net income ..................... 36,459 36,459
----- ------ ------- -------
Balances, December 31, 1996 ....... 1,000 1,000 84,596 85,596
Net income (unaudited) ......... 6,108 6,108
----- ------ ------- -------
Balances, June 2, 1997 (unaudited). 1,000 $1,000 $90,704 $91,704
===== ====== ======= =======
The accompanying notes are an integral part of the financial statements.
F-50
<PAGE>
IG DISTRIBUTION, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six For the
Years Ended Months Period
December 31, Ended January 1,
------------------- June 30, 1997 Through
1995 1996 1996 June 2, 1997
-------- -------- -------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ................................. $ 24,542 $ 36,459 $ 19,957 $ 6,108
Changes in assets and liabilities:
Due from affiliate ......................... (24,607) (36,525) (19,957) (6,108)
Prepaid expenses ........................... 65 66
-------- -------- -------- --------
Net cash provided by operating activities -- --
Increase in cash and cash equivalents ......... -- --
-------- -------- -------- --------
Cash and cash equivalents, beginning of period -- -- -- --
-------- -------- -------- --------
Cash and cash equivalents, end of period ...... $ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-51
<PAGE>
IG DISTRIBUTION, INC.
Notes to Financial Statements
1. Nature of Operations and Basis of Presentation:
Basis of Presentation
The financial statements are prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1995 and 1996 and reported amounts of revenues and
expenses for the years then ended. Actual results could differ from those
estimates made by management.
Nature of Operations
IG Distribution, Inc. ("the Company") holds contracts with certain
manufacturers/importers for the distribution of a broad array of complex
computer graphics hardware and software in the western United States. Execution
of the contracts and distribution of the products is granted to an affiliated
company (Intelligent Products Marketing, Inc.) in return for a commission of 5%
of the gross profit.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 2, 1997
and for the six months ended June 30, 1996 and for the period January 1, 1997
through June 2, 1997 have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements for the year ended December 31, 1995 and 1996
and include all adjustments, which were of a normal and recurring nature which,
in the opinion of management, are necessary to present fairly the financial
position of the Company and the results of operations and cash flows for the
periods presented. The operating results for the interim periods are not
necessarily indicative of results for the full year.
Revenue
Revenue represents commission revenue and all revenue is derived from an
affiliated company.
Concentration of Credit Risk
Receivables are due from an affiliated company.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts
are determined in accordance with SFAS No. 109, "Accounting for Income Taxes"
("SFAS 109"). Under SFAS 109, deferred tax liabilities and assets are determined
based on temporary differences between the basis of certain assets and
liabilities for income tax and financial reporting purposes. As of December 31,
1995 and 1996, no such temporary differences exist. The Company's effective
income tax rate varied from the federal statutory income tax rate due primarily
to state income taxes and federal surtax exemptions.
3. Subsequent Events:
On June 2, 1997, the Company closed on a stock purchase agreement (the
"Agreement") completing the sale of all of the outstanding common stock of IG
Distribution, Inc. and an affiliated company, Intelligent Products Marketing,
Inc., in exchange for 900 shares of common stock of Tekgraf, Inc. (formerly
Crescent Computers, Inc.). The acquisition by Tekgraf, Inc. will be accounted
for under the purchase method of accounting. Pursuant to the Agreement, the
Company is required to deliver a defined guaranteed net asset value ("NAV"). In
addition, the stockholders of the Company have entered into employment
agreements with Tekgraf, Inc. which provide for a set base salary, participation
in future incentive bonus plans, certain other benefits, and a covenant not to
compete following termination of such person's employment.
F-52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
G&R Marketing, Inc.
We have audited the accompanying balance sheets of G&R Marketing, Inc. as of
December 31, 1995 and 1996, and the related statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of G&R Marketing, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
May 12, 1997, except for
Note 7 as to which the date
is June 30, 1997
F-53
<PAGE>
G&R Marketing, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 2, 1997
1995 1996 (Unaudited)
------------ ----------- ------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 613 $ 591 $ 556
Accounts receivable, less allowance for doubtful accounts
of $25,822 and $25,000 at December 31, 1995 and 1996,
respectively ......................................... 2,402,683 2,539,987 2,456,493
Inventories, net ........................................ 1,887,081 1,907,441 1,598,760
Other receivables ....................................... 295,193 144,796 177,575
Due from related entities ............................... 119,686 177,241 41,745
Prepaid expenses and other assets ....................... 10,068 17,456 55,823
----------- ----------- -----------
Total current assets ................................. 4,715,324 4,787,512 4,330,952
----------- ----------- -----------
Property and equipment:
Furniture and equipment ................................. 453,738 365,869 426,182
Leasehold improvements .................................. 24,697 24,697 24,697
----------- ----------- -----------
478,435 390,566 450,879
Accumulated depreciation ................................ (355,484) (306,372) (328,872)
----------- ----------- -----------
122,951 84,194 122,007
Other assets ............................................... 24,115 3,200 90,543
----------- ----------- -----------
Total assets ......................................... $ 4,862,390 $ 4,874,906 $ 4,543,502
=========== =========== ===========
LIABILITIES
Current liabilities:
Line of credit .......................................... $ 1,188,596 $ 1,188,598 $ 1,299,823
Accounts payable ........................................ 2,964,941 2,902,969 2,526,932
Accrued expenses ........................................ 77,287 31,825 21,598
State income taxes payable .............................. 3,100 3,600 62
----------- ----------- -----------
Total current liabilities ............................ 4,233,924 4,126,992 3,848,415
----------- ----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, no par value, 1,000,000 shares
authorized; 1,000 shares issued and outstanding
at December 31, 1995 and 1996, respectively ............. 2,100 2,100 2,100
Due from pre-acquisition stockholders (see Note 7) ......... (247,000)
Additional paid-in capital ................................. 247,000
Retained earnings .......................................... 626,366 745,814 692,987
----------- ----------- -----------
Total stockholders' equity ........................... 628,466 747,914 695,087
----------- ----------- -----------
Total liabilities and stockholders' equity ........... $ 4,862,390 $ 4,874,906 $ 4,543,502
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-54
<PAGE>
G&R Marketing, Inc.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended Six Months For the Period
December 31, Ended January 1, 1997
------------------------------------- June 30, Through June 2,
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales ............................ $21,316,998 $20,783,843 $21,038,228 $ 9,787,042 $ 7,971,221
Cost of goods sold ................... 18,676,506 17,990,180 18,117,338 8,389,438 6,821,844
----------- ----------- ----------- ----------- -----------
Gross profit ................... 2,640,492 2,793,663 2,920,890 1,397,604 1,149,377
Operating expenses:
Selling, general and administrative 2,281,214 2,387,135 2,551,281 1,175,490 872,095
Depreciation ...................... 48,259 67,498 56,549 27,000 22,500
----------- ----------- ----------- ----------- -----------
Income from operations ............ 311,019 339,030 313,060 195,114 254,782
Other income (expense) ............... 12 1,136 182 (60,065) 19,719
Interest expense ..................... 137,486 166,114 140,194 69,124 51,801
----------- ----------- ----------- ----------- -----------
Income before provision for
state income taxes .... 173,545 174,052 173,048 65,925 222,700
Provision for state income taxes ..... 3,400 3,100 3,600
----------- ----------- ----------- ----------- -----------
Net income ........................ $ 170,145 $ 170,952 $ 169,448 $ 65,925 $ 222,700
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-55
<PAGE>
G&R Marketing, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Due from
Additional Pre-acquisition
Number of Common Paid-in stockholders Retained
Shares Stock Capital (Note 7) Earnings Total
------ ----- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994............... 1,000 $2,100 $314,681 $316,781
Net income........................... 170,145 170,145
----- ------ -------- -------- -------- --------
Balances, December 31, 1994............. 1,000 2,100 484,826 486,926
Stockholder distributions............ (29,412) (29,412)
Net income........................... 170,952 170,952
----- ------ -------- -------- -------- --------
Balances, December 31, 1995............. 1,000 2,100 626,366 628,466
Stockholder distributions............ (50,000) (50,000)
Net income........................... 169,448 169,448
----- ------ -------- -------- -------- --------
Balances, December 31, 1996............. 1,000 2,100 745,814 747,914
Due from pre-acquisition
stockholders (unaudited)............. $247,000 $(247,000)
Stockholder distributions (unaudited) (275,527) (275,527)
Net income (unaudited)............... 222,700 222,700
----- ------ -------- -------- -------- --------
Balances, June 2, 1997 (unaudited)...... 1,000 $2,100 $247,000 (247,000) $692,987 $695,087
===== ====== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-56
<PAGE>
G&R Marketing, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Six Months For the Period
December 31, Ended January 1, 1997
------------------------------ June 30, Through June 2,
1994 1995 1996 1996 1997
---- ----- ---- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ................................... $ 170,145 $ 170,952 $ 169,448 $ 65,926 $ 222,700
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation ................................. 48,259 67,498 56,549 27,000 22,500
Provision for doubtful accounts receivable ... 25,000 822
Changes in assets and liabilities:
Accounts receivable .......................... (857,177) 467,716 (137,304) 137,777 83,494
Other receivables ............................ 40,586 (89,039) 150,397 (32,779)
Due from related entities .................... (71,461) 15,631 (57,555) 135,496
Inventories .................................. (375,104) 162,122 (20,360) 3,613 308,681
Prepaid expenses ............................. 6,989 (4,528) (7,388) (6,670) (38,367)
Other assets ................................. 4,882 (11,721) 20,915 (87,343)
Accounts payable and accrued expenses ........ 72,259 217,902 (107,434) 29,508 (386,264)
State income taxes payable ................... 1,800 (300) 500 (3,538)
--------- --------- --------- --------- ---------
Net cash provided (used) by operating
activities .............................. (933,822) 997,055 67,768 257,154 224,580
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Payments for purchase of property
and equipment ............................. (54,748) (73,004) (17,792) (7,077) (60,313)
--------- --------- --------- --------- ---------
Net cash used by investing activities ..... (54,748) (73,004) (17,792) (7,077) (60,313)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds (repayment) from line of credit ..... 923,636 (904,993) 2 (250,106) 111,225
Stockholder distributions .................... (29,412) (50,000) (275,527)
--------- --------- --------- --------- ---------
Net cash provided (used) by financing
activities ................................. 923,636 (934,405) (49,998) (250,106) (164,302)
--------- --------- --------- --------- ---------
Decrease in cash and cash equivalents ........... (64,934) (10,354) (22) (29) (35)
Cash and cash equivalents, beginning of period .. 75,901 10,967 613 613 591
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period ........ $ 10,967 $ 613 $ 591 $ 584 $ 556
========= ========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ........ $ 150,128 $ 172,264 $ 128,363
========= ========= =========
Cash paid during the period for state
income taxes ................................. $ 1,605 $ 3,270 $ 3,158
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-57
<PAGE>
G&R Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and Nature of Operations:
Nature of Operations
G&R Marketing, Inc. ("the Company") is a distributor and marketer of a
broad array of complex computer graphics hardware and software in the upper
midwestern United States. Customers consist primarily of value added resellers
and vertical solution providers.
Inherent in the accompanying financial statements are certain risks and
uncertainties. These risks and uncertainties include, but are not limited to:
the impact of competitive products, competition and available sources of supply.
Basis of Presentation
The financial statements are prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1995 and 1996 and reported amounts of revenues and
expenses for each of the three years in the period ended December 31, 1996.
Significant estimates include those made for the allowance for doubtful accounts
and inventory reserves for excess, obsolete and damaged products. Actual results
could differ from those estimates made by management.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 2, 1997
and for the six months ended June 30, 1996 and for the period January 1, 1997
through June 2, 1997 have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements for the three years in the period ended
December 31, 1996 and include all adjustments, which were of a normal and
recurring nature, which in the opinion of management are necessary to present
fairly the financial position of the Company and results of operations and cash
flows for the periods presented. The operating results for the interim periods
are not necessarily indicative of results for the full year.
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents. The
Company maintains cash balances at financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out method) or market. Inventory is comprised primarily of
finished goods. The Company maintains a reserve for its estimate of excess,
obsolete and damaged goods.
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a accelerated basis over their estimated useful lives which range
from 3 to 7 years.
Amounts expended for maintenance and repairs are charged to expense as
incurred. Upon disposition, both the related cost and accumulated depreciation
accounts are relieved and the related gain or loss is credited or charged to
operations.
F-58
<PAGE>
G&R Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, Continued:
Revenue
Sales are recognized upon the shipment of products to the customer.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations.
Income Taxes
The Company has elected S corporation status as defined by the Internal
Revenue Code. Under this election, taxable income and any applicable tax credits
are included in the income tax return of the stockholders, and any federal
income tax liability is borne by the stockholders. The Company's tax status
insofar as state corporate income taxes are concerned is not effected by the
election. Accordingly, the provision for state income taxes and corresponding
balance sheet accounts are determined in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets
and liabilities are determined based on temporary differences between the basis
of certain assets and liabilities for income tax and financial reporting
purposes, if any. The deferred tax assets and liabilities are classified
according to the financial statement classification of the assets and
liabilities generating the differences. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
Fair Value of Financial Instruments
The Company utilizes a line of credit to finance short-term obligations.
Management believes that this financial instrument bears interest at a rate
which approximates prevailing market rates for instruments with similar
characteristics and, accordingly, that the carrying value for this instrument is
a reasonable estimate of fair value.
3. Line of Credit:
The Company has available a line of credit of $3,000,000 of which
$1,811,402 was unused at December 31, 1996. Interest is payable monthly at the
bank's prime lending rate (8.25% at December 31, 1996) plus .50% and expires
June 30, 1997. The line of credit is collateralized by the Company's assets, and
guaranteed by the stockholders of the Company.
4. Employee Benefit Plan:
Effective January 1, 1994, the Company established a defined contribution
plan which covers all eligible employees, as defined by the plan. All
contributions are made at the discretion of the Board of Directors. Profit
sharing contribution expense for the years ended December 31, 1994 and 1995 were
$55,057 and $54,124, respectively. There were no contributions made during 1996.
5. Related Party Transactions:
The Company is affiliated through common ownership with G/B Marketing,
Inc. ("G/B"). Various operating expenses, such as rent, utilities, insurance and
other expenses are allocated to G/B and received by the Company each month.
Total operating expenses charged to G/B for the three years in the period ended
December 31, 1996 were $114,900, $134,494, and $82,474, respectively. In
addition, the Company has advances of $14,430 and $71,985 due from G/B at
December 31, 1995 and 1996, respectively.
F-59
<PAGE>
G&R Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS, Continued
5. Related Party Transactions, Continued:
The Company has advances to stockholders of $105,256 at December 31, 1995
and 1996. These advances are due on demand.
During the normal course of business, the Company sells inventory, at
cost, to a company in the same industry, but a different geographic region. This
Company is partially owned by stockholders of the Company. During the years in
the period ended December 31, 1996, these sales amounted to $784,862, $677,538,
and $521,087, respectively.
6. Commitments and Contingencies:
Operating Lease The Company leases office space under an operating lease
expiring in 2000. At December 31, 1996 future minimum rentals due under the
lease were as follows:
1997 ............................................... $158,062
1998 ............................................... 160,452
1999 ............................................... 162,842
2000 ............................................... 68,265
--------
$549,621
========
Rent expense, net of amounts allocated to G/B, for each of the three years
in the period ended December 31, 1996 were $91,502, $129,147 and $155,546,
respectively.
Litigation
The Company is involved from time to time in litigation on matters which
are routine to the conduct of its business. Although the outcome of any
litigation cannot be predicted with certainty, the Company does not believe that
any outstanding litigation will have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
7. Subsequent Events:
On June 2, 1997, the Company closed on a stock purchase agreement (the
"Agreement") completing the sale of all of the outstanding common stock of G&R
in exchange for 2,505 shares of common stock of Tekgraf, Inc. (formerly Crescent
Computers, Inc.). The acquisition by Tekgraf, Inc. will be accounted for under
the purchase method of accounting. Pursuant to the Agreement, the Company is
required to deliver a defined guaranteed net asset value ("NAV"). The Company's
NAV over the book value of approximately $247,000 is expected to be contributed
in cash or satisfied with the contribution of the Company's stock by the
Company's stockholders. It is anticipated that the contribution will occur
during December 1997. In addition, and also pursuant to the Agreement, the
stockholders of the Company have entered into employment agreements with
Tekgraf, Inc. which provide for a set base salary, participation in future
incentive bonus plans, certain other benefits, and a covenant not to compete
following termination of such person's employment.
On June 30, 1997, the Company extended the line of credit with a bank
through December 31, 1997.
F-60
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by the Underwriters.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer, or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein contained is correct as of any time
subsequent to the date of this Prospectus.
--------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 7
Use of Proceeds ........................................................... 14
Dividends and Distributions ............................................... 14
Capitalization ............................................................ 15
Dilution .................................................................. 16
Unaudited Pro Forma Combined Financial
Statements .............................................................. 17
Selected Financial and Operating Data ..................................... 20
Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................... 24
Business .................................................................. 31
Management ................................................................ 39
Certain Transactions ...................................................... 43
Principal Stockholders .................................................... 46
Description of Securities ................................................. 48
Shares Eligible for Future Sale ........................................... 51
Underwriting .............................................................. 52
Legal Matters ............................................................. 54
Experts ................................................................... 54
Additional Information .................................................... 54
Index to Financial Statements ............................................. F-1
--------------------
Until _____________, 1997, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
================================================================================
================================================================================
2,100,000 Units
TEKGRAF, INC.
Consisting of 2,100,000 shares of
Class A Common Stock and
2,100,000 Redeemable Warrants
------------
PROSPECTUS
------------
D.H. BLAIR INVESTMENT
BANKING CORP.
_________________, 1997
================================================================================
<PAGE>
PART II
Information Not Required In Prospectus
Item 13. Other Expenses of Issuance and Distribution
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions) are as follows:
Amount
------
SEC Registration Fee ..................................... $11,439
NASD Filing Fees ......................................... 4,275
Nasdaq Filing Fees ....................................... 10,000
Printing and Engraving Expenses .......................... 145,000
Accounting Fees and Expenses ............................. 500,000
Legal Fees and Expenses .................................. 210,000
Blue Sky Fees and Expenses ............................... 4,500
Transfer Agent's Fees and Expenses ....................... 3,500
Representative's Non-Accountable Expense Allowance ....... 378,000
Miscellaneous Expenses ................................... 83,286
----------
Total $1,350,000
==========
Item 14. Indemnification of Directors and Officers
The Registrant intends to enter into indemnification agreements with each
of its officers and directors, the form of which is filed as Exhibit 10.12 and
reference is hereby made to such form.
Reference is made to Section 6 of the Underwriting Agreement (Exhibit 1.1)
which provides for indemnification by the Underwriters of the Registrant, its
officers and directors.
Item 15. Recent Sales of Unregistered Securities
During the last three years, the Registrant has sold and issued the
following unregistered securities:
In June 1997, the Registrant issued an aggregate of 6,576 shares of common
stock (2,630,400 shares of Class B Common Stock on a post-recapitalization
basis) to 14 persons, including officers and directors of the Company, in
connection with the acquisition of all of the outstanding capital stock of six
entities.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof. The sale of securities
was without the use of an underwriter, and the certificates evidencing the
shares bear a restrictive legend permitting the transfer thereof only upon
registration of the shares or an exemption under the Securities Act of 1933, as
amended.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1 -- Form of Underwriting Agreement
2.1 -- Plan of Merger*
3.1 -- Certificate of Incorporation of the Registrant*
3.2 -- By-laws of the Registrant*
4.1 -- Form of Warrant Agreement
4.2 -- Form of Representative's Unit Purchase Option
5.1 -- Opinion of Bachner, Tally, Polevoy & Misher LLP
10.1 -- 1997 Stock Option Plan*
II-1
<PAGE>
10.2 -- Employment Agreement between the Registrant and Phillip
C. Aginsky*
10.3 -- Employment Agreement between the Registrant and Dan I.
Bailey*
10.4 -- Employment Agreement between the Registrant and William
M. Rychel*
10.5 -- Form of Employment Agreement between the Registrant and
Regional Sales Directors*
10.6 -- Stock Purchase Agreement by and among Crescent Computers,
Inc. and its shareholders and Microsouth, Inc. and its
shareholders dated as of May 1, 1997, as amended*
10.7 -- Stock Purchase Agreement by and among Crescent Computers,
Inc. and its shareholders and tekgraf, inc. and its
shareholders dated as of May 1, 1997, as amended*
10.8 -- Stock Purchase Agreement by and among Crescent Computers,
Inc. and its shareholders and G&R Marketing, Inc. and its
shareholders dated as of May 1, 1997, as amended*
10.9 -- Stock Purchase Agreement by and among Crescent Computers,
Inc. and its shareholders and Computer Graphics
Distributing Company and its shareholders dated as of May
1, 1997, as amended*
10.10 -- Stock Purchase Agreement by and among Crescent Computers,
Inc. and its shareholders and Intelligent Products
Marketing, Inc. and its shareholders and IG Distributing,
Inc. and its shareholders dated as of May 1, 1997, as
amended*
10.11 -- Form of Escrow Agreement by and among American Stock
Transfer & Trust Company, the Registrant and certain
stockholders of the Registrant
10.12 -- Form of Indemnification Agreement between the Registrant
and its directors and officers*
10.13 -- [Intentionally omitted]
10.14 -- Lease Agreement by and between TCW Realty Fund II and
Crescent Computers, Inc. dated September 4, 1993*
10.15 -- Leases for property located at 7020 Koll Center Parkway
by and between Patrician Associates, Inc., Koll Bernal
Avenue Associates and Intelligent Products Marketing,
Inc., as amended*
10.16 -- Lease by and between American National Bank and Trust
Company of Chicago and G&R Technologies dated November
13, 1991, as amended*
10.17 -- Commercial Lease by and between Girard Associates II
Limited Partnership and Computer Graphics Distributing
Company dated March 29, 1991, as amended*
10.18 -- Lease between ASC North Fulton Associates Joint Venture
and Microsouth, Inc., as amended*
10.19 -- Lease Agreement by and between Connecticut General Life
Insurance Company and Tekgraf, Inc. dated April 14, 1994,
as amended*
10.20 -- Voting Agreement by and between the Registrant, A. Lowell
Nerenberg and Edward H.L. Mason*
10.21 -- Form of Employment Agreement between the Registrant and
Peter Armstrong
11 -- Computation of earnings per share
21 -- Subsidiaries of the Registrant*
23.1 -- Consent of Bachner, Tally, Polevoy & Misher LLP -
Included in Exhibit 5.1
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Albert Sisto*
23.4 -- Consent of Frank Dalton
23.5 -- Consent of Peter Armstrong
24 -- Power of Attorney*
27 -- Financial Data Schedule*
- ----------
* Previously filed
(b) All schedules are omitted since the required information is not present in
amounts sufficient to require submission of the schedule, or because the
information required is included in the financial statements and notes
thereto.
II-2
<PAGE>
Item 17. Undertakings
(1) The undersigned Registrant hereby undertakes that it will:
(a) File, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act,
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement, and
(iii) Include any additional or changed material information
on the plan of distribution.
(b) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(c) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the Offering.
(2) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(3) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(4) The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4),
or 497(h) under the Securities Act as part of this registration statement
as of the time it was declared effective.
(b) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of such securities at that time as the initial
bona fide offering of those securities.
II-3
<PAGE>
CONSENT OF COUNSEL
The consent of Bachner, Tally, Polevoy & Misher LLP is contained in its
opinion filed as Exhibit 5.1 to the Registration Statement.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has authorized this Registration
Statement or Amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Norcross, State of Georgia on the 15th
day of October, 1997.
TEKGRAF, INC.
By: /s/ PHILLIP C. AGINSKY
----------------------------
Phillip C. Aginsky, Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement or Amendment thereto has been signed by the following
persons in the capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ PHILLIP C. AGINSKY Chairman of the Board October 15, 1997
- --------------------------- (principal executive
Phillip C. Aginsky officer, principal
financial and accounting
officer)
* Co-President - Technology October 15, 1997
- --------------------------- Division and Director
Dan I. Bailey
* Co-President - Graphics October 15, 1997
- --------------------------- Division and Director
William M. Rychel
* Director October 15, 1997
- ---------------------------
Martyn L. Cooper
* Director October 15, 1997
- ---------------------------
J. Thomas Woolsey
- -----------
* By Phillip C. Aginsksy as attorney-in-fact
II-5
2,100,000 Units
(each Unit consisting of (i) one share of Class A Common Stock,
par value $.001 per share and (ii) one redeemable warrant to purchase
one share of Class A Common Stock)
TEKGRAF, INC.
UNDERWRITING AGREEMENT
____________, 1997
D.H. Blair Investment Banking Corp.
As Representative of the Several Underwriters
44 Wall Street
2nd Floor
New York, New York 10005
TEKGRAF, INC., a Delaware corporation (the "Company"), proposes to issue
and sell to the underwriters named in Schedule A (the "Underwriters") of this
Underwriting Agreement (the "Agreement"), for whom you are acting as
representative (the "Representative"), an aggregate of 2,100,000 Units, each
unit being hereinafter referred to as a "Unit" and consisting of (i) one share
of Class A Common Stock, par value $.001 per share, of the Company ("Shares")
and (ii) one redeemable warrant ("Warrants") to purchase one share of Class A
Common Stock of the Company at a price of $8.40 from _______, 1997 to_______,
2002. The Warrants are subject to redemption, in certain instances commencing
one year from the date of this Agreement. In addition, the Company proposes to
grant to the Underwriters (or, at its option, the Representative, individually)
the option referred to in Section 2(b) to purchase all or any part of an
aggregate of 315,000 additional Units. Unless the context otherwise indicates,
the term "Units" shall include the 315,000 additional Units referred to above.
The aggregate of 2,415,000 Units to be sold by the Company, together with
all or any part of the 210,000 Units which the Underwriters have the option to
purchase, and the Shares and the Warrants comprising such Units, are herein
called the "Units." The Common Stock of the Company to be outstanding after
giving effect to the sale of the Shares is herein called the "Common Stock." The
Shares and Warrants included in the Units (including the Units which the
Underwriters have the option to purchase) are herein collectively called the
"Securities."
<PAGE>
You have advised the Company that you and the other Underwriters desire to
purchase, severally, the Units, and that you have been authorized by the
Underwriters to execute this Agreement on their behalf. The Company confirms the
agreements made by it with respect to the purchase of the Units by the several
Underwriters on whose behalf you are signing this Agreement, as follows:
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Underwriters that:
(a) A registration statement (File No. 333-33449) on Form S-1 relating to
the public offering of the Units, including a form of prospectus subject to
completion, copies of which have heretofore been delivered to you, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission under the Act and one or more
amendments to such registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(i) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (A) if the
Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined)
relating to the Units that shall identify the Preliminary Prospectus (as
hereinafter defined) that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the
Company does not rely on Rule 434 under the Act a prospectus in the form most
recently included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act and in the case of either clause (i)(A) or (i)(B) of
this sentence, as have been provided to and approved by the Representative prior
to the execution of this Agreement, or (ii) if such registration statement, as
it may have been amended, has not been declared by the Commission to be
effective under the Act, an amendment to such registration statement, including
a form of prospectus, a copy of which amendment has been furnished to and
approved by the Representative prior to the execution of this Agreement.
As used in this Agreement, the term "Registration Statement" means such
registration statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and including
any information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means (A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Units that is first filed pursuant to Rule
2
<PAGE>
424(b)(7) under the Act, together with the Preliminary Prospectus identified
therein that such Term Sheet supplements; (B) if the Company does not rely on
Rule 434 under the Act, the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act or (C) if the Company does not rely on Rule 434
under the Act and if no prospectus is required to be filed pursuant to said Rule
424(b), such term means the prospectus included in the Registration Statement;
except that if such registration statement or prospectus is amended or such
prospectus is supplemented, after the effective date of such registration
statement and prior to the Option Closing Date (as hereinafter defined), the
terms "Registration Statement" and "Prospectus" shall include such registration
statement and prospectus as so amended, and the term "Prospectus" shall include
the prospectus as so supplemented, or both, as the case may be; and the term
"Term Sheet" means any term sheet that satisfies the requirements of Rule 434
under the Act. Any reference to the "date" of a Prospectus that includes a Term
Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus. At the time the Registration Statement
becomes effective and at all times subsequent thereto up to and on the Closing
Date (as hereinafter defined) or the Option Closing Date, as the case may be,
(i) the Registration Statement and Prospectus will in all respects conform to
the requirements of the Act and the Rules and Regulations; and (ii) neither the
Registration Statement nor the Prospectus will include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make statements therein not misleading; provided, however, that
the Company makes no representations, warranties or agreements as to information
contained in or omitted from the Registration Statement or Prospectus in
reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of the Underwriters specifically for use in the
preparation thereof. It is understood that the statements set forth in the
Prospectus on page 2 with respect to stabilization, under the headings "Risk
Factors--Possible Adverse Effect on Liquidity of the Company's Securities Due to
Securities and Exchange Commission Investigation of the Representative and Blair
& Co. and Recent Settlement by Blair & Co. with NASD" and "Underwriting" and the
identity of counsel to the Underwriters under the heading "Legal Matters"
constitute the only information furnished in writing by or on behalf of the
several Underwriters for inclusion in the Registration Statement and Prospectus,
as the case may be.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with full power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus and is duly
qualified to do business as a foreign corporation and is in good standing in all
other jurisdictions in which the nature of its business or the character or
location of its properties requires such qualification, except where failure to
so qualify will not materially affect the Company's business, properties or
financial condition.
(d) The authorized, issued and outstanding capital stock of the Company as
of _______, 1997 is as set forth in the Prospectus under "Capitalization";
3
<PAGE>
the shares of issued and outstanding capital stock of the Company set forth
thereunder have been duly authorized, validly issued and are fully paid and
non-assessable; except as set forth in the Prospectus, no options, warrants, or
other rights to purchase, agreements or other obligations to issue, or
agreements or other rights to convert any obligation into, any shares of capital
stock of the Company have been granted or entered into by the Company; and the
capital stock conforms to all statements relating thereto contained in the
Registration Statement and Prospectus.
(e) The Units and the Shares are duly authorized, and when issued and
delivered pursuant to this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable and free of preemptive rights of any security
holder of the Company. Neither the filing of the Registration Statement nor the
offering or sale of the Units as contemplated in this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as described
in the Registration Statement.
The Warrants have been duly authorized and, when issued and delivered
pursuant to this Agreement, will have been duly executed, issued and delivered
and will constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms and entitled to the benefits provided
by the warrant agreement pursuant to which such Warrants are to be issued (the
"Warrant Agreement"), which will be substantially in the form filed as an
exhibit to the Registration Statement. The shares of Common Stock issuable upon
exercise of the Warrants have been reserved for issuance upon the exercise of
the Warrants and when issued in accordance with the terms of the Warrants and
Warrant Agreement, will be duly and validly authorized, validly issued, fully
paid and non-assessable and free of preemptive rights and no personal liability
will attach to the ownership thereof. The Warrant Agreement has been duly
authorized and, when executed and delivered pursuant to this Agreement, will
have been duly executed and delivered and will constitute the valid and legally
binding obligation of the Company enforceable in accordance with its terms. The
Warrants and the Warrant Agreement conform to the respective descriptions
thereof in the Registration Statement and Prospectus.
The Shares and the Warrants contained in the Unit Purchase Option have been
duly authorized and, when duly issued and delivered, such Warrants will
constitute valid and legally binding obligations of the Company enforceable in
accordance with their terms and entitled to the benefits provided by the Unit
Purchase Option. The Shares included in the Unit Purchase Option (and the shares
of Common Stock issuable upon exercise of such Warrants) when issued and sold,
will be duly authorized, validly issued, fully paid and non-assessable and free
of preemptive rights and no personal liability will attach to the ownership
thereof.
(f) This Agreement, the Unit Purchase Option, the M/A Agreement and the
Escrow Agreement have been duly and validly authorized, executed and delivered
by the Company. The Company has full
4
<PAGE>
power and lawful authority to authorize, issue and sell the Units to be sold by
it hereunder on the terms and conditions set forth herein, and no consent,
approval, authorization or other order of any governmental authority is required
in connection with such authorization, execution and delivery or with the
authorization, issue and sale of the Units or the Unit Purchase Option, except
such as may be required under the Act or state securities laws.
(g) Except as described in the Prospectus, the Company is not in violation,
breach or default of or under, and consummation of the transactions herein
contemplated and the fulfillment of the terms of this Agreement will not
conflict with, or result in a breach or violation of, any of the terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any of the property or assets
of the Company pursuant to the terms of any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company is a party
or by which the Company may be bound or to which any of the property or assets
of the Company is subject, nor will such action result in any violation of the
provisions of the articles of incorporation or the by-laws of the Company, as
amended, or any statute or any order, rule or regulation applicable to the
Company of any court or of any regulatory authority or other governmental body
having jurisdiction over the Company.
(h) Subject to the qualifications stated in the Prospectus, the Company has
good and marketable title to all properties and assets described in the
Prospectus as owned by it, free and clear of all liens, charges, encumbrances or
restrictions, except such as are not materially significant or important in
relation to its business; all of the material leases and subleases under which
the Company is the lessor or sublessor of properties or assets or under which
the Company holds properties or assets as lessee or sublessee as described in
the Prospectus are in full force and effect, and, except as described in the
Prospectus, the Company is not in default in any material respect with respect
to any of the terms or provisions of any of such leases or subleases, and no
claim has been asserted by anyone adverse to rights of the Company as lessor,
sublessor, lessee or sublessee under any of the leases or subleases mentioned
above, or affecting or questioning the right of the Company to continued
possession of the leased or subleased premises or assets under any such lease or
sublease except as described or referred to in the Prospectus; and the Company
owns or leases all such properties described in the Prospectus as are necessary
to its operations as now conducted and, except as otherwise stated in the
Prospectus, as proposed to be conducted as set forth in the Prospectus.
(i) Coopers & Lybrand L.L.P., who have given their reports on certain
financial statements filed and to be filed with the Commission as a part of the
Registration Statement, which are incorporated in the Prospectus, are with
respect to the Company, independent public accountants as required by the Act
and the Rules and Regulations.
5
<PAGE>
(j) The financial statements, and Schedules together with related notes,
set forth in the Prospectus (or if the Prospectus is not in existence, the most
recent Preliminary Prospectus) or the Registration Statement present fairly the
financial position and results of operations and changes in cash flow position
of the Company on the basis stated in the Registration Statement, at the
respective dates and for the respective periods to which they apply. Said
statements and Schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a basis which is consistent
during the periods involved. The information set forth under the captions
"Dilution", "Capitalization", and "Selected Financial Data" in the Prospectus
fairly present, on the basis stated in the Prospectus, the information included
therein. The pro forma financial information filed as part of the Registration
Statement or included in the Prospectus (or such preliminary prospectus) has
been prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements, and includes all adjustments
necessary to present fairly the pro forma financial condition and results of
operations at the respective dates and for the respective periods indicated and
all assumptions used in preparing such pro forma financial statements are
reasonable.
(k) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), the Company has not incurred
any liabilities or obligations, direct or contingent, not in the ordinary course
of business, or entered into any transaction not in the ordinary course of
business, which is material to the business of the Company, and there has not
been any change in the capital stock of, or any incurrence of short-term or
long-term debt by, the Company or any issuance of options, warrants or other
rights to purchase the capital stock of the Company or any adverse change or any
development involving, so far as the Company can now reasonably foresee a
prospective adverse change in the condition (financial or other), net worth,
results of operations, business, key personnel or properties of it which would
be material to the business or financial condition of the Company and the
Company has not become a party to, and neither the business nor the property of
the Company has become the subject of, any material litigation whether or not in
the ordinary course of business.
(l) Except as set forth in the Prospectus, there is not now pending or, to
the knowledge of the Company, threatened, any action, suit or proceeding to
which the Company is a party before or by any court or governmental agency or
body, which might result in any material adverse change in the condition
(financial or other), business prospects, net worth, or properties of the
Company, nor are there any actions, suits or proceedings related to
environmental matters or related to discrimination on the basis of age, sex,
religion or race; and no labor disputes involving the employees of the Company
exist or are imminent which might be expected to adversely affect the conduct of
the business, property or operations or the financial condition or results of
operations of the Company.
6
<PAGE>
(m) Except as disclosed in the Prospectus, the Company has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes shown as due thereon; and there is no tax deficiency which has
been or to the knowledge of the Company might be asserted against the Company.
(n) The Company has sufficient licenses, permits and other governmental
authorizations currently required for the conduct of its business or the
ownership of its properties as described in the Prospectus and is in all
material respects complying therewith and owns or possesses adequate rights to
use all material patents, patent applications, trademarks, service marks,
trade-names, trademark registrations, service mark registrations, copyrights and
licenses necessary for the conduct of such business and had not received any
notice of conflict with the asserted rights of others in respect thereof. To the
best knowledge of the Company, none of the activities or business of the Company
are in violation of, or cause the Company to violate, any law, rule, regulation
or order of the United States, any state, county or locality, or of any agency
or body of the United States or of any state, county or locality, the violation
of which would have a material adverse impact upon the condition (financial or
otherwise), business, property, prospective results of operations, or net worth
of the Company.
(o) The Company has not, directly or indirectly, at any time (i) made any
contributions to any candidate for political office, or failed to disclose fully
any such contribution in violation of law or (ii) made any payment to any state,
federal or foreign governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments or contributions
required or allowed by applicable law. The Company's internal accounting
controls and procedures are sufficient to cause the Company to comply in all
material respects with the Foreign Corrupt Practices Act of 1977, as amended.
(p) On the Closing Dates (hereinafter defined) all transfer or other taxes,
(including franchise, capital stock or other tax, other than income taxes,
imposed by any jurisdiction) if any, which are required to be paid in connection
with the sale and transfer of the Units to the several Underwriters hereunder
will have been fully paid or provided for by the Company and all laws imposing
such taxes will have been fully complied with.
(q) All contracts and other documents of the Company which are, under the
Rules and Regulations, required to be filed as exhibits to the Registration
Statement have been so filed.
(r) The Company has not taken and will not take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of the
Units hereby.
7
<PAGE>
(s) Except as disclosed in the Prospectus, the Company has no subsidiaries.
(t) The Company has not entered into any agreement pursuant to which any
person is entitled either directly or indirectly to compensation from the
Company for services as a finder in connection with the proposed public
offering.
(u) Except as previously disclosed in writing by the Company to the
Representative, no officer, director or stockholder of the Company has any
affiliation or association with any member of the National Association of
Securities Dealers Inc. ("NASD").
(v) The Company is not, and upon receipt of the proceeds from the sale of
the Units will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, and the rules and regulations
thereunder.
(w) The Company has not distributed and will not distribute prior to the
First Closing Date any offering material in connection with the offering and
sale of the Units other than the Preliminary Prospectus, Prospectus, the
Registration Statement or the other materials permitted by the Act, if any.
(x) The conditions for use of Form S-1, as set forth in the General
Instructions thereto, have been satisfied.
(y) There are no business relationships or related-party transactions of
the nature described in Item 404 of Regulation S-K involving the Company, the
Subsidiaries and any person described in such Item that are required to be
disclosed in the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) and that have not been so disclosed.
(z) The Acquisitions, the Merger and the Recapitalization (as each such
term is defined in the Prospectus) were consummated in accordance with all
applicable laws and the Company, as the surviving entity in the Merger,
succeeded to the business and all of the assets and liabilities of Crescent
Computer, Inc. and those of the Subsidiaries (as defined in the Prospectus). The
Acquisitions, the Merger and the Recapitalization have not and will not (i)
result in any violation of the Certificate of Incorporation or By-Laws of the
Company, (ii) result in the creation of any lien, charge or encumbrance upon any
of the assets of the Company pursuant to the terms or provisions of, or result
in a breach or violation of any of the terms or provisions of, or constitute a
default under, or give any other party a right to terminate any of its
obligations under, or result in the acceleration of any obligation under, any
contract or other agreement to which the Company is a party or by which the
Company or any of its properties is bound or affected, except such as have been
waived, consented to or would not, individually or in the aggregate, materially
and adversely affect the Company or its business, properties,
8
<PAGE>
business prospects, condition (financial or otherwise) or results of operations
or (iii) violate or conflict with any judgment, ruling, decree, order, statute,
rule or regulation of any court or other governmental agency or body applicable
to the business or properties of the Company except such as would not,
individually or in the aggregate, materially and adversely affect the Company or
its business, properties, business prospects, condition (financial or otherwise)
or results of operations.
(aa) The Company has complied with all provisions of Section 517.075
Florida Statutes relating to doing business with the government of Cuba or with
any person or affiliate located in Cuba.
2. Purchase, Delivery and Sale of the Units.
(a) Subject to the terms and conditions of this Agreement, and upon the
basis of the representations, warranties, and agreements herein contained, the
Company agrees to issue and sell to the Underwriters, and each such Underwriter
agrees, severally and not jointly, to buy from the Company at $5.55 per Unit,
at the place and time hereinafter specified, the number of Units set forth
opposite the names of the Underwriters in Schedule A attached hereto (the "First
Units") plus any additional Units which such Underwriters may become obligated
to purchase pursuant to the provisions of Section 9 hereof. The First Units
shall consist of 2,100,000 Units to be purchased from the Company.
Delivery of the First Units against payment therefor shall take place at
the offices of D.H. Blair Investment Banking Corp., 44 Wall Street, 2nd Floor,
New York, New York 10005 (or at such other place as may be designated by
agreement between you and the Company) at 10:00 a.m., New York time, on
_________, 1997, or at such later time and date as you may designate, such time
and date of payment and delivery for the First Units being herein called the
"First Closing Date."
(b) In addition, subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warranties and agreements herein
contained, the Company hereby grants an option to the several Underwriters (or,
at its option, to the Representative, individually) to purchase all or any part
of an aggregate of an additional 315,000 Units at the same price per Unit as the
Underwriters shall pay for the First Units being sold pursuant to the provisions
of subsection (a) of this Section 2 (such additional Units being referred to
herein as the "Option Units"). This option may be exercised within 30 days after
the effective date of the Registration Statement upon notice by the
Representative to the Company advising as to the amount of Option Units as to
which the option is being exercised, the names and denominations in which the
certificates for such Option Units are to be registered and the time and date
when such certificates are to be delivered. Such time and date shall be
determined by the Representative but shall not be earlier than four nor later
than ten full business days after the exercise of said option, nor in any event
prior to the First Closing Date, and such time and date is referred to herein as
the
9
<PAGE>
"Option Closing Date." Delivery of the Option Units against payment therefor
shall take place at the offices of D.H. Blair Investment Banking Corp., 44 Wall
Street, 2nd Floor, New York, New York 10005. The number of Option Units to be
purchased by each Underwriter, if any, shall bear the same percentage to the
total number of Option Units being purchased by the several Underwriters
pursuant to this subsection (b) as the number of Units such Underwriter is
purchasing bears to the total number of the First Units being purchased pursuant
to subsection (a) of this Section 2, as adjusted, in each case by the
Representative in such manner as the Representative may deem appropriate. The
Option granted hereunder may be exercised only to cover overallotments in the
sale by the Underwriters of First Units referred to in subsection (a) above. In
the event the Company declares or pays a dividend or distribution on its Common
Stock, whether in the form of cash, shares of Common Stock or any other
consideration, prior to the Option Closing Date, such dividend or distribution
shall also be paid on the Option Units on the Option Closing Date.
(c) The Company will make the certificates for the securities comprising
the Units to be purchased by the Underwriters hereunder available to you for
checking at least two full business days prior to the First Closing Date or the
Option Closing Date (which are collectively referred to herein as the "Closing
Dates"). The certificates shall be in such names and denominations as you may
request, at least two full business days prior to the Closing Dates. Time shall
be of the essence and delivery at the time and place specified in this Agreement
is a further condition to the obligations of each Underwriter.
Definitive certificates in negotiable form for the Units to be purchased by
the Underwriters hereunder will be delivered by the Company to you for the
accounts of the several Underwriters against payment of the respective purchase
prices by the several Underwriters, by certified or bank cashier's checks in New
York Clearing House funds, payable to the order of the Company.
In addition, in the event the Underwriters (or the Representative,
individually) exercise the option to purchase from the Company all or any
portion of the Option Units pursuant to the provisions of subsection (b) above,
payment for such Units shall be made to or upon the order of the Company by
certified or bank cashier's checks payable in New York Clearing House funds at
the offices of D.H. Blair Investment Banking Corp., at the time and date of
delivery of such Units as required by the provisions of subsection (b) above,
against receipt of the certificates for such Units by the Representative for the
respective accounts of the several Underwriters registered in such names and in
such denominations as the Representative may request.
It is understood that you, individually and not as Representative of the
several Underwriters, may (but shall not be obligated to) make any and all
payments required pursuant to this Section 2 on behalf of any Underwriters whose
check or
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checks shall not have been received by the Representative at the time of
delivery of the Units to be purchased by such Underwriter or Underwriters. Any
such payment by you shall not relieve any such Underwriter or underwriters of
any of its or their obligations hereunder. It is also understood that you
individually rather than all of the Underwriters may (but shall not be obligated
to) purchase the Option Units referred to in subsection (b) of this Section 2,
but only to cover overallotments.
It is understood that the several Underwriters propose to offer the Units
to be purchased hereunder to the public upon the terms and conditions set forth
in the Registration Statement, after the Registration Statement becomes
effective.
3. Covenants of the Company. The Company covenants and agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective as promptly as possible. If required, the Company
will file the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto with the Commission in the manner and within
the time period required by Rules 434 and 424(b) under the Act. Upon
notification from the Commission that the Registration Statement has become
effective, the Company will so advise you and will not at any time, whether
before or after the effective date, file the Prospectus, Term Sheet or any
amendment to the Registration Statement or supplement to the Prospectus of which
you shall not previously have been advised and furnished with a copy or to which
you or your counsel shall have objected in writing or which is not in compliance
with the Act and the Rules and Regulations. At any time prior to the later of
(A) the completion by all of the Underwriters of the distribution of the Units
contemplated hereby (but in no event more than nine months after the date on
which the Registration Statement shall have become or been declared effective)
and (B) 25 days after the date on which the Registration Statement shall have
become or been declared effective, the Company will prepare and file with the
Commission, promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus which, in your opinion, may be necessary or
advisable in connection with the distribution of the Units.
As soon as the Company is advised thereof, the Company will advise you, and
confirm the advice in writing, of the receipt of any comments of the Commission,
of the effectiveness of any post-effective amendment to the Registration
Statement, of the filing of any supplement to the Prospectus or any amended
Prospectus, of any request made by the Commission for amendment of the
Registration Statement or for supplementing of the Prospectus or for additional
information with respect thereto, of the issuance by the Commission or any state
or regulatory body of any stop order or other order or threat thereof suspending
the effectiveness of the Registration Statement or any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Units for offering in any jurisdiction, or of the
institution of any proceedings for any
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of such purposes, and will use its best efforts to prevent the issuance of any
such order, and, if issued, to obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each Preliminary
Prospectus, and the Company has consented and hereby consents to the use of such
copies for the purposes permitted by the Act. The Company authorizes the
Underwriters and dealers to use the Prospectus in connection with the sale of
the Units for such period as in the opinion of counsel to the several
Underwriters the use thereof is required to comply with the applicable
provisions of the Act and the Rules and Regulations. In case of the happening,
at any time within such period as a Prospectus is required under the Act to be
delivered in connection with sales by an underwriter or dealer of any event of
which the Company has knowledge and which materially affects the Company or the
securities of the Company, or which in the opinion of counsel for the Company or
counsel for the Underwriters should be set forth in an amendment of the
Registration Statement or a supplement to the Prospectus in order to make the
statements therein not then misleading, in light of the circumstances existing
at the time the Prospectus is required to be delivered to a purchaser of the
Units or in case it shall be necessary to amend or supplement the Prospectus to
comply with law or with the Rules and Regulations, the Company will notify you
promptly and forthwith prepare and furnish to you copies of such amended
Prospectus or of such supplement to be attached to the Prospectus, in such
quantities as you may reasonably request, in order that the Prospectus, as so
amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material facts necessary in order to make the
statements in the Prospectus, in the light of the circumstances under which they
are made, not misleading. The preparation and furnishing of any such amendment
or supplement to the Registration Statement or amended Prospectus or supplement
to be attached to the Prospectus shall be without expense to the Underwriters,
except that in case any Underwriter is required, in connection with the sale of
the Units to deliver a Prospectus nine months or more after the effective date
of the Registration Statement, the Company will upon request of and at the
expense of the Underwriter, amend or supplement the Registration Statement and
Prospectus and furnish the Underwriter with reasonable quantities of
prospectuses complying with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and Regulations and the
Securities Exchange Act of 1934 and the rules and regulations thereunder in
connection with the offering and issuance of the Units.
(b) The Company will use its best efforts to qualify to register the Units
for sale under the securities or "blue sky" laws of such jurisdictions as the
Representative may designate and will make such applications and furnish such
information as may be required for that purpose and to comply with such laws,
provided the Company shall not be required to qualify as a foreign corporation
or a dealer in securities or to execute a general consent of service of process
in any jurisdiction in any action other than one arising out of the offering or
sale of the
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Units. The Company will, from time to time, prepare and file such statements and
reports as are or may be required to continue such qualification in effect for
so long a period as the Underwriters may reasonably request.
(c) If the sale of the Units provided for herein is not consummated for any
reason caused by the Company, the Company shall pay all costs and expenses
incident to the performance of the Company's obligations hereunder, including
but not limited to, all of the expenses itemized in Section 8, including the
accountable out-of-pocket expenses of the Representative.
(d) The Company will use its best efforts to (i) cause a registration
statement under the Securities Exchange Act of 1934 to be declared effective
concurrently with the completion of this offering and will notify the
Representative in writing immediately upon the effectiveness of such
registration statement, and (ii) if requested by the Representative, to obtain a
listing on the Pacific Stock Exchange and to obtain and keep current a listing
in the Standard & Poors or Moody's Industrial OTC Manual.
(e) For so long as the Company is a reporting company under either Section
12(g) or 15(d) of the Securities Exchange Act of 1934, the Company, at its
expense, will furnish to its stockholders an annual report (including financial
statements audited by independent public accountants), in reasonable detail and
at its expense, will furnish to you during the period ending five (5) years from
the date hereof, (i) as soon as practicable after the end of each fiscal year, a
balance sheet of the Company and any of its subsidiaries as at the end of such
fiscal year, together with statements of income, surplus and cash flow of the
Company and any subsidiaries for such fiscal year, all in reasonable detail and
accompanied by a copy of the certificate or report thereon of independent
accountants; (ii) as soon as practicable after the end of each of the first
three fiscal quarters of each fiscal year, consolidated summary financial
information of the Company for such quarter in reasonable detail; (iii) as soon
as they are available, a copy of all reports (financial or other) mailed to
security holders; (iv) as soon as they are available, a copy of all
non-confidential reports and financial statements furnished to or filed with the
Commission or any securities exchange or automated quotation system on which any
class of securities of the Company is listed; and (v) such other information as
you may from time to time reasonably request.
(f) To the extent the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will deliver to you at or before the First Closing Date two
signed copies of the Registration Statement including all financial statements
and exhibits filed therewith, and of all amendments thereto, and will deliver to
the
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several Underwriters such number of conformed copies of the Registration
Statement, including such financial statements but without exhibits, and of all
amendments thereto, as the several Underwriters may reasonably request. The
Company will deliver to or upon the order of the several Underwriters, from time
to time until the effective date of the Registration Statement, as many copies
of any Preliminary Prospectus filed with the Commission prior to the effective
date of the Registration Statement as the Underwriters may reasonably request.
The Company will deliver to the Underwriters on the effective date of the
Registration Statement and thereafter for so long as a Prospectus is required to
be delivered under the Act, from time to time, as many copies of the Prospectus,
in final form, or as thereafter amended or supplemented, as the Underwriters may
from time to time reasonably request. The Company, not later than (i) 5:00 p.m.,
New York City time, on the date of determination of the public offering price,
if such determination occurred at or prior to 12:00 noon, New York City time, on
such date or (ii) 6:00 p.m., New York City time, on the business day following
the date of determination of the public offering price, if such determination
occurred after 12:00 noon, New York City time, on such date, will deliver to the
Underwriters, without charge, as many copies of the Prospectus and any amendment
or supplement thereto as the Underwriters may reasonably request for purposes of
confirming orders that are expected to settle on the First Closing Date.
(h) The Company will make generally available to its security holders and
to the registered holders of its Warrants and deliver to you as soon as it is
practicable to do so but in no event later than 90 days after the end of twelve
months after its current fiscal quarter, an earnings statement (which need not
be audited) covering a period of at least 12 consecutive months beginning after
the effective date of the Registration Statement, which shall satisfy the
requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the Units for
the purposes set forth under "Use of Proceeds" in the Prospectus, and will file
such reports with the Commission with respect to the sale of the Units and the
application of the proceeds therefrom as may be required pursuant to Rule 463
under the Act.
(j) The Company will, promptly upon your request, prepare and file with the
Commission any amendments or supplements to the Registration Statement,
Preliminary Prospectus or Prospectus and take any other action, which in the
reasonable opinion of Paul, Hastings, Janofsky & Walker LLP, counsel to the
several Underwriters, may be reasonably necessary or advisable in connection
with the distribution of the Units, and will use its best efforts to cause the
same to become effective as promptly as possible.
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(k) The Company will reserve and keep available that maximum number of its
authorized but unissued securities which are issuable upon exercise of the Unit
Purchase Option outstanding from time to time.
(l) For a period of 13 months from the First Closing Date, no officer,
director or stockholder of the Company will directly or indirectly, offer, sell
(including any short sale), grant any option for the sale of, acquire any option
to dispose of, or otherwise dispose of any shares of Common Stock without the
prior written consent of the Representative. In order to enforce this covenant,
the Company shall impose stop-transfer instructions with respect to the shares
owned by the stockholders of the Company until the end of such period.
(m) [INTENTIONALLY OMITTED]
(n) Prior to completion of this offering, the Company will make all filings
required, including registration under the Securities Exchange Act of 1934, to
obtain the listing of the Common Stock and Warrants on the Nasdaq National
Market and the Units on the Nasdaq SmallCap Market (or a listing on such other
market or exchange as the Underwriters consent to), and will effect and maintain
such listing for at least five years from the date of this Agreement.
(o) The Company represents that it has not taken and agrees that it will
not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Units, Shares or the Warrants
or to facilitate the sale or resale of the Securities.
(p) On the Closing Date and simultaneously with the delivery of the Units,
the Company shall execute and deliver to you, individually and not as
representative of the Underwriters, the Unit Purchase Option. The Unit Purchase
Option will be substantially in the form of the Representative's Unit Purchase
Option filed as an Exhibit to the Registration Statement.
(q) Without the prior written consent of the Representative, (i) during the
18 month period commencing on the date of this Agreement, the Company will not
grant options to purchase shares of Common Stock at an exercise price less than
the greater of (x) the initial public offering price of the Units (without
allocating any value to the Warrants) or (y) the fair market value of the Common
Stock on the date of grant; (ii) during the six month period commencing on the
date of this Agreement, grant options to any current officer of the Company;
(iii) during the three year period commencing on the date of this Agreement,
offer or sell any of its securities pursuant to Regulation S under the Act; (iv)
grant registration rights to any person which are exercisable sooner than 13
months from the First Closing Date; or (v) issue any securities which have per
share voting rights greater than the voting rights of the Shares (or take any
corporate action which would have this effect).
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(r) Mr. Phillip Aginsky, Mr. William Rychel and Mr. Dan Bailey shall be the
Chairman of Board, Co-President - Graphics Division and Co-President Technology
Division of the Company, respectively, on the Closing Dates. The Company has
obtained key person life insurance on the lives of each of Messrs. Aginsky,
Rychel and Bailey in an amount of not less than $2 million and will use its best
efforts to maintain such insurance during the five year period commencing with
the First Closing Date unless their employment with the Company are earlier
terminated. In such event, the Company will obtain a comparable policy on the
lives of each of their successor for the balance of the five year period. For a
period of thirteen months from the First Closing Date, the compensation of the
executive officers of the Company shall not be increased from the compensation
levels disclosed in the Prospectus.
(s) On the Closing Date and simultaneously with the delivery of the Units
the Company shall execute and deliver to you, individually and not as
representative of the Underwriters, an agreement with you regarding mergers,
acquisitions, joint ventures and certain other forms of transactions, in the
form previously delivered to the Company by you (the "M/A Agreement").
(t) So long as any Warrants are outstanding, the Company shall use its best
efforts to cause post-effective amendments to the Registration Statement to
become effective in compliance with the Act and without any lapse of time
between the effectiveness of any such post-effective amendments and cause a copy
of each Prospectus, as then amended, to be delivered to each holder of record of
a Warrant and to furnish to each Underwriter and dealer as many copies of each
such Prospectus as such Underwriter or dealer may reasonably request. The
Company shall not call for redemption any of the Warrants unless a registration
statement covering the securities underlying the Warrants has been declared
effective by the Commission and remains current at least until the date fixed
for redemption. In addition, for so long as any Warrant is outstanding, the
Company will promptly notify the Representative of any material change in the
business, financial condition or prospects of the Company.
(u) Upon the exercise of any Warrant or Warrants after _______, 1998, the
Company will pay the Representative, in its individual capacity and not as
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representative of the underwriters, a fee of 5% of the aggregate exercise price
of the Warrants, of which a portion may be reallowed to the dealer who solicited
the exercise (which may also be the Representative) if (i) the market price of
the Company's Common Stock is greater than the exercise price of the Warrants on
the date of exercise; (ii) the exercise of the Warrant was solicited by a member
of the NASD; (iii) the Warrant holder designates in writing that the exercise of
the Warrant was solicited by a member of the NASD and designates in writing the
broker-dealer to receive compensation for such exercise; (iv) the Warrant is not
held in a discretionary account; (v) the disclosure of compensation arrangements
has been made in documents provided to customers, both as part of the original
offering and at the time of exercise, and (vi) the solicitation of the Warrant
was not in violation of Regulation M promulgated under the Securities Exchange
Act of 1934, as amended. The Company agrees not to solicit the exercise of any
Warrants other than through the Representative and will not authorize any other
dealer to engage in such solicitation without the prior written consent of the
Representative.
(v) For a period of five years from the Effective Date the Company (i) at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit) the Company's financial statements for
each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's 10-Q quarterly
report and the mailing of quarterly financial information to stockholders and
(ii) shall not change its accounting firm without the prior written consent of
the Chairman or the President of the Representative.
(w) As promptly as practicable after the Closing Date, the Company will
prepare, at its own expense, hard cover "bound volumes" relating to the
offering, and will distribute at least four of such volumes to the individuals
designated by the Representative or counsel to the Underwriters.
(x) For a period of five years from the First Closing Date (i) the
Representative shall have the right, but not the obligation, to designate one
director of the Board of Directors of the Company and (ii) the Company shall
engage a public relations firm acceptable to the Underwriter.
(y) The Company shall, for a period of six years after date of this
Agreement, submit which reports to the Secretary of the Treasury and to
stockholders, as the Secretary may require, pursuant to Section 1202 of the
Internal Revenue Code, as amended, or regulations promulgated thereunder, in
order for the Company to qualify as a "small business" so that stockholders may
realize special tax treatment with respect to their investment in the Company.
(z) On or prior to the Effective Date the Company shall have obtained
officers and directors insurance and property and casualty insurance in
appropriate amounts and shall maintain such insurance coverage for a period of
five years from the Effective Date.
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4. Conditions of Underwriters' Obligation. The obligations of the several
Underwriters to purchase and pay for the Units which they have respectively
agreed to purchase hereunder, are subject to the accuracy (as of the date
hereof, and as of the Closing Dates) of and compliance with the representations
and warranties of the Company herein, to the performance by the Company of its
obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and
you shall have received notice thereof not later than 10:00 A.M., New
York time, on the date on which the amendment to the registration
statement originally filed with respect to the Units or to the
Registration Statement, as the case may be, containing information
regarding the initial public offering price of the Units has been
filed with the Commission, or such later time and date as shall have
been agreed to by the Representative; if required, the Prospectus or
any Term Sheet that constitutes a part thereof and any amendment or
supplement thereto shall have been filed with the Commission in the
manner and within the time period required by Rule 434 and 424(b)
under the Act; on or prior to the Closing Dates no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that or a similar purpose shall
have been instituted or shall be pending or, to your knowledge or to
the knowledge of the Company, shall be contemplated by the Commission;
any request on the part of the Commission for additional information
shall have been complied with to the reasonable satisfaction of Paul,
Hastings, Janofsky & Walker LLP, counsel to the several Underwriters;
(b) At the First Closing Date, you shall have received the
opinion, together with copies of such opinion for each of the other
several Underwriters, dated as of the First Closing Date, of Bachner,
Tally, Polevoy & Misher LLP, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, to the effect
that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the State of Delaware, with full corporate power and
authority to own its properties and conduct its business as
described in the Registration Statement and Prospectus and
is duly qualified or licensed to do business as a foreign
corporation and is in good standing in Georgia and in each
other jurisdiction in which the ownership or leasing of its
properties or conduct of its business requires such
qualification;
(ii) to the best knowledge of such counsel, (a) the Company
has obtained, or is in the process of obtaining, all
licenses, permits and other governmental authorizations
necessary to the conduct of its business as described in the
Prospectus, (b) such licenses, permits
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and other governmental authorizations obtained are in full
force and effect, and (c) the Company is in all material
respects complying therewith;
(iii) the authorized capitalization of the Company as of
June 30, 1997 is as set forth under "Capitalization" in the
Prospectus; all shares of the Company's outstanding stock
requiring authorization for issuance by the Company's board
of directors have been duly authorized, validly issued, are
fully paid and non-assessable and conform to the description
thereof contained in the Prospectus; the outstanding shares
of Common Stock of the Company have not been issued in
violation of the preemptive rights of any shareholder and
the shareholders of the Company do not have any preemptive
rights or other rights to subscribe for or to purchase, nor
are there any restrictions upon the voting or transfer of
any of the Stock; the Common Stock, the Warrants, the Unit
Purchase Option and the Warrant Agreement conform to the
respective descriptions thereof contained in the Prospectus;
the Shares have been, and the shares of Common Stock to be
issued upon exercise of the Warrants and the Unit Purchase
Option, upon issuance in accordance with the terms of such
Warrants, the Warrant Agreement and Unit Purchase Option
have been duly authorized and, when issued and delivered,
will be duly and validly issued, fully paid, non-assessable,
free of preemptive rights and no personal liability will
attach to the ownership thereof; all prior sales by the
Company of the Company's securities have been made in
compliance with or under an exemption from registration
under the Act and applicable state securities laws and no
shareholders of the Company have any rescission rights with
respect to Company securities; a sufficient number of shares
of Common Stock has been reserved for issuance upon exercise
of the Warrants and Unit Purchase Option and to the best of
such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Units
as contemplated by this Agreement gives rise to any
registration rights or other rights, other than those which
have been waived or satisfied for or relating to the
registration of any shares of Common Stock;
(iv) this Agreement, the Unit Purchase Option, the Warrant
Agreement, the M/A Agreement and the Escrow Agreement have
been duly and validly authorized, executed and delivered by
the Company and, assuming due execution by each other party
hereto or thereto, each constitutes a legal, valid and
binding obligation of the Company enforceable against the
Company in accordance with its respective terms (except as
such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization,
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moratorium or other laws of general application relating to
or affecting enforcement of creditors' rights and the
application of equitable principles in any action, legal or
equitable, and except as rights to indemnity or contribution
may be limited by applicable law;
(v) the certificates evidencing the shares of Common Stock
are in valid and proper legal form; the Warrants will be
exercisable for shares of Common Stock of the Company in
accordance with the terms of the Warrants and at the prices
therein provided for; at all times during the term of the
Warrants the shares of Common Stock of the Company issuable
upon exercise of the Warrants have been duly authorized and
reserved for issuance upon such exercise and such shares,
when issued upon such exercise in accordance with the terms
of the Warrants and at the price provided for, will be duly
and validly issued, fully paid and non-assessable;
(vi) such counsel knows of no pending or threatened legal or
governmental proceedings to which the Company is a party
which could materially adversely affect the business,
property, financial condition or operations of the Company;
or which question the validity of the Securities, this
Agreement, the Warrant Agreement, the Unit Purchase Option,
the M/A Agreement or the Escrow Agreement, or of any action
taken or to be taken by the Company pursuant to this
Agreement, the Warrant Agreement, the Unit Purchase Option,
the M/A Agreement or the Escrow Agreement; and no such
proceedings are known to such counsel to be contemplated
against the Company; there are no governmental proceedings
or regulations required to be described or referred to in
the Registration Statement which are not so described or
referred to;
(vii) the Company is not in violation of or default under,
nor will the execution and delivery of this Agreement, the
Unit Purchase Option, the Warrant Agreement, the M/A
Agreement or the Escrow Agreement, and the incurrence of the
obligations herein and therein set forth and the
consummation of the transactions herein or therein
contemplated or those contemplated in connection with the
Acquisitions, result in a breach or violation of, or
constitute a default under the certificate or articles of
incorporation or by-laws of the Company, or, to such
counsel's knowledge, in the performance or observance of any
material obligations, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, loan
agreement, lease, joint venture or other agreement or
instrument known to such counsel to which the Company is a
party or by which it or any of its properties may be bound
or in violation of any material order, rule, regulation,
writ, injunction, or
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decree of any government, governmental instrumentality or
court, domestic or foreign;
(viii) the Registration Statement has become effective under
the Act, and to the best of such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement is in effect, and no proceedings for that purpose
have been instituted or are pending before, or threatened
by, the Commission; the Registration Statement and the
Prospectus (except for the financial statements and other
financial data contained therein, or omitted therefrom, as
to which such counsel need express no opinion) comply as to
form in all material respects with the applicable
requirements of the Act and the Rules and Regulations;
(ix) such counsel has participated in the preparation of the
Registration Statement and the Prospectus and nothing has
come to the attention of such counsel to cause such counsel
to have reason to believe that the Registration Statement or
any amendment thereto at the time it became effective or as
of the Closing Dates contained any untrue statement of a
material fact required to be stated therein or omitted to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading or
that the Prospectus or any supplement thereto contains any
untrue statement of a material fact or omits to state a
material fact necessary in order to make statements therein,
in light of the circumstances under which they were made,
not misleading (except, in the case of both the Registration
Statement and any amendment thereto and the Prospectus and
any supplement thereto, for the financial statements, notes
thereto and other financial information and schedules
contained therein, as to which such counsel need express no
opinion);
(x) all descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of
contracts and other documents are accurate and fairly
present the information required to be shown, and such
counsel is familiar with all contracts and other documents
referred to in the Registration Statement and the Prospectus
and any such amendment or supplement or filed as exhibits to
the Registration Statement, and such counsel does not know
of any contracts or documents of a character required to be
summarized or described therein or to be filed as exhibits
thereto which are not so summarized, described or filed;
(xi) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary
in connection with the authorization, issuance, transfer,
sale or delivery
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of the Units by the Company, in connection with the
execution, delivery and performance of this Agreement by the
Company or in connection with the taking of any action
contemplated herein, or the issuance of the Unit Purchase
Option or the Securities underlying the Unit Purchase
Option, other than registrations or qualifications of the
Units under applicable state or foreign securities or Blue
Sky laws and registration under the Act;
(xii) the statements in the Registration Statement under the
captions "Business", "Use of Proceeds", "Management", and
"Description of Securities" have been reviewed by such
counsel and insofar as they refer to descriptions of
agreements, statements of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions, are
correct in all material respects;
(xiii) such counsel has received notification from The
Nasdaq Stock Market, Inc. that the Units, the Common Stock
and the Warrants have been duly authorized for quotation on
the Nasdaq National Market;
(xiv) to such counsel's knowledge, there are no business
relationships or related-party transactions of the nature
described in Item 404 of Regulation S-K involving the
Company, any Subsidiary and any person described in such
Item that are required to be disclosed in the Prospectus and
which have not been so disclosed; and
(xv) the Acquisitions, the Merger and the Recapitalization
(as each such term is defined in the Prospectus) were
consummated in accordance with all applicable laws and the
Company, as the surviving entity in the Merger, succeeded to
the business and all of the assets and liabilities of
Crescent Computer, Inc. and those of the Subsidiaries (as
defined in the Prospectus).
Such opinion shall also cover such matters incident to the transactions
contemplated hereby as the Representative or counsel for the Underwriters shall
reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact; and may rely as to all matters of law other than the law of the United
States or of the State of Delaware upon opinions of counsel satisfactory to you,
in which case the opinion shall state that they have no reason to believe that
you and they are not entitled to so rely.
(c) All corporate proceedings and other legal matters relating to this
Agreement, the Registration Statement, the Prospectus and other related matters
shall be satisfactory to or approved by Paul, Hastings, Janofsky & Walker LLP,
counsel to the several Underwriters, and you shall have received from such
counsel a signed opinion, dated as of the First Closing Date, together with
copies thereof for each of the other Underwriters, with respect to the validity
of the issuance of the Units, the form of the Registration Statement and
Prospectus (other than the financial statements and other financial data
contained therein), the execution of this Agreement and other related matters as
you may reasonably require. The Company shall have furnished to counsel for the
several Underwriters such documents as they may reasonably request for the
purpose of enabling them to render such opinion.
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(d) You shall have received a letter prior to the effective date of the
Registration Statement and again on and as of the First Closing Date from
Coopers & Lybrand L.L.P., independent public accountants for the Company,
substantially in the form approved by you, and including estimates of the
Company's revenues and results of operations for the period ending at the end of
the month immediately preceding the effective date and results of the comparable
period during the prior fiscal year.
(e) At the Closing Dates, (i) the representations and warranties of the
Company contained in this Agreement shall be true and correct with the same
effect as if made on and as of the Closing Dates and the Company shall have
performed all of its obligations hereunder and satisfied all the conditions on
its part to be satisfied at or prior to such Closing Date; (ii) the Registration
Statement and the Prospectus and any amendments or supplements thereto shall
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and shall in all material respects
conform to the requirements thereof, and neither the Registration Statement nor
the Prospectus nor any amendment or supplement thereto shall contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading; (iii)
there shall have been, since the respective dates as of which information is
given, no material adverse change, or any development involving a prospective
material adverse change, in the business, properties, condition (financial or
otherwise), results of operations, capital stock, long-term or short-term debt
or general affairs of the Company from that set forth in the Registration
Statement and the Prospectus, except changes which the Registration Statement
and Prospectus indicate might occur after the effective date of the Registration
Statement, and the Company shall not have incurred any material liabilities or
entered into any agreement not in the ordinary course of business other than as
referred to in the Registration Statement and Prospectus; and (iv) except as set
forth in the Prospectus, no action, suit or proceeding at law or in equity shall
be pending or threatened against the Company which would be required to be set
forth in the Registration Statement, and no proceedings shall be pending or
threatened against the Company before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an unfavorable
decision, ruling or finding would materially and adversely affect the business,
property, condition (financial or otherwise), results of operations or general
affairs of the Company, and (v) you shall have received, at the First Closing
Date, a certificate signed by each of the Chairman of the Board or the President
and the principal financial or accounting officer of the Company, dated as of
the First Closing Date, evidencing compliance with the provisions of this
subsection (e).
(f) Upon exercise of the option provided for in Section 2(b) hereof, the
obligations of the several Underwriters (or, at its option, the Representative,
individually) to purchase and pay for the Option Units referred to therein will
be subject (as of the date hereof and as of the Option Closing Date) to the
following additional conditions:
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(i) The Registration Statement shall remain effective at the
Option Closing Date, and no stop order suspending the
effectiveness thereof shall have been issued and no proceedings
for that purpose shall have been instituted or shall be pending,
or, to your knowledge or the knowledge of the Company, shall be
contemplated by the Commission, and any reasonable request on the
part of the Commission for additional information shall have been
complied with to the satisfaction of Paul, Hastings, Janofsky &
Walker LLP, counsel to the several Underwriters.
(ii) At the Option Closing Date there shall have been delivered
to you as Representative the signed opinion of Bachner, Tally,
Polevoy & Misher LLP, counsel for the Company, dated as of the
Option Closing Date, in form and substance satisfactory to Paul,
Hastings, Janofsky & Walker LLP, counsel to the several
Underwriters, together with copies of such opinion for each of
the other several underwriters, which opinion shall be
substantially the same in scope and substance as the opinion
furnished to you at the First Closing Date pursuant to Section
4(b) hereof, except that such opinion, where appropriate, shall
cover the Option Units.
(iii) At the Option Closing Date there shall have been delivered
to you a certificate of the Chairman of the Board or the
President and the principal financial or accounting officer of
the Company, dated the Option Closing Date, in form and substance
satisfactory to Paul, Hastings, Janofsky & Walker LLP, counsel to
the several Underwriters, substantially the same in scope and
substance as the certificate furnished to you at the First
Closing Date pursuant to Section 4(e) hereof.
(iv) At the Option Closing Date there shall have been delivered
to you a letter in form and substance satisfactory to you from
Coopers & Lybrand L.L.P., dated the Option Closing Date and
addressed to the Underwriters confirming the information in their
letter referred to in Section 4(d) hereof and stating that
nothing has come to their attention during the period from the
ending date of their review referred to in said letter to a date
not more than five business days prior to the Option Closing
Date, which would require any change in said letter if it were
required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option Closing Date
in connection with the sale and issuance of the Option Units
shall be satisfactory in form and substance to you and Paul,
Hastings, Janofsky & Walker LLP, counsel to the several
Underwriters, shall have been furnished with all such documents,
certificates, and
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opinions as you may request in connection with this transaction
in order to evidence the accuracy and completeness of any of the
representations, warranties or statements of the Company or its
compliance with any of the covenants or conditions contained
herein.
(g) No action shall have been taken by the Commission or the NASD the
effect of which would make it improper, at any time prior to the Closing Date,
for members of the NASD to execute transactions (as principal or agent) in the
Units, Common Stock or the Warrants and no proceedings for the taking of such
action shall have been instituted or shall be pending, or, to the knowledge of
the Representative or the Company, shall be contemplated by the Commission or
the NASD. The Company represents that at the date hereof it has no knowledge
that any such action is in fact contemplated by the Commission or the NASD. The
Company shall have advised the Underwriters of any NASD affiliation of any of
its officers, directors, stockholders or their affiliates known to the Company
after due inquiry.
(h) The estimated revenues and earnings of the Company for the nine months
ending September 30, 1997 will be greater than those of the nine months ended
September 30, 1996.
(i) If any of the conditions herein provided for in this Section shall not
have been fulfilled as of the date indicated, this Agreement and all obligations
of the several Underwriters under this Agreement may be cancelled at, or at any
time prior to, each Closing Date by the Representative. Any such cancellation
shall be without liability of the Underwriters to the Company.
5. Conditions of the Obligations of the Company. The obligation of the
Company to sell and deliver the Units is subject to the condition that at the
Closing Dates, no stop orders suspending the effectiveness of the Registration
Statement shall have been issued under the Act or any proceedings therefor
initiated or threatened by the Commission.
If the condition to the obligations of the Company provided for in this
Section have been fulfilled on the First Closing Date but are not fulfilled
after the First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company to sell and deliver the Units on exercise of the
option provided for in Section 2(b) hereof shall be affected.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
reasonable costs of defense and investigation and all attorneys' fees), to which
such
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Underwriter or such controlling person may become subject, under the Act or
otherwise, and will reimburse, as incurred, such Underwriters and such
controlling persons for any legal or other expenses reasonably incurred in
connection with investigating, defending against or appearing as a third party
witness in connection with any losses, claims, damages or liabilities, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
(B) any blue sky application or other document executed by the Company
specifically for that purpose or based upon written information furnished by the
Company filed in any state or other jurisdiction in order to qualify any or all
of the Units under the securities laws thereof (any such application, document
or information being hereinafter called a "Blue Sky Application"), or arise out
of or are based upon the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, Prospectus, or any amendment
or supplement thereto, or in any Blue Sky Application, a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent, but only to the extent, that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the Underwriters
specifically for use in the preparation of the Registration Statement or any
such amendment or supplement thereof or any such Blue Sky Application or any
such preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto. This indemnity will be in addition to any liability which
the Company may otherwise have.
(b) Each Underwriter severally, but not jointly, will indemnify and hold
harmless the Company, each of its directors, each nominee (if any) for director
named in the Prospectus, each of its officers who have signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the Act, against any losses, claims, damages or liabilities (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees) to which the Company or any
such director, nominee, officer or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto (i) in reliance upon and in conformity with written
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<PAGE>
information furnished to the Company by you or by any Underwriter through you
specifically for use in the preparation thereof and (ii) relates to the
transactions effected by the Underwriters in connection with the offer and sale
of the Units contemplated hereby. This indemnity agreement will be in addition
to any liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that if the indemnified party is an Underwriter
or a person who controls such Underwriter within the meaning of the Act, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both such Underwriter or such
controlling person and the indemnifying party and in the judgment of the
Representative, it is advisable for the Representative or such Underwriters or
controlling persons to be represented by separate counsel (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of such Underwriter or such controlling person, it being understood,
however, that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys for all such Underwriters and controlling persons, which firm shall be
designated in writing by you). No settlement of any action against an
indemnified party shall be made without the consent of the indemnifying party,
which shall not be unreasonably withheld in light of all factors of importance
to such indemnifying party.
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<PAGE>
7. Contribution.
In order to provide for just and equitable contribution under the Act in
any case in which (i) any Underwriter makes claim for indemnification pursuant
to Section 6 hereof but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of Section 6 provide for indemnification in such case, or
(ii) contribution under the Act may be required on the part of any Underwriter,
then the Company and each person who controls the Company, in the aggregate, and
any such Underwriter shall contribute to the aggregate losses, claims, damages
or liabilities to which they may be subject (which shall, for all purposes of
this Agreement, include, but not be limited to, all reasonable costs of defense
and investigation and all reasonable attorneys' fees) in either such case (after
contribution from others) in such proportions that all such Underwriters are
responsible in the aggregate for that portion of such losses, claims, damages or
liabilities represented by the percentage that the underwriting discount per
Unit appearing on the cover page of the Prospectus bears to the public offering
price appearing thereon, and the Company shall be responsible for the remaining
portion, provided, however, that (a) if such allocation is not permitted by
applicable law then the relative fault of the Company and the Underwriters and
controlling persons, in the aggregate, in connection with the statements or
omissions which resulted in such damages and other relevant equitable
considerations shall also be considered. The relative fault shall be determined
by reference to, among other things, whether in the case of an untrue statement
of a material fact or the omission to state a material fact, such statement or
omission relates to information supplied by the Company, or the Underwriters and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if the respective
obligations of the Company and the Underwriters to contribute pursuant to this
Section 7 were to be determined by pro rata or per capita allocation of the
aggregate damages (even if the Underwriters in the aggregate were treated as one
entity for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in the first sentence of
this Section 7 and (b) that the contribution of each contributing Underwriter
shall not be in excess of its proportionate share (based on the ratio of the
number of Units purchased by such Underwriter to the number of Units purchased
by all contributing Underwriters) of the portion of such losses, claims, damages
or liabilities for which the Underwriters are responsible. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. As used in this paragraph, the word "Company"
includes any officer, director, or person who controls the Company within the
meaning of Section 15 of the Act. If the full amount of the contribution
specified in this paragraph is not permitted by law, then any Underwriter and
each person who controls any Underwriter shall be entitled to contribution from
the
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Company, its officers, directors and controlling persons to the full extent
permitted by law. The foregoing contribution agreement shall in no way affect
the contribution liabilities of any persons having liability under Section 11 of
the Act other than the Company and the Underwriters. No contribution shall be
requested with regard to the settlement of any matter from any party who did not
consent to the settlement; provided, however, that such consent shall not be
unreasonably withheld in light of all factors of importance to such party.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or the sale of the
Units to the Underwriters is consummated, the Company will pay all costs and
expenses incident to the performance of this Agreement by the Company including,
but not limited to, the fees and expenses of counsel to the Company (which fees
shall not exceed $150,000) and of the Company's accountants; the costs and
expenses incident to the preparation, printing, filing and distribution under
the Act of the Registration Statement (including the financial statements
therein and all amendments and exhibits thereto), Preliminary Prospectus and the
Prospectus, as amended or supplemented, or the Term Sheet, the fee of the NASD
in connection with the filing required by the NASD relating to the offering of
the Units contemplated hereby; all expenses, including reasonable fees and
disbursements of counsel to the Underwriters, in connection with the
qualification of the Units under the state securities or blue sky laws which the
Representative shall designate; the cost of printing and furnishing to the
several Underwriters copies of the Registration Statement, each Preliminary
Prospectus, the Prospectus, this Agreement, the Agreement Among Underwriters,
Selling Agreement, Underwriters' Questionnaire, Underwriters' Power of Attorney
and the Blue Sky Memorandum, any fees relating to the listing of the Units,
Common Stock and Warrants on the Nasdaq National Market or any other securities
exchange, the cost of printing the certificates representing the securities
comprising the Units, the fees of the transfer agent and warrant agent the cost
of publication of at least three "tombstones" of the offering (at least one of
which shall be in national business newspaper and one of which shall be in a
major New York newspaper) and the cost of preparing at least four hard cover
"bound volumes" relating to the offering, in accordance with the Underwriters'
request. The Company shall pay any and all taxes (including any transfer,
franchise, capital stock or other tax imposed by any jurisdiction) on sales to
the Underwriters hereunder. The Company will also pay all costs and expenses
incident to the furnishing of any amended Prospectus or of any supplement to be
attached to the Prospectus as called for in Section 3(a) of this Agreement
except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at the First
Closing Date pay to the Representative, in its individual rather than
representative capacity, a non-accountable expense allowance of $_______ of
which $_______ has been paid. In the event the overallotment option is
exercised, the Company shall pay to the Representative at the Option Closing
Date an additional amount equal to 3% of
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the gross proceeds received upon exercise of the overallotment option. In the
event the transactions contemplated hereby are not consummated by reason of any
action by the Representative (except if such prevention is based upon a breach
by the Company of any covenant, representation or warranty contained herein or
because any other condition to the Underwriters' obligations hereunder required
to be fulfilled by the Company is not fulfilled) the Company shall be liable for
the accountable expenses of the Representative, including legal fees, up to a
maximum of $_______. In the event the transactions contemplated hereby are not
consummated by reason of any action of the Company or because of a breach by the
Company of any covenant, representation or warranty herein, the Company shall be
liable for the accountable out-of-pocket expenses of the Representative,
including legal fees, up to a maximum of $_______.
(c) No person is entitled either directly or indirectly to compensation
from the Company, from the Representative or from any other person for services
as a finder in connection with the proposed offering, and the Company agrees to
indemnify and hold harmless the Representative and the other Underwriters,
against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), to which the
Representative or such other Underwriter or person may become subject insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon the claim of any person (other than an employee
of the party claiming indemnity) or entity that he or it is entitled to a
finder's fee in connection with the proposed offering by reason of such person's
or entity's influence or prior contact with the indemnifying party.
9. Substitution of Underwriters.
If any Underwriters shall for any reason not permitted hereunder cancel
their obligations to purchase the First Units hereunder, or shall fail to take
up and pay for the number of First Units set forth opposite their respective
names in Schedule A hereto upon tender of such First Units in accordance with
the terms hereof, then:
(a) If the aggregate number of First Units which such Underwriter or
Underwriters agreed but failed to purchase does not exceed 10% of the total
number of First Units, the other Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the First
Units which such defaulting Underwriter or Underwriters agreed but failed to
purchase.
(b) If any Underwriter or Underwriters so default and the agreed number of
First Units with respect to which such default or defaults occurs is more than
10% of the total number of First Units, the remaining Underwriters shall have
the right to take up and pay for (in such proportion as may be agreed upon among
them) the First Units which the defaulting Underwriter or Underwriters agreed
but failed to purchase. If such remaining Underwriters do not, at the First
Closing Date, take up and pay for the First Units which the defaulting
Underwriter or Underwriters
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agreed but failed to purchase, the time for delivery of the First Units shall be
extended to the next business day to allow the several Underwriters the
privilege of substituting within twenty-four hours (including nonbusiness hours)
another underwriter or underwriters satisfactory to the Company. If no such
underwriter or underwriters shall have been substituted as aforesaid, within
such twenty-four hour period, the time of delivery of the First Units may, at
the option of the Company, be again extended to the next following business day,
if necessary, to allow the Company the privilege of finding within twenty-four
hours (including nonbusiness hours) another underwriter or underwriters to
purchase the First Units which the defaulting Underwriter or Underwriters agreed
but failed to purchase. If it shall be arranged for the remaining Underwriters
or substituted Underwriters to take up the First Units of the defaulting
Underwriter or Underwriters as provided in this Section, (i) the Company or the
Representative shall have the right to postpone the time of delivery for a
period of not more than seven business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement or supplements to the
Prospectus which may thereby be made necessary, and (ii) the respective numbers
of First Units to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken at the basis of the underwriting obligation for all
purposes of this Agreement.
If in the event of a default by one or more Underwriters and the remaining
Underwriters shall not take up and pay for all the First Units agreed to be
purchased by the defaulting Underwriters or substitute another underwriter or
underwriters as aforesaid, the Company shall not find or shall not elect to seek
another underwriter or underwriters for such First Units as aforesaid, then this
Agreement shall terminate.
If, following exercise of the option provided in Section 2(b) hereof, any
Underwriter or Underwriters shall for any reason not permitted hereunder cancel
their obligations to purchase Option Units at the Option Closing Date, or shall
fail to take up and pay for the number of Option Units, which they become
obligated to purchase at the Option Closing Date upon tender of such Option
Units in accordance with the terms hereof, then the remaining Underwriters or
substituted Underwriters may take up and pay for the Option Units of the
defaulting Underwriters in the manner provided in Section 9(b) hereof. If the
remaining Underwriters or substituted Underwriters shall not take up and pay for
all such Option Units, the Underwriters shall be entitled to purchase the number
of Option Units for which there is no default or, at their election, the option
shall terminate, the exercise thereof shall be of no effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. In the event of termination,
there shall be no liability on the part of any nondefaulting Underwriter to the
Company,
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provided that the provisions of this Section 9 shall not in any event affect the
liability of any defaulting Underwriter to the Company arising out of such
default.
10. Effective Date.
The Agreement shall become effective upon its execution except that you
may, at your option, delay its effectiveness until 11:00 A.M., New York time on
the first full business day following the effective date of the Registration
Statement, or at such earlier time after the effective date of the Registration
Statement as you in your discretion shall first commence the initial public
offering by the Underwriters of any of the Units. The time of the initial public
offering shall mean the time of release by you of the first newspaper
advertisement with respect to the Units, or the time when the Units are first
generally offered by you to dealers by letter or telegram, whichever shall first
occur. This Agreement may be terminated by you at any time before it becomes
effective as provided above, except that Sections 3(c), 6, 7, 8, 13, 14, 15 and
16 shall remain in effect notwithstanding such termination.
11. Termination.
(a) This Agreement, except for Sections 3(c), 6, 7, 8, 13, 14, 15 and 16
hereof, may be terminated at any time prior to the First Closing Date, and the
option referred to in Section 2(b) hereof, if exercised, may be cancelled at any
time prior to the Option Closing Date, by you if in your judgment it is
impracticable to offer for sale or to enforce contracts made by the Underwriters
for the resale of the Units agreed to be purchased hereunder by reason of (i)
the Company having sustained a material loss, whether or not insured, by reason
of fire, earthquake, flood, accident or other calamity, or from any labor
dispute or court or government action, order or decree; (ii) trading in
securities on the New York Stock Exchange, the American Stock Exchange, the
Nasdaq SmallCap Market or the Nasdaq National Market having been suspended or
limited; (iii) material governmental restrictions having been imposed on trading
in securities generally (not in force and effect on the date hereof); (iv) a
banking moratorium having been declared by federal or New York state
authorities; (v) an outbreak of international hostilities or other national or
international calamity or crisis or change in economic or political conditions
having occurred; (vi) a pending or threatened legal or governmental proceeding
or action relating generally to the Company's business, or a notification having
been received by the Company of the threat of any such proceeding or action,
which could materially adversely affect the Company; (vii) except as
contemplated by the Prospectus, the Company is merged or consolidated into or
acquired by another company or group or there exists a binding legal commitment
for the foregoing or any other material change of ownership or control occurs;
(viii) the passage by the Congress of the United States or by any state
legislative body or federal or state agency or other authority of any act, rule
or regulation, measure, or the adoption of any orders, rules or regulations by
any governmental body or any authoritative accounting institute or board, or any
governmental executive, which is reasonably believed likely by the
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Representative to have a material impact on the business, financial condition or
financial statements of the Company or the market for the securities offered
pursuant to the Prospectus; (ix) any adverse change in the financial or
securities markets beyond normal market fluctuations having occurred since the
date of this Agreement, or (x) any material adverse change having occurred,
since the respective dates of which information is given in the Registration
Statement and Prospectus, in the earnings, business prospects or general
condition of the Company, financial or otherwise, whether or not arising in the
ordinary course of business.
(b) If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11 or in Section 10, the
Company shall be promptly notified by you, by telephone or telegram, confirmed
by letter.
12. Unit Purchase Option.
At or before the First Closing Date, the Company will sell to the
Representative (for its own account and not as Representative of the several
Underwriters), or its designees for a consideration of $210, and upon the
terms and conditions set forth in the form of Unit Purchase Option annexed as an
exhibit to the Registration Statement, a Unit Purchase Option to purchase an
aggregate of 210,000 Units. In the event of conflict in the terms of this
Agreement and the Unit Purchase Option, the language of the Unit Purchase Option
shall control.
13. Representations, Warranties and Agreements to Survive Delivery.
The respective indemnities, agreements, representations, warranties and
other statements of the Company or its Principal Stockholders, where
appropriate, and the undertakings set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of the Underwriters, the Company or any of its officers or
directors or any controlling person and will survive delivery of and payment of
the Units and the termination of this Agreement.
14. Notice.
Any communications specifically required hereunder to be in writing, if
sent to the Underwriters, will be mailed, delivered and confirmed to them at
D.H. Blair Investment Banking Corp., 44 Wall Street, 2nd Floor, New York, New
York 10005, with a copy sent to Paul, Hastings, Janofsky & Walker LLP, 399 Park
Avenue, New York, New York 10022, or if sent to the Company, will be mailed,
delivered and confirmed to it at 2979 Pacific Drive, Suite B, Norcross, Georgia
30071.
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15. Parties in Interest.
The Agreement herein set forth is made solely for the benefit of the
several Underwriters and the Company, any person controlling the Company or any
of the several Underwriters, and directors of the Company, nominees for
directors (if any) named in the Prospectus, its officers who have signed the
Registration Statement, and their respective executors, administrators,
successors, assigns and no other person shall acquire or have any right under or
by virtue of this Agreement. The term "successors and assigns" shall not include
any purchaser, as such purchaser, from any of the several Underwriters of the
Units. All of the obligations of the Underwriters hereunder are several and not
joint.
16. Applicable Law.
This Agreement will be governed by, and construed in accordance with, the
laws of the State of New York applicable to agreements made and to be entirely
performed within New York.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return this agreement, whereupon it will become a binding
agreement between the Company and the several Underwriters in accordance with
its terms.
Very truly yours,
TEKGRAF, INC.
By:___________________________
Name:
Title:
The foregoing Underwriting Agreement is hereby confirmed and accepted as of
the date first above written.
D.H. BLAIR INVESTMENT BANKING
CORP.
By:________________________________
For itself and as Representative
of the several Underwriters
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SCHEDULE A
Underwriter Number of Units to be Purchased
[UNDERWRITER]
Total:__________
___________Units
35
WARRANT AGREEMENT
AGREEMENT, dated as of this ____th day of ___________, 1997, by and among
TEKGRAF, INC., a Delaware corporation ("Company"), AMERICAN STOCK TRANSFER &
TRUST COMPANY, as Warrant Agent (the "Warrant Agent"), and D.H. BLAIR INVESTMENT
BANKING CORP., a New York corporation ("Blair" or the "Underwriter").
W I T N E S S E T H
WHEREAS, in connection with a public offering of up to 2,415,000 units
("Units"), each unit consisting of one (1) share of the Company's Class A Common
Stock, $.001 par value ("Common Stock") and one (1) redeemable Warrant
("Warrants") pursuant to an underwriting agreement (the "Underwriting
Agreement") dated _______________, 1997 between the Company and the Underwriter
and the issuance to the Underwriter or its designees of Unit Purchase Options to
purchase an aggregate of 210,000 additional Units, to be dated as of __________,
1997 (the "Unit Purchase Options"), the Company may issue up to 2,625,000
Warrants; and
WHEREAS, each Warrant initially entitles the Registered Holder thereof to
purchase one (1) share of Common Stock; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the Registered Holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Aggregate Per Share Price" shall mean the Purchase Price per share
multiplied by the number of shares of Common Stock purchasable upon the exercise
of a Warrant.
(b) "Class A Aggregate Per Share Price" shall mean $8.40.
(c) "Common Stock" shall mean stock of the Company of any class, whether
now or hereafter authorized, which has the right to participate in the
<PAGE>
distribution of earnings and assets of the Company without limit as to amount or
percentage, which at the date hereof consists of 31,666,667 shares of Class A
Common Stock, $.001 par value and 3,333,333 shares of Class B Common Stock,
$.001 par value.
(d) "Corporate Office" shall mean the office of the Warrant Agent (or its
successor) at which at any particular time its principal business shall be
administered, which office is located at the date hereof at 40 Wall Street, New
York, New York 10005.
(e) "Exercise Date" shall mean, as to any Warrant, the date on which the
Warrant Agent shall have received both (a) the Warrant Certificate representing
such Warrant, with the exercise form thereon duly executed by the Registered
Holder thereof or his attorney duly authorized in writing, and (b) payment in
cash, or by official bank or certified check made payable to the Company, of an
amount in lawful money of the United States of America equal to the applicable
Purchase Price.
(f) "Initial Warrant Exercise Date" shall mean __________, 1997.
(g) "Market Price" shall mean shall mean (i) the average closing bid price
of the Common Stock, for thirty (30) consecutive business days ending on the
Calculation Date as reported by Nasdaq, if the Common Stock is traded on the
Nasdaq SmallCap Market, or (ii) the average last reported sale price of the
Common Stock, for thirty (30) consecutive business days ending on the
Calculation Date, as reported by the primary exchange on which the Common Stock
is traded, if the Common Stock is traded on a national securities exchange, or
by Nasdaq, if the Common Stock is traded on the Nasdaq National Market.
(h) "Purchase Price" shall mean the purchase price to be paid upon exercise
of each Warrant in accordance with the terms hereof, which price shall be $7.00,
subject to adjustment from time to time pursuant to the provisions of Section 9
hereof, and subject to the Company's right to reduce the Purchase Price upon
notice to all Registered Holders of Warrants.
(i) "Redemption Price" shall mean the price at which the Company may, at
its option in accordance with the terms hereof, redeem the Warrants, which price
shall be $0.05 per Warrant.
(j) "Registered Holder" shall mean as to any Warrant and as of any
particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the Warrant
Agent pursuant to Section 6.
(i) "Transfer Agent" shall mean American Stock Transfer & Trust Company, as
the Company's transfer agent, or its authorized successor, as such.
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(l) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time) on
_________, 2002 (subject to extension as provided herein and in Section 9(e) or,
with respect to Warrants which are outstanding as of the applicable Redemption
Date (as defined in Section 8) and specifically excluding Warrants issuable upon
exercise of Unit Purchase Options if the Unit Purchase Options have not been
exercised, the Redemption Date, whichever is earlier; provided that if such date
shall in the State of New York be a holiday or a day on which banks are
authorized or required to close, then 5:00 P.M. (New York time) on the next
following day which in the State of New York is not a holiday or a day on which
banks are authorized or required to close. Upon notice to all Registered
Holders, the Company shall have the right to extend the Warrant Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) A Warrant initially shall entitle the Registered Holder of the Warrant
Certificate representing such Warrant to purchase one share of Common Stock upon
the exercise thereof, in accordance with the terms hereof, subject to
modification and adjustment as provided in Section 9.
(b) The Warrants included in the offering of Units will be detachable and
separately transferable immediately from the shares of Common Stock constituting
part of such Units.
(c) Upon execution of this Agreement, Warrant Certificates representing the
number of Warrants sold pursuant to the Underwriting Agreement shall be executed
by the Company and delivered to the Warrant Agent. Upon written order of the
Company signed by its President or Chairman or a Vice President and by its
Secretary or an Assistant Secretary, the Warrant Certificates shall be
countersigned, issued and delivered by the Warrant Agent as part of the Units.
(d) From time to time, up to the Warrant Expiration Date, the Transfer
Agent shall countersign and deliver stock certificates in required whole number
denominations representing up to an aggregate of 2,625,000 shares of Common
Stock, subject to adjustment as described herein, upon the exercise of Warrants
in accordance with this Agreement.
(e) From time to time, up to the Warrant Expiration Date, the Warrant Agent
shall countersign and deliver Warrant Certificates in required whole number
denominations to the persons entitled thereto in connection with any transfer or
exchange permitted under this Agreement; provided that no Warrant Certificates
shall be issued except (i) those initially issued hereunder, (ii) those issued
on or after the Initial Warrant Exercise Date, upon the exercise of fewer than
all Warrants represented by any Warrant Certificate, to evidence any unexercised
Warrants held by the exercising Registered Holder, (iii) those issued upon any
transfer or exchange pursuant to Section 6; (iv) those issued in replacement of
lost, stolen, destroyed or
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mutilated Warrant Certificates pursuant to Section 7; (v) those issued pursuant
to the Unit Purchase Option; and (vi) at the option of the Company, in such form
as may be approved by the its Board of Directors, to reflect any adjustment or
change in the Purchase Price, the number of shares of Common Stock purchasable
upon exercise of the Warrants or the Target Price(s) therefor made pursuant to
Section 8 hereof.
(f) Pursuant to the terms of the Unit Purchase Options, the Underwriter may
purchase up to 210,000 Units, which include up to 210,000 Warrants.
Notwithstanding anything to the contrary contained herein, the Warrants
underlying the Unit Purchase Option shall not be subject to redemption by the
Company except under the terms and conditions set forth in the Unit Purchase
Options.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the form annexed
hereto as Exhibit A (the provisions of which are hereby incorporated herein) and
may have such letters, numbers or other marks of identification or designation
and such legends, summaries or endorsements printed, lithographed or engraved
thereon as the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Warrants may be listed, or to conform to
usage or to the requirements of Section 2(d). The Warrant Certificates shall be
dated the date of issuance thereof (whether upon initial issuance, transfer,
exchange or in lieu of mutilated, lost, stolen, or destroyed Warrant
Certificates) and issued in registered form. Warrant Certificates shall be
numbered serially with the letter AW on Warrants of all denominations.
(b) Warrant Certificates shall be executed on behalf of the Company by its
Chairman of the Board, President or any Vice President and by its Secretary or
an Assistant Secretary, by manual signatures or by facsimile signatures printed
thereon, and shall have imprinted thereon a facsimile of the Company's seal.
Warrant Certificates shall be manually countersigned by the Warrant Agent and
shall not be valid for any purpose unless so countersigned. In case any officer
of the Company who shall have signed any of the Warrant Certificates shall cease
to be an officer of the Company or to hold the particular office referenced in
the Warrant Certificate before the date of issuance of the Warrant Certificates
or before countersignature by the Warrant Agent and issue and delivery thereof,
such Warrant Certificates may nevertheless be countersigned by the Warrant
Agent, issued and delivered with the same force and effect as though the person
who signed such Warrant Certificates had not ceased to be an officer of the
Company or to hold such office. After countersignature by the Warrant Agent,
Warrant Certificates shall be delivered by the Warrant Agent to the Registered
Holder without further action by the Company, except as otherwise provided by
Section 4(a) hereof.
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<PAGE>
SECTION 4. Exercise.
(a) Each Warrant may be exercised by the Registered Holder thereof at any
time on or after the Initial Exercise Date, but not after the Warrant Expiration
Date, upon the terms and subject to the conditions set forth herein and in the
applicable Warrant Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date and the person
entitled to receive the securities deliverable upon such exercise shall be
treated for all purposes as the holder of those securities upon the exercise of
the Warrant as of the close of business on the Exercise Date. As soon as
practicable on or after the Exercise Date, the Warrant Agent shall deposit the
proceeds received from the exercise of a Warrant and shall notify the Company in
writing of the exercise of the Warrants. Promptly following, and in any event
within five days after the date of such notice from the Warrant Agent, the
Warrant Agent, on behalf of the Company, shall cause to be issued and delivered
by the Transfer Agent, to the person or persons entitled to receive the same, a
certificate or certificates for the securities deliverable upon such exercise,
(plus a Warrant Certificate for any remaining unexercised Warrants of the
Registered Holder) unless prior to the date of issuance of such certificates the
Company shall instruct the Warrant Agent to refrain from causing such issuance
of certificates pending clearance of checks received in payment of the Purchase
Price pursuant to such Warrants. Notwithstanding the foregoing, in the case of
payment made in the form of a check drawn on an account of the Underwriter or
such other investment banks and brokerage houses as the Company shall approve in
writing to the Warrant Agent, certificates shall immediately be issued without
prior notice to the Company or any delay. Upon the exercise of any Warrant and
clearance of the funds received, the Warrant Agent shall promptly remit the
payment received for the Warrant (the "Warrant Proceeds") to the Company or as
the Company may direct in writing, subject to the provisions of Sections 4(b)
and 4(c) hereof.
(b) If, at the Exercise Date in respect of the exercise of any Warrant
after __________, 1998, (i) the market price of the Company's Common Stock is
greater than the then Purchase Price of the Warrant, (ii) the exercise of the
Warrant was solicited by a member of the National Association of Securities
Dealers, Inc. ("NASD") as designated in writing on the Warrant Certificate
Subscription Form, (iii) the Warrant was not held in a discretionary account,
(iv) disclosure of compensation arrangements was made both at the time of the
original offering and at the time of exercise; and (v) the solicitation of the
exercise of the Warrant was not in violation of Regulation M (as such rule or
any successor rule may be in effect as of such time of exercise) promulgated
under the Securities Exchange Act of 1934, then the Warrant Agent,
simultaneously with the distribution of the Warrant Proceeds to the Company
shall, on behalf of the Company, pay from the Warrant Proceeds, a fee of 5% (the
"Exercise Fee") of the Purchase Price to the Underwriter (of which a portion may
be reallowed by the Underwriter to the dealer who solicited the exercise, which
may also be the Underwriter or D.H. Blair & Co., Inc.). In the event the
Exercise Fee is not received within five days of the date on which the Company
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<PAGE>
receives Warrant Proceeds, then the Exercise Fee shall begin accruing interest
at an annual rate of prime plus four percent (4%), payable by the Company to the
Underwriter at the time the Underwriter receives the Exercise Fee. Within five
days after exercise the Warrant Agent shall send to the Underwriter a copy of
the reverse side of each Warrant exercised. The Underwriter shall reimburse the
Warrant Agent, upon request, for its reasonable expenses relating to compliance
with this section 4(b). The Company shall pay all fees and expenses including
all blue sky fees and expenses and all out-of-pocket expenses of the
Underwriter, including legal fees, in connection with the solicitation,
redemption or exchange of the Warrants. In addition, the Underwriter and the
Company may at any time during business hours, examine the records of the
Warrant Agent, including its ledger of original Warrant Certificates returned to
the Warrant Agent upon exercise of Warrants. The provisions of this paragraph
may not be modified, amended or deleted without the prior written consent of the
Underwriter.
(c) In order to enforce the provisions of Section 4(b) above, in the event
there is any dispute or question as to the amount or payment of the Exercise
Fee, the Warrant Agent is hereby expressly authorized to withhold payment to the
Company of the Warrant Proceeds unless and until the Company establishes an
escrow account for the purpose of depositing the entire amount of the Exercise
Fee, which amount will be deducted from the net Warrant Proceeds to be paid to
the Company. The funds placed in the escrow account may not be released to the
Company without a written agreement from the Underwriter that the required
Exercise Fee has been received by the Underwriter.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be issuable upon exercise of the
Warrants shall, at the time of delivery, be duly and validly issued, fully paid,
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, (other than those which the Company shall promptly pay or
discharge) and that upon issuance such shares shall be listed on each national
securities exchange, on which the other shares of outstanding Common Stock of
the Company are then listed or shall be eligible for inclusion in the Nasdaq
National Market or the Nasdaq SmallCap Market if the other shares of outstanding
Common Stock of the Company are so included.
(b) The Company covenants that if any securities to be reserved for the
purpose of exercise of Warrants hereunder require registration with, or approval
of, any governmental authority under any federal securities law before such
securities may be validly issued or delivered upon such exercise, then the
Company will in good faith and as expeditiously as reasonably possible, endeavor
to secure such registration
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<PAGE>
or approval. The Company will use reasonable efforts to obtain appropriate
approvals or registrations under state "blue sky" securities laws. With respect
to any such securities, however, Warrants may not be exercised by, or shares of
Common Stock issued to, any Registered Holder in any state in which such
exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and other
governmental charges that may be imposed with respect to the issuance of
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to requisition the
Company's Transfer Agent from time to time for certificates representing shares
of Common Stock issuable upon exercise of the Warrants, and the Company will
authorize the Transfer Agent to comply with all such proper requisitions. The
Company will file with the Warrant Agent a statement setting forth the name and
address of the Transfer Agent of the Company for shares of Common Stock issuable
upon exercise of the Warrants.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant Certificates
representing an equal aggregate number of Warrants of the same class or may be
transferred in whole or in part. Warrant Certificates to be exchanged shall be
surrendered to the Warrant Agent at its Corporate Office, and upon satisfaction
of the terms and provisions hereof, the Company shall execute and the Warrant
Agent shall countersign, issue and deliver in exchange therefor the Warrant
Certificate or Certificates which the Registered Holder making the exchange
shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which, subject to
such reasonable regulations as it may prescribe, it shall register Warrant
Certificates and the transfer thereof in accordance with its regular practice.
Upon due presentment for registration of transfer of any Warrant Certificate at
such office, the Company shall execute and the Warrant Agent shall issue and
deliver to the transferee or transferees a new Warrant Certificate or
Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for registration or
transfer, or for exchange or exercise, the subscription form on the reverse
thereof shall be duly endorsed, or be accompanied by a written instrument or
instruments of transfer and subscription, in form satisfactory to the Company
and the Warrant
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Agent, duly executed by the Registered Holder or his attorney-in-fact duly
authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any exchange
or registration of transfer of Warrant Certificates. In addition, the Company
may require payment by such holder of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange in
case of mutilated Warrant Certificates shall be promptly cancelled by the
Warrant Agent and thereafter retained by the Warrant Agent until termination of
this Agreement or resignation as Warrant Agent, or, with the prior written
consent of the Underwriter, disposed of or destroyed, at the direction of the
Company.
(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary. The Warrants, which are being publicly offered in Units with
shares of Common Stock pursuant to the Underwriting Agreement, will be
immediately detachable from the Common Stock and transferable separately
therefrom.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the Warrant
Agent of evidence satisfactory to them of the ownership of and loss, theft,
destruction or mutilation of any Warrant Certificate and (in case of loss, theft
or destruction) of indemnity satisfactory to them, and (in the case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or
Warrant Agent that the Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall comply with such
other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
SECTION 8. Redemption.
(a) Subject to the provisions of paragraph 2(g) hereof, at any time after
_____, 1998, on not less than thirty (30) days notice (the "Redemption Notice"),
to Registered Holders of the Warrants being redeemed, the Warrants may be
redeemed, at the option of the Company, at a redemption price of $0.05 per
Warrant, provided the Market Price shall exceed $11.75 (the "Target Price"),
subject to adjustment as set forth in Section 8(f), below. All Warrants must be
redeemed if any are redeemed, provided that the Warrants
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underlying the Unit Purchase Option may only be redeemed in compliance with and
subject to the terms and conditions of the Unit Purchase Option. For purposes of
this Section 8, the Calculation Date shall mean a date within 15 days of the
mailing of the Redemption Notice. The date fixed for redemption of the Warrants
is referred to herein as the "Redemption Date."
(b) If the conditions set forth in Section 8(a) are met, and the Company
desires to exercise its right to redeem the Warrants, it shall request the
Underwriter to mail a Redemption Notice to each of the Registered Holders of the
Warrants to be redeemed, first class, postage prepaid, not later than the
thirtieth day before the date fixed for redemption, at their last address as
shall appear on the records maintained pursuant to Section 6(b). Any notice
mailed in the manner provided herein shall be conclusively presumed to have been
duly given whether or not the Registered Holder receives such notice.
(c) The Redemption Notice shall specify (i) the redemption price, (ii) the
Redemption Date, (iii) the place where the Warrant Certificates shall be
delivered and the redemption price paid, (iv) that the Underwriter will assist
each Registered Holder of a Warrant in connection with the exercise thereof and
(v) that the right to exercise the Warrant shall terminate at 5:00 P.M. (New
York time) on the business day immediately preceding the Redemption Date. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
Registered Holder (a) to whom notice was not mailed or (b) whose notice was
defective. An affidavit of the Warrant Agent or of the Secretary or an Assistant
Secretary of the Underwriter or the Company that notice of redemption has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 P.M. (New York
time) on the business day immediately preceding the Redemption Date. On and
after the Redemption Date, Registered Holders of the Warrants shall have no
further rights except to receive, upon surrender of the Warrant, the Redemption
Price.
(e) From and after the Redemption Date, the Company shall, at the place
specified in the Redemption Notice, upon presentation and surrender to the
Company by or on behalf of the Registered Holder thereof of one or more Warrant
Certificates evidencing Warrants to be redeemed, deliver or cause to be
delivered to or upon the written order of such Registered Holder a sum in cash
equal to the Redemption Price of each such Warrant. From and after the
Redemption Date and upon the deposit or setting aside by the Company of a sum
sufficient to redeem all the Warrants called for redemption, such Warrants shall
expire and become void and all rights hereunder and under the Warrant
Certificates, except the right to receive payment of the Redemption Price, shall
cease.
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(f) If the shares of the Company's Common Stock are subdivided or combined
into a greater or smaller number of shares of Common Stock, the Target Price
shall be proportionally adjusted by the ratio which the total number of shares
of Common Stock outstanding immediately prior to such event bears to the total
number of shares of Common Stock to be outstanding immediately after such event.
SECTION 9. Adjustment of Exercise Price and Number of Shares of Common
Stock or Warrants.
(a) Subject to the exceptions referred to in Section 9(g) below, in the
event the Company shall, at any time or from time to time after the date hereof,
sell any shares of Common Stock for a consideration per share less than the
Market Price on the date of the sale or issue any shares of Common Stock as a
stock dividend to the holders of Common Stock, or subdivide or combine the
outstanding shares of Common Stock into a greater or lesser number of shares
(any such sale, issuance, subdivision or combination being herein called a
"Change of Shares"), then, and thereafter upon each further Change of Shares,
the Purchase Price in effect immediately prior to such Change of Shares shall be
changed to a price (including any applicable fraction of a cent) determined by
multiplying the Purchase Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares and the number of shares of Common Stock which the aggregate
consideration received (determined as provided in subsection 9(f)(F) below) for
the issuance of such additional shares would purchase at the Market Price and
the denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately after the issuance of such additional shares. Such
adjustment shall be made successively whenever such an issuance is made. For
purposes of this Section 9, the Calculation Date shall mean the date of the
sale, issuance, modification or other transaction referred to in this Section 9.
Upon each adjustment of the Purchase Price pursuant to this Section 9, the
total number of shares of Common Stock purchasable upon the exercise of each
Warrant shall (subject to the provisions contained in Section 9(b) hereof) be
such number of shares (calculated to the nearest one-hundredth; provided,
however, that in no event shall the Class A Aggregate Per Share Price increase
as a result of such rounding calculation) purchasable at the Purchase Price in
effect immediately prior to such adjustment multiplied by a fraction, the
numerator of which shall be the Purchase Price in effect immediately prior to
such adjustment and the denominator of which shall be the Purchase Price in
effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the Purchase Price
hereunder, to adjust the number of Warrants outstanding, in lieu of the
adjustment in the number of shares of Common Stock purchasable upon the exercise
of each Warrant as hereinabove provided, so that each Warrant outstanding after
such adjustment shall represent the right to purchase one share of Common Stock.
Each
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Warrant held of record prior to such adjustment of the number of Warrants shall
become that number of Warrants (calculated to the nearest tenth) determined by
multiplying the number one by a fraction, the numerator of which shall be the
Purchase Price in effect immediately prior to such adjustment and the
denominator of which shall be the Purchase Price in effect immediately after
such adjustment. Upon each adjustment of the number of Warrants pursuant to this
Section 9, the Company shall, as promptly as practicable, cause to be
distributed to each Registered Holder of Warrant Certificates on the date of
such adjustment Warrant Certificates evidencing, subject to Section 10 hereof,
the number of additional Warrants to which such Holder shall be entitled as a
result of such adjustment or, at the option of the Company, cause to be
distributed to such Holder in substitution and replacement for the Warrant
Certificates held by him prior to the date of adjustment (and upon surrender
thereof, if required by the Company) new Warrant Certificates evidencing the
number of Warrants to which such Holder shall be entitled after such adjustment.
(c) In case of any reclassification, capital reorganization or other change
of outstanding shares of Common Stock, or in case of any consolidation or merger
of the Company with or into another corporation (other than a consolidation or
merger in which the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock), or in case of any sale or conveyance to
another corporation of the property of the Company as, or substantially as, an
entirety (other than a sale/leaseback, mortgage or other financing transaction),
the Company shall cause effective provision to be made so that each holder of a
Warrant then outstanding shall have the right thereafter, by exercising such
Warrant, to purchase the kind and number of shares of stock or other securities
or property (including cash) receivable upon such reclassification, capital
reorganization or other change, consolidation, merger, sale or conveyance by a
holder of the number of shares of Common Stock that might have been purchased
upon exercise of such Warrant immediately prior to such reclassification,
capital reorganization or other change, consolidation, merger, sale or
conveyance. Any such provision shall include provision for adjustments that
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Section 9. The Company shall not effect any such consolidation,
merger or sale unless prior to or simultaneously with the consummation thereof
the successor (if other than the Company) resulting from such consolidation or
merger or the corporation purchasing assets or other appropriate corporation or
entity shall assume, by written instrument executed and delivered to the Warrant
Agent, the obligation to deliver to the holder of each Warrant such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such holders may be entitled to purchase and the other obligations of the
Company under this Agreement. The foregoing provisions shall similarly apply to
successive reclassifications, capital reorganizations and other changes of
outstanding shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.
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(d) Irrespective of any adjustments or changes in the Purchase Price or the
number of shares of Common Stock purchasable upon exercise of the Warrants, the
Warrant Certificates theretofore and thereafter issued shall, unless the Company
shall exercise its option to issue new Warrant Certificates pursuant to Section
2(f) hereof, continue to express the Purchase Price per share, the number of
shares purchasable thereunder and the Redemption Price therefor as the Purchase
Price per share, and the number of shares purchasable and the Redemption Price
therefor were expressed in the Warrant Certificates when the same were
originally issued.
(e) After each adjustment of the Purchase Price pursuant to this Section 9,
the Company will promptly prepare a certificate signed by the Chairman or
President, and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, of the Company setting forth: (i) the Purchase Price as so
adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of
each Warrant after such adjustment and, if the Company shall have elected to
adjust the number of Warrants, the number of Warrants to which the Registered
Holder of each Warrant shall then be entitled, and the adjustment in Redemption
Price resulting therefrom, and (iii) a statement showing in detail the method of
calculation and the facts upon which such adjustment or readjustment is based,
including a statement of (a) the consideration received or to be received by the
Company for any securities issued or sold or deemed to have been issued, (b) the
number of shares of Common Stock outstanding or deemed to be outstanding, and
(c) the Purchase Price in effect immediately prior to such issue or sale and as
adjusted and readjusted (if required by Section 9) on account thereof. The
Company will promptly file such certificate with the Warrant Agent and furnish a
copy thereof to be sent no later than thirty (30) days after the adjustment by
ordinary first class mail to the Underwriter and to each Registered Holder of
Warrants at his last address as it shall appear on the registry books of the
Warrant Agent. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity thereof except as to the holder to
whom the Company failed to mail such notice, or except as to the holder whose
notice was defective. If such mailing is not made within such 30-day period the
Warrant Expiration Date shall be extended by the period of time equal to the
period commencing on the 31st day and expires on the date such mailing is
effectuated. The Company will, upon the written request at any time of the
Underwriter, furnish to the Underwriter a report by Coopers & Lybrand L.L.P., or
other independent public accountants of recognized national standing (which may
be the regular auditors of the Company) selected by the Company to verify such
computation and setting forth such adjustment or readjustment and showing in
detail the method of calculation and the facts upon which such adjustment or
readjustment is based. The Company will also keep copies of all such
certificates and reports at its principal office.
(f) For purposes of Section 9(a) and 9(b) hereof, the following provisions
(A) to (G) shall also be applicable:
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(A) The number of shares of Common Stock outstanding at any given time
shall include shares of Common Stock owned or held by or for the account of
the Company and the sale or issuance of such treasury shares or the
distribution of any such treasury shares shall not be considered a Change
of Shares for purposes of said sections.
(B) No adjustment of the Purchase Price shall be made unless such
adjustment would require an increase or decrease of at least $.10 in the
Purchase Price; provided that any adjustments which by reason of this
clause (B) are not required to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment
which, together with any adjustment(s) so carried forward, shall require an
increase or decrease of at least $.10 in the Purchase Price then in effect
hereunder.
(C) In case of (1) the sale by the Company for cash (or as a component
of a unit being sold for cash) of any rights or warrants to subscribe for
or purchase, or any options for the purchase of, Common Stock or any
securities convertible into or exchangeable for Common Stock without the
payment of any further consideration other than cash, if any (such
securities convertible, exercisable or exchangeable into Common Stock being
herein called "Convertible Securities"), or (2) the issuance by the
Company, without the receipt by the Company of any consideration therefor,
of any rights or warrants to subscribe for or purchase, or any options for
the purchase of, Common Stock or Convertible Securities, in each case, if
(and only if) the consideration payable to the Company upon the exercise of
such rights, warrants or options shall consist of cash, whether or not such
rights, warrants or options, or the right to convert or exchange such
Convertible Securities, are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such Convertible
Securities (determined by dividing (x) the minimum aggregate consideration
payable to the Company upon the exercise of such rights, warrants or
options, plus the consideration, if any, received by the Company for the
issuance or sale of such rights, warrants or options, plus, in the case of
such Convertible Securities, the minimum aggregate amount of additional
consideration, other than such Convertible Securities, payable upon the
conversion or exchange thereof, by (y) the total maximum number of shares
of Common Stock issuable upon the exercise of such rights, warrants or
options or upon the conversion or exchange of such Convertible Securities
issuable upon the exercise of such rights, warrants or options) is less
than the Market Price on the Calculation Date, then the total maximum
number of shares of Common Stock issuable upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such Convertible
Securities (as of the date of the issuance or sale of such rights, warrants
or options) shall be deemed to be outstanding shares of Common Stock for
purposes of Sections 9(a) and
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9(b) hereof and shall be deemed to have been sold for cash in an amount
equal to such price per share.
(D) In case of the sale by the Company for cash of any Convertible
Securities, whether or not the right of conversion or exchange thereunder
is immediately exercisable, and the price per share for which Common Stock
is issuable upon the conversion or exchange of such Convertible Securities
(determined by dividing (x) the total amount of consideration received by
the Company for the sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, other than such
Convertible Securities, payable upon the conversion or exchange thereof, by
(y) the total maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities) is less than the
Market Price on the Calculation Date, then the total maximum number of
shares of Common Stock issuable upon the conversion or exchange of such
Convertible Securities (as of the date of the sale of such Convertible
Securities) shall be deemed to be outstanding shares of Common Stock for
purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been
sold for cash in an amount equal to such price per share.
(E) In case the Company shall modify the rights of conversion,
exchange or exercise of any of the securities referred to in (C) or (D)
above or any other securities of the Company convertible, exchangeable or
exercisable for shares of Common Stock, for any reason other than an event
that would require adjustment to prevent dilution, so that the
consideration per share received by the Company after such modification is
less than the Market Price on the Calculation Date, the Purchase Price to
be in effect after such modification shall be determined by multiplying the
Purchase Price in effect immediately prior to such event by a fraction, of
which the numerator shall be the number of shares of Common Stock
outstanding on the date prior to the modification plus the number of shares
of Common Stock which the aggregate consideration receivable by the Company
for the securities affected by the modification would purchase at the
Market Price and of which the denominator shall be the number of shares of
Common Stock outstanding on such date plus the number of shares of Common
Stock to be issued upon conversion, exchange or exercise of the modified
securities at the modified rate. Such adjustment shall become effective as
of the date upon which such modification shall take effect. On the
expiration of any such right, warrant or option or the termination of any
such right to convert or exchange any such Convertible Securities referred
to in Paragraph (C) or (D) above, the Purchase Price then in effect
hereunder shall forthwith be readjusted to such Purchase Price as would
have obtained (a) had the adjustments made upon the issuance or sale of
such rights, warrants, options or Convertible Securities been made upon the
basis of the issuance of only the number of shares of Common Stock
theretofore actually delivered (and the total
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<PAGE>
consideration received therefor) upon the exercise of such rights, warrants
or options or upon the conversion or exchange of such Convertible
Securities and (b) had adjustments been made on the basis of the Purchase
Price as adjusted under clause (a) for all transactions (which would have
affected such adjusted Purchase Price) made after the issuance or sale of
such rights, warrants, options or Convertible Securities.
(F) In case of the sale for cash of any shares of Common Stock, any
Convertible Securities, any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or Convertible
Securities, the consideration received by the Company therefore shall be
deemed to be the gross sales price therefor without deducting therefrom any
expense paid or incurred by the Company or any underwriting discounts or
commissions or concessions paid or allowed by the Company in connection
therewith.
(G) In case any event shall occur as to which the provisions of
Section 9 are not strictly applicable but the failure to make any
adjustment would not fairly protect the purchase rights represented by the
Warrants in accordance with the essential intent and principles of Section
9, then, in each such case, the Board of Directors of the Company shall in
good faith by resolution provide for the adjustment, if any, on a basis
consistent with the essential intent and principles established in Section
9, necessary to preserve, without dilution, the purchase rights represented
by the Warrants. The Company will promptly make the adjustments described
therein.
(g) No adjustment to the Purchase Price of the Warrants or to the number of
shares of Common Stock purchasable upon the exercise of each Warrant will be
made, however,
(i) upon the exercise of any of the options presently outstanding
under the Company's 1997 Stock Option Plan (the "Plan") for officers,
directors and certain other key personnel of the Company; or
(ii) upon the issuance or exercise of any other securities which may
hereafter be granted or exercised under the Plan or under any other
employee benefit plan of the Company approved by the Company's
stockholders; or
(iii) upon the sale or exercise of the Warrants, including without
limitation the sale or exercise of any of the Warrants comprising the Unit
Purchase Option or upon the sale or exercise of the Unit Purchase Option;
or
(iv) upon the sale of any shares of Common Stock and/or Convertible
Securities in a firm commitment underwritten public offering, including,
without limitation, shares sold upon the exercise of any
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<PAGE>
overallotment option granted to the underwriters in connection with such
offering; or
(v) upon the sale by the Company of any shares of Common Stock and/or
Convertible Securities in a private placement for which the Underwriter is
the Placement Agent; or
(vi) upon the issuance or sale of Common Stock or Convertible
Securities upon the exercise of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or Convertible
Securities, whether or not such rights, warrants or options were
outstanding on the date of the original sale of the Warrants or were
thereafter issued or sold; or
(vii) upon the issuance or sale of Common Stock upon conversion or
exchange of any Convertible Securities, whether or not any adjustment in
the Purchase Price was made or required to be made upon the issuance or
sale of such Convertible Securities and whether or not such Convertible
Securities were outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold.
(viii) upon the issuance or sale of Common Stock or convertible
securities to the seller in connection with the bona fide acquisition of a
business; provided that no beneficial holder of more than 20% of the
Company's capital stock owns more than 2% of the capital stock of the
entity being acquired.
(h) As used in this Section 9, the term "Common Stock" shall mean and
include the Company's Common Stock authorized on the date of the original issue
of the Units and shall also include any capital stock of any class of the
Company thereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include only shares of such class
designated in the Company's Certificate of Incorporation as Common Stock on the
date of the original issue of the Units or (i), in the case of any
reclassification, change, consolidation, merger, sale or conveyance of the
character referred to in Section 9(c) hereof, the stock, securities or property
provided for in such section or (ii), in the case of any reclassification or
change in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination or consisting of a change
in par value, or from par value to no par value, or from no par value to par
value, such shares of Common Stock as so reclassified or changed.
(i) Any determination as to whether an adjustment in the Purchase Price in
effect hereunder is required pursuant to Section 9, or as to the amount of any
such adjustment, if required, shall be binding upon the holders of the Warrants
and the Company if made in good faith by the Board of Directors of the Company.
(j) If and whenever the Company shall grant to the holders of Common Stock,
as such, rights or warrants to subscribe for or to purchase, or any options for
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the purchase of, Common Stock or securities convertible into or exchangeable for
or carrying a right, warrant or option to purchase Common Stock, the Company
shall concurrently therewith grant to each Registered Holder as of the record
date for such transaction of the Warrants then outstanding, the rights, warrants
or options to which each Registered Holder would have been entitled if, on the
record date used to determine the stockholders entitled to the rights, warrants
or options being granted by the Company, the Registered Holder were the holder
of record of the number of whole shares of Common Stock then issuable upon
exercise (assuming, for purposes of this Section 9(j), that exercise of Warrants
is permissible during periods prior to the Initial Warrant Exercise Date) of his
Warrants. Such grant by the Company to the holders of the Warrants shall be in
lieu of any adjustment which otherwise might be called for pursuant to this
Section 9.
SECTION 10. Fractional Warrants and Fractional Shares.
(a) If the number of shares of Common Stock purchasable upon the exercise
of each Warrant is adjusted pursuant to Section 9 hereof, the Company
nevertheless shall not be required to issue fractions of shares, upon exercise
of the Warrants or otherwise, or to distribute certificates that evidence
fractional shares. With respect to any fraction of a share called for upon the
exercise of any Warrant, the Company shall pay to the Holder an amount in cash
equal to such fraction multiplied by the current market value of such fractional
share, determined as follows:
(1) If the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange or is traded on
the Nasdaq National Market, the current market value shall be the last
reported sale price of the Common Stock on such exchange or market on the
last business day prior to the date of exercise of this Warrant or if no
such sale is made on such day, the average of the closing bid and asked
prices for such day on such exchange or market; or
(2) If the Common Stock is not listed or admitted to unlisted trading
privileges on a national securities exchange or is not traded on the Nasdaq
National Market, the current market value shall be the mean of the last
reported bid and asked prices reported by the Nasdaq SmallCap Market or, if
not traded thereon, by the National Quotation Bureau, Inc. on the last
business day prior to the date of the exercise of this Warrant; or
(3) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount determined in such reasonable
manner as may be prescribed by the Board of Directors of the Company.
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SECTION 11. Warrant Holders Not Deemed Stockholders. No holder of Warrants
shall, as such, be entitled to vote or to receive dividends or be deemed the
holder of Common Stock that may at any time be issuable upon exercise of such
Warrants for any purpose whatsoever, nor shall anything contained herein be
construed to confer upon the holder of Warrants, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue or reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger or conveyance or otherwise), or to receive
notice of meetings, or to receive dividends or subscription rights, until such
holder shall have exercised such Warrants and been issued shares of Common Stock
in accordance with the provisions hereof.
SECTION 12. Rights of Action. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Warrants, and
any Registered Holder of a Warrant, without consent of the Warrant Agent or of
the holder of any other Warrant, may, in his own behalf and for his own benefit,
enforce against the Company his right to exercise his Warrants for the purchase
of shares of Common Stock in the manner provided in the Warrant Certificate and
this Agreement.
SECTION 13. Agreement of Warrant Holders. Every holder of a Warrant, by his
acceptance thereof, consents and agrees with the Company, the Warrant Agent and
every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry books of the Warrant
Agent by the Registered Holder thereof in person or by his attorney duly
authorized in writing and only if the Warrant Certificates representing such
Warrants are surrendered at the office of the Warrant Agent, duly endorsed or
accompanied by a proper instrument of transfer satisfactory to the Warrant Agent
and the Company in their sole discretion, together with payment of any
applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the person in
whose name the Warrant Certificate is registered as the holder and as the
absolute, true and lawful owner of the Warrants represented thereby for all
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice or knowledge to the contrary, except as otherwise expressly provided in
Section 7 hereof.
SECTION 14. Cancellation of Warrant Certificates. If the Company shall
purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be delivered to the Warrant
Agent and cancelled by it and retired. The Warrant Agent shall also cancel the
Warrant
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Certificate or Warrant Certificates following exercise of any or all of the
Warrants represented thereby or delivered to it for transfer or exchange.
SECTION 15. Concerning the Warrant Agent. The Warrant Agent acts hereunder
as agent and in a ministerial capacity for the Company, and its duties shall be
determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder be
deemed to make any representations as to the validity, value or authorization of
the Warrant Certificates or the Warrants represented thereby or of any
securities or other property delivered upon exercise of any Warrant or whether
any stock issued upon exercise of any Warrant is fully paid and nonassessable.
The Warrant Agent shall not at any time be under any duty or responsibility
to any holder of Warrant Certificates to make or cause to be made any adjustment
of the Purchase Price or the Redemption Price provided in this Agreement, or to
determine whether any fact exists which may require any such adjustments, or
with respect to the nature or extent of any such adjustment, when made, or with
respect to the method employed in making the same. It shall not (i) be liable
for any recital or statement of facts contained herein or for any action taken,
suffered or omitted by it in reliance on any Warrant Certificate or other
document or instrument believed by it in good faith to be genuine and to have
been signed or presented by the proper party or parties, (ii) be responsible for
any failure on the part of the Company to comply with any of its covenants and
obligations contained in this Agreement or in any Warrant Certificate, or (iii)
be liable for any act or omission in connection with this Agreement except for
its own negligence or wilful misconduct.
The Warrant Agent may at any time consult with counsel satisfactory to it
(who may be counsel for the Company) and shall incur no liability or
responsibility for any action taken, suffered or omitted by it in good faith in
accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order or demand of
the Company shall be sufficiently evidenced by an instrument signed by the
Chairman of the Board, President, any Vice President, its Secretary, or
Assistant Secretary, (unless other evidence in respect thereof is herein
specifically prescribed). The Warrant Agent shall not be liable for any action
taken, suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand believed by it to be genuine.
The Company agrees to pay the Warrant Agent reasonable compensation for its
services hereunder and to reimburse it for its reasonable expenses hereunder; it
further agrees to indemnify the Warrant Agent and save it harmless against any
and all losses, expenses and liabilities, including judgments, costs and counsel
fees, for anything done or omitted by the Warrant Agent in the execution of its
duties and
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powers hereunder except losses, expenses and liabilities arising as a result of
the Warrant Agent's negligence or wilful misconduct.
The Warrant Agent may resign its duties and be discharged from all further
duties and liabilities hereunder (except liabilities arising as a result of the
Warrant Agent's own negligence or wilful misconduct), after giving 30 days'
prior written notice to the Company. At least 15 days prior to the date such
resignation is to become effective, the Warrant Agent shall cause a copy of such
notice of resignation to be mailed to the Registered Holder of each Warrant
Certificate at the Company's expense. Upon such resignation, or any inability of
the Warrant Agent to act as such hereunder, the Company shall appoint a new
warrant agent in writing. If the Company shall fail to make such appointment
within a period of 15 days after it has been notified in writing of such
resignation by the resigning Warrant Agent, then the Registered Holder of any
Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a new warrant agent. Any new warrant agent, whether appointed by
the Company or by such a court, shall be a bank or trust company having a
capital and surplus, as shown by its last published report to its stockholders,
of not less than $10,000,000 or a stock transfer company that is a registered
transfer agent under the Securities Exchange Act of 1934. After acceptance in
writing of such appointment by the new warrant agent is received by the Company,
such new warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
Any corporation into which the Warrant Agent or any new warrant agent may
be converted or merged or any corporation resulting from any consolidation to
which the Warrant Agent or any new warrant agent shall be a party or any
corporation succeeding to the trust business of the Warrant Agent shall be a
successor warrant agent under this Agreement without any further act, provided
that such corporation is eligible for appointment as successor to the Warrant
Agent under the provisions of the preceding paragraph. Any such successor
warrant agent shall promptly cause notice of its succession as warrant agent to
be mailed to the Company and to the Registered Holder of each Warrant
Certificate.
The Warrant Agent, its subsidiaries and affiliates, and any of its or their
officers or directors, may buy and hold or sell Warrants or other securities of
the Company and otherwise deal with the Company in the same manner and to the
same extent and with like effects as though it were not Warrant Agent. Nothing
herein
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shall preclude the Warrant Agent from acting in any other capacity for the
Company or for any other legal entity.
SECTION 16. Modification of Agreement. Subject to the provisions of
Section 4(b), the parties hereto and the Company may by supplemental agreement
make any changes or corrections in this Agreement (i) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained; (ii) to reflect an
increase in the number of Warrants which are to be governed by this Agreement
resulting from (a) a subsequent public offering of Company securities which
includes Warrants or (b) a subsequent private placement of Company securities
which includes Warrants, in either case having the same terms and conditions as
the Warrants, originally covered by or subsequently added to this Agreement
under this Section 16, provided, however, that in the case of a private
placement, the amendment to this Agreement will be effective only at such time
as the resale of such Warrants, as well as the securities underlying such
Warrants is covered by an effective registration statement under the Act; or
(iii) that they may deem necessary or desirable and which shall not adversely
affect the interests of the holders of Warrant Certificates; provided, however,
that this Agreement shall not otherwise be modified, supplemented or altered in
any respect except with the consent in writing of the Registered Holders of
Warrant Certificates representing not less than 50% of the Warrants then
outstanding; and provided, further, that no change in the number or nature of
the securities purchasable upon the exercise of any Warrant, or the Purchase
Price therefor, or the acceleration of the Warrant Expiration Date, shall be
made without the consent in writing of the Registered Holder of the Warrant
Certificate representing such Warrant, other than such changes as are
specifically prescribed by this Agreement as originally executed or are made in
compliance with applicable law.
SECTION 17. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class registered or certified mail, postage
prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the
address of such holder as shown on the registry books maintained by the Warrant
Agent; if to the Company, at 2979 Pacific Drive, Suite B, Norcross, Georgia
30071, attention: Chairman, or at such other address as may have been furnished
to the Warrant Agent in writing by the Company; if to the Warrant Agent, at its
Corporate Office; if to the Underwriter, at D.H. Blair Investment Banking Corp.,
44 Wall Street, New York, New York 10005.
SECTION 18. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without
reference to principles of conflict of laws.
SECTION 19. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the Company and, the Warrant Agent and their respective
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successors and assigns, and the holders from time to time of Warrant
Certificates . Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or obligation.
SECTION 20. Termination. This Agreement shall terminate at the close of
business on the earlier of the Warrant Expiration Date or the date upon which
all Warrants (including the warrants issuable upon exercise of the Unit Purchase
Options) have been exercised, except that the Warrant Agent shall account to the
Company for cash held by it and the provisions of Section 15 hereof shall
survive such termination.
SECTION 21. Counterparts. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
TEKGRAF, INC.
By:_________________________
Name:
Title:
AMERICAN STOCK TRANSFER &
TRUST COMPANY
By:_________________________
Authorized Officer
D.H. BLAIR INVESTMENT BANKING
CORP.
By:_________________________
Authorized Officer
23
<PAGE>
EXHIBIT A
[FORM OF FACE OF WARRANT CERTIFICATE]
No. W ____________ Warrants
VOID AFTER ____________, 2002
WARRANT CERTIFICATE FOR PURCHASE
OF COMMON STOCK
TEKGRAF, INC.
This certifies that FOR VALUE RECEIVED __________________ or registered
assigns (the "Registered Holder") is the owner of the number of Warrants
("Warrants") specified above. Each Warrant represented hereby initially entitles
the Registered Holder to purchase, subject to the terms and conditions set forth
in this Warrant Certificate and the Warrant Agreement (as hereinafter defined),
one fully paid and nonassessable share of Class A Common Stock, $.001 par value
("Common Stock"), of Tekgraf, Inc., a Delaware corporation (the "Company") at
any time between ____________, 1997 and the Expiration Date (as hereinafter
defined), upon the presentation and surrender of this Warrant Certificate with
the Subscription Form on the reverse hereof duly executed, at the corporate
office of AMERICAN STOCK TRANSFER & TRUST COMPANY, as Warrant Agent, or its
successor (the "Warrant Agent"), accompanied by payment of $7.00 for each
Warrant (the "Purchase Price") in lawful money of the United States of America
in cash or by official bank or certified check made payable to
_________________.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated ______________,
1997, by and among the Company, the Warrant Agent and D.H. Blair Investment
Banking Corp.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company
<PAGE>
shall cancel this Warrant Certificate upon the surrender hereof and shall
execute and deliver a new Warrant Certificate or Warrant Certificates of like
tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York time) on
_______________, 2002 or such earlier date as the Warrants shall be redeemed. If
such date shall in the State of New York be a holiday or a day on which banks
are authorized to close, then the Expiration Date shall mean 5:00 P.M. (New York
time) the next following day which in the State of New York is not a holiday or
a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of the Warrants represented hereby unless a registration statement
under the Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same to become
effective and to keep such registration statement current while any of the
Warrants are outstanding. The Warrants represented hereby shall not be
exercisable by a Registered Holder in any state where such exercise would be
unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any applicable transfer fee
per certificate in addition to any tax or other governmental charge imposed in
connection therewith, for registration of transfer of this Warrant Certificate
at such office, a new Warrant Certificate or Warrant Certificates representing
an equal aggregate number of Warrants will be issued to the transferee in
exchange therefor, subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
The Warrants represented hereby may be redeemed at the option of the
Company, at a redemption price of $0.05 per Warrant at any time after
__________, 1998, provided the Market Price (as defined in the Warrant
Agreement) for the Common Stock shall exceed $9.80 per share. Notice of
redemption shall be given not later than the thirtieth day before the date fixed
for redemption, all as provided in the Warrant Agreement. On and after the date
fixed for redemption, the Registered Holder shall have no rights with respect to
the Warrants represented hereby except to receive the $0.05 per Warrant upon
surrender of this Warrant Certificate.
2
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Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
The Company has agreed to pay a fee of 5% of the Purchase Price upon
certain conditions as specified in the Warrant Agreement upon the exercise of
the Warrants represented hereby.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
3
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IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile, by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
TEKGRAF, INC.
By:________________________
Name:
Title:
Dated: _____________________
[seal]
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By ___________________________
Authorized Officer
4
<PAGE>
[FORM OF REVERSE OF WARRANT CERTIFICATE]
TRANSFER FEE: $_______ PER CERTIFICATE ISSUED
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
_______ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
_____________________________________
_____________________________________
_____________________________________
_____________________________________
[please print or type name and address]
and be delivered to
_____________________________________
_____________________________________
_____________________________________
_____________________________________
[please print or type name and address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
The undersigned represents that the exercise of the Warrants evidenced
hereby was solicited by a member of the National Association of Securities
Dealers,
<PAGE>
Inc. If not solicited by an NASD member, please write "unsolicited" in the space
below. Unless otherwise indicated by listing the name of another NASD member
firm, it will be assumed that the exercise was solicited by D.H. Blair
Investment Banking Corp. or D.H. Blair & Co., Inc.
____________________________________
(Name of NASD Member)
Dated: _______________ ____________________________________
____________________________________
____________________________________
Address
____________________________________
Taxpayer Identification Number
____________________________________
Signature Guaranteed
____________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
2
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
OF TRANSFEREE
_________________________
_________________________
_________________________
[please print or type name and address]
_________________ of the Warrants represented by this Warrant Certificate, and
hereby irrevocably constitutes and appoints ____________________________________
Attorney to transfer this Warrant Certificate on the books of the Company, with
full power of substitution in the
premises.
Dated:________________ X______________________________
Signature Guaranteed
------------------------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
Option to Purchase
_________ Units
TEKGRAF, INC.
Unit Purchase Option
Dated: ___________, 1997
No. ______
THIS CERTIFIES THAT _________________ (herein sometimes called the
"Holder") is entitled to purchase from Tekgraf, Inc., a Delaware corporation
(hereinafter called the "Company"), at the prices and during the periods as
hereinafter specified, up to __________________________ (________) Units
("Units"), each Unit consisting of one share of the Company's Class A Common
Stock, $.001 par value, as now constituted ("Common Stock") and one warrant
("Warrants"). Each Warrant is exercisable to purchase one share of Class A
Common Stock at an exercise price of $8.40 from __________, 1997 to ________,
2002.
The Units have been registered under a registration statement (the
"Registration Statement") on Form S-1, (File No. 333-33449) declared
effective by the Securities and Exchange Commission on __________, 1997 (the
"Effective Date"). This Option, together with options of like tenor,
constituting in the aggregate options (the "Options") to purchase 210,000 Units,
subject to adjustment in accordance with Section 8 of this Option (the "Option
Units"), was originally issued pursuant to an underwriting agreement between the
Company and D.H. Blair Investment Banking Corp., as underwriter ("Blair" or the
"Underwriter") in connection with a public offering (the "Offering") of
2,100,000 Units (the "Public Units") through the Underwriter, in consideration
of $_______ received for the Options.
Except as specifically otherwise provided herein, the Common Stock and the
Warrants issued pursuant to the option herein granted (the "Option") shall bear
the same terms and conditions as described under the caption "Description of
Securities" in the Registration Statement, and the Warrants shall be governed by
the terms of the Warrant Agreement dated as of __________, 1997 executed in
connection with such public offering (the "Warrant Agreement"), and except that
(i) the holder shall have registration rights under the Securities Act of 1933,
as amended (the "Act"), for the Option, the Common Stock and the Warrants
included in the Option Units, and the shares of Common Stock underlying the
Warrants, as more fully described in Section 6 of this Option and (ii) the
Warrants issuable upon exercise of the Option will be subject to redemption by
the Company pursuant to the Warrant Agreement at any time after the Option has
been exercised and the Warrants underlying the Option Units are outstanding. Any
such redemption shall be on the same terms and conditions
<PAGE>
as the Warrants included in the Public Units (the "Public Warrants"). The
Company will list the Common Stock underlying this Option and, at the Holder's
request the Warrants, on the Nasdaq National Market or such other exchange or
market as the Common Stock or Public Warrants may then be listed or quoted. In
the event of any extension of the expiration date or reduction of the exercise
price of the Public Warrants, the same changes to the Warrants included in the
Option Units shall be simultaneously effected.
1. The rights represented by this Option shall be exercised at the prices,
subject to adjustment in accordance with Section 8 of this Option ("the
"Exercise Price"), and during the periods as follows:
(a) During the period from _______, 1997 to _______, 1999
inclusive, the Holder shall have no right to purchase any Option Units
hereunder, except that in the event of any merger, consolidation or
sale of all or substantially all the capital stock or assets of the
Company or in the case of any statutory exchange of securities with
another corporation (including any exchange effected in connection
with a merger of another corporation into the Company) subsequent to
_______, 1997, the Holder shall have the right to exercise this Option
and the Warrants included herein at such time and receive the kind and
amount of shares of stock and other securities and property (including
cash) which a holder of the number of shares of Common Stock
underlying this Option and the Warrants included in this Option would
have owned or been entitled to receive had this Option been exercised
immediately prior thereto.
(b) Between _______, 1999 and _______, 2002 inclusive, the Holder
shall have the option to purchase Option Units hereunder at a price of
$_______ per Unit. For purposes of the adjustments under Section 8
hereof, the Per Share Exercise Price shall be deemed to be $_______,
subject to further adjustment as provided in such Section 8.
(c) After _________, 2002 the Holder shall have no right to
purchase any Units hereunder.
2. (a) The rights represented by this Option may be exercised at any time
within the period above specified, in whole or in part, by (i) the surrender of
this Option (with the purchase form at the end hereof properly executed) at the
principal executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); and (ii) payment to the
Company of the exercise price then in effect for the number of Option Units
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any. This Option shall be deemed to have been exercised, in
whole or in part to the extent specified, immediately prior to the close of
business on the date this Option is
2
<PAGE>
surrendered and payment is made in accordance with the foregoing provisions of
this Section 2, and the person or persons in whose name or names the
certificates for shares of Common Stock and Warrants shall be issuable upon such
exercise shall become the holder or holders of record of such Common Stock and
Warrants at that time and date. The certificates for the Common Stock and
Warrants so purchased shall be delivered to the Holder as soon as practicable
but not later than ten (10) days after the rights represented by this Option
shall have been so exercised.
(b) At any time during the period above specified, during which this Option
may be exercised, the Holder may, at its option, exchange this Option, in whole
or in part (an "Option Exchange"), into the number of Option Units determined in
accordance with this Section (b), by surrendering this Option at the principal
office of the Company or at the office of its stock transfer agent, accompanied
by a notice stating such Holder's intent to effect such exchange, the number of
Option Units into which this Option is to be exchanged and the date on which the
Holder requests that such Option Exchange occur (the "Notice of Exchange"). The
Option Exchange shall take place on the date specified in the Notice of Exchange
or, if later, the date the Notice of Exchange is received by the Company (the
"Exchange Date"). Certificates for the shares of Common Stock and Warrants
issuable upon such Option Exchange and, if applicable, a new Option of like
tenor evidencing the balance of the Option Units remaining subject to this
Option, shall be issued as of the Exchange Date and delivered to the Holder
within seven (7) days following the Exchange Date. In connection with any Option
Exchange, this Option shall represent the right to subscribe for and acquire the
number of Option Units (rounded to the next highest integer) equal to (x) the
number of Option Units specified by the Holder in its Notice of Exchange up to
the maximum number of Option Units subject to this option (the "Total Number")
less (y) the number of Option Units equal to the quotient obtained by dividing
(A) the product of the Total Number and the existing Exercise Price by (B) the
Fair Market Value. "Fair Market Value" shall mean first, if there is a trading
market as indicated in Subsection (i) below for the Units, such Fair Market
Value of the Units and if there is no such trading market in the Units, then
Fair Market Value shall have the meaning indicated in Subsections (ii) through
(v) below for the aggregate value of all shares of Common Stock and Warrants
which comprise a Unit:
(i) If the Units are listed on a national securities
exchange or listed or admitted to unlisted trading privileges on
such exchange or listed for trading on the Nasdaq National Market
or the Nasdaq Small Cap Market, the Fair Market Value shall be
the average of the last reported sale prices or the average of
the means of the last reported bid and asked prices,
respectively, of the Units on such exchange or market for the
twenty (20) business days ending on the last business day prior
to the Exchange Date; or
(ii) If the Common Stock or Warrants are listed on a
national securities exchange or admitted to unlisted trading
privileges on such
3
<PAGE>
exchange or listed for trading on the Nasdaq National Market or
the Nasdaq Small Cap Market, the Fair Market Value shall be the
average of the last reported sale prices or the average of the
means of the last reported bid and asked prices, respectively, of
Common Stock or Warrants, respectively, on such exchange or
market for the twenty (20) business days ending on the last
business day prior to the Exchange Date; or
(iii) If the Common Stock or Warrants are not so listed or
admitted to unlisted trading privileges, the Fair Market Value
shall be the average of the means of the last reported bid and
asked prices of the Common Stock or Warrants, respectively, for
the twenty (20) business days ending on the last business day
prior to the Exchange Date; or
(iv) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so
reported, the Fair Market Value shall be an amount, not less than
book value thereof as at the end of the most recent fiscal year
of the Company ending prior to the Exchange Date, determined in
such reasonable manner as may be prescribed by the Board of
Directors of the Company; or
(v) If the Warrants are not so listed or admitted to
unlisted trading privileges, and bid and asked prices are not so
reported for Warrants, then Fair Market Value for the Warrants
shall be an amount equal to the difference between (i) the Fair
Market Value of the shares of Common Stock and Warrants which may
be received upon the exercise of the Warrants, as determined
herein, and (ii) the Warrant Exercise Price.
3. Neither this Option nor the underlying securities shall be transferred,
sold, assigned, or hypothecated for a period of two years commencing on the
Effective Date except that they may be transferred or assigned, in whole or in
part to (i) any person who is an officer or partner of the Holder; (ii) any
member participating in the selling group relating to the Offering, which may be
D.H. Blair & Co., Inc. ("Blair & Co.") or any officer or partner of such selling
group member; (iii) successors of the Holder or an officer or partner of such
successor; (iv) any purchaser of substantially all the assets of the Holder; or
(v) by operation of law. Any such assignment shall be effected by the Holder (i)
executing the form of assignment at the end hereof and (ii) surrendering this
Option for cancellation at the office or agency of the Company referred to in
Section 2 hereof, accompanied by a certificate (signed by an officer of the
Holder if the Holder is a corporation), stating that each transferee is a
permitted transferee under this Section 3 hereof; whereupon the Company shall
issue, in the name or names specified by the Holder (including the Holder) a new
Option or
4
<PAGE>
Options of like tenor and representing in the aggregate rights to purchase the
same number of Option Units as are purchasable hereunder.
4. The Company covenants and agrees that all shares of Common Stock which
may be issued as part of the Option Units purchased hereunder and the Common
Stock which may be issued upon exercise of the Warrants will, upon issuance, be
duly and validly issued, fully paid and nonassessable and no personal liability
will attach to the holder thereof. The Company further covenants and agrees that
during the periods within which this Option may be exercised, the Company will
at all times have authorized and reserved a sufficient number of shares of its
Common Stock to provide for the exercise of this Option and that it will have
authorized and reserved a sufficient number of shares of Common Stock for
issuance upon exercise of the Warrants included in the Option Units.
5. This Option shall not entitle the Holder to any voting rights or any
other rights, or subject to the Holder to any liabilities, as a stockholder of
the Company.
6. (a) The Company shall advise the Holder or its transferee, whether the
Holder holds the Option or has exercised the Option and holds Option Units or
any of the securities underlying the Option Units, by written notice at least
four weeks prior to the filing of any post-effective amendment to the
Registration Statement or of any new registration statement or post-effective
amendment thereto under the Act covering any securities of the Company, for its
own account or for the account of others, and will for a period of seven years
from the Effective Date, upon the request of the Holder, include in any such
post-effective amendment or registration statement, such information as may be
required to permit a public offering of the Option, all or any of the Option
Units, the Common Stock or Warrants included in the Option Units or the Common
Stock issuable upon the exercise of the Warrants (the "Registrable
Securities");provided, however, the right of any Holder to include its
Registrable Securities in any such post-effective amendment or registration
statement may be waived by the written consent of Blair or Blair & Co.
(b) If Blair or Blair & Co. shall give notice to the Company at any time to
the effect that such holder desires to register under the Act this Option, the
Option Units or any of the underlying securities contained in the Option Units
under such circumstances that a public distribution (within the meaning of the
Act) of any such securities will be involved then the Company will promptly, but
no later than two weeks after receipt of such notice, file a post-effective
amendment to the current Registration Statement or a new registration statement
on Form S-1 or such other form as the holder requests pursuant to the Act, to
the end that the Option, the Option Units and/or any of the securities
underlying the Option Units may be publicly sold under the Act as promptly as
practicable thereafter and the Company will use its best efforts to cause such
registration to become and remain effective (including the taking of such steps
as are necessary to obtain the removal of any stop order); provided, that such
holder shall furnish the Company with appropriate information in connection
5
<PAGE>
therewith as the Company may reasonably request in writing. Either Blair or
Blair & Co. may, at its option, request the filing of a post-effective amendment
to the current Registration Statement or a new registration statement under the
Act on two occasions during the four year period beginning one year from the
Effective Date. Blair or Blair & Co. may, at its option request the registration
of the Option and/or any of the securities underlying the Option in a
registration statement made by the Company as contemplated by Section 6(a) or in
connection with a request made pursuant to this Section 6(b) prior to
acquisition of the Option Units issuable upon exercise of the Option and even
though the Holder has not given notice of exercise of the Option. Blair or Blair
& Co. may, at its option, request such post-effective amendment or new
registration statement during the described period with respect to the Option,
the Option Units as a unit, or separately as to the Common Stock and/or Warrants
included in the Option Units and/or the Common Stock issuable upon the exercise
of the Warrants, and such registration rights may be exercised by Blair or Blair
& Co. prior to or subsequent to the exercise of the Option.
Within ten days after receiving any such notice pursuant to this Section
6(b), the Company shall give notice to the other holders of the Options,
advising that the Company is proceeding with such post-effective amendment or
registration statement and offering to include therein the securities underlying
the Options of the other holders, provided that they shall furnish the Company
with such appropriate information (relating to the intentions of such holders)
in connection therewith as the Company shall reasonably request in writing. In
the event the registration statement is not filed within the period specified
herein and in the event the registration statement is not declared effective
under the Act prior to ________, 200_, then, at the holders' request, the
Company shall purchase the Options from the holder for a per option price equal
to the difference between (i) the Fair Market Value of the Common Stock on the
date of notice multiplied by the number of shares of Common Stock issuable upon
exercise of the Option and the underlying Warrants and (ii) the average per
share purchase price of the Option and each share of Common Stock underlying the
Option.] All costs and expenses of the first such post-effective amendment or
new registration statement under this paragraph 6(b) shall be borne by the
Company, except that the holders shall bear the fees of their own counsel and
any underwriting discounts or commissions applicable to any of the securities
sold by them and all costs and expenses of the second such post-effective
amendment or new registration statement shall be borne by the Holders. If the
Company determines to include securities to be sold by it in any registration
statement originally requested pursuant to this Section 6(b), such registration
shall instead be deemed to have been a registration under Section 6(a) and not
under this Section 6(b).
The Company will maintain such registration statement or post-effective
amendment current under the Act for a period of at least six months (and for up
to an additional three months if requested by the Holder) from the effective
date thereof.
6
<PAGE>
(c) Whenever pursuant to Section 6 a registration statement relating to any
Registrable Securities is filed under the Act, amended or supplemented, the
Company shall (i) supply prospectuses and such other documents as the Holder may
request in order to facilitate the public sale or other disposition of the
Registrable Securities, (ii) use its best efforts to register and qualify any of
the Registrable Securities for sale in such states as such Holder designates,
(iii) furnish indemnification in the manner provided in Section 7 hereof, (iv)
notify each Holder of Registrable Securities at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, 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 therein not misleading and, at the request of
any such Holder, prepare and furnish to such Holder a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be necessary
so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus shall not included an untrue statement of a material
fact or omit to state material fact required to be stated therein or necessary
to make the statements therein not misleading and (v) do any and all other acts
and things which may be necessary or desirable to enable such Holders to
consummate the public sale or other disposition of the Registrable Securities,
The Holder shall furnish appropriate information in connection therewith and
indemnification as set forth in Section 7.
(d) The Company shall not permit the inclusion of any securities other than
the Registrable Securities to be included in any registration statement filed
pursuant to Section 6(b) hereof without the prior written consent of Blair or
Blair & Co.
(e) The Company shall furnish to each Holder participating in the offering
and to each underwriter, if any, a signed counterpart, addressed to such Holder
or underwriter, of (i) an opinion of counsel to the Company, dated the effective
date of such registration statement (or, if such registration includes an
underwritten public offering, an opinion dated the date of the closing under the
underwriting agreement), and (ii) if such registration includes an underwritten
public offering, a "cold comfort" letter dated the effective date of such
registration statement and dated the date of the closing under the underwriting
agreement signed by the independent public accountants who have issued a report
on the Company's financial statements included in such registration statement,
in each case covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the case of
such accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(f) The Company shall deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described
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<PAGE>
below and to the managing underwriter copies of all correspondence between the
Commission and the Company, its counsel or auditors and all memoranda relating
to discussions with the Commission or its staff with respect to the registration
statement and permit each Holder and underwriter to do such investigation, upon
reasonable advance notice, with respect to information contained in or omitted
from the registration statement as it deems reasonable necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to
non-confidential books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times as any such Holder shall
reasonably request.
7. (a) Whenever pursuant to Section 6 a registration statement relating to
the Registrable Securities is filed under the Act, amended or supplemented, the
Company will indemnify and hold harmless each holder of the Registrable
Securities covered by such registration statement, amendment or supplement (such
holder being hereinafter called the "Distributing Holder"), and each person, if
any, who controls (within the meaning of the Act) the Distributing Holder, and
each underwriter (within the meaning of the Act) of such securities and each
person, if any, who controls (within the meaning of the Act) any such
underwriter, against any losses, claims, damages or liabilities, joint or
several, to which the Distributing Holder, any such controlling person or any
such underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any such registration statement or any preliminary
prospectus or final prospectus constituting a part thereof or any amendment or
supplement thereto, or arise out of or are based upon the omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; and will reimburse the Distributing Holder
and each such controlling person and underwriter for any legal or other expenses
reasonably incurred by the Distributing Holder or such controlling person or
underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in said registration statement,
said preliminary prospectus, said final prospectus or said amendment or
supplement in reliance upon and in conformity with written information furnished
by such Distributing Holder specifically for use in the preparation thereof. The
foregoing indemnification shall be in addition to any liability the Company may
otherwise have.
(b) If requested by the Company prior to the filing of any registration
statement covering the Registrable Securities, each Distributing Holder will
agree, severally but not jointly, to indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject,
8
<PAGE>
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in said registration statement, said
preliminary prospectus, said final prospectus, or said amendment or supplement,
or arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent that such untrue statement or alleged untrue statement or omission or
alleged omission was made in said registration statement, said preliminary
prospectus, said final prospectus or said amendment or supplement in reliance
upon and in conformity with written information furnished by such Distributing
Holder specifically for use in the preparation thereof; except that the maximum
amount which may be recovered from the Distributing Holder pursuant to this
Section 7 or otherwise shall be limited to the amount of net proceeds received
by the Distributing Holder from the sale of the Registrable Securities.
(c) Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this Section 7.
(d) In case any such action is brought against any indemnified party, and
it notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section 7 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation.
(8) In addition to the provisions of Section 1(a) of this Option, the
Exercise Price in effect at any time and the number and kind of securities
purchasable upon the exercise of the Options shall be subject to adjustment from
time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock payable in shares of
Common Stock, (ii) subdivide or reclassify its outstanding shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify its
outstanding shares of Common Stock into a smaller number of shares, the
Exercise Price in effect at the time of the record date for such dividend
or distribution or on the effective date of such subdivision, combination
or
9
<PAGE>
reclassification shall be proportionally adjusted so that it shall equal
the price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such action, and the numerator of which
shall be the number of shares of Common Stock outstanding immediately prior
to such action. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) Whenever the Exercise Price payable upon exercise of each Option
is adjusted pursuant to Subsection (a) above, (i) the number of shares of
Common Stock included in an Option Unit shall simultaneously be adjusted by
multiplying the number of shares of Common Stock included in Option Unit
immediately prior to such adjustment by the Exercise Price in effect
immediately prior to such adjustment and dividing the product so obtained
by the Exercise Price, as adjusted and (ii) the number of shares of Common
Stock or other securities issuable upon exercise of the Warrants included
in the Option Units and the exercise price of such Warrants shall be
adjusted in accordance with the applicable terms of the Warrant Agreement.
(c) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents
($0.05) in such price; provided, however, that any adjustments which by
reason of this Subsection (c) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment required to be
made hereunder. All calculations under this Section 8 shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may
be. Anything in this Section 8 to the contrary notwithstanding, the Company
shall be entitled, but shall not be required, to make such changes in the
Exercise Price, in addition to those required by this Section 8, as it
shall determine, in its sole discretion, to be advisable in order that any
dividend or distribution in shares of Common Stock, or any subdivision,
reclassification or combination of Common Stock, hereafter made by the
Company shall not result in any Federal Income tax liability to the holders
of Common Stock or securities convertible into Common Stock (including
Warrants issuable upon exercise of this Option).
(d) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly but no later than 10 days after any request for such
an adjustment by the Holder, cause a notice setting forth the adjusted
Exercise Price and adjusted number of Option Units issuable upon exercise
of each Option and, if requested, information describing the transactions
giving rise to such adjustments, to be mailed to the Holders, at the
address set forth herein, and shall cause a certified copy thereof to be
mailed to its transfer agent, if any. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors
(who may be the
10
<PAGE>
regular accountants employed by the Company) to make any computation
required by this Section 8, and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(e) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (a) above, the Holder of this Option thereafter
shall become entitled to receive any shares of the Company, other than
Common Stock, thereafter the number of such other shares so receivable upon
exercise of this Option shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Common Stock contained in Subsections (a) to (d),
inclusive above.
(f) In case any event shall occur as to which the other provisions of
this Section 8 or Section 1(a) hereof are not strictly applicable but as to
which the failure to make any adjustment would not fairly protect the
purchase rights represented by this Option in accordance with the essential
intent and principles hereof then, in each such case, the Holders of
Options representing the right to purchase a majority of the Option Units
may appoint a firm of independent public accountants reasonably acceptable
to the Company, which shall give their opinion as to the adjustment, if
any, on a basis consistent with the essential intent and principles
established herein, necessary to preserve the purchase rights represented
by the Options. Upon receipt of such opinion, the Company will promptly
mail a copy thereof to the Holder of this Option and shall make the
adjustments described therein. The fees and expenses of such independent
public accountants shall be borne by the Company.
9. This Agreement shall be governed by and in accordance with the laws of
the State of New York, without giving effect to the principles of conflicts of
law thereof.
11
<PAGE>
IN WITNESS WHEREOF, ____________ has caused this Option to be signed by its
duly authorized officers under its corporate seal, and this Option to be dated
____________, 1997.
TEKGRAF, INC.
By: ____________________________
Name:
Title: President
(Corporate Seal)
Attest:
______________________________
12
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of option)
The undersigned, the holder of the foregoing Option, hereby irrevocably
elects to exercise the purchase rights represented by such Option for, and to
purchase thereunder, ______ Units of Tekgraf, Inc., each Unit consisting of one
share of Class A Common Stock, $.001 Par Value and one Class A Warrant to
purchase one share of Class A Common Stock and herewith makes payment of
$_________ thereof
Dated:____________ Instructions for Registration of Stock and Warrants
_______________________________________
Print Name
_______________________________________
Address
_______________________________________
Signature
13
<PAGE>
OPTION EXCHANGE
The undersigned, pursuant to the provisions of the foregoing Option, hereby
elects to exchange its Option for _________ Units of Tekgraf, Inc., each Unit
consisting of one share of Class A Common Stock, $.001 Par Value and one Class A
Warrant to purchase one share of Class A Common Stock, pursuant to the Option
Exchange provisions of the Option.
Dated:________________
_______________________________________
Print Name
_______________________________________
Address
_______________________________________
Signature
14
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and transfers
unto _______________ the right to purchase Units represented by the foregoing
Option to the extent of ____ Units, and appoints _____________ attorney to
transfer such rights on the books of Tekgraf, Inc., with full power of
substitution in the premises.
Dated: _________________
[Holder]
By: _____________________________________
_______________________________________
Address
In the presence of:
15
October 13, 1997
Tekgraf, Inc.
2979 Pacific Drive
Suite B
Norcross, GA 30071
Gentlemen:
We have acted as counsel to Tekgraf, Inc. (the "Company") in connection
with its filing of a registration statement on Form S-1 File No. 333-33449 (the
"Registration Statement") covering (i) 2,415,000 Units, including 315,000 Units
subject to an over-allotment option, each Unit consisting of one share of Common
Stock, $.001 par value (the "Common Stock"), one redeemable Class A Warrant (the
"Warrants"), with each Warrant entitling the holder to purchase one share of
Common Stock, and (ii) an option (the "Unit Purchase Option") to the
representative of the underwriters and/or its designees to purchase an aggregate
of 210,000 additional Units.
In our capacity as counsel to the Company, we have examined the Company's
Certificate of Incorporation, as amended, and By-laws, and the minutes and other
corporate proceedings of the Company.
With respect to factual matters, we have relied upon statements and
certificates of officers of the Company. We have also reviewed such other
matters of law and examined and relied upon such other documents, records and
certificates as we have deemed relevant hereto. In all such examinations we have
assumed conformity with the original documents of all documents submitted to us
as originals and the genuineness of all signatures on all documents submitted to
us.
On the basis of the foregoing, we are of the opinion that:
(i) the shares of Common Stock included in the Units covered by the
Registration Statement have been validly authorized and will, when sold as
contemplated by the Registration Statement, be legally issued, fully paid
and non-assessable;
(ii) the Warrants included in the Units covered by the Registration
Statement and the Warrants issuable upon exercise of the Unit Purchase
Option will, when sold as contemplated by the Registration Statement,
constitute legal, valid and binding obligations of the Company; and
<PAGE>
Tekgraf, Inc.
October 13, 1997
Page 2
(iii) the shares of Common Stock issuable upon exercise of the
foregoing Warrants and the Unit Purchase Option will, upon issuance and
payment in accordance with the terms of the Warrants and the Unit Purchase
Option, be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference made to us under the caption "Legal
Matters" in the prospectus constituting part of the Registration Statement.
Very truly yours,
BACHNER, TALLY, POLEVOY
& MISHER LLP
TM:msw
ESCROW AGREEMENT
AGREEMENT, dated as of the 9th day of October, 1997 and effective as
of the Effective Date, as defined herein, by and among American Stock Transfer &
Trust Company, a New York corporation (hereinafter referred to as the "Escrow
Agent"), Tekgraf, Inc., a Delaware corporation (the "Company"), and the
stockholders of the Company who have executed this agreement (hereinafter
collectively called the "Stockholders").
WHEREAS, the Company contemplates a public offering ("Public
Offering") of units ("Units"), each Unit consisting of one share of its Class A
Common Stock, par value $.001 per share (the "Class A Common Stock"), and one
redeemable Class A Warrant (the "Class A Warrant") through D. H. Blair
Investment Banking Corp., as managing underwriter (the "Underwriter") pursuant
to a Registration Statement (the "Registration Statement") on Form S-1 filed
with the Securities and Exchange Commission ("SEC"); and
WHEREAS, the Stockholders have agreed to deposit in escrow an
aggregate of 166,667 shares of Class B Common Stock (hereinafter referred to
collectively with the Class A Common Stock, as "Common Stock), upon the terms
and conditions set forth herein.
In consideration of the mutual covenants and promises herein
contained, the parties hereto agree as follows:
1. The Stockholders and the Company hereby appoint American Stock
Transfer & Trust Company as Escrow Agent and agree that the Stockholders will,
prior to the filing of the Registration Statement relating to the Public
Offering, deliver to the Escrow Agent to hold in accordance with the provisions
hereof, certificates representing an aggregate of 166,667 shares of Common Stock
owned of record by the Stockholders in the respective amounts set forth on
Exhibit A hereto (the "Escrow Shares"), together with stock powers executed in
blank. The Escrow Agent, by its execution and delivery of this Agreement, hereby
acknowledges receipt of the Escrow Shares and accepts its appointment as Escrow
Agent to hold the Escrow Shares in escrow, upon the terms, provisions and
conditions hereof.
2. This Agreement shall become effective upon the date on which the
Securities and Exchange Commission declares effective the Registration Statement
("Effective Date") and shall continue in effect until the earlier of (i) the
date specified in paragraph 4(e) hereof or (ii) the distribution by the Escrow
Agent of all of the Escrow Shares in accordance with the terms hereof (the
"Termination Date"). The period of time from the Effective Date until the
Termination Date is referred to herein as the "Escrow Period."
3. During the Escrow Period, the Escrow Agent shall receive all of
the money, securities, rights or property distributed in respect of the Escrow
Shares then held in escrow, including any such property distributed as dividends
or pursuant to any stock split,
<PAGE>
merger, recapitalization, dissolution, or total or partial liquidation of the
Company, such property to be held and distributed as herein provided and
hereinafter referred to collectively as the "Escrow Property."
4. (a) The Escrow Shares are subject to release to the Stockholders
only in the event the conditions set forth herein are met. The Escrow Agent,
upon notice to such effect from the Company as provided in paragraph 5 hereof,
shall deliver the Escrow Shares, together with stock powers executed in blank,
and the Escrow Property deposited in escrow with respect to such Escrow Shares,
to the respective Stockholders, if, and only if, one of the following conditions
is met:
(i) the Company's net income before provision for Federal, state
and local income taxes (the "Minimum Pretax Income") equals or
exceeds $8,700,000 for the fiscal year ending December
31,1998; or
(ii) the Minimum Pretax Income equals or exceeds $17,900,000 for
the fiscal year ending December 31,1999; or
(iii) The Closing Price (as defined herein) of the Company's Common
Stock shall average in excess of $16.25 per share for any 30
consecutive business days during the period commencing on the
Effective Date and ending 18 months from the Effective Date;
or
(iv) The Closing Price (as defined herein) of the Company's Common
Stock shall average in excess of $20.00 per share for any 30
consecutive business days during the period commencing on the
19 month after the Effective Date and ending 36 months from
the Effective Date.
(b) As used in this Section 4, the term "Closing Price" shall be subject
to adjustments in the event of any stock dividend, stock distribution, stock
split or other similar event and shall mean:
(i) If the principal market for the Common Stock is a national
securities exchange or the Nasdaq National Market, the closing
sales price of the Common Stock as reported by such exchange
or market, or on a consolidated tape reflecting transactions
on such exchange or market; or
(ii) if the principal market for the Common Stock is not a national
securities exchange or the Nasdaq National Market and the
Common Stock is quoted on the Nasdaq SmallCap Market, the
closing bid price of the Common Stock as quoted on the Nasdaq
SmallCap Market; or
(iii) if the principal market for the Common Stock is not a national
securities exchange or the Nasdaq National Market and the
Common Stock is not
-2-
<PAGE>
quoted on the Nasdaq SmallCap Market, the closing bid for the
Common Stock as reported by the National Quotation Bureau,
Inc. ("NQB") or at least two market makers in the Common Stock
if quotations are not available from NQB but are available
from market makers.
(c) The determination of Minimum Pretax Income shall be determined by the
Company's independent public accountants in accordance with U.S. generally
accepted accounting principles provided that such determination is calculated
exclusive of any extraordinary earnings or charges (including any charges
incurred by the Company in connection with the release from escrow of the Escrow
Shares and any Escrow Property in respect thereof pursuant to the provisions of
this paragraph 4).
(d) In the event of any issuance (such issuance being herein called a
"Change of Shares") of additional shares of Common Stock (or securities
convertible into or exchangeable for Common Stock without the payment of
additional consideration, referred to as "Convertible Securities") after the
Effective Date, then each of the Minimum Pretax Income amounts set forth in
subparagraph (a) above shall be increased to an amount (the "Adjusted Minimum
Pretax Income") calculated in accordance with the formula set forth in
subparagraph (ii) below.
(i) For purposes of the foregoing paragraph, a Change of Shares
shall exclude shares of Common Stock sold in the Public
Offering or Common Stock or Convertible Securities issued in
connection with a stock split or stock dividend or
distribution but shall include any shares of Common Stock or
Convertible Securities that are issued upon the exercise of
the Class A Warrants, the Class B Warrants or any other
options or warrants outstanding as of the Effective Date or
granted after the Effective Date by the Company (excluding
options granted under the Company's 1997 Stock Option Plan
which, in the aggregate, do not exceed 10% of the then
outstanding shares of Common Stock and Convertible Securities,
including Escrow Shares).
(ii) Each Adjusted Minimum Pretax Income amount shall be calculated
by multiplying the applicable Minimum Pretax Income amount
prior to the Change of Shares by a fraction, the numerator of
which shall be the weighted average number of shares of Common
Stock outstanding during the fiscal year for which the
determination is being made (including the Escrow Shares and
any shares of Common Stock issuable upon conversion of any
Convertible Securities, but excluding treasury stock), and the
denominator of which shall be the sum of (x) the number of
shares of Common Stock outstanding on the Effective Date
(including the Escrow Shares and any shares of Common Stock
issuable upon conversion of Convertible Securities outstanding
immediately prior to the Effective Date) plus (y) the number
of shares of Common Stock sold by the Company pursuant to the
Prospectus included in the Registration
-3-
<PAGE>
Statement, after adjustment for any stock dividends, stock
splits or similar events. The Adjusted Minimum Pretax Income
amounts shall be calculated successively whenever such a
Change of Shares occurs.
(e) After each adjustment of the Minimum Pretax Income amounts pursuant to
this Section 4, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Minimum Pretax Income amounts as so adjusted, and (ii) a statement showing in
detail the calculation of the adjustment in the Minimum Pretax Income amounts
and the facts upon which such adjustment is based. The Company will promptly
file such certificate with the Escrow Agent and furnish a copy thereof to be
sent no later than thirty (30) days after the adjustment by ordinary first class
mail to the Underwriter and to the Stockholders at their respective addresses
set forth on Exhibit A hereto. The Company will, upon the written request at any
time of the Underwriter, furnish to the Underwriter a report by Coopers &
Lybrand LLP, or other independent public accountants of recognized national
standing (which may be the regular auditors of the Company) selected by the
Company to verify such computation and setting forth such adjustment and showing
in detail the method of calculation and the facts upon which such adjustment is
based. The Company will also keep copies of all such certificates and reports at
its principal office.
(f) If the Escrow Agent has not received the notice provided for in
Paragraph 5 hereof and delivered all of the Escrow Shares and related Escrow
Property in accordance with the provisions of this Paragraph 4 on or prior to
March 31, 2001, the Escrow Agent shall deliver the certificates representing all
Escrow Shares, together with stock powers executed in blank, and any related
Escrow Property to the Company to be placed in the Company's treasury for
cancellation thereof as a contribution to capital. After such date, the
Stockholders shall have no further rights as a stockholder of the Company with
respect to any of the cancelled Escrow Shares.
5. Upon the occurrence or satisfaction of any of the events or
conditions specified in Paragraph 4 hereof, the Company shall promptly give
appropriate notice to the Escrow Agent, the Underwriter (and if the transfer
agent of the Company's Common Stock is different from the Escrow Agent, such
transfer agent) and present such documentation as is reasonably required by the
Escrow Agent to evidence the satisfaction of such conditions.
6. It is understood and agreed by the parties to this Agreement as
follows:
(a) The Escrow Agent is not and shall not be deemed to be a
trustee for any party for any purpose and is merely acting as a depository and
in a ministerial capacity hereunder with the limited duties herein prescribed.
(b) The Escrow Agent does not have and shall not be deemed to
have any responsibility in respect of any instruction, certificate or notice
delivered to it or of the Escrow Shares or any related Escrow Property other
than faithfully to carry out the obligations
-4-
<PAGE>
undertaken in this Agreement and to follow the directions in such instruction or
notice provided in accordance with the terms hereof.
(c) The Escrow Agent is not and shall not be deemed to be
liable for any action taken or omitted by it in good faith and may rely upon,
and act in accordance with, the advice of its counsel without liability on its
part for any action taken or omitted in accordance with such advice. In any
event, its liability hereunder shall be limited to liability for gross
negligence, willful misconduct or bad faith on its part.
(d) The Escrow Agent may conclusively rely upon and act in
accordance with any certificate, instruction, notice, letter, telegram,
cablegram or other written instrument believed by it to be genuine and to have
been signed by the proper party or parties.
(e) The Company agrees (i) to pay the Escrow Agent's
reasonable fees and to reimburse it for its reasonable expenses including
attorney's fees incurred in connection with duties hereunder and (ii) to save
harmless, indemnify and defend the Escrow Agent for, from and against any loss,
damage, liability, judgment, cost and expense whatsoever, including counsel
fees, suffered or incurred by it by reason of, or on account of, any
misrepresentation made to it or its status or activities as Escrow Agent under
this Agreement except for any loss, damage, liability, judgment, cost or expense
resulting from gross negligence, willful misconduct or bad faith on the part of
the Escrow Agent. The obligation of the Escrow Agent to deliver the Escrow
Shares to either the Stockholders or the Company shall be subject to the prior
satisfaction upon demand from the Escrow Agent, of the Company's obligations to
so save harmless, indemnify and defend the Escrow Agent and to reimburse the
Escrow Agent or otherwise pay its fees and expenses hereunder.
(f) The Escrow Agent shall not be required to defend any legal
proceeding which may be instituted against it in respect of the subject matter
of this Agreement unless requested to do so by the Stockholders and indemnified
to the Escrow Agent's satisfaction against the cost and expense of such defense
by the party requesting such defense. If any such legal proceeding is instituted
against it, the Escrow Agent agrees promptly to given notice of such proceeding
to the Stockholders and the Company. The Escrow Agent shall not be required to
institute legal proceedings of any kind.
(g) The Escrow Agent shall not, by act, delay, omission or
otherwise, be deemed to have waived any right or remedy it may have either under
this Agreement or generally, unless such waiver be in writing, and no waiver
shall be valid unless it is in writing, signed by the Escrow Agent, and only to
the extent expressly therein set forth. A waiver by the Escrow Agent under the
term of this Agreement shall not be construed as a bar to, or waiver of, the
same or any other such right or remedy which it would otherwise have on any
other occasion.
(h) The Escrow Agent may resign as such hereunder by giving 30
days written notice thereof to the Stockholders and the Company. Within 20 days
after receipt of such notice, the Stockholders and the Company shall furnish to
the Escrow Agent written instructions
-5-
<PAGE>
for the release of the Escrow Shares and any related Escrow Property (if such
shares and property, if any, have not yet been released pursuant to Paragraph 4
hereof) to a substitute Escrow Agent which (whether designated by written
instructions from the Stockholders and the Company jointly or in the absence
thereof by instructions from a court of competent jurisdiction to the Escrow
Agent) shall be a bank or trust company organized and doing business under the
laws of the United States or any state thereof. Such substitute Escrow Agent
shall thereafter hold any Escrow Shares and any related Escrow Property received
by it pursuant to the terms of this Agreement and otherwise act hereunder as if
it were the Escrow Agent originally named herein. The Escrow Agent's duties and
responsibilities hereunder shall terminate upon the release of all shares then
held in escrow according to such written instruction or upon such delivery as
herein provided. This Agreement shall not otherwise be assignable by the Escrow
Agent without the prior written consent of the Company.
7. The Stockholders shall have the sole power to vote the Escrow
Shares and any securities deposited in escrow under this Agreement while they
are being held pursuant to this Agreement.
8. (a) Each of the Stockholders agrees that during the term of this
Agreement he will not sell, transfer, hypothecate, negotiate, pledge, assign,
encumber or otherwise dispose of any or all of the Escrow Shares set forth
opposite his name on Exhibit A hereto, unless and until the Company shall have
given the notice as provided in Paragraph 5. This restriction shall not be
applicable to transfers upon death, by operation of law, to the Company, to
family members of the Stockholders or to any trust for the benefit of the
Stockholders, provided that such transferees agree to be bound by the provisions
of this Agreement.
(b) The Stockholders will take any action necessary or
appropriate, including the execution of any further documents or agreements, in
order to effectuate the transfer of the Escrow Shares to the Company if required
pursuant to the provisions of this Agreement.
9. Each of the certificates representing the Escrow Shares will bear
legends to the following effect, as well as any other legends required by
applicable law:
(a) "The sale, transfer, hypothecation, negotiation, pledge,
assignment, encumbrance or other disposition of the shares
evidenced by this certificate are restricted by and are
subject to all of the terms, conditions and provisions of a
certain Escrow Agreement entered into among [UNDERWRITER],
[Company] and its Stockholders, dated as of _________, 199_, a
copy of which may be obtained from the [Company]. No transfer,
sale or other disposition of these shares may be made unless
specific conditions of such agreement are satisfied.
-6-
<PAGE>
(b) "The shares evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended. No
transfer, sale or other disposition of these shares may be
made unless a registration statement with respect to these
shares has become effective under said act, or the Company is
furnished with an opinion of counsel satisfactory in form and
substance to it that such registration is not required."
Upon execution of this Agreement, the Company shall direct the
transfer agent for the Company to place stop transfer orders with respect to the
Escrow Shares and to maintain such orders in effect until the transfer agent and
the Underwriter shall have received written notice from the Company as provided
in Paragraph 5.
10. Each notice, instruction or other certificate required or
permitted by the terms hereof shall be in writing and shall be communicated by
personal delivery, fax or registered or certified mail, return receipt
requested, to the parties hereto at the addresses set forth below, or at such
other address as any of them may designate by notice to each of the others:
(i) If to the Company, to:
Tekgraf, Inc.
2979 Pacific Drive, Suite B
Norcross, Georgia 30071
(ii) If to the Stockholders to their respective addresses as set
forth on Exhibit A hereto.
(iii) If to the Escrow Agent, to:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(iv) If to the Underwriter, to:
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 10005
Att: Martin A. Bell, Esq.
Fax: 212-514-7837
All notices, instructions or certificates given hereunder to the Escrow Agent
shall be effective upon receipt by the Escrow Agent. All notices given hereunder
by the Escrow Agent shall be effective and deemed received upon personal
delivery or transmission by fax or, if mailed, five (5) calendar days after
mailing by the Escrow Agent.
-7-
<PAGE>
A copy of all communications sent to the Company, the Stockholders
or the Escrow Agent shall be sent by ordinary mail to Bachner, Tally, Polevoy &
Misher LLP, 380 Madison Avenue, New York, NY 10017, Attention: Fran Stoller,
Esq.
11. Except as set forth in paragraph 12 hereof, this Agreement may
not be modified, altered or amended in any material respect or cancelled or
terminated except with the prior consent of the holders of all of the
outstanding shares of Common Stock of the Company.
12. In the event that (i) the Registration Statement is not declared
effective by the SEC within one year from the date of the filing of the
Registration Statement with the SEC or (ii) the Public Offering is not
consummated within twenty-five (25) days of the Effective Date of the
Registration Statement, this Agreement shall terminate and be of no further
force and effect and the Escrow Agent, upon written notice from both the Company
and the Underwriter in accordance with paragraph 10 hereof of such termination,
will return the Escrow Shares and any Escrow Property in respect thereof to the
Stockholders.
13. This Agreement shall be governed by and construed in accordance
with the laws of New York and shall be binding upon and inure to the benefit of
all parties hereto and their respective successors in interest and assigns.
14. This Agreement may be executed in several counterparts, which
taken together shall constitute a single instrument.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers on the day and year first above
written.
TEKGRAF, INC.
By:
-------------------------------
Phillip Aginsky, Chairman
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By:
-------------------------------
STOCKHOLDERS:
ALONGAL EXTRUSIONS, INC.,
as Attorney-In-Fact for Anita, Ltd.
By:
------------------------------- -----------------------------------
Phillip C. Aginsky, President Martyn L. Cooper
- ----------------------------------- -----------------------------------
Dan I. Bailey A. Lowell Nerenberg
- ----------------------------------- -----------------------------------
Peter Goletz Beverly Nerenberg
- ----------------------------------- -----------------------------------
Michelle L. Lightman Rose Sabato
- ----------------------------------- -----------------------------------
William J. Parillo David B. Thompson
- ----------------------------------- -----------------------------------
J. Thomas Woolsey Eric H. Nerenberg
- ----------------------------------- -----------------------------------
William M. Rychel Michael G. Watkins
- ----------------------------------- -----------------------------------
Thomas A. Gust Edward H.L. Mason
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<PAGE>
- -----------------------------------
Margaret Mason
- -----------------------------------
E. Jeffery Mason
- -----------------------------------
Diana Fee Mason
- -----------------------------------
Christopher B. Mason
- -----------------------------------
Jerri O. Mason
- -----------------------------------
Patrick J. McLaughlin
- -----------------------------------
Jennifer Mason-McLaughlin
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<PAGE>
EXHIBIT A
STOCKHOLDERS' LIST
Name and Address
of Stockholder Number of Escrow Shares
-------------- -----------------------
Anita, Ltd. 29,100
c/o Tekgraf, Inc.
Attention: Phillip C. Aginsky, Chairman
2979 Pacific Drive
Suite B
Norcross, GA 30071
Dan I. Bailey 12,850
5036 Sherifield Drive
Marietta, Georgia 30068
Peter Goletz 12,850
225 Perrin Drive
Lawrenceville, Georgia 30249
Michelle L. Lightman 1,134
2042 Montgomery Trail
Duluth, Georgia 30245
William J. Parillo 1,133
1240 Grayland Hills Trail
Lawrenceville, Georgia 30245
J. Thomas Woolsey 26,434
215 Birchmead Drive
Roswell, Georgia 30075
Martyn L. Cooper 13,900
6227 Haskell
Houston, Texas 77007
William M. Rychel 20,450
2665 Oak Street
Highland Park, Illinois 60035
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<PAGE>
Thomas A. Gust 21,300
12 Windstone Way
North Barrington, Illinois 60010
A. Lowell Nerenberg 2,450
17513 Sir Galahad Way
Ashton, MD 20861
Beverly Nerenberg 8,217
17513 Sir Galahad Way
Ashton, MD 20861
Rosa Sabato 850
7 Fernwood Court
East Brunswick, NJ 08816
David B. Thompson 333
781 Quince Orchard Boulevard, Apt. 34
Gaithersburg, MD 20878
Eric H. Nerenberg 333
2217 Carter Mill Way
Brookeville, MD 20833
Michael G. Watkins 333
18606 Mustard Seed Court
Germantown, MD 20874
Edward H. L. Mason and Margaret M. Mason or Any 5,100
Successor Trustee(s) Under Trust Agreement Dated 12/15/77,
as Amended
90 St. Andrews Lane
Alamo, California 94507
E. Jeffrey Mason and Diana Mason, as Community Property 2,917
353 Canterbury Court
Alamo, CA 94507
Christopher B. Mason and Jerri Mason, as Trustees of the C&J 3,350
Mason Trust Dated February 29, 1996
436 Red Wing Drive
Danville, CA 94526
Patrick J. McLaughlin and Jennifer Mason-McLaughlin, as 3,633
Community Property
437 Coventing Place
Danville, CA 94506
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EMPLOYMENT AGREEMENT
AGREEMENT, dated as of November 1, 1997, between Tekgraf, Inc., a Delaware
corporation (the "Company"), and Peter C. Armstrong (the "Employee").
W I T N E S S E T H:
WHEREAS, Company desires to employ Employee and Employee desires to be
employed by Company on the terms and conditions hereinafter set forth;
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Employment. The Company agrees to employ Employee for the position of
Chief Financial Officer. Employee shall perform such duties as the Board of
Directors of the Company from time to time may assign to him or her hereunder.
2. Duties and Responsibilities. Employee agrees to devote his or her full
time and attention and his or her best efforts to performing his or her duties
hereunder. While employed by the Company, Employee will not, without the
Company's prior written consent, engage in any other business activity, other
than investment of Employee's personal funds on a passive basis and without
lending assistance directly or indirectly to any competitor. In no event shall
Employee pursue outside business or personal interests that interfere with his
or her full-time responsibilities or entail any use of the Company's resources.
The Employee acknowledges that while his headquarters will be at the Company's
facility located in Norcross, Georgia, Employee's duties will involve a
substantial amount of travel.
3. Compensation.
(a) The Company shall pay to Employee as compensation for all services
rendered hereunder a base salary in the amount of One Hundred Twenty Thousand
Dollars ($120,000.00) per annum, payable according to the Company's normal
procedures as adopted from time to time; and
(b) Commencing with the year ending December 31, 1999, Employee shall
be entitled, along with certain other officers of the Company, to participate in
a Company bonus/commission plan (the "Bonus Plan"), based on Employee's
performance. In the event the Bonus Plan is not in effect by July 1, 1998, the
Company shall develop a substitute plan for Employee which shall remain in
effect until such time as the Bonus Plan is in effect. The payment of bonuses to
Employee under the Bonus Plan shall be at the sole discretion of the Board of
Directors. The Company reserves the right to modify or terminate the Bonus Plan
or change the terms of eligibility in its discretion at any time, provided,
however, that any such
<PAGE>
modification or termination shall be non-discriminatory as to employees at the
same or similar grade or level of employment with the Company; and
(c) On the effective date of the Company's proposed initial public
offering, if any (the "Effective Date"), Employee shall be granted incentive
stock options to purchase 15,000 shares of the Company's Class A Common Stock
("Common Stock") at an exercise price of $6.00 per share. Employee shall also be
granted incentive stock options to purchase an additional 15,000 shares of
Common Stock on each of the first and second anniversaries of the Effective Date
at an exercise price equal to the fair market value of the Common Stock on the
date of grant. All of the foregoing options shall vest in full one year from the
date of grant..
4. Reimbursable Expenses and Fringe Benefits. In addition to the
compensation provided under Section 3 above:
(a) Employee shall be reimbursed for all pre-approved out-of-pocket
expenses incurred by him while conducting Company business in accordance with
the policies adopted by the Company from time to time for such purpose; and
(b) Employee shall be entitled to participate in other benefit
programs, such as group insurance policies, and medical and health benefits
plans, to the extent maintained by the Company and offered to other executive
employees under the programs adopted by the Company from time to time for such
purpose. Employee shall be entitled to initial paid vacation periods aggregating
two (2) weeks per year. The Company reserves the right to modify or terminate
any such benefit program or change the terms of eligibility at any time in its
discretion to the fullest extent permitted by applicable law.
5. Term of Employment.
(a) The term of Employee's employment shall commence on the effective
date of this Agreement and continue for an initial term of two (2) years and
sixty (60) days, unless sooner terminated as provided herein. Upon expiration of
the initial term, and annually thereafter, the term of Employee's employment
shall automatically renew on a year-to-year basis, unless and until terminated
as provided herein. In the event of any renewal of the term of such employment,
automatic or otherwise, the compensation of Employee shall be determined by the
Board of Directors of the Company effective at the time of renewal; provided
however, that if the Employee is not satisfied with the compensation determined
by the Board of Directors, he may, by written notice to the Board of Directors
within ten (10) days after receiving written notice of such compensation,
terminate this Agreement without liability except under the restrictive
covenants contained herein.
(b) Either the Company or Employee may terminate this Agreement at any
time within the first sixty (60) days of its term for any reason without
penalty.
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<PAGE>
(c) Employee's employment hereunder may be terminated hereunder at any
time following the occurrence of any of the following events:
(i) the death of Employee;
(ii) the total disability of Employee, which shall be considered
to occur if Employee is unable to substantially perform his or her normal
required services hereunder for a period of 90 days within any 120-day period by
reason of Employee's mental or physical disability as so determined by an
independent licensed physician reasonably satisfactory to the Company;
(iii) a finding that Employee has committed negligence or
misconduct that materially departs from the standard of care applicable to
Employee or the duties assigned to Employee hereunder; that Employee has failed
or refused to comply with his or her duties; that Employee has been chronically
inattentive to his or her duties or habitually absent from his or her work; or
that Employee has committed any breach of this Agreement; provided that the
Company shall give Employee notice of its finding prior to terminating
Employee's employment on such grounds and, if the matter is such as to permit
cure in the reasonable judgment of the Company, Employee shall have a reasonable
period of time, not to exceed thirty (30) days, to avert termination by curing
the grounds for such termination;
(iv) a finding that Employee has committed any act that casts the
Company in public disrepute; that Employee has been advised that he or she is a
target or subject of a grand jury investigation or similar proceeding or
investigation (which Employee shall promptly communicate to the Company); that
Employee has been indicted for, pleads guilty or nolo contendere to, or is
convicted of any felony; or that Employee has otherwise committed any act or
offense involving moral turpitude;
(v) the decision of either the Company or Employee to terminate
Employee's employment upon the expiration of the current term of Employee's
employment; provided that the party electing termination shall give the other
party notice of such decision at least thirty (30) days before such expiration
is to occur;
Any finding, determination or decision on the part of the Company referred to in
this Section 5(c) shall be made by the Board of Directors of the Company.
(d) In the event of any termination of Employee's employment, Employee
shall immediately tender his or her resignation from all positions as officer
and director of the Company and each subsidiary and affiliate (if any) which
Employee serves in such capacity. All parties may rely on this provision as
evidence of such resignation at such time.
(e) In the event of any termination of Employee's employment by the
Company prior to expiration of the current term, other than pursuant to Section
5(b) or (c),
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<PAGE>
Employee shall receive the balance of his salary pursuant to Section 3(a) for
the remainder of the current term.
(f) Notwithstanding any termination of Employee's employment, Sections
6 through 12 hereof inclusive shall continue in accordance with their terms.
6. Ownership of Work Product.
(a) Employee shall diligently disclose to the Company as soon as it is
created or conceived by Employee, and the Company shall own, all Work Product
(as defined below). To the extent permitted by law, all Work Product shall be
considered work made for hire by Employee and owned by the Company.
(b) If any of the Work Product may not, by operation of law, be
considered work made for hire by Employee for the Company (or if ownership of
all right, title and interest of the intellectual property rights therein shall
not otherwise vest exclusively in the Company), Employee agrees to assign, and
upon creation thereof automatically assigns, without further consideration, the
ownership of all Trade Secrets (as defined below), U.S. and international
copyrights, patentable inventions, and other intellectual property rights
therein to the Company, its successors and assigns.
(c) The Company, its successors and assigns, shall have the right to
obtain and hold in its or their own name copyrights, registrations, and any
other protection available in the foregoing.
(d) Employee agrees to perform upon the reasonable request of the
Company, during or after Employee's employment, such further acts as may be
necessary or desirable to transfer, perfect and defend the Company's ownership
of the Work Product. When requested, Employee will
(i) Execute, acknowledge and deliver any requested affidavits and
documents of assignment and conveyance;
(ii) Obtain and aid in the enforcement of copyrights (and, if
applicable, patents) with respect to the Work Product in any countries;
(iii) Provide testimony in connection with any proceeding
affecting the right, title or interest of the Company in any Work Product; and
(iv) Perform any other acts deemed necessary or desirable to
carry out the purposes of this Agreement.
The Company shall reimburse all reasonable out-of-pocket expenses incurred by
Employee at the Company's request in connection with the foregoing, including
(unless Employee is
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<PAGE>
otherwise being compensated at the time) a reasonable per diem or hourly fee for
services rendered following termination of Employee's employment.
(e) For purposes hereof, "Work Product" shall mean all intellectual
property rights, including all Trade Secrets, U.S. and international copyrights,
patentable inventions, discoveries and improvements, and other intellectual
property rights, in any programming, documentation, technology or other work
product that relates to the business and interests of the Company and that
Employee conceives, develops, or delivers to the Company at any time during the
term of Employee's employment. "Work Product" shall also include all
intellectual property rights in any programming, documentation, technology or
other work product that is now contained in any of the products or systems
(including development and support systems) of the Company to the extent
Employee conceived, developed or delivered such Work Product to the Company
prior to the date of this Agreement while Employee was engaged as an independent
contractor or employee of the Company. Employee hereby irrevocably relinquishes
for the benefit of the Company and its assigns any moral rights in the Work
Product recognized by applicable law.
7. Confidentiality. Employee shall maintain in strict confidence and shall
not use or disclose (except as required to perform Employee's duties under this
Agreement) all Trade Secrets of Company, its affiliates and customers. This
obligation shall apply during and after the term of this Agreement for so long
as the pertinent information remains a Trade Secret, and shall apply whether or
not the Trade Secret is in written or tangible form. As provided by Georgia
statutes, "Trade Secret" shall mean any information (including, but not limited
to, technical or non-technical data, a formula, a pattern, a compilation, a
program, a device, a method, a technique, a drawing, a process, financial data,
financial plans, product plans, or a list of actual or potential customers)
that: (i) derives economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other persons
who can obtain economic value from its disclosure or use; and (ii) is the
subject of efforts that are reasonable under the circumstances to maintain its
secrecy. In the case of Company's business, Company's Trade Secrets include
(without limitation) information regarding names and addresses of any customers,
sales personnel, account invoices, training and educational manuals,
administrative manuals, prospective customer leads, in whatever form, whether or
not computer or electronically accessible "on-line."
8. Return of Materials. Upon the request of the Company and, in any event,
upon the termination of Employee's employment,
(a) Employee shall take such steps as Company may reasonably request
in order to transfer, disclose, and give Company the full benefit of any Work
Product remaining in Employee's possession; and
(b) Employee shall deliver to Company all memoranda, notes, records,
drawings, daily or monthly appointment calendars, manuals, disks and other
documents and media, regardless of form, that contain Work Product or Trade
Secrets or otherwise relate to the
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<PAGE>
Company's business. Employee shall not retain any such materials (whether in
original or duplicated form) following such delivery.
9. No Solicitation of Customers.
(a) For a period of two (2) years following termination of Employee's
employment, Employee shall not, either directly or indirectly, alone or in
concert with others, solicit or attempt to solicit Customers in the Restricted
Territory to acquire or obtain any product or service competitive with any
Current Product of the Company from anyone other than Company. It is intended
that this provision be limited to: (a) solicitation or attempts to solicit; (b)
Customers who meet the narrow criteria set forth in this Section and who are
located in the Restricted Territory (as defined with respect to each such
Customer); and (c) products competitive with Current Products of the Company.
(b) For purposes of this Section, a "Customer" refers to any person or
group of persons with whom Employee had direct material contact while selling
Current Products of the Company during the period of two (2) years preceding
termination of Employee's employment; "Current Products" refers to the products
and services that Employee or any personnel under his or her supervision were
authorized to market or sell on behalf of Company during the period of two (2)
years preceding termination of Employee's employment; and "Restricted Territory"
refers to the continental United States of America, it being acknowledged that
the scope of Company's business and Employee's managerial responsibilities are
of that scope.
10. No Recruitment of Personnel. For a period of three (3) years following
termination of Employee's employment, Employee shall not, either directly or
indirectly, alone or in concert with others, induce or attempt to induce any
employee, agent, independent contractor or other personnel of the Company to
terminate his, her or their relationship with the Company, or recruit or attempt
to recruit such persons to accept employment or a contract with another business
that would have the effect of terminating his, her or its relationship with the
Company.
11. Names and Marks. Following the termination of Employee's employment,
Employee shall not, for the benefit of his or her own or any other person or
entity's business, use or display the names, marks, logos or slogans of the
Company or its affiliates, or any name, mark, logo or slogan confusingly similar
thereto, without the prior written consent of the Company.
12. Enforcement. In the event of any breach or threatened breach by
Employee of any covenant contained in the above Sections 6 through 11, the
resulting injuries to the Company would be difficult or impossible to estimate
accurately, even though irreparable injury or damages would certainly result.
Accordingly, an award of legal damages, if without other relief, would be
inadequate to protect the Company. Employee therefore agrees that, in the event
of any such breach, the Company shall be entitled to apply to a court of
competent jurisdiction to
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<PAGE>
obtain an injunction to restrain the breach or anticipated breach of any such
covenant, and to obtain any other available legal, equitable, statutory, or
contractual relief. Should the Company have cause to seek such relief, no bond
shall be required, and Employee shall pay all attorney's fees and court costs
which the Company may incur.
13. Representations. Employee represents and warrants to the Company that
he is not a party to any other agreement or arrangement containing
non-competition, non-solicitation, non-recruitment or similar obligations on the
part of Employee.
14. Miscellaneous.
(a) This Agreement shall inure to the benefit of, and be binding upon,
the Company and its subsidiaries and affiliates, together with their successors
and assigns, and Employee, together with his or her executors, administrators,
personal representatives, heirs and legatees.
(b) Any notice or request hereunder shall be in writing and shall be
given by hand delivery, mail, telecopy or similar transmission addressed as set
forth beside the name of each party at the end of this Agreement or to any such
other address as either party may specify to the other by written notice. Such
notice or request shall be deemed to have been given and received only on and
after receipt by the designated individual (specifically the President, in the
case of the Company), effective as of the date of such authorized recipient's
actual receipt of such notice or request if received during normal business
hours on a normal business day or as of the first business day after receipt if
given after normal business hours or on a day other than a normal business day.
(c) THIS AGREEMENT SHALL BE GOVERNED BY AND ENFORCED UNDER THE LAWS OF
THE STATE OF GEORGIA AS THEY APPLY TO A CONTRACT EXECUTED, DELIVERED AND
PERFORMED ENTIRELY IN SUCH STATE.
(d) This Agreement merges and supersedes all prior and contemporaneous
agreements, undertakings, covenants or conditions, whether oral or written,
express or implied, to the extent they contradict or conflict with the
provisions hereof.
(e) This Agreement may be executed in two or more counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
(f) This Agreement may be modified only by a written instrument signed
by each of the parties hereto. No waiver shall be effective unless made in
writing and signed by the party against whom enforcement is sought.
(g) Should any aspect or provision of this Agreement prove invalid or
unenforceable for any reason, the remainder of this Agreement shall nonetheless
be fully
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<PAGE>
enforced to the fullest extent permitted by law, regardless of whether the
invalid or unenforceable aspect or provision is facially severable from the
remainder of this Agreement; provided that if a court of competent jurisdiction
holds any covenant herein invalid by reason of its duration or its geographic or
business scope, then the court shall have the power to rewrite or reform such
covenant so as not to be invalid under applicable law.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the day and year first above written.
"THE COMPANY" "EMPLOYEE"
TEKGRAF, INC.
- ------------------------------ ------------------------------
Signature Signature
- ------------------------------ ------------------------------
Title Peter C. Armstrong
Address: 2979 Pacific Drive, Suite B Address: 643 Bostic Hill Court
Norcross, Georgia 30071 Marietta, GA 30067
Effective Date:_______________
-8-
Computation of Earnings Per Share
Exhibit 11
For the years ended December 31 Six months
--------------------------------- ended
1994 1995 1996 June 30, 1997
---- ---- ---- --------------
Primary and Fully-diluted:
Net income (loss) ($15,230) ($3,721) $43,073 $155,342
Weighted average shares
outstanding(1) 1,141,333 1,141,333 1,141,333 1,244,011
Earnings (loss) per
share(2) ($0.01) -- $0.04 $0.12
========= ========= ========= ==========
(1) Where appropriate, reflects the acquisitions, the Recapitalization
and the reverse stock split
(2) Primary and fully-diluted earnings(loss) per share are computed by
dividing net income(loss) by the weighted average number of shares
outstanding
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No.333-33449) of our report dated June 2, 1997 except for Note 9 as to which the
date is June 17, 1997, on our audits of the consolidated financial statements of
Tekgraf, Inc. (formerly Crescent Computers, Inc.); our report dated June 2,
1997, on our audits of the financial statements of Microsouth, Inc.; our report
dated May 21, 1997, except for Note 4 as to which the date is June 2, 1997 on
our audits of the financial statements of IG Distribution, Inc.; our report
dated June 2, 1997, on our audits of the financial statements of Intelligent
Products Marketing, Inc.; our report June 2, 1997, on our audits of the
financial statements of tekgraf, inc.; our report dated May 12, 1997, except for
Note 7 as to which the date is June 30, 1997 on our audits of the financial
statements of G&R Marketing, Inc.; and our report dated May 12, 1997, except for
Note 9 as to which the date is October 9, 1997 on our audits of the financial
statements of Computer Graphics Distributing Company. We also consent to the
references to our firm under the captions "Experts" and "Selected Financial and
Operating Data."
Coopers & Lybrand L.L.P.
Atlanta, Georgia
October 20, 1997
Consent of Nominee for Director
I hereby consent to the use of my name as nominee for the position of
Director in the Registration Statement on Form S-1 (File No. 333-33449) and
related Prospectus of Tekgraf, Inc.
Date: October 7, 1997
/s/ Frank X. Dalton
----------------------------
Frank X. Dalton
Consent of Chief Financial Officer
I hereby consent to the use of my name for the position of Chief Financial
Officer in the Registration Statement on Form S-1 (File No. 333-33449) and
related Prospectus of Tekgraf, Inc.
Date: October 14, 1997
/s/ Peter C. Armstrong
----------------------------
Peter C. Armstrong
