<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the period from _____ to _________.
Commission File No. 0-23221
TEKGRAF, INC.
------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Georgia 58-2033795
- ----------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6000 Lake Forrest Drive, Suite 110 30328
Atlanta, Georgia ------------
- ----------------------------------- (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (404) 252-0201
----------------
Former Address: N/A
(Former name, former address and former fiscal year, if changed since last
report):
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes: X No:
---- ----
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practical date:
<TABLE>
<CAPTION>
Class Outstanding at August 14, 1998
------- --------------------------------------
<S> <C>
Class A Common Stock, $.001 par value 2,994,998 shares
Class B Common Stock, $.001 par value 3,333,333 shares
</TABLE>
<PAGE> 2
TEKGRAF, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
Table of Contents
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998 1
Consolidated Statements of Income for the three and six months ended June 30, 1997 and
June 30, 1998 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and June 30, 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Securities Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 14
Index of Exhibits
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Tekgraf, Inc. Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,600,339 $ 1,305,227
Accounts receivable, less allowance for
doubtful accounts of $205,000 and $350,000 at
December 31, 1997 and June 30, 1998, respectively 9,217,843 16,153,589
Inventories, net 4,700,615 8,977,877
Prepaid expenses and other assets 368,770 619,528
Prepaid income taxes 26,435
Deferred income taxes 62,832 179,245
------------ ------------
Total current assets 22,950,399 27,261,901
------------ ------------
Property and equipment 531,922 924,150
Less accumulated depreciation (187,219) (289,342)
------------ ------------
344,703 634,808
Goodwill, net 6,555,773 9,095,603
Other assets 52,633 96,234
Deferred income taxes 48,840 48,840
------------ ------------
Total assets $ 29,952,348 $ 37,137,386
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
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Tekgraf, Inc. Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt $ 23,474 $ 436,677
Due to acquisition stockholders 180,289 414,500
Note payable, stockholders 90,000
Due to stockholders and related entities 246,956
Accounts payable 8,345,388 12,861,402
Accrued expenses 928,121 1,347,471
Income taxes payable 70,100
------------ ------------
Total current liabilities 9,884,328 15,060,050
Debt, less current maturities 12,788 12,788
------------ ------------
9,897,116 15,072,838
------------ ------------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock, $.001 par value,
31,666,667 shares authorized; 2,100,000 and 2,994,998
shares issued and outstanding at
December 31, 1997 and June 30, 1998, respectively 2,100 2,995
Class B Common Stock, $.001 par value, 3,333,333
shares authorized; 3,333,333 shares issued and
outstanding at December 31, 1997 and June 30, 1998 3,333 3,333
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; no shares issued at December 31, 1997
and June 30, 1998
Due from acquisition stockholders (149,863) (424,228)
Additional paid-in capital 20,584,028 22,562,927
Retained earnings (deficit) (384,366) (80,479)
------------ ------------
Total stockholders' equity 20,055,232 22,064,548
------------ ------------
Total liabilities and stockholders' equity $ 29,952,348 $ 37,137,386
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 5
Tekgraf, Inc. Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ---------------------------
1997 1998 1997 1998
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 9,321,271 $27,505,230 $12,451,881 $44,376,511
Cost of goods sold 8,086,841 23,256,410 10,606,313 37,297,566
----------- ----------- ----------- -----------
Gross profit 1,234,430 4,248,820 1,845,568 7,078,945
Operating expenses:
Selling, general and administrative 1,052,013 3,695,113 1,415,233 6,222,977
Depreciation 24,082 54,052 34,449 99,728
Amortization 33,395 162,396 33,395 282,999
----------- ----------- ----------- -----------
Income from operations 124,940 337,259 362,491 473,241
Other income/expense, net 14,440 154,880 20,847 272,886
Interest expense 83,270 6,548 108,270 10,356
----------- ----------- ----------- -----------
Income before provision for income
taxes and minority interest 56,110 485,591 275,068 735,771
Provision for income taxes 37,184 254,000 122,584 400,000
----------- ----------- ----------- -----------
Income before minority interest 18,926 231,591 152,484 335,771
Minority interest (9,319) 21,929 14,629 31,884
----------- ----------- ----------- -----------
Net income $ 28,245 $ 209,662 $ 137,855 $ 303,887
=========== =========== =========== ===========
Basic and diluted weighted
average shares outstanding 1,747,888 5,955,016 1,417,910 5,612,743
=========== =========== =========== ===========
Basic and diluted net income per share $ .02 $ .04 $ .10 $ .05
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 6
Tekgraf, Inc. Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1997 1998
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 137,855 $ 303,887
Adjustments to reconcile net income to
net cash used in operating activities:
Provision for accounts receivable 11,000 175,000
Provision/writedown of inventory 147,300
Depreciation 34,449 99,728
Amortization 33,395 282,999
Deferred taxes (4,200) (116,413)
Minority interest 14,629 31,884
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (1,995,720) (2,523,107)
Inventories (716,012) (1,880,690)
Prepaid expenses and other assets (30,517) (96,479)
Accounts payable and accrued expenses 2,155,172 (85,005)
Income taxes 87,103 (96,535)
------------ ------------
Total adjustments (410,701) (4,061,318)
------------ ------------
Net cash used in operating activities (272,846) (3,757,431)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (49,950) (226,598)
Cash paid for acquisitions, including overdrafts
acquired from acquisitions (1,798,166)
Cash acquired from acquisitions, net of acquisition
costs of $88,677 349,482
------------ ------------
Net cash provided by (used in) investing activities 299,532 (2,024,764)
------------ ------------
Cash flows from financing activities:
Repayment of advances to
stockholders and related entities (15,731) (246,956)
Payments from stockholders for deficient
net asset values 109,367
Repayment of acquired companies' loans (1,558,122)
Proceeds from acquired companies' line of credit facilities 327,714 233,362
Payment of stock issuance costs (50,568)
------------ ------------
Net cash provided by (used in) financing activities 311,983 (1,512,917)
------------ ------------
Increase (decrease) in cash and cash equivalents 338,669 (7,295,112)
Cash and cash equivalents, beginning of period 633,027 8,600,339
------------ ------------
Cash and cash equivalents, end of period $ 971,696 $ 1,305,227
============ ============
Supplemental non-cash investing and financing activities:
Fair value of stock issued $ 2,030,362
Cash paid in connection with acquisitions 1,415,000
Other acquisition costs 212,000
Fair value of liabilities assumed 6,923,314
Fair value of assets acquired (7,758,314)
------------
Goodwill $ 2,822,362
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 7
Tekgraf, Inc. Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accounting and reporting policies of Tekgraf, Inc. ("Tekgraf" or the
"Company") conform to generally accepted accounting principles. The interim
financial information included herein is unaudited but reflects all adjustments
which, in the opinion of management, are necessary for the fair presentation of
the consolidated financial position, results of operations and cash flows for
the interim periods presented. All adjustments reflected in the interim
financial statements are of a normal recurring nature. Such interim financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. The year-end balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. The results of operations for interim periods
are not necessarily indicative of the results to be expected for the full year,
or for any subsequent period.
2. Net Income Per Common Share
Basic and diluted net income per common share are computed by dividing net
income by the weighted average number of common shares and common share
equivalents outstanding during the period. There were no common share
equivalents during either of the periods presented. The basic and diluted
weighted average shares outstanding exclude the escrow shares and were
determined as follows for the three and six months ended June 30, 1998:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, 1998 Ended June 30, 1998
------------------- -------------------
<S> <C> <C>
Weighted average common shares outstanding 6,121,683 5,779,410
Weighted average escrow shares (166,667) (166,667)
--------- ---------
Basic and diluted weighted average shares 5,955,016 5,612,743
========= =========
</TABLE>
3. Acquisitions
On May 8, 1998, the Company acquired New England Computer Graphics, Inc., a
Massachusetts corporation ("NECG"), by merging NECG into a wholly-owned
subsidiary of the Company. The Company paid $415,000 in cash and issued an
aggregate of 264,998 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of NECG as
consideration in this acquisition.
On May 1, 1998, the Company acquired Martec, Inc., a California corporation
("Martec"), by merging Martec into a wholly-owned subsidiary of the Company. The
Company paid $500,000 in cash and issued an aggregate of 300,000 unregistered
shares of the Company's Class A Common Stock to the holder of all of the
outstanding shares of stock of Martec as consideration in this acquisition.
On April 1, 1998, the Company acquired Computer Graphics Technology, Inc., a
South Carolina corporation ("CGT"), by merging CGT into a wholly-owned
subsidiary of the Company. The Company paid $500,000 in cash and issued an
aggregate of 330,000 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of CGT as consideration
in this acquisition.
The purchase prices for the acquisitions (collectively, "the 1998 Acquisitions")
described above are subject to adjustment based on certain net asset value and
profitability guarantees. In order to secure these guarantees, a total of
$325,000 of the cash consideration and 192,251 of the unregistered shares of the
Class A Common Stock issued in the 1998 Acquisitions were placed in escrow. In
addition to these escrowed amounts, a total of 192,250 shares of the Class A
Common Stock issued in the 1998 Acquisitions was placed in escrow to secure the
various representations, warranties and other provisions of the respective
agreements. The acquisitions were recorded under the purchase method of
accounting and accordingly, the results of operations of the acquired entities
have been included in the Company's statements of income from the respective
acquisition dates. The acquired entities are regional distributors and marketers
of computer graphics hardware and software.
On June 2, 1997, the Company completed the acquisition of 100% of the
outstanding common stock of each of G&R Marketing, Inc., Microsouth, Inc.,
tekgraf, inc., Computer Graphics Distributing Company, Intelligent Products
Marketing, Inc., and IG Distributing, Inc. (collectively, the "1997
Acquisitions") in exchange for the issuance of 2,192,000 shares of Class B
Common Stock of the Company (giving effect to the Company's 400-for-one share
exchange and .83333325-for-one reverse stock split). The companies acquired
in the 1997
5
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Acquisitions are regional distributors and marketers of computer graphics
hardware and software. The 1997 Acquisitions were recorded under the purchase
method of accounting and accordingly, the results of operations have been
included in the Company's statements of income from the acquisition date.
The following unaudited pro forma summary combines the consolidated results
of the Company and the 1997 Acquisitions and the 1998 Acquisitions as if the
acquisitions had occurred as of January 1, 1997. The pro forma summary also
gives effect, for the 1997 Acquisitions, but not for the 1998 Acquisitions, to
certain adjustments, including elimination of revenue and expenses related to
affiliated entities of the 1997 Acquisitions which were not acquired by the
Company, adjustments in compensation levels that have been contractually agreed
to, elimination of amortization related to negative goodwill, elimination of 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 1997 acquisition companies, and
amortization of intangible assets. In addition, the earnings per share amounts
give effect to the combination and subsequent recapitalization that the Company
completed during November 1997 and the weighted average shares outstanding
exclude 166,667 weighted average escrow shares for the three and six months
ended June 30, 1997 and 1998, respectively. The pro forma summary does not
purport to represent what the Company's results of operations would have
actually been if the 1997 and 1998 Acquisitions had occurred as of January 1,
1997, or to project the Company's results of operations for any future period.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- -----------------------------
1997 1998 1997 1998
Unaudited Unaudited
--------- ---------
Statement of Income Data: (Pro forma (Pro forma (Pro forma (Pro forma
Combined) Combined) Combined) Combined)
<S> <C> <C> <C> <C>
Net sales $21,921,608 $29,076,289 $45,293,844 $ 54,140,381
Gross profit 4,227,304 4,512,117 7,998,873 8,533,962
Income from operations 932,468 369,341 1,824,670 300,359
Income before taxes 835,972 526,579 1,735,396 624,651
Net income 527,873 250,650 1,047,022 192,767
Basic and diluted income per share $ 0.09 $ 0.04 $ 0.17 $ 0.03
Weighted average shares outstanding 6,161,664 6,161,664 6,161,664 6,161,664
</TABLE>
4. Income Taxes
The Company's effective tax rate was 66.26% and 52.30% for the three months
ended June 30, 1997 and 1998, respectively. The difference between the Company's
effective and statutory tax rates was primarily due to the amortization of
non-deductible goodwill and to state taxes net of the federal benefit.
5. Subsequent Events
Loan and Security Agreement
In July 1998, the Company entered into a Loan and Security Agreement (the
"Agreement") with a bank that provides for a maximum outstanding principal
amount of $7.5 million. Outstanding advances bear interest at the LIBOR Index
Rate plus a rate, varying from 2.00% to 2.75%, to be determined based on a scale
of the Company's debt to net worth ratio ranging from 1:1 to 2:1. Pursuant to
the terms of the Agreement, accounts receivable, inventory, including proceeds
thereof, and equipment have been pledged as collateral by the Company.
Reincorporation of Company in the State of Georgia
Effective July 31, 1998, the Company reincorporated in the State of Georgia by
merging into Tekgraf Reincorporation Subsidiary, Inc., a wholly-owned subsidiary
of the Company which had been incorporated in the State of Georgia (the
"Subsidiary"), pursuant to an Agreement and Plan of Merger between the Company
and the Subsidiary and in accordance with the applicable provisions of the
Delaware General Corporation Law and the Georgia Business Corporation Code (the
"Merger"). As the surviving corporation in the Merger, the Subsidiary will
succeed to all the business, properties, assets and liabilities of the Company.
6
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Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This report contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements appear in a number of places
in this report and include all statements that are not historical fact and that
relate to the intent, belief or current expectations of the Company, its
directors or its officers with respect to, among other things: (i) the Company's
financing plans, including the Company's ability to obtain financing in the
future; (ii) trends affecting the Company's financial condition or results of
operations; (iii) the Company's growth strategy and operating strategy; (iv) the
Company's anticipated capital needs and capital expenditures; (v) projected
outcomes and any effects on the Company of any litigation or investigations
concerning the Company; and (vi) the potential impact of changes to, additions
of or losses of distribution agreements with manufacturers. Investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and that actual results, performance or developments could differ
materially for those implied by such forward-looking statements as a result of
known and unknown risks and other factors, including those described from time
to time in the Company's filings with the Securities and Exchange Commission
under the heading "Risk Factors" and elsewhere, which should be read in
conjunction with this document. Among such factors are risks relating to
acquisitions, competition and pricing pressures, dependence on acquiring and
maintaining distribution arrangements with manufacturers, dependence on certain
suppliers and economic conditions.
Overview
The Company was incorporated in Georgia in February 1993 and completed the
acquisition of a 60% interest in Prisym Technologies, Inc. of Georgia in
December 1994. In June 1997, the Company completed the acquisition of 100% of
the outstanding capital stock of each of Microsouth, Inc., G&R Marketing, Inc.,
tekgraf, inc., Computer Graphics Distributing Company, Intelligent Products
Marketing, Inc. and IG Distributing, Inc. (the "1997 Acquisitions"). The 1997
Acquisitions have been accounted for using the purchase method of accounting.
Subsequent to the 1997 Acquisitions, the Company 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. After the reincorporation, the Company completed a
.83333325-for-one reverse stock split of the Class B Common Stock. In connection
with the 1997 Acquisitions, a total of 2,192,000 shares of Class B Common Stock
(giving effect to the share exchange and the reverse stock split) of the Company
was issued. In November 1997, the Company completed its initial public offering
of 2,100,000 shares of its Class A Common Stock.
On April 1, 1998, the Company acquired Computer Graphics Technology, Inc., a
South Carolina corporation ("CGT"), by merging CGT into a wholly-owned Georgia
subsidiary of the Company. The Company paid $500,000 in cash and issued an
aggregate of 330,000 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of CGT as consideration
in this acquisition.
On May 1, 1998, the Company acquired Martec, Inc., a California corporation
("Martec"), by merging Martec into a wholly-owned Georgia subsidiary of the
Company. The Company paid $500,000 in cash and issued an aggregate of 300,000
unregistered shares of the Company's Class A Common Stock to the holder of all
of the outstanding shares of stock of Martec as consideration in this
acquisition.
On May 8, 1998, the Company acquired New England Computer Graphics, Inc., a
Massachusetts corporation ("NECG"), by merging NECG into a wholly-owned Georgia
subsidiary of the Company. The Company paid $415,000 in cash and issued an
aggregate of 264,998 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of NECG as
consideration in this acquisition.
The purchase prices for the acquisitions of CGT, Martec and NECG (collectively,
the "1998 Acquisitions") are subject to adjustment based on certain net asset
value and profitability guarantees. Accordingly, a total of $325,000 of the cash
consideration ($100,000 in connection with CGT, $150,000 in connection with
Martec, and $75,000 in connection with NECG) and 192,251 of the unregistered
shares of Class A Common Stock (66,000 in connection with CGT, 60,000 in
connection with Martec and 66,251 in connection with NECG) issued in
consideration in the 1998 Acquisitions were placed in escrow to secure these
guarantees. In addition to these escrowed amounts, a total of 192,250 of the
shares (66,000 in connection with CGT, 60,000 in connection with Martec and
66,250 in connection with NECG) issued as consideration in the 1998 Acquisitions
was placed in escrow to secure the various representations, warranties and other
provisions of the respective agreements. The 1998 Acquisition companies are
regional distributors and marketers of computer graphics hardware and software.
These acquisitions were recorded under the purchase method of accounting.
On July 31, 1998, the Company reincorporated from Delaware to Georgia by merging
into Tekgraf Reincorporation Subsidiary, Inc., a wholly-owned subsidiary of the
Company that had been incorporated in Georgia as a shell corporation for the
purpose of carrying out the reincorporation. See Item 5.
Results of Operations
NET SALES. Net sales for the quarter ended June 30, 1998 increased 195% to $27.5
million from $9.3 million for the comparable prior year period. Net sales for
the six months ended June 30, 1998 increased 256% to $44.4 million from $12.4
million for the same period in 1997. The growth in net sales for the quarter and
six months ended June 30, 1998 as compared to the prior year was
7
<PAGE> 10
primarily due to the acquisitions that were completed in June 1997 and April and
May of 1998. For the quarter ended June 30, 1998, the 1998 Acquisitions
contributed $5.9 million in net sales. The remaining growth in net sales as
compared to the first quarter of 1998, or $4.6 million, was due to internal
growth and the introduction of additional product lines.
GROSS PROFIT. Gross profit for the quarter ended June 30, 1998 increased 244% to
$4.2 million from $1.2 million for the comparable prior year period. Gross
profit for the six months ended June 30, 1998 increased 284% to $7.1 million
from $1.8 million for the same period in 1997. Gross profit as a percentage of
sales for the quarter and six months ended June 30, 1998 was 15.4% and 16.0%,
respectively, compared to 13.2% and 14.8% for the comparable prior year periods.
While gross margins remained under pressure, the Company maintained its gross
margin percentages primarily as a result of differing product mixes and by
providing increased value-added services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses for the quarter ended June 30, 1998 increased
251% to $3.7 million from $1.1 million for the comparable prior year period. SGA
expenses for the six months ended June 30, 1998 increased 340% to $6.2 million
from $1.4 million for the same period in 1997. SG&A expenses as a percentage of
sales were 13.4% and 14.0% for the three and six months ended June 30, 1998,
respectively, compared to 11.2% and 11.3% for the same periods in 1997. The
increase in SGA expenses is primarily attributable to the acquisitions that
occurred in June 1997 and April and May of 1998. The 1998 acquisitions accounted
for $692,000 of the increase in SGA expenses for the quarter and six months
ended June 30, 1998. Costs associated with the internal growth of the Company,
including commissions on increased sales, costs of operating as a public company
and additional infrastructure costs accounted for the remainder of the increase
in SGA expenses.
OPERATING INCOME. Operating income for the quarter ended June 30, 1998 increased
170% to $337,000 from $125,000 for the comparable prior year period. Operating
income for the six months ended June 30, 1998 increased 31% to $473,000 from
$362,000 for the same period in 1997. In addition to the costs described above,
income from operations was reduced by the amortization of goodwill of $162,000
and $283,000 for the quarter and six months ended June 30, 1998, respectively.
Depreciation expense increased $30,000 and $65,000 during the quarter and six
months ended June 30, 1998, compared to the same periods in 1997.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 52.30% and
54.36% for the quarter and six months ended June 30, 1998 compared to 66.26% and
44.56% for the comparable prior year periods. The difference between the
Company's effective and statutory tax rates was primarily due to the
amortization of non-deductible goodwill and to state taxes net of the federal
benefit.
Pro Forma Combined Financial Information
The 1997 and 1998 Acquisitions described previously have had a significant
impact on the comparisons of operating results for 1997 and 1998, due to the
fact that the operating results for the 1997 Acquisitions are included only from
June 2 through June 30 for the three and six month periods ended June 30, 1997
and the operating results for the 1998 Acquisitions are only included from April
and May 1998 forward. Therefore, in addition to the historical comparisons of
the three and six month periods ended June 30, 1998 and June 30, 1997, the
Company has included herein the pro forma data for the three and six month
periods ended June 30, 1997 and 1998 as if the acquisitions had occurred as of
January 1, 1997, giving effect for the 1997 acquisitions to certain adjustments,
including the elimination of revenue and expenses related to affiliated entities
of the 1997 acquisitions which were not acquired by the Company, adjustments in
compensation levels that have been contractually agreed to, elimination of
amortization of 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
1997 acquisition companies, and amortization of the intangible assets.
The 1997 and 1998 unaudited pro forma data below also gives no effect to any
efficiencies or additional costs that might have occurred, if any, had the
companies actually been combined for the entire period presented. Note also that
the entities acquired previously operated as closely held businesses.
Additionally, the 1997 unaudited pro forma data does not take into account the
additional interest that might have been earned or interest expense that might
have been saved from the proceeds of the Offering. The unaudited pro forma data
is not intended to be indicative of future results of operations. A discussion
and analysis of the pro forma results, given the above qualifications, is not
considered meaningful and is therefore not presented. All amounts are presented
in thousands.
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<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- ------------------------------
1997 1998 1997 1998
Unaudited Unaudited
--------- ---------
Statement of Income Data: (Pro forma (Pro forma (Pro forma (Pro forma
Combined) Combined) Combined) Combined)
<S> <C> <C> <C> <C>
Net sales $ 21,922 $ 29,076 $ 45,294 $ 54,140
Gross profit 4,227 4,512 7,999 8,534
Income from operations 932 369 1,825 300
Income before taxes 836 527 1,735 625
Net income 528 251 1,047 193
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In November 1997, the Company consummated an initial public offering of
2,100,000 units consisting of 2,100,000 shares of Class A Common Stock and
2,100,000 redeemable warrants at a combined price of $6 per unit. The net
proceeds of the sale, after deducting underwriter discounts, etc., were
approximately $10.4 million. Additionally, certain stockholders of the Company
contributed an aggregate of $870,000 to the capital of the Company. A portion of
the proceeds from the initial public offering was used to repay bank debt of $2
million, debt to a related entity of $2 million and debt to a stockholder of
$125,000. In conjunction with the repayment of the bank debt, the Company
terminated the line of credit facilities with the related banks.
During the quarter ended June 30, 1998, the Company issued 894,998 unregistered
shares of Class A common stock and paid cash of $1,415,000 in connection with
the three acquisitions consummated. Additionally, the Company repaid $1.6
million in debt, primarily bank debt, and terminated the existing lines of
credit in connection with the acquired entities. The one remaining loan facility
was terminated in July 1998, as discussed below.
The Company made purchase price adjustments, adjusting goodwill, for the 1997
Acquisitions, during the second quarter of 1998 for excess net asset values
contributed or for net asset values that were less than originally estimated to
the stockholders of the acquisition companies. The total amount received by the
Company for deficient net asset values during the second quarter was $109,000.
Additionally, a $90,000 note payable to a stockholder was offset for amounts
owed to the Company for a deficient net asset value. The remaining amounts of
$245,000 and $68,000 were paid and received, for excess and deficient net asset
values, respectively, in July.
Since inception, the Company has financed its operations through a combination
of cash flow from operations, bank borrowings and equity capital and
subsequently, the net proceeds from the Company's initial public offering. The
Company's capital requirements have arisen primarily in connection with
acquisitions, growth in revenue and the purchase of fixed assets. 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.
In July 1998, the Company entered into a Loan and Security Agreement (the
"Agreement") with a bank that provides for a maximum outstanding principal
amount of $7.5 million. Outstanding advances bear interest at the LIBOR Index
Rate plus a rate, varying from 2.00% to 2.75%, to be determined based on a scale
of the Company's debt to net worth ratio ranging from 1:1 to 2:1. Pursuant to
the terms of the Agreement, the Company has pledged accounts receivables,
inventory and equipment as collateral. The Company believes that its available
funds, together with the cash flow expected to be generated from operations and
current and anticipated credit facilities, will be adequate to satisfy its
current and planned operations for at least the next 12 months.
For the six months ended June 30, 1998, the Company used approximately $3.8
million in operating activities. The cash used in operations resulted primarily
from the increases in accounts receivable and inventory, with these increases
attributable to growth in sales during the past quarter and stocking for
anticipated sales in the near term.
For the six months ended June 30, 1998, the Company used cash in investing
activities of $1.8 million for acquisitions, including overdrafts acquired, and
$227,000 for the purchase of property and equipment.
Cash used in financing activities for the six months ended June 30, 1998
resulted from the repayment of advances from stockholders and related entities,
loaned to the Company prior to the initial public offering, of $247,000, and the
repayment of the acquired entities' existing lines of credit of $1.6 million.
These amounts were partially offset by proceeds received of $233,000 under an
acquired entity's existing line of credit and the receipt of $109,000 from
stockholders for deficient net asset values as discussed above. The acquired
entity's outstanding line of credit was paid in full in July and the facility
was terminated.
9
<PAGE> 12
YEAR 2000
The Company has adopted a plan to facilitate a smooth transition of the systems,
products and vendors that Tekgraf relies on into the twenty-first century.
Additionally, for the software products sold to customers, all products are
licensed from the suppliers, and while there is no guarantee, the suppliers
claim that where applicable, the software is Year 2000 compliant.
Substantially all of Tekgraf's software systems are licenses from outside
vendors or will be once the management information project is completed
(anticipated to be fourth quarter 1998). Tekgraf's primary exposure emanates
from the ability of its technology vendors to implement the necessary changes
for Year 2000 compliance. Management believes it will be successful in the
achievement of its plans and does not believe that the execution of the plan
will have a material adverse effect on future operating results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in certain claims arising in the normal course of
business. In the opinion of management of the Company, although the outcomes of
the claims are uncertain, they are not likely to have, in the aggregate, an
adverse material effect on the Company.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the quarter ended June 30, 1998, the Company issued the securities
described below without registration under the Securities Act of 1933 (the "1933
Act"). All of the securities were issued pursuant to the exemption from
registration contained in Section 4(2) of the 1933 Act, based on the following
factors: the transactions did not involve general solicitations, the persons to
whom the securities were issued were provided with financial and other
information with respect to the Company, the securities were issued to a limited
number of persons, and the Company received reasonable assurance that those
persons were acquiring the securities for investment purposes.
On April 1, 1998, the Company issued an aggregate of 330,000 unregistered shares
of the Company's Class A Common Stock as consideration in connection with its
acquisition of Computer Graphics Technology, Inc. ("CGT"), a South Carolina
corporation. Pursuant to the Agreement and Plan of Merger (the "CGT Merger
Agreement") by and among the Company, Tekgraf Sub I, Inc., CGT and the CGT
Shareholders, 66,000 of the 330,000 shares were placed in escrow to secure
certain net asset value and profitability guarantees made by CGT and the CGT
shareholders. Another 66,000 of the 330,000 shares were placed in escrow to
secure various other representations, warranties and provisions contained in the
CGT Merger Agreement. The balance of the 330,000 shares was delivered to the CGT
shareholders.
On May 1, 1998, the Company issued an aggregate of 300,000 unregistered shares
of the Company's Class A Common Stock as consideration in connection with its
acquisition of Martec, Inc. ("Martec"), a California corporation. Pursuant to
the Agreement and Plan of Merger (the "Martec Merger Agreement") by and among
the Company, Tekgraf Sub II, Inc., Martec and the Martec shareholder, 60,000 of
the 300,000 shares were placed in escrow to secure certain net asset value and
profitability guarantees made by Martec and the Martec shareholder. Another
60,000 of the 300,000 shares were placed in escrow to secure various other
representations, warranties and provisions contained in the Martec Merger
Agreement. The balance of the 300,000 shares was delivered to the Martec
shareholder.
On May 8, 1998, the Company issued an aggregate of 264,998 unregistered shares
of the Company's Class A Common Stock as consideration in connection with its
acquisition of New England Computer Graphics, Inc. ("NECG"), a Massachusetts
corporation. Pursuant to the Agreement and Plan of Merger , as amended (the
"NECG Agreement of Merger"), by and among the Company, Tekgraf Sub III, Inc.,
NECG and the NECG shareholders, 66,251 of the 264,998 shares were placed in
escrow to secure certain net asset value and profitability guarantees made by
NECG and the NECG shareholders. Another 66,250 of the 264,998 shares were placed
in escrow to secure various other representations, warranties and provisions
contained in the NECG Agreement of Merger. The balance of the 264,998 shares was
delivered to the NECG shareholders.
Use of Proceeds
In November 1997, the Company completed the initial public offering of 2,100,000
shares of its Class A Common Stock (the "IPO"). Gross proceeds from the IPO were
$12.6 million and net proceeds to the Company were $10.4 million. During the
second
10
<PAGE> 13
quarter of 1998, the Company used proceeds from the IPO to fund all of the cash
consideration paid in connection with the acquisitions of CGT, Martec and NECG,
including repayment of existing debt.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
The Company's 1998 Annual Meeting of Stockholders was held on May 20, 1998.
The following votes for each proposal are as follows:
The following directors were elected for terms expiring at the 1999 annual
meeting:
<TABLE>
<CAPTION>
For Against Abstain
PROPOSAL 1: Election of Directors
<S> <C> <C> <C>
Phillip C. Aginsky 17,826,944 0 10,517
Dan I. Bailey 17,826,944 0 10,517
William M. Rychel 17,826,944 0 10,517
Martyn L. Cooper 17,826,944 0 10,517
J. Thomas Woolsey 17,826,944 0 10,517
Albert E. Sisto 17,826,944 0 10,517
Frank X. Dalton, Jr. 17,826,944 0 10,517
</TABLE>
PROPOSAL 2: Ratification of appointment of Coopers & Lybrand L.L.P. as
independent public accountants for the year ended December 31, 1998:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
17,833,261 1,000 3,200
</TABLE>
PROPOSAL 3: Approval of reincorporation of the Company from the State of
Delaware to the State of Georgia:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
16,286,842 11,100 5,700
</TABLE>
Item 5. Other Information
On July 31, 1998, the Company reincorporated from Delaware to Georgia by merging
into Tekgraf Reincorporation Subsidiary, Inc. (the "Subsidiary"), a wholly-owned
subsidiary of the Company, which was incorporated in Georgia as a shell
corporation for the purpose of carrying out the reincorporation. Pursuant to the
Agreement and Plan of Merger by and among the Company and the Subsidiary, the
officers and directors of the Company became the officers and directors of the
entity surviving the merger, and all outstanding shares of Class A Common Stock
and Class B Common Stock of the Company, as well as all outstanding warrants and
options to purchase shares of Common Stock of the Company, were converted into
shares of Class A Common Stock, Class B Common Stock, warrants and options,
respectively, of the entity surviving the merger. At the effective time of the
merger, the Articles of Incorporation of the Subsidiary were amended to change
the name of the Subsidiary to "Tekgraf, Inc." Thus, as a result of the merger,
the Company effectively became a Georgia corporation with all of the business,
assets, rights, obligations, and liabilities of its predecessor Delaware
corporation, together with the same management structure as its predecessor
Delaware corporation, except for changes necessitated by differences in the laws
of the states of Delaware and Georgia. Pursuant to Rule 12g-3(a) under the
Securities and Exchange Act of 1934, the shares of Class A Common Stock of
Tekgraf, Inc. that were registered while the Company was incorporated in
Delaware are deemed to be registered under Section 12(b) of the Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Plan of Merger between Crescent Computers, Inc. and Tekgraf,
Inc., dated June 20, 1997 (Filed as Exhibit 2.1 to the Company's
Registration Statement on Form S-1, No. 333-33449 and incorporated
herein by reference (the "Registration Statement")).
2.2 Agreement and Plan of Merger, dated July 30, 1998, by and among
Tekgraf, Inc. and Tekgraf Reincorporation Subsidiary, Inc.
11
<PAGE> 14
<TABLE>
<S> <C>
3.1 Articles of Incorporation, dated July 16, 1998.
3.2 Certificate of Merger, dated July 30, 1998, containing an amendment to
the Articles of Incorporation of Tekgraf Reincorporation Subsidiary,
Inc.
3.3 Bylaws.
10.1 1997 Stock Plan of the Company (Filed as Exhibit 10.1 to the
Registration Statement and incorporated herein by reference).
10.2 Employment Agreement dated June 2, 1997 between Crescent Computers,
Inc. and Phillip C. Aginsky (Filed as Exhibit 10.2 to the Registration
Statement and incorporated herein by reference).
10.3 Employment Agreement dated June 2, 1997 between Crescent Computers,
Inc. and Dan I. Bailey (Filed as Exhibit 10.3 to the Registration
Statement and incorporated herein by reference).
10.4 Employment Agreement dated June 2, 1997 between Crescent Computers,
Inc. and William M. Rychel (Filed as Exhibit 10.4 to the Registration
Statement and incorporated herein by reference).
10.5 Form of Employment Agreement between Crescent Computers, Inc. and
Regional Sales Directors (Filed as Exhibit 10.5 to the Registration
Statement and incorporated herein by reference).
10.6 Employment Agreement dated February 26, 1998, between Tekgraf, Inc. and
W. Jeffrey Camp. (Filed as Exhibit 10.6 to the Company's Annual Report
on Form 10-K, filed March 31, 1998, and incorporated herein by
reference (the "Form 10-K")).
10.7 Stock Purchase Agreement dated May 1, 1997, by and among Crescent
Computers, Inc. and its shareholders and Microsouth, Inc. and its
shareholders, as amended (Filed as Exhibit 10.6 to the Registration
Statement and incorporated herein by reference).
10.8 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and tekgraf, Inc. and its
shareholders, as amended (Filed as Exhibit 10.7 to the Registration
Statement and incorporated herein by reference).
10.9 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and G&R Marketing, Inc. and its
shareholders, as amended (Filed as Exhibit 10.8 to the Registration
Statement and incorporated herein by reference).
10.10 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and Computer Graphics Distributing
Company and its shareholders, as amended (Filed as Exhibit 10.9 to the
Registration Statement and incorporated herein be reference).
10.11 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and Intelligent Products
Marketing, Inc. and its shareholders and IG Distributing, Inc. and its
shareholders, as amended (Filed as Exhibit 10.10 to the Registration
Statement and incorporated herein by reference).
10.12 Escrow Agreement dated August 1997 (Filed as Exhibit 10.11 to the
Registration Statement and incorporated herein by reference).
10.13 Indemnification Agreement dated 1997 (Filed as Exhibit 10.12 to the
Registration Statement and incorporated herein by reference).
10.14 [Intentionally omitted].
10.15 Lease Agreement dated September 4, 1993 between Crescent Computers,
Inc. and TCW Realty Fund II (Filed as Exhibit 10.14 to the Registration
Statement and incorporated herein by reference).
10.16 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 (Filed as Exhibit
10.15 to the Registration Statement and incorporated herein by
reference).
10.17 Industrial Space Lease dated November 13, 1991 between G&R Technologies
and American National Bank and Trust Company of Chicago (Filed as
Exhibit 10.16 to the Registration Statement and incorporated herein by
reference).
</TABLE>
12
<PAGE> 15
<TABLE>
<S> <C>
10.18 Commercial Lease Agreement dated March 29, 1991 between Computer
Graphics Distributing Company and Girard Associates II Limited
Partnership (Filed as Exhibit 10.17 to the Registration Statement and
incorporated herein by reference).
10.19 Lease Agreement dated May 1, 1992 between Microsouth, Inc. and ASC
North Fulton Associates Joint Venture (Filed as Exhibit 10.18 to the
Registration Statement and incorporated herein by reference).
10.20 Lease Agreement dated March 1998 between Tekgraf, Inc. a Texas
corporation and Connecticut General Life Insurance Company, (Filed as
Exhibit 10.19 to the Registration Statement and incorporated herein by
reference), as amended (amendment filed as Exhibit 1020(a) to the Form
10-K and incorporated herein by reference).
10.21 Lease Agreement, dated March 1, 1998, by and between Computer Graphics
Technology and Southridge Equities. (Filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K, filed April 16, 1998, and
incorporated herein by reference (the "Form 8-K")).
10.22 Standard Industrial/Commercial Multi-Tenant Lease, dated May 9, 1995,
between Sanwa Bank California, as Lessor, and Martec, Inc., as Lessee.
(Filed as Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q
filed on May 15, 1998 and incorporated herein by reference (the "Form
10-Q")).
10.23 Commercial Lease, dated January 1, 1997, between Woodland Park Realty
Trust No. 2, as Lessor, and New England Computer Graphics, as Lessee.
(Filed as Exhibit 10.23 to the Form 10-Q and herein incorporated by
reference).
10.24 Industrial Lease Agreement, dated July 25, 1997, between 2725312 Canada
Inc., as Landlord, and New England Computer Graphics, Inc., as Tenant
(filed as Exhibit 10.24 to the Form 10-Q and incorporated herein by
reference).
10.25 Voting Agreement dated as of August 7, 1997 between Tekgraf, Inc. and
A. Lowell Nerenberg and Edward H.L. Mason (Filed as Exhibit 10.20 to
the Registration Statement and incorporated herein be reference).
10.26 Agreement and Plan of Merger by and among Tekgraf, Inc., a Delaware
corporation, Tekgraf Sub I, Inc., a Georgia corporation, and Computer
Graphics Technology, Inc., a South Carolina corporation, and its
Shareholders, dated March 23, 1998. (Filed as Exhibit 10.22 to the Form
10-K and incorporated herein by reference). **
10.27 Escrow Agreement, dated April 1, 1998, by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub I, Inc., a Georgia corporation, Scott
C. Barker, Robert Shumaker, and Thomas Mills (as the "Company
Shareholders"), Scott C. Barker (as the "Shareholder Representative"),
and First Union National Bank (as the "Escrow Agent"). (Filed as
Exhibit 2.2 to the Form 8-K and incorporated herein by reference).
10.28 Pledge, Security and Escrow Agreement, dated April 1, 1998, by and
among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub I, Inc., a
Georgia corporation, Scott C. Barker, Robert Shumaker, and Thomas Mills
(as the "Company Shareholders"), Scott C. Barker (as the
"Indemnification Representative"), and First Union National Bank (as
the "Escrow Agent"). (Filed as Exhibit 2.3 to the Form 8-K and
incorporated herein by reference).
10.29 Agreement and Plan of Merger, dated March 25, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation and Martec, Inc., a California corporation, and its
shareholder. (Filed as Exhibit 10.23 to the Form 10-K and incorporated
herein by reference). **
10.30 Escrow Agreement, dated May 1, 1998, by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub II, Inc., a Georgia corporation, Mark
Lewis (as the "Company Shareholder"), Mark Lewis ( as the "Shareholder
Representative"), and First Union National Bank (as the" Escrow
Agent"). (Filed as Exhibit 10.30 to the Form 10-Q and incorporated
herein by reference).
10.31 Pledge, Security and Escrow Agreement, dated May 1, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation, Mark Lewis (as the "Company Shareholder"), Mark Lewis (as
the "Indemnification Representative"), and First Union National Bank
(as the "Escrow Agent"). (Filed as Exhibit 10.31 to the Form 10-Q and
incorporated herein by reference).
10.32 Agreement and Plan of Merger, dated March 25, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub III, Inc., a Georgia
corporation, and New England Computer Graphics, Inc., a Massachusetts
corporation, and its shareholders. (Filed as Exhibit 10.24 to the Form
10-K and incorporated herein by reference.)**
10.33 First Amendment to Agreement and Plan of Merger, dated March 30, 1998,
by and among Tekgraf, Inc., Tekgraf Sub III, Inc., New England Computer
Graphics, Inc. and its Shareholders. (Filed as Exhibit 10.25 to the
Annual Report on Form 10-K and incorporated herein by reference.)
</TABLE>
13
<PAGE> 16
<TABLE>
<S> <C>
10.34 Escrow Agreement, dated May 8, 1998, by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub III, Inc., a Georgia corporation,
Robert Shumaker, Thomas Gust, A. Lowell Nerenberg, Scott Barker, David
Boston, William Rychel and Thomas Mills (as the "Company
Shareholders"), David Boston (as the "Shareholder Representative"),
and First Union National Bank (as the" Escrow Agent"). (Filed as
Exhibit 10.34 to the Form 10-Q and incorporated herein by reference).
10.35 Pledge, Security and Escrow Agreement, dated May 8, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub III, Inc., a Georgia
corporation, Robert Shumaker, Thomas Gust, A. Lowell Nerenberg, Scott
Barker, David Boston, William Rychel and Thomas Mills (as the "Company
Shareholders"), David Boston (as the "Indemnification Representative"),
and First Union National Bank (as the "Escrow Agent"). (Filed as
Exhibit 10.35 to the Form 10-Q and incorporated herein by reference).
10.36 Loan and Security Agreement, dated July 2, 1998, between Tekgraf, Inc.,
as Borrower , and all Subsidiaries of Borrower (except Prisym), as
Subsidiary Guarantors, and Wachovia Bank, National Association, as
Lender.**
11.1 Statements of Computation of Earnings Per Share
27.1 Financial Data Schedule
99.1 Press Release, dated April 8, 1998 (filed as Exhibit 99.2 to the Form
8-K and incorporated herein by reference).
99.2 Press release dated May 13, 1998 (filed as Exhibit 99.1 to the Form
10-Q and incorporated herein by reference).
99.3 Press release dated May 14, 1998 (filed as Exhibit 99.2 to the Form
10-Q and incorporated herein by reference).
99.4 Press release dated August 14, 1998
</TABLE>
** The Company will furnish supplementally a copy of any omitted schedule or
exhibit to the Securities and Exchange Commission upon request, as
provided in Item 601 (b) (2) of Regulation S-K.
(b) Reports Filed on Form 8-K
On April 16, 1998, the Company filed a Current Report on Form 8-K, pursuant to
Item 2 thereof, concerning the completion of its acquisition of CGT on April 1,
1998.
On May 15, 1998, the Company filed its Quarterly Report on Form 10-Q for the
first quarter of 1998. Pursuant to Item 5 of the Form 10-Q, the Company
incorporated the information required to be disclosed on a Current Report on
Form 8-K, regarding the completion of its acquisition of Martec, on May 1, 1998,
and the completion of its acquisition of NECG, on May 8, 1998, into this Form
10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEKGRAF, INC.
Date: August 14, 1998
By: /s/ Phillip C. Aginsky
-----------------------------
Phillip C. Aginsky, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1998
By: /s/ W. Jeffrey Camp
-----------------------------
W. Jeffrey Camp, Chief
Financial Officer
(Principal Financial and
Accounting Officer)
14
<PAGE> 17
TEKGRAF, INC.
Index of Exhibits
The following exhibits are filed as part of the Report.
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
2.1 Plan of Merger between Crescent Computers, Inc. and Tekgraf, Inc.,
dated June 20, 1997 (Filed as Exhibit 2.1 to the Company's
Registration Statement on Form S-1, No. 333-33449 and incorporated
herein by reference (the "Registration Statement")).
2.2 Agreement and Plan of Merger, dated July 30, 1998, by and among
Tekgraf, Inc. and Tekgraf Reincorporation Subsidiary, Inc.
3.1 Articles of Incorporation dated, July 16, 1998.
3.2 Certificate of Merger, dated July 30, 1998, containing an amendment to
the Articles of Incorporation of Tekgraf Reincorporation Subsidiary,
Inc.
3.3 Bylaws.
10.1 1997 Stock Plan of the Company (Filed as Exhibit 10.1 to the
Registration Statement and incorporated herein by reference).
10.2 Employment Agreement dated June 2, 1997 between Crescent Computers,
Inc. and Phillip C. Aginsky (Filed as Exhibit 10.2 to the Registration
Statement and incorporated herein by reference).
10.3 Employment Agreement dated June 2, 1997 between Crescent Computers,
Inc. and Dan I. Bailey (Filed as Exhibit 10.3 to the Registration
Statement and incorporated herein by reference).
10.4 Employment Agreement dated June 2, 1997 between Crescent Computers,
Inc. and William M. Rychel (Filed as Exhibit 10.4 to the Registration
Statement and incorporated herein by reference).
10.5 Form of Employment Agreement between Crescent Computers, Inc. and
Regional Sales Directors (Filed as Exhibit 10.5 to the Registration
Statement and incorporated herein by reference).
10.6 Employment Agreement dated February 26, 1998, between Tekgraf, Inc.
and W. Jeffrey Camp. (Filed as Exhibit 10.6 to the Company's Annual
Report on Form 10-K, filed March 31, 1998, and incorporated herein by
reference (the "Form 10-K")).
10.7 Stock Purchase Agreement dated May 1, 1997, by and among Crescent
Computers, Inc. and its shareholders and Microsouth, Inc. and its
shareholders, as amended (Filed as Exhibit 10.6 to the Registration
Statement and incorporated herein by reference).
10.8 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and tekgraf, Inc. and its
shareholders, as amended (Filed as Exhibit 10.7 to the Registration
Statement and incorporated herein by reference).
10.9 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and G&R Marketing, Inc. and its
shareholders, as amended (Filed as Exhibit 10.8 to the Registration
Statement and incorporated herein by reference).
10.10 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and Computer Graphics
Distributing Company and its shareholders, as amended (Filed as
Exhibit 10.9 to the Registration Statement and incorporated herein be
reference).
10.11 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and Intelligent Products
Marketing, Inc. and its shareholders and IG Distributing, Inc. and its
shareholders, as amended (Filed as Exhibit 10.10 to the Registration
Statement and incorporated herein by reference).
</TABLE>
1
<PAGE> 18
<TABLE>
<S> <C>
10.12 Escrow Agreement dated August 1997 (Filed as Exhibit 10.11 to the
Registration Statement and incorporated herein by reference).
10.13 Indemnification Agreement dated 1997 (Filed as Exhibit 10.12 to the
Registration Statement and incorporated herein by reference).
10.14 [Intentionally omitted].
10.15 Lease Agreement dated September 4, 1993 between Crescent
Computers, Inc. and TCW Realty Fund II (Filed as Exhibit 10.14 to the
Registration Statement and incorporated herein by reference).
10.16 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 (Filed as Exhibit
10.15 to the Registration Statement and incorporated herein by
reference).
10.17 Industrial Space Lease dated November 13, 1991 between G&R
Technologies and American National Bank and Trust Company of Chicago
(Filed as Exhibit 10.16 to the Registration Statement and incorporated
herein by reference).
10.18 Commercial Lease Agreement dated March 29, 1991 between Computer
Graphics Distributing Company and Girard Associates II Limited
Partnership (Filed as Exhibit 10.17 to the Registration Statement and
incorporated herein by reference).
10.19 Lease Agreement dated May 1, 1992 between Microsouth, Inc. and ASC
North Fulton Associates Joint Venture (Filed as Exhibit 10.18 to the
Registration Statement and incorporated herein by reference).
10.20 Lease Agreement dated March 1998 between Tekgraf, Inc. a Texas
corporation and Connecticut General Life Insurance Company, (Filed as
Exhibit 10.19 to the Registration Statement and incorporated herein by
reference), as amended (amendment filed as Exhibit 1020(a) to the Form
10-K and incorporated herein by reference).
10.21 Lease Agreement, dated March 1, 1998, by and between Computer Graphics
Technology and Southridge Equities. (Filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K, filed April 16, 1998, and
incorporated herein by reference (the "Form 8-K")).
10.22 Standard Industrial/Commercial Multi-Tenant Lease, dated May 9, 1995,
between Sanwa Bank California, as Lessor, and Martec, Inc., as Lessee.
(Filed as Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q
filed on May 15, 1998 and incorporated herein by reference (the "Form
10-Q")).
10.23 Commercial Lease, dated January 1, 1997, between Woodland Park Realty
Trust No. 2, as Lessor, and New England Computer Graphics, as Lessee.
(Filed as Exhibit 10.23 to the Form 10-Q and incorporated herein by
reference).
10.24 Industrial Lease Agreement, dated July 25, 1997, between 2725312
Canada Inc., as Landlord, and New England Computer Graphics, Inc., as
Tenant. (Filed as Exhibit 10.24 to the Form 10-Q and incorporated
herein by reference).
10.25 Voting Agreement dated as of August 7, 1997 between Tekgraf, Inc. and
A. Lowell Nerenberg and Edward H.L. Mason (Filed as Exhibit 10.20 to
the Registration Statement and incorporated herein be reference).
10.26 Agreement and Plan of Merger by and among Tekgraf, Inc., a Delaware
corporation, Tekgraf Sub I, Inc., a Georgia corporation, and Computer
Graphics Technology, Inc., a South Carolina corporation, and its
Shareholders, dated March 23, 1998. (Filed as Exhibit 10.22 to the
Form 10-K and incorporated herein by reference). **
10.27 Escrow Agreement, dated April 1, 1998, by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub I, Inc., a Georgia corporation,
Scott C. Barker, Robert Shumaker, and Thomas Mills (as the "Company
Shareholders"), Scott C. Barker (as the "Shareholder Representative"),
and First Union National Bank (as the "Escrow Agent"). (Filed as
Exhibit 2.2 to the Form 8-K and incorporated herein by reference).
10.28 Pledge, Security and Escrow Agreement, dated April 1, 1998, by and
among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub I, Inc., a
Georgia corporation, Scott C. Barker, Robert Shumaker, and Thomas
Mills (as the "Company Shareholders"), Scott C. Barker (as the
"Indemnification Representative"), and First Union National Bank (as
the "Escrow Agent"). (Filed as Exhibit 2.3 to the Form 8-K and
incorporated herein by reference).
10.29 Agreement and Plan of Merger, dated March 25, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation and Martec, Inc., a California corporation, and its
shareholder. (Filed as Exhibit 10.23 to the Form 10-K and incorporated
herein by reference). **
</TABLE>
2
<PAGE> 19
<TABLE>
<S> <C>
10.30 Escrow Agreement, dated May 1, 1998, by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub II, Inc., a Georgia corporation,
Mark Lewis (as the "Company Shareholder"), Mark Lewis (as the
"Shareholder Representative"), and First Union National Bank (as the"
Escrow Agent"). (Filed as Exhibit 10.30 to the Form 10-Q and
incorporated herein by reference).
10.31 Pledge, Security and Escrow Agreement, dated May 1, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation, Mark Lewis (as the "Company Shareholder"), Mark Lewis (as
the "Indemnification Representative"), and First Union National Bank
(as the "Escrow Agent"). (Filed as Exhibit 10.31 to the Form 10-Q and
incorporated herein by reference).
10.32 Agreement and Plan of Merger, dated March 25, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub III, Inc., a
Georgia corporation, and New England Computer Graphics, Inc., a
Massachusetts corporation, and its shareholders. (Filed as Exhibit
10.24 to the Form 10-K and incorporated herein by reference.)**
10.33 First Amendment to Agreement and Plan of Merger, dated March 30, 1998,
by and among Tekgraf, Inc., Tekgraf Sub III, Inc., New England
Computer Graphics, Inc. and its Shareholders. (Filed as Exhibit 10.25
to the Annual Report on Form 10-K and incorporated herein by
reference.)
10.34 Escrow Agreement, dated May 8, 1998, by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub III, Inc., a Georgia corporation,
Robert Shumaker, Thomas Gust, A. Lowell Nerenberg, Scott Barker, David
Boston, William Rychel and Thomas Mills (as the "Company
Shareholders"), David Boston (as the "Shareholder Representative"),
and First Union National Bank (as the" Escrow Agent"). (Filed as
Exhibit 10.34 to the Form 10-Q and incorporated herein by reference).
10.35 Pledge, Security and Escrow Agreement, dated May 8, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub III, Inc., a
Georgia corporation, Robert Shumaker, Thomas Gust, A. Lowell
Nerenberg, Scott Barker, David Boston, William Rychel and Thomas Mills
(as the "Company Shareholders"), David Boston (as the "Indemnification
Representative"), and First Union National Bank (as the "Escrow
Agent"). (Filed as Exhibit 10.35 to the Form 10-Q and incorporated
herein by reference).
10.36 Loan and Security Agreement, dated July 2, 1998, between Tekgraf,
Inc., as Borrower, and all Subsidiaries of Borrower (except Prisym),
as Subsidiary Guarantors and Wachovia Bank, National Association, as
Lender.**
11.1 Statements of Computation of Earnings Per Share.
27.1 Financial Data Schedule.
99.1 Press Release, dated April 8, 1998 (filed as Exhibit 99.2 to the Form
8-K and incorporated herein by reference).
99.2 Press release dated May 13, 1998 (filed as Exhibit 99.1 to the Form
10-Q and incorporated herein by reference).
99.3 Press release dated May 14, 1998 (filed as Exhibit 99.2 to the Form
10-Q and incorporated herein by reference).
99.4 Press release dated August 14, 1998
</TABLE>
** The Company will furnish supplementally a copy of any omitted schedule or
exhibit to the Securities and Exchange Commission upon request, as provided
in Item 601 (b) (2) of Regulation S-K.
3
<PAGE> 1
EXHIBIT 2.2
AGREEMENT
AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is entered into as of this 30th day of
July, 1998, by and between Tekgraf, Inc., a corporation organized under the laws
of the State of Delaware ("Tekgraf"), and Tekgraf Reincorporation Subsidiary,
Inc., a corporation organized under the laws of the State of Georgia
("Subsidiary"). The names of the corporations planning to merge are Tekgraf,
Inc., a corporation organized under the laws of the State of Delaware, and
Tekgraf Reincorporation Subsidiary, Inc., a corporation organized under the laws
of the State of Georgia. Immediately after the effective time of the Merger, the
name of the surviving corporation into which Tekgraf plans to merge will be
changed to "Tekgraf, Inc." (the "Merger").
1. Tekgraf shall, pursuant to the provisions of the Georgia Business
Corporation Code and the Delaware General Corporation Law, be merged with and
into Subsidiary, which shall be the surviving corporation and which is sometimes
hereinafter referred to as the "surviving corporation", and which shall continue
to exist as said surviving corporation under the name "Tekgraf, Inc.", pursuant
to the provisions of the laws of the State of Georgia. At the effective time of
the Merger, the surviving corporation will amend its Articles of Incorporation
to change its name from "Tekgraf Reincorporation Subsidiary, Inc." to "Tekgraf,
Inc." The separate existence of Tekgraf, which is sometimes hereinafter referred
to as the "non-surviving corporation", shall cease when the merger takes effect
in accordance with the provisions of the Georgia Business Corporation Code and
the Delaware General Corporation Law.
2. The Articles of Incorporation of the surviving corporation when the
Merger takes effect in the jurisdiction of its organization shall be the
Articles of Incorporation of said surviving corporation and said Articles of
Incorporation shall continue in full force and effect until amended and changed
in the manner prescribed by the provisions of the laws of the jurisdiction of
organization of the surviving corporation.
3. The bylaws of the surviving corporation when the Merger takes effect in
the jurisdiction of its organization shall be the bylaws of said surviving
corporation and shall continue in full force and effect until changed, altered
or amended as therein provided and in the manner prescribed by the provisions of
the laws of the jurisdiction of its organization.
4. The members of the Board of Directors and the officers in office of the
non-surviving corporation when the merger takes effect in the jurisdiction of
its organization shall continue to be the members of the Board of Directors and
the officers of the surviving corporation, all of whom shall hold their
directorships and offices until the election and qualification of their
respective successors or until their tenure is otherwise terminated in
accordance with the provisions of the bylaws of the surviving corporation.
5. Each issued share of Class A Common Stock and Class B Common Stock of
the non-surviving corporation when the merger takes effect shall be converted
automatically and without any further action by the holder thereof into one
share of Class A Common Stock, $.001 par value, or Class B Common Stock, $.001
par value, respectively, of the surviving corporation. Each issued option and
warrant to purchase shares of the non-surviving corporation shall be converted
automatically and without any further action by the holder thereof into one
issued and outstanding option or warrant, respectively, of the surviving
corporation. The issued shares of the surviving corporation shall not be
converted or exchanged in any manner or any consideration be delivered therefor,
and each said share which is issued as of the effective date of the merger shall
be cancelled.
6. The Plan of Merger herein made and approved shall have been submitted to
the shareholders of the non-surviving corporation for their approval or
rejection in the manner prescribed by the provisions of the Delaware General
Corporation Law, and the merger of the non-surviving corporation with and into
the surviving corporation shall be authorized in the manner prescribed by the
Georgia Business Corporation Code.
<PAGE> 2
7. In the event that the Plan of Merger shall have been approved by the
shareholders entitled to vote of the non-surviving corporation in the manner
prescribed by the provisions of the Delaware General Corporation Law, and in the
event that the merger of the non-surviving corporation with and into the
surviving corporation shall have been duly authorized in compliance with the
provisions of the Georgia Business Corporation Code, the non-surviving
corporation and the surviving corporation hereby stipulate that they will cause
to be executed and filed and/or recorded any document or documents prescribed by
the laws of the State of Georgia and by the laws of the State of Delaware, and
that they will cause to be performed all necessary acts therein and elsewhere to
effectuate the merger.
8. The surviving corporation hereby agrees that it may be served with
process in the State of Delaware in any proceeding for enforcement of any
obligation of non-surviving corporation, as well as for any obligation of the
surviving corporation resulting from the merger, and hereby irrevocably appoints
the Secretary of State of the State of Delaware as its agent to accept service
of process in any such suit or other proceedings. The address to which the
Secretary of State shall mail a copy of such process to surviving corporation is
6000 Lake Forrest Drive, Suite 110, Atlanta, Georgia 30328.
9. The Board of Directors and the proper officers of the non-surviving
corporation and of the surviving corporation, respectively, are hereby
authorized, empowered and directed to do any and all acts and things, and to
make, execute, deliver, file and/or record any and all instruments, papers and
documents which shall be or become necessary, proper or convenient to carry out
or put into effect any of the provisions of this Plan of Merger or of the merger
herein provided for.
10. The merger herein provided for shall become effective in the State of
Georgia upon the date of the filing of the Certificate of Merger with the
Secretary of State of Georgia.
TEKGRAF, INC.
By: /s/ Phillip Aginsky
--------------------------------------------
Name: Phillip Aginsky
Title: Chairman and Chief Executive Officer
TEKGRAF REINCORPORATION
SUBSIDIARY, INC.
By: /s/ Phillip Aginsky
--------------------------------------------
Name: Phillip Aginsky
Title: President
2
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
TEKGRAF REINCORPORATION SUBSIDIARY, INC.
------------------------------------
FIRST: The name of the corporation is Tekgraf Reincorporation
Subsidiary, Inc. (the "Corporation").
SECOND: The aggregate number of shares which the Corporation shall
have authority to issue is Forty Million (40,000,000) shares, consisting of (i)
Thirty-One Million Six Hundred Sixty-Six Thousand Six Hundred Sixty-Seven
(31,666,667) shares of Class A Common Stock, $.001 par value per share (the
"Class A Common Stock"); (ii) Three Million Three Hundred Thirty-Three Thousand
Three Hundred Thirty-Three (3,333,333) shares of Class B Common Stock, $.001 par
value per share (the "Class B Common Stock"); and (iii) Five Million (5,000,000)
shares of Preferred Stock, $.001 par value per share the ("Preferred Stock").
A. Common Stock
(1) General. The designations, preferences, limitations and relative rights
of the Class A Common Stock and the Class B Common Stock shall be in all respect
identical, except as stated in these Articles of Incorporation or as otherwise
required by law.
(2) Voting Rights.
(a) At each meeting of shareholders of the Corporation and upon each
proposal presented at such meeting, every holder of Class A Common Stock shall
be entitled to one vote in person or by proxy for each share of Class A Common
Stock standing in his or her name on the stock transfer records of the
Corporation and every holder of Class B Common Stock shall be entitled to five
votes in person or by proxy for each share of Class B Common Stock standing in
his or her name on the stock transfer records of the Corporation.
(b) Except as provided in this Paragraph (2) or as may be otherwise
required by law, the holders of Class A Common Stock and Class B Common Stock
shall vote together as a single class with respect to all matters. The number of
authorized shares of Class A Common Stock or Class B Common Stock may be
increased or decreased (but not below the number of shares of such class then
outstanding) by the affirmative vote of the holders of a majority of the Class A
Common Stock and Class B Common Stock of the Corporation entitled to vote,
voting together as a single class.
(c) Except as may be otherwise required by law or stated in any
Preferred Stock Designation (as defined in Section B of this ARTICLE SECOND),
the holders of Class A Common Stock and Class B Common Stock shall have the
exclusive right to vote for the election of directors and for all other
purposes, each holder of the Class A Common Stock and Class B Common Stock being
entitled to vote as provided in this Paragraph (2).
(3) Dividends and Distributions. Subject to the rights of the holders of
Preferred Stock, and subject to any other provisions of these Articles of
Incorporation, as they may be amended from time to time, holders of Class A
Common Stock and Class B Common Stock shall be entitled to receive such
dividends and other distributions in cash, in property or in shares of the
Corporation as may be declared
<PAGE> 2
thereon by the Board of Directors from time to time out of assets or funds of
the Corporation legally available therefor; provided, however, that no cash,
property or share dividend or distribution may be declared or paid on the
outstanding shares of either the Class A Common Stock or Class B Common Stock
unless an identical per share dividend or distribution is simultaneously
declared and paid on the outstanding shares of the other such class of stock;
provided further, however, that a dividend of shares may be declared and paid in
Class A Common Shares to holders of Class A Common Stock and Class B Common
Stock if the number of shares paid per share to holders of Class A Common Stock
and to holders of Class B Common Stock shall be the same. If the Corporation
shall in any manner subdivide, combine or reclassify the outstanding shares of
Class A Common Stock or Class B Common Stock, the outstanding shares of the
other such class shall be subdivided, combined or reclassified proportionally in
the same manner and on the same basis as the outstanding shares of Class A
Common Stock or Class B Common Stock, as the case may be, have been subdivided,
combined or reclassified. A dividend in shares of Class A Common Stock may be
paid to the holders of shares of any other class of the Corporation.
(4) Common Stock Subject to Priorities of Preferred Stock. The Class A
Common Stock and Class B Common Stock are subject to all the powers, rights,
privileges, preferences and priorities of the Preferred Stock as may be stated
in these Articles of Incorporation and in any Preferred Stock Designation.
(5) Liquidation Rights. Upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, and after the holders, if any, of
the Preferred Stock of each series shall have been paid in full the amounts to
which they respectively shall be entitled, or a sum sufficient for such payment
in full shall have been set aside, the remaining net assets of the Corporation
shall be distributed pro rata on a share for share basis to the holders of the
Class A Common Stock and Class B Common Stock, subject to any Preferred Stock
Designation.
(6) No Conversion of Class A Common Stock. The shares of Class A Common
Stock are not convertible into or exchangeable for shares of Class B Common
Stock or any other shares or securities of the Corporation.
(7) Conversion of Class B Common Stock.
(a) Optional Conversion. Each record holder of Class B Common Stock
is entitled, at any time or from time to time, to convert any or all of the
shares of such holder's Class B Common Stock into fully paid and non-assessable
shares of Class A Common Stock for no additional consideration, at the ratio of
one share of Class A Common Stock for each share of Class B Common Stock.
(b) Optional Conversion Procedures.
(i) Each conversion of shares pursuant to Paragraph (7)(a)
hereof shall be effected by the surrender of the certificate or certificates
representing the shares to be converted at the principal office of the
Corporation at any time during normal business hours, together with a written
notice by the holder stating the number of shares that such holder desires to
convert. Such conversion shall be deemed to have been effected as of the close
of business on the date on which such certificate or certificates have been
surrendered, and at such time, the rights of any such holder with respect to the
converted shares of such holder will cease and the person or persons in whose
name or names the certificate or certificates for shares are to be issued upon
such conversion will be deemed to have become the holder or holders of record of
such shares represented thereby.
(ii) Promptly after such surrender, the Corporation will issue
and deliver in accordance with the surrendering holder's instructions the
certificate or certificates for the Class A Common Stock issuable upon such
conversion and a certificate representing any Class B Common Stock which was
represented by the certificate or certificates delivered to the Corporation in
connection with such conversion, but which was not converted.
2
<PAGE> 3
(c) Automatic Conversion. Each share of Class B Common Stock shall
(subject to receipt of any and all necessary approvals) convert automatically
into one fully paid and non-assessable share of Class A Common Stock (i) upon
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 any other holder of Class B
Common Stock; (ii) upon 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) upon the conversion of an aggregate of 75% of the authorized
shares of Class B Common Stock into Class A Common Stock.
(d) Issuance Costs. The issuance of certificates upon conversion of
shares pursuant hereto will be made without charge to the holder or holders of
such shares for any issuance tax (except stock transfer tax) in respect thereof
or other costs incurred by the Corporation in connection therewith.
(e) Reservation of Shares. Solely for the purpose of issuance upon
conversion of such shares as herein provided, the Corporation shall at all times
reserve and keep available out of its authorized but unissued shares of Class A
Common Stock such number of shares of Class A Common Stock as are then issuable
upon the conversion of all outstanding shares of Class B Common Stock. The
Corporation covenants that all shares of Class A Common Stock so issuable shall,
when so issued, be duly and validly issued, fully paid and non-assessable, and
free from liens and charges with respect to such issue. The Corporation will
take all such action as may be necessary to assure that all such shares of Class
A Common Stock may be so issued without violation of any applicable law or
regulation, or of any requirements of any national securities exchange upon
which the Class A Common Stock may be listed. The Corporation will not take any
action that results in any adjustment of the conversion ratio if the total
number of shares of Class A Common Stock issued and issuable after such action
upon conversion of the Class B Common Stock would exceed the total number of
Class A Common Stock then authorized by the Articles of Incorporation.
(8) Reissuance of Shares. Any shares of Class B Common Stock that are
converted into shares of Class A Common Stock as provided herein shall be
retired and cancelled and shall not be reissued.
B. Preferred Stock
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors of the Corporation is hereby expressly authorized to
provide, by resolution or resolutions duly adopted by it prior to issuance, for
the creation of each such series and to fix the designation and the powers,
preferences, rights, qualifications, limitations and restrictions relating to
the shares of each such series (the "Preferred Stock Designation"). The
authority of the Board of Directors with respect to each series of Preferred
Stock shall include, but not be limited to, determining the following:
(1) the designation of such series, the number of shares to constitute such
series and the stated value if different from the par value thereof;
(2) whether the shares of such series shall have voting rights, in addition
to any voting rights provided by law, and, if so, the terms of such voting
rights, which may be general or limited;
(3) the dividends, if any, payable on such series, whether any such
dividends shall be cumulative, and, if so, from what dates, the conditions and
dates upon which such dividends shall be payable, and the preference or relation
which such dividends shall bear to the dividends payable on any shares of stock
of any other class or any other series of Preferred Stock;
(4) whether the shares of such series shall be subject to redemption by the
Corporation, and, if so, the times, prices and other conditions of such
redemption;
3
<PAGE> 4
(5) the amount or amounts payable upon shares of such series upon, and the
rights of the holders of such series in, the voluntary or involuntary
liquidation, dissolution or winding up, or upon any distribution of the assets,
of the Corporation;
(6) whether the shares of such series shall be subject to the operation of
a retirement or sinking fund and, if so, the extent to and the manner in which
any such retirement or sinking fund shall be applied to the purchase or
redemption of the shares of such series for retirement or other corporate
purposes and the terms and provisions relating to the operation thereof;
(7) whether the shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or any other series of
Preferred Stock or any other securities and, if so, the price or prices or the
rate or rates of conversion or exchange and the method, if any, of adjusting the
same, and any other terms and conditions of conversion or exchange;
(8) the limitations and restrictions, if any, to be effective while any
shares of such series are outstanding upon the payment of dividends or the
making of other distributions on, and upon the purchase, redemption or other
acquisition by the Corporation of, the Common Stock or shares of stock of any
other class or any other series of Preferred Stock;
(9) the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional stock,
including additional shares of such series or of any other series of Preferred
Stock or of any other class; and
(10) any other powers, preferences and relative, participating, optional
and other special rights, and any qualifications, limitations and restrictions,
thereof.
The powers, preferences and relative, participating, optional and other
special rights of each series of Preferred Stock, and the qualification,
limitations or restrictions thereof, if any, may differ from those of any and
all other series at any time outstanding. All shares of any one series of
Preferred Stock shall be identical in all respects with all other shares of such
series, except that shares of any one series issued at different times may
differ as to the dates from which dividends thereof shall be cumulative.
THIRD: The address of the Corporation's registered office in the
State of Georgia is located at 999 Peachtree Street, N.E., Suite 1400, Atlanta,
Georgia 30309 (Fulton County). The name of its registered agent at such address
is Wade H. Stribling, Esq.
FOURTH: The name and address of the incorporator is Wade H.
Stribling, Esq., and his mailing address is c/o Nelson Mullins Riley &
Scarborough, L.L.P., First Union Plaza, 999 Peachtree Street, N.E., Suite 1400,
Atlanta, Georgia 30309.
FIFTH: The mailing address of the principal office of the corporation
is 6000 Lake Forrest Drive, Suite 110, Atlanta, Georgia 30328.
SIXTH: The corporation shall have no fewer than three directors, with
the actual number to be set in accordance with the Bylaws of the corporation.
SEVENTH: A director of the corporation shall not be personally liable
to the corporation or its shareholders for monetary damages for breach of duty
of care or other duty as a director, except for liability (1) for any
appropriation, in violation of the director's duties, of any business
opportunity of the corporation, (2) for acts or omissions which involve
intentional misconduct or a knowing violation of law, (3) set forth in section
14-2-832 (or any successor provision or redesignation thereunder) of the Georgia
Business Corporation Code, or (4) for any transaction from which the director
derived an improper personal benefit.
4
<PAGE> 5
If at any time the Georgia Business Corporation Code shall have been
amended to authorize elimination or limitation of the liability of a director,
then the liability of each director of the corporation shall be eliminated or
limited to the fullest extent permitted by the Georgia Business Corporation
Code, as so amended, without further action by the shareholders, unless the
provisions of the Georgia Business Corporation Code, as amended, require further
action by the shareholders. Any repeal or modification of the foregoing
provisions of this Article VII shall not adversely affect the elimination or
limitation of liability or alleged liability pursuant hereto of any director of
the corporation for or with respect to any alleged act or omission of the
director occurring prior to such repeal or modification.
EIGHTH: Shareholder action may be taken without a meeting if written
consent, setting forth the action so taken, is signed by persons who would be
entitled to vote not less than the minimum number of shares that would be
necessary to authorize or take the action, subject to the provisions of the
Georgia Business Corporation Code.
IN WITNESS THEREOF, I have hereunto signed my name and affirm that the
statements made herein are true under the penalties of perjury, this 14th day of
July, 1998.
/s/ Wade H. Stribling
------------------------------
Wade H. Stribling, Esq.
Incorporator
5
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF MERGER OF
TEKGRAF, INC.
WITH AND INTO
TEKGRAF REINCORPORATION SUBSIDIARY, INC.
Pursuant to Sections 14-2-1107 and 14-2-1105(b) of the Georgia Business
Corporation Code, (the "Code"), the undersigned corporation DOES HEREBY CERTIFY:
1. That the names and states of incorporation of the constituent
corporations of the merger are Tekgraf, Inc., a Delaware corporation (sometimes
hereinafter referred to as "Tekgraf"), and Tekgraf Reincorporation Subsidiary,
Inc., a Georgia corporation (sometimes hereinafter referred to as
"Reincorporation Sub" or the "Surviving Corporation") (Tekgraf and
Reincorporation Sub are sometimes hereinafter collectively referred to as the
"Constituent Corporations").
2. That the Surviving Corporation to the merger will be Tekgraf
Reincorporation Subsidiary, Inc.
3. That the Articles of Incorporation of Reincorporation Sub shall be the
Articles of Incorporation of the Surviving Corporation, which Articles of
Incorporation shall be amended at the effective time of the merger by deleting
Article First in its entirety and replacing it with the following Article First:
"FIRST: The name of the corporation is Tekgraf, Inc. (the
"Corporation")."
4. That an executed copy of the Agreement and Plan of Merger, dated as of
July 30, 1998 (the "Plan of Merger"), is on file at the principle place of
business of the Surviving Corporation. The address of the principle place of
business of the Surviving Corporation is 6000 Lake Forrest Drive, Suite 110,
Atlanta, Georgia 30328.
5. That the Surviving Corporation will furnish a copy of the Plan of
Merger, on request and without cost, to any shareholder of any of the
Constituent Corporations.
6. That the Plan of Merger was duly approved by the shareholders of both
Constituent Corporations.
7. A request for publication of a notice of filing the foregoing
Certificate of Merger and payment therefor, will be made as required by Section
14-2-1105.1(b) of the Georgia Business Corporation Code.
IN WITNESS WHEREOF, I have signed my name on behalf of the Surviving
Corporation this 30th day of July, 1998.
[CORPORATE SEAL] TEKGRAF REINCORPORATION
SUBSIDIARY, INC.
ATTEST: /s/ Jeff Camp By: /s/ Phillip C. Aginsky
---------------------- ---------------------------------
Name: Jeff Camp Name: Phillip C. Aginsky
Title: Chief Financial Officer Title: President
<PAGE> 1
EXHIBIT 3.3
BY-LAWS
OF
TEKGRAF REINCORPORATION SUBSIDIARY, INC.
(A Georgia Corporation)
-----------------------
ARTICLE I
Meetings of Shareholders
Section 1. Annual Meeting. The annual meeting of the Shareholders of TEKGRAF
REINCORPORATION SUBSIDIARY, INC., hereinafter called the "Corporation",
for the election of directors and for the transaction of such other
business as may come before the meeting shall be held in the 5th month
following the close of the Corporation's fiscal year, at such date and
time as shall be designated by the Board or Chairman of the Board or the
President, or at such other date and time as the Board shall designate.
Section 2. Special Meeting. Special Meetings of the Shareholders, unless
otherwise prescribed by statute, may be called at any time by the Board
or the Chairman of the Board or the President. The Board of Directors
shall call a special meeting of the Shareholders when requested in
writing by Shareholders holding not less than 20% of the outstanding
stock of the corporation; such written request shall state the object of
the meeting proposed to be held.
Section 3. Notice of Meetings. Notice of the place, date and time of the
holding of each annual and special meeting of the Shareholders and, in
the case of a special meeting, the purpose or purposes thereof shall be
given personally or by mail in a postage prepaid envelope to each
Shareholder entitled to vote at such meeting, not less than ten (10) nor
more than sixty (60) days before the date of such meeting, and, if
mailed, it shall be directed to such Shareholder at his address as it
appears on the records of the Corporation, unless he shall have filed
with the Secretary of the Corporation a written request that notices to
him be mailed to some other address, in which case it shall be directed
to him at some other address. If mailed, such notice shall be deemed to
be delivered when deposited in United States mail so addressed with
postage thereon prepaid. Notice of any meeting of Shareholders shall not
be required to be given to any Shareholder who shall attend such meeting
in person or by proxy and shall not, at the beginning of such meeting,
object to the transaction of any business because the meeting is not
lawfully called or convened, or who shall, either before or after the
meeting, submit a signed waiver of notice, in person or by proxy. Unless
the Board shall fix after the adjournment a new record date for an
adjourned meeting, notice of such adjourned meeting need not be given if
the time and place to which the meeting shall be adjourned were
announced at the meeting at which the adjournment is taken. At the
adjourned meeting the Corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall
be given to each Shareholder of record entitled to vote at the meeting.
Section 4. Place of Meetings. Meetings of the Shareholders may be held at
such place, within or without the State of Georgia, as the Board or
other officer calling the same shall specify in the notice of such
meeting, or in a duly executed waiver of notice thereof.
Section 5. Quorum. At all meetings of the Shareholders, the holders of a
majority of the votes of the shares of stock of the Corporation issued
and outstanding and entitled to vote shall be present in person or by
proxy to constitute a quorum for the transaction of any business, except
when Shareholders are required to vote by class, in which event a
majority of the issued and outstanding shares of the appropriate class
shall be
<PAGE> 2
present in person or by proxy, or except as otherwise provided by
statute or in the Articles of Incorporation. In the absence of a quorum,
the holders of a majority of the votes of the shares of stock present in
person or by proxy and entitled to vote, or if no Shareholder entitled
to vote is present, then any officer of the Corporation may adjourn the
meeting from time to time. At any such adjourned meeting at which a
quorum may be present any business may be transacted which might have
been transacted at the meeting as originally called.
Section 6. Organization. At each meeting of the Shareholders the Chairman of
the Board, or in his absence or inability to act, the President, or in
the absence or inability to act of the Chairman of the Board and the
President, a Vice President, or in the absence of all the foregoing, any
person chosen by a majority of those Shareholders present, shall act as
chairman of the meeting. The Secretary, or, in his absence or inability
to act, the Assistant Secretary or any person appointed by the chairman
of the meeting, shall act as secretary of the meeting and keep the
minutes thereof.
Section 7. Order of Business. The order of business at all meetings of the
Shareholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute, the Articles of
Incorporation, or any certificate duly filed in the office of the
Secretary of State of Georgia, each holder of record of shares of stock
of the Corporation having voting power shall be entitled at each meeting
of the Shareholders to one vote for every share of such stock standing
in his name on the record of Shareholders of the Corporation on the date
fixed by the Board as the record date for the determination of the
Shareholders who shall be entitled to notice of and to vote at such
meeting; or if such record date shall not have been so fixed, then at
the close of business on the day next preceding the day on which the
meeting is held; or each Shareholder entitled to vote at any meeting of
Shareholders may authorize another person or persons to act for him by a
proxy signed by such Shareholder or his attorney-in-fact. Any such proxy
shall be delivered to the secretary of such meeting at or prior to the
time designated in the order of business for so delivering such proxies.
No proxy shall be valid after the expiration of three years from the
date thereof, unless otherwise provided in the proxy. Every proxy shall
be revocable at the pleasure of the Shareholder executing it, except in
those cases where an irrevocable proxy is permitted by law. Except as
otherwise provided by statute, these By-Laws, or the Articles of
Incorporation, any corporate action to be taken by vote of the
Shareholders shall be authorized by a majority of the total votes, or
when Shareholders are required to vote by class by a majority of the
votes of the appropriate class, cast at a meeting of Shareholders by the
holders of shares present in person or represented by proxy and entitled
to vote on such action. Unless required by statute, or determined by the
chairman of the meeting to be advisable, the vote on any question need
not be by written ballot. On a vote by written ballot, each ballot shall
be signed by the Shareholder voting, or by his proxy, if there be such
proxy, and shall state the number of shares voted.
Section 9. List of Shareholders. The officer who has charge of the stock
ledger of the Corporation, or the transfer agent of the Corporation's
stock, if there be one then acting, shall prepare and make, at least ten
days before every meeting of Shareholders, a complete list of the
Shareholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each Shareholder and the number of
shares registered in the name of each Shareholder. Such list shall be
open to the examination of any Shareholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where
the meeting is to be held, at the place where the meeting is to be held,
or at the office of the transfer agent. The list shall also be produced
and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any Shareholder who is present.
Section 10. Inspectors. The Board may, in advance of any meeting of
Shareholders, appoint one or more inspectors to act at such meeting or
any adjournment thereof. If the inspectors shall not be so appointed or
if any of them shall fail to appear or act, the chairman of the meeting
may, and on the request of any Shareholder entitled to vote thereat
shall, appoint inspectors. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to
execute the duties of inspector at such
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meeting with strict impartiality and according to the best of his
ability. The inspectors shall determine the number of shares outstanding
and the voting power of each, the number of shares represented at the
meeting, the existence of a quorum, the validity and effect of proxies,
and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote,
count and tabulate all votes, ballots or consents, determine the result,
and do such acts as are proper to conduct the election or vote with
fairness to all Shareholders. On request of the chairman of the meeting
or any Shareholder entitled to vote thereat, the inspectors shall make a
report in writing of any challenge, request or matter determined by them
and shall execute a certificate of any fact found by them. No director
or candidate for the office of director shall act as inspector of an
election of directors. Inspectors need not be Shareholders.
Section 11. Consent of Shareholders in Lieu of Meeting. Unless otherwise
provided in the Articles of Incorporation, any action required by
Section 14-2-704 of the Georgia Business Corporation Code, to be taken
at any annual or special meeting of such Shareholders, may be taken
without a meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon
were present and voted and shall be delivered to the corporation by
delivery to its registered office in this State, its principal place of
business, or an officer or agent of the corporation having custody of
the book in which proceedings of meetings of Shareholders are recorded.
Delivery made to a corporation's registered office shall be by hand or
by certified or registered mail, return receipt requested.
ARTICLE II
Board of Directors
Section 1. General Powers. The business and affairs of the Corporation shall
be managed by the Board. The Board may exercise all such authority and
powers of the Corporation and do all such lawful acts and things as are
not by statute or the Articles of Incorporation or by these By-Laws
directed or required to be exercised or done by the Shareholders.
Section 2. Number, Qualifications, Election and Term of Office. The number of
directors of the Corporation shall be fixed from time to time by the
vote of a majority of the entire Board then in office and the number
thereof may thereafter by like vote be increased or decreased to such
greater or lesser number (not less than three) as may be so provided,
subject to the provisions of Section 11 of this Article II. All of the
directors shall be of full age and need not be Shareholders. Except as
otherwise provided by statute or these By-Laws, the directors shall be
elected at the annual meeting of the Shareholders for the election of
directors at which a quorum is present, and the persons receiving a
plurality of the votes cast at such meeting shall be elected. Each
director shall hold office until the next annual meeting of the
Shareholders and until his successor shall have been duly elected and
qualified, or until his death, or until he shall have resigned, or have
been removed, as hereinafter provided in these By-Laws, or as otherwise
provided by statute or the Articles of Incorporation.
Section 3. Place of Meetings. Meetings of the Board may be held at such
place, within or without the State of Georgia, as the Board may from
time to time determine or as shall be specified in the notice or waiver
of notice of such meeting.
Section 4. Annual Meeting. The Board shall meet for the purpose of
organization, the election of officers and the transaction of other
business, as soon as practicable after each annual meeting of the
Shareholders, on the same day and at the same place where such annual
meeting shall be held. Notice of such meeting need not be given. Such
meeting may be held at any other time or place (within or without the
State of Georgia) which shall be specified in a notice thereof given as
hereinafter provided in Section 7 of this Article II.
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Section 5. Regular Meetings. Regular meetings of the Board shall be held
at such time and place as the Board may from time to time determine. If
any day fixed for a regular meeting shall be a legal holiday at the
place where the meeting is to be held, then the meeting which would
otherwise be held on that day shall be held at the same hour on the next
succeeding business day. Notice of regular meetings of the Board need
not be given except as otherwise required by statute or these By-Laws.
Section 6. Special Meetings. Special meetings of the Board may be called
by two or more directors of the Corporation or by the Chairman of the
Board or the President.
Section 7. Notice of Meetings. Notice of each special meeting of the Board
(and of each regular meeting for which notice shall be required) shall
be given by the Secretary as hereinafter provided in this Section 7, in
which notice shall be stated the time and place (within or without the
State of Georgia) of the meeting. Notice of each such meeting shall be
delivered to each director either personally or by telephone, telegraph,
cable or wireless, at least twenty-four hours before the time at which
such meeting is to be held or by first-class mail, postage prepaid,
addressed to him at his residence, or usual place of business, at least
three days before the day on which such meeting is to be held. If
mailed, such notice shall be deemed to be delivered when deposited in
the United States mail. Notice of any such meeting need not be given to
any director who shall, either before or after the meeting, submit a
signed waiver of notice or who shall attend such meeting protesting,
prior to or at its commencement, the lack of notice to him. Except as
otherwise specifically required by these By-Laws, a notice or waiver of
notice of any regular or special meeting need not state the purposes of
such meeting.
Section 8. Quorum and Manner of Acting. A majority of the entire Board shall
be present in person at any meeting of the Board in order to constitute
a quorum for the transaction of business at such meeting, and, except as
otherwise expressly required by statute or the Articles of
Incorporation, the act of a majority of the directors present at any
meeting at which a quorum is present shall be the act of the Board. Any
one or more members of the Board or any committee thereof may
participate in a meeting of the Board or such committee by means of a
conference telephone or similar communications equipment allowing all
participants in the meeting to hear each other at the same time and
participation by such means shall constitute presence in person at a
meeting. In the absence of a quorum at any meeting of the Board, a
majority of the directors present thereat, or if no director be present,
the Secretary, may adjourn such meeting to another time and place, or
such meeting, unless it be the annual meeting of the Board, need not be
held. At any adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at the
meeting as originally called. Except as provided in Article III of these
By-Laws, the directors shall act only as a Board and the individual
directors shall have no power as such.
Section 9. Organization. At each meeting of the Board, the Chairman of the
Board (or, in his absence or inability to act, the President, or, in his
absence or inability to act, another director chosen by a majority of
the directors present) shall act as chairman of the meeting and preside
thereat. The Secretary (or, in his absence or inability to act, any
person appointed by the chairman) shall act as secretary of the meeting
and keep the minutes thereof.
Section 10. Resignations. Any director of the Corporation may resign at any
time by giving written notice of his resignation to the Board or
Chairman of the Board or the President or the Secretary. Any such
resignation shall take effect at the time specified therein or, if the
time when it shall become effective shall not be specified therein,
immediately upon its receipt; and unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it
effective.
Section 11. Vacancies. Vacancies, including newly created directorships, may
be filled by a majority of the directors then in office, including those
who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall
hold office as provided in this section for the filling of other
vacancies.
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Section 12. Removal of Directors. Except as otherwise provided in the
Articles of Incorporation or in these By-Laws, any director may be
removed, either with or without cause, at any time, by the affirmative
vote of a majority of the votes of the issued and outstanding shares of
stock entitled to vote for the election of the Shareholders called and
held for that purpose, or by a majority vote of the Board of Directors
at a meeting called for such purpose, and the vacancy in the Board
caused by any such removal may be filled by such Shareholders or
directors, as the case may be, at such meeting, and if the Shareholders
shall fail to fill such vacancy, such vacancy shall be filled in the
manner as provided by these By-Laws.
Section 13. Compensation. The Board shall have authority to fix the
compensation, including fees and reimbursement of expenses, of directors
for services to the Corporation in any capacity, provided no such
payment shall preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor.
Section 14. Action by the Board. To the extent permitted under the laws of
the State of Georgia, any action required or permitted to be taken at
any meeting of the Board or of any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case
may be, consent thereto in writing, and the writing or writings are
filed with the minutes of the proceedings of the Board or committee.
ARTICLE III
Executive and Other Committees
Section 1. Executive and Other Committees. The Board may, by resolution
passed by a majority of the whole Board, designate one or more
committees, each committee to consist of two or more of the directors of
the Corporation. The Board may designate one or more directors as
alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the Committee. Any such committee,
to the extent provided in the resolution, shall have and may exercise
the powers of the Board in the management of the business and affairs of
the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; provided, however, that in
the absence or disqualification of any member of such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board to act at the
meeting in the place of any such absent or disqualified member. Each
committee shall keep minutes of its proceedings and shall report such
minutes to the Board when required. All such proceedings shall be
subject to revision or alteration by the Board, provided, however, the
third parties shall not be prejudiced by such revision or alteration.
Section 2. General. A majority of any committee may determine its action and
fix the time and place of its meetings, unless the Board shall otherwise
provide. Notice of such meetings shall be given to each member of the
committee in the manner provided for in Article II, Section 7. The Board
shall have the power at any time to fill vacancies in, to change the
membership of, or to dissolve any such committee. Nothing herein shall
be deemed to prevent the Board from appointing one or more committees
consisting in whole or in part of persons who are directors of the
Corporation; provided, however, that no such committee shall have or may
exercise any authority of the Board.
ARTICLE IV
Officers
Section 1. Number and Qualifications. The officers of the Corporation shall
include the Chairman of the Board, the President, one or more Vice
Presidents (one or more of whom may be designated Executive Vice
President or Senior Vice President), the Treasurer, and the Secretary.
Any two or more offices may be held by the same person. Such officers
shall be elected from time to time by the Board, each to hold office
until the meeting of the Board following the next annual meeting of the
Shareholders, or until his successor shall have been duly elected and
shall have qualified, or until his death, or until he shall have
resigned, or have been removed, as hereinafter provided in these
By-Laws. The Board may from time to time elect a Vice Chairman of the
Board, and the Board may from time to time elect, or the Chairman of
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the Board, or the President may appoint, such other officers (including
one or more Assistant Vice Presidents, Assistant Secretaries, and
Assistant Treasurers), as may be necessary or desirable for the business
of the Corporation. Such other officers and agents shall have such
duties and shall hold their offices for such terms as may be prescribed
by the Board or by the Board or by the appointing authority.
Section 2. Resignation. Any officer of the Corporation may resign at any time
by giving written notice of his resignation to the Board, the Chairman
of the Board, the President or the Secretary. Any such resignation shall
take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its
receipt; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 3. Removal. Any officer or agent of the Corporation may be removed,
either with or without cause, at any time, by the vote of the majority
of the entire Board at any meeting of the Board or, except in the case
of an officer or agent elected or appointed by the Board, by the
Chairman of the Board or the President. Such removal shall be without
prejudice to the contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office, whether arising from death,
resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to
such office.
Section 5. a. The Chairman of the Board. The Chairman of the Board, if one be
elected, shall, if present, preside at each meeting of the Shareholders
and of the Board and shall be an ex officio member of all committees of
the Board. He shall perform all duties incident to the office of
Chairman of the Board and such other duties as may from time to time be
assigned to him by the Board.
b. The Vice Chairman of the Board. The Vice Chairman of the
Board, if one be elected, shall have such powers and perform
all such duties as from time to time may be assigned to him by
the Board or the Chairman of the Board and, unless otherwise
provided by the Board, shall in the case of the absence or
inability to act of the Chairman of the Board, perform the
duties of the Chairman of the Board and when so acting shall
have all the powers of, and be subject to all the restrictions
upon, the Chairman of the Board.
Section 6. The President. The President shall be the chief operating and
executive officer of the Corporation and shall have general and active
supervision and direction over the business and affairs of the
Corporation and over its several officers, subject, however, to the
direction of the Chairman of the Board and the control of the Board. If
no Chairman of the Board is elected, or at the request of the Chairman
of the Board, or in the case of his absence or inability to act, unless
there be a Vice Chairman of the Board so designated to act, the
President shall perform the duties of the Chairman of the Board and when
so acting shall have all the powers of, and be subject to all the
restrictions upon, the Chairman of the Board. He shall perform all
duties incident to the office of the President and such other duties as
from time to time may be assigned to him by the Board or the Chairman of
the Board.
Section 7. Vice Presidents. Each Executive Vice President, each Senior Vice
President and each Vice President shall have such powers and perform all
such duties as from time to time may be assigned to him by the Board,
the Chairman of the Board, or the President. They shall, in the order of
their seniority, have the power and may perform the duties of the
Chairman of the Board and the President.
Section 8. The Treasurer. The Treasurer shall be the chief financial officer
of the Corporation and shall exercise general supervision over the
receipt, custody and disbursement of Corporate funds. He shall have such
further powers and duties as may be conferred upon him from time to time
by the President or the Board of Directors. He shall perform the duties
of controller if no one is elected to that office.
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Section 9. The Secretary. The Secretary shall:
(a) keep or cause to be kept in one or more books provided
for the purpose, the minutes of all meetings of the Board, the
committees of the Board and the Shareholders;
(b) see that all notices are duly given in accordance with
the provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the
Corporation and affix and attest the seal to all stock
certificates of the Corporation (unless the seal be a facsimile,
as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under
its seal;
(d) see that the books, reports, statements, certificates
and other documents and records required by law to be kept and
filed are properly kept and filed, and
(e) in general, perform all the duties incident to the
office of Secretary and such other duties as from time to time
may be assigned to him by the Board, the Chairman of the Board,
or the President.
Section 10. Officer's Bonds or Other Security. If required by the Board, any
officer of the Corporation shall give a bond or other security for the
faithful performance of his duties, in such amount and with such surety
or sureties as the Board may require.
Section 11. Compensation. The compensation of the officers of the Corporation
for their services as such officers shall be fixed from time to time by
the Board, provided, however, that the Board may delegate to the
Chairman of the Board or the President the power to fix the compensation
of officers and agents appointed by the Chairman of the Board or the
President, as the case may be. An officer of the Corporation shall not
be prevented from receiving compensation by reason of the fact that he
is also a director of the Corporation, but any such officer who shall
also be a director shall not have any vote in the determination of the
amount of compensation paid to him.
ARTICLE V
Indemnification
The Corporation shall, to the fullest extent permitted by the laws of
the state of incorporation, indemnify any and all persons whom it shall have
power to indemnify against any and all costs, expenses, liabilities or other
matters incurred by them by reason of having been officers or directors of the
Corporation, any subsidiary of the Corporation or of any other corporation for
which he acted as officer or director at the request of the Corporation.
ARTICLE VI
Contracts, Checks, Drafts, Bank Account, etc.
Section 1. Execution of Contracts. Except as otherwise required by statute,
the Articles of Incorporation or these By-Laws, any contracts or other
instruments may be executed and delivered in the name and on behalf of
the Corporation by such officer or officers (including any assistant
officer) of the Corporation as the Board may from time to time direct.
Such authority may be general or confined to specific instances as the
Board may determine. Unless authorized by the Board or expressly
permitted by these By-Laws, an officer or agent or employee shall not
have any power or authority to bind the Corporation by any contract or
engagement or to pledge its credit or to render it pecuniarily liable
for any purpose or to any amount.
Section 2. Loans. Unless the Board shall otherwise determine, either (a) the
Chairman of the Board, the Vice Chairman of the Board or the President,
singly, or (b) a Vice President, together with the Treasurer, may effect
loans and advances at any time for the Corporation or guarantee any
loans and advances to any subsidiary of the Corporation, from any bank,
trust company or other institution, or from any firm, corporation or
individual, and for such loans and advances may make, execute and
deliver promissory
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notes, bonds or other certificates or evidences of indebtedness of the
Corporation, or guarantee of indebtedness of subsidiaries of the
Corporation, but no officer or officers shall mortgage, pledge,
hypothecate or transfer any securities or other property of the
Corporation, except when authorized by the Board.
Section 3. Checks, Drafts, etc. All checks, drafts, bills of exchange or
other orders for the payment of money out of the funds of the
Corporation, and all notes or other evidences of indebtedness of the
Corporation, shall be signed in the name and on behalf of the
Corporation by such persons and in such manner as shall from time to
time be authorized by the Board.
Section 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in
such banks, trust companies or other depositories as the Board may from
time to time designate or as may be designated by any officer or
officers of the Corporation to whom such power of designation may from
time to time be delegated by the Board. For the purpose of deposit and
for the purpose of collection for the account of the Corporation,
checks, drafts and other orders for the payment of money which are
payable to the order of the Corporation may be endorsed, assigned and
delivered by any officer or agent of the Corporation, or in such manner
as the Board may determine by resolution.
Section 5. General and Special Bank Accounts. The Board may from time to time
authorize the opening and keeping of general and special bank accounts
with such banks, trust companies or other depositories as the Board may
designate or as may be designated by any officer or officers of the
Corporation to whom such power of designation may from time to time be
delegated by the Board. The Board may make such special rules and
regulations with respect to such bank accounts, not inconsistent with
the provisions of these By-Laws, as it may deem expedient.
Section 6. Proxies in Respect of Securities of Other Corporations. Unless
otherwise provided by resolution adopted by the Board of Directors, the
Chairman of the Board, the President, or a Vice President may from time
to time appoint an attorney or attorneys or agent or agents, of the
Corporation, in the name and on behalf of the Corporation to cast the
votes which the Corporation may be entitled to cast as the holder of
stock or other securities in any other corporation, any of whose stock
or other securities may be held by the Corporation, at meetings of the
holders of the stock or other securities of such other corporation, or
to consent in writing, in the name of the Corporation as such holder, to
any action by such other corporation, and may instruct the person or
persons so appointed as to the manner of casting such votes or giving
such consent, and may execute or cause to be executed in the name and on
behalf of the Corporation and under its corporate seal, or otherwise,
all such written proxies or other instruments as he may deem necessary
or proper in the premises.
ARTICLE VII
Shares, Etc.
Section 1. Stock Certificates. Each holder of shares of stock of the
Corporation shall be entitled to have a certificate, in such form as
shall be approved by the Board, certifying the number of shares of the
Corporation owned by him. The certificates representing shares of stock
shall be signed in the name of the Corporation by the Chairman of the
Board or the President or a Vice President and by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer and
sealed with the seal of the Corporation (which seal may be a facsimile,
engraved or printed); provided, however, that where any such certificate
is countersigned by a transfer agent other than the Corporation or its
employee, or is registered by a registrar other than the Corporation or
one of its employees, the signature of the officers of the Corporation
upon such certificates may be facsimiles, engraved or printed. In case
any officer who shall have signed or whose facsimile signature has been
placed upon such certificates shall have ceased to be such officer
before such certificates shall be issued, they may nevertheless be
issued by the Corporation with the same effect as if such officer were
still in office at the date of their issue.
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Section 2. Books of Account and Record of Shareholders. The books and records
of the Corporation may be kept at such places within or without the
state of incorporation as the Board of Directors may from time to time
determine. The stock record books and the blank stock certificate books
shall be kept by the Secretary or by any other officer or agent
designated by the Board of Directors.
Section 3. Transfer of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of the Corporation only
upon authorization by the registered holder thereof, or by his attorney
thereunto authorized by power of attorney duly executed and filed with
the Secretary or with a transfer agent or transfer clerk, and on
surrender of the certificate or certificates for such shares properly
endorsed or accompanied by a duly executed stock transfer power and the
payment of all taxes thereon. Except as otherwise provided by law, the
Corporation shall be entitled to recognize the exclusive right of a
person in whose name any share or shares stand on the record of
Shareholders as the owner of such share or shares for all purposes,
including, without limitation, the rights to receive dividends or other
distributions, and to vote as such owner, and the Corporation may hold
any such Shareholder of record liable for calls and assessments and the
Corporation shall not be bound to recognize any equitable or legal claim
to or interest in any such share or shares on the part of any other
person whether or not it shall have express or other notice thereof.
Whenever any transfers of shares shall be made for collateral security
and not absolutely, and both the transferor and transferee request the
Corporation to do so, such fact shall be stated in the entry of the
transfer.
Section 4. Regulations. The Board may make such additional rules and
regulations, not inconsistent with these By-Laws, as it may deem
expedient concerning the issue, transfer and registration of
certificates for shares of stock of the Corporation. It may appoint, or
authorize any officer or officers to appoint, one or more transfer
agents or one or more transfer clerks and one or more registrars and may
require all certificates for shares of stock to bear the signature or
signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any
certificate representing shares of stock of the Corporation shall
immediately notify the Corporation of any loss, destruction or
mutilation of such certificate, and the Corporation may issue a new
certificate of stock in the place of any certificate theretofore issued
by it which the owner thereof shall allege to have been lost, stolen, or
destroyed or which shall have been mutilated, and the Board may, in its
discretion, require such owner or his legal representative to give the
Corporation a bond in such sum, limited or unlimited, and in such form
and with such surety or sureties as the Board in its absolute discretion
shall determine, to indemnify the Corporation against any claim that may
be made against it on account of the alleged loss, theft, or destruction
of any such certificate, or the issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute
discretion, may refuse to issue any such new certificate, except
pursuant to legal proceedings under the laws of the State of Georgia.
Section 6. Fixing of the Record Date. In order that the Corporation may
determine the Shareholders entitled to notice of, or to vote at, any
meeting of Shareholders or any adjournment thereof, or to express
consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution of allotment of
any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful
action, the Board may fix, in advance, a record date, which shall not be
more than sixty nor less than ten days before the date of such meeting,
nor more than sixty days prior to any other action. A determination of
Shareholders of record entitled to notice of, or to vote at, a meeting
of Shareholders shall apply to any adjournment of the meeting; provided,
however, that the Board may fix a new record date for the adjourned
meeting.
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ARTICLE VIII
Offices
Section 1. Principal or Registered Office. The principal registered office
of the Corporation shall be at such place as may be specified in the
Articles of Incorporation of the Corporation or other certificate filed
pursuant to law, or if none be so specified, at such place as may from
time to time be fixed by the Board.
Section 2. Other Offices. The Corporation also may have an office or offices
other than said principal or registered office, at such place or places
either within or without the State of Georgia.
ARTICLE IX
Fiscal Year
The fiscal year of the Corporation shall be determined by the Board.
ARTICLE X
Seal
The Board shall provide a corporate seal which shall contain the name of
the Corporation, the words "Corporate Seal" and the year and State of Georgia.
ARTICLE XI
Amendments
Section 1. Shareholders. These By-Laws may be amended or repealed, or new
By-Laws may be adopted, at any annual or special meeting of the
Shareholders, by a majority of the total votes of the Shareholders or
when Shareholders are required to vote by class by a majority of the
appropriate class, in person or represented by proxy and entitled to
vote on such action; provided, however, that the notice of such meeting
shall have been given as provided in these By-Laws, which notice shall
mention that amendment or repeal of these By-Laws, or the adoption of
new By-Laws, is one of the purposes of such meeting.
Section 2. Board of Directors. These By-Laws may also be amended or repealed
or new By-Laws may be adopted, by the Board at any meeting thereof;
provided, however, that notice of such meeting shall have been given as
provided in these By-Laws, which notice shall mention that amendment or
repeal of the By-Laws, or the adoption of new By-Laws, is one of the
purposes of such meetings, By-Laws adopted by the Board may be amended
or repealed by the Shareholders as provided in Section 1 of this Article
XI.
ARTICLE XII
Miscellaneous
Section 1. Interested Directors. No contract or other transaction between the
Corporation and any other corporation shall be affected and invalidated
by the fact that any one or more of the Directors of the Corporation is
or are interested in or is a Director or officer or are Directors or
officers of such other corporation, and any Director or Directors,
individually or jointly, may be a party or parties to or may be
interested in any contract or transaction of the Corporation or in which
the Corporation is interested; and no contract, act or transaction of
the Corporation with any person or persons, firm or corporation shall be
affected or invalidated by the fact that any Director or Directors of
the Corporation is a party or are parties to or interested in such
contract, act or transaction, or in any way connected with such person
or persons, firms or associations, and each and every person who may
become a Director of the Corporation is hereby relieved from any
liability that might otherwise exist from contracting with the
Corporation for the benefit of himself, any firm, association or
corporation in which he may be in any way interested.
Section 2. Ratification. Any transaction questioned in any Shareholders'
derivative suit on the grounds of lack of authority, defective or
irregular execution, adverse interest of director, officer or
Shareholder,
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nondisclosure, miscomputation, or the application of improper principles
or practices of accounting, may be ratified before or after judgment, by
the Board of Directors or by the Shareholders in case less than a quorum
of Directors are qualified, and, if so ratified, shall have the same
force and effect as if the questioned transaction had been originally
duly authorized, and said ratification shall be binding upon the
Corporation and its Shareholders, and shall constitute a bar to any
claim or execution of any judgment in respect of such questioned
transaction.
11
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EXHIBIT 10.36
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LOAN AND SECURITY AGREEMENT
BETWEEN
TEKGRAF, INC., AS BORROWER
ALL THOSE SUBSIDIARIES OF BORROWER IDENTIFIED
AS "SUBSIDIARY GUARANTORS" HEREUNDER
AND
WACHOVIA BANK, NATIONAL ASSOCIATION, AS LENDER
CLOSING DATE: JULY 2, 1998
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<PAGE> 2
TABLE OF CONTENTS
1. DEFINITIONS, TERMS AND REFERENCES........................................ 1
1.1. Certain Definitions................................................ 1
1.2. Use of Defined Terms............................................... 9
1.3. Accounting Terms................................................... 9
1.4. UCC Terms.......................................................... 9
2. THE FINANCING............................................................ 9
2.1. Extensions of Credit............................................... 9
2.2. Interest and Other Fees and Charges................................10
2.3. General Provisions as to Payments..................................12
2.4. Subsidiary Guaranty................................................13
3. SECURITY INTEREST........................................................15
4. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO ACCOUNTS
RECEIVABLE COLLATERAL....................................................15
4.1. Bona Fide Accounts.................................................15
4.2. Good Title.........................................................15
4.3. Right to Grant Security Interest...................................15
4.4. Collateral Reserve Account.........................................15
4.5. Trade Styles.......................................................15
4.6. Limited Power of Attorney..........................................16
5. REPRESENTATIONS, WARRANTEES AND COVENANTS APPLICABLE TO INVENTORY
COLLATERAL...............................................................16
5.1. Sale of Inventory Collateral.......................................16
5.2. Insurance..........................................................16
5.3. Good Title.........................................................16
5.4. Right to Grant Security Interest...................................16
5.5. Location of Inventory Collateral...................................16
6. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO ACCOUNTS
RECEIVABLE COLLATERAL....................................................17
6.1. Sale of Equipment Collateral.......................................17
6.2. Insurance..........................................................17
6.3. Good Title.........................................................17
6.4. Right to Grant Security Interest...................................17
6.5. Location...........................................................17
7. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO BALANCES
COLLATERAL...............................................................17
7.1. Ownership..........................................................17
7.2. Remedies...........................................................17
7.3. Liens..............................................................18
8. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INTANGIBLES
COLLATERAL...............................................................18
8.1. Ownership..........................................................18
8.2. Liens..............................................................18
8.3. Preservation.......................................................18
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<TABLE>
<S> <C> <C>
9. GENERAL REPRESENTATIONS AND WARRANTIES...................................18
9.1. Existence.and Qualification......................................18
9.2. Authority; and Validity and Binding Effect.......................18
9.3. Incumbency and Authority of Signing Officers.....................18
9.4. No Material Litigation...........................................19
9.5. Taxes............................................................19
9.6. Capital..........................................................19
9.7. Organization.....................................................19
9.8. Insolvency.......................................................19
9.9. Title............................................................19
9.10. Margin Stock.....................................................19
9.11. No Violations....................................................19
9.12. Financial Statements.............................................19
9.13. Purchase of Collateral...........................................20
9.14. Pollution and Environmental Control..............................20
9.15. Possession of Permits............................................20
9.16. Subsidiaries.....................................................20
9.17. Federal Taxpayer Identification Number...........................20
9.18. Employee Benefit Plans...........................................20
9.19. Year 2000 Compliance.............................................20
10. AFFIRMATIVE COVENANTS....................................................20
10.1. Records Respecting Collateral....................................20
10.2. Further Assurances...............................................21
10.3. Right to Inspect and Conduct Audits..............................21
10.4. Collateral Reports...............................................21
10.5. Settlement Reports...............................................21
10.6. Periodic Financial Statements....................................21
10.7. Annual Financial Statements......................................21
10.8. SEC Reports......................................................22
10.9. Payment of Taxes.................................................22
10.10. Maintenance of Insurance.........................................22
10.11. Maintenance of Property and Management...........................22
10.12. Compliance Certificate...........................................22
10.13. Change of Principal Place of Business, Etc.......................22
10.14. Waivers..........................................................23
10.15. Preservation of Existence........................................23
10.16. Compliance With Laws.............................................23
10.17. Subordinations...................................................23
10.18. Certain Required Notices.........................................23
10.19. Year 2000 Compatability..........................................22
11. NEGATIVE COVENANTS.......................................................23
11.1. Encumbrances.....................................................23
11.2. Debt.............................................................23
11.3. Contingent Liabilities...........................................24
11.4. Dividends........................................................24
11.5. Redemption.......................................................24
11.6. Investments......................................................24
11.7. Mergers..........................................................24
11.8. Business Locations...............................................24
</TABLE>
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<TABLE>
<S> <C> <C>
11.9. Affiliate Transactions...........................................24
11.10. Subsidiaries.....................................................25
11.11. Fiscal Year......................................................25
11.12. Disposition of Assets............................................25
11.13. Federal Taxpayer Identification Number...........................25
11.14. Employee Benefit Plans...........................................25
12. FINANCIAL COVENANTS......................................................25
13. EVENTS OF DEFAULT........................................................25
13.1. Obligations......................................................25
13.2. Misrepresentations...............................................25
13.3. Certain Covenants................................................25
13.4. Other Covenants..................................................25
13.5. Other Debts......................................................26
13.6. Voluntary Bankruptcy.............................................26
13.7. Involuntary Bankruptcy...........................................26
13.8. Damage, Loss, Theft or Destruction of Collateral.................26
13.9. Judgments........................................................26
13.10. Disavowal of Certain Obligations.................................26
13.11. Material Adverse Change..........................................26
13.12. Change of Control, Etc...........................................27
14. REMEDIES.................................................................27
14.1. Acceleration of the Obligations..................................27
14.2. Default..........................................................27
14.3. Remedies of a Secured Party......................................27
14.4. Repossession of the Collateral...................................27
14.5. Direct Notification..............................................28
14.6. Other Remedies...................................................28
14.7. Set Off..........................................................28
15. MISCELLANEOUS............................................................28
15.1. Waiver...........................................................28
15.2. Governing Law....................................................28
15.3. Survival.........................................................28
15.4. Assignments......................................................28
15.5. Counterparts.....................................................28
15.6. Reimbursement....................................................29
15.7. Successors and Assign............................................29
15.8. Severability.....................................................29
15.9. Notices..........................................................29
15.10. Entire Agreement; Amendments.....................................29
15.11. Time of Essence..................................................29
15.12. Interpretation...................................................29
15.13. Lender Not a Joint Venturer......................................30
15.14. Jurisdiction.....................................................30
15.15. Acceptance.......................................................30
15.16. Payment on Non-Business Days.....................................30
15.17. Cure of Defaults by Lender.......................................30
15.18. Recitals.........................................................30
15.19. Attorney-in-Fact.................................................30
15.20. Sole Benefit.....................................................31
15.21. Indemnification..................................................31
</TABLE>
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15.22. Jury Trial Waiver................................................31
15.23. Terminology......................................................31
15.24. Exhibits.........................................................31
16. CONDITIONS PRECEDENT.....................................................31
16.1. Secretary's Certificate..........................................32
16.2. Good Standing Certificates.......................................32
16.3. Loan Documents...................................................32
16.4. Insurance........................................................32
16.5. Financing Statements.............................................32
16.6. Opinion of Counsel...............................................32
16.7. Landlord Agreements..............................................32
16.8. No Default.......................................................32
16.9. Telephone Instruction Letter.....................................32
16.10. No Material Adverse Change.......................................32
16.11. Stock Pledge Agreement...........................................32
16.12. Field Audit......................................................32
16.13. NationsBank Acknowledgment.......................................32
16.14. Other............................................................33
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LOAN AND SECURITY AGREEMENT
PREAMBLE. THIS AGREEMENT, made, entered into and effective as of July 2,1998, by
and among TEKGRAF, INC., a Delaware corporation ("Borrower"); those Subsidiaries
(as hereinafter defined) of Borrower identified hereinbelow as "Subsidiary
Guarantors" (herein called, collectively, "Subsidiary Guarantors" and,
individually, a "Subsidiary Guarantor"); and WACHOVIA BANK, NATIONAL
ASSOCIATION, a national bank ("Lender").
W I T N E S S E T H :
WHEREAS, Borrower and its Subsidiaries are engaged in a common business
enterprise in which any extensions of credit to Borrower will result in direct
and indirect, substantive economic benefit to its Subsidiaries; and
WHEREAS, Borrower has applied to Lender for a certain extension of credit,
as more particularly described hereinbelow, consisting of a $7,500,000 line of
credit for the mutual use and benefit of Borrower and each Subsidiary of
Borrower; and
WHEREAS, Lender is willing to extend such financing to Borrower in
accordance with the terms hereof upon the execution of this Agreement by
Borrower and each Subsidiary Guarantor (Borrower and each Subsidiary Guarantor
are herein collectively called "Obligors" and individually called an "Obligor");
compliance by each Obligor with all of the terms and provisions of this
Agreement relevant thereto and fulfillment of all conditions precedent to
Lender's obligations herein contained;
NOW, THEREFORE, to induce Lender to extend the financing provided for
herein, and for other good and valuable consideration, the sufficiency and
receipt of all of which are acknowledged by Obligors, Lender agrees with
Obligors as follows:
1. DEFINITIONS, TERMS AND REFERENCES.
1.1 CERTAIN DEFINITIONS. In addition to such other terms as elsewhere
defined herein, as used in this Agreement and in any Exhibit or Schedule
attached hereto, the following terms shall have the following meanings:
"Accounts Receivable Collateral" shall mean and include all accounts,
accounts receivable, contract rights, instruments, chattel paper and general
intangibles in the nature of payment obligations owing to each Obligor,
including, without limitation, all rights of each Obligor to payment for goods
sold or leased, or to be sold or to be leased, or for services rendered or to be
rendered, howsoever evidenced or incurred, together with all returned or
repossessed goods and all books, records, computer tapes, programs and ledger
books arising therefrom or relating thereto, all whether now owned or hereafter
acquired and howsoever arising.
"Account Debtor" shall mean any Person who is obligated on any of the
Accounts Receivable Collateral or otherwise is obligated as a purchaser or
lessee of any of the Inventory Collateral.
"Advance" shall mean an advance of borrowed funds made by Lender to or on
behalf of Borrower pursuant to this Agreement.
"Affiliate" shall mean, with respect to any Person, any other Person
Controlling, Controlled by or under common Control with such Person.
"Agreement" shall mean this Loan and Security Agreement, as it may be
modified, amended or supplemented from time to time; together with any and all
Schedules or Exhibits attached hereto.
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"Applicable Rate" shall mean the interest rate per annum payable on the
Advances, as is defined and more particularly described in Section 2.2.1.
"Assignment of Claims Act" shall mean the federal Assignment of Claims Act
of 1940, as it may be amended from time to time; together with all regulations
promulgated from time to time in respect thereof.
"Balances Collateral" shall mean all property of each Obligor left with
Lender or in Lender's possession, custody or control now or hereafter, all
deposit accounts of each Obligor now or hereafter opened with Lender, all
certificates of deposit now or hereafter issued by Lender to each Obligor, and
all drafts, checks and other items deposited in or with Lender by each Obligor
for collection now or hereafter.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as it may
be amended from time to time.
"Booked Cost" in respect of Inventory Collateral, shall mean the inventory
cost accounting method employed by each Obligor as of the Closing Date, which,
unless otherwise designated on the Obligor Information Schedule attached hereto,
is "FIFO".
"Borrower" shall have the meaning given to such term in the preamble to
this Agreement.
"Borrowings" shall mean Advances of borrowed funds made hereunder to or on
behalf of Borrower pursuant to this Agreement.
"Business Day" shall mean a day on which Lender is open for the conduct of
banking business at its principal office in Atlanta, Georgia; provided, however,
that, for purposes of determining the timing of requests for, and establishing
the Applicable Rate on, LIBOR Borrowings, "Business Day" shall mean,
additionally, any day on which dealings in United States Dollar deposits are
also being carried out by Lender in the London interbank Eurodollar market.
"Closing Date" shall mean the date set forth on the cover page as the
"Closing Date."
"Collateral" shall mean the property, or interests in property, of each
Obligor described as such in Article 3 plus any other property, or interests in
property, of each Obligor in which Lender has, or hereafter obtains or claims, a
Lien as security for the payment of the Obligations.
"Collateral Locations" shall mean the Executive Office and those additional
locations, if any, set forth and described on the Obligor Information Schedule.
"Collateral Reserve Account" shall mean a demand deposit account which one
or more of the Obligors may be required to open and maintain with Lender
pursuant to the requirements of Section 4.4 for the concentration and collection
of proceeds of certain Collateral.
"Compliance Certificate" shall mean a certificate to be signed by a duly
authorized officer of Borrower pursuant to Section 10.12 in substantially the
form of Exhibit "B" attached hereto (unless otherwise required or approved by
Lender).
"Commitment' shall mean the maximum amount which is available for borrowing
under the Line of Credit (considered without regard to the Margin) which, as of
the Closing Date, is Seven Million Five Hundred Thousand Dollars ($7,500,000).
"Consolidated Subsidiaries" shall mean those Subsidiaries of Borrower (if
any) existing from time to time which, for purposes of GAAP, are required to be
consolidated for financial reporting purposes.
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"Control," "Controlled" or "Controlling" shall mean, with respect to any
Person, the power to direct the management and policies of such Person,
directly, indirectly, whether through the ownership of voting securities or
otherwise; provided, however, that, in any event, any Person which owns directly
or indirectly ten percent (10%) or more of the securities having ordinary voting
power for the election of directors or other governing body of an entity shall
be deemed to "Control" such entity for purposes of this Agreement.
"Debt" means all liabilities, obligations and indebtedness of a Person, of
any kind or nature, whether now or hereafter owing, arising, due or payable,
howsoever evidenced, created, incurred, acquired or owing, and whether primary,
secondary, direct, contingent, fixed or otherwise, including, without in any way
limiting the generality of the foregoing: (i) all obligations, liabilities and
indebtedness secured by any Lien on a Person's property, even though such Person
shall not have assumed or become liable for the payment thereof; (ii) all
obligations or liabilities created or arising under any capital lease,
conditional sale or other title retention agreement; (iii) all accrued pension
fund and other employee benefit plan obligations and liabilities; (iv) all
Guaranteed Obligations; (v) any liabilities under, or associated with, interest
rate protection agreements; and (vi) any deferred taxes.
"Default Condition" shall mean the occurrence of any event which, after
satisfaction of any requirement for the giving of notice or the lapse of time,
or both, would become an Event of Default.
"Default Rate" shall mean that interest rate per annum equal to two percent
(2%) per annum in excess of the otherwise Applicable Rate payable on any
Obligation.
"Dollars" or "$" shall mean United States Dollars.
"Eligible Accounts" shall mean that portion of an Obligor's Accounts
Receivable Collateral consisting of trade accounts receivable actually billed
to, and owing to such Obligor by, its Account Debtors in the ordinary course of
its business, excluding, however, in any event, any such account: (i) with
respect to which any portion thereof is more than ninety (90) days past invoice
date; (ii) which is owing by any Affiliate of such Obligor; (iii) which is owing
by any Account Debtor having fifty percent (50%) or more in face value of its
then existing accounts with such Obligor ineligible hereunder pursuant to the
operation and effect of clause (i) above; (iv) which arises from any contract on
which such Obligor's performance is assured by a performance, completion or
other bond; (v) constituting retainage which has been withheld from such Obligor
pending contract completion, to the extent thereof; (vi) constituting a service,
warranty or similar charge, to the extent thereof; (vii) which is evidenced by a
promissory note, other instrument or chattel paper; (viii) which represents an
accord and satisfaction in respect of any prior account receivable; (ix) the
assignment of which is subject to any requirements set forth in the Assignment
of Claims Act (unless and except to the extent that an Obligor has complied
therewith to Lender's satisfaction); (x) which does not conform in any respect
to the warranties and representations set forth in the Loan Documents in respect
of Accounts Receivable Collateral; (xi) which is owing by any Account Debtor
whose accounts in face amount with all Obligors exceed ten percent (10%) of
total Eligible Accounts, but only to the extent of such excess; (xii) which is
owing by, billed to or paid by any Account Debtor not located in the United
States of America (unless and except to the extent that it is backed by a letter
of credit issued to such Obligor as beneficiary by or through a bank
headquartered in the United States which is acceptable to Lender); (xiii) as to
which a duly perfected, first priority security interest does not exist at any
time in favor of Lender, (xiv) as to which any counterclaim, defense, setoff,
deduction or contra-account exists, to the extent thereof; (xv) which represents
a progress billing, to the extent that the Account Debtor has not received and
accepted the underlying goods services; or (xvi) which has otherwise been
determined by Lender in its good faith discretion not to be an "Eligible
Account" for purposes hereof.
"Eligible Inventory" shall mean that portion of an Obligor's Inventory
Collateral consisting of unopened boxed goods inventory of such Obligor subject
to an existing repurchase agreement from the manufacture, but in any event, no
more than ninety (90) days old, which (i) is at all times subject to a duly
perfected, first priority security interest in favor of Lender; (ii) is in good
and saleable condition; (iii) is not on consignment from, or subject to, any
repurchase agreement with any supplier; (iv) does not constitute returned,
repossessed, damaged or slow-moving goods; (v) conforms in all respects to the
warranties and representations set forth in the Loan Documents in respect of
Inventory Collateral; (vi) is not subject to a negotiable document of title
(unless issued or
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endorsed to Lender); (vii) is not subject to any license or other agreement that
limits or restricts such Obligor's or Lender's right to sell or otherwise
dispose of such inventory; (viii) is located only at a Collateral Location
within the United States of America, with respect to which, if leased by such
Obligor, Lender has received from the landlord at such location a Landlord's
Agreement; and (ix) which has not otherwise been determined by Lender in its
good faith discretion to be excluded from "Eligible Inventory" for purposes
hereof.
"Employee Benefit Plan" shall mean any "employee welfare benefit plan," as
that term is defined in Section 3(l) of ERISA, any "employee pension benefit
plan," as that term is defined in Section 3(2) of ERISA, or any other plan which
is subject to the provisions of Title IV of ERISA which is for the benefit of
any employees of Borrower and any employees of any Subsidiary or any other
entity which is a member of a "controlled group" or under "common control" with
Borrower, as such terms are defined in Section 4001(a)(14) of ERISA.
"Environmental Laws" shall mean all federal, state and local laws, rules,
regulations, ordinances, programs, permits, guidances, orders and consent
decrees relating to health, safety and environmental matters, whether now or
hereafter existing, including, but not limited to state and federal superlien
and environmental cleanup laws and U.S. Department of Transportation regulations
and any other state or local law or regulation relating to pollution,
reclamation, or protection of the environment including laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, or hazardous or toxic materials or wastes into air, water, or
land, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling or pollutants, contaminants
or hazardous or toxic materials or wastes.
"Equipment Collateral" shall mean all equipment and fixtures of each
Obligor, whether now owned or hereafter acquired, wherever located, including,
without limitation, all machinery, furniture, furnishings, leasehold
improvements, computer hardware, motor vehicles, forklifts, rolling stock, dies
and tools used or useful in such Obligor's business operations.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
may be amended from time to time.
"Event of Default" shall mean any of the events or conditions described in
Article 13, provided that any requirement for the giving of notice or the lapse
of time, or both, set forth in Article 13 has been satisfied.
"Executive Office" shall mean the address of each Obligor's chief executive
office and principal place of business, as designated on the Obligor Information
Schedule.
"Fiscal Year", in respect of a Person, shall mean the fiscal year of such
Person, as employed by such Person as of the Closing Date, and designated as
such on the Obligor Information Schedule, as to Borrower and its Consolidated
Subsidiaries. The terms "Fiscal Quarter" and "Fiscal Month", if used herein,
shall correspond accordingly thereto.
"GAAP" shall mean generally accepted accounting principles consistently
applied for the fiscal period(s) in question.
"Guaranty Obligations" shall mean, with respect to any Person, all
obligations of such Person which in any manner directly or indirectly guarantee
or assure, or in effect guarantee or assure, the payment or performance of any
indebtedness, dividend or other obligation of any other Person or to assure or
in effect assure the holder of any such obligations against loss in respect
thereof.
"Guarantor" shall mean, individually and collectively, any and all
accommodation makers, endorsers, guarantors or sureties from whom Lender may
require, either on or after the Closing Date, the endorsement of any Note or the
execution of any contract of guaranty or suretyship guaranteeing payment of any
of the Obligations. As of the Closing Date, the Subsidiary Guarantors are the
only Guarantors.
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"Guaranty" shall mean any agreement or other writing executed by a
Guarantor guaranteeing payment of any of the Obligations which has been accepted
and approved by Lender for such purpose. In the case of the Subsidiary
Guarantors, Section 2.4 below shall constitute their Guaranty.
"H-P Reserve" shall mean a reserve in that amount estimated by Lender from
time to time to be equivalent to Borrower's total outstanding Indebtedness
(including contingent liabilities) to Hewlett Packard, which, initially, shall
be $2,500,000, but may be adjusted up or down by Lender from time to time, in
its good faith discretion.
"Intangibles Collateral" shall mean all general intangibles of an Obligor,
whether now existing or hereafter acquired or arising, including, without
limitation, all copyrights, royalties, tax refunds, rights to tax refunds,
trademarks, trade names, service marks, patent and proprietary rights,
blueprints, drawings, designs, trade secrets, plans, diagrams, schematics and
assembly and display materials relating thereto, all customer lists, all books
and records, all computer software and programs, and all rights of an Obligor as
purchaser, lessee, licensee or indemnitee under any contract.
"Inventory Collateral" shall mean all inventory of an Obligor, whether now
owned or hereafter acquired, wherever located, including, without limitation,
all goods of an Obligor held for sale or lease or furnished or to be furnished
under contracts of service, all goods held for display or demonstration, goods
on lease or consignment, spare parts, repair parts, returned and repossessed
goods, all raw materials, work-in-process, finished goods, catalysts and
supplies used or consumed in an Obligor's business, together with all documents,
documents of title, dock warrants, dock receipts, warehouse receipts, bills of
lading or orders for the delivery of all, or any portion, of the foregoing.
"Landlord's Agreement" shall mean an agreement from the landlord of any
Collateral Location pursuant to which such landlord has waived, released or
subordinated in favor of Lender any rights it has in respect of the Collateral,
to be substantially in the form of Exhibit "C" attached hereto (unless otherwise
approved by Lender).
"Lender" shall have the meaning given to such term in the preamble to this
Agreement.
"Letter of Credit" shall have the meaning given to such term in Section
2.1.2.
"Letter of Credit Obligations" shall mean all Obligations of Borrower
arising in respect of Letters of Credit, including, without limitation, (i) all
contingent liabilities arising in respect of Letters of Credit issued, but not
drawn upon, and (ii) all reimbursement liabilities arising in respect of
drawings made under Letters of Credit.
"Leverage Ratio" shall mean, at any time, the ratio of (i) all Debts of
Borrower and its Consolidated Subsidiaries, to (ii) Tangible Net Worth.
"LIBOR Borrowings" shall mean those Borrowings which bear interest at a
rate per annum determined by reference to the LIBOR Index Rate.
"LIBOR Index Rate" shall mean that interest rate per annum determined
monthly by Lender on that day which is two (2) Business Days prior to the first
day of each calendar month by dividing: (x) the offered rate for deposits in
Dollars in the London interbank borrowing market of amounts equal to or
comparable to the maximum amount of the Line of Credit for a period of one (1)
month, which rate appears on the display designated as page "3750" of the
Telerate Service (or such other page as may replace page "3750" of that service
or such other service or services as may be nominated by the British Bankers'
Association for the purpose of displaying London interbank offered rates for
U.S. dollar deposits) as of 11:00 a.m., London time, on such date (which rate
shall be rounded upward, if necessary, to the next higher 1/10,000 of 1%);
provided, however, that if more than one such offered rate appears on such
service on such date, the offered rate shall be deemed to be the arithmetic
average (rounded upward, if necessary, to the next higher of 1/100 of 1%) of
such offered rates; by (y) the number 1 minus any then applicable percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or its successor) for
determining the maximum reserve requirement for a member of the Federal Reserve
System in respect of "Eurocurrency liabilities"(or any other category of
liabilities
- 5 -
<PAGE> 11
which includes deposits by reference to which the interest rate on such
borrowings is determined or any category of extensions of credit or other assets
which includes loans by a non-United States office of Lender to United States
residents). The LIBOR Index Rate shall be adjusted automatically on and as of
the effective date of any change in the percentage described in the foregoing
clause (y).
"Lien" shall mean any deed to secure debt, deed of trust, mortgage or
similar instrument, and any lien, security interest, preferential arrangement
which has the practical effect of constituting a security interest, security
title, pledge, charge, encumbrance or servitude of any kind, whether by
consensual agreement or by operation of statute or other law, and whether
voluntary or involuntary, including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof.
"Lien Subordination Agreement" shall mean an agreement from any vendor or
distributor of inventory to Borrower pursuant to which such Person has waived,
released or subordinated in favor of Lender any rights it has in respect of such
inventory and any proceeds thereof, to be substantially in the form of Exhibit
"K" attached hereto (unless otherwise approved by Lender).
"Line of Credit" shall refer to the line of credit in the maximum principal
amount of Seven Million Five Hundred Thousand Dollars ($7,500,000) opened by
Lender in favor of Borrower pursuant to the provisions of Section 2.1.
"Loan Documents" shall mean this Agreement, the Notes, any financing
statements covering portions of the Collateral, and any and all other documents,
instruments, certificates and agreements executed and/or delivered by any
Obligor in connection herewith, or any one, more, or all of the foregoing, as
the context shall require.
"Margin" shall mean a sum determined by adding (i) an amount equal to
eighty percent (80%), or such lesser or greater percentage which Lender may
elect to establish from time to time by written notice to Borrower in its good
faith discretion, of the net dollar amount of Eligible Accounts as at the date
of determination to (ii) an amount equal to forty percent (40%), or such lesser
or greater percentage which Lender may elect to establish from time to time by
written notice to Borrower in its good faith discretion, of the dollar amount of
the Eligible Inventory, valued at the lower of its Booked Cost or market value,
as at the date of determination, not to exceed, in any event, as to Eligible
Inventory, the lesser of (A) Two Million Five Hundred Thousand Dollars
($2,500,000) or (B) then current borrowing availability under the Line of Credit
determined by reference to Eligible Accounts without regard to Eligible
Inventory. As of the Closing Date, Lender has imposed the H-P Reserve against
the Margin and borrowing availability under the Line of Credit. Prior to the
expiration of a thirty (30) days' period beginning on the Closing Date, the H-P
Reserve may be released if, but only if, Hewlett Packard has executed and
delivered to Lender a Lien Subordination Agreement in respect of its inventory
and the proceeds thereof. Subsequent to the expiration of such thirty(30) days'
period, the H-P Reserve shall be released if, but only if, (a) Hewlett Packard
has executed and delivered to Lender such Lien Subordination Agreement, and (b)
Borrower has returned to Lender the full amount of the loan origination fee
previously rebated to it by Lender ($12,500) pursuant to Section 2.2.2(a).
Lender shall also be entitled to impose such other reserves against the Margin
and borrowing availability under the Line of Credit as it may elect from time to
time in its good faith discretion, by written notice to Borrower.
"Margin Requirement" shall have the meaning ascribed to such term in
Section 2.1.1.
"Margining Period" shall mean any period during which the Leverage Ratio is
greater than 1.50:1. Each Margining Period shall begin on the first day of the
first calendar month following the calendar month in which Lender receives the
monthly financial statements of Borrower and its consolidated Subsidiaries
pursuant to Section 10.6 reflecting a Leverage Ratio greater than 1.50:1, and
shall continue thereafter until the first day of the first calendar month
following the calendar month in which Lender receives such monthly financial
statements of Borrower and its consolidated Subsidiaries reflecting a Leverage
Ratio equal to or less than 1.50:1. There may be multiple, consecutive and
non-consecutive Margining Periods during the term of this Agreement.
- 6 -
<PAGE> 12
"Master Note" shall mean the master promissory note, dated of even date
herewith, as amended or supplemented from time to time, in a principal amount
equal to the maximum amount of the Line of Credit, evidencing Advances to be
obtained by Borrower under the Line of Credit, together with any renewals or
extensions thereof in whole or in part. The Master Note shall be substantially
in the form of Exhibit 'D".
"Material Adverse Change" shall mean with respect to any event, act,
condition or occurrence of whatever nature (including any adverse determination
in any litigation, arbitration or governmental investigation or proceeding),
whether singly or in conjunction with any other event or events, act or acts,
condition or conditions, occurrence or occurrences, whether or not related, a
material adverse change in, or a material adverse effect upon, any of (a) the
financial condition, operations, business, properties or prospects of the
Borrower and its Consolidated Subsidiaries, taken as a whole, or any Guarantor
(other than a Subsidiary Guarantor), (b) the rights and remedies of the Lender
under any of the Loan Documents or any documents, instruments or agreements
executed and/or delivered by any Person other than an Obligor in conjunction
with the Loan Documents, or the ability of any Obligor to perform its
obligations under any of the Loan Documents or of any Guarantor to perform
Guarantor's obligations under any Guaranty or any documents, instruments or
agreements executed by any Guarantor in conjunction with such Guaranty, or (c)
the legality, validity or enforceability of any of the Loan Documents or any
documents, instruments or agreements executed and/or delivered by any Person
other than an Obligor in conjunction with the Loan Documents.
"Note" shall mean any instrument at any time evidencing all or any portion
of any Obligations.
"Obligations" shall mean any and all Debts of each Obligor to Lender,
including without limiting the generality of the foregoing, any Debt of any
Obligor to Lender under any loan made to such Obligor by Lender prior to the
date hereof and any and all extensions or renewals thereof in whole or in part;
any Debt of Borrower to Lender arising hereunder or as a result hereof, whether
evidenced by any Note, or constituting Advances, Letter of Credit Obligations or
otherwise, and any and all extensions or renewals thereof in whole or in part;
the Debt of each Subsidiary Guarantor under its Guaranty; any Debt of any
Obligor to Lender under any later or future advances or loans made by Lender to
such Obligor, and any and all extensions or renewals thereof in whole or in
part; and any and all future or additional Debts of any Obligor to Lender
whatsoever and in any event whether existing as of the date hereof or hereafter
arising, whether arising under a loan, lease, credit card arrangement, line of
credit, letter of credit or other type of financing, and whether direct,
indirect, absolute or contingent, as maker, endorser, guarantor, surety or
otherwise, and whether evidenced by, arising out of, or relating to, a
promissory note, bill of exchange, check, draft, bond, letter of credit,
guaranty agreement, bankers' acceptance, foreign exchange contract, interest
rate protection agreement, derivative product or contract, commitment fee,
service charge or otherwise.
"Obligor" and "Obligors" shall have the meanings given to such terms in
the preamble to this Agreement
"Obligor Information Schedule" shall mean an information schedule, to be
completed by Borrower for itself and each other Obligor, in substantially the
form of Exhibit "A" attached hereto.
"Permitted Encumbrances" shall mean: (i) Liens for taxes not yet due and
payable or being actively contested as permitted by this Agreement, but only if
such Liens do not adversely affect Lender's rights or the priority of Lender's
security interest in the Collateral; (ii) carriers', warehousemen's, mechanics,
materialmen's, repairmen's or other like Liens arising in the ordinary course of
business, payment for which is not yet due or which are being actively contested
in good faith and by appropriate, lawful proceedings, but only if such liens are
and remain junior to liens granted in favor of Lender; (iii) pledges or deposits
in connection with worker's compensation, unemployment insurance and other
social security legislation; (iv) deposits to secure the performance of
utilities, leases, statutory obligations and surety and appeal bonds and other
obligations of a like nature arising by statute or under customary terms
regarding depository relationships on deposits held by financial institutions
with whom an Obligor has a banker-customer relationship; (vi) typical
restrictions imposed by licenses and leases of software (including location and
transfer restrictions); (vii) Liens in favor of Lender; (viii) Liens granted by
any Obligor to vendors or financiers of fixed assets to secure the payment of
Purchase Money Debt so long as (A) such Debt is permitted to be incurred
hereunder, (B) such Liens extend only to the specific assets so purchased,
secure only such deferred payment obligation and related interest, fees and
charges and no other Debt, and (C) such Liens
- 7 -
<PAGE> 13
are promptly released upon the payment in full of such Debt; (ix) Liens existing
on the Closing Date in Inventory Collateral (including proceeds thereof) granted
by an Obligor in favor of any vendor or distributor of inventory, provided that
such Person has executed in Lender's favor a Lien Subordination Agreement; (x)
any Lien existing on any specific fixed asset of any Person at the time such
Person becomes an Obligor and not created in contemplation of such event; (xi)
any Lien on any specific fixed asset of any Person existing at the time such
Person is merged or consolidated with or into one of the Obligors and not
created in contemplation of such event; (xii) any Lien existing on any specific
fixed asset prior to the acquisition thereof by one of the Obligors and not
created in contemplation of such acquisition; (xiii) any Lien arising out of the
refinancing, extension, renewal or refunding of any Debt secured by any Lien
permitted by any of the foregoing paragraphs of this Section, provided that (A)
such Debt is not secured by any additional assets, and (B) the amount of such
Debt secured by any such Lien is not increased; and (xiv) Liens incidental to
the conduct of its business or the ownership of its assets which (A) do not
secure Debt and (B) do not in the aggregate materially detract from the value of
its assets or materially impair the use thereof in the operation of its
business.
"Person" shall mean any individual, partnership, corporation, limited
liability company, joint venture, joint stock company, trust, governmental unit
or other entity.
"Prime Borrowings" shall mean those Borrowings which, pursuant to the
operation and effect of Section 2.2.1(c), are required to bear interest at a
rate per annum equal to the Prime Rate.
"Prime Rate" refers to that interest rate so denominated and set by Lender
from time to time as an interest rate basis for borrowings. The Prime Rate is
but one of several interest rate bases used by Lender. Lender extends credit at
interest rates equal to, above and below the Prime Rate.
"Prisym" shall mean Prisym Technologies Inc. of Georgia, a Georgia
corporation.
"Purchase Money Debt" shall mean Debt incurred by Borrower or any
Subsidiary in connection with the acquisition of fixed assets for the cost
thereof (including any for the deferred payment of any purchase price).
"Settlement" shall mean a report submitted by Borrower to Lender
demonstrating compliance with the Margin Requirement, to be substantially in the
form of Exhibit E attached hereto (unless otherwise required or approved by
Lender).
"Subordinated Debt" shall mean any unsecured Debt of Borrower or any
Subsidiary to any Person for borrowed funds or for the deferred payment of any
purchase price which, by written agreement in form and substance satisfactory to
Lender, has been subordinated in right of payment and claim, to the rights and
claims of Lender in respect of the Obligations, on terms and conditions
otherwise accepted and approved by Lender.
"Subsidiary" shall mean any corporation, partnership, business association
or other entity (including any Subsidiary of any of the foregoing) of which
Borrower owns, directly or indirectly through one or more Subsidiaries, fifty
percent (50%) or more of the capital stock or other equity interest having
ordinary power for the election of directors or others performing similar
functions.
"Subsidiary Guarantor" shall mean each Subsidiary of Borrower which either
on or subsequent to the Closing Date becomes a party to this Agreement as a
"Subsidiary Guarantor." As of the Closing Date, all Subsidiaries of Borrower,
except Prisym, are Subsidiary Guarantors, and each Subsidiary Guarantor is
identified as such under the term "Subsidiary Guarantor" on the signature
page(s) to this Agreement.
"Tangible Net Worth" shall mean Borrower's book net worth, determined on a
consolidated basis for Borrower and its Consolidated Subsidiaries in accordance
with GAAP, minus all assets of Borrower and such Subsidiaries constituting (i)
goodwill, patents, copyrights, trademarks, trade names and other intangible
assets, (ii) write-ups of assets, (iii) unamortized debt discount and expense,
(iv) deferred charges, (v) any Debts owing to such Person from any shareholders,
officers or directors of such Person, or from any Affiliates or Subsidiaries of
such
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<PAGE> 14
Person, and (vi) any permitted Restricted Investments. For purposes hereof, any
minority interest in any Subsidiary shown on Borrower's balance sheet shall be
excluded from its net worth and be included in its total liabilities.
"Telephone Instructions Letter" shall mean a letter from Borrower to
Lender, dated as of the Closing Date, indicating to Lender the Person(s)
authorized to request Advances pursuant hereto, to be substantially in the form
of Exhibit "F" attached hereto (unless otherwise required or approved by
Lender).
"Termination Date" shall mean the earliest to occur of the following dates:
(i) that date on which, pursuant to Section 14, Lender terminates the Line of
Credit (or the Line of Credit is deemed automatically terminated) subsequent to
the occurrence of an Event of Default; (ii) that date which is June 30, 2001; or
(iii) such later date as to which Lender may agree in writing from time to time
hereafter.
"UCC" shall mean the Uniform Commercial Code-Secured Transactions of
Georgia (OCGA Art. 11-9), as in effect on the Closing Date.
"Year 2000 Compliant and Ready" shall mean that Borrower's and each of its
Subsidiaries' hardware and software systems with respect to the operation of its
business and its general business plan will: (i) handle date information
involving any and all dates before, during and/or after January 1, 2000,
including accepting input, providing output and performing date calculations in
whole or in part; (ii) operate, accurately without interruption on and in
respect of any and all dates before, during and/or after January 1, 2000 and
without any change in performance; (iii) respond to and process two digit year
input without creating any ambiguity as to the century; and (iv) store and
provide date input information without creating any ambiguity as to the century.
"Year 2K Plan" shall have the meaning ascribed to such term in Section
9.19.
1.2 USE OF DEFINED TERMS. All terms defined in this Agreement and the
Exhibits shall have the same defined meanings when used in any other Loan
Documents, unless the context shall require otherwise.
1.3 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall have the meanings generally attributed to such terms under GAAP.
1.4 UCC TERMS. The terms "accounts", "chattel paper", "instruments",
"general intangibles", "inventory," "equipment" and "fixtures", as and when used
in the Loan Documents, shall have the same meanings given to such terms under
the UCC.
2. THE FINANCING.
2.1 EXTENSIONS OF CREDIT.
2.1.1 LINE OF CREDIT. On the Closing Date, subject to fulfillment
of all conditions precedent set forth in Section 16, Lender agrees to open the
Line of Credit in favor of Borrower so that, during the period from the Closing
Date to, but not including, the Termination Date, so long as there is not in
existence any Default Condition or Event of Default and the requested Borrowing,
if made, will not cause a Default Condition or Event of Default to exist,
Borrower may borrow and repay and reborrow Advances in up to a maximum aggregate
principal amount outstanding at any one time equal to the original principal
amount of the Line of Credit; subject, however, to the requirement that at no
time shall the aggregate principal amount of (i) outstanding Advances under the
Line of Credit, plus (ii) the aggregate amount of all Letter of Credit
Obligations, exceed the Commitment or, during any Margining Period, the lesser
of (A) the Commitment or (B) the Margin (such requirement being referred to
herein as the "Margin Requirement"), and subject, further, to the requirement
that if, at any time during any Margining Period, the Margin Requirement is not
satisfied, Borrower will immediately repay the then principal balance of the
Master Note by that amount necessary to satisfy the Margin Requirement. All
proceeds so obtained under the Line of Credit may be used by Borrower for
working capital in such manner as Borrower may elect in the ordinary course of
its business operations. The Debts arising from Advances made to or on behalf of
Borrower under the Line of Credit shall be evidenced by the Master Note, which
shall be executed by Borrower and delivered
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<PAGE> 15
to Lender on the Closing Date. The outstanding principal amount of the Master
Note may fluctuate from time to time, but shall be due and payable in full on
the Termination Date, and shall bear interest from the date of each disbursement
of principal until paid in full at the Applicable Rate, payable in the manner
described in Section 2.2.1. Subject to any contrary provisions of Section 2.2.1
in respect of LIBOR Borrowings, Borrower shall have the option to request
Advances under the Line of Credit by telephone pursuant to the Telephone
Instructions Letter or in a writing delivered to Lender not later than 11:00
a.m. (Atlanta, Georgia time) on the date of the requested Advance; provided,
however, that any telephone requests shall be made in accordance with the
Telephone Instructions Letter and, unless otherwise approved by Lender,
confirmed in writing not later than the Business Day following the disbursement
of the requested Advance.
2.1.2 LETTERS OF CREDIT. In addition to the foregoing, so long
as the Line of Credit remains open, Borrower shall have the further right to
apply for, and obtain commercial or standby letters of credit ("Letters of
Credit") to be issued by Lender for Borrower for use by Borrower in the ordinary
course of its business operations pursuant to a separate application and
agreement (one per each Letter of Credit) to be executed at time of issuance
between Lender and Borrower, which shall set forth, among other things, the
purpose, beneficiary, the expiry date and credit limit, together with the fees
and charges imposed by Lender for the issuance and administration thereof. All
outstanding Letter of Credit Obligations shall be reserved by Lender against
borrowing availability under the Line of Credit and be included as outstanding
Debt for purposes of determining the Margin Requirement. Lender shall have the
continuing right to charge as Advances any outstanding Letter of Credit
Obligations, and any fees and charges associated therewith, which have become
due and payable. Lender shall have the further right from time to time to impose
sublimits on the aggregate amounts of Letters of Credit and Letter of Credit
Obligations which at any one time may be outstanding.
2.2 INTEREST AND OTHER FEES AND CHARGES.
2.2.1 INTEREST AT APPLICABLE RATE. Lender and Borrower agree
that the interest rate payable on the Borrowings (herein called the "Applicable
Rate") shall be determined as follows:
(a) LINE OF CREDIT. Outstanding Advances under the Line of
Credit shall bear interest at the LIBOR Index Rate plus two percent (2%) per
annum; subject, however, to subsequent adjustment as provided in subsection (b)
below.
(b) SUBSEQUENT ADJUSTMENTS. The Applicable Rate described in
subsection (a) above shall be subject to subsequent adjustment, up or down,
based on Borrower's financial performance, determined by reference to THE
Leverage Ratio, measured monthly; that is, if the Leverage Ratio, measured as of
the end of each Fiscal Month of Borrower, commencing with the Fiscal Month
ending closest to, but occurring after, the Closing Date, is as described below,
the Applicable Rate shall be the interest rate appearing opposite said Leverage
Ratio:
<TABLE>
<CAPTION>
APPLICABLE RATE
-----------------------
LEVERAGE RATIO (LIBOR INDEX RATE PLUS)
-------------- -----------------------
<S> <C>
>2.00:1 2.75%
>1.50:1, <2.00:1 2.50%
-
>1.0:1, <1.50:1 2.25%
-
<1.00:1 2.00%
-
</TABLE>
Lender shall determine whether any adjustment to the Applicable Rate is to be
made monthly, based on Borrower's financial statements as of and for each Fiscal
Month end delivered to Lender pursuant to Section 10.6, provided, however, that
if such financial statements are not timely delivered to Lender, then an
adjustment to the Applicable Rate shall be made based on an assumed delivery of
said financial statements reflecting a Leverage Ratio of greater than 2.00:1;
and, provided, further, that no downward adjustment shall be made if an Event of
Default or Default Condition then exists. Each such adjustment to the Applicable
Rate shall become effective as of the first day of the calendar month following
the date on which such financial statements are delivered (or deemed delivered)
to Lender, and shall remain effective unless and until any subsequent adjustment
becomes effective in accordance with
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<PAGE> 16
the terms of this subsection (b). Each such adjustment shall apply to all LIBOR
Borrowings then existing and any made during the period for which such
adjustment becomes effective. In the event that the annual audit report of
Borrower for any Fiscal Year shall require restatement of financial statements
of Borrower and such restatement shall affect the Leverage Ratio and would have
required a different Applicable Rate to be in effect for prior periods, then
Lender at its option, may require Borrower to make additional payments of
interest or rebate interest for such prior periods.
(c) SPECIAL CONDITIONS AND LIMITATIONS ON LIBOR BORROWINGS. If
at any time, a change of law, or compliance by Lender with any request or
directive (whether or not having the force of law) of any governmental authority
shall make it unlawful or impracticable for Lender to make available, maintain
or fund any LIBOR Borrowings, Lender shall forthwith give notice to such effect
to Borrower, whereupon, until Lender notifies Borrower that the circumstances
giving rise to such suspension no longer exist, the obligation of Lender to make
such borrowings available to Borrower shall be suspended and if Lender shall
determine that it may not lawfully continue to maintain and fund any then
outstanding borrowings to maturity and shall so specify in such notice, each
Borrowing so affected shall be converted into a Prime Borrowing, effective
immediately, and any subsequent Borrowings shall be made, instead, as Prime
Borrowings.
(d) PAYMENT OF INTEREST. Accrued interest on any Borrowings at
the Applicable Rate shall be due and payable monthly in arrears, on the first
day of each calendar month, for the preceding calendar month (or portion
thereof), commencing on the first day of the first calendar month following the
Closing Date, and at maturity.
(e) CALCULATION OF INTEREST AND FEES. Interest on Borrowings
and any fees described in Section 2.2.2 computed on a per annum basis shall be
calculated on the basis of a 360-day year and actual days elapsed. The
Applicable Rate on any Prime Borrowings shall change with each change in the
Prime Rate, effective as of the opening of business on the Business Day of such
change. The Applicable Rate on LIBOR Borrowings shall change with each monthly
adjustment of the LIBOR Index Rate, effective on the first day of each calendar
month.
(f) CHARGING OF INTEREST AND FEES. Accrued and unpaid interest
on any Borrowings (and any outstanding fees described in Section 2.2.2) may,
when due and payable, be paid, at Lender's option (without any obligation to do
so), either (i) by Lender's charging the Line of Credit for an Advance in the
amount thereof; or (ii) by Lender's debiting any deposit account constituting
Balances Collateral for the amount thereof; but, notwithstanding the foregoing,
Borrower shall be and remain responsible for the payment of such sums.
(g) RATE ON OTHER OBLIGATIONS. To the extent that, at any
time, there are other Obligations besides Advances which are outstanding and
unpaid, such Obligations shall, unless and except to the extent that this
Agreement, any Note or any other Loan Document evidencing such Obligations
provides otherwise, bear interest at the same rate per annum as is then and
thereafter payable on Prime Borrowings under the Line of Credit.
2.2.2 FEES. In addition to the payment of interest at the
Applicable Rate, Borrower shall, also be obligated to pay Lender the following
fees and charges:
(a) LOAN ORIGINATION FEE. On the Closing Date, a fully earned,
non-refundable loan origination fee of Thirty Seven Thousand Five Hundred
Dollars ($37,500); provided, however, that a portion thereof, equal to $12,500,
shall be rebated by Lender to Borrower on the thirtieth (30th) day after the
Closing Date unless, within such thirty (30) days' period, Lender has released
the H-P Reserve.
(b) NON-USAGE FEE. Quarterly, on the first day of each
calendar quarter, commencing on the first of such dates following the Closing
Date, Borrower shall pay to Lender a fee equal to (x) One-fourth of one percent
(1/4%) per annum, times (y) the difference between (A) the Commitment, and (B)
the sum, without duplication, of the following, determined on a daily average
basis for the immediately preceding calendar quarter
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<PAGE> 17
(or portion thereof, as the case may be): (i) all Advances under the Line of
Credit plus (ii) all outstanding Letter of Credit Obligations.
(c) AUDIT FEES. For Collateral audits performed by Lender
pursuant to Section 10.3, Lender's standard audit fee for each audit performed
by Lender (or its designee), which, as of the Closing Date, equals One Thousand
Five Hundred Dollars ($1,500) plus expenses; provided, however, that (i)
Borrower shall not have to pay for more than one (1) such audit in any Fiscal
Year so long as Borrower is not in a Margining Period and (ii) Borrower shall
not have to pay for more than four (4) such audits in any one Fiscal Year so
long as no Event of Default exists.
2.2.3 CAPITAL ADEQUACY. If, after the Closing Date, the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change therein, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the administration thereof, or compliance by Lender with any request or
directive regarding capital adequacy (whether or not having the force of law) of
any such authority, central bank or comparable agency, affects or might affect
the amount of capital required or expected to be maintained by Lender or any
corporation in control of Lender and Lender determines that the amount of such
capital is increased by or based upon Lender's obligations hereunder, then from
time to time, within thirty (30) days after demand by Lender, which demand shall
include the change which has occurred and an explanation of such other request,
direction or requirement that is necessitating such change, Borrower shall pay
to Lender such additional amount or amounts as will compensate Lender in light
of such circumstances, to the extent that Lender reasonably determines such
increase in capital is allocable to Lender's obligations hereunder, and such
payment, as and when received, shall be applied by Lender in reimbursement of
Lender's increased costs in regard to such obligations.
2.2.4 USURY SAVINGS PROVISIONS. Lender and Borrower hereby
further agree that the only charge imposed by Lender upon Borrower for the use
of money in connection herewith is and shall be interest at the Applicable Rate,
and that all other charges imposed by Lender upon Borrower in connection
herewith, are and shall be deemed to be charges made to compensate Lender for
underwriting and administrative services and costs, and other services and costs
performed and incurred, and to be performed and incurred, by Lender in
connection with making credit available to Borrower hereunder, and shall under
no circumstances be deemed to be charges for the use of money. In no contingency
or event whatsoever shall the aggregate of all amounts deemed interest hereunder
or under the Notes and charged or collected pursuant to the terms of this
Agreement or pursuant to the Notes exceed the highest rate permissible under any
law which a court of competent jurisdiction shall, in a final determination,
deem applicable hereto. In the event that such a court determines that Lender
has charged or received interest hereunder in excess of the highest applicable
rate, the rate in effect hereunder shall automatically be reduced to the maximum
rate permitted by applicable law and Lender shall promptly refund to Borrower
any interest received by Lender in excess of the maximum lawful rate or, if so
requested by Borrower, shall apply such excess to the principal balance of the
Obligations. It is the intent hereof that Borrower not pay or contract to pay,
and that Lender not receive or contract to receive, directly or indirectly in
any manner whatsoever, interest in excess of that which may be paid by Borrower
under applicable law.
2.3 GENERAL PROVISIONS AS TO PAYMENTS.
2.3.1 METHOD OF PAYMENT. All payments of interest, fees
and principal pursuant to this Agreement must be received by Lender no later
than 2:00 p.m. (Atlanta, Georgia time) on the date when due, in federal or other
funds immediately available to Lender in Atlanta, Georgia.
2.3.2 APPLICATION OF PAYMENT. Except as otherwise
expressly set forth herein, all payments received by Lender hereunder shall be
applied, in accordance with the then current billing statement applicable to the
Borrowing, first to accrued interest, then to fees, then to principal due and
then to late charges. Any remaining funds shall be applied to the further
reduction of principal. In the event more than one Borrowing shall be
outstanding hereunder, and no designation is made by Borrower, Lender, in its
discretion, may determine to which Borrowing(s) each payment shall be applied.
Notwithstanding the foregoing, upon the occurrence of a
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Default Condition or Event of Default, payments shall be applied to the
Obligations in such order as Lender, in its sole discretion, may elect.
2.3.3 PREPAYMENT. Obligors may prepay any Obligations, in
whole or in part, at any time by paying the principal amount to be prepaid
together with accrued interest thereon to date of prepayment, but without any
premium or penalty.
2.4 SUBSIDIARY GUARANTY.
2.4.1 THE GUARANTY. The Subsidiary Guarantors hereby jointly
and severally guarantee to Lender and its successors and assigns the prompt
payment in full when due, whether at stated maturity, by acceleration or
otherwise of all Obligations of Borrower to Lender (such Obligations herein
called, collectively, the "Guaranteed Obligations"), in each case strictly in
accordance with the terms thereof. The Subsidiary Guarantors hereby further
jointly and severally agree that if Borrower shall fail to pay in full when due
(whether at stated maturity, by acceleration or otherwise) any of the Guaranteed
Obligations, the Subsidiary Guarantors will promptly pay the same, on demand,
and that in the case of any extension of time of payment or renewal of any of
the Guaranteed Obligations, the same will be promptly paid in full when due
(whether at extended maturity, by acceleration or otherwise) in accordance with
the terms of such extension or renewal.
2.4.2 OBLIGATIONS UNCONDITIONAL. The obligations of the
Subsidiary Guarantors hereunder are absolute and unconditional, joint and
several, irrespective of the value, genuineness, validity, regularity or
enforceability of the obligations of Borrower under this Agreement, the Notes or
any other Loan Document or any substitution, release or exchange of any other
guarantee of or security for any of the Guaranteed Obligations, and, to the
fullest extent permitted by applicable law, irrespective of any other
circumstance whatsoever that might otherwise constitute a legal or equitable
discharge or defense of a surety or guarantor, it being the intent of this
Section that the obligations of the Subsidiary Guarantors hereunder shall be
absolute and unconditional, joint and several, under and all circumstances.
Without limiting the generality of the foregoing, it is agreed that the
occurrence of any one or more of the following shall not alter or impair the
liability of the Subsidiary Guarantors hereunder which shall remain absolute and
unconditional as described above:
(i) at any time or from time to time, without notice to any of the
Subsidiary Guarantors, the time for any performance of or compliance with
any of the Guaranteed Obligations shall be extended, or such performance
or compliance shall be waived;
(ii) any of the acts mentioned in any of the provisions of this
Agreement or the Notes or any other agreement or instrument referred to
herein or therein shall be done or omitted;
(iii) the maturity of any of the Guaranteed Obligations shall be
accelerated, or any of the, Guaranteed Obligations shall be modified,
supplemented or amended in any respect, or any right under this Agreement
or the Notes or any other Loan Document shall be waived or any other
guarantee of any of the Guaranteed Obligations or any security therefor
shall be released or exchanged in whole or in part or otherwise dealt
with; or
(iv) any lien or security interest granted to, or in favor of,
Lender as security for any of the Guaranteed Obligations shall fail to be
perfected.
The Subsidiary Guarantors hereby expressly waive diligence, presentment, demand
of payment, protest and all notices whatsoever, and any requirement that Lender
exhaust any right, power or remedy or proceed against Borrower under this
Agreement or the Notes or any other Loan Document, or against any other Person
under any other Guaranty of, or security for, any of the Guaranteed Obligations.
2.4.3 REINSTATEMENT. The obligations of the Subsidiary
Guarantors hereunder shall be automatically reinstated if and to the extent that
for any reason any payment by or on behalf of Borrower in respect of the
Guaranteed Obligations is rescinded or must be otherwise restored by any holder
of any of the
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Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise and the Subsidiary Guarantors jointly and severally
agree that they will indemnify Lender on demand for all reasonable costs and
expenses (including, without limitation, fees of counsel) incurred by Lender in
connection with such rescission or restoration, including any such costs and
expenses incurred in defending against any claim alleging that such payment
constituted a preference, fraudulent transfer or similar payment under any
bankruptcy, insolvency or similar law.
2.4.4 SUBROGATION. Each Subsidiary Guarantor hereby waives all
rights of subrogation or contribution, whether arising by contract or operation
of law (including, without limitation, any such right arising under the
Bankruptcy Code) or otherwise by reason of any payment by it pursuant to the
provisions hereof until all Guaranteed Obligations are fully paid and satisfied,
and further agrees with the Borrower for the benefit of each of its creditors
(including, without limitation, Lender) that any such payment by it shall
constitute a contribution of capital by such Subsidiary Guarantor to the
Borrower (or an investment in the equity capital of the Borrower by such
Subsidiary Guarantor).
2.4.5 REMEDIES. The Subsidiary Guarantors jointly and
severally agree that, as between the Subsidiary Guarantors and Lender, the
Guaranteed Obligations may be declared to be forthwith due and payable as
provided herein (and shall be deemed to have become automatically due and
payable in the circumstances provided herein) for purposes hereof,
notwithstanding any stay, injunction or other prohibition preventing such
declaration (or such obligations from becoming automatically due and payable) as
against Borrower and that, in the event of such declaration (whether or not due
and payable by the Borrower) shall forthwith become due and payable by the
Subsidiary Guarantors for purposes hereof.
2.4.6 CONTINUING GUARANTY. The Guaranty set forth herein is a
continuing Guaranty, and shall apply to all Guaranteed Obligations, whenever and
howsoever arising.
2.4.7 RIGHTS OF CONTRIBUTION. The Subsidiary Guarantors hereby
agree, as between themselves, that if any Subsidiary Guarantor shall become an
"Excess Funding Guarantor" (as defined below) by reason of the payment by
Subsidiary Guarantor of any Guaranteed Obligations, each other Subsidiary
Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the
next sentence), pay to such Excess Funding Guarantor an amount equal to such
Subsidiary Guarantor's "Pro Rata Share" (as defined below and determined, for
this purpose, without reference to the properties, debts and liabilities of such
Excess Funding Guarantor) of the "Excess Payment" (as defined below) in respect
of such Guaranteed Obligations. The payment obligation of a Subsidiary Guarantor
to any Excess Funding Guarantor under this Section shall be subordinate and
subject in right of payment to the prior payment in full of the obligations of
such Subsidiary Guarantor under the other provisions of this Section 2.4 and
such Excess Funding Guarantor shall not exercise any right or remedy with
respect to such excess until payment and satisfaction in full of all such
obligations. For purposes hereof, (i) "Excess Funding Guarantor" means, in
respect of any guaranteed Obligations, a Subsidiary Guarantor that has paid an
amount in excess of its Pro Rata Share of such Guaranteed Obligations, (ii)
"Excess Payment" means, in respect of any guaranteed Obligations, the amount
paid by an Excess Funding Guarantor in excess of its Pro Rata Share of such
Guaranteed Obligations, (iii) "Pro Rata Share" means, for any Subsidiary
Guarantor, the ratio (express as a percentage) of (x) the amount by which the
aggregate present fair saleable value of all Properties of such Subsidiary
Guarantor (excluding any shares of stock of any other Subsidiary Guarantor)
exceeds the amount of all the debts and liabilities of such Subsidiary Guarantor
(including contingent, subordinated, unmatured and unliquidated liabilities, but
excluding the obligations of such Subsidiary Guarantor hereunder and any
obligations of any other Subsidiary Guarantor that have been Guaranteed by such
Subsidiary Guarantor) to (y) the amount by which the aggregate fair saleable
value of all Properties of all of the Subsidiary Guarantors exceeds the amount
of all the debts and liabilities (including contingent, subordinated, unmatured
and unliquidated liabilities, but excluding the obligations of the Subsidiary
Guarantor hereunder) of the Subsidiary Guarantors, determined (A) with respect
to any Subsidiary Guarantor that is a party hereto on the Closing Date, as of
the Closing Date, and (B) with respect to any other Subsidiary Guarantor, as of
the date such Subsidiary Guarantor becomes a Subsidiary Guarantor hereunder.
2.4.8 GENERAL LIMITATION ON GUARANTEED OBLIGATIONS. In any
action or proceeding involving any state corporate law, or any state of Federal
bankruptcy, insolvency, reorganization or other law
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<PAGE> 20
affecting the rights of creditors generally, if the obligations of the
Subsidiary Guarantors hereunder would otherwise, be held or determined to be
void, invalid or unenforceable, or subordinated to the claims of any other
creditors, on account of the amount of its liability hereunder, then,
notwithstanding any other provision hereof to the contrary, the amount of such
liability shall, without any further action by any Subsidiary Guarantor, Lender
or any other Person, be automatically limited and reduced to the highest amount
that is valid and enforceable and not subordinated to the claims of other
creditors a determined in such action or proceeding.
3. SECURITY INTEREST. As security for the payment of all Obligations owing
by it from time to time, each Obligor hereby grants to Lender a continuing,
general Lien upon and security interest and security title in and to the
following described property, or interests in property, of such Obligor,
wherever located, whether now existing or hereafter acquired or arising (herein
collectively called the "Collateral"), namely: (a) all of its Accounts
Receivable Collateral; (b) all of its Inventory Collateral; (c) all of its
Equipment Collateral; (d) all of its Intangibles Collateral; (e) all of its
Balances Collateral; and (f) all products and/or proceeds of any and all of the
foregoing, including, without limitation, insurance proceeds.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO ACCOUNTS
RECEIVABLE COLLATERAL. With respect to its Accounts Receivable Collateral, each
Obligor hereby represents, warrants and covenants to Lender as set forth below.
4.1 BONA FIDE ACCOUNTS. Each item of its Accounts Receivable
Collateral arises or will arise under a contract between an Account Debtor and
it, or from the bona fide sale or delivery of goods to or performance of
services for, an Account Debtor.
4.2 GOOD TITLE. It has good title to its Accounts Receivable
Collateral free and clear of all Liens other than any Permitted Encumbrances,
and no financing statement covering its Accounts Receivable Collateral is on
file in any public office other than any evidencing Permitted Encumbrances.
4.3 RIGHT TO GRANT SECURITY INTEREST. It has full right, power
and authority to grant this security interest in its Accounts Receivable
Collateral and hereafter will not pledge, hypothecate, grant a security interest
in, sell, assign, transfer, or otherwise dispose of its Accounts Receivable
Collateral, or any interest therein.
4.4 COLLATERAL RESERVE ACCOUNT. If requested by Lender to do
so on or at any time during a Margining Period, it shall establish as soon as
practicable but in any event within sixty (60) days thereafter and thereafter
maintain for the balance of such Margining Period with Lender, either
individually or in combination with one or more other Obligors, a Collateral
Reserve Account into which it shall transfer and deliver all cash, checks,
drafts, items and other instruments for the payment of money which it now has or
may at any time hereafter receive in full or partial payment for its Inventory
Collateral or otherwise as proceeds of its Accounts Receivable Collateral and,
pending such transfer and delivery, it shall be deemed to hold same in trust for
the benefit of Lender. Such Obligor shall not be entitled to withdraw funds on
deposit in such Collateral Reserve Account after its inception without the prior
written consent of Lender; provided, however, that, at any time during which
collected funds exist on deposit in such Collateral Reserve Account, Lender may
withdraw such deposits, or any portion thereof, therefrom, for application
against the Obligations in such manner as Lender, in its sole discretion, may
determine. Notwithstanding the foregoing, however, so long as no Event of
Default exists, Lender agrees to settle with each Obligor as to any funds which
may exist in its Collateral Reserve Account opened by it, after the foregoing
application, on a daily basis, on each Business Day.
4.5 TRADE STYLES. Except as may be set forth on the Obligor
Information Schedule attached hereto, it uses no trade names or trade styles in
its business operations (herein, "Trade Styles"), and it covenants with Lender
not to use any Trade Styles in its business operations hereafter, except as so
specified on the Obligor Information Schedule prior to having given Lender at
least thirty (30) days prior written notice thereof. In any event to the extent
that, now or hereafter, it uses any Trade Styles, it hereby certifies and agrees
with Lender that: (i) all of the accounts receivable and proceeds thereof
arising out of sales under the Trade Styles shall be the property of, and belong
to, it; (ii) each of the Trade Styles is a trade name and trade style (and not
an independent corporation or other legal entity) by which it identifies and
sells certain of its products or services and under which
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<PAGE> 21
it may conduct a portion of its business; (iii) all accounts receivable,
proceeds thereof, and returned merchandise which arise from the sale of products
invoiced under the names of any of the Trade Styles shall be owned solely by it
and shall be subject to the terms of this Agreement as they relate to its
Accounts Receivable Collateral; and (iv) each Obligor hereby appoints Lender as
its attorney-in-fact to file such certificates disclosing its use of the Trade
Styles and to take such other actions on its behalf as are necessary to comply
with the statutes of any states relating to the use of fictitious or assumed
business names, to the extent that it fails to do so.
4.6 LIMITED POWER OF ATTORNEY. It irrevocably designates and
appoints Lender as its true and lawful attorney-in-fact to endorse for
collection any checks, drafts, notes or other instruments received in payment of
or on account of any of its Collateral hereafter coming into Lender's possession
and control, whether pursuant to the Collateral Reserve Account or otherwise,
but Lender shall not be under any duty to exercise any such authority or power
or in any way be responsible for the collection of any such Collateral.
5. REPRESENTATIONS, WARRANTEES AND COVENANTS APPLICABLE TO INVENTORY
COLLATERAL. With respect to its Inventory Collateral, each Obligor hereby
represents, warrants and covenants to Lender as set forth below:
5.1 SALE OF INVENTORY COLLATERAL. It will not sell, lease,
exchange, or otherwise dispose of any of its Inventory Collateral without the
prior written consent of Lender, except in the ordinary course of business for
cash or on open account or on terms of payment ordinarily extended to its
customers. Upon the sale, exchange or other disposition of its Inventory
Collateral, the security interest and lien created and provided for herein,
without break in continuity and without further formality or act, shall continue
in and attach to any proceeds thereof, including, without limitation, accounts,
contract rights, shipping documents, documents of title, bills of lading,
warehouse receipts, dock warrants, dock receipts and cash or noncash proceeds
(subject to any Permitted Encumbrances), and in the event of any unauthorized
sale, shall continue in its Inventory Collateral itself.
5.2 INSURANCE. It will continue to maintain insurance on its
Inventory Collateral with the same, or substantially the same, companies, the
same, or substantially the same, relative amounts and against the same, or
substantially the same, risks as is maintained by Borrower on the Closing Date,
with loss payable to Lender as its interests may appear. Such insurance shall
not be cancellable by it, unless with the prior written consent of Lender, or by
its insurer, unless with at least thirty (30) days (or any lesser number of days
otherwise approved by Lender) advance written notice to Lender. In addition, it
shall cause insurer to provide Lender with at least thirty (30) days advance
written notice prior to insurer's nonrenewal of such insurance. Borrower shall
provided to Lender a copy of each such policy.
5.3 GOOD TITLE. Except with respect to any Permitted
Encumbrances, it owns its Inventory Collateral free and clear of any Lien, and
no financing statements or other evidences of the grant of a security interest
respecting its Inventory Collateral exist on the public records as of the date
hereof other than any evidencing any Permitted Encumbrances.
5.4 RIGHT TO GRANT SECURITY INTEREST. It has the right to
grant a security interest in its Inventory Collateral. It will pay all taxes and
other charges against its Inventory Collateral, and it will not use its
Inventory Collateral illegally or allow its Inventory Collateral to be
encumbered except for the security interest in favor of Lender granted herein
and except for any Permitted Encumbrances.
5.5 LOCATION OF INVENTORY COLLATERAL. It hereby represents and
warrants to Lender that, as of the date hereof, its Inventory Collateral is
situated only at one or more of the Collateral Locations, and it covenants with
Lender not to locate the Inventory Collateral at any location other than a
Collateral Location without at least thirty (30) days prior written notice to
Lender.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO ACCOUNTS
RECEIVABLE COLLATERAL. With respect to its Equipment Collateral, each Obligor
hereby represents, warrants and covenants to Lender as set forth below:
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<PAGE> 22
6.1 SALE OF EQUIPMENT COLLATERAL. It will not sell, lease,
exchange, or otherwise dispose of any of its Equipment Collateral without the
prior written consent of Lender; provided, however, that, with notice to, but
without the necessity of consent of, Lender, from time to time hereafter, in the
ordinary course of its business, it may sell, exchange, or otherwise dispose of
portions of the Equipment Collateral which are obsolete, worn out or unsuitable
for continued use if such Equipment Collateral is replaced promptly upon its
disposition with equipment constituting Equipment Collateral having a market
value equal to or greater than the Equipment Collateral so disposed of and in
which Lender shall obtain and have a first priority security interest pursuant
hereto.
6.2 INSURANCE. It agrees that it will continue to maintain
insurance on its Equipment Collateral with the same, or substantially the same,
companies, in the same, or substantially the same, relative amounts and against
the same, or substantially the same, risks as is maintained by Borrower on the
Closing Date, with loss payable to Lender as its interests may appear. Such
insurance shall not be cancellable by it, unless with the prior written consent
of Lender, or by its insurer, unless with at least thirty (30) days (or such
lesser number of days otherwise approved by Lender) advance written notice to
Lender. In addition, it shall cause insurer to provide to Lender at least thirty
(30) days advance written notice prior to insurer's nonrenewal of such
insurance. It shall provide to Lender a copy of each such policy on the Closing
Date.
6.3 GOOD TITLE. It owns its Equipment Collateral free and
clear of any prior Lien other than with respect to any Permitted Encumbrances
and no financing statements or other evidences of the grant of a security
interest respecting the Equipment Collateral exist on the public records as of
the date hereof other than any evidencing any Permitted Encumbrances.
6.4 RIGHT TO GRANT SECURITY INTEREST. It has the right to
grant a security interest in its Equipment Collateral. It will pay all taxes and
other charges against its Equipment Collateral. It will not use the Equipment
Collateral illegally or allow its Equipment Collateral to be encumbered except
for the security interest in favor of Lender granted herein and except for any
Permitted Encumbrances.
6.5 LOCATION. As of the Closing Date, its Equipment Collateral
is located only at one or more of the Collateral Locations and, hereafter, it
covenants with Lender not to locate its Equipment Collateral at any location
other than a Collateral Location without at least thirty (30) days written
notice to Lender.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO BALANCES
COLLATERAL. With respect to its Balances Collateral, each Obligor hereby
represents, warrants and covenants to Lender as set forth below:
7.1 OWNERSHIP. It owns its Balances Collateral free and clear
of any liens, mortgages, security interests or encumbrances thereon, except for
any Permitted Encumbrances.
7.2 REMEDIES. In addition to such other rights and remedies
with respect to its Balances Collateral as may exist from time to time hereafter
in favor of Lender, whether by way of set-off, banker's lien, consensual
security interest or otherwise, Lender may charge any part or all of the
obligations of Lender to an Obligor represented by items constituting its
Balances Collateral in the possession and control of Lender against the
Obligations.
7.3 LIENS. Hereafter, it will not incur, create or suffer to
Lien upon its Balances Collateral, except for Permitted Encumbrances, or sell,
convey, hypothecate, pledge or assign its right, title or interest therein,
without the prior written consent of Lender thereto.
8. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INTANGIBLES
COLLATERAL. With respect to its Intangibles Collateral, it hereby represents,
warrants and covenants to Lender as set forth below:
8.1 OWNERSHIP. It owns its Intangibles Collateral free and
clear of any Liens other than with respect to any Permitted Encumbrances, and no
financing statements or other evidences of the grant of a security
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interest respecting its Intangibles Collateral exist on the public records as of
the date hereof other than any evidencing any Permitted Encumbrances.
8.2 LIENS. Hereafter, it will not incur, create or suffer to
exist any lien, security interest or encumbrance upon its Intangibles Collateral
except for the security interest granted herein and except for any Permitted
Encumbrances or sell, convey, hypothecate, pledge or assign its right, title or
interest therein.
8.3 PRESERVATION. Hereafter, it will take all necessary and
appropriate measures to obtain, maintain, protect and preserve its Intangibles
Collateral including, without limitation, registration thereof with the
appropriate state or federal governmental agency or department.
9. GENERAL REPRESENTATIONS AND WARRANTIES. In order to induce Lender to
enter into this Agreement, each Obligor hereby represents and warrants to Lender
(which representations and warranties, together with any other representations
and warranties of each Obligor contained elsewhere in this Agreement, shall be
deemed to be renewed as of the date of each Advance and the issuance of each
Letter of Credit), as set forth below:
9.1 EXISTENCE AND QUALIFICATION. It is a corporation duly
organized, validly existing and in good standing under the laws of the State of
its incorporation, as designated on the Obligor Information Schedule, with its
principal place of business, chief executive office and office where it keeps
all of its books and records being located at the Executive Office and is duly
qualified as a foreign corporation in good standing in each other state in which
a Collateral Location of that Obligor is situated or wherein the failure to so
qualify could not reasonably be expected to result in a Material Adverse Change.
It has as its corporate name, as registered with the secretary of state of the
state of its incorporation, the words first inscribed hereinabove as its name,
and, except as may be described on the Obligor Information Schedule, it has not
done business under any other name.
9.2 AUTHORITY; AND VALIDITY AND BINDING EFFECT. It has the
corporate power to make, deliver and perform under the Loan Documents to which
it is party, and, in the case of Borrower, to borrow hereunder, and has taken
all necessary and appropriate corporate action to authorize the execution,
delivery and performance of the Loan Documents. This Agreement constitutes, and
the remainder of the Loan Documents, as and when executed and delivered for
value received, will constitute, the valid obligations of each Obligor, legally
binding upon it and enforceable against it in accordance with their respective
terms.
9.3 INCUMBENCY AND AUTHORITY OF SIGNING OFFICERS. The
undersigned officers of each Obligor hold the offices specified hereinbelow and,
in such capacities, are duly authorized and empowered to execute, attest and
deliver this Agreement and the remainder of the Loan Documents for and on behalf
of such Obligor, and to bind it accordingly thereby.
9.4 NO MATERIAL LITIGATION. Except as may be set forth on the
Obligor Information Schedule, to the best of such Obligor's knowledge, there are
no legal proceedings pending before any court or administrative agency which, if
adversely determined, could reasonably be expected to result in a Material
Adverse Change.
9.5 TAXES. It has filed or caused to be filed all tax returns
required to be filed by it and has paid all taxes shown to be due and payable by
it on said returns or on any assessments made against it wherein the failure to
so qualify could not reasonably be expected to result in a Material Adverse
Change.
9.6 CAPITAL. All capital stock, debentures, bonds, notes and
all other securities of each Obligor presently issued and outstanding are
validly and properly issued in accordance with all applicable laws, including,
but not limited to, the "blue sky" laws of all applicable states and the federal
securities laws. Unless otherwise set forth on the Obligor Information Schedule,
Borrower owns all issued and outstanding capital stock of each Subsidiary
Guarantor.
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9.7 ORGANIZATION. The articles of incorporation of and bylaws
of each Obligor are in full force and effect under the law of the state of its
incorporation and all amendments to said articles of incorporation and bylaws
have been duly and properly made under and in accordance with all applicable
laws.
9.8 INSOLVENCY. After giving effect to the execution and
delivery of the Loan Documents and the extension of any credit or other
financial accommodations hereunder, no Obligor will be "insolvent", within the
meaning of such term as used in O.C.G.A. Section 18-2-22 or as defined in
Section 101(32) of the Bankruptcy Code; or be unable to pay its debts generally
as such debts become due; or have an unreasonably small capital.
9.9 TITLE. It has good and marketable title to all of its
properties subject to no Lien of any kind except for Permitted Encumbrances.
9.10 MARGIN STOCK. It is not engaged principally, or as one of
its important activities, in the business of purchasing or carrying any "margin
stock", as that term is defined in Section 221.2(h) of Regulation U of the Board
of Governors of the Federal Reserve System, and no part of the proceeds of any
borrowing made pursuant hereto will be used to purchase or carry any such margin
stock or to extend credit to others for the purpose of purchasing or carrying
any such margin stock, or be used for any purpose which violates, or which is
inconsistent with, the provisions of Regulation X of said Board of Governors. In
connection herewith, if requested by Lender, each Obligor will furnish to Lender
a statement in conformity with the requirements of Federal Reserve Form U-1
referred to in said Regulation U to the foregoing effect.
9.11 NO VIOLATIONS. The execution, delivery and performance by
it of each of the Loan Documents to which it is party have been duly authorized
by all necessary corporate action and do not and will not require any consent or
approval of the shareholders of any Obligor, violate any provision of any law,
rule, regulation (including, without limitation, Regulation X of the Board of
Governors of the Federal Reserve System), order, writ, judgment, injunction,
decree, determination or award presently in effect having applicability to any
Obligor or of the charter or bylaws of any Obligor, or, to the best of its
knowledge, result in a breach of or constitute a default under any indenture or
loan or credit agreement or any other agreement, lease or instrument to which
any Obligor is a party or by which it or its properties may be bound or
affected, and, to the best of its knowledge, no Obligor is in default under any
such law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award or any such indenture, agreement, lease or instrument.
9.12 FINANCIAL STATEMENTS. The financial statements of
Borrower and its Consolidated Subsidiaries (if any) for its most recently
completed Fiscal Year and for that portion of its current Fiscal Year ended with
that Fiscal Month ended closest to the Closing Date for which financial
statements have been prepared, including balance sheet; income statement and, if
available, statement of changes in cash flow, copies of which heretofore have
been furnished to Lender, are complete and accurately and fairly represent the
financial condition of Borrower and its Consolidated Subsidiaries (if any), the
results of its operations and the transactions in its equity accounts as of the
dates and for the periods referred to therein, and have been prepared in
accordance with GAAP. There are no material liabilities, direct or indirect,
fixed or contingent, of Borrower or any such Consolidated Subsidiaries as of the
date of such financial statements which are not reflected therein or in the
notes thereto. No Material Adverse Change has occurred since the date of the
balance sheet contained in the annual financial statement described hereinabove.
9.13 PURCHASE OF COLLATERAL. Within the twelve (12) months
period preceding the Closing Date, no Obligor has purchased any of the
Collateral in a bulk transfer or in a transaction which was outside the ordinary
course of the business of Borrower's seller, except for any Collateral acquired
in connection with the acquisitions of Computer Graphics Technology, Inc.,
Martec, Inc., and New England Computer Graphics, Inc.
9.14 POLLUTION AND ENVIRONMENTAL CONTROL. Each Obligor and
each of its Subsidiaries have obtained all permits, licenses and other
authorizations which are required under, and is in material compliance with, all
Environmental Laws.
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9.15 POSSESSION OF PERMITS. Each Obligor and each of its
Subsidiaries possess all franchises certificates, licenses, permits and other
authorizations from governmental political subdivisions or regulatory
authorities; and all patents, trademarks, service marks, trade names,
copyrights, licenses and other, similar rights, free from burdensome
restrictions, that are necessary for the ownership, maintenance and operation of
any of its properties and assets, and no Obligor or any such Subsidiary is in
violation of any thereof. A complete and accurate list of all such patents,
trademarks, service marks, trade names, copyrights, licenses and other, similar
rights owned by each Obligor in existence on the Closing Date is set forth on
the Obligor Information Schedule attached hereto.
9.16 SUBSIDIARIES. As of the Closing Date, no Obligor has any
Subsidiaries, except: (i) that Prisym and each Subsidiary Guarantor is a
Subsidiary of Borrower; and (ii) each other Obligor (besides Borrower) may have
Subsidiaries, if and to the extent described on the Obligor Information
Schedule.
9.17 FEDERAL TAXPAYER IDENTIFICATION NUMBER. Each Obligor's
federal taxpayer identification number (to the extent available on the Closing
Date) is as indicated on the Obligor Information Schedule.
9.18 EMPLOYEE BENEFIT PLANS. As of the Closing Date, no
Obligor has any Employee Benefit Plans except as may be described on the Obligor
Information Schedule.
9.19 YEAR 2000 COMPLIANCE. Borrower has developed and has
delivered to Lender a comprehensive plan (the "Y2K Plan") for insuring that the
Borrower's and its Subsidiaries' software and hardware systems which impact or
affect in any way the business operations of the Borrower and its Subsidiaries
will be Year 2000 Compliant and Ready. The Borrower and its Subsidiaries have
met the Y2K Plan milestones such that all hardware and software systems will be
Year 2000 Compliant and Ready in accordance with the Y2K Plan.
10. AFFIRMATIVE COVENANTS. Each Obligor covenants to Lender that from and
after the date hereof, and so long as any amounts remain unpaid on account of
any of the Obligations or this Agreement remains effective (whichever is the
last to occur), such Obligor will comply (and cause each of its Subsidiaries to
comply) with the affirmative covenants set forth below:
10.1 RECORDS RESPECTING COLLATERAL. All records with respect
to its Collateral will be kept at its Executive Office and will not be removed
from such address without the prior written consent of Lender.
10.2 FURTHER ASSURANCES. It shall duly execute and/or deliver
(or cause to be duly executed and/or delivered) to Lender any instrument,
invoice, document, document of title, dock warrant, dock receipt, warehouse
receipt, bill of lading, order, financing statement, assignment, waiver, consent
or other writing which may be reasonably necessary to Lender to carry out the
terms of this Agreement and any of the other Loan Documents and to perfect its
security interest in and facilitate the collection of its Collateral, the
proceeds thereof, and any other property at any time constituting security to
Lender. It shall perform or cause to be performed such acts as Lender may
request to establish and maintain for Lender a valid and perfected security
interest in and security title to its Collateral, free and clear of any liens,
encumbrances or security interests other than Permitted Encumbrances.
10.3 RIGHT TO INSPECT AND CONDUCT AUDITS. Lender (or any
Person or Persons designated by it) shall have the continuing right to call at
any Executive Office or any Collateral Location at any reasonable time, upon
reasonable advance notice, and without hindrance or delay, inspect, audit, check
and make extracts from an Obligor's books, records, journals, orders, receipts
and any correspondence and other data relating to the Collateral, to an
Obligor's business or to any other transactions between the parties hereto.
10.4 COLLATERAL REPORTS. During any Margining Period, Borrower
shall, as soon as practicable, and in any event on or before ten (10) days after
the end of each Fiscal Month, assemble or cause to be assembled, and furnish or
cause to be furnished to Lender, a status report, certified by a duly authorized
officer of Borrower, showing the aggregate dollar value of the items comprising
the Obligors' Accounts Receivable Collateral and the age of each individual item
thereof as of the last day of the preceding Fiscal Month (segregating such items
in such manner and to such degree as Lender may request), plus the type, dollar
value and location of the Obligors'
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Inventory Collateral as at the end of the preceding Fiscal Month, valued at the
lower of its Booked Cost or market value, plus an accounts payable aging.
Additionally, Lender may, at any time in its sole discretion, require each
Obligor to permit Lender to verify the individual account balances of any
individual Account Debtors. Further, upon request from Lender, made at any time
hereafter, and, in any event, with the above-described status report for the
month of December in each year, each Obligor shall furnish Lender with a then
current customer and Account Debtor name and address list.
10.5 SETTLEMENT REPORTS. During any Margining Period, Borrower
shall, as soon as practicable, and in any event within ten (10) days after the
end of each Fiscal Month, if the Leverage Ratio as of any Fiscal Month during
such Margining Period is >1.50:1, <=2.00:1, and on or before the second Business
Day following each calendar week end if the Leverage Ratio as of any Fiscal
Month during such Margining Period is >2.00:100, prepare and deliver to Lender a
settlement report with respect to satisfaction of the Margin Requirement as of
the date of report submission, to be substantially in the form of Exhibit "F"
attached hereto or in such form as Lender may deliver for such purpose to
Borrower from time to time hereafter (herein, a "Settlement Report"), the
statements in which, in each instance, shall be certified as to truth and
accuracy by a duly authorized officer of Borrower.
10.6 PERIODIC FINANCIAL STATEMENTS. Borrower shall, as soon
as practicable, and in any event within thirty (30) days after the end of each
Fiscal Month, furnish to Lender unaudited financial statements of Borrower and
each Consolidated Subsidiary (if any), including balance sheets, income
statements and statements of cash flow for the Fiscal Month ended, and for the
Fiscal Year to date, on a consolidated and, if requested by Lender,
consolidating basis. Such financial statements shall also be prepared on an
unaudited consolidating basis for such Subsidiaries of Borrower (if any) which
accounted for more than ten percent (10%) of the gross revenues of Borrower for
that year. All such financial statements shall be certified by a duly authorized
officer of Borrower to present fairly the financial position and results of
operations of Borrower for the period involved in accordance with GAAP (but for
the omission of footnotes and subject to year-end audit adjustments).
10.7 ANNUAL FINANCIAL STATEMENTS. Borrower shall, as soon as
practicable, and in any event within one hundred twenty (120) days after the end
of each Fiscal Year, furnish to Lender the annual audit report of Borrower and
its Consolidated Subsidiaries (if any), certified without material qualification
by independent certified public accountants selected by Borrower and acceptable
to Lender, and prepared in accordance with GAAP, together with relevant
financial statements of Borrower and such Subsidiaries for the Fiscal Year then
ended, on a consolidating and a consolidated basis, if applicable. Borrower
shall cause said accountants to furnish Lender with a statement that in making
their examination of such financial statements, they obtained no knowledge of
any Event of Default or Default Condition which pertains to accounting matters
relating to this Agreement or the Notes, or, in lieu thereof, a statement
specifying the nature and period of existence of any such Event of Default or
Default Condition disclosed by their examination.
10.8 SEC REPORTS. So long as Borrower is subject to reporting
requirements of the Securities and Exchange Commission ("SEC"), Borrower shall
submit to Lender copies of its quarterly 10-Q reports, annual 10-K reports and
any other, similar or supplemental reports which Borrower must issue to the SEC
promptly, but in any event within ten (10) days after, its delivery of such
reports to the SEC.
10.9 PAYMENT OF TAXES. Each Obligor shall pay and discharge
all taxes, assessments and governmental charges upon it, its income and its
properties prior to the date on which penalties attach thereto, unless and to
the extent only that (x) such taxes, assessments and governmental charges are
being contested in good faith and by appropriate proceedings by it, (y) it
maintains reasonable reserves on its books therefor and (z) the payment of such
taxes does not result in a Lien upon any of the Collateral other than a
Permitted Encumbrance.
10.10 MAINTENANCE OF INSURANCE. In addition to and cumulative
with any other requirements herein imposed on an Obligor with respect to
insurance, each Obligor shall maintain insurance with responsible insurance
companies on such of its properties, in such amounts and against such risks as
is customarily maintained by similar businesses operating in the same vicinity,
but in any event to include loss, damage, flood, windstorm, fire, theft,
extended coverage, business interruption, freight insurance and product
liability insurance in relative amounts which are the same, or substantially the
same, as in existence on the Closing Date, which such insurance
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<PAGE> 27
shall not be cancellable by it, unless with the prior written consent of Lender,
or by its insurer, unless with at least thirty (30) days advance written notice
to Lender thereof (or such lesser or greater time period as shall be accepted or
required by Lender from time to time). Each Obligor shall file with Lender upon
its request a detailed list of such insurance then in effect stating the names
of the insurance companies, the amounts and rates of insurance, the date of
expiration thereof, the properties and risks covered thereby and the insured
with respect thereto, together with a copy of each such policy and, within
thirty (30) days after notice in writing from Lender, obtain such additional
insurance as Lender may reasonably request.
10.11 MAINTENANCE OF PROPERTY AND MANAGEMENT. Each Obligor
shall maintain its property in good working condition and its executive
management reasonably satisfactory to Lender.
10.12 COMPLIANCE CERTIFICATE. Borrower shall, on a monthly
basis not later than forty-five (45) days after the close of each of its first
three (3) Fiscal Quarters and not later than one hundred twenty (120) days after
the close of its Fiscal Year, certify to Lender, in a statement executed by a
duly authorized Officer of Borrower in the form of Exhibit "G" attached hereto
(herein, a "Compliance Certificate") that no Event of Default and no Default
Condition exists or has occurred, or, if an Event of Default or Default
Condition exists, specifying the nature and period of existence thereof. Such
Compliance Certificate shall also set forth, in reasonable detail, evidence of
Borrower's, compliance with all financial covenants set forth in Schedule "I"
attached hereto for the immediately preceding Fiscal Month or Fiscal Quarter, as
applicable.
10.13 CHANGE OF PRINCIPAL PLACE OF BUSINESS, ETC. Each Obligor
hereby understands and agrees that if, at time hereafter, it elects to move its
Executive Office, or if Borrower elects to change its name, identity or its
organization structure to other than a corporate structure, it must notify
Lender in writing at least thirty (30) days prior thereto; provided, however,
that no such notice shall be required for the change in name of Intelligent
Products Marketing Incorporated into Tekgraf, Inc., a California corporation,
which is scheduled to occur on or about the Closing Date.
10.14 WAIVERS. With respect to each of the Collateral
Locations, each Obligor will obtain such waivers of lien, estoppel certificates
or subordination agreements as Lender may reasonably require to insure the
priority of its security interest in that portion of its Collateral situated at
such locations.
10.15 PRESERVATION OF EXISTENCE. Each Obligor shall preserve
and maintain its corporate existence, rights, franchises and privileges in the
jurisdiction of its incorporation, and qualify and remain qualified as a foreign
corporation in each jurisdiction in which such qualification is necessary or
desirable in view of its business and operations or the ownership of its
properties.
10.16 COMPLIANCE WITH LAWS. Each Obligor and each of its
Subsidiaries shall comply with the requirements of all applicable laws, rules,
regulations and orders of any governmental authority, noncompliance with which
would or could materially adversely affect their respective financial condition
or the ownership, maintenance or operation of any material portion of any of
their respective properties. Without limiting the foregoing, each Obligor and
each of its Subsidiaries shall obtain and maintain all permits, licenses and
other authorizations which are required under, and otherwise comply with, all
federal, state, and local laws and regulations.
10.17 SUBORDINATIONS. At Lender's request, which may be made
at any time on or after the Closing Date, Borrower shall provide Lender with a
Subordination Agreement executed by any Person who is an Affiliate of Borrower
or any Guarantor to whom Borrower or any Subsidiary Guarantor is or hereafter
owes any Debt subordinating in right of payment and claim on terms acceptable to
Lender all of such Debt to the claims of Lender in respect of the Obligations.
10.18 CERTAIN REQUIRED NOTICES. Promptly, upon its receipt of
notice or knowledge thereof, Borrower will report to Lender: (i) any lawsuit or
administrative proceeding in which Borrower or any Subsidiary is a defendant
which, if decided adversely to Borrower or such Subsidiary, could reasonably be
expected to result in a Material Adverse Change; or (ii) the existence and
nature of any Default Condition or Event of Default.
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10.19 YEAR 2000 COMPATIBILITY. Borrower will deliver to Lender
(i) simultaneously with the delivery of its financial statements pursuant to
Sections 10.6 and 10.7 hereof, a statement of the Chief Executive Officer or
Chief Financial Officer of Borrower to the effect that nothing has come to such
officer's attention to cause such officer to believe that the Y2K Plan
milestones have not been met in a manner such that the Borrower's and its
Subsidiaries hardware and software systems will not be Year 2000 Compliant and
Ready in accordance with the Y2K Plan; (ii) within five (5) Business Days after
the Borrower becomes aware of any deviations from the Y2K Plan which would cause
compliance with the Plan to be delayed or not achieved, a statement of the Chief
Executive Officer or Chief Financial Officer, setting forth the details thereof
and the action which Borrower is taking or proposes to take with respect
thereto; and (iii) promptly upon the receipt thereof, a coy of any third party
assessments of Borrower's Y2K Plan, together with any recommendations made by
such third party with respect to Year 2000 compliance.
11. NEGATIVE COVENANTS. Each Obligor covenants to Lender that from and
after the date hereof and so long as any amount remains unpaid on account of any
of the Obligations or this Agreement remains effective (whichever is the last to
occur), it will not do (and will not permit any of its Subsidiaries to do),
without the prior written consent of Lender, any of the things or acts set forth
below:
11.1 ENCUMBRANCES. Create, assume, or suffer to exist any
Lien, except for Permitted Encumbrances.
11.2 DEBT. Incur, assume, or suffer to exist any Debt, except
for: (i) Debt to Lender or any Affiliate of Lender; (ii) Debt to Persons other
than Lender existing on the date of this Agreement; (iii) Subordinated Debt;
(iv) trade payables and contractual obligations to suppliers and customers
incurred in the ordinary course of business; (v) accrued pension fund and other
employee benefit plan obligations and liabilities (provided, however, that such
Debt does not result in the existence of any Event of Default or Default
Condition under any other provision of this Agreement); (vi) deferred taxes;
(vii) accruals arising in the ordinary course of business; (viii) Purchase Money
Debt; and (ix) Debt resulting from endorsements of negotiable instruments
received in the ordinary course of its business.
11.3 CONTINGENT LIABILITIES. Guarantee, endorse, become surety
with respect to or otherwise become directly or contingently liable for or in
connection with the obligations of any other person, firm, or corporation,
except for endorsements of negotiable instruments for collection in the ordinary
course of business.
11.4 DIVIDENDS. Declare or pay any dividends on, or make any
distribution with respect to, its shares of any class of capital stock.
11.5 REDEMPTION. Purchase, redeem, or otherwise acquire for
value any shares of any class of its capital stock.
11.6 INVESTMENTS. Make any investment in cash or by delivery
of property to any Person, whether by acquisition of stock, indebtedness or
other obligation or security, or by loan, advance or capital contribution, or
otherwise, in any Person or property of a Person, except: (i) fixed assets
acquired from time -to time in the ordinary course of business; (ii) current
assets arising from the sale of goods or the provision of services in the
ordinary course of business; (iii) loans or advances to employees for salary,
commissions, travel or the like, made in the ordinary course of business; (iv)
investments in direct obligations of the United States of America, or any agency
thereof or obligations guaranteed by the United States of America, provided that
such obligations mature within one (1) year from the date of acquisition
thereof; (v) investments in time deposits, demand deposits and certificates of
deposit maturing within one year from the date of acquisition issued by a bank
or trust company organized under the laws of the United States or any state
thereof having capital surplus and undivided profits aggregating at least
$500,000,000; and (vi) investments in commercial paper given the highest rating
by a national credit rating agency and maturing not more than two hundred
seventy (270) days from the date of creation thereof; and (vii) loans and
advances between or among Obligors.
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11.7 MERGERS. Dissolve or otherwise terminate its corporate
status or enter into any merger or consolidation or make any substantial change
in the basic type of business conducted by Borrower and its Subsidiaries, as of
the Closing Date, except that (i) any of Borrower's Subsidiaries may merge or
consolidate with each other or with Borrower, so long as Borrower is the
surviving corporation in such merger; and (ii) Borrower may reincorporate as a
Georgia corporation, provided that Borrower upon at least twenty-one (21) days
prior written notice to Lender and after the delivery to Lender of financing
statements, if required by Lender, in form satisfactory to Lender, to perfect or
continue the perfection of Lender's Lien.
11.8 BUSINESS LOCATIONS. Transfer its principal place of
business or Executive Office, or open new store locations or warehouses, or
transfer existing store locations or warehouses or maintain records with respect
to its Collateral, to or at any locations other than those at which the same are
presently kept or maintained as set forth on the Obligor Information Schedule,
except upon at least twenty-one (21) days prior written notice to Lender and
after the delivery to Lender of financing statements, if required by Lender, in
form satisfactory to Lender, to perfect or continue the perfection of Lender's
Lien.
11.9 AFFILIATE TRANSACTIONS. Enter into, or be a party to, or
permit any Subsidiary to enter into or be a party to, any transaction with any
Affiliate, except in the ordinary course of and pursuant to the reasonable
requirements of its or such Subsidiary's business and upon fair and reasonable
terms which are fully disclosed to Lender and are no less favorable to it or
such Obligor than would be obtained in a comparable arm's length transaction
with a Person not an Affiliate.
11.10 SUBSIDIARIES. Acquire or create any Subsidiary (except
Prisym) unless (i) Lender receives at least ten (10) days advance written notice
thereof, (ii) such Subsidiary executes a joinder agreement, in substantially the
form of Exhibit "J" attached hereto, binding itself to be a Subsidiary
Guarantor; and (iii) all capital stock of such Subsidiary is pledged to Lender
pursuant to a Stock Pledge Agreement in substantially the form of Exhibit "I".
11.11 FISCAL YEAR. Change its Fiscal Year, or permit any
Subsidiary to have a fiscal year different from the Fiscal Year of Borrower.
11.12 DISPOSITION OF ASSETS. Sell, lease or otherwise dispose
of any of its properties, including any disposition of property as part of a
sale and leaseback transaction, to or in favor of any person, except (i) sales
of Inventory Collateral in the ordinary course of an Obligor's business or (ii)
such other dispositions as otherwise may be expressly authorized by this
Agreement.
11.13 FEDERAL TAXPAYER IDENTIFICATION NUMBER. Change or permit
any Subsidiary to change its federal taxpayer identification number without
prior written notice to Lender.
11.14 EMPLOYEE BENEFIT PLANS. Permit an Employee Benefit Plan
to become materially underfunded or create any Employee Benefit Plan without
prior written notice to Lender and upon such-notification this Agreement shall
be amended as determined necessary by Lender in its discretion as a result of
the creation of such Plan.
12. FINANCIAL COVENANTS. Borrower covenants to Lender that, from and after
the date hereof and so long as any amount remains on account of any of the
Obligations or this Agreement remains effective (whichever is the last to
occur), it will comply with the financial covenants set forth below on Schedule
"I" attached hereto.
13. EVENTS OF DEFAULT. The occurrence of any events or conditions set forth
below shall constitute an Event of Default hereunder, provided that any
requirement for the giving of notice or the lapse of time, or both, has been
satisfied:
13.1 OBLIGATIONS. Any Obligor shall fail to make any payment
on any of its Obligations, when due, and such failure to pay shall continue
without waiver or cure for a period of three (3) Business Days.
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13.2 MISREPRESENTATIONS. Any Obligor, any Subsidiary of an
Obligor or any Guarantor shall make any representation or warranty of a material
fact in any of the Loan Documents or in any Guaranty or in any other certificate
or statement furnished at any time hereunder or in connection with any of the
Loan Documents or any Guaranty which proves to have been false or misleading in
any material respect when made or furnished.
13.3 CERTAIN COVENANTS. Any Obligor shall default in the
observance or performance of any covenant or agreement contained in Sections
10.3 through 10.8, 10.12, 10.14 or 10.19 of Article 10, in any Section of
Article 11 or of any Section in Schedule "I".
13.4 OTHER COVENANTS. Any Obligor, any Subsidiary of an
Obligor or any Guarantor shall default in the observance or performance of any
covenant or agreement contained herein, in any of the other Loan Documents, or
any Guaranty (other than a default the performance or observance of which is
dealt with specifically elsewhere in this Section) unless (i) with respect to
this Agreement, such default is cured to Lender's satisfaction within twenty
(20) days after the sooner to occur of receipt of notice of such default from
Lender or the date on which such default first becomes known to Borrower and
(ii) with respect to any other Loan Document or Guaranty, such default is cured
within any applicable grace, cure or notice and cure period contained therein.
13.5 OTHER DEBTS. Any Obligor, any Subsidiary or any Guarantor
shall default in connection with any agreement for Debt exceeding, individually,
or in aggregate amount, Two Hundred Fifty Thousand Dollars ($250,000) with any
creditor, including Lender, which entitles said creditor to accelerate the
maturity thereof, and any grace or cure period with respect thereto elapses
without such default being cured or waived.
13.6 VOLUNTARY BANKRUPTCY. Any Obligor, any Subsidiary of an
Obligor or any Guarantor shall file a voluntary petition in bankruptcy or a
voluntary petition or answer seeking liquidation, reorganization, arrangement,
readjustment of its debts, or for any other relief under the Bankruptcy Code, or
under any other act or law pertaining to insolvency or debtor relief, whether
state, Federal, or foreign, now or hereafter existing; any Obligor, any
Subsidiary of an Obligor or any Guarantor shall enter into any agreement
indicating its consent to, approval of, or acquiescence in, any such petition or
proceeding; any Obligor, any Subsidiary of an Obligor or any Guarantor shall
apply for or permit the appointment by consent or acquiescence of a receiver,
custodian or trustee of any Obligor, any Subsidiary of an Obligor or any
Guarantor for all or a substantial part of its property; any Obligor, any
Subsidiary of an Obligor or any Guarantor shall make an assignment for the
benefit of creditors; or any Obligor, any Subsidiary of an Obligor or any
Guarantor shall be unable or shall fail to pay its debts generally as such debts
become due, or any Obligor, any Subsidiary of an Obligor or any Guarantor shall
admit, in writing, its inability or failure to pay its debts generally as such
debts become due.
13.7 INVOLUNTARY BANKRUPTCY. There shall have been filed
against any Obligor, any Subsidiary of an Obligor or any Guarantor an
involuntary petition in bankruptcy or seeking liquidation, reorganization,
arrangement, readjustment of its debts or for any other relief under the
Bankruptcy Code, or under any other act or law pertaining to insolvency or
debtor relief, whether state, federal or foreign, now or hereafter existing; any
Obligor, any Subsidiary of an Obligor or any Guarantor shall suffer or permit
the involuntary appointment of a receiver, custodian or trustee of any Obligor,
any Subsidiary or any Guarantor or for all or a substantial part of its
property; or any Obligor, any Subsidiary of an Obligor or any Guarantor shall
suffer or permit the issuance of a warrant of attachment, execution or similar
process against all or any substantial part of the property of any Obligor, any
Subsidiary of an Obligor or any Guarantor; or any motion, complaint or other
pleading is filed in any bankruptcy case of any person or entity other than any
Obligor, any Subsidiary of an Obligor or any Guarantor and such motion,
complaint or pleading seeks the consolidation of any such Obligor's,
Subsidiary's or Guarantor's assets and liabilities with the assets and
liabilities of such person or entity.
13.8 DAMAGE, LOSS, THEFT OR DESTRUCTION OF COLLATERAL. There
shall have occurred material uninsured damage to, or uninsured loss, theft or
destruction of, any Collateral having a value, based on the lower of its
depreciated cost or market value, exceeding Two Hundred Fifty Thousand Dollars
($250,000).
13.9 JUDGMENTS. A final judgment or order for the payment of
money is rendered against any Obligor, any Subsidiary of an Obligor or any
Guarantor in the amount of One Hundred Thousand Dollars ($
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100,000) or more (exclusive of amounts covered by insurance) and either (x)
enforcement proceedings shall have been commenced by any creditor upon such
judgment or order, or (y) a stay of enforcement of such judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect for any period
of thirty (30) consecutive days.
13.10 DISAVOWAL OF CERTAIN OBLIGATIONS. Any Person (other than
Lender) party to a Guaranty or Subordination Agreement shall disavow its
obligations thereunder, or any such Guaranty or Subordination Agreement is
alleged to be, or determined by any governmental authority to be, invalid,
unenforceable or otherwise not binding on any Person party thereto (other than
Lender), in whole or in part.
13.11 MATERIAL ADVERSE CHANGE. There shall occur any Material
Adverse Change.
13.12 CHANGE OF CONTROL, ETC. Either (a) a change in Control
shall occur in respect of Borrower; or (b) Borrower shall fail to own,
beneficially and of record, with power, all issued and outstanding capital stock
of each Subsidiary Guarantor having voting power or shall enter into, consent
to, or acquiesce in, any sale, assignment transfer, pledge, hypothecation or
other disposition of any such shares of capital stock.
14. REMEDIES. Upon the occurrence or existence of any Event of Default, or
at any time thereafter, without prejudice to the rights of Lender to enforce its
claims against any Obligor for damages for failure by any Obligor to fulfill any
of its obligations hereunder, subject only to prior receipt by Lender of payment
in full of all Obligations then outstanding in a form acceptable to Lender,
Lender shall have all of the rights and remedies set forth below, and it may
exercise any one, more, or all of such remedies, in its sole discretion, without
thereby waiving any of the others; provided, however, that, in addition to the
foregoing, if the Event of Default is in respect of Section 13.6 or 13.7, then,
automatically, immediately upon such Event of Default occurring, without
necessity of any further action on Lender's part, all commitments of Lender
hereunder and under all other Loan Documents shall terminate, and all
Obligations shall be immediately due and payable.
14.1 ACCELERATION OF THE OBLIGATIONS. Lender, at its option,
may terminate all commitments of Lender hereunder and under all other Loan
Documents, and declare all of the Obligations to be immediately due and payable,
whereupon the same shall become immediately due and payable without presentment,
demand, protest, notice of nonpayment or any other notice required by law
relative thereto, all of which are hereby expressly waived by each Obligor,
anything contained herein to the contrary notwithstanding. If any promissory
note of any Obligor to Lender constituting Obligations, including, without
limitation, any of the Notes, shall be a demand instrument, however, the
recitation of the right of Lender to declare any and all Obligations to be
immediately due and payable, whether such recitation is contained in such note
or in this Agreement, as well as the recitation of the above events permitting
Lender to declare all Obligations due and payable, shall not constitute an
election by Lender to waive its right to demand payment under a demand at any
time and in any event; as Lender in its discretion may deem appropriate.
Hereafter, Lender, at its option, may, but shall not be obligated to, accept
less than the entire amount of Obligations due, if tendered, provided, however,
that unless then agreed to in writing by Lender, no such acceptance shall or
shall be deemed to constitute a waiver of any Event of Default or a
reinstatement of any commitments of Lender hereunder or under all other Loan
Documents.
14.2 DEFAULT. If Lender so elects, by further written notice
to Borrower, Lender may increase the rate of interest charged on the Notes then
outstanding for so long thereafter as Lender further shall elect by an amount
not to exceed the Default Rate.
14.3 REMEDIES OF A SECURED PARTY. Lender shall thereupon have
the rights and remedies of a secured party under the UCC in effect on the date
thereof (regardless whether the same has been enacted in the jurisdiction where
the rights or remedies are asserted), including, without limitation, the right
to take possession of any of the Collateral or the proceeds thereof, to sell or
otherwise dispose of the same, to apply the proceeds therefrom to any of the
Obligations in such order as Lender, in its sole discretion, may elect. Lender
shall give Borrower in behalf of all Obligors, written notice of the time and
place of any public sale of the Collateral or the time after which any other
intended disposition thereof is to be made. The requirement of sending
reasonable notice shall be met if such notice is given to Borrower at least ten
(10) days before such disposition. Expenses of retaking,
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<PAGE> 32
holding, insuring, preserving, protecting, preparing for sale or selling or the
like with respect to the Collateral shall include, in any event, reasonable
attorneys' fees and other legally recoverable collection expenses, all of which
shall constitute Obligations.
14.4 REPOSSESSION OF THE COLLATERAL. Lender may take the
Collateral or any portion thereof into its possession, by such means (without
breach of the peace) and through agents or otherwise as it may elect (and, in
connection therewith, demand that Borrower assemble the Collateral at a place or
places and in such manner as Lender shall prescribe), and sell, lease or
otherwise dispose of the Collateral or any portion thereof in its then condition
or following any commercially reasonable preparation or processing, which
disposition may be by public or private proceedings, by one or more contracts,
as a unit or in parcels, at any time and place and on any terms, so long as the
same are commercially reasonable and each Obligor hereby waives all rights which
it has or may have under and by virtue of OCGA Ch. 44-14, including, without
limitation, the right of each Obligor to notice and to a judicial hearing prior
to seizure of any of its Collateral by Lender.
14.5 DIRECT NOTIFICATION. Lender may, additionally, in its
sole discretion, at any time that an Event of Default exists, direct Account
Debtors to make payments on the Accounts Receivable Collateral, or portions
thereof, of any Obligor directly to Lender, and the Account Debtors are hereby
authorized and directed to do so by such Obligor upon Lender's direction, and
the funds so received shall be also deposited in the Collateral Reserve Account
if then opened, or, at the election of Lender, upon its receipt thereof, be
applied directly to repayment of the Obligations in such order as Lender, in its
sole discretion, shall determine.
14.6 OTHER REMEDIES. Unless and except to the extent expressly
provided for to the contrary herein, the rights of Lender specified herein shall
be in addition to, and not in limitation of, Lender's rights under the UCC, as
amended from time to time, or any other statute or rule of law or equity, or
under any other provision of any of the Loan Documents, or under the provisions
of any other document, instrument or other writing executed by Borrower or any
third party in favor of Lender, all of which may be exercised successively or
concurrently.
14.7 SET OFF. Lender may set off any or all of the Balances
Collateral against the Obligations.
15. MISCELLANEOUS.
15.1 WAIVER. Each and every right granted to Lender under this
Agreement, or any of the other Loan Documents, or any other document delivered
hereunder or in connection herewith or allowed it by law or in equity, shall be
cumulative and may be exercised from time to time. No failure on the part of
Lender to exercise, and no delay in exercising, any right shall operate as a
waiver thereof, nor shall any single or partial exercise by Lender of any right
preclude any other or future exercise thereof or the exercise of any other right
No waiver by Lender of any Default Condition or Event of Default shall
constitute a waiver of any subsequent Default Condition or Event of Default.
15.2 GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND
THEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF GEORGIA.
15.3 SURVIVAL. All representations, warranties and covenants
made herein and in the Loan Documents shall survive the execution and delivery
hereof and thereof. The terms and provisions of this Agreement shall continue in
full force and effect notwithstanding the payment of one or more of the Notes or
the termination of the Line of Credit, until all of the Obligations have been
paid in full and Lender has terminated this Agreement in writing.
15.4 ASSIGNMENTS. No assignment hereof or of any Loan Document
shall be made by Borrower without the prior written consent of Lender. Lender
may assign, or sell participations in, its right, title and interest herein and
in the Loan Documents at any time hereafter without notice to or consent of
Borrower.
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<PAGE> 33
15.5 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which when fully executed shall be an original, and
all of said counterparts taken together shall be deemed to constitute one and
the same agreement.
15.6 REIMBURSEMENT. Each Obligor binds itself to pay to Lender
on demand all out-of-pocket costs and expenses that Lender pays or actually
incurs in connection with the negotiation, preparation, consummation,
enforcement and termination of this Agreement and the other Loan Documents,
including, without limitation: (a) attorneys' fees and paralegals' fees and
disbursements of outside counsel; (b) costs and expenses (including outside
attorneys' and paralegals' fees and disbursements) for any amendment,
supplement, waiver, consent or subsequent closing in connection with the Loan
Documents and the transactions contemplated thereby; (c) costs and expenses of
lien and title searches and title insurance; (d) actual taxes, fees and other
charges for recording any deeds to secure debt, deeds of trust, mortgages,
filing financing statements and continuations, and other actions to perfect,
protect and continue the Lien of Lender in the Collateral; (e) sums paid or
incurred to pay for any amount or to take any action required of any Obligor
under the Loan Documents that it fails to pay or take; (f) costs of appraisals,
inspections, field audits and verifications of the Collateral, including,
without limitation, costs of travel, for inspections of the Collateral and an
Obligor's operations by Lender; (g) costs and expenses of preserving and
protecting the Collateral; and (h) after an Event of Default, costs and expenses
(including attorneys' and paralegals' fees and disbursements) paid or incurred
to obtain payment of the Obligations, enforce the Lien in the collateral, sell
or otherwise realize upon the Collateral, and otherwise enforce the provisions
of the Loan Documents or to defend any claim made or threatened against Lender
arising out of the transactions contemplated hereby (including, without
limitation, preparations for and consultations concerning any such matters). The
foregoing shall not be construed to limit any other provisions of the Loan
Documents regarding costs and expenses to be paid to Borrower. All of the
foregoing costs and expenses may, in the discretion of Lender, be charged to the
Master Note. Obligors will pay all expenses incurred by them in this
transaction. In the event any Obligor becomes a debtor under the Bankruptcy
Code, Lender's secured claim in such case shall include interest on the
Obligations and all fees, costs and charges provided for herein (including,
without limitation, reasonable attorneys' fees actually incurred) all for the
extent allowed by the Bankruptcy Code.
15.7 SUCCESSORS AND ASSIGN. This Agreement and Loan Documents
shall be binding upon and inure to the benefit of the successors and permitted
assigns of the parties hereto and thereto.
15.8 SEVERABILITY. If any provision this Agreement or of any
of the Loan Documents or the application thereof to any party thereto or
circumstances shall be invalid or unenforceable to any extent, the remainder of
such Loan Documents and the application of such provisions to any other party
thereto or circumstance shall not be affected thereby and shall be enforced to
the greatest extent permitted by law.
15.9 NOTICES. All notices, requests and demands to or upon the
respective parties hereto shall be deemed to have been given or made when
personally delivered or deposited in the mail, registered or certified mail,
postage prepaid, addressed as follows: (i) for Lender, care of the address of
Lender inscribed beneath its signature hereinbelow and (ii) for any Obligor,
care of the address set forth as its Executive Office on the Obligor Information
Schedule (or to such other address as may be designated hereafter in writing by
the respective parties hereto) except in cases where it is expressly provided
herein or by applicable law that such notice, demand or request is not effective
until received by the party to whom it is addressed.
15.10 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together
with the remaining Loan Documents, constitute the entire agreement between the
parties hereto with respect to the subject matter hereof. Neither this Agreement
nor any Loan Document may be changed, waived, discharged, modified or terminated
orally, but only by an instrument in writing signed by the party against whom
enforcement is sought
15.11 TIME OF ESSENCE. Time is of the essence in this
Agreement and the other Loan Documents.
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<PAGE> 34
15.12 INTERPRETATION. No provision of this Agreement or any
Loan Document shall be construed against or interpreted to the disadvantage of
any party hereto by any court or other governmental or judicial authority by
reason of such party having or being deemed to have structured or dictated such
provision.
15.13 LENDER NOT A JOINT VENTURER. Neither this Agreement nor
any Loan Document shall in any respect be interpreted, deemed or construed as
making Lender a partner or joint venturer with Borrower or as creating any
similar relationship or entity, and Borrower agrees that it will not make any
contrary assertion, contention, claim or counterclaim in any action, suit or
other legal proceeding involving Lender and Borrower.
15.14 JURISDICTION. EACH OBLIGOR AGREES THAT ANY LEGAL ACTION
OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY LOAN DOCUMENT MAY BE BROUGHT
IN THE COURTS OF THE STATE OF GEORGIA OR THE UNITED STATES OF AMERICA FOR THE
NORTHERN DISTRICT OF GEORGIA, ATLANTA DIVISION, ALL AS LENDER MAY ELECT. BY
EXECUTION OF THIS AGREEMENT, EACH OBLIGOR HEREBY SUBMITS TO EACH SUCH
JURISDICTION, HEREBY EXPRESSLY WAIVING WHATEVER RIGHTS MAY CORRESPOND TO IT BY
REASON OF ITS PRESENT OR FUTURE DOMICILE. NOTHING HEREIN SHALL AFFECT THE RIGHT
OF LENDER TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST BORROWER IN
ANY OTHER JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED OR REQUIRED
BY LAW.
15.15 ACCEPTANCE. This Agreement, together with the other Loan
Documents, shall not become effective unless and until delivered to Lender at
its principal office in Atlanta, Fulton County, Georgia and accepted in writing
by Lender at such office as evidenced by its execution hereof (notice of which
delivery and acceptance are hereby waived by each Obligor).
15.16 PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be
made hereunder or under the Notes shall be stated to be due on a Saturday,
Sunday or any other day in which national banks within the State of Georgia are
legally authorized to close, such payment may be made on the next succeeding
Business Day, and such extension of time shall in such case be included in the
computation of payment of interest hereunder or under the Notes.
15.17 CURE OF DEFAULTS BY LENDER. If, hereafter, any Event of
Default occurs, Lender may, at its option, but without obligation, cure such
Event of Default itself and any costs, fees and expenses incurred by Lender in
connection therewith including, without limitation, for the purchase of
insurance, the payment of taxes and the removal or settlement of liens and
claims, shall be deemed to be advances against the Master Note, whether or not
this creates an overadvance thereunder, and shall be payable in accordance with
its terms.
15.18 RECITALS. All recitals contained herein are hereby
incorporated by reference into this Agreement and made part thereof.
15.19 ATTORNEY-IN-FACT. Each Obligor hereby designates,
appoints and empowers Lender irrevocably as its attorney-in-fact, effective
during any time that an Event of Default exists, either in its name or the name
of Lender, at such Obligor's cost and expense, (i) to do any and all actions
which Lender may deem necessary or advisable to carry out the terms of this
Agreement or any other Loan Document upon the failure, refusal or inability of
an Obligor to do so and (ii) to ask for, demand, sue for, collect compromise,
compound, receive, receipt for and give acquittances for any and all sums owing
or which may become due upon any of the Collateral and, in connection therewith,
to take any and all actions as Lender may deem necessary or desirable to realize
upon any Collateral; and each Obligor hereby agrees to indemnify and hold Lender
harmless from any costs, damages, expenses or liabilities arising against or
incurred by Lender in connection therewith.
15.20 SOLE BENEFIT. The rights and benefits set forth in this
Agreement and the other Loan Documents are for the sole and exclusive benefit of
the parties hereto and thereto and may be relied upon only by them.
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<PAGE> 35
15.21 INDEMNIFICATION. Each Obligor will hold Lender, its
respective directors, officers, employees, agents, Affiliates, successors and
assigns harmless from and indemnify Lender, its respective directors, officers,
employees, agents, Affiliates, successors and assigns against, all loss,
damages, costs and expenses (including, without limitation, reasonable
attorney's fees, costs and expenses) actually incurred by any of the foregoing,
whether direct, indirect or consequential, as a result of or arising from or
relating to any "Proceedings" (as defined below) by any Person, whether
threatened or initiated, asserting a claim for any legal or equitable remedy
against any Person under any statute, case or regulation, including, without
limitation, any federal or state securities laws or under any common law or
equitable case or otherwise, arising from or in connection with this Agreement,
and any other of the transactions contemplated by this Agreement, except to the
extent such losses, damages, costs or expenses are due to the willful misconduct
or gross negligence of Lender. As used herein, "Proceedings" shall mean actions,
suits or proceedings before any court, governmental or regulatory authority and
shall include, particularly, but without limitation, any actions concerning
Environmental Laws. At the request of Lender, each Obligor will indemnify any
Person to whom Lender transfers or sells all or any portion of its interest in
the Obligations or participations therein on terms substantially similar to the
terms set forth above. Lender shall not be responsible or liable to any Person
for consequential damages which may be alleged as a result of this Agreement or
any of the transactions contemplated hereby. The obligations of Borrower under
this Section shall survive the termination of this Agreement and payment of the
Obligations.
15.22 JURY TRIAL WAIVER. EACH OBLIGOR AND LENDER HEREBY WAIVE,
TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE RIGHT TO TRIAL BY JURY IN ANY
ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED
TO ANY OF THE LOAN DOCUMENTS, OBLIGATIONS OR THE COLLATERAL.
15.23 TERMINOLOGY. All personal pronouns used in this
Agreement, whether used in the masculine, feminine or neuter gender, shall
include all other genders; the singular shall include the plural, and the plural
shall include the singular. Titles of Articles and Sections in this Agreement
are for convenience only, and neither limit nor amplify the provisions of this
Agreement, and all references in this Agreement to Articles Sections,
Subsections, paragraphs, clauses, subclauses or Exhibits shall refer to the
corresponding Article, Section, Subsection, paragraph, clause, subclause of, or
Exhibit attached to, this Agreement, unless specific reference is made to the
articles, sections or other subdivisions divisions of or Exhibit to, another
document or instrument. Wherever in this Agreement reference is made to any
instrument, agreement or other document, including, without limitation, any of
the Loan Documents, such reference shall be understood to mean and include any
and all amendments thereto or modifications, restatements, renewals or
extensions thereof. Wherever in this Agreement reference is made to any statute,
such reference shall be understood to mean and include any and all amendments
thereof and all regulations promulgated pursuant thereto. Whenever any matter
set forth herein or in any Loan Document is to be consented to or be
satisfactory to Lender, or is to be determined, calculated or approved by
Lender, then, unless otherwise expressly set forth herein or in any such Loan
Document, such consent, satisfaction, determination, calculation or approval
shall be in Lender's sole discretion, exercised in good faith and, where
required by law, in a commercially reasonable manner, and shall be conclusive
absent manifest error.
15.24 EXHIBITS. All Exhibits attached hereto are by reference
made a part hereof.
16. CONDITIONS PRECEDENT. Unless waived in writing by Lender at or prior to
the execution and delivery of this Agreement, the conditions set forth below
shall constitute express conditions precedent to any obligation of Lender
hereunder.
16.1 SECRETARY'S CERTIFICATE. Receipt by Lender of a
certificate from the Secretary (or Assistant Secretary) of each Obligor, to be
in form and substance substantially similar to the secretary's certificate set
forth on Exhibit "G" certifying to Lender (i) that appropriate resolutions have
been entered into by its Board of Directors incident hereto and that its
officers whose signatures appear hereinbelow, on the other Loan Documents, and
on any and all other documents, instruments and agreements executed in
connection herewith, are duly authorized by its Board of Directors for it and on
its behalf to execute and deliver this Agreement, the other Loan Documents and
such other documents, instruments and agreements, and to bind it accordingly
thereby, and (ii) as to its existence and the status of its articles of
incorporation and by-laws.
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<PAGE> 36
16.2 GOOD STANDING CERTIFICATES. Receipt by Lender of a
certificate of good standing with respect to each Obligor from the secretaries
of state of the state of its incorporation and of any state in which a
Collateral Location of its is situated, dated within thirty (30) days of the
Closing Date.
16.3 LOAN DOCUMENTS. Receipt by Lender of all the other Loan
Documents, including any Notes, together with any Guaranty and any Subordination
Agreement, each duly executed in form and substance acceptable to Lender.
16.4 INSURANCE. Receipt by Lender of a certificate respecting
all insurance required to be maintained hereunder, together with appropriate
loss payee and additional insured endorsements thereto, favoring Lender, all in
form acceptable to Lender.
16.5 FINANCING STATEMENTS. Receipt by Lender of Uniform
Commercial Code financing statements respecting the Collateral, duly executed by
each Obligor in form and substance acceptable to Lender.
16.6 OPINION OF COUNSEL. Receipt by Lender of an opinion of
counsel from independent legal counsel to Obligors in substantially the form of
Exhibit "H".
16.7 LANDLORD AGREEMENTS. Landlord's Agreements with respect
to each Collateral Location leased by an Obligor as of the Closing Date.
16.8 NO DEFAULT. No Default Condition or Event of Default
shall exist and each Obligor shall in all respects be in compliance with all of
the terms of the Loan Documents, as evidenced by its delivery of a Compliance
Certificate to such effect.
16.9 TELEPHONE INSTRUCTION LETTER. Receipt by Lender of the
Telephone Instruction Letter.
16.10 NO MATERIAL ADVERSE CHANGE. Lender shall have determined
that no Material Adverse Change shall have occurred.
16.11 STOCK PLEDGE AGREEMENT. Receipt by Lender of a Stock
Pledge Agreement from Borrower in respect of each Subsidiary Guarantor's capital
stock and/or any other equity securities described therein, to be substantially
in the form of Exhibit "I" attached hereto.
16.12 FIELD AUDIT. Completion by Lender of its field audit at
MicroSouth and G&R Marketing with all related fees and expenses paid by
Borrower.
16.13 NATIONSBANK ACKNOWLEDGMENT. An acknowledgment letter
signed by NationsBank, N.A. recognizing Lender's prior Lien on any proceeds of
Collateral held on deposit at any time by it.
16.14 OTHER. Receipt by Lender of such other documents,
certificates, instruments and agreements as shall be required hereunder or
provided for herein or as Lender or Lender's counsel may require in connection
herewith.
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<PAGE> 37
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and each Obligor has caused its seal to be affixed hereto, as of the
day and year first above written.
"LENDER"
WACHOVIA BANK NATIONAL
ASSOCIATION
By: /s/ Kevin R. Combs
-----------------------------------------
Name: Kevin R. Combs
---------------------------------
Title: Assistant Vice President
--------------------------------
Address for Notices:
Wachovia Bank, N.A.
191 Peachtree
29th Floor
Atlanta, GA 30303
Attn: Specialized Finance
"BORROWER"
TEKGRAF, INC., A (SEAL)
DELAWARE CORPORATION
By: /s/ Phillip Aginsky
----------------------------------------
Name: Phillip Aginsky
-----------------------------------
Title: President and Chief Executive Officer
---------------------------------
Attest: /s/ Jeff Camp
---------------------------------------------
Name: Jeff Camp
------------------------------------
Title: Secretary
-----------------------------------
"SUBSIDIARY GUARANTORS"
TEKGRAF, INC., A TEXAS CORPORATION (SEAL)
By: /s/ Phillip Aginsky
------------------------------------------------
Name: Phillip Aginsky
-------------------------------------------
Title: President
------------------------------------------
Attest: /s/ Jeff Camp
--------------------------------------------
Name: Jeff Camp
-------------------------------------
Title: Secretary
------------------------------------
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<PAGE> 38
COMPUTER GRAPHICS (SEAL)
DISTRIBUTING COMPANY, A
MARYLAND CORPORATION
By: /s/ Phillip Aginsky
-------------------------------------------------
Name: Phillip Aginsky
--------------------------------------------
Title: President
-------------------------------------------
Attest: /s/ Jeff Camp
--------------------------------------------
Name: Jeff Camp
-------------------------------------
Title: Secretary
-------------------------------------
G&R MARKETING, INC., AN (SEAL)
ILLINOIS CORPORATION
By: /s/ Phillip Aginsky
-------------------------------------------------
Name: Phillip Aginsky
-----------------------------------------
Title: President
-----------------------------------------
Attest: /s/ Jeff Camp
---------------------------------------------
Name: Jeff Camp
------------------------------------
Title: Secretary
-----------------------------------
INTELLIGENT PRODUCTS (SEAL)
MARKETING INCORPORATED,
A CALIFORNIA CORPORATION, T/B/K/A
TEKGRAF, INC.
By: /s/ Phillip Aginsky
------------------------------------------------
Name: Phillip Aginsky
-----------------------------------------
Title: President
----------------------------------------
Attest: /s/ Jeff Camp
--------------------------------------------
Name: Jeff Camp
--------------------------------------
Title: Secretary
-------------------------------------
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<PAGE> 39
IG DISTRIBUTION INCORPORATED (SEAL)
A CALIFORNIA CORPORATION, A/K/A
IG DISTRIBUTING, INC.
By: /s/ Phillip Aginsky
-------------------------------------------------
Name: Phillip Aginsky
--------------------------------------------
Title: President
-------------------------------------------
Attest: /s/ Jeff Camp
---------------------------------------------
Name: Jeff Camp
--------------------------------------
Title: Secretary
-------------------------------------
MICROSOUTH, INC., A (SEAL)
GEORGIA CORPORATION
By: /s/ Phillip Aginsky
------------------------------------------------
Name: Phillip Aginsky
-----------------------------------------
Title: President
----------------------------------------
Attest: /s/ Jeff Camp
---------------------------------------------
Name: Jeff Camp
--------------------------------------
Title: Secretary
-------------------------------------
COMPUTER GRAPHICS (SEAL)
TECHNOLOGY, INC., A GEORGIA
CORPORATION
By: /s/ Phillip Aginsky
------------------------------------------------
Name: Phillip Aginsky
------------------------------------------
Title: President
-----------------------------------------
Attest: /s/ Jeff Camp
--------------------------------------------
Name: Jeff Camp
--------------------------------------
Title: Secretary
-------------------------------------
MEDIA GRAPHICS DISTRIBUTION (SEAL)
INC., A GEORGIA CORPORATION
By: /s/ Phillip Aginsky
-------------------------------------------------
Name: Phillip Aginsky
-------------------------------------------
Title: President
------------------------------------------
Attest: /s/ Jeff Camp
---------------------------------------------
Name: Jeff Camp
--------------------------------------
Title: Secretary
-------------------------------------
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<PAGE> 40
NEW ENGLAND COMPUTER (SEAL)
GRAPHICS, INC., A GEORGIA
CORPORATION
By: /s/ Phillip Aginsky
------------------------------------------------
Name: Phillip Aginsky
-------------------------------------------
Title: President
------------------------------------------
Attest: /s/ Jeff Camp
--------------------------------------------
Name: Jeff Camp
---------------------------------------
Title: Secretary
--------------------------------------
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<PAGE> 41
SCHEDULE "I"
This Schedule "I" is attached to, and made an integral part of, that
certain Loan and Security Agreement, dated as of July 2, 1998 (herein as it may
be amended or modified, called the Loan Agreement), among TEKGRAF, INC.
("Borrower"), its Subsidiary Guarantors (as identified therein), and WACHOVIA
BANK, NATIONAL ASSOCIATION ("Lender"). Capitalized terms used herein shall have
the meanings given to such terms in the Loan Agreement. The initial version of
this Schedule is dated the Closing Date. The initial or any subsequent versions
of this Schedule may be amended or modified from time to time by Lender and
Borrower, as evidenced by their mutual execution of a replacement Schedule, to
be dated subsequent to the Closing Date, which henceforth shall be Schedule "I"
to the Loan Agreement for all purposes thereof.
1. MODIFIED CURRENT RATIO. Borrower shall maintain a ratio of (i) its
current assets consisting of accounts receivable and inventory only, to (ii) the
sum of (A) that portion of its current liabilities consisting of accounts
payable only and (B) total outstanding Advances, as determined on a consolidated
basis for Borrower and its Consolidated Subsidiaries in accordance with GAAP, of
at least 1.50:1 at all times; provided, however, that (a) there shall be
excluded from clause (i) above any such current assets of or belonging to Prisym
and (b) there shall be excluded from clause (ii)(A) above any accounts payable
owing by Prisym, unless and except to the extent that Borrower or any other
Obligor then has guaranteed, or assumed liability for, the payment thereof.
2. WORTH/DEBT RATIO. Borrower shall maintain a Leverage Ratio of not more
than 2.50:1 at all times.
3. FIXED CHARGE COVERAGE RATIO. Borrower shall maintain as of the end of
each Fiscal Quarter of Borrower a Fixed Charge Coverage Ratio (as that term is
hereinafter defined), equal to at least 3.0:1. For purposes hereof, "Fixed
Charge Coverage Ratio" shall mean, the ratio of (i) Borrower's net income for
the period in question before provision for interest expense, lease expense,
depreciation, amortization and income tax expense to (ii) Borrower's interest
expense and operating lease expense for such period, all as determined on a
consolidated basis for Borrower and its Consolidated Subsidiaries in accordance
with GAAP. The Fixed Charge Coverage Ratio for the Fiscal Quarter ended June 30,
1998, shall cover the two (2) preceding Fiscal Quarters ending on that date. The
Fixed Charge Coverage Ratio for the Fiscal Quarter ended September 30, 1998,
shall cover the three (3) preceding Fiscal Quarters ending on that date. The
Fixed Charge Coverage Ratio for each Fiscal Quarter beginning December 31, 1998,
shall cover the preceding four (4) Fiscal Quarters.
IN WITNESS WHEREOF, the parties hereto have caused this Schedule "I" to be
executed and Borrower has caused its seal to be affixed hereto, as of the day
and year first above written.
"LENDER"
WACHOVIA BANK NATIONAL ASSOCIATION
By: /s/ Kevin R. Combs
-----------------------------------------
Name: Kevin R. Combs
-----------------------------------
Title: Assistant Vice President
----------------------------------
- 1 -
<PAGE> 42
"BORROWER"
TEKGRAF, INC. (SEAL)
By: /s/ Phillip Aginsky
----------------------------------------------
Name: Phillip Aginsky
----------------------------------------
Title: Chairman and Chief Executive Officer
---------------------------------------
Attest: /s/ Jeff Camp
------------------------------------------
Name: Jeff Camp
------------------------------------
Title: Secretary
-----------------------------------
- 2 -
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
Exhibit A Obligor Information Schedule
Exhibit B Compliance Certificate
Exhibit C Landlord's Agreement
Exhibit D Master Note
Exhibit E Settlement Report
Exhibit F Telephone Instructions Letter
Exhibit G Secretary's Certificate
Exhibit H Opinion of Counsel
Exhibit I Stock Pledge Agreement
Exhibit J Joinder Agreement
Exhibit K Lien Subordination Agreement
</TABLE>
<PAGE> 44
MASTER NOTE
1. FOR VALUE RECEIVED, the undersigned ("Borrower"), promises to pay to the
order of WACHOVIA BANK, NATIONAL ASSOCIATION ("Lender"), at the principal office
of Lender in Atlanta, Georgia, or at such other place as Lender hereafter may
direct in writing, in legal tender of the United States of America, the
principal sum of Seven Million Five Hundred Thousand Dollars ($7,500,000), or so
much thereof as may be disbursed and remain outstanding from time to time
hereafter under that certain "Line of Credit" opened by Lender in favor of
Borrower pursuant to the terms of that certain Loan and Security Agreement,
dated as of July 2, 1998, among Borrower, its Subsidiary Guarantors as so
identified therein, and Lender (hereinafter, as it may be amended or
supplemented from time to time, called the "Loan Agreement"; all capitalized
terms used herein, but not expressly defined herein, shall have the meanings
given to such terms in the Loan Agreement), the terms and provisions of which
are hereby incorporated herein by reference and made a part hereof, on the
Termination Date, with interest thereon (computed on the daily outstanding
principal balance, for the actual number of days outstanding, on the basis of a
360 day year) on each advance made hereunder from date of advance until paid in
full at a rate per annum, equal to the Applicable Rate. Unless and except to the
extent otherwise expressly provided in the Loan Agreement, accrued interest on
the unpaid principal balance hereof from time to time outstanding shall be due
and payable monthly, commencing on the first day of the calendar month
succeeding the date hereof and continuing on the same day of each succeeding
calendar month thereafter and on demand for payment in full of the principal
balance hereof.
2. Borrower agrees, in the event that this Master Note or any portion
hereof is collected by law or through an attorney at law, to pay all costs of
collection, including, without limitation, reasonable attorneys' fees.
3. This Note evidences borrowing under, is subject to and secured by, and
shall be paid and enforced in accordance with, the terms of the Loan Agreement,
and is the "Master Note" defined in Section 1.1 thereof.
4. Nothing herein shall limit any right granted to Lender by any other
instrument or by law or equity.
5. Borrower hereby waives presentment, demand, protest, notice of
presentment, demand, protest and nonpayment and any other notice required by law
relative hereto, except to the extent as otherwise may be provided for in the
Loan Agreement.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed and sealed
as of July 2, 1998.
"BORROWER"
TEKGRAF, INC. (SEAL)
By: /s/ Phillip Aginsky
------------------------------------------------
Name: Phillip Aginsky
------------------------------------------
Title: Chairman and Chief Executive Officer
-----------------------------------------
Attest: /s/ Jeff Camp
--------------------------------------------
Name: Jeff Camp
-------------------------------------
Title: Secretary
------------------------------------
<PAGE> 1
EXHIBIT 11.1
Tekgraf, Inc.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
1997 1998
------ ------
<S> <C> <C>
Net income $ 28 $ 210
Weighted average number of common shares
Common shares 1,748 5,955
Net income per share $ 0.02 $ 0.04
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1997 1998
------ ------
<S> <C> <C>
Net income $ 138 $ 304
Weighted average number of common shares
Common shares 1,418 5,613
Net income per share $ 0.10 $ 0.05
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TEKGRAF, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,305,227
<SECURITIES> 0
<RECEIVABLES> 16,503,589
<ALLOWANCES> 350,000
<INVENTORY> 8,977,877
<CURRENT-ASSETS> 27,261,901
<PP&E> 924,150
<DEPRECIATION> 289,342
<TOTAL-ASSETS> 37,137,386
<CURRENT-LIABILITIES> 15,060,050
<BONDS> 0
0
0
<COMMON> 6,328
<OTHER-SE> 22,064,548
<TOTAL-LIABILITY-AND-EQUITY> 37,137,386
<SALES> 44,376,511
<TOTAL-REVENUES> 44,376,511
<CGS> 37,297,566
<TOTAL-COSTS> 6,605,704
<OTHER-EXPENSES> 272,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,356
<INCOME-PRETAX> 735,771
<INCOME-TAX> 400,000
<INCOME-CONTINUING> 335,771
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 303,887
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
<PAGE> 1
EXHIBIT 99.4
FOR IMMEDIATE RELEASE
INVESTOR CONTACT:
Jeff Camp, CFO
Tekgraf 404.252.0201
TEKGRAF, INC., ANNOUNCES SECOND-QUARTER RESULTS
August 14, 1998 (ATLANTA)--Tekgraf, Inc. (NASDAQ: TKGFA), a value-added,
wholesale distributor of advanced computer graphics products and a manufacturer
and distributor of premium computers, mass storage systems and computer
peripherals, today announced its financial results for the second quarter of
1998.
Tekgraf reported net income of $210,000 or $0.04 per share (basic and diluted)
for the quarter ended June 30, 1998. Income from operations before the
amortization of goodwill was $486,000 for the second quarter, which represented
a $237,000 or a 95% increase over the first quarter of 1998. Net income for the
six months ended June 30, 1998 was $304,000, or $0.05 per share (basic and
diluted).
The announcement marked Tekgraf's third quarter of operating results on a
consolidated basis since the Company completed its June 1997 acquisitions (G&R
Marketing, Inc., Microsouth, Inc., tekgraf, Inc., Computer Graphics Distributing
Company, Intelligent Products Marketing, Inc., and IG Distribution, Inc.) and
its initial public offering on November 10, 1997 that raised $12.6 million.
Comparative figures for 1997 have not been presented, as they are not directly
comparable to 1998 due to the significance of the 1997 acquisitions and the
public offering described above.
"The Company's results, as expected, continue to improve with each quarter,"
said Phillip Aginsky, Tekgraf chairman. "Sales for the quarter were $27.5
million, which represented a $10.6 million increase over the prior quarter, with
the three acquisitions consummated in April and May accounting for $5.9 million
of the increase. Tekgraf continues to build upon its nationwide network as
evidenced by the growth in sales. Additionally, the Company is making
significant progress towards implementing its new MIS system that will allow us
to serve our customers more effectively while also creating operating
efficiencies."
Commenting on the recently completed acquisitions of three computer graphics
wholesale distribution companies this quarter, Aginsky stated, "We are already
beginning to see the positive effects of the new companies and are working
towards full integration. They have expanded our network of distributors in
North America and will continue to improve our sales of services and premium
computer graphics product lines to achieve our goal of gaining a larger share of
the high-end computer graphics market."
Tekgraf recently announced another distribution agreement with Heidelberg Color
Publishing Solutions, Americas (formerly Linotype CPS) to be a value-added
distributor of Heidelberg CPS' mid-to high-end scanners and Linocolor software
in North America. Tekgraf continues to actively pursue additional distribution
alliances with other nationally recognized manufacturers to further increase its
ability to offer enterprise wide products and support to its customers.
<PAGE> 2
Tekgraf Announces Second-Quarter 98 Earnings
TEKGRAF, INC.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
SUMMARY OF OPERATIONS
<S> <C> <C>
Net Sales $27,505,000 $44,377,000
Cost of Goods Sold 23,256,000 37,298,000
Gross Profit 4,249,000 7,079,000
Income from Operations(1) 337,000 473,000
Net Income 210,000 304,000
Common Stock:
Average Shares Outstanding 5,955,000 5,613,000
Earnings per Average Share $ 0.04 $ 0.05
</TABLE>
(1) Income from operations has been reduced by goodwill amortization of $149,000
and $263,000 for the three months and six months ended June 30, 1998,
respectively.
Tekgraf, Inc. (NASDAQ: TKGFA), headquartered in Atlanta, Ga., is a value-added
wholesale distributor of advanced computer graphics products and a manufacturer
of custom personal computers. The Tekgraf Graphics Division provides sales,
marketing and technical support of computer graphics technologies through
reseller channels. Demonstration and distribution centers are located throughout
the United States and Canada. The Tekgraf Technology Division is engaged in the
manufacture, sale, distribution and support of special purpose Intel-based NT
workstations and servers. Additional information on Tekgraf may be obtained by
visiting the company Web site at http://www.tekgraf.com, or by calling the
nearest Tekgraf Graphics Division office toll free at 888-321-TKGF.
# # #
This press release contains statements that constitute forward-looking
statements within the meaning of the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995, as amended. These statements appear in
a number of places in this press release and include all statements that are not
historical statement of fact. The words "may," "would," "could," "will,"
"progress toward," "move forward," "actively pursuing," "increase," "expect,"
"estimate," "anticipate," "believes," "intends," "plans," and similar
expressions and variations thereof are intended to identify forward-looking
statements. Investors are cautioned that such statements are not guarantees of
future performance and involve various risks and uncertainties, many of which
are beyond the Company's control. Actual results may differ materially from
those discussed in the forward-looking statements as a result of factors
described below. These risks include, but are not limited to, competitive market
pressures, material changes in customer demand, availability of labor, the
Company's ability to perform contracts, governmental policies adverse to the
computer industry, economic and competitive conditions, and other risks outside
the control of the Company, as well as those factors discussed in detail in the
Company's filings with the Securities and Exchange Commission, including the
"Risk Factors" section of the Company's registration statement on Form S-1
(Registration No. 333-33449).
2
