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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-23221
TEKGRAF, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 58-2033795
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
2979 Pacific Drive, Suite B, Norcross, Georgia 30071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(770) 441-1107
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, $.001 PAR VALUE
AND
WARRANTS TO PURCHASE CLASS A COMMON STOCK, $8.40 EXERCISE PRICE
(TITLE OF CLASS)
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:
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Class A Common Stock held by
non-affiliates of the registrant was $7,625,000 at March 27,1998. There were no
shares of the Class B Common Stock held by non-affiliates of the registrant at
March 27, 1998.
The number of shares of Class A and Class B Common Stock outstanding as
of March 27, 1998 was 2,100,000 and 3,333,333, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy statement for the 1998
Annual Meeting of Stockholders of Tekgraf, Inc. are incorporated by reference
into Part III of this Annual Report on Form 10-K. Various exhibits to the
Registrant's Registration Statement on Form S-1, File Number 333-33449, are
incorporated by reference into the Exhibits to this Annual Report on Form 10-K.
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TEKGRAF, INC.
TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business...................................................................................... 3
2. Properties.................................................................................... 13
3. Legal Proceedings............................................................................. 14
4. Submission of Matters to a Vote of Security Holders........................................... 15
PART II
5. Market for the Company's Common Equity and Related
Shareholder Matters............................................................... 15
6. Selected Financial Data....................................................................... 18
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition................................................ 19
8. Financial Statements and Supplementary Data................................................... 26
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................... 26
PART III
10. Directors and Executive Officers of the Company.............................................. 26
11. Executive Compensation....................................................................... 26
12. Security Ownership of Certain Beneficial Owners and
Management........................................................................ 26
13. Certain Relationships and Related Transactions............................................... 26
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K......................................................................... 26
Signatures.................................................................................. 30
Index of Exhibits........................................................................... E-1
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PART I
ITEM 1. BUSINESS.
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"). See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Private Securities Litigation
Reform Act."
Overview
Tekgraf, Inc.("the Company") is engaged in the manufacture,
configuration, distribution and servicing of computers and computer peripherals,
hardware and software. The Company commenced operations in February 1993 for the
purpose of engaging in the manufacture of custom or "made-to order" premium
servers and network workstations under the brand name "Crescent Computer". In
December 1994, the Company acquired a controlling interest in Prisym
Technologies, Inc. of Georgia ("Prisym"), an authorized reseller of equipment
manufactured by Digital Equipment Corporation (a "DEC Reseller").
In June 1997, the Company completed the acquisition of all of the
outstanding capital stock of G&R Marketing, Inc., Microsouth, Inc., tekgraf,
inc., Computer Graphics Distributing Company, Intelligent Products Marketing,
Inc. and IG Distribution, Inc. (the "1997 Acquisitions")in exchange for
2,192,000 shares (giving effect to the .83333325-for-one stock split effected in
October 1997)of Class B Common Stock of the Company. All of the acquired
companies are regional distributors specializing in computer graphics
technologies. Subsequent to the 1997 Acquisitions, the Company reincorporated by
merger under the laws of the State of Delaware into a wholly owned Delaware
subsidiary (the "Merger") and changed its name to Tekgraf, Inc. In connection
therewith, the Company reorganized its operations into two divisions: the
Graphics Division, a wholesale distribution network of high-end computer
graphics products; and the Technology Division, which is engaged in the
manufacture, sale and support of the Crescent Computer and distribution of
related components and DEC Reseller activities.
On November 10, 1997, the Company completed the initial public
offering of its securities (the "Offering"). In the Offering, the Company
offered 2,100,000 units (the "Units") at a price of $6.00 per Unit, with each
unit consisting of one share of Class A Common Stock and one redeemable warrant
(a "Warrant"). Each Warrant entitles the holder to purchase one share of Class A
Common Stock at an exercise price of $8.40, subject to adjustment. See "Price
Range of Class A Common Stock and Warrants."
Strategy
The Company's overall business strategy is to become a nationally
recognized, vertically oriented provider of computer products and services. The
Company intends to accomplish this goal through internal growth of its operating
divisions, acquisitions of complementary businesses and expansion into selected
international markets.
Internal Growth. The Company anticipates that it will be able to
expand its operations through internal growth of each of its operating
divisions. The Company will seek to increase the customer base of the Technology
Division by utilizing the consolidated marketing and
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distribution structure of the Graphics Division achieved as a result of the
1997 Acquisitions, by increased marketing of the Crescent Computer to selected
markets, and through enhanced product and service offerings. The Company
believes that the increased technical personnel and capabilities will enable
Prisym to achieve higher certifications with DEC, thereby broadening the product
mix available to customers.
Acquisition Strategy and the 1998 Acquisitions
The Company intends to expand its operations through acquisitions of
complementary businesses. The Company intends to focus its acquisition
activities on profitable technology companies that can be integrated into the
Company's existing divisional structure, increase divisional revenues, expand
the geographic and technical scope of the Company's operations and offer a
greater range of products and services to existing and potential customers.
The Company continually explores acquisition possibilities and has
targeted certain computer graphics distributors. On March 23, 1998, the Company
entered into two agreements and plans of merger and on March 25, 1998 entered
into a third agreement and plan of merger (the "1998 Acquisitions") to acquire
three computer graphics wholesale companies. It is expected that each
acquisition will be accounted for as a purchase and will be treated as a
tax-free reorganization to the extent permissible. The agreement and plan of
merger (the "CGT Agreement") by and between the Company, Tekgraf Sub I, Inc., a
Georgia corporation ("Tekgraf Sub I"), Computer Graphics Technology, Inc., a
South Carolina corporation ("CGT"), and its shareholders (the "CGT
Shareholders") provides that CGT will merge with and into Tekgraf Sub I in
exchange for delivery to the CGT Shareholders of aggregate consideration of
330,000 unregistered shares of the Company's Class A Common Stock and $500,000
in cash. The consideration to be delivered to the CGT Shareholders is subject
to adjustment based on certain profitability and net asset value guarantees
made by CGT. To secure these guarantees, $100,000 of the cash and 20% of the
shares to be issued to the CGT Shareholders will be placed in escrow, and
another 20% of the shares to be issued to the CGT Shareholders will be placed
in escrow to secure various representations, warranties, and other provisions
contained in the CGT Agreement. The closing of the merger of CGT into Tekgraf
Sub I is scheduled for April 1, 1998, subject to the satisfactory completion of
due diligence, the receipt of regulatory approvals and consents, and other
conditions to closing. CGT, which is headquartered in Greenville, South
Carolina, is a computer graphics distribution company focused on the Southeast.
The agreement and plan of merger (the "MGD Agreement") by and between
the Company, Tekgraf Sub II, Inc., a Georgia corporation ("Tekgraf Sub II"),
Martec, Inc., a California corporation doing business as Media Graphics
Distribution and MGD ("MGD"), and its shareholders (the "MGD Shareholders"),
provides that MGD will merge with and into Tekgraf Sub II in exchange for
delivery to the MGD Shareholders of aggregate consideration of 300,000
unregistered shares of the Company's Class A Common Stock and $500,000 in cash.
The consideration to be received by the MGD Shareholders is subject to
adjustment based on certain profitability and net asset value guarantees made
by MGD. To secure these guarantees, $150,000 of the cash and 20% of the shares
to be issued to the MGD Shareholders will be placed in escrow, and another 20%
of the shares to be issued to the MGD Shareholders will be placed in escrow to
secure various representations, warranties, and other provisions contained in
the MGD Agreement. The closing of the merger of MGD into Tekgraf Sub II is
scheduled for April 30, 1998, subject to the satisfactory completion of due
diligence, the receipt of regulatory approvals and consents, and other
conditions to closing. MGD is a computer graphics distribution company
headquartered in Torrance, California.
The agreement and plan of merger, as amended (the "NECG Agreement"), by
and between the Company, Tekgraf Sub III, Inc., a Georgia corporation ("Tekgraf
Sub III"), New England Computer Graphics, Inc., a Massachusetts corporation
("NECG"), and its shareholders (the "NECG Shareholders"), provides that NECG
will merge with and into Tekgraf Sub III in exchange for delivery to the NECG
Shareholders of aggregate consideration of 265,000 unregistered shares of the
Company's Class A Common Stock and $415,000 in cash. The consideration to be
received by the NECG Shareholders is subject to adjustment based on certain
profitability and net asset value guarantees made by NECG. To secure these
guarantees, $75,000 of the cash and 25% of the shares to be issued to the NECG
Shareholders will be placed in escrow, and another 25% of the shares to be
issued to the NECG Shareholders will be placed in escrow to secure various
representations, warranties, and other provisions contained in the NECG
Agreement. The closing of the merger of NECG into Tekgraf Sub III is scheduled
for April 30, 1998, subject to the satisfactory completion of due diligence, the
receipt of regulatory approvals and consents, and other conditions to closing.
William M. Rychel, a director and shareholder of the Company, owns approximately
14% of the outstanding common stock of NECG, and Thomas Gust, a shareholder of
the Company, and Lowell Nerenberg, a shareholder and an employee of the Company,
own approximately 14% and 28%, respectively, of NECG. The acquisition of NECG
was approved by the unanimous vote of the disinterested directors of the
Company. NECG is headquartered in Westford, Massachusetts and also has offices
in Mississaugua, Ontario. It is engaged in selling computer graphics products
through a network of resellers focused on the pre-press, wideformat color
graphics, and electronic document management and storage markets in New England,
upper New York State and Canada.
The descriptions set forth herein of the terms and conditions of the
CGT, MGD and NECG Agreements (the "Agreements") are qualified in their entirety
by reference to the full texts of the Agreements and the exhibits thereto,
copies of which are filed as Exhibits to this Report on Form 10-K. There can be
no assurance that the Company's acquisition program will be successful, that the
acquisition of these or other companies will be completed or that, if completed,
any companies acquired will be profitable or will contribute revenues to the
Company.
International Expansion. The Company intends to market the Crescent
Computer and components, as well as products and services distributed by the
Graphics Division, to selected international markets such as Canada, the United
Kingdom, South Africa and Australia.
THE COMPANY'S DIVISIONS AND PRODUCTS
THE GRAPHICS DIVISION
General
The Graphics Division currently consists of five regional wholesale
distributor subsidiaries which specialize in computer graphics technologies.
These subsidiaries are G&R Marketing, Inc.("G&R"), Microsouth,
Inc.("Microsouth"), tekgraf, inc.("tekgraf"), Computer Graphics Distributing
Company("CGD"), and Intelligent Products Marketing, Inc.("IGD"), which includes
IG Distribution, Inc. The Graphics Division sells and supports products in the
digital prepress, presentation graphics, color desktop publishing, large format
display graphics, digital imaging, electronic drawing management, CAD and other
emerging computer graphics technologies markets. The Company provides
value-added sales, marketing, fulfillment, and logistics support for more than
30 manufacturers of a broad array of complex computer graphics hardware and
software. See "-- Products and Markets."
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Although initially comprised of six individual companies, central to
the business model of the Graphics Division and a core motivation for the 1997
Acquisitions and the resulting business combination were the pre-existing
relationships among such companies and their principals. The desire to provide
manufacturers with national sales and marketing programs fostered close
cooperation among these regional firms, ultimately leading to the formation of
two trade associations, the David Group and the Vision Group. The purpose of
these associations was to facilitate joint marketing and promotion, product line
acquisitions, the sharing of technical resources and sales strategies, and the
transfer of excess inventory. All of the companies that make up the Graphics
Division are current or former members of one or both of such trade
associations.
The goal of the Graphics Division is to build on the aforementioned
historic inter-company cooperation and function as a single entity with respect
to sales, marketing, advertising, public relations, technical support and
technology evaluation. With the current exception of the areas of Southern
California, Arizona, New Mexico and New England, the Graphics Division is in a
position to provide computer graphics manufacturers a national distribution
presence with the key benefit of local technical sales and support. See
"--Customers, Sales and Marketing." The Company intends to acquire additional
regional distributors of computer graphics technology in order to increase the
geographic scope of the operations of the Graphics Division. There can be no
assurance, however, that the Company will successfully complete any such
acquisitions.
During the years ended December 31, 1996 and 1997, the revenues of the
Graphics Division accounted for 80.5% and 78.4%, respectively, of the Company's
total revenues on a pro forma combined basis. The operating profit of the
Graphics Division for these same periods accounted for 78.0% and 76.7%,
respectively, of the Company's operating profit on a pro forma consolidated
basis. The identifiable assets of the Graphics Division accounted for 82.4% and
59.0%, respectively, of the Company's identifiable assets, on a consolidated
basis as of December 31, 1996 and 1997, respectively.
Products and Markets
The Company's Graphics Division distributes and supports products of
over 30 manufacturers, including Agfa Division of Bayer Corporation, Electronics
For Imaging (EFI) Encad, Inc., Epson America, Inc., Mitsubishi Electronics
America, Inc., Scitex America Corporation and Vidar Systems Corporation. Among
the products the Graphics Division distributes and sells are color scanners,
color digital film recorders, digital cameras, color laser printers,
color-calibrated monitors, audio-visual presentation systems, raster image
processors (RIPs), ink jet printers, plotters, pre-press software, image
setters, color proofers, mass storage devices and the consumable products used
in many of such products. Prices typically range from less than $100 to in
excess of $100,000.
The Company's agreements with manufacturers are generally
non-exclusive, provide for wholesale distribution to dealers and resellers in
specified geographic territories and are terminable by either party without
cause on either 30 or 60 days notice.
The Graphics Division intends to continue to operate in the following
four vertical markets:
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- Digital Pre-Press
- Computer-Aided Design (CAD)
- Electronic Drawing Management Systems (EDMS)
- Display Graphics
Digital Pre-Press. Over the last three years, there has been a dramatic
shift in the process printing industry from manual, analog production of printed
materials to the use of computers. Historically the production of a printed
brochure, magazine or catalog involved numerous manual steps using photographic
materials to produce the final press-ready copy.
With rapid advances in software and hardware, much of today's printed
materials are produced digitally. The print production process now allows a
printed piece to go from concept to imaged printing plate in a fully digital
environment. Copy writing, proofing and revisions all take place on a desktop
computer, increasing the speed and efficiency of the pre-press process, and
streamlining personnel requirements in the process. The Company believes this
market is in a period of rapid transition regarding the manner in which
electronics products are delivered to the traditional printing customer. When
digital pre-press systems sold for $200,000 per seat (user), most manufacturers
used a captive direct sales force to sell to the end-user. Today, the typical
seat sells for under $20,000, forcing manufacturers to utilize a reseller
channel to deliver their products.
The Graphics Division sells input, proofing, networking, color
management software and output devices, which are integral parts of a digital
pre-press system. These products are typically sold through two classes of
resellers: graphic arts dealers who have traditionally sold film, chemicals,
printing plates and other analog pre-press supplies, and graphics value added
resellers ("VARs") who have specialized in pre-press workflow technologies and
the automation of the pre-press process.
Computer Aided Design (CAD). Over the last ten years, traditional
drafting tables have given way to the desktop computer. Today, most
architectural and engineering design and drafting in the United States is done
using a desktop computer or workstation.
The CAD market is a more mature digital market than digital pre-press.
As a result, the delivery mechanism for products into this market has adapted to
the combination of less expensive products and more informed buyers. According
to industry sources, over 90% of all CAD software and peripherals are delivered
using a multi-tiered reseller channel.
The Graphics Division sells primarily processing and output products in
this market, with plotters, high-resolution graphics displays and optical
storage representing the majority of sales.
Electronic Drawing Management Systems (EDMS). The use of CAD systems in
the engineering and architectural community has created a workflow problem for
those firms that have embraced CAD - what to do with the archive of manually
drafted drawings.
EDMS allow these customers to capture (i.e., scan) paper drawings and
store them digitally. When needed, they can be retrieved, annotated, printed or
converted to CAD format for further revision. Since most of these functions can
be performed using existing CAD workstations or PC's, the cost of converting to
an EDMS systems is relatively low, and the demand for such systems is growing
dramatically.
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The Graphics Division sells all of the components necessary for the
installation of an EDMS system, including large format scanners, archiving and
manipulation software, optical storage systems and output devices.
Display Graphics. The most rapidly growing segment of the computer
graphics output market is display graphics. Display graphics, or large format
graphics, describes a process that allows computer-generated or captured images
to be printed in sizes up to 60 inches wide.
Historically, these images could only be printed on color electrostatic
printers costing over $120,000. However, over the last three years, significant
advances in ink-jet technology, software, specialty inks and media have placed
the cost of entry for display graphics systems starting at under $10,000, and
market acceptance has been rapid. End-users of this technology include a wide
range of industries and markets, such as:
- Trade-show graphics - production of booth and arcade
displays
- Point of Sale graphics - floor displays
- Sign Shops - traditional signage, fleet graphics
- Print-for-Pay (e.g., Kinkos, Sir Speedy)
- Package Design - package prototyping
- Graphic Arts - imposition proofing
Products sold to this market include large-format ink-jet printers
(ENCAD), faster image processing software (Amiable Technologies, EFI, Onyx
Graphics, PISA), lamination systems (Seal Products, a division of Hunt
Manufacturing) and a wide range of inks, papers and other specialty media.
Customers, Sales and Marketing
The Graphics Division's customers are principally value-added resellers
(VARs) and systems integrators (SIs), as well as, for certain products,
retailers, mass merchandisers and direct marketers. VARs typically focus on
sales to users in specific vertical markets where the selling organization has
unique knowledge and expertise concerning the prospective customer's
application. These customers purchase products from the Company and resell them
as an integrated solution bundled with installation services and post-sales
support. SIs typically purchase products from the Company for further
integration into a much larger solution comprised of components from many
sources. These solutions typically are very large in scale and may involve an
integration contract between the SI and the end-user customer. The Graphics
Division utilizes the retail, mass merchant and direct marketing sales channels
when product demand is firmly established and a lower cost mechanism of delivery
to the end user is warranted.
Currently, the Graphics Division has 21 outside and 18 inside sales
representatives and seven technical support representatives. The Company
believes that this constitutes the highest concentration of sales and technical
support professionals in the country devoted to the sales, marketing, and
support of high-end computer graphics products.
The Company's sales representatives receive commissions based on sales.
During each of the years ended December 31, 1995, 1996 and 1997,
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compensation paid to outside sales representatives amounted to less than 5% of
the Company's sales.
Each regional office of the Graphics Division maintains and has
training and demonstration facilities equipped with its manufacturers' hardware
and applications software. These resources are made available to prospects and
customers for product evaluations, product training, demonstrations, benchmark
testing and in-house and in-the-field seminars. In addition, the Graphics
Division's sales force and technical sales representatives are trained to
demonstrate the technology it distributes and the applications of such
technology. Inside and outside technical sales representatives are also trained
to understand their manufacturers' products, the competitors' products, related
applications, software and the relevant end-user markets.
The Company believes the service offered by the Graphics Division is
unique in providing face-to-face sales, marketing, and distribution of mid to
high-end computer graphics products sold through vertical reseller channels.
Typically, products carried by the Graphics Division are relatively complex,
requiring technical sales training, product demonstrations, product training,
pre-sale and post-sale technical support and immediate product availability.
Selling and supporting products in these markets require knowledge of many
distinct types of hardware and software as well as communications protocols,
networking architecture, file formats, compression techniques, and other systems
integration issues. Manufacturers of products with such a level of complexity
often need to leverage their own limited resources by selling and distributing
through reseller organizations. Similarly, reseller organizations are often
severely limited in the technical sales and marketing resources they can devote
to the sale of specific products. Accordingly, each regional office of the
Graphics Division augments both the manufacturer's and the reseller's staff,
capitalizing on its ongoing relationships with the local resellers and end user
community. Resellers are trained and assisted by Graphics Division staff in all
aspects of sales, marketing, distribution and installation of its products.
The Company believes that the consolidation of the operations of G&R,
Microsouth, tekgraf, CGD and IGD into the Graphics Division and the 1998
Acquisitions, if consummated, will enable it to establish a national
distribution network. In addition to economies of scale achieved, the Company
believes that it will be more cost-effective for certain manufacturers of
computer graphics technology and peripheral equipment to utilize the Company as
a distributor than to maintain their own extensive internal sales force.
THE TECHNOLOGY DIVISION
General
The operations of the Technology Division currently consist of the
manufacture of the Crescent Computer and the DEC Reseller activities of Prisym.
The Company custom designs, assembles and sells custom or "made-to-order"
premium servers or workstations (Crescent Computers) and related technology to
VARs, vertical solution providers ("VSPs"), corporations, universities and the
government. See "--Customers, Sales and Marketing." The Company also provides
services to its customers, including system architecture design, hardware
consulting and customer support.
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Products and Markets
The Crescent Computer is a PC that can be assembled in a number of
different configurations using standard component parts. Although many of the
Crescent Computers are based on standard configurations, customization enables
the Company to accommodate customer computer needs with respect to storage
capacity, speed, price, applications, size, configuration and a range of other
considerations that can be accommodated in whole or in part by the selection of
appropriate components. The Company works with SIs on network configuration. The
Company also provides customers with continuing technical support and assistance
in the maintenance and operations of Company purchased products.
Crescent Computers are currently being used to operate non-sterile heart
catheterization diagnostic equipment, as voice mail/auto-attendant controllers,
in informational kiosks and in other process-control applications. The Company
also sells servers and RAID storage systems to VARs and other companies seeking
to create Internet web sites, internal networks, graphics and CAD workstations
and application servers.
Through Prisym, the Company provides DEC's Alpha-based Workstations and
servers, mass storage, printers, components and computer peripherals and
supplies to the nationwide installed base of DEC customers. Prisym's customers
include Fortune 500 companies, governmental agencies and educational
institutions.
During the years ended December 31, 1996 and 1997, the revenues of the
Technology Division accounted for 19.5% and 21.6%, respectively, of the
Company's total revenues on a pro forma combined basis. The operating profit of
the Technology Division for these same periods accounted for 22.0% and 23.3%,
respectively, of the Company's operating profit on a pro forma consolidated
basis, and the identifiable assets of the Technology Division accounted for
17.6% and 41.0%, respectively, of the Company's identifiable assets, on a
consolidated basis as of December 31, 1996 and 1997, respectively.
Manufacturing and Suppliers
The Company's manufacturing operations consist of the assembly of Crescent
Computers at its facility in Norcross, Georgia and the testing of the electronic
and mechanical components incorporated into its products.
The Company has elected to assemble its products utilizing principally
off-the-shelf electronic component parts available from multiple sources. The
Company believes that this practice helps to ensure better quality control and
pricing by allowing the Company to select the best manufactured and best
performing components available on the market, rather than a proprietary product
that may fall behind the latest technology in terms of either such
characteristic, and to purchase such components from marketplace sources that
offer the best prices at the time the particular components are needed for
production, as opposed to having prices dictated by the limited sources able to
provide a proprietary component. The Company obtains component parts on a
purchase order basis and does not have long-term contracts with any suppliers.
To date, the Company has not experienced significant interruptions in the supply
of such component parts, and believes that numerous qualified suppliers are
available. The Company believes that the inability of any of its current
suppliers, except as specified below, to provide component parts to the Company
would not adversely
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affect the Company's operations and that alternate sources could be readily
established.
The Company currently obtains the motherboards (a primary component of
the PC) from two sources. Certain of the Company's file server products
incorporate a motherboard which is currently purchased from a sole supplier.
Historically the Company has been able to obtain adequate supplies of this
component and does not anticipate any related sourcing problems; the inability
in the future to obtain sufficient numbers of such components or to develop
alternative sources could result in delays in product introductions or
shipments. Such delays could have a material and adverse effect on the Company's
results of operations. The Company plans to attempt development of additional
alternative sources to limit any adverse impact on the Company's result of
operations.
The Company has established a comprehensive testing and qualification
program to ensure that all subassemblies meet the Company's specifications and
standards before final assembly and testing. The Company's quality control
program includes diagnostic tests, assembly, burn-in, final configuration and
final quality assurance tests and the employment of process controls at its
manufacturing facility. The Company has also implemented quality control
policies that are reviewed and accepted by the Company's major customers. The
Company believes that this procedure helps ensure a high-quality product.
The Company, through its Prisym subsidiary, is an authorized DEC
reseller. During the years ended December 31, 1996 and 1997, revenues derived
from the sale of DEC and DEC-related products accounted for 37.5% and 41.6%,
respectively, of the Technology Division's revenues. Prisym has no written
supply agreement with DEC.
The Company's own manufacturing facility totals approximately 4,000
square feet. The Company believes that additional manufacturing facilities, if
necessary, are available. The Company is currently operating at approximately
50% of capacity at this facility. See "Item 2 - Properties."
Customers, Sales and Marketing
Customers for the Crescent Computer include OEMs, other vertical market
computer resellers, computer dealers, universities, government entities and
corporations. The Technology Division does not market to individual end-users,
focusing instead on establishing relationships with entities which will
constitute repeat sales and have internal computer support personnel capable of
handling local issues prior to involvement of Company personnel.
Prisym markets to the current installed base of DEC customers. Such
customers primarily include Fortune 500 and other large corporations,
governmental agencies and educational institutions.
The Company currently distributes Technology Division products
principally through the efforts of its internal direct sales force. In the
future, the Company intends to offer Technology Division products through its
recently acquired Graphics Division sales force and to expand its marketing
efforts and seek to (i) expand the customer base for the Crescent Computer, (ii)
expand the geographic market serviced by the Graphics Division, and (iii)
increase both the number of products
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distributed and the number of manufacturers whose products are distributed by
the Graphics Division. Because the Technology Division typically sells large
amounts of equipment to a small number of customers, a large portion of the
Technology Division's sales may be derived from a limited number of customers.
During the year ended December 31, 1997, three customers accounted for an
aggregate of 9% of the Technology Division's sales.
Service and Support
The Company believes that customer service and support is a significant
competitive factor in the network systems market in which it sells the Crescent
Computer and will become more important as local area networks ("LANs") become
more complex and as more enterprises implement business-critical applications on
their networks. The Company supports its customers by providing rapid problem
resolutions both during and after the installation process. The Company
maintains a technical support organization that assists customers in
trouble-shooting problems and providing replacement parts. The Company provides
a toll-free telephone number to help diagnose and correct customer system
interruptions as they occur at customer sites and support staff is available
during normal business hours.
The Company warrants all of its Crescent Computer servers and
workstations against defects in materials and workmanship for two years. During
the warranty period, the Company will repair or replace any Crescent Computer,
or component thereof, which the Company identifies as defective. The Company
will, in certain circumstances, send replacement parts to the customer site
prior to the return of defective component in order to minimize down time. The
Company has contracted with a service provider to furnish on-site service of
Crescent Computers to customers which choose that option.
The Company's product warranties do not differ materially from those
generally available in the industry. In most instances, the Company receives
warranties on products from vendors which are at least equivalent to those it
provides to its customers. To date, the Company has not experienced significant
claims under its warranties.
Graphics and Technology
Backlog
The Company does not have significant backlog due to (i) the Technology
Division being able to manufacture and deliver products generally within a few
days of order receipt and long-term contracts to supply products have not been
entered into with customers (the Company manufactures and sells products on the
basis of individual purchase orders as and when received) and (ii) the fact that
the Graphics Division generally receives orders for shipment the same or next
day. Accordingly, backlog at the beginning of a quarter may not represent a
significant percentage of the products anticipated to be sold in that quarter.
Quarterly revenues and operating results depend on the volume and timing of
bookings received during the quarter. Therefore, management of the Company does
not consider order backlog a significant indicator of the Company's future
revenues.
Competition
The business of manufacturing and selling computers and computer
peripheral equipment is intensely competitive and rapidly changing. The Company
believes that the principal competitive factors in this industry
11
<PAGE> 12
include relative price and performance, product availability, technical
expertise, financial stability, service, support and reputation.
The Company's Graphics Division competes primarily with computer
equipment manufacturers that either utilize an in-house sales force to market
their products to resellers and end-users or utilize the services of large,
national fulfillment distributors. The Company believes that the primary
competition will come from national fulfillment distributors whose specialty is
order fulfillment. The Company believes that the key factors differentiating it
from such competitors lies in the ability to provide technical sales training,
product demonstrations, product training, pre- and post- sale technical support
and evaluation units.
The Company's Crescent Computers are constructed with standardized
parts which are available to others in the market. The Company's competitors
include established computer product manufacturers, some of which supply
products to the Company, computer resellers, distributors and service providers.
Some of the Company's current and potential competitors have substantially
greater financial, sales, marketing, technical and other competitive resources
than those of the Company. As a result, the Company's competitors may be able to
devote greater resources than the Company to the sales and service of their
computer products. As the computer market in which the Company competes has
matured, product price competition has intensified and is likely to continue to
intensify, which may make it too costly for the Company to continue the "made to
order" method of doing business. One of the results of this competition may be
to lower sales prices and decrease profit margins.
Technological competition from other and longer established computer
hardware manufacturers and software developers is significant and expected to
increase. The Company expects that hardware manufacturers and software
developers will continue to enter the market to provide and package integrated
information distribution solutions to the same customer base served by the
Company's Technology Division. All such market participants will compete
intensely to maintain or improve their market shares and revenues. Most of the
companies with which the Company's Technology Division competes have
substantially greater capital resources, research and development staffs,
marketing and distribution programs and facilities, and many of them have
substantially greater experience in the production and marketing of products.
In the development market for network servers and workstations, the
Company experiences competition from hundreds of small companies and a number of
significant competitors, including such major industry participants as IBM,
Novell, Inc. and Compaq Computers, Inc. Accordingly, there is no assurance that
the Crescent Computer will continue to achieve sufficient market acceptance to
assure the Company's future success and long range profitability in the face of
competition with such significantly larger and better capitalized companies.
With respect to the Technology Division's DEC reseller activities, the
Company faces competition from several national and regional companies, many of
which are substantially larger and more established than the Company and have
national sales forces.
12
<PAGE> 13
Intellectual Property
The Company has no patents and its success will depend, in part, on its
ability to preserve its trade secrets and proprietary know-how, and to operate
without infringing the proprietary rights of third parties.
The Company seeks to protect trade secrets and proprietary know-how, in
part, by confidentiality agreements with employees, consultants, advisors, and
others. There can be no assurance that such employees, consultants, advisors, or
others, will maintain the confidentiality of such trade secrets or proprietary
information, or that the trade secrets or proprietary know-how of the Company
will not otherwise become known or be independently developed by competitors in
such a manner that the Company will have no practical recourse.
Product Research and Market Development
The market for the Company's products is characterized by rapid
technological change and evolving industry standards, and it is highly
competitive with respect to timely product innovations. The introduction of
products embodying new technology and the emergence of new industry standards
can render existing products obsolete and unmarketable. The Company believes
that its future success will depend upon its ability to develop, manufacture and
market new products and enhancements to existing products on a cost-effective
and timely basis.
If the Company is unable for technological or other reasons to develop
products in a timely manner in response to changes in the industry, or if
products or product enhancements that the Company develops do not achieve market
acceptance, the Company's business will be materially and adversely affected.
The Company has in the past experienced delays in introducing certain of its
products and enhancements, and there can be no assurance that it will not
encounter technical or other difficulties that could in the future delay the
introduction of new products or enhancements. Such delays in the past have
generally resulted from the Company's need to obtain a requisite component from
a third-party vendor whose own development process has been delayed (e.g., the
RAID controller card for the Company's server products).
Employees
As of December 31, 1997, the Company had 27 full-time and 4 part-time
employees in the Technology Division and 66 full-time and 10 part-time employees
in the Graphics Division.
The Company intends to hire additional management, administrative,
technical and sales personnel. The Company's employees are not represented by a
labor union and the Company believes that relations with employees are
satisfactory.
Other Matters
The Company has been advised that D.H. Blair and Co., Inc. ("Blair &
Co.") intends to make a market in the Company's securities. The company is
unable to predict whether Blair & Co.'s settlement with NASD Regulation, Inc.
("NASDR") or any unfavorable resolution of the investigation of the Securities
and Exchange Commission (the "Commission") will have any effect on such firm's
ability to make a market in the Company's securities and, if so, whether the
liquidity or price of the Company's securities would be adversely affected.
ITEM 2. PROPERTIES.
Facilities and Administrative Functions
The Company's executive offices and the Technology Division's
manufacturing and warehousing facilities are located in approximately 7,600
square feet in Norcross, Georgia pursuant to a lease expiring October 31, 1998,
which provides for an annual rental of $30,600. Prisym has approximately 2,850
square feet in Norcross, Georgia pursuant to a lease expiring November 14, 1998,
which provides for an annual rental of $39,900.
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<PAGE> 14
The table below sets forth certain information with respect to leased properties
of the Graphics Division, all of which are leased from non-affiliated lessors:
Lease Terms:
<TABLE>
<CAPTION>
Approximate Square Expiration Annual
Location Footage Date Rental(1)
- --------- ------------------ ---------- ---------
<S> <C> <C> <C>
980 Corporate Woods Parkway
Vernon Hills, Illinois 14,935 5/31/00 $159,058
645 Hembree Parkway
Roswell, Georgia 10,447 4/30/98 $ 47,012
620 East Diamond Avenue
Gaithersburg, Maryland 8,993 6/30/99 $ 91,368
7020 Koll Center Parkway
Pleasanton, California 7,892 12/8/01(2) $ 96,888
6721 Port West
Houston, Texas 5,495 2/28/99 $ 45,000
</TABLE>
- ----------
(1) Certain of these leases provide for moderate annual rental increases.
(2) A portion of these premises is being subleased to a company affiliated with
IGD for an annual rental of approximately $39,000.
The Company will acquire additional office space by virtue of the 1998
Acquisitions, if consummated. The Company also maintains five regional
warehouses for the Graphics Division. As part of its ongoing consolidation, the
Company is examining the feasibility of reducing the number of warehouses to
three.
The Company has recently begun examining centralization of
administrative and marketing functions from the existing seven locations to its
executive offices in Georgia. Management is currently evaluating accounting
systems and integrated Management Information Systems ("MIS") that will provide
inventory management, billing and collection management, accounts receivable and
accounts payable management and streamlined consolidated financial reporting. In
addition, the MIS system being evaluated is intended to increase the Company's
customer service and sales capabilities by providing contact management,
customized management reports, facilitating order tracking and automating sales
projections.
The Company periodically reviews its space and is currently exploring
the possibility of relocating the Company's headquarters to another facility
during 1998.
ITEM 3. 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, in the aggregate, they are not likely to have a
material adverse effect on the Company.
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<PAGE> 15
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by the Company
during the quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Class A Common Stock and Warrants
The Company's Class A Common Stock and Warrants have been quoted on the
NASDAQ National Market under the symbols "TKGFA" and "TKGFW", respectively,
since November 10, 1997, when the Company completed the Offering. Each Warrant
entitles the holder thereof to purchase one share of Class A Common Stock of the
Company at an exercise price of $8.40 at any time until 5:00 p.m., New York City
time, on November 10, 2002. Beginning on November 10, 1998, the Warrants will be
redeemable by the Company, on 30 days' written notice, at a price of $0.05 per
Warrant, if the "closing price" of the Company's Class A Common Stock for any 30
consecutive trading days ending within 15 days of the notice of redemption
averages in excess of $11.75 per share. The "closing price" shall mean the
closing bid price if listed in the over-the-counter market on Nasdaq or
otherwise or the closing sale price if listed on the Nasdaq National Market or a
national securities exchange. The Company has agreed not to redeem the Warrants
unless a prospectus covering the shares of Class A Common Stock underlying the
Warrants is in effect throughout the date fixed for redemption. All Warrants
must be redeemed if any are redeemed.
The following table sets forth, for the period indicated, the high and
low closing prices per share of the Class A Common Stock and Warrants as
reported by the NASDAQ National Market.
<TABLE>
<CAPTION>
For the period November 10, 1997 to
December 31, 1997 High Low
- ----------------------------------- ---- ---
<S> <C> <C>
Class A Common Stock $5 9/16 $2 5/16
Redeemable Warrants 1 7/8 9/16
</TABLE>
Class B Common Stock
There is no active trading market for the Class B Common Stock,
however, each share of Class B common stock can be converted into one Class A
share. The Company issued 2,192,000 (giving effect to the .83333325-for-one
reverse stock split effected in October 1997) shares of Class B Common Stock,
as the consideration used in the 1997 Acquisitions on June 2, 1997. No
underwriter was employed by the Company in connection with the issuance and
sale of the Class B Common Stock described above. The Company believes that the
issuance and sale of all of the foregoing securities were exempt from
registration pursuant to Rule 701 under the Securities Act of 1933, as amended.
15
<PAGE> 16
All of the 3,333,333 outstanding shares of Class B Common Stock are
"restricted securities" within the meaning of Rule 144 under the Securities Act
and may not be sold publicly unless they are registered under the Securities Act
or are sold pursuant to Rule 144 or another exemption from registration.
1,141,333 of such shares are currently eligible for sale in the public market
pursuant to Rule 144 and the remainder will become so eligible commencing in
June 1998 (subject to the restrictions on transferability relating to those
shares placed in escrow pursuant to an Escrow Agreement(as defined below) with
American Stock Transfer & Trust Company, as escrow shares and subject to volume
limitations). However, all of the holders of the shares of Class B Common Stock
outstanding prior to the Offering have agreed not to sell or otherwise dispose
of any securities of the Company for a period of 13 months after the sale of the
Offering without the prior written consent of D. H. Blair Investment Banking
Corp. and for the ten months thereafter, not to sell more than 10% of their
holdings in any month on a cumulative basis without such consent.
Each share of Class B Common Stock of the Company is convertible into
one share of Class A Common Stock of the Company at any time at the option of
the holder, or automatically upon: (i) its sale, gift or transfer, except in the
case of transfer to a trust for which the original holder acts as sole trustee
or to any other holder of Class B Common Stock; (ii) the death of the original
holder thereof, including in the case of the original holder having transferred
the Class B Common Stock to a trust for which the original holder served as
trustee during his or her lifetime; or (iii) the conversion of an aggregate of
75% of the authorized shares of Class B Common Stock into Class A Common Stock.
In connection with the Offering, the holders of the Class B Common
Stock of the Company agreed to place an aggregate of 166,667 shares into escrow
pursuant to an escrow agreement (the "Escrow Agreement") with American Stock
Transfer & Title Company, as escrow agent. The Escrow Shares may be voted, but
are not transferable or assignable other than to a permitted transferee who
agrees to be bound by the Escrow Agreement. The Escrow Shares will be released
from escrow if, and only if, one or more of the following conditions are/is met:
(a) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (all as audited by the
Company's independent public accountants) (the "Minimum Pretax
Income") amounts to at least $8,700,000 for the fiscal year ending
December 31, 1998;
(b) the Minimum Pretax Income amounts to at least $13,000,000 for the
fiscal year ending December 31, 1999;
(c) the Minimum Pretax Profit amounts to at least $17,900,000 for the
fiscal year ended December 31, 2000;
(d) the Closing Price (as defined in the Escrow Agreement)of the Class
A Common Stock averages in excess of $16.25 per share for 30
consecutive business days during the 18-month period commencing on
November 10, 1997;
(e) the Closing Price of the Class A Common Stock averages in excess of
$20.00 per share for 30 consecutive business days during the
18-month period commencing eighteen months from November 10, 1997.
The Minimum Pretax Profit amounts set forth above will be calculated
exclusive of any extraordinary earnings, including any charge to income
resulting from release of the Escrow Shares and any property distributed in
respect of such shares. Minimum Pretax Income will be calculated assuming
release of the Escrow Shares and conversion or exercise of all outstanding
equity securities of the Company convertible into or
16
<PAGE> 17
exchangeable for Common Stock, whether or not convertible or exchangeable at the
time of computation and after adjustment for any stock dividends, stock splits,
or similar events. The Closing Price amounts set forth above are subject to
adjustment in the event of any stock splits, reverse stock splits or other
similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Shares, including any property distributed as dividends or pursuant to
any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in Escrow until the release of the
Escrow Shares. If none of the applicable Minimum Pretax Income or Closing Price
levels set forth above have been met by March 31, 2001, the Escrow Shares, as
well as any dividends or other distributions made with respect thereto will be
cancelled and contributed to the capital of the Company. The release of Escrow
Shares to officers, directors, employees and consultants of the Company will be
deemed compensatory and, accordingly, will result in a substantial change to
reportable earnings, which would equal the fair market value of such shares on
the date of release. Such charge could substantially reduce or eliminate the
Company's net income, if any, for financial reporting purposes for the period
during which such shares are, or become probable of being, released form escrow.
Although the amount of compensation expense recognized by the Company will not
effect the Company's total stockholder equity, it may have a negative effect on
the market price of the Company's securities.
The Minimum Pretax Income and Closing Price levels set forth above were
determined by negotiation between the Company and D.H. Blair Investment Banking
Corp. in connection with the Offering and should not be construed to imply or
predict any future earnings by the Company or any increase in the market price
of its securities.
As of March 19, 1998, the approximate number of holders of record of
the Class A and Class B Common stock were 1,155 and 14, respectively.
As of March 19, 1998, the approximate number of holders of record of
the Warrants was 1,073.
Dividends
The Company has applied and intends to continue to apply, its retained
and current earnings toward the development of its business and to finance the
growth of the Company. Consequently, the Company currently does not anticipate
paying cash dividends in the foreseeable future. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources."
Other Securities
As was stated above, in June 1997, the Company completed the
acquisitions of the outstanding capital stock of G&R, Microsouth, tekgraf, CGD,
and IGD in exchange for the issuance of an aggregate of 2,192,000 shares of its
Class B Common Stock (giving effect to the .83333325-for-one reverse stock split
effected in October 1997).
On November 1, 1997, the Company granted an employee stock options to
purchase shares of the Company's Class A Common Stock at an exercise price of
$6.00 per share. These options were terminated on March 1, 1998, pursuant to a
right granted to the Company in the option agreements. On March 1, 1998, the
Company granted options to purchase 45,000 shares of the Company's Class A
Common Stock to W.
17
<PAGE> 18
Jeffrey Camp, its Chief Financial Officer, with an exercise price of $3.00 per
share. 15,000 of these options became exercisable on March 1, 1998 15,000 of
these options will become exercisable on March 1, 1999, and 15,000 of these
options will become exercisable on March 1, 2000.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL AND OPERATING DATA
The financial information presented below represents selected
historical data for the Company. The following selected financial and operating
data presented by the Company should be read in conjunction with the historical
consolidated financial statements of the Company and the related notes thereto
and "Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition." Also note that effective June 2, 1997, the Company
acquired all of the outstanding common stock of G&R, Microsouth, tekgraf Texas,
CGD, and IGD. These acquisitions were accounted for as purchases and
accordingly, only included in the historical consolidated financial statements
from the acquisition date forward. All amounts are presented in thousands.
Historical
<TABLE>
<CAPTION>
Years Ended
December 31
(in Thousands)
----------------------------------------------------------------
1993 1994 1995 1996 (1)1997
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 4,943 $ 6,340 $ 12,277 $13,414 $ 48,732
Cost of goods sold 4,214 5,228 10,368 10,952 41,250
------- ------- -------- ------- --------
Gross profit 729 1,111 1,910 2,463 7,483
Operating expenses:
Selling, general and
administrative 772 1,082 1,761 2,245 7,294
Depreciation and amortization 4 8 28 17 390
------- ------- -------- ------- --------
Operating income (loss) (47) 21 120 201 (201)
Other income 39 -- -- 15 68
Interest expenses 3 40 126 160 301
------- ------- -------- ------- --------
Income (loss) before taxes (11) (19) (5) 56 (434)
Provision (benefit) for income taxes (4) (4) (2) 13 (41)
------- ------- -------- ------- --------
Net income(loss) $ (15) $ (15) $ (4) $ 43 $ (393)
======= ======= ======== ======= ========
Net income(loss) per share $ -- $ .04 $ (.15)
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Years Ended
December 31
(in Thousands)
-------------------------------------------------------
1993 1994 1995 1996 (1)1997
----- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ (30) $ (39) $ (51) $ (104) $13,066
Total assets 833 1,725 2,264 3,007 29,952
Due to stockholders/related entities 723 1,424 1,616 2,211 517
Long-term obligations 13
Stockholders' equity (deficit) (11) (24) (33) 10 20,055
</TABLE>
- ----------------------------
(1) On June 2, 1997, the Company acquired six computer graphics companies and
their operations are included in the Statement of Operations and Balance
Sheet data from this date forward. See "Item 1. Business-Overview".
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the information
contained in the Consolidated Financial Statements, including the related notes.
Overview
The Company was incorporated in Georgia in February 1993 and in
December 1994, completed the acquisition of a 60% interest in Prisym. In June
1997, the Company completed the acquisition of a 100% interest in each of the
subsidiaries as shown in the table below. The acquisitions for each of the
subsidiaries have been accounted for using the purchase method of accounting.
Subsequent to the acquisitions, the Company completed a merger pursuant to which
it reincorporated in the State of Delaware and effected a recapitalization
pursuant to which each share of common stock of the Georgia entity was exchanged
for 400 shares of Class B Common Stock of the Delaware entity.
ACQUISITIONS
<TABLE>
<CAPTION>
(in thousands)
Company Date 1996 Net
Name Acquired Net Sales Assets
- ---- -------- --------- ------
<S> <C> <C> <C>
Microsouth June 2 $10,326 $ 484
tekgraf June 2 4,063 255
IGD June 2 9,104 407
G&R June 2 21,038 525
CGD June 2 11,003 639
------- ------
$55,534 $2,310
======= ======
</TABLE>
In connection with the acquisitions listed above, a total of 2,192,000 shares of
Class B common stock of the Company were issued.
A principal part of Tekgraf's strategy is to acquire other companies in order to
increase the Company's market share by expanding to create a national
distribution network. This will allow the Company to become a nationally
recognized, vertically oriented provider of computer products and services, and
accordingly, to more efficiently absorb the Company's overhead and add
profitable lines of business.
19
<PAGE> 20
Tekgraf has also entered into agreements and plans of merger for the acquisition
of three additional computer graphics distribution companies, which it
anticipates consummating in the second quarter of 1998. See "Item 1. Business
Overview -- Acquisition Strategy and 1998 Acquisitions."
Results of Operations
Net sales reflect the sale of the Company's products, net of allowances
for returns and other adjustments and include minimal revenues related to
services performed at the Company's premises. Sales are generated from the sale
of products in both the domestic and international markets. No individual
customer accounted for more than 5% of sales during 1996 or 1997.
Cost of goods sold consists primarily of product costs (cost of
manufacture or acquisition) and freight charges. Cost of sales also includes
direct expenses, such as labor and inventory, obtaining FCC certification of
products where required, the cost of shipping and delivery charges to bring the
product to the Company's premises, as well as overhead allocated to direct
expenses, incurred in manufacturing products sold by the Company. The direct
costs associated with providing services performed by the Company for its
customers are also included in the cost of goods sold.
Sales and gross profits depend in part on the volume and mix of
components and finished goods contained in the Company's inventory from time to
time. Manufactured product sales have a higher gross profit margin with a
relatively lower volume of sales per customer, while component sales have a
comparably low gross profit with a relatively high volume of sales per customer.
A large portion of the Company's operating expenses is relatively
fixed. Since the Company does not obtain long-term purchase orders or
commitments from its customers, it must anticipate the future volume of orders
based upon historical purchasing practices of its customers as to their future
requirements. Cancellations, reductions or delays in orders by a customer or
group of customers could have a material adverse effect on the Company's
business, financial condition and results of operations.
Selling, general and administrative ("SG&A") expenses include costs
related to the Company's sales force, which are comprised of both direct
employees of the Company and independent sales representatives. Included are
direct labor costs for in-house sales representatives as well as commissions
paid to both in-house and independent sales personnel. Costs associated with
marketing and advertising of the Company's products are also included in SG&A
expenses, along with expenses relating to corporate and administrative functions
that serve to support the existing products and service business of the Company,
as well as to provide the infrastructure for future growth. Also reflected as
SG&A expenses are certain management, supervisory and staff salaries and
employee benefits, data processing, training, rent, and office supply costs.
Interest expense includes costs and expenses associated with working
capital indebtedness, as evidenced by prior outstanding balances on the
Company's principal credit facilities, and working capital advances made by
certain current and former stockholders.
20
<PAGE> 21
Year Ended December 31, 1997 Compared With Year Ended December 31,
1996.
Net sales. Net sales increased $35 million, or 263%, to $48.73 million
for the year ended December 31, 1997 compared to $13.4 million for the year
ended December 31, 1996. Of the increase, $33 million was attributable to the
acquisitions that occurred on June 2, 1997. The remaining $2 million increase
was due to increased market penetration and internal growth.
Gross Profit. Gross profit increased $5.02 million, or 204%, to $7.48
million for 1997 compared to $2.46 million for 1996. Gross margin decreased to
15.35% for 1997 compared to 18.36% for 1996. The decreases were primarily
attributable to the differing product mixes.
SG&A Expenses. SG&A expenses increased $5.05 million, or 225%, to $7.29
million for 1997 compared to $2.24 million for 1996. The acquisitions accounted
for $4.3 million of the increase and the remainder was primarily attributable to
the additional infrastructure costs associated with combining the companies and
the additional costs of operating as a public company.
Operating Income. Operating income(loss) decreased $402,000 to
$(201,000) for the 1997 year compared to $201,000 for the 1996 year. The
acquisitions increased operating income by $450,000 but were offset by a small
operating loss at the technology division and the increased infrastructure costs
discussed previously.
Year Ended December 31, 1996 Compared With Year Ended December 31,
1995.
Net sales. Net sales increased $1.14 million, or 9.3%, to $13.41
million for the year ended December 31, 1996 compared to $12.28 million for the
year ended December 31, 1995 ("1995"). The increase in net sales was primarily
attributable to strong sales in the OEM sector to both established and new OEM
customers as a result of a focus on systems sales and increased market
penetration by Prisym resulting from an expanded sales force.
Gross Profit. Gross profit increased $553,000, or 29%, to $2.46 million
for 1996 compared to $1.91 million for 1995. Gross margin increased to 18.4% for
1996 compared to 15.6% for 1995, primarily as a result of the growth in system
sales to specialized OEMs.
SG&A Expenses. SG&A expenses increased $484,000, or 27.5%, to $2.25
million for 1996 compared to $1.76 million for 1995. This increase was primarily
attributable to increased infrastructure costs and higher commissions. SG&A
expenses as a percentage of net sales increased to 16.7% for 1996 compared to
14.3% for 1995.
Operating Income. Operating income increased $81,000, or 68%, to
$201,000 for 1996 compared to $120,000 for 1995.
Year Ended December 31, 1995 Compared With Year Ended December 31,
1994.
Net Sales. Net sales increased $5.94 million, or 94%, to $12.28 million
for 1995 compared to $6.34 million for the year ended December
21
<PAGE> 22
31, 1994 ("1994"). The increase in net sales was primarily attributable to the
acquisition of Prisym in December 1994.
Gross Profit. Gross profit increased $799,000, or 72%, to $1.91 million
for 1995 compared to $1.11 million for 1994. Gross margin decreased to 15.6% for
1995 compared to 17.5% for 1994, primarily as a result of an increase in sales
by Prisym which operates at lower margins.
SG&A Expenses. SG&A expenses increased $679,000, or 62.8%, to $1.77
million for 1995 compared to $1.08 million for 1994. This increase was primarily
attributable to the addition of the costs of Prisym. SG&A expenses as a
percentage of net sales decreased to 14.3% for 1995 compared to 17.1% for 1994.
Operating Income. Operating income increased $99,000 to $120,000 for
1995 compared to $21,000 for 1994.
PRO FORMA COMBINED FINANCIAL INFORMATION
The Company is currently in the process of consolidating certain
general and administrative functions at the Company's headquarters in Atlanta,
Georgia, including human resources, public relations, accounting and legal
functions. Economies of scale and elimination of duplicate overhead and
administrative costs are expected to reduce future operating costs. The Company
does not believe that these savings can be accurately quantified. Offsetting
these anticipated benefits are anticipated increases in personnel costs and
expenses incurred and to be incurred in developing the Company's corporate
infrastructure and the costs associated with being a public company, such as the
cost of Directors' and Officers' insurance and increased accounting and legal
fees associated with complying with ongoing reporting requirements. The Company
does not believe these costs can be accurately quantified; however, the Company
has allocated $800,000 of the proceeds of the Offering to consolidation expenses
and estimates the costs associated with being a public company to be in the
range of $300,000 to $500,000 annually, although there can be no assurance that
actual costs will not significantly exceed such range. Accordingly, neither the
anticipated savings nor the anticipated costs have been included in the pro
forma combined financial information that is provided below.
The acquisitions described previously have had a significant impact on
the comparisons of operating results for 1997 and 1996, due to the fact that the
operating results are included only for the period June 2, 1997 through December
31, 1997. Therefore, in addition to the historical comparisons of the year ended
December 31, 1997 and the year ended December 31, 1996, the Company has included
the pro forma statements of income for these two years as if the acquisitions
had occurred at the beginning of 1996, giving effect to certain adjustments,
including the elimination of revenue and expenses related to affiliated entities
of the 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
acquisition companies, and amortization of the intangible assets. The year ended
December 31,
22
<PAGE> 23
1997, includes a pro forma adjustment to eliminate the effect of certain
inventory purchase accounting adjustments.
The 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. Additionally, the pro forma data
does not take into account the additional interest that might have been earned
or interest expense that that might have been saved from the proceeds of the
Offering. The pro forma statement of operations data is not intended to be
indicative of future operations, but rather for a better understanding of the
Company on a comparative basis. 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.
Pro Forma Combined
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------
1996 1997
------- -------
<S> <C> <C>
Statement of Income Data:
Net sales $68,902 $70,603
Cost of goods sold 57,643 59,066
------- -------
Gross profit 11,259 11,537
Operating expenses:
Selling, general and
Administrative 7,500 9,557
Depreciation and amortization 616 640
------- -------
Operating income 3,143 1,339
Other income 117 115
Interest expenses 430 316
------- -------
Income before taxes 2,830 1,139
Provision for income taxes 1,314 627
------- -------
Pro Forma Net income $ 1,516 $ 512
======= =======
</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 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.
Proceeds from the initial public offering were also 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.
23
<PAGE> 24
The Company expects to make purchase price adjustments during the first
quarter of 1998 for either excess net asset values contributed or for net asset
values that were less than originally estimated to the stockholders of the
acquisition companies. The gross amounts to be paid and received by the Company
are estimated to be approximately $300,000 and $200,000, respectively.
Since inception, the Company has financed its operations through a
combination of cash flow from operations, bank borrowings and equity capital and
the net proceeds from the Company's initial public offering. The Company's
capital requirements have arisen primarily in connection with acquisitions and
the purchase of fixed assets.
Additionally, from time to time, Alongal, a related entity, had made
advances to the Company for working capital purposes. At December 31, 1996 and
December 31, 1997, amounts owed to Alongal were $2,109,000 and $195,000,
respectively. Such advances bore interest at the annual rate of 8% and were
payable on demand.
The Company's cash used in operations was $170,000 and $199,000 for the
years ended December 31, 1995 and 1996, respectively. However, during 1997, cash
provided by operations was $1.6 million which was due primarily to an increase
in accounts payable arising from increased purchases of inventories and, to a
lesser extent, offset by an increase in accounts receivable and inventories due
to increased sales and sales demand. The increase in accounts receivable and
inventories is primarily attributable to the purchase of computer equipment
subject to firm purchase orders and then shipped to customers. The Company's
cash flow from operations has been and continues to be affected primarily by the
timing of collection of accounts receivable, which has increased as net sales
have increased. The Company's working capital was $(104,000) and $13.1 million
at December 31, 1996 and 1997, respectively, with the significant increase in
1997 due to the offering proceeds.
The Company invested $33,000, $69,000 and $59,000 in capital equipment
and leasehold improvements in 1995, 1996 and 1997, respectively. While the
capital expenditure amounts have been very minimal for the past three years, the
Company anticipates a significant increase in 1998 due primarily to purchases
and upgrades of computer equipment and software utilized in-house, development
of the services component of the Company's business and the enhancement of its
management information systems infrastructure. The Company has projected that
the total capital outlay for this project is approximately $800,000.
A key element of the Company's strategy is to continue to expand
through acquisitions of companies engaged in the distribution and/or marketing
of computers and/or computer hardware, software and peripherals. See "Item 1.
Business Strategy." Such acquisitions are expected to involve the issuance of
restricted stock, cash and debt or a combination thereof.
The Company believes that its available funds, together with the cash
flow expected to be generated from operations and anticipated credit facilities,
will be adequate to satisfy its current and planned operations for at least the
next 12 months.
24
<PAGE> 25
FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statements of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information ("SFAS 131"), and No. 130, Reporting
Comprehensive Income ("SFAS 130"). SFAS 131 specifies revised guidelines for
determining an entity's operating segments and the type and level of financial
information to be disclosed. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. SFAS 129
consolidates the existing requirements to disclose certain information about an
entity's capital structure. These Standards are effective for periods ending
after December 31, 1997.
The Company believes that the impact of these Standards, when adopted,
will not have a material impact on the Company's financial statements and
financial statement presentation when presented on a comparable basis.
IMPACT OF INFLATION
Management believes that inflation has not had a material impact on the
Company's business, its net sales and revenues or its income from continuing
operations.
YEAR 2000
The Company has adopted a plan to facilitate a smooth transition of the
systems, products and vendors which Tekgraf relies on into the twentieth
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.
PRIVATE SECURITIES LITIGATION REFORM ACT
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K contain forward-looking statements
that involve a number of risks and uncertainties which could cause the Company's
future results of operations to differ materially, including the impact of
competitive products and pricing, business conditions and growth in the
industry, general economic and stock market conditions and other risks detailed
from time to time in this Annual Report on Form 10-K and in the Company's SEC
Reports, including the Prospectus included as part of the S-1 Registration
Statement (Sec File No. 333-33449) declared effective under the Securities Act
of 1933 on November 10, 1997. The words "may," "would," "could," "will,"
"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.
25
<PAGE> 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements beginning on page F-1.
Consolidated condensed quarterly financial information on the Company is
included in Note 16 of Notes to the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
For the three year period ended December 31, 1997, there has been no
disagreement between Tekgraf, Inc. and any accountants on any matter of
accounting principles or practices or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information relating to the Company's directors, nominees for
election as directors and executive officers under the headings "Election of
Directors" and "Executive Officers" in the Company's definitive proxy statement
for the 1998 Annual Meeting of Shareholders is incorporated herein by reference
to such proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the heading "Executive Compensation" in the
Company's definitive proxy statement for the 1998 Annual Meeting of Shareholders
is incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for the 1998 Annual Meeting of Shareholders is incorporated herein by reference
to such proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1998 Annual
Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Consolidated Financial Statements.
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
26
<PAGE> 27
(a) (2) Consolidated Financial Statement Schedule for the Period Ended
December 31, 1997.
Report of Independent Accountants on Schedule VIII Valuation and
Qualifying Accounts on page F-22.
Schedule VIII Valuation and Qualifying Accounts on page F-23.
All other financial statement schedules are omitted because the
information is not required, or is otherwise included in the Consolidated
Financial Statements or the notes thereto included in this Annual Report on Form
10-K.
Condensed quarterly financial information on the Company is included in
Note 16 of Notes to the Consolidated Financial Statements.
(a) (3) Exhibits.
The following exhibits are filed with or incorporated by reference into
this Annual Report on Form 10-K. Unless indicated otherwise, the exhibit number
corresponds to the exhibit number incorporated by reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<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")) .
3.1 Certificate of Incorporation dated June 17, 1997 (Filed as
Exhibit 3.1 to the Registration Statement and incorporated herein
by reference).
3.2 Bylaws. (Filed as Exhibit 3.2 to the Registration Statement and
incorporated herein by reference).
4.1 Form of Warrant Agreement (Filed as Exhibit 4.1 to the Registration
Statement and incorporated herein by reference)
4.2 Form of Unit Purchase Option (Filed as Exhibit 4.2 to the Registration
Statement and incorporated herein by reference).
10.1 1997 Stock Option Plan of the Company (Filed as Exhibit 10.1 to the
Registration Statement and incorporated herein by reference).
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
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.
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 by 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>
28
<PAGE> 29
<TABLE>
<CAPTION>
<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
attached as Exhibit 10.20a).
10.21 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 by
reference).
10.22 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.
10.23 Agreement and Plan of Merger by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation, and Martec, Inc., a California corporation, and its
Shareholders, dated March 23, 1998.
10.24 Agreement and Plan of Merger 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, dated
March 25, 1998.
10.25 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.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
The Registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to Exhibit 10.22, 10.23 or 10.24 to the Securities and
Exchange Commission upon request, as provided in Item 601(b)(2) of Regulation
S-K.
(b) Reports on Form 8-K.
None.
29
<PAGE> 30
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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 THIS 31st DAY OF MARCH,
1998.
Tekgraf, Inc.
(Registrant) By: /s/ Phillip C. Aginsky
-------------------------------------
Phillip C. Aginsky
Principal Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE Title Date
--------- ----- ----
<S> <C> <C>
/s/ Phillip C. Aginsky Chairman of the Board, President March 31, 1998
- ------------------------- and Chief Executive Officer
Phillip C. Aginsky (Principal Executive Officer)
/s/ Dan I. Bailey Co-President-Technology Division March 31, 1998
- ------------------------- and Director
Dan I. Bailey
/s/ William M. Rychel Co-President-Graphics Division March 31, 1998
- ------------------------ and Director
William M. Rychel
/s/ Martyn L. Cooper Chief Operating Officer and March 31, 1998
- ------------------------- Director
Martyn L. Cooper
/s/ J. Thomas Woolsey Director March 31, 1998
- -------------------------
J. Thomas Woolsey
/s/ Albert E. Sisto Director March 31, 1998
- -------------------------
Albert E. Sisto
/s/ Frank X. Dalton, Jr. Director March 31, 1998
- -------------------------
Frank X. Dalton, Jr.
/s/ W. Jeffrey Camp Chief Financial Officer March 31, 1998
- ------------------------- (duly authorized principal
W. Jeffrey Camp financial and accounting
officer)
</TABLE>
30
<PAGE> 31
Tekgraf, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements of Tekgraf, Inc.
<TABLE>
<S> <C>
Report of Independent Accountants.................................. F-2
Consolidated Balance Sheets........................................ F-3
Consolidated Statements of Operations.............................. F-4
Consolidated Statements of Changes in Stockholder's Equity......... F-5
Consolidated Statements of Cash Flows.............................. F-6
Notes to Consolidated Financial Statements......................... F-8
</TABLE>
F-1
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
Tekgraf, Inc.
We have audited the accompanying consolidated balance sheets of Tekgraf, Inc. as
of December 31, 1996 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Tekgraf, Inc. as of December 31, 1996 and 1997, and the results of their
consolidated operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
Atlanta, Georgia
March 20, 1998 Coopers & Lybrand, L.L.P.
F-2
<PAGE> 33
TEKGRAF, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 633,027 $ 8,600,339
Accounts receivable, less allowance for doubtful accounts of $35,000
and $100,000 at December 31, 1996 and 1997, respectively 1,621,180 9,217,843
Inventories, net 636,019 4,700,615
Prepaid expenses and other assets 368,770
Deferred income taxes 1,500 62,832
---------------- ---------------
Total current assets 2,891,726 22,950,399
---------------- ---------------
Property and equipment:
Furniture and fixtures 83,294 188,132
Computer equipment 36,225 343,790
---------------- ---------------
119,519 531,922
Less accumulated depreciation (62,765) (187,219)
---------------- ---------------
56,754 344,703
Goodwill, net 6,555,773
Other assets 58,629 52,633
Deferred income taxes 48,840
---------------- ---------------
Total assets $ 3,007,109 $ 29,952,348
================ ===============
LIABILITIES
Current liabilities:
Current debt $ 23,474
Due to acquisition stockholders 180,289
Notes payable, stockholders 90,000
Due to stockholders and related entities $ 2,211,164 246,956
Accounts payable 711,125 8,345,388
Accrued expenses 69,408 928,121
Income taxes payable 4,100 70,100
---------------- ---------------
Total current liabilities 2,995,797 9,884,328
---------------- ---------------
Debt, less current maturities 12,788
Deferred income taxes 1,200
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A Common Stock $.001 par value, 31,666,667 shares authorized; no shares
issued and outstanding at December 31, 1996;
2,100,000 shares issued and outstanding at December 31, 1997 2,100
Class B Common Stock, $.001 par value, 3,333,333 shares authorized;
1,141,333 shares issued and outstanding at December 31, 1996 and
3,333,333 issued and outstanding at December 31, 1997 1,141 3,333
Preferred Stock, $.001 par value, 5,000,000 shares authorized; no shares
issued and outstanding at December 31, 1996 and 1997
Due from acquisition stockholders (149,863)
Additional paid-in capital 20,584,028
Retained earnings (deficit) 8,971 (384,366)
---------------- ---------------
Total stockholders' equity 10,112 20,055,232
---------------- ---------------
Total liabilities and stockholders' equity $ 3,007,109 $ 29,952,348
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 34
TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Net sales $ 12,277,340 $ 13,414,131 $ 48,732,391
Cost of goods sold 10,367,789 10,951,551 41,249,611
---------------- ----------------- ----------------
Gross profit 1,909,551 2,462,580 7,482,780
Operating expenses:
Selling, general and administrative 1,760,957 2,244,924 7,294,267
Depreciation 28,349 16,999 124,453
Amortization 265,263
---------------- ----------------- ----------------
Income (loss) from operations 120,245 200,657 (201,203)
Other income 14,916 68,333
Interest expense 125,566 159,500 301,453
---------------- ----------------- ----------------
Income (loss) before provision (benefit) for
income taxes (5,321) 56,073 (434,323)
Provision (benefit) for income taxes (1,600) 13,000 (40,986)
---------------- ----------------- ----------------
Net income (loss) $ (3,721) $ 43,073 $ (393,337)
================ ================= ================
Basic and diluted weighted average shares outstanding 1,084,266 1,084,266 2,581,441
================ ================= ================
Basic and diluted net income (loss) per share $ - $ .04 $ (.15)
================ ================= ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 35
TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER CLASS A NUMBER CLASS B
OF SHARES COMMON OF SHARES COMMON DUE FROM
CLASS A STOCK CLASS B STOCK STOCKHOLDERS
<S> <C> <C> <C> <C> <C>
Balances, January 1,1995 1,141,333 $ 1,141
Net loss
----------- ------------- ---------- ------------ -------------
Balances, December 31, 1995 1,141,333 1,141
Net income
----------- ------------- ---------- ------------ -------------
Balances, December 31, 1996 1,141,333 1,141
Issuance of stock for acquisitions 2,192,000 2,192
Due from acquisition stockholders $ (149,863)
Contribution from pre-acquisition
stockholders
Common stock issued 2,100,000 $ 2,100
Net loss
----------- ------------- ---------- ------------ -------------
Balances, December 31, 1997 2,100,000 $ 2,100 3,333,333 $ 3,333 $ (149,863)
=========== ============= ========== ============ =============
<CAPTION>
ADDITIONAL RETAINED
PAID-IN EARNINGS
CAPITAL (DEFICIT) TOTAL
<S> <C> <C> <C>
Balances, January 1,1995 $ (30,381) $ (29,240)
Net loss (3,721) (3,721)
--------------- ------------ ---------------
Balances, December 31, 1995 (34,102) (32,961)
Net income 43,073 43,073
--------------- ------------ ---------------
Balances, December 31, 1996 8,971 10,112
Issuance of stock for acquisitions $ 9,170,866 9,173,058
Due from acquisition stockholders 149,863 -
Contribution from pre-acquisition
stockholders 870,000 870,000
Common stock issued 10,393,299 10,395,399
Net loss (393,337) (393,337)
--------------- ------------ ---------------
Balances, December 31, 1997 $ 20,584,028 $ (384,366) $ 20,055,232
=============== ============ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 36
TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,721) $ 43,073 $ (393,337)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 28,349 16,999 124,454
Provision/writedown of inventory 237,275
Amortization 265,263
Provision for doubtful accounts receivable 2,800 18,000 149,170
Deferred income taxes (1,600) 8,900 (111,372)
Changes in net assets and liabilities, net of
the effects of the acquisitions:
Receivables (417,787) (256,507) (956,268)
Inventories (137,289) (86,745) (501,897)
Other assets 1,456 (45,897) 114,455
Accounts payable and accrued expenses 357,377 99,025 2,591,941
Income taxes payable 4,100 66,000
--------- ----------- ------------
Net cash provided (used) by operating
activities (170,415) (199,052) 1,585,684
--------- ----------- ------------
Cash flows from investing activities:
Cash acquired from acquisitions, net of acquisition
costs of $88,677 371,585
Payments for purchase of property and equipment (33,060) (69,042) (59,082)
--------- ----------- ------------
Net cash provided (used) by investing
activities (33,060) (69,042) 312,503
--------- ----------- ------------
Cash flows from financing activities:
Advance from stockholders and related entities 472,272 1,115,957 37,862
Repayment of advance from stockholders and
related entities (520,657) (2,039,000)
Repayment of stockholder notes payable (125,000)
Repayments on lines of credit, net (280,130) (2,018,036)
Payment to stockholders for excess net asset values (1,050,000)
Capital contribution from stockholders 870,000
Payment of stock issuance costs (923,701)
Proceeds from issuance of common stock, net of
underwriting discounts 11,317,000
--------- ----------- ------------
Net cash provided by financing activities 192,142 595,300 6,069,125
--------- ----------- ------------
Increase (decrease) in cash and cash equivalents (11,333) 327,206 7,967,312
Cash and cash equivalents, beginning of year 317,154 305,821 633,027
--------- ----------- ------------
Cash and cash equivalents, end of year $ 305,821 $ 633,027 $ 8,600,339
========= =========== ============
</TABLE>
<Continued>
F-6
<PAGE> 37
TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 120,109 $ 159,500 $ 301,453
================ =============== ===============
Cash paid during the year for income taxes $ - $ - $ 4,386
================ =============== ===============
Supplemental noncash investing and financing activities:
During June 1997, the Company issued 2,192,000 shares of Class B Common Stock
for the outstanding common stock of six companies
Fair value of stock issued $ 9,485,537
Other acquisition costs 88,677
Fair value of liabilities assumed 9,240,106
Fair value of assets acquired (11,993,284)
----------------
Goodwill $ 6,821,036
================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 38
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION, AND NATURE OF OPERATIONS:
ORGANIZATION
The consolidated financial statements of Tekgraf, Inc. (the "Company") as
of December 31, 1996 include the accounts of Prisym Technologies, Inc. of
Georgia ("Prisym"), a 60% owned subsidiary. The consolidated financial
statements of the Company as of December 31, 1997 and for the year then
ended include the accounts of Prisym and six computer graphics distributing
companies which were acquired on June 2, 1997. These acquisitions were
recorded under the purchase method of accounting, and accordingly their
results of operations are included in the consolidated statements of
operations since their date of acquisition. Minority interest, if any,
represents the minority stockholder's proportionate share of the equity in
Prisym. All significant intercompany balances, transactions, and profits
have been eliminated in consolidation.
BASIS OF PRESENTATION
The consolidated financial statements are prepared on the basis of
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at December 31, 1996 and 1997
and reported amounts of revenues and expenses for each of the three years
in the period ended December 31, 1997. Significant estimates include
primarily those made for the allowance for doubtful accounts, reserves for
obsolete and slow-moving inventory and the useful life of goodwill. Actual
results could differ from those estimates made by management.
NATURE OF OPERATIONS
The Company is a manufacturer, integrator and distributor of premium
personal computers, workstations, and internet/intranet servers. Products
are sold either directly or through distributors. Prisym markets
workstations, printers, mass storage, components and peripherals of a major
U.S. manufacturer.
The computer graphic distributing companies acquired during 1997 are
located in five separate regions of the U.S. and distribute and market a
broad array of complex computer graphics hardware and software. Products
are sole primarily to value added resellers and vertical solutions
providers.
F-8
<PAGE> 39
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS, CONTINUED:
Inherent in the accompanying consolidated financial statements are certain
risks and uncertainties. These risks and uncertainties include, but are not
limited to: the impact of competitive products, competition, available
sources of supply and various technology related risks.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out, and average costs methods) or market. The Company
maintains a reserve for its estimate of excess, obsolete and damaged goods.
In most instances, the Company receives warranties on its products from its
vendors which are at least equivalent to those it provides to its
customers.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives
which generally range from 3 to 7 years. Amounts expended for maintenance
and repairs are charged to expense as incurred. Upon disposition, both the
related cost and accumulated depreciation accounts are relieved and the
related gain or loss is credited or charged to operations.
GOODWILL
Goodwill is amortized over its estimated economic life or period of future
benefit. The Company is currently amortizing goodwill, on a straight-line
basis of 15 years. This estimated life is a composite of many factors which
are subject to change because of the nature of the Company's operations.
This is particularly true because goodwill reflects value attributable to
the going concern nature of acquired businesses, the stability of their
operations, market presence and reputation. Accordingly, at each reporting
period, the Company evaluates the continued appropriateness of this life
and recoverability of the carrying value of the goodwill based upon current
and future levels of income and undiscounted cash flows as well as the
latest available economic factors and circumstances. Impairment of value,
if any, is recognized in the period in which it is determined. The Company
does not believe that there are facts or circumstances to indicate
impairment of goodwill at December 31, 1997.
F-9
<PAGE> 40
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE
Sales are recognized upon the shipment of products to the customer or
distributor.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the
Company's customer base. The Company performs ongoing credit evaluations
and provides an allowance for potential credit losses against the portion
of accounts receivable which is estimated to be uncollectible. Such losses
have historically been within management's expectations.
INCOME TAXES
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with SFAS No. 109, "Accounting for Income Taxes"
("SFAS 109"). Under SFAS 109, deferred tax liabilities and assets are
determined based on temporary differences between the bases of certain
assets and liabilities for income tax and financial reporting purposes. The
deferred tax assets and liabilities are classified according to the
financial statement classification of the assets and liabilities generating
the differences. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include its debt obligations.
Management believes that these instruments bear interest at rates which
approximate prevailing market rates for instruments with similar
characteristics and, accordingly, that the carrying values for these
instruments are reasonable estimates of fair value.
3. ACQUISITIONS:
Effective June 2, 1997, the Company completed the acquisition of 100% of
the outstanding common stock of six regional computer graphics distributors
(collectively the "Subsidiaries") in exchange for the issuance of 2,192,000
shares of Class B Common Stock. Each stockholder deposited 40% of his
shares in escrow to cover potential claims for indemnification under the
stock purchase agreements (the "Agreement") for liabilities resulting from
the breach of any representation, warranty, covenant or agreement contained
in the Agreements.
F-10
<PAGE> 41
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. ACQUISITIONS, CONTINUED:
Pursuant to the terms of the Agreements, the Subsidiaries were required to
deliver a defined guaranteed net asset value ("NAV"). For certain of the
Subsidiaries the estimated excess net book value over the NAV was
approximately $1,230,000. During December 1997, $1,050,000 of this estimate
was distributed to certain stockholders of subsidiaries. It is anticipated
that the remaining excess NAV will be distributed during 1998. For certain
of the Subsidiaries the preliminary deficit NAV over the net book value of
approximately $150,000 will be collected from the former stockholders of
the Subsidiaries. It is anticipated that these amounts will be collected
after the final calculation is completed during 1998.
Pursuant to the terms of the Agreements, pre-acquisition Tekgraf
stockholders were required to contribute approximately $870,000 to capital.
This contribution was made during November 1997.
The acquisitions were recorded under the purchase method of accounting. The
purchase prices have been allocated to assets acquired and liabilities
assumed based on the fair market value of the Company's common stock at the
date of acquisition. The fair market value of the Company's stock was
estimated based on the initial public offering price of the Company's
Units, a discount for lack of marketability, a premium for the voting
rights of the Class B Common Stock issued in connection with the
acquisitions, and the value of the warrants contained in the Units using
the Black Scholes model. The fair value of assets acquired and liabilities
assumed, after giving effect to the excess and deficit NAV, is as follows:
<TABLE>
<S> <C>
Fair value of stock issued and other acquisition cost $ 9,574,214
Fair value of liabilities assumed 9,240,106
Fair value of tangible and identifiable assets acquired (11,993,284)
----------------
Goodwill $ 6,821,036
================
</TABLE>
F-11
<PAGE> 42
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. ACQUISITIONS, CONTINUED:
The following unaudited pro forma summary combines the consolidated results
of the Company and the Subsidiaries as if the acquisitions had occurred at
the beginning of the earliest period presented, after giving effect to
certain adjustments, including the elimination of expenses related to
affiliated entities of the Subsidiaries 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 the pro rata interest expense incurred on capital to be
contributed by the pre-acquisition stockholders of the Company, related
income tax effects, elimination of transactions between the Subsidiaries,
and amortization of intangible assets. The year ended December 31, 1997
amounts include a pro forma adjustment to eliminate the effect of certain
inventory purchase accounting adjustments. In addition, the earnings per
share amounts give effect to the acquisitions, subsequent recapitalization
and the weighted average shares outstanding exclude 166,667 of escrow
shares. The pro forma summary does not purport to represent what the
Company's results of operations would actually have been if such
transaction in fact had occurred at the beginning of the earliest period
presented or to project the Company's results of operations for any future
period.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1996 1997
<S> <C> <C>
Net sales $ 68,902,291 $ 70,603,136
Gross profit 11,259,485 11,536,984
Income from operations 3,143,383 1,339,482
Income before taxes 2,829,594 1,138,943
Net income 1,515,862 512,304
Basic and diluted income per share .48 .15
Weighted average shares outstanding 3,166,666 3,454,337
</TABLE>
4. INVENTORIES:
Inventories, net of reserves, at December 31, 1996 and 1997 consist of the
following:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Component materials $ 562,526 $ 661,770
Finished goods 73,493 4,038,845
--------------- ---------------
$ 636,019 $ 4,700,615
=============== ===============
</TABLE>
F-12
<PAGE> 43
5. GOODWILL:
Goodwill at December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Goodwill associated with the 1997 acquisition $ 6,821,036
Accumulated amortization (265,263)
---------------
$ 6,555,773
===============
</TABLE>
6. DEBT:
Long-term debt at December 31, 1997 consists of various installment notes
payable with banks bearing interest at rates ranging from 7.5% to 8.5%.
These notes are payable in monthly principal and interest installments
through 1999 and are collateralized by certain equipment with an
approximate net book value of $50,000.
7. INCOME TAXES:
The provision (benefit) for income taxes for the years ended 1995, 1996 and
1997 is as follows:
<TABLE>
<CAPTION>
1995 FEDERAL STATE TOTAL
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred (1,200) 400 (1,600)
--------------- --------------- ---------------
$ (1,200) $ 400 $ (1,600)
=============== =============== ===============
<CAPTION>
1996 FEDERAL STATE TOTAL
<S> <C> <C> <C>
Current $ 3,567 $ 533 $ 4,100
Deferred 7,654 1,246 8,900
--------------- --------------- ---------------
$ 11,221 $ 1,779 $ 13,000
=============== =============== ===============
<CAPTION>
1997 FEDERAL STATE TOTAL
<S> <C> <C> <C>
Current $ 59,261 $ 11,125 $ 70,386
Deferred (108,030) (3,341) (111,372)
--------------- --------------- ---------------
$ (48,770) $ 7,784 $ (40,985)
=============== =============== ===============
</TABLE>
F-13
<PAGE> 44
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED:
A reconciliation of federal statutory and effective income tax rates is as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Statutory U.S. federal income tax rate 15.0% 15.0% (34.0)%
Effect of:
State income taxes, net of federal benefit 5.0 5.0 2.4
Nondeductible meals and entertainment 8.0 1.5 3.9
Nondeductible goodwill amortization 20.8
Other, net 2.0 1.5 (2.5)
---------- ---------- ----------
Effective rate 30.0% 23.0% (9.4)%
========== ========== ==========
</TABLE>
Benefits of approximately $8,400 and $15,000 were recognized due to
operating loss carryforwards during 1996 and 1997, respectively.
An analysis of the deferred income tax assets and liabilities is as
follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Current deferred income tax assets:
Net operating loss carryforward $ 1,500
Accounts receivable $ 36,885
Inventory 25,947
---------- ---------
Total current deferred income tax assets $ 1,500 $ 62,832
========== =========
Noncurrent deferred income tax assets:
Other $ 48,840
Net operating loss carryforwards $ 800 -
---------- ---------
Total noncurrent deferred income tax assets $ 800 $ 48,840
========== =========
Noncurrent deferred income tax liabilities:
Property and equipment $ (1,200) $ -
---------- ---------
Total noncurrent deferred income tax liabilities $ (1,200) $ -
========== =========
</TABLE>
F-14
<PAGE> 45
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED:
Management believes that realization of the deferred tax assets are more
likely than not due primarily to anticipated future taxable income and
taxable income available in carryback periods.
8. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASE
The Company leases office space under various operating leases expiring
through 2001. At December 31, 1997 minimum rentals due under these leases
were as follows:
<TABLE>
<S> <C>
1998 $ 464,655
1999 309,265
2000 163,162
2001 96,888
----------
$1,033,970
==========
</TABLE>
Rent expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $60,000, $60,000 and $323,000, respectively.
LITIGATION
The Company is involved from time to time in litigation on matters which
are routine to the conduct of its business. Although the outcome of any
litigation cannot be predicted with certainty, the Company does not believe
that any outstanding litigation will have a material adverse effect on the
Company's consolidated financial position, results of operations, or cash
flows.
EMPLOYMENT AGREEMENTS
Certain stockholders of the Company have entered into employment agreements
which provide for a set base salary, participation in future incentive
bonus plans, stock option plans, certain other benefits, and a covenant not
to compete following termination of such person's employment.
F-15
<PAGE> 46
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STRUCTURE:
On November 11, 1997, in connection with the initial public offering of the
Company's securities, 2,100,000 units were issued. Each unit consisted of
one share of Class A Common Stock and one Redeemable Warrant. The Class A
Common Stock and Redeemable Warrant were transferable separately
immediately upon issuance.
CLASS A COMMON STOCK
On June 2, 1997, the Company authorized 31,666,667 shares of Class A Common
Stock, $.001 par value. Holders of Class A Common Stock have the right to
cast one vote for each share held of record on all matters submitted to a
vote of holders of Class A Common Stock.
REDEEMABLE WARRANTS
Each Redeemable Warrant entitles the registered holder to purchase one
share of Class A Common Stock at an exercise price of $8.40 at any time
until the fifth anniversary of the date of issue. Beginning on the first
anniversary of the date of issue, the Redeemable Warrants are redeemable by
the Company on 30 days written notice and at a redemption price of $.05 per
Redeemable Warrant if the closing price of the Class A Common Stock for any
30 consecutive trading days ending within 15 days of the notice of
redemption averages in excess of $11.75 per share. All Redeemable Warrants
must be redeemable if any are redeemed. The Company has reserved from its
authorized but unissued shares a sufficient number of shares of Class A
Common Stock for issuance upon the exercise of the Redeemable Warrants. The
Redeemable Warrants do not contain any voting or other rights of a
stockholder of the Company.
CLASS B COMMON STOCK
On May 1, 1997 the Company increased the outstanding shares from 100 to
3,424 by declaring a 34.24-for-1 stock split of the Company's common stock
(par value of $1.00). On June 2, 1997, the Company declared a 400-for-1
stock split of the Company's common stock pursuant to which all of the
Company's outstanding common stock were exchanged for 4,000,000 shares of
Class B Common Stock with a par value of $.001. During October 1997, the
Company effected a .83333325-for-1 reverse stock split pursuant to which
the outstanding shares of Class B Common Stock were exchanged for 3,333,333
shares of Class B Common Stock. Each share of Class B Common Stock is
entitled to five votes on all matters on which stockholders may vote,
including the election of directors. Each share of Class B Common Stock is
automatically converted into one share of Class A Common Stock upon (i) its
sale, gift of transfer, except in the case of a transfer to a trust for
which the original holder acts as sole trustee or to any other holder of
Class B Common Stock, (ii) the death of the original holder thereof,
including in the case of the original holder having transferred the Class B
common Stock to a trust for which the original holder served as trustee
during his or her lifetime, or (iii) the conversion of an aggregate of 75%
of the authorized shares of Class B Common Stock.
F-16
<PAGE> 47
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STRUCTURE, CONTINUED:
ESCROW SHARES
In connection with the Company's initial public offering of its securities,
the holders of the Company's Class B Common Stock agreed to place an
aggregate of 166,667 shares into escrow. These shares may be voted, but are
not transferable or assignable. These shares will be released if, and only
if, certain predetermined thresholds of pre-tax income or market value of
the Company's Class A Common stock are exceeded. In the event any shares
are released from escrow to the holders who are employees or directors of
the Company, compensation expense equal to the fair value of the escrow
shares will be recognized in the consolidated statement of operations.
PREFERRED STOCK
On June 2, 1997, the Company authorized 5,000,000 shares of preferred
stock. The Board of Directors will have the authority to issue the
preferred stock in one or more series and to fix the number of shares and
the relative rights, conversion rights, voting rights and terms of
redemption and liquidation preferences, without further vote or action by
the stockholders.
The consolidated balance sheets as of December 31, 1996 and 1997 have been
retroactively adjusted for these events. As part of the recapitalization,
the Company changed its name from Crescent Computers, Inc. to Tekgraf, Inc.
10. STOCK OPTION PLAN:
During August 1997, the Company's Board of Directors and stockholders
approved the 1997 Stock Option Plan (the "Plan") covering 300,000 shares of
the Company's Class A Common Stock which may be granted to employees,
officers, directors, and consultants or advisers to the Company. Options
granted under the Plan may be either (i) options intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code or
(ii) non-qualified stock options. Incentive options granted under the Plan
are exercisable for a period of up to ten years from the date of grant at
an exercise price which is not less than the fair market value of the stock
on the date of grant, except that the term of an incentive option granted
under the Plan to a stockholder owning more than 10% of the outstanding
voting power may not exceed five years and its exercise price may not be
less than 110% of the fair market value of the stock on the date of grant.
In addition, to the extent that the aggregate fair market value, as of the
date of grant, of the stock for which incentive options become exercisable
for the first time by an optionee during the calendar year exceeds $100,000
the portion of such option which is in excess of $100,000 limitation will
be treated as a non-qualified option. The Plan, which expires in August
2007, is administered by the Company's Board of Directors.
F-17
<PAGE> 48
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTION PLAN, CONTINUED:
The Company granted 15,000 options during November 1997, at an exercise
price of $6.00 per share. The Company did not grant any options prior to
November 1997 and at December 31, 1997 no options were exercisable.
The Company has 285,000 shares available for future grant at December 31,
1997.
The Company applies APB Opinion No. 25 ("APB 25") and related
Interpretations in accounting for the Plan. During 1995, the Financial
Accounting Standards Board issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") changing the methods for recognition
of cost on plans similar to those of the Company. Adoption of the
accounting provisions of FAS 123 is optional; however, pro forma
disclosures as if the Company adopted the cost recognition requirements
under FAS 123 are required, but approximate the amounts recognized by
applying APB 25. This is not indicative of future amounts as additional
awards in future years are anticipated.
11. NET INCOME (LOSS) PER COMMON SHARE:
In February 1997, the Financial Accounting Standard Board issued Statement
No. 128 ("FAS 128"). This statement establishes standards for computing and
presenting earnings per share ("EPS"). Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. FAS 128 requires restatement of all
prior-period EPS data.
Potential common stock is in the form of stock options and warrants which
do not have an effect on the 1997 diluted net income (loss) per common
share calculations. The following table presents information necessary to
calculate basic and diluted EPS for the years ended December 31, 1995, 1996
and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Weighted average shares outstanding 1,141,333 1,141,333 2,702,166
Escrow shares (57,067) (57,067) (120,725)
------------- ------------- -------------
1,084,266 1,084,266 2,581,441
============= ============= =============
</TABLE>
F-18
<PAGE> 49
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. RELATED PARTY TRANSACTIONS:
Included in the due to stockholder and related parties balance at December
31, 1996 and 1997 are advances from the Company's majority stockholder of
$2,109,325 and $137,314, respectively, and advances from other stockholders
of $101,840 and $109,642, respectively. During each of the three years in
the period ended December 31, 1997, the Company recognized interest expense
on the advances from the majority stockholder of approximately $126,000,
$160,000, and $177,000, respectively. The advances from the majority
stockholders bear interest at 8%. The advances from other stockholder do
not bear interest. All advances from stockholders are due on demand.
During the year ended December 31, 1996, the Company paid management fees
to the majority stockholder of $135,000.
At December 31, 1997, the Company has a note payable with a stockholder of
the Company for $90,000. The note bears interest at 12% and has no stated
maturity date.
13. FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS:
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of an Enterprise
and Related Information ("SFAS 131"), and No. 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 131 specifies revised guidelines for determining
an entity's operating segments and the type and level of financial
information to be disclosed. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements.
These Standards are effective for years beginning after December 15, 1997.
The Company believes that the impact of these Standards, when adopted, will
not have a material impact on the Company's consolidated financial
statements.
F-19
<PAGE> 50
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. SEGMENT INFORMATION:
The Company's operations are classified into two business units: graphics
and technology. These business units are revenue producing components of
the Company about which separate financial information is produced
internally and operating decisions are made.
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Net sales:
Graphics $ - $ - $ 33,511,680
Technology 12,277,340 13,414,131 15,220,711
--------------- --------------- --------------
Total net sales $ 12,277,340 $ 13,414,131 $ 48,732,391
=============== =============== ==============
Operating income (loss):
Graphics $ - $ - $ 449,446
Technology 120,245 200,657 (225,862)
Corporate (424,787)
--------------- --------------- --------------
Total operating income (loss) $ 120,245 $ 200,657 $ (201,203)
=============== =============== ==============
Identifiable assets:
Graphics $ - $ - $ 17,668,748
Technology 2,264,411 3,007,109 2,096,920
Corporate - - 10,186,680
--------------- --------------- --------------
Total identifiable assets $ 2,264,411 $ 3,007,109 $ 29,952,348
=============== =============== ==============
</TABLE>
Corporate operating income (loss) includes overhead and special charges
related to the consolidated Company.
15. SUBSEQUENT EVENT:
In March 1998, the Company entered into three agreements and plans of
merger, each of which is by and among the Company, a subsidiary of the
Company formed for purposes of effectuating each merger, and a computer
graphics wholesale company. The agreements provide for the issuance of an
aggregate of 895,000 unregistered Class A common stock shares of the
Company and payment of $1,415,000 in cash, in connection with these
acquisitions, subject to adjustment in the event that warranted earnings
levels and warranted net asset values are either not met or exceeded.
These acquisitions will be accounted for under the purchase method of
accounting and are subject to the satisfactory completion of due
diligence, the receipt of regulatory approvals and consents, and other
conditions to closing.
F-20
<PAGE> 51
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. CONSOLIDATED CONDENSED QUARTERLY INFORMATION (UNAUDITED):
Selected financial information for each of the four quarters in the years
ended December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION> NET INCOME WEIGHTED
NET (LOSS) AVERAGE SHARES
NET GROSS INCOME PER SHARE OUTSTANDING
1996 SALES PROFIT (LOSS) BASIC AND DILUTED BASIC AND
DILUTED
<S> <C> <C> <C> <C> <C>
First $ 3,415,851 $ 585,817 $ 139,230 $ 0.13 1,084,266
Second 3,434,479 566,137 23,672 0.02 1,084,266
Third 3,282,468 658,078 (32,266) (0.03) 1,084,266
Fourth 3,281,333 652,548 (87,563) (0.08) 1,084,266
------------- ------------- ------------
Total $ 13,414,131 $ 2,462,580 $ 43,073 $ 0.04 1,084,266
============= ============= ============
1997
First $ 3,130,610 $ 611,138 $ 109,610 $ 0.10 1,084,266
Second 9,321,271 1,234,430 28,245 0.02 1,725,004
Third 18,536,085 3,009,566 191,966 0.06 3,166,666
Fourth 17,744,425 2,627,646 (723,158)(1) (0.17) 4,307,970
------------- ------------- ------------
Total $ 48,732,391 $ 7,482,780 $ (393,337) $ (0.15) 2,581,441
============= ============= ============
</TABLE>
(1) Net loss in the fourth quarter was primarily attributable to decreased
sales and additional selling, general and administrative expenses incurred
in the fourth quarter, including costs associated with operating as a
public company.
Basic income (loss) per shared was the same as diluted income (loss) per
share in each period presented above.
F-21
<PAGE> 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Our report on the consolidated financial statements of Tekgraf, Inc. is included
on page F-2 of this Form 10-K. In connection with our audits of such
consolidated financial statements, we have also audited the related consolidated
financial statement schedule included on page F-23 of this Form 10-K.
In our opinion, the consolidated financial statement schedule referred to above,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information required
to be included therein.
Coopers & Lybrand, L.L.P.
Atlanta, Georgia
March 20, 1998
F-22
<PAGE> 53
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND AND AT END
DESCRIPTION OF PERIOD EXPENSES RECLASSIFICATIONS OF PERIOD
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 35,000 $ 149,170 $ (84,170) $ 100,000
================ ================ ===================== ===============
</TABLE>
F-23
<PAGE> 54
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<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")) .
3.1 Certificate of Incorporation dated June 17, 1997 (Filed as
Exhibit 3.1 to the Registration Statement and incorporated herein
by reference).
3.2 Bylaws. (Filed as Exhibit 3.2 to the Registration Statement and
incorporated herein by reference).
4.1 Form of Warrant Agreement (Filed as Exhibit 4.1 to the Registration
Statement and incorporated herein by reference)
4.2 Form of Unit Purchase Option (Filed as Exhibit 4.2 to the Registration
Statement and incorporated herein by reference).
10.1 1997 Stock Option 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.
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).
</TABLE>
E-1
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
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 by 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>
E-2
<PAGE> 56
<TABLE>
<CAPTION>
<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
attached as Exhibit 10.20a).
10.21 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 by
reference).
10.22 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.
10.23 Agreement and Plan of Merger by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation, and Martec, Inc., a California corporation, and its
Shareholders, dated March 23, 1998.
10.24 Agreement and Plan of Merger 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, dated
March 25, 1998.
10.25 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.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
E-3
<PAGE> 1
EXHIBIT 10.6
Mr. W. Jeffrey Camp February 26, 1998
Senior Manager
Coopers & Lybrand LLP
1100 Camparrile Building
1155 Peachtree Street
Atlanta, Georgia 30309
Dear Jeff:
The following summarizes what Tekgraf (the Company) has agreed to offer as it
relates to your employment.
* The Company agrees to employ you for the position of Chief Financial Officer,
which is an executive officer of the Company.
* Your annual base salary will be at least $125,000 and will be reviewed at
least annually along with the other executive officers of the company. You
are also eligible to participate in any bonus plan, profit sharing plan, stock
option plan, and any other compensation programs for executive officers based
on your performance. Additionally, you will be entitled to participate in any
and all medical and health benefit programs offered to executive officers.
* On the first day of your employment, you will be granted incentive stock
options pursuant to the Company's Stock Option Plan to purchase 45,000 shares
of the Company's Class A Common Stock at an exercise price equal to $3.00 per
share. The shares will vest as follows: 15,000 shares immediately, and
15,000 shares on each of the first and second anniversaries of your
employment.
* Should there be a change-in-control of the Company, all options granted vest
immediately and the Company will also be obligated to you for six months of
your then current salary payable in cash on the date the transaction is
closed.
* The Company can fire you at any time. However, the Company must give you 6
month's written notice, or at least keep you on the payroll at your then
current salary for 6 month's after receipt of written notice, provided
however, that you have not committed a criminal act against the Company.
If you agree with the above, please sign and return to me.
Sincerely,
/s/ Phillip C. Aginsky /s/ W. Jeffrey Camp 2/26/98
Phillip C. Aginsky ------------------------------
Chief Executive Officer and Chairman W. Jeffrey Camp Date
of the Board of Directors
2
<PAGE> 1
EXHIBIT 10.20a
March 3, 1998
Mr. Martyn Cooper
Tekgraf, Inc.
6721 Portwest #100
Houston, TX 77024
Re: Second Amendment to Lease Agreement at 6721
Portwest, Suite 100, Houston, Texas
Dear Martyn:
In regard to the Lease Agreement dated April 14, 1994 ("Lease
Agreement") entered into between Tekgraf, Inc., a Texas Corporation ("Tenant"),
and Connecticut General Life Insurance Company, a Connecticut Corporation
("Landlord"), for the 5,495 square foot premises at 6721 Portwest, Suite 100,
Houston, Texas, it is agreed the Lease Agreement shall be amended and modified
to the following terms and conditions:
1. It is acknowledged and agreed by the parties hereto that the Landlord
shall be Transwestern CG Partners I, L.P. (hereinafter referred to as
"Landlord").
2. The Term as described in paragraph 1 of the Lease Agreement shall be
renewed and extended for twelve (12) months, commencing March 1, 1998
and expiring at midnight on February 28, 1999.
3. The Base Rent described in paragraph 2 of the Lease Agreement shall be
as follows:
Months 1 - 12 $3,205.00 per month
4. Paragraph 4, Operating Expense Stop of the Lease Agreement shall be
deleted and of no further force and effect and replaced with the
following paragraph:
TENANT'S PRO RATA SHARE OF BUILDING COSTS
Subject to all of the provisions of this Lease relevant hereto, Tenant
promises and agrees to pay, as additional rent hereunder and as provided herein,
at the office of the Landlord or at such other place designated by Landlord,
without any prior demand therefor and without any deduction or set-off
throughout the term of this Lease, Tenant's Pro Rata Share of certain Building
expenditures made by Landlord, as follows:
(1) Real Estate Taxes, as defined in Article (a);
(2) Common Area Maintenance Costs, as defined in Article (b); and
(3) Building Insurance Costs, as defined in Article (c).
<PAGE> 2
(4) Management Fees, as defined in Article (b).
The amounts due from Tenant as Tenant's Pro Rata Share of Real Estate Taxes,
Common Area Maintenance Costs and Insurance shall be estimated by Landlord for
each calendar year and paid by Tenant in equal installments of one-twelfth
(1/12) of such estimated amount, monthly in advance, upon the first day of each
calendar month provided, however, if the term shall commence upon a day other
than the first day of the calendar month, Tenant shall pay upon the commencement
date of this Lease a portion of Tenant's Pro Rata Share of said expenses
calculated on a per diem basis with respect to the fractional month preceding
the commencement of the first full calendar month of the term of this Lease.
Said amounts shall be adjusted between Landlord and Tenant annually and at the
expiration or earlier termination of this Lease, and payment shall be made to,
or refund made by, Landlord, as the case may be, and Landlord shall receive the
precise amount due as Tenant's Pro Rata Share of the actual cost of said Real
Estate Taxes, Common Area Maintenance Costs and Insurance for the preceding
calendar year or any fractional calendar year.
Tenant will pay Landlord the sum of the following per month, in advance, payable
at the same time and place as the minimum rent is payable, as estimated charges
for Tenant's Pro Rata Share of Real Estate Taxes, Common Area Maintenance Costs
and Insurance Costs:
<TABLE>
<S> <C> <C>
(1) Real Estate Taxes $ 494.00
(2) Common Area Maintenance Costs $ 343.00
(3) Insurance Costs $ 23.00
(4) Management Fees $ 146.00
-----------
Total $ 1,006.00
</TABLE>
The estimated charges as set out above are subject to changes from time
to time throughout the Lease term. Failure to pay any one or all of Tenant's Pro
Rata Share of Building Costs shall constitute an event of default hereunder.
(A) TAXES
(1) "Tax Year" means the calendar and/or fiscal year
basis upon which taxes and/or special assessments are
assessed upon the Building throughout the term of
this Lease.
(2) "Real Estate Taxes" means the amount (in dollars) of
taxes and/or special assessments levied or assessed
against the land and improvements of the Building,
said taxes to be either ad valorem taxes or a
substitution therefor which may be designated as
appropriate by applicable governing authorities, in
any tax year or fractional part thereof. Excluded are
all estate or death, succession, income or franchise
taxes.
(3) "Tenant's Pro Rata Share of Real Estate Taxes" means
that amount obtained by multiplying the Real Estate
Taxes by a fraction, the
2
<PAGE> 3
numerator of which is the square foot area of the
Leased Premises and the denominator of which is the
gross leasable area of the Building.
(4) "Building" means all of the real estate and the
buildings and other improvements actually constructed
thereon, including common areas, as more specifically
shown on the Site Plan attached as Exhibit "B".
Landlord's Payment. Subject to the limitations, conditions and
agreements contained in this Article, Landlord shall pay annually, all Real
Estate Taxes. On or before one hundred eighty (180) days after the end of the
Tax Year, Landlord shall render a statement showing the total of Tenant's
Estimated Tax Payments made in advance during the preceding Tax Year, and the
balance, if any, then due from Tenant. At the time of rendering the statement,
Landlord shall submit to Tenant a true copy of the tax bills. Taxes and/or
special assessments for a fractional year, if any, shall be prorated. Landlord's
failure to provide the statements shall not relieve Tenant of any liability
hereunder.
Tenant's Liability. Tenant promises and agrees to pay Tenant's
Estimated Pro Rata Share of Real estate Taxes, monthly in advance, on the first
day of each calendar month, in an amount estimated by Landlord as provided
above.
Annual Adjustment. Within ten (10) days after the receipt of Landlord's
statement showing the total amount paid in advance by Tenant and a copy of the
paid tax bills showing the actual taxes paid or to be paid by Landlord, there
shall be an adjustment between Landlord and Tenant. Tenant shall pay to landlord
on demand the difference between the amount paid by Tenant and the actual amount
due. If the total amount paid by Tenant hereunder for any such calendar year
shall exceed such actual amount due from Tenant for such calendar year, the
excess shall be credited by Landlord against any amounts then due and owing by
Tenant to Landlord, and any remaining net surplus shall then be refunded by
Landlord to Tenant. Failure of Tenant to pay Tenant's Pro Rata Share of Real
Estate Taxes in the manner and time provided herein shall constitute an event of
default hereunder.
(B) COMMON AREA MAINTENANCE
Landlord agrees to maintain and repair throughout the term hereof the
common areas and facilities of the Building, including, without limitation, the
automobile entrances, exits, driveways, parking areas, pedestrian walks,
landscaped areas, public toilets, meeting rooms, lighting facilities, service
areas and Building signs not otherwise the responsibility of Tenant as set out
in this Lease (said areas hereinafter called the "Common Area"). Landlord's
maintenance and repairs shall include all repairs and replacements and the
supplies and materials therefor, which in Landlord's reasonable judgment are
necessary to preserve the utility of the Common Area and facilities in the
condition same were in at the time of completion, reasonable wear and tear only
excepted.
As used herein, the term "Common Area Maintenance Costs" shall mean all
costs and expenses of every kind paid or incurred during the term of this Lease
in connection with the
3
<PAGE> 4
operation and upkeep of the Common Area and facilities within the Building, and
where necessary, the cost of replacing any of said common facilities and the
cost of policing and protecting same. In addition to the foregoing, the Common
Area Maintenance Costs may include a reserve fund of ten percent (10%) of the
aggregate Common Area Maintenance Costs, which reserve fund will be put into an
escrow account and accrue interest until such time as a major repair such as
resurfacing the parking lot or major concrete drive replacement, where it shall
be applied against such "Major Repair Cost". Also, in addition to the foregoing,
the Common Area Maintenance Costs shall include, but not limited to, maintenance
and repair costs, management fees, wages and fringe benefits payable to
employees of Landlord whose duties are connected with the operation and
maintenance of the Building and common areas, all services, supplies, repairs,
replacements or other expenses for maintaining and operating the Building.
Tenant's Pro Rata Share of the Common Area Maintenance Costs means that amount
obtained by multiplying said Costs by a fraction, the numerator of which is the
square foot area of the Leased Premises and the denominator of which is the
gross leasable area of the Building. Tenant promises to pay Tenant's Pro Rata
Share of Common Area Maintenance Costs monthly in advance, on the first day of
each calendar month in an amount estimated by Landlord as provided above.
Landlord's failure to provide the statements shall not relieve Tenant of any
liability hereunder.
Annual Adjustment. Within ten (10) days after the receipt of Landlord's
statement showing the total amount paid in advance by Tenant and a copy of the
paid tax bills showing the actual taxes paid or to be paid by Landlord, there
shall be an adjustment between Landlord and Tenant. Tenant shall pay to Landlord
on demand the difference between the amount paid by Tenant and the actual amount
due. If the total amount paid by Tenant hereunder for any such calendar year
shall exceed such actual amount due from Tenant for such calendar year, the
excess shall be credited by Landlord against any amounts then due and owing by
Tenant to Landlord, and any remaining net surplus shall then be refunded by
Landlord to Tenant, Failure of Tenant to pay Tenant's Pro Rata Share of Real
Estate Taxes in the manner and time provided herein shall constitute an event of
default hereunder.
(C) INSURANCE
Tenant's Liability Insurance. Tenant agrees, at Tenant's sole cost, to
maintain in force during the term of this Lease a policy or policies of
comprehensive public liability insurance, including property damage, written by
one or more responsible insurance companies approved by Landlord and licensed to
do business in Texas, which insurance companies shall be rated not less than
A-13 by Best Guide Rating, insuring Tenant and naming, as additional named
insured, Landlord and such other person, firms or corporations as are designated
by Landlord and acceptable to said insurance companies, insuring against loss of
life, bodily injury and/or property damage with respect to the Leased Premises
and the business operated by Tenant and any subtenant, licensee, concessionaire
or assignee of Tenant in the Leased Premises or Building, in which the limit of
public liability shall not be less than ONE MILLION AND NO/100 DOLLARS
($1,000,000) single limit bodily injury and in which the limit of property
damage liability shall be not less than FIVE HUNDRED THOUSAND AND NO/100 DOLLARS
($500,000.00). Additionally, Tenant shall maintain at Tenant's sole cost, plate
4
<PAGE> 5
glass insurance on the windows and door or doors of the Leased Premises. Each
such policy shall be noncancellable for any cause without first giving Landlord
thirty (30) days prior written notice. Subject to all of the foregoing, the
insurance coverage required to be furnished by Tenant pursuant to this Section B
may be in a blanket policy covering all of Tenant's operations. A copy of such
policy, or a certificate of such insurance together with a receipt showing all
premiums paid thereon for at least one (1) year in advance, shall be delivered
to Landlord upon the commencement of the term of this Lease and annually
thereafter upon the first day of such lease year throughout the term hereof.
Landlord's Liability Insurance. Landlord agrees to maintain in force
during the term of this Lease a policy or policies of comprehensive public
liability insurance, including property damage, written by one or more
responsible insurance companies approved by Landlord and licensed to do business
in Texas insuring Landlord against loss of life, bodily injury and/or property
damage with respect to the common areas of the Building and the operation of the
Building, in which the limit of public liability shall be not less than FIVE
HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00) single limit bodily injury and
in which the limit of property damage liability shall be not less than ONE
HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00). In addition, Landlord may
maintain in force such umbrella policy or policies of public liability insurance
as Landlord, in its sole discretion, may deem appropriate.
Landlord's Fire and Extended Coverage Insurance. Landlord agrees to
procure and keep in effect during the terms of this Lease a policy or policies
of fire and extended coverage insurance covering the Building, or separate fire
rating division as determined by the State Board of Insurance which includes the
leased Premises, including rent abatement, vandalism and malicious mischief
coverage, written by an insurance company authorized to do business within the
State of Texas, and in an amount equal to not less than eighty percent (80%) of
the replacement cost of the premises covered. Such insurance shall provide
protection against losses so insured against for the benefits of Landlord and
any first mortgage of Landlord, subject to the terms and provisions of this
Lease and any first mortgage; provided, however, that all proceeds payable by
any insurance company under such policy or policies shall be payable to such
mortgagee, if any, and shall be applied in accordance with the terms of such
mortgage; or, if there is no mortgage, the full amount of such proceeds shall be
payable to Landlord, and Tenant shall not be entitled to, and shall have no
interest in, such proceeds or any part thereof. Such policy or policies shall
contain a provision or endorsement with respect to mutual waiver of right of
subrogation. The premium on said insurance shall be paid at least one (1) year
in advance, and Landlord shall, upon request, furnish Tenant proof of such
Insurance.
Tenant's Liability for Building Insurance Costs. At the commencement of
the term of this Lease and within one hundred eighty (180) days after the
commencement of each calendar year (or partial calendar year) thereafter,
Landlord shall furnish Tenant a statement, together with a true copy of the
premium statement, showing the Building Insurance Costs for the calendar year in
which the term commences or the applicable calendar year thereafter and any
deductible amount incurred in any loss. Landlord's failure to provide the
statement shall not
5
<PAGE> 6
relieve Tenant of any liability hereunder. As used herein, the term "Building
Insurance Costs" shall mean the actual premium costs of public liability and
fire and extended coverage insurance, including rent abatement insurance
required by this Lease to be maintained by Landlord and any deductible incurred
in any loss. Tenant's Pro Rata Share of public liability insurance shall be
determined by multiplying the total cost of such insurance by a fraction, the
numerator of which is the square foot area of the Leased Premises and the
denominator of which is the gross leasable area of the Building. Tenant's Pro
Rata Share of fire and extended coverage insurance shall be determined by
multiplying said total cost of such insurance by a fraction, the numerator of
which is the square foot area of the Leased Premises and the denominator of
which is the gross leasable area of the Building. Tenant's Pro Rata Share of
Building Insurance Costs shall be paid as provided above.
Annual Adjustments. Within ten (10) days after the receipt of
Landlord's statement showing the total amount paid in advance by Tenant and a
copy of the insurance bills showing the actual monies paid or to be paid by
Landlord, there shall be an adjustment between Landlord and Tenant. Tenant shall
pay to Landlord on demand the difference between the amount paid by Tenant and
the actual amount due. If the total amount paid by Tenant hereunder for any such
calendar year shall exceed such actual amount due from Tenant for such calendar
year, the excess shall be credited by Landlord against any amounts then due and
owing by Tenant to Landlord and any remaining net surplus shall then be refunded
by Landlord to Tenant. Failure of Tenant to pay Tenant's Insurance Costs in the
manner and time provided herein shall constitute an event of default hereunder.
5. Tenant agrees to accept the premises in it "as is", "where is"
condition.
6
<PAGE> 7
Except as provided herein, all terms and conditions of the Lease
Agreement shall remain in full force and effect.
LANDLORD: TENANT:
Transwestern CG Partners I, L.P. Tekgraf, Inc., a Texas
By: Transwestern CP GP I, L.L.C., its sole Corporation
general partner By: /s/ Martyn Cooper
By: Houston Properties, L.L.C., its --------------------
managing member Name: Martyn Cooper
By: Connecticut General Life ------------------
Insurance Company, its sole
managing member Its: Director
By: Cigna Investments, Inc., --------------------
its authorized signatory
By:
---------------------------
Name:
-------------------------
Its:
--------------------------
By: Transwestern CP GP I, L.L.C., its
managing member
By: Transwestern Investment
Company, L.L.C., its authorized
signatory
By: /s/ Randal Bossolo
--------------------------
Name: Randal Bossolo
------------------------
Its: Managing Director
--------------------------
7
<PAGE> 1
EXHIBIT 10.22
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 as of March 23, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I THE MERGER ............................................................................. 5
1.1 The Merger .............................................................................. 5
1.2 Effect of Merger ......................................................................... 5
1.3 Purchase Price Adjustment ................................................................ 7
1.4 The Closing .............................................................................. 13
1.5 Dissenting Shareholders .................................................................. 13
1.6 Certain Tax Agreements ................................................................... 14
ARTICLE II REPRESENTATIONS AND WARRANTIES ......................................................... 14
2.1 Representations and Warranties of the Company and the Company Shareholders ............... 14
2.2 Representations and Warranties of Acquisition Sub and Purchaser .......................... 31
2.3 Disclosure ............................................................................... 33
2.4 Disclosure ............................................................................... 33
2.5 Investment Representation of Company Shareholders ........................................ 33
ARTICLE III COVENANTS ............................................................................. 33
3.1 Covenants Against Disclosure ............................................................. 33
3.2 Access to Information .................................................................... 34
3.3 Interim Period ........................................................................... 34
3.4 Completion of Schedules .................................................................. 35
3.5 On and After Closing ..................................................................... 36
3.6 Continuity of Business Enterprise ........................................................ 36
3.7 Non-Competition .......................................................................... 36
3.8 Registration Statement ................................................................... 38
3.9 Company Indebtedness ..................................................................... 38
3.10 Further Assurances ....................................................................... 38
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IV CONDITIONS PRECEDENT TO OBLIGATIONS .................................................... 38
4.1 Conditions to Obligations of Acquisition Sub ............................................. 38
4.2 Conditions to Obligations of the Company and the Company Shareholders .................... 40
ARTICLE V INDEMNIFICATION ......................................................................... 40
5.1 Survival of Representations, Warranties, Covenants and Agreements ........................ 40
5.2 Indemnification of Acquisition Sub and Purchaser ......................................... 41
5.3 Indemnification of the Company Shareholders .............................................. 41
5.4 Procedure for Indemnification with Respect to Third-Party Claims ......................... 41
5.5 Procedure For Indemnification with Respect to Non-Third Party Claims ..................... 42
5.6 Escrowed Shares .......................................................................... 43
ARTICLE VI TERMINATION AND CONDITIONS SUBSEQUENT .................................................. 43
6.1 Termination .............................................................................. 43
6.2 Effect of Termination .................................................................... 43
ARTICLE VII MISCELLANEOUS PROVISIONS .............................................................. 44
7.1 Notice ................................................................................... 44
7.2 Entire Agreement ......................................................................... 44
7.3 Binding Effect: Assignment ............................................................... 44
7.4 Expenses of Transaction .................................................................. 44
7.5 Waiver; Consent .......................................................................... 44
7.6 Counterparts ............................................................................. 45
7.7 Severability ............................................................................. 45
7.8 Remedies of the Parties .................................................................. 45
7.9 Governing Law ............................................................................ 45
7.10 Arbitration; Attorneys' Fees ............................................................. 45
7.11 Cooperation and Records Retention ........................................................ 46
</TABLE>
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<PAGE> 4
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of March ___, 1998, is made
and entered into by and among TEKGRAF, INC., a Delaware corporation
("Purchaser"), TEKGRAF SUB I, a Georgia corporation ("Acquisition Sub"),
COMPUTER GRAPHICS TECHNOLOGY, INC., a South Carolina corporation (the
"Company"), and the shareholders set forth on the signature page of this
Agreement (the oCompany Shareholderso). Acquisition Sub and the Company are
hereinafter sometimes referred to as the "Constituent Corporations" and
Acquisition Sub as the "Surviving Corporation".
WHEREAS, Purchaser, Acquisition Sub, and the Company desire that the
Company merge with and into Acquisition Sub (the "Merger"), upon the terms and
conditions set forth herein and in accordance with the Georgia Business
Corporation Code and the Code of Laws of South Carolina, with the result that
Acquisition Sub shall continue as the surviving corporation and the separate
existence of the Company (except as it may be continued by operation of law)
shall cease;
WHEREAS, Purchaser, Acquisition Sub, and the Company desire that, upon
the Merger, at the Effective Time (as hereinafter defined), all outstanding
shares of common [and preferred] stock of the Company be converted into shares
of common stock of Purchaser and cash as provided herein;
WHEREAS, the respective Boards of Directors of Purchaser, Acquisition
Sub, and the Company have approved the Merger; and
WHEREAS, the parties intend for the Merger to be accomplished under
Section 368(a)(2)(D) under the Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, for and in consideration of the mutual representations,
warranties, covenants, agreements and conditions contained herein, and in order
to set forth the terms and conditions of the Merger and the mode of carrying the
same into effect, the parties hereto hereby agree as follows:
DEFINITIONS
"Accounts Receivable" has the meaning set forth in Section 2.1(kk).
"Accredited Investor" has the meaning set forth in Regulation D
promulgated under the Securities Act of 1933.
"Acquisition Sub" means Tekgraf Sub I, Inc., a Georgia corporation.
"Acquisition Sub Common Stock" means the common stock of Tekgraf Sub I,
Inc., par value $.001 per share.
"Acquisition Sub Indemnifiable Claims" has the meaning set forth in
Section 5.3.
"Acquisition Sub Share" means a share of Acquisition Sub Common Stock.
<PAGE> 5
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934.
"Affiliated Group" means any affiliated group within the meaning of Code
(0) 1504(a).
"Articles of Merger" means the Articles of Merger respecting the Merger
as filed by the Parties with the Secretary of State of the State of South
Carolina.
"Audited Balance Sheet" has the meaning set forth in Section 2.1(e).
"Business" shall mean, collectively, the businesses conducted by the
Company including, among other things, the business of computer integration and
wholesale distribution of computer products.
"Capital Stock" has the meaning set forth in Section 2.1(b).
"Cash Consideration" has the meaning set forth in Section 1.2(e).
"Certificate of Merger" means the Certificate of Merger respecting the
Merger filed by the Parties with the Secretary of State of the State of Georgia.
"Claim" has the meaning set forth in Section 2.1(bb).
"Closing" has the meaning set forth in Section 1.4 below.
"Closing Date" has the meaning set forth in Section 1.4 below.
"Code" has the meaning set forth in Section 2.1(k).
"Company" means Computer Graphics Technology, Inc., a South Carolina
corporation.
"Company Indemnifiable Claims" has the meaning set forth in Section 5.2.
"Company Share" means a share of common stock of the Company, par value
$___.___ per share.
"Company Shareholder(s)" means any shareholder(s) of the Company.
"Company State" means the state of incorporation of the Company.
"Confidential Material" has the meaning set forth in Section 3.1(a).
"Contracts" has the meaning set forth in Section 2.1(r).
"Customers" has the meaning set forth in Section 2.1(dd).
"Damages" has the meaning set forth in Section 5.2.
"Dissenting Share" means any Company Share which any shareholder who or
which has exercised his or its appraisal rights under the South Carolina
Business Corporation Act holds of record.
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<PAGE> 6
"Effective Time" has the meaning set forth in Section 1.2(a) below.
"Employees" has the meaning set forth in Section 2.1(z).
"Environmental Laws" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Resource Conservation and Recovery
Act of 1976, and the Occupational Safety and Health Act of 1970, each as
amended, together with all other laws (including rules, regulations, codes,
plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder)
of federal, state, local, and foreign governments (and all agencies thereof)
concerning pollution or protection of the environment, public health and safety,
or employee health and safety, including laws relating to emissions, discharges,
releases, or threatened releases of pollutants, contaminants, or chemical,
industrial, hazardous, or toxic materials or wastes into ambient air, surface
water, ground water, or lands or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes.
"Equity Consideration" has the meaning set forth in Section 1.2(e).
"ERISA" has the meaning set forth in Section 2.1(hh).
"Financial Statements" has the meaning set forth in Section 2.1(e).
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Hazardous Substance Issues" has the meaning set forth in Section
2.1(bb).
"Indemnifiable Claims" has the meaning set forth in Section 5.4(a).
"Indemnified Party" has the meaning set forth in Section 5.4(a).
"Indemnifying Party" has the meaning set forth in Section 5.4(a).
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, (c) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e) all trade
secrets and confidential business information (including all applications,
registrations, and renewals in connection therewith), (f) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing, the production process and
techniques, technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and
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<PAGE> 7
business and marketing plans and proposals), (g) all computer software
(including data and related documentation), (h) all other proprietary rights,
and (i) all copies and tangible embodiments thereof (in whatever form or
medium).
"Inventory" has the meaning set forth in Section 2.1(j).
"IRS" means the Internal Revenue Service.
"Knowledge" means the actual knowledge of all officers, directors and
shareholders of the Company, after reasonable investigation and due inquiry.
"Leased Properties" has the meaning set forth in Section 2.1(gg).
"Liens" has the meaning set forth in Section 2.1(i).
"Managing Shareholder" shall mean Scott Barker, the current president of
the Company.
"Materials" has the meaning set forth in Section 2.1(r).
"Merger" has the meaning set forth in the recitals above and in Section
1.1 below.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party" means a party to this Agreement and the Merger.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Plan" has the meaning set forth in Section 2.1(hh).
"Purchaser Common Stock" shall mean the Class A Common Stock of
Purchaser, par value $.001 per share.
"Purchaser Shares" means shares of Purchaser Common Stock.
"Qualified Plans" has the meaning set forth in Section 2.1(hh).
"Related Property" has the meaning set forth in Section 2.1(t).
"Related Agreements" shall mean any and all escrow agreements and
employment agreements required to be executed in connection with this Agreement.
"Representatives" has the meaning set forth in Section 2.1(aa).
"Returns" has the meaning set forth in Section 2.1(k).
"SEC" means the Securities and Exchange Commission.
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<PAGE> 8
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Suppliers" has the meaning set forth in Section 2.1(r).
"Surviving Corporation" has the meaning set forth in Section 1.1 below.
"State" shall have the meaning set forth in Section 2.1(a).
"Taxes" has the meaning set forth in Section 2.1(k).
"Territory" has the meaning set forth in Section 3.5(a).
"Unaudited Annual Financial Statements" has the meaning set forth in
Section 2.1(e).
"Unaudited Financial Statements" has the meaning set forth in Section
2.1(e).
"Unaudited Interim Financial Statements" has the meaning set forth in
Section 2.1(e).
ARTICLE I
THE MERGER
Section 1.1 The Merger. On and subject to the terms and conditions of
this Agreement, the Company will merge with and into Acquisition Sub (the
"Merger") at the Effective Time. From and after the Effective Time, the separate
corporate existence of the Company shall cease, and Acquisition Sub shall
continue as the corporation surviving the Merger (the "Surviving Corporation").
Immediately after the Effective Time, the Surviving Corporation shall change its
name to "Computer Graphics Technology, Inc." and shall file with the Secretary
of State of the State of South Carolina its qualification to do business as a
foreign corporation. The parties shall cause the Certificate of Merger to be
filed with the Secretary of State of the State of Georgia and the Articles of
Merger to be filed with the Secretary of State of the State of South Carolina
promptly following the Closing.
Section 1.2 Effect of Merger.
(a) General. The Merger shall become effective at the time (the
"Effective Time") when the Articles of Merger filed with the Secretary of State
of the State of South Carolina and the Certificate of Merger filed with the
Secretary of State of the State of Georgia have become effective in accordance
with their terms and in accordance with the laws of each State. The Merger shall
have the effect set forth in Section 33-11-101 of the Code of Laws of South
Carolina and Section 14-2-1106 of the Georgia Business Corporation Code. The
Surviving Corporation may, at any time after the Effective Time, take any action
(including executing and delivering any document) in the name and on behalf of
the Surviving Corporation in order to carry out and effectuate the transactions
contemplated by this Agreement. Further, the Surviving Corporation shall possess
all of the rights, privileges, powers and franchises, and be subject to all the
restrictions, disabilities and duties, of each of the Constituent Corporations;
and the rights, privileges, powers and franchises of each of the Constituent
Corporations, and all property of and all debts due to any of the Constituent
Corporations on whatever
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<PAGE> 9
account, shall be vested in the Surviving Corporation; and all property, rights,
privileges, powers and franchises, and all and every other interest shall be
thereafter as effectually the property of the Surviving Corporation as they were
of the Constituent Corporations, and the title to any real estate vested by deed
or otherwise in any of the Constituent Corporations shall not revert or be in
any way impaired by reason of the Merger, but all rights of creditors and all
liens upon any property of any of the Constituent Corporations shall be
preserved unimpaired, and all debts, liabilities and duties of the Constituent
Corporations shall attach to the Surviving Corporation and may be enforced
against it to the same extent as if said debts, liabilities and duties had been
incurred or contracted by it.
(b) Articles of Incorporation. The Articles of Incorporation of
Acquisition Sub in effect at and as of the Effective Time will remain the
Articles of Incorporation of the Surviving Corporation without any modification
or amendment, other than the change of the name of the Surviving Corporation, in
the Merger.
(c) Bylaws. The Bylaws of Acquisition Sub in effect at and as of the
Effective Time will remain the Bylaws of the Surviving Corporation without any
modification or amendment, other than the change of the name of the Surviving
Corporation, in the Merger.
(d) Directors and Officers. The initial directors of the Surviving
Corporation at and as of the Effective Time shall be comprised of the current
Acquisition Sub directors, and those persons listed on Exhibit D. The principal
officers of the Surviving Corporation at and as of the Effective Time shall be
as set forth in Exhibit D.
(e) Conversion of Shares. At and as of the Effective Time, in
consideration for the Capital Stock and in full payment therefor, each Company
Share shall be converted into the right to receive its pro rata share of (i)
Five Hundred Thousand Dollars ($500,000.00) (the "Cash Consideration") and (ii)
an aggregate of 330,000 shares of Purchaser Common Stock (the "Equity
Consideration," together with the Cash Consideration, hereinafter referred to
collectively as the "Purchase Price"), subject to the adjustments to the
Purchase Price set out in Section 1.3. All shares of Purchaser Common Stock
issued as herein described shall have identical rights as to dividends, voting
and all other matters. Except as expressly provided in this Agreement, there
shall be no other consideration paid to or for the account of the Company
Shareholders in connection with or relating to the transactions contemplated
hereby. However, the Equity Consideration shall be subject to equitable
adjustment in the event of a stock split, stock dividend, reverse stock split,
or other change in the number of Purchaser Shares outstanding. Each Dissenting
Share shall be converted into the right to receive payment from the Surviving
Corporation with respect thereto in accordance with the provisions set forth in
Section 1.5. No Company Share shall be deemed to be outstanding or to have any
rights other than those set forth above in this Section 1.2(e) after the
Effective Time. No fractional Purchaser Shares shall be issued, and, to the
extent that any shareholder would be entitled to receive fractional shares of
Purchaser Common Stock pursuant this Section, the number of Purchaser Shares
that such Company Shareholder is entitled to receive shall be rounded down to
the next lower whole number. Any such fractional share interests will not
entitle the holder thereof to vote or to any rights of a shareholder of
Purchaser.
(f) All shares of Capital Stock held by the Company as treasury stock
shall be retired and canceled and no shares of Purchaser Common Stock or other
consideration shall be delivered or paid in exchange therefor.
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<PAGE> 10
(g) Each Purchaser Share issued and outstanding at and as of the
Effective Time will remain issued and outstanding thereafter.
Section 1.3 Purchase Price Adjustment.
(a) As used in this Section 1.3, the following capitalized terms shall
have the meanings set forth below:
"Actual Pre-Tax Profit" shall mean the pre-tax profit of the Surviving
Corporation, determined in accordance with generally accepted accounting
principles consistently applied ("GAAP"), for the Year. Except as otherwise
stated herein, the accounting principles employed shall be the same as those
applied by the Company on a consistent basis in prior years. Depreciation for
all plant and equipment shall be computed as follows: (i) items with a useful
life of three years or less when placed in service shall be depreciated using
the straight-line method of depreciation; (ii) items with a useful life of
greater than three years when placed in service shall be depreciated using the
declining-balance method of depreciation; (iii) items with a value of less than
$400.00 when purchased shall be expensed and written off immediately; (iv) prior
period adjustments and extraordinary items, as defined in APB Opinion 9, APB
Opinion 20 and FASB Statement 15 will be excluded from the definition of "Actual
Pre-Tax Profit;" and, (v) inventories will be accounted for on a cost basis
consistent with prior years, determined on a first-in, first-out basis and
providing for a write down to market value in those instances where the cost
exceeds the market value as of the date of the balance sheet. The "Actual
Pre-Tax Profit" shall be adjusted on a pro forma basis, as and if required, to
reflect profit or losses normally attributable to the Surviving Corporation due
to the manufacturers' co-op, advertising, market development or discount
programs, if such profit or losses are not received by or charged to Acquisition
Sub.
"Actual Tangible Net Asset Value" shall mean the aggregate amount of the
Current Assets less Liabilities on the Closing Date.
"Alternative Actual Pre-Tax Profit" shall mean the pre-tax profit of the
Surviving Corporation, determined in accordance with generally accepted
accounting principles consistently applied ("GAAP"), for the Alternative Year.
Other than the period for which it is calculated, it shall be computed in the
same manner as the Actual Pre-Tax Profit.
"Alternative Warranted Pre-Tax Profit" shall mean $575,000.
"Alternative Year" means the twelve month period beginning on the date
which is three months after the day after the Closing Date and ending on the
date which is fifteen months after the Closing Date.
"Current Assets" shall be used in all respects in accordance with GAAP
and comprises the aggregate of all cash, cash equivalents, receivables and
inventory, but specifically excludes all other fixed or current assets as
determined in accordance with GAAP and any deferred assets, including without
limitation deferred tax and deferred income, and valued in accordance with GAAP,
and on a basis in all material respects consistent with that adopted for the
purposes of the last audited financial statements of the Company and the value
of all receivables and inventory has been written down to realizable market
value and adequate provision has been made therefor.
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<PAGE> 11
"Fixed Assets" shall be used in all respects in accordance with GAAP and
shall mean fixed assets at the values at which they were included in the latest
audited financial statements (or if acquired after the balance sheet date, their
cost), less depreciation calculated in accordance with the method adopted in the
financial statements. Fixed Assets shall specifically exclude, and no value
shall be attributable to, any intangible assets (including without limitation
goodwill, trademarks, service marks, formulas, franchise rights and patents),
and no asset shall be written up or revalued above its original cost less
applicable depreciation. "Liabilities" shall be used in all respects in
accordance with GAAP and shall mean all liabilities, whether long-term or
current, including without limitation Taxes, all actual liabilities of the
Company on the Closing Date, with proper provision in accordance with GAAP,
having been made therein for all other liabilities of the Company then
outstanding whether contingent, quantified, disputed or not, that are known or
reasonably should have been known, including without limitation the cost of any
work or material for which payment has been received or credit taken, any future
loss which may arise in connection with uncompleted contracts and any claims
against the Company in respect of completed contracts.
"Net Asset Value Shortfall" means the excess, if any, of the Warranted
Tangible Net Asset Value over the Actual Tangible Net Asset Value on the Closing
Date, subject to the limitations set forth in this Section 1.3.
"Net Asset Value Surplus" means the excess, if any, of the Actual
Tangible Net Asset Value over the Warranted Tangible Net Asset Value on the
Closing Date, subject to the limitations set forth in this Section 1.3.
"Profit Shortfall" means the excess, if any, of the Warranted Pre-Tax
Profit over the Actual Pre- Tax Profit, subject to the limitations set forth in
this Section 1.3.
"Profit Surplus" means the excess, if any, of the Actual Pre-Tax Profit
over $550,000, subject to the limitations set forth in this Section 1.3.
"Warranted Pre-Tax Profit" shall mean $525,000.
"Warranted Tangible Net Asset Value" shall mean $285,000.
"Year" means the twelve month period beginning on the day after the
Closing Date and ending on the first anniversary of the Closing Date.
(b) Each Company Shareholder agrees that the Warranted Pre-Tax Profit
and the Warranted Tangible Net Asset Value of the Company shall be not less than
the amounts set forth above. To the extent that any of the conditions set forth
below are met, the corresponding adjustments to the Purchase Price payable to
the Company Shareholders or the Purchaser, as the case may be, shall be made:
(i) In the event that there is a Net Asset Value Surplus, the
Purchase Price shall be increased by the amount of the Net Asset Value
Surplus. Such amount will be paid by the Purchaser, in cash, to the
Company Shareholders within ninety (90) days after the determination of
Actual Tangible Net Asset Value.
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<PAGE> 12
(ii) In the event that there is a Net Asset Value Shortfall,
the Purchase Price shall be reduced by the amount of the Net Asset Value
Shortfall. Such amount will be paid, in cash, by the Company
Shareholders to Purchaser within thirty (30) days after the
determination of the Actual Tangible Net Asset Value.
(iii) In addition to any adjustments made pursuant to
subsections (i) and (ii) above, if the Actual Pre-Tax Profit for the
Year (or for the Alternative Year, if applicable) exceeds $550,000, the
Purchase Price shall be increased by the number of Purchaser Shares
determined by the following formula (the "Profit Surplus Adjustment"):
(Actual Pre-Tax Profit/$550,000 x 430,000) - 430,000
The number of Purchaser Shares required for the Profit Surplus
Adjustment shall be transferred to Company Shareholders within three
business days after the final determination of the amount of such Profit
Surplus Adjustment. In no event, however, shall the Purchase Price be
increased by more than 43,000 Purchaser Shares pursuant to this Profit
Surplus Adjustment (the "Adjustment Ceiling").
(iv) Also in addition to any adjustments made pursuant to
subsections (i) and (ii) above, in the event that the Warranted Pre-Tax
Profit exceeds the Actual Pre-Tax Profit for the Year (or the for
Alternative Year, if applicable), the Purchase Price shall be reduced by
the number of Purchaser Shares determined by the following formula (the
"Profit Shortfall Adjustment"):
430,000 - (Actual Pre-Tax Profit/$550,000 x 430,000)
The number of Purchaser Shares required for the Shortfall
Surplus Adjustment shall be transferred to Purchaser immediately within
three business days after receiving notice from Purchaser of the amount
of such Profit Shortfall Adjustment. In no event, however, shall the
Purchase Price be reduced by more than 100,000 Purchaser Shares pursuant
to this Profit Shortfall Adjustment (the "Adjustment Floor").
(v) In the event that there is a stock split, stock dividend,
reverse stock split or other change in the number of Purchaser Shares
outstanding, the formulae set forth in subsections (iii) and (iv) above,
the Adjustment Ceiling and the Adjustment Floor shall be proportionately
adjusted to reflect such a change in the number of Purchaser Shares.
(c) Any receivable of the Company existing as of the Closing Date that
remains uncollected by the Surviving Corporation or its successor 90 days after
the Closing Date, or such later date as determined by the Extension Option below
(the "Measurement Date"), or, as of such date, has been collected at less than
its full value as shown in Current Assets on the Closing Date shall be
considered a "Collection Shortfall." The Company Shareholders shall have the
option to extend the Measurement Date to a date that is 120 days after the
Closing Date by giving notice of such extension to Purchaser and Surviving
Corporation no later than the date which is 60 days after the Closing Date (the
"Extension Option"). In the event that there is a Collection Shortfall, (i) the
Surviving Corporation shall have the option of assigning such receivable to the
Company Shareholders, without representation or warranty, not more than 30 days
after the Measurement Date, and demanding the amount of the Collection
Shortfall, and upon such assignment, such Company Shareholders shall pay to the
Surviving Corporation such amount, in cash, within ten (10) days after demand;
provided that Surviving
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<PAGE> 13
Corporation shall have exercised all reasonable efforts at collecting such
receivable at such full value; and (ii) the Company Shareholders shall have the
option of causing the Surviving Corporation to sell such receivable to the
Company Shareholders, without representation or warranty, not more than 120 days
after the Closing Date, and paying the amount of the Collection Shortfall, and
upon such assignment, the Company Shareholders shall pay Surviving Corporation
such amount, in cash, within ten (10) days after demand. The Company
Shareholders shall thereafter be free to pursue such collection measures as they
in their sole discretion shall deem necessary or appropriate. To the extent, if
any, that the Collection Shortfall remains unpaid after such ten (10) day
period, Surviving Corporation shall adjust the Purchase Price, effective as of
the Closing Date, in accordance with the provisions set forth in Section
1.3(b)(ii) above, adding Collection Shortfall to the Net Asset Value Shortfall.
(d) Any items of the Company's inventory existing as of the Closing Date
that remain unsold by the Surviving Corporation or its successor 90 days
thereafter, or such later date as chosen by the Company Shareholders upon
exercise of the Extension Option, set forth in Section 1.3(c) above, or which
have been sold at less than full value as shown in Current Assets on the Closing
Date shall be considered "Inventory Shortfall." Not more than thirty (30) days
after the Measurement Date, Surviving Corporation shall deliver and transfer
such unsold inventory to the Company Shareholders without representation or
warranty and shall demand the amount of the Inventory Shortfall, and upon such
transfer and delivery, the Company Shareholders shall pay the Surviving
Corporation such amount, in cash, within ten (10) days of demand; provided that
Surviving Corporation shall have exercised all reasonable efforts at selling
such inventory at such full value. Such Company Shareholders shall, at any time
after Surviving Corporation's demand of the Inventory Shortfall, be free to sell
such inventory as they in their sole discretion shall deem necessary or
appropriate. To the extent, if any, that the Inventory Shortfall remains unpaid
after such ten (10) day period, Surviving Corporation shall adjust the Purchase
Price, effective as of the Closing Date, in accordance with the provisions set
forth in Section 1.3(b)(ii) above, adding Inventory Shortfall to the Net Asset
Value Shortfall.
(e) Each Company Shareholder shall escrow twenty percent (20%) of the
Equity Consideration (the "Escrowed Shares") and the Company Shareholders shall
collectively escrow $100,000 of the Cash Consideration (the "Escrowed Cash"), to
be subject to redistribution by Purchaser and Acquisition Sub in the
circumstances described in this Section 1.3. The terms of the escrow shall be
substantially as set forth in the form of Escrow Agreement attached as Exhibit
1.3(e) hereto. Any Escrowed Cash not subject to redistribution for purposes of
this Section shall be released to the Company Shareholders after final
determination of the Actual Tangible Net Asset Value. The Escrowed Cash released
to the Company Shareholders shall include interest earned on such released
Escrowed Cash, to the extent that the Company Shareholders provide the escrow
agent with the appropriate paperwork required to invest such funds on a timely
basis. Upon determination of either a Profit Surplus Adjustment or a Profit
Shortfall Adjustment pursuant to the terms of Section 1.3(b), the number of
Escrowed Shares to be used to satisfy such Adjustment shall be calculated by
dividing the amount of the Adjustment by the twenty-day average trading price of
Purchaser Common Stock as quoted on the Nasdaq National Market System for the
twenty-day period ending on the date that the Adjustment is determined. Any
Escrowed Shares not subject to redistribution for the purposes of this Section
shall be released to the Company Shareholders as follows: one-half within thirty
(30) days after the determination of the application of this Section 1.3
pursuant to the provisions of subsection (b), (c) or (d) above, as the case may
be, and one-half on the first anniversary of the Closing Date, or, in the event
that the Company Shareholders elect to exercise the Alternative Year provisions
set forth in Section 1.3(g), at the end of the Alternative Year. In the event
that the Purchase Price Adjustment
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described in this Section 1.3 exceeds the number of Escrowed Shares and the
amount of Escrowed Cash available, Purchaser's recovery of shares or cash
pursuant to the Purchase Price Adjustment shall not be limited to the number of
available Escrowed Shares or the amount of Escrowed Cash. In the event that
Purchaser elects, pursuant to Section 1.3(h), to waive the Profit Surplus
Adjustment of Section 1.3(b)(iii) and the Profit Shortfall Adjustment of Section
1.3(b)(iv), the Escrowed Shares shall be transferred to the escrow account
established under Section 5.6 hereof, and such shares shall become subject to
all of the terms and conditions under Section 5.6, except that such shares shall
be released to the Company Shareholders pursuant to the provisions of that
certain Pledge, Security and Escrow Agreement executed in connection with
Section 5.6 hereof.
(f) As an example of the application of subsections (b) and (c) above,
in the event that the Actual Tangible Net Asset Value shall be $270,000 on the
Closing Date rather than the Warranted Tangible Net Asset Value of $285,000,
being a $15,000 shortfall in Warranted Tangible Net Asset Value, and an
additional shortfall is determined under subsection (c) above in the amount of
$10,000 and such amount remains unpaid, and in the event that the Actual Pre-Tax
Profit shall be $500,000, rather than the Warranted Pre-Tax Profit of $525,000,
being a $25,000 shortfall in Warranted Pre-Tax Profit, then the amount of Cash
Consideration shall be reduced by $25,000 and the number of Purchaser Shares to
be distributed to the Company Shareholders shall be reduced by 39,091 shares,
computed as follows:
430,000 - ($500,000 / $550,000 x 430,000) = 39,091 Shares
(g) For purposes of calculating the Purchase Price Adjustment under this
Section 1.3, the Company Shareholders shall have the option, at the end of the
Year, to calculate the Profit Surplus Adjustment, as set forth in Section
1.3(b)(iii), and the Profit Shortfall Adjustment, as set forth in Section
1.3(b)(iv), based on the Alternative Year rather than the Year. If the Company
Shareholders elect to exercise this option, the following substitutions shall be
made to the provisions of Sections 1.3(b)(iii) and (iv): the Alternative Actual
Pre-Tax Profit shall be substituted for the Actual Pre-Tax Profit, the
Alternative Warranted Pre-Tax Profit shall be substituted for the Warranted
Pre-Tax Profit and the dollar figure shall be increased from $550,000 to
$575,000, in the body of Section 1.3(b)(iii) and in the denominators of both
equations. Once the Company Shareholders elect to exercise this option, the
decision shall be final, and the Company Shareholders shall not be entitled to
calculate the Purchase Price Adjustment based on the Actual Pre-Tax Profit and
the Warranted Pre-Tax Profit.
(h) Purchaser shall have the exclusive option to waive the Profit
Surplus Adjustment set forth in Section 1.3(b)(iii) and the Profit Shortfall
Adjustment set forth in Section 1.3(b)(iv) by giving notice of its election to
exercise such option within 120 days after the Closing Date. In the event that
Purchaser makes such an election, there shall be no adjustments whatsoever
pursuant to Sections 1.3(b)(iii) and (iv).
(i) Until the end of the Year (or the end of the Alternative Year, if
the Shareholders elect to calculate the Purchase Price Adjustment on that
basis), the Purchaser covenants and agrees as follows:
(i) The business and assets of the Company, to which the
Surviving Corporation will succeed in the Merger, will be maintained
intact as a business unit, under the management and control of the
Managing Shareholder, and operating in substantially the same manner as
prior to the Merger, with substantially the same managerial and support
staff, working capital, and other business resources, as prior to the
Merger, so the Company Shareholders will not be
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<PAGE> 15
disadvantaged, in their attempt to achieve the maximum Actual or
Alternative Pre-Tax Profit, by factors such as the combination of the
Company's business and assets with other businesses, or the diversion
of managers, employees, working capital and other resources to other
activities of Purchaser or its affiliates. In this connection, all
dealings and transactions between the Surviving Corporation and the
Purchaser and Purchaser's affiliates will be conducted on an arm's
length basis, except as set forth below, and on terms at least as
favorable to the Company as it could obtain from an unrelated third
party.
(ii) The Surviving Corporation shall be entitled to "Most
Favored Distributor" status, in that it shall be entitled to deal with
Purchaser and its affiliates on terms at least as favorable as any other
person or entity acting as a distributor, representative or in a similar
capacity for the Purchaser or any affiliate, and without limitation,
will be given the reasonable opportunity to become a distributor,
representative or seller of each of the products and product lines
offered now or in the future by Purchaser or its affiliates, except to
the extent that such products are licensed directly to Purchaser or one
or more affiliates of Purchaser by a third party.
(a) Specific service requests by Purchaser to Surviving
Corporation and vice versa for technical aid, special services,
advertising, and similar services will be charged on a basis of
cost. Operating capital advanced to Acquisition Sub., Surviving
Corporation or their successors by Purchaser will bear interest
at the Prime Rate charged by NationsBank N.A. of Delaware, or at
the rate Purchaser pays for the funds.
(b) General services such as auditing, tax, legal, etc. provided
or paid for by Purchaser for the Surviving Corporation in lieu
of obtaining such services from other sources will be charged to
the Surviving Corporation at cost on a basis consistent with
Purchaser's current practice. However, charges for such services
shall be limited to services provided and shall not exceed costs
at which Surviving Corporation could reasonably expect to obtain
similar services from other sources. Arbitrary charges by
Purchaser for management or administrative services which are
neither controllable by Surviving Corporation nor properly
chargeable against Surviving Corporations operations will be
excluded from any determination of Company's Actual or
Alternative Pre-Tax Profit.
(iii) The Surviving Corporation shall receive credit, in the
calculation of Actual or Alternative Pre-Tax Profit, for all credits
from its vendors and manufacturers for items such as advertising,
rebates, market development funds, and the like that are properly
attributable to Surviving Corporation.
(iv) The Surviving Corporation will be given credit for all
available anticipation, prepay or early pay discounts on
vendor/manufacturer charges and invoices that are properly attributable
to Surviving Corporation.
(v) In the event that Ricoh, a customer of the Company, ceases
to do business with the Surviving Corporation after the merger, the
Warranted Pre-Tax Profit or the Alternative Warranted Pre-Tax Profit, as
the case may be, shall be reduced by $50,000.
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<PAGE> 16
(j) In the event that a "Change of Control," as defined below, occurs
prior to the end of the Year (or the Alternative Year, if Shareholders elect to
calculate the Purchase Price Adjustment on that basis), then, at Shareholder's
option, the Purchase Price Adjustment shall be waived, no such adjustment shall
occur and the Escrows provided under Section 1.3(e) shall be released. For
purposes hereof, a "change of Control" shall mean any transaction in which: (a)
individuals who were directors of the Purchaser, immediately prior to a Control
Transaction shall cease, within one year of any Control Transaction, to
constitute a majority of the Purchaser's Board of Directors (or of the Board of
Directors of any successor to Purchaser or to all or substantially all of its
assets), or (b) any entity, person or group which is not currently a shareholder
of the Purchaser acquires shares of the Purchaser in a transaction or series of
transactions that result in such entity, person or group directly or indirectly
owning beneficially 51% or more of the outstanding shares. Notwithstanding the
foregoing, an inssuance of shares by the Purchaser to more than one party in
connection with a capital-raising transaction shall not constitute a Change in
Control. "Control Transaction" shall mean (aa) any tender offer for or
acquisition of capital stock of Purchaser, (bb) any merger, consolidation, or
sale of all or substantially all of the assets of Purchaser which has been
approved by the shareholders, (cc) any contested election of directors of
Purchaser which results in a change in the majority of the Board of Directors of
Purchaser, or (dd) any combination of the foregoing which results in a change in
voting power sufficient to elect a majority of the Board of Directors of
Purchaser.
Section 1.4 The Closing. Subject to termination of this Agreement as
provided in Article VI below, the closing and consummation of the transactions
contemplated by this Agreement shall take place in the offices of Purchaser's
attorneys on such date that the conditions of closing set forth in Article IV
hereof have been satisfied or waived, or such other date as the parties hereto
may mutually select (the "Closing Date"), which in no event shall be after April
1, 1998, unless extended as provided herein. Purchaser and Acquisition Sub on
the one hand, and Company and Company Shareholders on the other hand, shall each
have the unilateral option to extend the Closing Date to a date which is not
more than 30 days after April 1, 1998, provided that the party electing to
exercise such option shall give written notice of its election to do so not
later than three (3) business days prior to April 1, 1998. Thereafter, the
parties may extend the Closing Date by mutual consent. The "Closing" shall mean
the deliveries to be made by the parties hereto on the Closing Date in
accordance with this Agreement, as follows: (i) Company will deliver to
Acquisition Sub and Purchaser the various certificates, instruments and
documents referred to in Section 4.1 below; (ii) Acquisition Sub and Purchaser
will deliver to Company the various certificates, instruments and documents
referred to in Section 4.2 below; (iii) each Company Shareholder shall deliver
to Acquisition Sub and Purchaser for cancellation the certificates representing
his shares of Capital Stock; (iv) Acquisition Sub and Purchaser will deliver the
consideration specified in Section 1.2 above, subject to any adjustments made
pursuant to Section 1.3; and (v) the Parties will file a Certificate of Merger
with the Secretary of State of the State of Georgia in substantially the form
attached hereto as Exhibit A and will file Articles of Merger with the Secretary
of State of the State of South Carolina in substantially the form attached
hereto as Exhibit B. The Merger shall be deemed to have become effective as of
12:01 a.m. Atlanta, Georgia Time on the Closing Date.
Section 1.5 Dissenting Shareholders. In the event that any holder of
Company Shares elects to exercise its dissenters rights pursuant to the
applicable provisions of the Code of Laws of South Carolina, and in the event
that Purchaser or Acquisition Sub have not otherwise terminated this Agreement
pursuant to Section 6.1, Purchaser and Acquisition Sub shall have the right to
terminate this Agreement on account of such shareholder's election. If
Purchaser and Acquisition Sub do not elect to terminate this Agreement, any
holder of Company Shares who perfects his or her dissenters' rights of
appraisal in accordance with and as contemplated by the applicable provisions of
the Code of Laws of
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<PAGE> 17
South Carolina shall be entitled to receive the value of such shares in cash as
determined pursuant to such provision of the Code of Laws of South Carolina,
provided that no such payment shall be made to any dissenting shareholder unless
and until such dissenting shareholder has complied with the applicable
provisions of the Code of Laws of South Carolina and surrendered to the Company
the certificate or certificates representing the shares for which payment is
being made. In the event that after the Effective Time a dissenting shareholder
fails to perfect or effectively withdraws or loses his or her right to appraisal
and of payment for his or her shares, Surviving Corporation shall issue and
deliver the consideration to which such holder of shares is entitled under this
Article I (without interest) upon surrender by such holder of the certificate or
certificates representing the shares held by him or her.
Section 1.6 Certain Tax Agreements. The Parties intend to adopt this
Agreement and Merger as a tax-free reorganization under Section 368(a)(2)(D) of
the Internal Revenue Code of 1986, as amended. The parties shall not take a
position on any tax return or engage in any activities inconsistent with this
Section 1.6. The adoption of this Agreement and the approval of the Merger by
the Company Shareholders shall constitute the agreement by each Company
Shareholder that, without limiting the foregoing:
(a) Such Company Shareholder has not sold, exchanged, transferred or
disposed of Company Shares in contemplation of the Merger except as disclosed on
Schedule 1.6 attached hereto, and such Company Shareholder has no present intent
to and will not sell, exchange, transfer, dispose of or receive any such stock
in contemplation of the Merger, nor has such Company Shareholder entered into
any discussions or negotiations with regard to the possible sale, exchange,
transfer or other disposition of such stock.
(b) Such Company Shareholder is not subject to any obligation to sell,
exchange, transfer or otherwise dispose of all or any Purchaser Shares to be
received by such Company Shareholder in the Merger. Such Company Shareholder has
not entered into any discussion or negotiations with regard to the possible
sale, exchange, transfer or other disposition of all or any of the Purchaser
Shares. Such Company Shareholder has no plan or intent to engage in any
transaction or arrangement that would reduce such Company Shareholder's risk of
ownership in any way, including, without limitation, a short sale, hedging
transaction or otherwise, with respect to any or all of such Purchaser Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 Representations and Warranties of the Company and the
Company Shareholders. All representations and warranties of the Company and the
Company Shareholders are accurate and material and are being made in order to
induce Purchaser and Acquisition Sub to enter into this Agreement. The Company
and each of the Company Shareholders hereby jointly and severally represent and
warrant to Purchaser and Acquisition Sub that:
(a) Organization. The Company is a corporation duly organized and
validly existing under the laws of the State of South Carolina (the "State"),
and has all requisite power and authority to lease, own, and operate its
properties and carry on the Business and operations and to directly own, lease,
and operate its assets. The Company is duly qualified or licensed to do business
as a corporation, and is in good standing in the State. The Company has
delivered to Purchaser and Acquisition Sub complete and accurate copies of its
Articles of Incorporation and Bylaws and all amendments thereto, and all minutes
and actions of its Board of Directors and shareholders. To the best of
Company's and Company
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<PAGE> 18
Shareholders' Knowledge, neither the Company nor any of the Company
Shareholders is in violation of any of the provisions of the Articles of
Incorporation or the Bylaws.
(b) Capitalization and Ownership. The authorized and outstanding capital
stock of the Company (including without limitation all voting securities) (the
"Capital Stock") and its par value per share, if any, is as set forth on
Schedule 2.1(b) hereto. Each person listed on Schedule 2.1(b) is the lawful
owner of that number of the issued and outstanding shares of capital stock of
the Company set forth opposite such person's name, free and clear of any
restrictions upon transfer except as indicated in Schedule 2.1(b), all of which
restrictions shall be removed no later than the Closing Date. The shares of
Capital Stock (the "Company Shares") set forth on Schedule 2.1(b) constitute all
of the shares of capital stock of the Company and all such shares have been duly
authorized and are validly issued, fully paid and nonassessable, and to the best
of the Knowledge and belief of the Company and the Company Shareholders, have
been issued in compliance with all applicable federal and state securities laws.
There are no outstanding subscriptions, warrants, calls, options, conversion
rights, rights of exchange or other commitments, plans, agreements, or
arrangements of any nature under which the Company or the Company Shareholder
may be obligated to issue, assign, exchange, purchase, redeem or transfer any
shares of capital stock of the Company, and there are no shareholders'
agreements to which the Company or the Company Shareholders is a party, or
proxies, voting trust agreements or similar agreements or options executed by
the Company or the Company Shareholders or to which the Company Shares are
subject. There are no outstanding subscriptions, options, warrants, rights,
convertible securities or other agreements or commitments of any character
relating to the issued or unissued capital stock or other securities of the
Company obligating the Company or the Company Shareholders to grant, extend or
enter into any subscription, option, warrant, right, convertible security or
other similar agreement or commitment. The Company has satisfied all of its
obligations to all current and past shareholders, and none of such current or
past shareholders has any claims, or any basis therefor, against the Company
arising out of or relating to obligations of the Company to such current or past
shareholders. None of the shares of the Company's Capital Stock was issued
pursuant to awards, grants, or bonuses.
(c) Subsidiaries. Except as set forth in Schedule 2.1(c), the Company
does not own, directly or indirectly, any capital stock or other equity or
ownership or proprietary interest in any corporation, partnership, association,
limited liability company, trust, joint venture or other entity.
(d) Authorization. The Company and each of the Company Shareholders have
full power and authority to enter into this Agreement, to perform their
respective obligations hereunder and to consummate the transactions contemplated
hereby. Each corporate Company Shareholder is duly organized and existing under
the laws of the jurisdiction of its incorporation. The Company and/or each of
the Company Shareholders, as appropriate, have taken all necessary and
appropriate corporate action with respect to the execution and delivery of this
Agreement. This Agreement constitutes a valid and binding obligation of the
Company and the Company Shareholders (to the extent to which each is a party),
enforceable in accordance with its terms; except as limited by applicable
bankruptcy, insolvency, moratorium, reorganization or other laws affecting
contracts, creditors' rights and other laws and remedies generally.
(e) Financial Information. The Company will deliver its unaudited
consolidated balance sheets and related statements of operations and cash flows
at and for the fiscal years ended 1995, 1996 and 1997 (the "Unaudited Annual
Financial Statements") and will deliver the unaudited statements of operations
and cash flows at and for the period from the end of the Company's 1997 fiscal
year through February 28, 1998 (the "Unaudited Interim Financial Statements,"
together with the Unaudited Annual
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<PAGE> 19
Financial Statements, collectively referred to herein as the "Unaudited
Financial Statements") within seven (7) days after the execution of this
Agreement. Within thirty (30) days after the Closing Date the Company will also
deliver an unaudited balance sheet as of the Closing Date (the "Unaudited
Balance Sheet," together with the Unaudited Financial Statements, collectively
referred to herein as the "Financial Statements"). To the best of the Knowledge
and belief of the Company and the Company Shareholders, the Financial Statements
will be prepared in accordance with Generally Accepted Accounting Principles
("GAAP") on a consistent basis throughout the periods indicated and with each
other and will present accurately the financial condition of the Company as of
the respective dates thereof and the results of operations for the periods then
ended. All of the Company's general ledgers, books, and records are located at
the Company's principal place of business in the State or at the offices of its
accountant. Purchaser or Acquisition Sub may, at their option, elect to engage,
at their own cost and expense, an accounting firm selected by them and
reasonably acceptable to the Company to audit the Unaudited Financial Statements
as of the Closing Date.
(f) Deposit Accounts; Powers of Attorney. Schedule 2.1(f) hereto lists:
(i) the name of each financial institution in which the
Company has accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
There are no persons, corporations, firms or other entities holding a
general or special power of attorney from the Company.
(g) Liabilities and Obligations. Other than as set forth in the
Unaudited Financial Statements, Schedule 2.1(g) sets forth an accurate list at
the date of this Agreement of all liabilities of the Company, and any
significant liabilities incurred thereafter in the ordinary course of business
or liabilities which are not reflected in the balance sheet of any kind,
character, or description, whether accrued, absolute, secured or unsecured,
contingent or otherwise, together with, in the case of those liabilities which
are not fixed, an estimate of the maximum amount which may be payable. For each
such liability for which the amount is not fixed or is contested, whether in
litigation or otherwise, the Company shall provide the following information:
(i) a summary description of the liability together with the
following:
(a) copies of all material relevant documentation
relating thereto;
(b) amounts claimed and any other action or relief
sought; and
(c) name of claimant and all other parties to the claim,
suit, or proceeding.
(ii) the name of each court or agency before which such claim,
suit, or proceeding is pending;
(iii) the date such claim, suit, or proceeding was instituted;
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<PAGE> 20
(iv) a reasonable estimate by the Company of the maximum amount,
if any, which is likely to become payable with respect to each such
liability. If no estimate is provided, the Company's best estimate shall
for purposes of this Agreement be deemed to be zero.
(h) Product and Service Warranties and Reserves. To the best of
Company's and Company Shareholders' Knowledge, except as set forth in Schedule
2.1(h), there are no product warranty claims relating to sales of the Company's
products occurring on or prior to the date of this Agreement. To the best of
Company's and Company Shareholders' Knowledge, the only express warranties,
written or oral, with respect to the products or services sold by the Company
are set forth in Schedule 2.1(h).
(i) Absence of Certain Changes and Events. Except as set forth in
Schedule 2.1(i) hereto, to the best of the Knowledge and belief of the Company
and the Company Shareholders, since the date of the Unaudited Annual Financial
Statements there has not been:
(i) Any material adverse change in the financial condition,
results of operation, assets, liabilities or prospects of the Company or
the Business, or any occurrence, circumstance, or combination thereof
which reasonably could be expected to result in any such material
adverse change;
(ii) Any transaction relating to or involving the Company, the
Business, the assets of the Company or the Company Shareholders which
was entered into or carried out by the Company or the Company
Shareholders other than for fair consideration in the Ordinary Course of
Business;
(iii) Any change by the Company in its accounting or tax
practices or procedures;
(iv) Any incurrence of any liability, other than liabilities
incurred in the Ordinary Course of Business consistent with past
practices;
(v) Any sale, lease, or disposition of, or any agreement to
sell, lease, or dispose of any of its properties (whether leased or
owned), or the assets of the Company, other than sales, leases, or
dispositions of goods, materials, or equipment in the Ordinary Course of
Business or as contemplated by this Agreement;
(vi) Any event permitting any of the assets or the properties
of the Company (whether leased or owned) to be subjected to any pledge,
encumbrance, security interest, lien, charge, or claim of any kind
whatsoever (direct or indirect) (collectively, "Liens");
(vii) Any increase in compensation or any adoption of, or
increase in, any bonus, incentive compensation, pension, profit sharing,
retirement, insurance, medical reimbursement or other employee benefit
plan, payment or arrangement to, for, or with any employee of the
Company, other than certain bonuses paid to the Company Shareholders and
disclosed in writing to the Acquisition Sub and Purchaser;
(viii) Any payment or distribution of any bonus to, or
cancellation of indebtedness owing from, or incurring of any liability
relating to any employees, consultants, directors, officers, or agents,
or any persons related thereto, other than certain bonuses paid to the
Company Shareholders;
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<PAGE> 21
(ix) Any notice (written or unwritten) from any employee of
the Company that such employee has terminated, or intends to terminate,
such employee's employment with the Company;
(x) Any adverse relationship or condition with Suppliers (as
defined in Section 2.1 (q)(i) hereof), vendors, or Customers (as defined
in Section 2.1(ee) hereof) that may have an adverse effect on the
Company, the Business, or the assets of the Company;
(xi) Any event, including, without limitation, shortage of
materials or supplies, fire, explosion, accident, requisition or taking
of property by any governmental agency, flood, drought, earthquake, or
other natural event, riot, act of God or a public enemy, or damage,
destruction, or other casualty, whether covered by insurance or not,
which has had an adverse effect on the Company, the properties (whether
leased or owned), the Business, or the assets of the Company or any such
event which could be expected to have an adverse effect on the Company,
the properties (whether leased or owned), the Business, or the assets of
the Company;
(xii) Any modification, waiver, change, amendment, release,
rescission, accord and satisfaction, or termination of, or with respect
to, any term, condition, or provision of any contract, agreement,
license, or other instrument to which the Company or a Company
Shareholder is a party and relating to or affecting the Business or the
assets of the Company other than any satisfaction by performance in
accordance with the terms thereof in the Ordinary Course of Business;
(xiii) Any discharge or satisfaction of any Lien or payment of
any liabilities, other than in the Ordinary Course of Business;
(xiv) Any waiver of any rights of substantial value by the
Company, other than waivers having no material adverse effect on the
Company;
(xv) Any issuance of equity securities of the Company or any
issuance of warrants, calls, options or other rights calling for the
issuance, sale, or delivery of the Company's equity securities;
(xvi) Any declaration of any dividend or any distribution of
any shares of its capital stock, or redemption, purchase, or other
acquisition of any shares of its capital stock or any grant of an
option, warrant, or other right to purchase or acquire any such shares;
(xvii) Any amendment, or agreement to amend, the Company's
Articles of Incorporation or Bylaws, or any merger or consolidation
with, or any agreement to merge or consolidate with, any other
corporation, partnership, limited liability company or any other entity;
(xviii) Any reduction, or agreement to reduce, the cash or
short-term investments of the Company, other than to meet cash needs
arising in the Ordinary Course of Business;
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<PAGE> 22
(xix) Any work interruptions, labor grievances or claims filed,
proposed law or regulation or any event of any character, materially
adversely affecting the Business or future prospects of the Company;
(xx) Any revaluation by the Company of any of its assets;
(xxi) Any loan by the Company to any person or entity, or any
guaranty by the Company of any loan; or
(xxii) To the best Knowledge of the Company and the Company
Shareholders, any other event or condition of any character which
materially adversely affects, or reasonably may be expected to so
affect, the assets of the Company, the Business, or the properties
(whether leased or owned) of the Company.
(j) Inventory. Schedule 2.1(j) sets forth the reasonable value of the
Company's inventory. All inventory is owned by the Company, including all goods
customarily sold and/or rented by the Company in connection with the Business
(whether located on the premises of the Company, in transit to or from such
premises, in other storage facilities, or otherwise) (collectively, the
"Inventory"), and the Company maintains appropriate records of such inventory.
The Company has continued to replenish the Inventory in a normal and customary
manner consistent with past practices. To the Knowledge of the Company and the
Company Shareholders, the Company has not received written or oral notice that
the Company will experience in the future any difficulty in obtaining, in the
desired quantity and quality and upon reasonable terms and conditions, the
vehicles, materials, supplies, or equipment required for the Business.
(k) Taxes.
(i) Definitions. For purposes of this Agreement:
(a) the term "Taxes" means (A) all federal, state,
local, foreign and other net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise,
profits, license, lease, service, service use,
withholding, payroll, employment, excise, severance,
stamp, occupation, premium, property, windfall profits,
customs, duties or other taxes, fees, assessments or
charges of any kind whatever, together with any interest
and any penalties, additions to tax or additional
amounts with respect thereto, (B) any liability for
payment of amounts described in clause (A) whether as a
result of transferee liability, of being a member of an
affiliated, consolidated, combined or unitary group for
any period, or otherwise through operation of law, and
(C) any liability for the payment of amounts described
in clauses (A) or (B) as a result of any tax sharing,
tax indemnity or tax allocation agreement or any other
express or implied agreement to indemnify any other
person; and the term "Tax" means any one of the
foregoing Taxes; and
(b) the term "Returns" means all returns, declarations,
reports, statements, claims for refund and other
documents required to be filed in respect of Taxes, and
the term "Return" means any one of the foregoing
Returns.
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<PAGE> 23
(ii) To the best of the Knowledge and belief of the Company
and the Company Shareholders, the Company has properly completed and
filed on a timely basis (including extensions) and in correct form all
Returns required to be filed on or prior to the Closing Date. As of the
time of filing, the foregoing Returns correctly reflected the facts
regarding the income, business, assets, operations, activities, status
or other matters of the Company or any other information required to be
shown thereon. In particular, to the best of the Knowledge of the
Company and the Company Shareholders, the foregoing Returns are not
subject to unpaid penalties under Section 6662 of the Internal Revenue
Code of 1986, as amended (the "Code"), relating to accuracy-related
penalties (or any corresponding provision of state, local or foreign Tax
law) or any other unpaid penalties.
(iii) To the best of the Knowledge and belief of the Company
and the Company Shareholders, with respect to all amounts in respect of
Taxes imposed upon the Company, or for which the Company is liable,
whether to taxing authorities (as, for example, under law) or to other
persons or entities (as, for example, under tax allocation agreements),
with respect to all taxable periods ending on or before the Closing Date
and portions of periods commencing before the Closing Date and ending
after the Closing Date, all applicable tax laws and agreements have been
fully complied with, and all such amounts required to be paid by the
Company to taxing authorities or others on or before the Closing Date
have been paid, and all such amounts required to be paid by the Company
to taxing authorities or others after the Closing which have not been
paid are reflected on the Financial Statements of the Company.
(iv) No notices raising tax issues have been received by the
Company from any taxing authority in connection with any of the Returns.
No extensions or waivers of statutes of limitations with respect to the
Returns have been given by or requested from the Company. Schedule
2.1(l)(iv) sets forth taxable years for which examinations have been
completed, those years for which examinations are presently being
conducted, and those years for which required Returns have not yet been
filed. Except to the extent indicated in Schedule 2.1(l)(iv), all
deficiencies asserted or assessments made as a result of any
examinations have been fully paid, or are fully reflected as a liability
in the Financial Statements of the Company, or are being contested and
an adequate reserve therefor has been established and is fully reflected
in the Financial Statements of the Company.
(v) There are no liens for Taxes (other than for current
Taxes not yet due and payable) upon the assets of the Company.
(vi) The Company is not a party to or bound by (nor will the
Company become a party to or become bound by) any tax indemnity, tax
sharing or tax allocation agreement.
(vii) The Company has never been a member of an affiliated
group of corporations within the meaning of Section 1504 of the Code.
(viii) The Company has not filed a consent pursuant to the
collapsible corporation provisions of Section 341(f) of the Code (or any
corresponding provision of state, local or foreign income Tax law) or
agreed to have Section 341(f)(2) of the Code (or any corresponding
provision of state, local or foreign income Tax law) apply to any
disposition of any asset owned by it.
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<PAGE> 24
(ix) None of the assets of the Company directly or indirectly
secures any debt the interest on which is tax exempt under Section
103(a) of the Code.
(x) None of the assets of the Company is "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(xi) The Company has not made and will not make a deemed
dividend election under Treas. Reg. ss.1.1502-32(f)(2) or a consent
dividend election under Section 565 of the Code.
(xii) The Company has not agreed to make, nor is it required to
make, any adjustment under Sections 481(a) or 263A of the Code or any
comparable provision of state or foreign tax laws by reason of a change
in accounting method or otherwise.
(xiii) None of the Company Shareholders is other than a United
States person within the meaning of the Code.
(xiv) The Company is not party to any joint venture,
partnership, or other arrangement or contract which could be treated as
a partnership for federal income tax purposes.
(xv) The Company's tax basis of each of its assets is
reflected in its Unaudited Financial Statements.
(xvi) All elections with respect to Taxes made during the
fiscal years ended December 31, 1995, December 31, 1996 and December
31, 1997 are reflected on the Returns for such periods, copies of which
have been provided to Purchaser.
(l) Employee Payments.
(i) The hours worked by and payments made to the Company's
employees have not been in violation in any respect of the Fair Labor
Standards Act or any other applicable federal, foreign, state or local
laws dealing with such matters.
(ii) All payments due from the Company on account of employee
health and welfare insurance have been paid or accrued.
(iii) All severance, sick, or vacation payments by the Company,
which are or were due under the terms of any agreement or otherwise have
been paid or are described in Schedule 2.1(l)(iii).
(m) Compliance With Law. The Company has complied and is in compliance
with all applicable zoning decisions and, to the best of the Knowledge of the
Company and the Company Shareholders, has complied and is in compliance with all
applicable federal, state, and local laws, statutes, licensing requirements,
rules, and regulations, and judicial or administrative decisions. To the best of
the Knowledge and belief of the Company and the Company Shareholders, the
Company has been granted all licenses, permits (temporary and otherwise),
authorizations, and approvals from federal, state, and local government
regulatory or zoning bodies necessary to carry on the Business and maintain the
assets of the Company, all of which are currently valid and in full force and
effect. All
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<PAGE> 25
such licenses, permits, authorizations and approvals shall be valid and in full
force and effect upon the consummation of the transactions contemplated by this
Agreement to the same extent as if the Company prior to the Closing Date were
continuing the Business and operations of the Company. To the best of the
Knowledge and belief of the Company and the Company Shareholders, there is no
order issued, or proceeding pending or threatened, or notice served with respect
to any violation of any law, ordinance, order, writ, decree, rule, or regulation
issued by any federal state, local, or foreign court or governmental agency or
instrumentality applicable to the Company. The Company has valid business
licenses to carry on its operations.
(n) No Disclosure Items. Except as otherwise indicated in Schedule
2.1(n), there is no adverse information with respect to the Company, the Company
Shareholder(s) or any officer, director or employee of the Company which
information would require disclosure in connection with a filing by the Company
under the federal securities acts. Neither the Company nor any Company
Shareholder has failed to disclose any material fact which would be required to
be disclosed for purposes of a proxy statement or other communication involved
in a public offering in accordance with the provisions of Rule 10b-5 or Rule
14a-9(a) of the U.S. Securities and Exchange Commission.
(o) Governmental Consents. To the best of the Knowledge of the Company
and the Company Shareholders, no consent, approval, order, or authorization of,
or registration, qualification, designation, declaration, or filing with, any
federal, state, local, or provincial governmental authority on the part of the
Company or the Company Shareholders is required in connection with the
consummation of the transactions contemplated hereunder.
(p) Intellectual Property.
(i) The Company and its subsidiaries own or have the right to
use pursuant to license, sublicense, agreement, or permission all
Intellectual Property necessary or desirable for the operation of the
business of the Company and its subsidiaries as presently conducted and
as presently proposed to be conducted by the Managing Shareholder. Each
item of Intellectual Property owned or used by any of the Company and
its subsidiaries immediately prior to the closing hereunder will be
owned or available for use by the Company, its subsidiaries, Surviving
Corporation or its subsidiaries on identical terms and conditions
immediately subsequent to the closing hereunder. Each of the Company and
its subsidiaries has taken all necessary and desirable action to
maintain and protect each item of Intellectual Property that it owns or
uses.
(ii) None of the Company and its subsidiaries has interfered
with, infringed upon, misappropriated, or otherwise come into conflict
with any Intellectual Property rights of third parties, and none of the
Company Shareholders and the directors and officers (and employees with
responsibility for Intellectual Property matters) of the Company and its
subsidiaries has ever received any charge, complaint, claim, demand, or
notice alleging any such interference, infringement, misappropriation,
or violation (including any claim that any of the company and its
subsidiaries must license or refrain from using any Intellectual
Property rights of any third party). To the Knowledge of any of the
Company Shareholders and the directors and officers (and employees with
responsibility for Intellectual Property matters) of the Company and its
subsidiaries, no third party has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual
Property rights of any of the Company and its subsidiaries.
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<PAGE> 26
(iii) Schedule 2.1(p)(iii) identifies each patent or
registration which has been issued to any of the Company and its
subsidiaries with respect to any of its Intellectual Property,
identifies each pending patent application or application for
registration which any of the Company and its subsidiaries has made with
respect to any of its Intellectual Property, and identifies each
license, agreement, or other permission which any of the Company and its
subsidiaries has granted to any third party with respect to any of its
Intellectual Property (together with any exceptions). The Company has
delivered to the Acquisition Sub correct and complete copies of all such
patents, registrations, applications, licenses, agreements, and
permission (as amended to date) and has made available to the
Acquisition Sub correct and complete copies of all other written
documentation evidencing ownership and prosecution (if applicable) of
each such item. Schedule 2.1(p)(iii) also identifies each trade name or
unregistered trademark used by any of the Company and its subsidiaries
in connection with any of its businesses. With respect to each item of
Intellectual Property required to be identified in Schedule 2.1(p)(iii):
(a) the Company and its subsidiaries possess all right,
title, and interest in and to the item, free and clear
of any security interest, license, or other restriction;
(b) the item is not subject to any outstanding
injunction, judgment, order, decree, ruling, or charge;
(c) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to
the Knowledge of any of the Company Shareholders and the
directors and officers (and employees with
responsibility for Intellectual Property matters) of the
Company and its subsidiaries, is threatened which
challenges the legality, validity, enforceability, use,
or ownership of the item; and
(d) none of the Company and its subsidiaries has ever
agreed to indemnify any Person for or against any
interference, infringement, misappropriation, or other
conflict with respect to the item.
(iv) Schedule 2.1(p)(iv) identifies each item of Intellectual
Property that any third party owns and that any of the Company and its
subsidiaries uses pursuant to license, sublicense, agreement, or
permission. The Company has delivered to Purchaser and Acquisition Sub
correct and complete copies of all such licenses, sublicenses,
agreements, and permission (as amended to date). With respect to each
item of Intellectual Property required to be identified in Schedule
2.1(p)(iv):
(a) the license, sublicense, agreement, or permission
covering the item is legal valid, binding, enforceable,
and in full force and effect.
(b) the license, sublicense, agreement, or permission
will continue to be legal, valid, binding, enforceable,
and in full force and effect on identical terms
following the consummation of the transactions
contemplated hereby (including the assignments and
assumptions referred to above);
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<PAGE> 27
(c) no party to the license, sublicense, agreement, or
permission is in breach or default, and no event has
occurred which with notice or lapse of time would
constitute a breach of default or permit termination,
modification, or acceleration thereunder;
(d) no party to the license, sublicense, agreement, or
permission has repudiated any provision thereof;
(e) with respect to each sublicense, the representations
and warranties set forth in subsections (A) through (D)
above are true and correct with respect to the
underlying license;
(f) the underlying item of Intellectual Property is not
subject to any outstanding injunction, judgment, order,
decree, ruling, or charge;
(g) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to
the Knowledge of any of the Company Shareholders and the
directors and officers (and employees with
responsibility for Intellectual Property matters) of the
Company and its subsidiaries, is threatened which
challenges the legality, validity, or enforceability of
the underlying item of Intellectual Property; and
(h) none of the Company and its subsidiaries has granted
any sublicense or similar right with respect to the
license, sublicense, agreement, or permission.
(v) None of the Company Shareholders and the directors and
officers (and employees with responsibility for Intellectual Property
matters) of the company and its subsidiaries has any Knowledge of any
new products, inventions, procedures, or methods of manufacturing or
processing that any competitors or other third parties have developed
which reasonably could be expected to supersede or make obsolete any
product or process of any of the Company and its subsidiaries.
(q) Restrictive Documents or Orders. To the best of the Knowledge of the
Company and the Company Shareholders, the Company is not a party to nor bound
under any agreement, contract, order, judgment, or decree, or any similar
restriction which adversely affects, or reasonably could be expected to
adversely affect (i) the continued operation by Surviving Corporation of the
Business and operations of the Company on and after the Closing Date on
substantially the same basis as said business was theretofore operated or (ii)
the consummation of the transactions contemplated by this Agreement.
(r) Contracts and Commitments.
(i) Schedule 2.1(r)(i) hereto sets forth a list of all material
written agreements and contracts, contract rights, licenses, and other
executory commitments (written or unwritten if known or if the Company
or the Company Shareholders reasonably should have known) other than
purchase and sale orders and quotations (collectively, the "Contracts")
including, without limitation, those contracts with insurance companies,
credit companies, governmental agencies, rental agencies, and all others
under which the Company is supplied with materials, supplies, or
equipment ("Materials") (such suppliers shall be referred to herein as
"Suppliers") to which the
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<PAGE> 28
Company is a party or to which any of the assets of the Company are
subject. To the best of the Knowledge and belief of the Company and the
Company Shareholders, there are no oral agreements or commitments that
would have a material adverse effect on the Company.
(ii) The Company Shareholders and the Company have performed
all of their obligations under the terms of each Contract, and are not
in default thereunder, except as described in Schedule 2.1(r)(ii). No
event or omission has occurred which but for the giving of notice or
lapse of time or both would constitute a default by any party thereto
under any such Contract. Each such Contract is valid and binding on all
parties thereto and in full force and effect, and each Contract will
continue to be valid and binding on identical terms following the
consummation of the transaction contemplated hereby. The Company has
received no written or unwritten notice of default, cancellation, or
termination in connection with any such Contract. The Company is not now
and has never been a party to any governmental contracts subject to
price redetermination or renegotiation.
(iii) There has not been any notice (written or unwritten) from
any Supplier that any such Supplier will not continue to supply the
current level and type of Materials currently being provided by such
Supplier upon the same terms and conditions.
(s) Debt. Schedule 2.1(s) sets forth a list of all agreements for the
incurring of indebtedness for borrowed money and all agreements relating to
industrial development bonds to which the Company is a party or guarantor. None
of the obligations pursuant to such agreements are subject to acceleration by
reason of the consummation of the transactions contemplated hereby, nor would
the execution of this Agreement or the consummation of the transactions
contemplated hereby result in any default under such agreements. The Company has
furnished Purchaser and Acquisition Sub with true and correct copies of each
such agreement listed in Schedule 2.1(s). The Company is not in default under
any of the agreements listed thereon, nor is the Company aware of any event
that, with the passage of time, or notice, or both, would result in an event of
default thereunder.
(t) Related Property. Schedule 2.1(t)(i) hereto lists all of the
Company's ownership interests (except for leasehold interests set forth in
Schedule 2.1(gg)) in real property, machinery, equipment, tooling, furniture,
fixtures, motor vehicles, supplies, spare parts, computer equipment, printers,
copiers, software, telecommunications equipment, miscellaneous supplies, tools,
repair and maintenance parts, chemicals, and fixed assets related to the
Business and operations of the Company (the "Related Property"). To the best
Knowledge of the Company and the Company Shareholders, all of the Related
Property is in good operating condition, normal wear and tear excepted, and is
adequate and suitable for the purposes for which it is presently being used.
Schedule 2.1(t)(ii) hereto lists certain property that belongs solely to and
shall be retained by the Company Shareholders.
(u) Assets. The assets of the Company include all the assets necessary
to operate the Business in the same manner as the Business was operated by the
Company immediately prior to the Closing Date, and none of the Company
Shareholders, nor any family member or entity affiliated with the Company
Shareholders or any such family member, owns, or has any interest in, any asset
used in the operation of the Company.
(v) Title to the Property. The Company has good and marketable title to
the assets of the Company (including, but not limited to the Related Property)
and a valid and subsisting leasehold interest in all leased property. Except as
described in Schedule 2.1(v), the Company owns all of its assets and property
free and clear of any lien.
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<PAGE> 29
(w) Litigation. Except as described in Schedule 2.1(w), none of the
Company, the Company Shareholders nor any of the Company's officers or directors
is engaged in, or has received any threat of, any litigation, arbitration,
investigation, or other proceeding relating to the Company, any of the Company
Shareholders, or the Company's officers, directors, employees, benefit plans,
properties, Proprietary Rights, the Business, or the assets, licenses, permits,
or goodwill of the Company; or against or affecting this Agreement, the Related
Agreements or the actions taken or contemplated in connection herewith and
therewith, nor, to the best of each's Knowledge, is there any reasonable basis
therefor. There is no action, suit, proceeding, or (to the best Knowledge of the
Company and the Company Shareholders) investigation pending or threatened
against the Company, or any of the Company Shareholders, or the officers or
directors of the Company, that questions the validity of this Agreement, the
Related Agreements, or the right of the Company or the Company Shareholders to
enter into this Agreement, the Related Agreements, any documents to be delivered
in connection with the Closing, or to consummate the transactions contemplated
hereby or thereby, or which might result in any adverse change in the assets of
the Company, the Business, conditions, or properties of the Company, or the
financial condition of the Company or the Company Shareholders. There is no
action, suit, proceeding, or investigation by the Company or the Company
Shareholders currently pending or which any of them currently intends to
initiate. None of the Company, the Company Shareholders, nor any of the
Company's officers or directors is bound by any judgment, decree, injunction,
ruling or order of any court, governmental, regulatory or administrative
department, commission, agency or instrumentality, arbitrator or any other
person which would or could have a material adverse effect on the Business or
the assets of the Company.
(x) No Conflict or Default. To the best of the Knowledge and belief of
the Company and the Company Shareholders, neither the execution and delivery of
this Agreement or the Related Agreements, nor compliance with the terms and
provisions hereof and thereof including, without limitation, the consummation of
the transactions contemplated hereby and thereby, will violate any statute,
regulation, or ordinance of any governmental or administrative authority, or
conflict with or result in the breach of any term, condition, or provision of
the Company's Articles of Incorporation or Bylaws, as presently in effect, or of
any agreement, deed, contract, mortgage, indenture, writ, order, decree, legal
obligation, or instrument to which the Company or the Company Shareholders is a
party or by which it or he or any of the assets of the Company are or may be
bound, or constitute a default (or an event which, with the lapse of time or the
giving of notice, or both, would constitute a default) thereunder.
(y) Consents. To the best of the Knowledge and belief of the Company and
the Company Shareholders, no consent, approval, or authorization of any person,
agency or third party or on the part of the Company or the Company Shareholders
is required in connection with the consummation of the transactions contemplated
hereunder.
(z) Labor Relations.
(i) To the best of the Knowledge and belief of the Company and
the Company Shareholders, with respect to the Business and operation of
the Company, the Company has not failed to comply in any respect with
Title VII of the Civil Rights Act of 1964, as amended, the Fair Labor
Standards Act, as amended, the Occupational Safety and Health Act of
1970, as amended, all applicable federal, state, and local laws, rules,
and regulations relating to employment, and all applicable laws, rules
and regulations governing payment of minimum
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<PAGE> 30
wages and overtime rates, and the withholding and payment of taxes from
compensation of employees.
(ii) There are no labor controversies pending or, to the
Knowledge of the Company or the Company Shareholders, threatened between
the Company and any of its employees (the "Employees") or any labor
union or other collective bargaining unit representing any of the
Employees.
(iii) The Company has never entered into a collective bargaining
agreement or other labor union contract relating to the Business and
applicable to the Employees.
(iv) Except as set forth in Schedule 2.1(z), there are no
written employment or separation agreements, or oral employment or
separation agreements other than (1) those establishing an "at will"
employment relationship between the Company and any of the Employees and
which do not provide for any advance notice requirements to terminate an
Employee's employment or any severance or salary or benefits
continuation obligations on the part of the Company and (2) any unknown
future claims for wrongful termination based upon a theory of implied
agreements arising out of course of conduct.
(aa) Brokers' and Finders' Fees/Contractual Limitations. Neither the
Company Shareholders nor the Company is obligated to pay any other fees or
expenses of any broker or finder in connection with the origin, negotiation, or
execution of this Agreement, the Related Agreements, or in connection with any
transactions contemplated hereby and thereby. None of the Company Shareholders,
the Company, or any officer, director, employee, agent, or representative of the
Company (collectively, the "Representatives") is or has been subject to any
agreement, letter of intent, or understanding of any kind which prohibits,
limits, or restricts the Company, the Company Shareholders or the
Representatives from negotiating, entering into, and consummating this
Agreement, the Related Agreements, and the transactions contemplated hereby and
thereby.
(bb) Environmental and Safety Matters.
(i) To the best of the Knowledge and belief of the Company and
the Company Shareholders, the Company has all permits, licenses,
approvals and registrations required to be issued under applicable
Environmental Laws including federal, state and local laws, statutes and
regulations relating to the protection of human health, safety, the
environment and natural resources and, to the best of the Knowledge of
the Company and the Company Shareholders, is in compliance with the
terms and conditions thereunder. To the best of the Knowledge and belief
of the Company and the Company Shareholders, the Company is in
compliance with and there are no past or present conditions, activities,
actions, or plans which may prevent compliance with, any current or past
law related to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling, or the release,
emission, or discharge of any hazardous substance or hazardous waste
("Hazardous Substance Issues") or any regulations, plans, judgments,
injunctions, or notices promulgated or approved thereunder: (1) which
are applicable to the operations of the Company, or the Company
Shareholders, or the property owned or leased by the Company or the
Company Shareholders, or the assets of the Company, or the Business or
operations of the Company, or (2) which may give rise to any liability
of the Company, or the Company Shareholders or otherwise form the basis
of any ongoing or threatened claims, actions, demands, suits,
proceedings, hearings, studies, or investigations against or relating to
the Company, the property owned or leased by the
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<PAGE> 31
Company or the Company Shareholders, or the Business, or the assets of
the Company, that are based on or related to any Hazardous Substance
Issues.
(ii) To the best of the Knowledge of the Company and the
Company Shareholders, no release of a hazardous substance has come to be
located on or beneath and remain located on or beneath any of the real
property upon which the Business is conducted or upon which any of the
property owned or leased currently or in the past by the Company or the
Company Shareholders or any predecessor which relates to the Business or
operations of the Company are held or maintained.
(iii) Schedule 2.1(bb) sets forth all reports, studies, and
evaluations conducted by the Company or the Company Shareholders, or
received by the Company or the Company Shareholders with respect to such
matters.
(iv) Neither the Company nor any of the Company Shareholders
has any Knowledge of the possible or actual presence, disposal, release
or threatened release of any hazardous substance or hazardous waste on
or under any adjacent properties.
(v) To the best of the Knowledge of the Company and the
Company Shareholders, the Company has not been alleged to be in
violation of, or been subject to any administrative, judicial, or
regulatory proceeding pursuant to, any applicable Environmental Laws
either now or any time during the past. No Claims (as hereinafter
defined) have been or are currently asserted against the Company based
on the Company's or any of the Company Shareholders' acts or failures to
act prior to the Closing Date with respect to hazardous substances or
hazardous wastes. As used herein, "Claim" shall mean any and all claims,
demands, orders, causes of action, suits, proceedings, administrative
proceedings, losses, judgments, decrees, debts, damages, liabilities,
court costs, attorneys' fees, and any other expenses incurred, assessed
or sustained by or against the Company or the Company Shareholders.
(vi) To the best of the Knowledge of the Company and the
Company Shareholders, none of the properties owned, leased, or operated
by the Company or any predecessor thereof are now, or were in the past,
listed on the National Priorities List of Superfund Sites, the
Comprehensive Environmental Response, Compensation and Liability
Information System, or any other state or local environmental database.
(cc) Certain Payments. To the best of the Company's and Company
Shareholders' Knowledge, the Company has not, and no person directly or
indirectly on behalf of the Company has, made or received any payment that was
not legal to make or receive.
(dd) Customers. To the best of the Knowledge and belief of the Company
and the Company Shareholders, Schedule 2.1(dd) hereto lists all of the customers
of the Company for the year 1997 to date (such customers referred to herein
individually as a "Customer"). No single Customer of the Company accounted for
more than ten percent (10%) of the net sales or rentals of the Company
(calculated on a unit basis) during 1997 except as set forth in Schedule
2.1(dd). The Company has furnished Purchaser and Acquisition Sub with complete
and accurate copies or descriptions of all current agreements (written or
unwritten) with such Customers. Neither the Company nor any of the Company
Shareholders is aware of any event, happening, or fact which would lead it or
him to believe that any of such Customers will not continue its current level of
purchases and/or rentals after the Closing Date.
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<PAGE> 32
(ee) Books and Records. The books and records of the Company to which
Purchaser and Acquisition Sub and their accountants and attorneys have been
given access are the true books and records of the Company and truly and fairly
reflect the underlying facts and transactions in all respects.
(ff) Complete Disclosure. To the best of the Knowledge and belief of the
Company and the Company Shareholders, no representation or warranty by the
Company or the Company Shareholders in this Agreement, and no exhibit, schedule,
statement, certificate, or other writing furnished to Purchaser and Acquisition
Sub pursuant to this Agreement or the Related Agreements or in connection with
the transactions contemplated hereby and thereby, contains or will contain any
untrue statement or omits or will omit to state any fact necessary to make the
statements contained herein and therein not materially misleading. If the
Company or any of the Company Shareholders becomes aware of any fact or
circumstance which would change a representation or warranty of the Company or
the Shareholders, the Company and the Shareholders shall immediately give notice
of such fact or circumstance to Purchaser and Acquisition Sub. However, such
notification shall not relieve either the Company or the Shareholders of their
respective obligations under this Agreement.
(gg) Leased Properties. The Financial Statements and Schedule 2.1(gg)
hereto together list all personal property (including equipment leases) and real
property leased by the Company or by the Company Shareholders in connection with
the Business (the "Leased Properties") and the aggregate annual rent or other
fees payable under all such leases. The Company has a valid leasehold or
ownership interest in all of the Leased Properties, free and clear of any liens.
The negotiation and consummation of this Agreement and the transactions
contemplated hereby will not result in any penalties, the acceleration of
payments or the termination of any lease of Leased Properties.
(hh) Employees and Employee Benefit Plans.
(i) Other than as set forth in Schedule 2.1(hh) hereto, the
Company is not a party to any pension, profit sharing, savings,
retirement or other deferred compensation plan, or any bonus (whether
payable in cash or stock) or incentive program, or any group health plan
(whether insured or self-funded), or any disability or group life
insurance plan or other employee welfare benefit plan, or to any
collective bargaining agreement or other agreement, written or oral,
with any trade or labor union, employees' association or similar
organization. The Company is not a party to, nor has made any
contribution to or otherwise incurred any obligation under, any
"multi-employer plan" as defined in Section 3(37) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
(ii) With respect to each such plan set forth in Schedule
2.1(hh) (a "Plan"), the Company has furnished to Purchaser, Acquisition
Sub or their counsel complete and accurate copies of the Plan documents
(including trust documents, insurance policies or contracts, employee
booklets, summary plan descriptions and other authorizing documents, and
any material employee communications). With respect to each Plan subject
to ERISA as either an employee pension benefit plan within the meaning
of Section 3(2) of ERISA or an employee welfare benefit plan within the
meaning of Section 3(1) of ERISA, the Company has prepared in good faith
and timely filed all requisite governmental reports and, to the best of
Company's and Company Shareholders' Knowledge, has properly and timely
posted, or distributed all notices and reports to employees required to
be filed, posted, or distributed with respect to each Plan. Each Plan
has at all times been properly and completely funded by the Company and
has
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<PAGE> 33
been operated and administered in all respects in accordance with its
terms and all applicable laws, including, but not limited to, ERISA and
the Code.
(iii) All Plans that are intended to qualify (the "Qualified
Plans") under Section 401(a) of the Code have been determined by the
Internal Revenue Service to be so qualified, and copies of such
determination letters are included as part of Schedule 2.1(hh) hereof.
Except as disclosed on Schedule 2.1(hh), all reports and other documents
required to be filed with any governmental agency or distributed to plan
participants or beneficiaries have been timely filed and distributed,
and copies thereof are included as part of Schedule 2.1(hh) hereof. The
Company further represents that:
(a) there have been no terminations, partial
terminations, or discontinuance of contributions to any
such Qualified Plan intended to qualify under Section
401(a) of the Code without notice to and approval by the
Internal Revenue Service;
(b) no such plan listed in Schedule 2.1(hh) subject to
the provisions of Title IV of ERISA has been terminated;
(c) there have been no "reportable events" (as that
phrase is defined in Section 4043 of ERISA) with respect
to any such plan listed in Schedule 2.1(hh); and
(d) The Company has not incurred any liability under
Section 4062 of ERISA.
(iv) Neither the Company nor any of the Company Shareholders has
made any oral or written communications to its current or former
employees that guarantee current or former employees continuation of
employer-provided benefits or retirement coverage under the Company's
welfare benefit plans or which would have any effect on the Surviving
Corporation's ability to terminate retiree or any other benefits to all
current or former employees.
(v) To the best of the Knowledge of the Company and the Company
Shareholders, the Company has not violated any of the health care
continuation coverage requirements of the Consolidated Omnibus Budget
Reconciliation Act of 1985 applicable to its Employees prior to the
Closing Date or any prior actions of or transactions entered into by the
Company or the Company Shareholders.
(ii) Compensation. The Company has delivered to Purchaser and
Acquisition Sub an accurate schedule, attached to this Agreement as Schedule 2.1
(ii), showing all officers, directors, and key employees of the Company and the
rate of compensation (and the portions thereof attributable to salary, bonus,
and other compensation, respectively) of the directors, officers, and key
employees.
(jj) Insurance. The Company maintains policies of insurance covering the
assets of the Company, properties, and Business in types and amounts as set
forth in Schedule 2.1(jj). To the best of the Knowledge and belief of the
Company and the Company Shareholders, the Company is in compliance with each of
such policies such that none of the coverage provided under such policies has
been invalidated and the Company has not received any written notice of
cancellation of any such
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policies. Schedule 2.1(jj) lists and describes all the Company insurance
policies in effect immediately prior to the time of Closing. To the Knowledge of
the Company and the Company Shareholders, such policies are with reputable
insurers and are in amounts sufficient for the prudent protection of the
properties and the Business of the Company.
(kk) Accounts and Notes Receivable. Schedule 2.1(kk) hereto sets forth
all accounts and notes receivable of the Company ("Accounts Receivable").
Schedule 2.1(kk) shows the aging of Accounts Receivable in amounts due in
thirty-day aging categories. All Accounts Receivable represent sales or rentals
actually made or services actually performed in the ordinary and usual course of
the Company's business.
(ll) Representations and Warranties on the Closing Date. The Company's
and the Company Shareholders' representations and warranties contained in this
Article II shall be true on and as of the Closing Date with the same force and
effect as though such representations and warranties had been made on such date,
except to the extent any such representations and warranties were made as of a
specified date, in which case such representations and warranties shall continue
on the Closing Date to have been true in all material respects as of such
specified date.
Section 2.2 Representations and Warranties of Acquisition Sub and
Purchaser. Acquisition Sub and Purchaser hereby represent and warrant to the
Company and the Company Shareholders that immediately prior to the time of
Closing:
(a) Organization and Standing. Acquisition Sub is a corporation duly
organized and validly existing under the laws of the State of Georgia, and has
all requisite power and authority to lease, own, and operate its properties and
carry on its business and operations and to directly own, lease, and operate its
assets. Acquisition Sub has delivered to the Company complete and accurate
copies of its Certificate of Incorporation and Bylaws and all amendments
thereto, and all minutes and actions of its Boards of Directors and
shareholders. Acquisition Sub is not in violation of any of the provisions of
its Certificates of Incorporation or Bylaws.
(b) Capitalization and Ownership. The authorized and outstanding capital
stock of Purchaser and its par value per share are as set forth on Purchaser's
Registration Statement on Form S-1, as updated and amended by reports filed with
the SEC pursuant to the requirements of the Securities Act of 1933 and the
Securities Exchange Act of 1934. The shares of Purchaser Common Stock set forth
in such Registration Statement and subsequent reports and filings made with the
SEC constitute all of the shares of capital stock of the Purchaser issued and
outstanding and have been duly authorized and validly issued, fully paid and
nonassessable, and to the best of the Knowledge and belief of Purchaser, issued
in compliance with all applicable federal and state securities laws. Except as
provided in such Registration Statement and subsequent reports and filings made
with the SEC, there are no outstanding subscriptions, warrants, calls, options,
conversion rights, rights of exchange or other commitments, plans, agreements,
or arrangements of any nature under which the Purchaser may be obligated to
issue, assign, exchange, purchase, redeem or transfer any shares of its capital
stock, and there are no shareholders' agreements to which the Purchaser or its
shareholders is a party, or proxies, voting trust agreements or similar
agreements or options executed by Purchaser or to which the Purchaser Common
Stock is subject. Except as provided in such Registration Statement and
subsequent reports and filings made with the SEC, there are no outstanding
subscriptions, options, warrants, rights, convertible securities or other
agreements or commitments of any character relating to the issued or unissued
capital stock or other securities of the Purchaser obligating Purchaser or, to
the best Knowledge of Purchaser, its shareholders to grant, extend or enter into
any subscription, option,
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warrant, right, convertible security or other similar agreement or commitment.
Upon issuance of shares of Purchaser Common Stock, as set forth herein, the
Company Shareholders shall acquire good and marketable title to the shares of
Purchaser Common Stock, free and clear of any liens, pledges, encumbrances,
security interests, charges, equities or restrictions of any nature imposed by
Purchaser, except as set forth in this Agreement. All of the issued and
outstanding capital stock of Acquisition Sub is owned by Purchaser. All of the
issued and outstanding capital stock of Acquisition Sub has been duly authorized
and validly issued, is fully paid and nonassessable, was offered, issued, sold
and delivered by Acquisition Sub in compliance with all applicable state and
federal laws concerning the issuance of securities, and was not issued in
violation of the preemptive rights of any past or present shareholder. No
capital stock of Acquisition Sub will be conveyed to the Company Shareholders in
the Merger. Within a reasonable time prior to Closing, Purchaser will provide to
Company Shareholders copies of its Registration Statement on Form S-1 and copies
of all subsequent Forms 10-K and 10-Q, to the extent that such copies are
reasonably available to Purchaser.
(c) Authorization. Acquisition Sub and Purchaser have full corporate
power and authority to enter into this Agreement, the Related Agreements, to
perform their obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby, including, without limitation, the
execution and delivery of this Agreement and the Related Agreements. Acquisition
Sub and Purchaser have taken all necessary and appropriate corporate action with
respect to the execution and delivery of this Agreement and the Related
Agreements. This Agreement and the Related Agreements constitute valid and
binding obligations of Acquisition Sub, enforceable in accordance with their
respective terms; except as limited by applicable bankruptcy, insolvency,
moratorium, reorganization, or other laws affecting creditors' rights and
remedies generally, and other laws and remedies.
(d) Brokers' and Finders' Fees/Contractual Limitations. Neither
Purchaser nor Acquisition Sub is obligated to pay any fees or expenses of any
broker or finder in connection with the origin, negotiation, or execution of
this Agreement, the Related Agreements, or in connection with any transactions
contemplated hereby. Neither Purchaser, Acquisition Sub nor any officer,
director, employee, agent, or representative of Purchaser or Acquisition Sub
(collectively, the "Acquisition Sub Representatives") is or has been subject to
any agreement, letter of intent, or understanding of any kind which prohibits,
limits, or restricts Purchaser, Acquisition Sub or the Acquisition Sub
Representatives from negotiating, entering into, and consummating this
Agreement, the Related Agreements, and the transactions contemplated hereby and
thereby.
(e) Governmental Consents. To the best of the Knowledge of Purchaser and
Acquisition Sub, no consent, approval, order, or authorization of, or
registration, qualification, designation, declaration, or filing with, any
federal, state, local, or provincial governmental authority on the part of
Acquisition Sub or Purchaser is required in connection with the consummation of
the transactions contemplated hereunder.
(f) Complete Disclosure. To the best of the Knowledge and belief of
Purchaser and Acquisition Sub, no representation or warranty by Purchaser or
Acquisition Sub in this Agreement, and no exhibit, schedule, statement,
certificate, or other writing furnished to Company and Company Shareholders
pursuant to this Agreement or the Related Agreements or in connection with the
transactions contemplated hereby and thereby, contains or will contain any
untrue statement or omits or will omit to state any fact necessary to make the
statements contained herein and therein not materially misleading. If Purchaser
or Acquisition Sub becomes aware of any fact or circumstance which would change
a representation or warranty of Purchaser or Acquisition Sub, Purchaser and
Acquisition Sub
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shall immediately give notice of such fact or circumstance to Company and
Company Shareholders. However, such notification shall not relieve either
Purchaser or Acquisition Sub of their respective obligations under this
Agreement.
Section 2.3 Disclosure. Disclosure of any item on any schedule hereto
shall be deemed adequate disclosure of such item on all other schedules,
provided a specific cross-reference is set forth in each such other schedule.
Section 2.4 Investment Representation of Company Shareholders. Each
Company Shareholder (i) understands that the shares of Purchaser Common Stock
have not been, and will not be, registered under the Securities Act of 1933, or
under any state securities laws, and are being offered and sold in reliance upon
federal and state exemptions for transactions not involving any public offering,
(ii) is acquiring the shares of Purchaser Common Stock solely for his or its own
account for investment purposes, and not with a view of the distribution
thereof, (iii) is a sophisticated investor with knowledge and experience in
business and financial matters, (iv) has received certain information concerning
Purchaser and has had the opportunity to obtain additional information as
desired in order to evaluate the merits and the risks inherent in holding the
Purchaser Common Stock, (v) is able to bear the economic risk and lack of
liquidity inherent in holding the Purchaser Common Stock, and (vi) is an
Accredited Investor for the reasons set forth in the annexed subscription
documents and investment letter.
ARTICLE III
COVENANTS
Section 3.1 Covenants Against Disclosure.
(a) The terms and provisions of this Agreement, and any information
heretofore disclosed or to be disclosed in the future in connection herewith by
any party hereto to any other party, other than information which is in the
public domain or which the disclosing party authorizes the receiving party in
writing to disclose (such terms, provisions and information herein called the
"Confidential Material") shall be treated confidentially by the parties;
provided that any party may disclose Confidential Material of another party to
the receiving party's employees, accountants, attorneys and advisors, including
personal financial planners and advisors, who need to know the same (it being
understood that they shall be informed by the receiving party of the
confidential nature of the Confidential Material, and that the receiving party
shall cause them to treat the same confidentially), and otherwise to the extent
required by law; and provided further that any party may disclose the terms and
provisions of this Agreement after the later of six months after the Closing
Date or December 31, 1998.
(b) Furthermore, the parties may disclose the terms of this Agreement to
the managing shareholder and company shareholders of Martec, Inc., a California
corporation, and to the managing shareholder and company shareholders of New
England Computer Graphics, Inc., a Massachusetts corporation, and their
attorneys and accountants for the purpose of arriving at an agreement acceptable
to all parties. The parties acknowledge that remedies at law would be inadequate
to enforce the covenants contained in this Section 3.1 and therefore agree that
a party aggrieved hereunder may enforce such covenants through the remedy of
specific performance or other equitable relief. Should an aggrieved party have
cause to seek such relief, no bond shall be required, and the breaching party
shall pay all attorney's fees and court costs which the aggrieved party may
incur in enforcing the provisions of this Section.
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(c) The parties shall, by mutual agreement, draft a press release for
public dissemination. No party shall disseminate (except to the parties to this
Agreement) any press release or announcement concerning the transactions
contemplated by this Agreement or the Related Agreements or the parties hereto
or thereto without the prior written consent of the Company, Purchaser and
Acquisition Sub, except as required by law.
Section 3.2 Access to Information. Through April 1, 1998 (or such later
Closing Date as may be established), the Company will give Purchaser,
Acquisition Sub and their accountants, legal counsel, and other representatives
reasonable access, during normal business hours, at times mutually agreeable
among the parties, to all of the properties, books, contracts, commitments, and
records relating to the Business and the Company and to all officers and
managers of the Company, and the Company will furnish to Purchaser and
Acquisition Sub, their accountants, legal counsel and other representatives, at
the Company's expense (which expense shall not include the costs and fees of
Acquisition Sub's or Purchaser's accountants, legal counsel, and other
representatives), all such information that Company and the Company Shareholders
are reasonably able to produce concerning the Business or the Company as
Acquisition Sub and Purchaser may request. Acquisition Sub and Purchaser agree
to indemnify and hold the Company harmless from and against loss or damage the
Company may incur as a result of Purchaser's or Acquisition Sub's activities or
the activities of their agents, representatives or designees upon property owned
or occupied by the Company and against any and all claims for death or injury to
persons or properties arising out of or connected with Purchaser's or
Acquisition Sub's (or their agents', representatives' or designees') going upon
such property pursuant to the provisions of this Agreement. Such indemnification
shall be provided in accordance with the provisions of Article V hereof.
Section 3.3 Interim Period.
(a) During the period commencing on the date of this Agreement and
ending with the earlier to occur of the Closing Date or the termination of this
Agreement in accordance with its terms, the Company agrees that it will, except
as set forth on Schedule 3.3(a):
(i) carry on its respective businesses in substantially the
same manner as it has heretofore and not introduce any material new
method of management, operation or accounting;
(ii) maintain its respective properties and facilities,
including those held under leases, in as good working order and
condition as at present, ordinary wear and tear excepted;
(iii) perform all of its respective obligations under agreements
relating to or affecting its respective assets, properties, or rights;
(iv) keep in full force and effect present insurance policies
or other comparable insurance coverage;
(v) use its best efforts to maintain and preserve its business
organization intact, retain its respective present key employees, and
maintain its respective relationships with suppliers, customers, and
others having business relations with it;
(vi) maintain compliance with all permits laws, rules and
regulations, consent orders, and all other orders of applicable courts,
regulatory agencies, and similar governmental authorities;
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(vii) maintain present debt and lease instruments and not enter
into new or amended debt or lease instruments; and
(viii) maintain present salaries and commission levels for all
officers, directors, employees and agents.
(b) During the period commencing on the date of this Agreement and
ending with the earlier to occur of the Closing Date or the termination of this
Agreement in accordance with its terms, the Company agrees that it will not,
except as set forth on Schedule 3.3(b):
(i) make any change in its Certificate or Articles of
Incorporation or Bylaws;
(ii) issue any securities, options, warrants, calls,
conversion rights or commitments relating to its securities of any kind;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or purchase,
redeem or otherwise acquire or retire for value any shares of its stock
or declare any dividends or make any distributions (other than S
Corporation distributions), nor pay out any extraordinary bonuses in
excess of pro rata bonuses customarily paid, or fees, or commissions to
the Shareholders, directors, management or other personnel;
(iv) sell, assign, lease, or otherwise transfer or dispose of
any property or equipment except in the normal course of business;
(v) negotiate for the acquisition of any business or the
start-up of any new business;
(vi) merge or consolidate or agree to merge or consolidate
with or into any other corporation;
(vii) waive any material rights or claims;
(viii) commit a material breach of or amend or terminate any
material agreement or Permit;
(ix) enter into any other transaction outside the ordinary
course of its business consistent with past business practice or
prohibited hereunder; or
(x) change its accounts receivable collection practice or factor
its accounts receivable in any way.
Section 3.4 Completion of Schedules. The parties acknowledge that all of
the Schedules hereto may not be completed as of the date of execution of this
Agreement. All missing or incomplete schedules shall be compiled and agreed upon
within 15 days after execution of this Agreement.
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Section 3.5 On and After Closing.
(a) On and after the Closing Date, none of the shares of stock of
Purchaser which are subject to the escrow provisions of this Agreement shall be
transferred or pledged except pursuant to the provisions of this Agreement. The
voting rights with respect to such shares shall be exercisable by the owners of
such shares. Dividends, if any, declared on the Purchaser Common Stock during
the effectiveness of such escrow provisions shall be paid to and reinvested by
the escrow agent as the parties shall agree.
(b) After the Closing Date, the Managing Shareholder and Surviving
Corporation agree that they will not without the consent of Purchaser, which
consent shall not be unreasonably withheld:
(i) enter into any contract or commitment or incur, or agree to
incur, any liability or make any capital expenditures, except in the
normal course of business consistent with past practice involving
amounts less than $5,000;
(ii) create, assume, or permit to exist mortgage, pledge, or
other lien or encumbrance upon any assets or properties whether now
owned or hereafter acquired, except (1) with respect to purchase money
liens incurred in connection with the acquisition of equipment with an
aggregate cost not in excess of $10,000 necessary or desirable for the
conduct of the businesses of the Company, (2) liens for taxes either not
yet due or being contested in good faith and by appropriate proceedings
(and for which contested taxes adequate reserves have been established
and are being maintained) or materialmen's, mechanics', workers',
repairmen's, employees', or other like liens arising in the ordinary
course of business (the liens set forth in clause (2) being referred to
herein as "Statutory Liens"), or (3) liens set forth on Schedule 2.1(v)
hereto;
Section 3.6 Continuity of Business Enterprise. Surviving Company will
continue a historic business of the Company, or use or cause to be used, a
significant portion of the Company's business, in a manner which satisfies the
continuity of business enterprise requirement at Treas. Reg. (0) 1.365-1(d).
Section 3.7 Non-Solicitation.
(a) Except as set forth on Exhibit 3.7(a) hereto, commencing as of the
Closing Date and continuing for three (3) years thereafter, each of the Company
Shareholders agrees that it/he shall not engage (except in its/his respective
capacity as an employee of Surviving Corporation, Purchaser, or a subsidiary of
either Surviving Corporation or Purchaser, if applicable), directly or
indirectly, whether on its/his own account or as a shareholder (other than as a
less than 1 % shareholder of a publicly-held company), partner, joint venturer,
employee, consultant, advisor, and/or agent, of any person, firm, corporation,
or other entity, in any or all of the following activities:
(i) Solicit or attempt to solicit customers, suppliers, or
business patronage of the Company, Surviving Corporation, the Business
of either Surviving Corporation or Purchaser, or any of their affiliates
for the purpose of inducing him, her or it to purchase or receive
products or services competitive with those offered by Surviving
Corporation or Purchaser (provided, however, that this restriction shall
apply only to customers with whom such Company Shareholder had material
contact in connection with services provided by the
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Company Shareholder for or on behalf of the Company within the three
years prior to the date of this Agreement); or,
(ii) Encourage or solicit any Employees of or service providers
to Surviving Corporation, Purchaser, the Business of either Surviving
Corporation or Purchaser, or any of their affiliates to leave the
employment of or terminate their service relationship with Surviving
Corporation, Purchaser or any of their affiliates for any reason.
(b) All proprietary and confidential data or information (whether in
tangible form or held as personal knowledge) of the Company pertaining to its
business, other than Trade Secrets (as defined below), which is not generally
known to the public, including, without limitation, information regarding the
Company's customers or prospective customers (such as lists containing the
names, addresses, and telephone numbers and/or account information of customers
and prospective customers), marketing plans and methods, short-term and
long-term business plans, research and development, manufacturing costs and
processes, pricing, cost or profit factors, quality programs, contracts and
bids, or personnel gained by a Company Shareholder as a result of his, her or
its relationship with the Company shall be considered "Company Confidential
Information". The Company Shareholders shall regard and treat each item
constituting Company Confidential Information as strictly confidential and
wholly-owned by Surviving Corporation and Purchaser until the third anniversary
of the Closing Date, and the Company Shareholders shall not, for any reason in
any fashion, either directly or indirectly, use, sell, lend, lease, distribute,
license, give, transfer, assign, show, disclose, disseminate, reproduce, copy,
appropriate or otherwise communicate any such item or information to any entity
for any purpose other than strictly in accordance with the express terms of this
Agreement.
(c) All information constituting "trade secrets" of the Company as
generally recognized under applicable law shall be considered "Company Trade
Secrets". The Company Shareholders, at all times during which such item
continues to constitute a Company Trade Secret, shall regard and treat each item
constituting a Company Trade Secret as strictly confidential and wholly-owned by
Surviving Corporation and Purchaser, and the Company Shareholders shall not, for
any reason in any fashion, either directly or indirectly, use, sell, lend,
lease, distribute, license, give, transfer, assign, show, disclose, disseminate,
reproduce, copy, appropriate or otherwise communicate any such item or
information to any entity for any purpose other than strictly in accordance with
the express terms of this Agreement.
(d) The parties agree that due to the unique nature of the services and
capabilities of the Company and the Company Shareholders, there can be no
adequate remedy at law for any breach of their respective obligations under this
Article III, that any such breach may allow the Company Shareholders and/or
third parties to unfairly compete with Surviving Corporation, Purchaser or their
affiliates resulting in irreparable harm to Surviving Corporation, Purchaser or
their affiliates, and therefore, that upon any such breach or any threat
thereof, Surviving Corporation, Purchaser or their affiliates shall be entitled
to appropriate equitable relief in addition to whatever remedies it might have
at law.
(e) Each of the Company Shareholders acknowledges, represents and
warrants to Acquisition Sub and Purchaser that the covenants of each in this
Section 3.7 are reasonably necessary for the protection of Acquisition Sub's and
Purchaser's interests under this Agreement and are not unduly restrictive upon
him.
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Section 3.8 Registration Statement. Purchaser shall use its best
efforts, when it next files with the SEC a registration statement, to prepare
and file at its costs and expense such amendment to such registration statement
to cover the shares of Purchaser Common Stock issuable to the Company
Shareholders, and to keep same effective for a period of at least ninety(90)
days so as to permit Company or the Company Shareholders, as the case may be, to
resell such shares during such period of not less than ninety (90) days.
Purchaser shall further use its best efforts to list the shares on the Nasdaq
National Market System subject to official notice of issuance under the
Securities Exchange Act of 1934.
Section 3.9 Company Indebtedness. Acquisition Sub and Purchaser will use
their best efforts to arrange with Company's banks and/or lending institutions
to assign Company's line of credit or other indebtedness to Acquisition Sub and
will coordinate with Company Shareholder to effect a release of Company
Shareholder's personal guarantees. In the event that such attempts are
unsuccessful at Closing, Purchaser shall loan to Acquisition Sub an amount
sufficient to discharge such indebtedness and release such guarantees. Such loan
shall bear interest at the rate being charged by the bank or lending institution
whose loan is being discharged.
Section 3.10 Further Assurances. On or after the Closing Date, each
party shall prepare, execute, and deliver, at the preparer's expense, such
further instruments, and shall take or cause to be taken such other or further
action, as any party shall reasonably request of any other party at any time or
from time to time in order to consummate, in any other manner, the terms and
provisions of this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT TO OBLIGATIONS
Section 4.1 Conditions to Obligations of Purchaser and Acquisition Sub.
Each and every obligation of Purchaser and Acquisition Sub to be performed on
the Closing Date shall be subject to the satisfaction on or before the Closing
Date of the following conditions (unless waived in writing by Purchaser or
Acquisition Sub), and the Company and the Company Shareholders shall exercise
all reasonable efforts in good faith to satisfy such conditions:
(a) Representations and Warranties. The representations and warranties
of each of the Company Shareholders and the Company set forth in Section 2.1 of
this Agreement shall have been true and correct when made and shall be true and
correct at and as of the Closing Date as if such representations and warranties
were made as of such date and time.
(b) Performance of Agreement. All covenants, conditions, and other
obligations under this Agreement and the Related Agreements which are to be
performed or complied with by the Company or each of the Company Shareholders,
as the case may be, including Boards of Directors approval and delivery of the
Balance Sheet, shall have been fully performed and complied with at or prior to
the Closing Date.
(c) No Material Adverse Change. Since the date of the Unaudited Annual
Financial Statements, there shall have occurred no material adverse change in
the financial condition, the business, the assets of the Company, or properties
of the Company which adversely affects the conduct of the Business as presently
being conducted, the assets of the Company, or the financial condition or
properties of the Company.
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(d) Absence of Governmental or Other Objection. There shall be no
pending or threatened lawsuit challenging the transaction by any body or agency
of the federal, state, or local government or by any third party, and the
consummation of the transaction shall not have been enjoined by a court of
competent jurisdiction as of the Closing Date and any applicable waiting period
under any applicable federal law shall have expired.
(e) Due Diligence Review. Purchaser and Acquisition Sub shall have
completed to its reasonable satisfaction their due diligence review of the
Company and its operations, the Business, the assets and financial condition of
the Company, and Purchaser and Acquisition Sub shall have received favorable
reviews from its advisors of the results of their due diligence review of the
Business.
(f) Certificate of President and Shareholders. The Company shall have
delivered to Purchaser and Acquisition Sub a certificate executed by its
President and the Company Shareholders, dated the date of the Closing Date, to
the effect that the conditions set forth in subsections (a)-(d) of this Section
4.1 have been satisfied with respect to the Company and the Company
Shareholders.
(g) Approval of Documents. The form and substance of all certificates,
instruments, opinions, and other documents delivered or to be delivered to
Purchaser and Acquisition Sub under this Agreement shall be reasonably
satisfactory to Purchaser and Acquisition Sub and their counsel.
(h) Execution of Related Agreements. Purchaser and Acquisition Sub shall
have received fully executed copies of the Related Agreements.
(i) Licenses. Acquisition Sub shall have received all licenses from all
appropriate governmental agencies to operate the Business in the same manner as
the Company operated the Business prior to the Closing Date and shall have
received a certificate, dated as of no earlier than ten (10) days prior to the
Closing Date, duly issued by the appropriate governmental authority in the
Company's State of Incorporation and in each state in which the Company is
authorized to do business, showing that the Company is in good standing and
authorized to do business and that all state franchise and/or income tax returns
and taxes for the Company for all periods prior to the Closing have been filed
and paid. This condition shall be deemed satisfied in the event that the
Acquisition Sub fails to use reasonable diligence in applying for and pursuing
such licenses.
(j) Consents. Purchaser and Acquisition Sub shall have received each and
every consent, approval and waiver (if any) required for the execution of this
Agreement and the consummation of the transactions contemplated hereby.
(k) Resignations. The officers and directors of the Company shall have
delivered their resignations, effective upon delivery.
(l) Delivery of Share Certificates. The Company Shareholders shall have
delivered for cancellation their certificates representing all of the
outstanding Company Shares owned by each of them.
Section 4.2 Conditions to Obligations of the Company and the Company
Shareholders. Each and every obligation of the Company and the Company
Shareholders to be performed on the Closing Date shall be subject to the
satisfaction as of or before the Closing Date of the following
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conditions (unless waived in writing by the Company Shareholders or the
Company), and Purchaser and Acquisition Sub shall exercise all reasonable
efforts in good faith to satisfy such conditions:
(a) Representations and Warranties. The representations and warranties
of Acquisition Sub and Purchaser set forth in Section 2.2 of this Agreement
shall have been true and correct when made and shall be true and correct on and
as of the Closing Date as if such representations and warranties were made as of
such date and time.
(b) Performance of Agreement. All covenants, conditions, and other
obligations under this Agreement and the Related Agreements which are to be
performed or complied with by Acquisition Sub, as the case may be, including
Board of Directors and shareholder approval, as applicable, shall have been
fully performed and complied with at or prior to the Closing Date.
(c) Absence of Governmental or Other Objection. There shall be no
pending or threatened lawsuit challenging the transaction by any body or agency
of the federal, state, or local government or by any third party, and the
consummation of the transaction shall not have been enjoined by a court of
competent jurisdiction as of the Closing Date and any applicable waiting period
under any applicable federal law shall have expired.
(d) Certificate of Officers. Acquisition Sub shall have delivered to the
Company a certificate executed by its authorized officer, dated the date of the
Closing Date, to the effect that the conditions set forth in subsections (a)-(c)
of this Section 4.2 have been satisfied.
(e) Execution of Related Agreements. The Company shall have received
fully executed copies of the Related Agreements (and all other documents
required hereunder).
(f) Approval of Documents. The form and substance of all certificates,
instruments, opinions, and other documents delivered or to be delivered to the
Company Shareholders under this Agreement shall be reasonably satisfactory to
each of the Company Shareholders and their counsel.
ARTICLE V
INDEMNIFICATION
Section 5.1 Survival of Representations, Warranties, Covenants and
Agreements.
(a) All representations, warranties, covenants, and agreements of the
Company, the Company Shareholders, Purchaser and Acquisition Sub shall survive
the execution, delivery, and performance of this Agreement for two years from
the Closing Date. All representations and warranties of the Company, the Company
Shareholders, Purchaser and Acquisition Sub set forth in this Agreement shall be
deemed to have been made again by the Company, the Company Shareholders,
Purchaser and Acquisition Sub on and as of the Closing Date.
(b) As used in this Article V, except as otherwise indicated in this
Article V, any reference to a representation, warranty, agreement, or covenant
contained in any section of this Agreement shall include the schedule relating
to such section.
Section 5.2 Indemnification of Acquisition Sub and Purchaser. Each of
the Company Shareholders hereby agrees to indemnify and hold harmless
Acquisition Sub and Purchaser and their
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<PAGE> 44
affiliates, the Company and the other Company Shareholders (collectively the
"Indemnified Parties") against any and all losses, liabilities, damages,
demands, claims, suits, actions, judgments, causes of action, assessments,
costs, and expenses, including, without limitation, interest, penalties,
attorneys' fees, any and all expenses incurred in investigating, preparing, and
defending against any litigation, commenced or threatened, and any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation (collectively, "Damages"), asserted against reasonably resulting
from, imposed upon, or incurred or suffered by the Indemnified Parties, directly
or indirectly, as a result of or arising from any inaccuracy in or breach or
nonfulfillment of any of the representations, warranties, covenants, or
agreements made by the Company or the Company Shareholders in this Agreement or
the Related Agreements or any facts or circumstances constituting such an
inaccuracy, breach, or nonfulfillment (all of which shall be referred to as
"Company Indemnifiable Claims").
Section 5.3 Indemnification of the Company Shareholders. Acquisition Sub
hereby agrees to indemnify and hold harmless each of the Company Shareholders
against any and all Damages (as defined in Section 5.2 above) asserted against,
reasonably resulting from, imposed upon, or incurred or suffered by such Company
Shareholders, directly or indirectly, as a result of or arising from any
inaccuracy in or breach or nonfulfillment of any of the representations,
warranties, covenants, or agreements made by Acquisition Sub in this Agreement
or the Related Agreements or any facts or circumstances constituting such an
inaccuracy, breach, or nonfulfillment or any claim against the Company which is
attributable to occurrences on or after the Closing Date (all of which shall be
referred to as "Acquisition Sub Indemnifiable Claims").
Section 5.4 Procedure for Indemnification with Respect to Third-Party
Claims.
(a) If any party hereto determines to seek indemnification (the party
seeking such indemnification hereinafter referred to as the "Indemnified Party"
and the party against whom such indemnification is sought is hereinafter
referred to as the "Indemnifying Party") under this Article V with respect to
Company Indemnifiable Claims where the Indemnified Party is Acquisition Sub or
any of its affiliates or Acquisition Sub Indemnifiable Claims where the
Indemnified Party is any of the Company Shareholders (such Claims shall be
referred to herein as "Indemnifiable Claims") resulting from the assertion of
liability by third parties, the Indemnified Party shall give notice to the
Indemnifying Parties within 60 days of the Indemnified Party becoming aware of
any such Indemnifiable Claim or of facts upon which any such Indemnifiable Claim
will be based; the notice shall set forth such material information with respect
thereto as is then reasonably available to the Indemnified Party. In case any
such liability is asserted against the Indemnified Party or its affiliates, and
the Indemnified Party notifies the Indemnifying Parties thereof, the
Indemnifying Parties will be entitled, if such Indemnifying Parties so elect by
written notice delivered to the Indemnified Party within 20 days after receiving
the Indemnified Party's notice, to assume the defense thereof with competent and
experienced counsel subject to the written consent of the Indemnified Party,
which consent shall not be unreasonably withheld. Notwithstanding the foregoing,
(i) the Indemnified Party or its affiliates shall also have the right to employ
its own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of the Indemnified Party unless the Indemnified Party or
its affiliates shall reasonably determine that there is a conflict of interest
between or among the Indemnified Party or its affiliates and any Indemnifying
Party with respect to such Indemnifiable Claim, in which case the Indemnified
Party shall select another attorney, subject to the consent of Indemnifying
Party, which consent shall not be unreasonably withheld, and the fees and
expenses of such counsel will be borne by such Indemnifying Parties, (ii) the
Indemnified Party shall have no obligation to give any notice of any assertion
of liability by a third party unless such assertion is in writing, and (iii) the
rights of the Indemnified Party or its affiliates to be indemnified hereunder in
respect of Indemnifiable Claims
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<PAGE> 45
resulting from the assertion of liability by third parties shall not be
adversely affected by their failure to give notice pursuant to the foregoing
unless, and, if so, only to the extent that, such Indemnifying Parties are
materially prejudiced thereby; provided, however, the Indemnifying Party shall
not be liable for attorneys fees and expenses incurred by the Indemnified Party
prior to the Indemnified Party's giving notice to the Indemnifying Party of an
Indemnifiable Claim. With respect to any assertion of liability by a third party
that results in an Indemnifiable Claim, the parties hereto shall make available
to each other all relevant information in their possession material to any such
assertion.
(b) In the event that such Indemnifying Parties, within 20 days after
receipt of the aforesaid notice of an Indemnifiable Claim fail to assume the
defense of the Indemnified Party or its affiliates against such Indemnifiable
Claim, the Indemnified Party or its affiliates shall have the right to undertake
the defense, compromise, or settlement of such action on behalf of and for the
account, expense, and risk of such Indemnifying Parties.
(c) Notwithstanding anything in this Article V to the contrary, (i) if
there is a reasonable probability that an Indemnifiable Claim may materially
adversely affect the Indemnified Party or its affiliates, the Indemnified Party
or its affiliates shall have the right to participate in such defense,
compromise, or settlement and such Indemnifying Parties shall not, without the
Indemnified Party's written consent (which consent shall not be unreasonably
withheld), settle or compromise any Indemnifiable Claim or consent to entry of
any judgment in respect thereof unless such settlement, compromise, or consent
includes as an unconditional term thereof the giving by the claimant or the
plaintiff to the Indemnified Party a release from all liability in respect of
such Indemnifiable Claim.
Section 5.5 Procedure For Indemnification with Respect to Non-Third
Party Claims. In the event that the Indemnified Party asserts the existence of a
claim giving rise to Damages (but excluding claims resulting from the assertion
of liability by third parties), it shall give written notice to the Indemnifying
Parties. Such written notice shall state that it is being given pursuant to this
Section 5.5, specify the nature and amount of the claim asserted and indicate
the date on which such assertion shall be deemed accepted and the amount of the
claim deemed a valid claim (such date to be established in accordance with the
next sentence). If such Indemnifying Parties, within 30 days after the receipt
of notice by the Indemnified Party, shall not give written notice to the
Indemnified Party announcing their intent to contest such assertion of the
Indemnified Party, such assertion shall be deemed accepted and the amount of
claim shall be deemed a valid claim. In the event, however, that such
Indemnifying Parties contest the assertion of a claim by giving such written
notice to the Indemnified Party within said period, then the parties shall act
in good faith to reach agreement regarding such claim. If the parties hereto,
acting in good faith, cannot reach agreement with respect to such claim within
ten (10) days after notice thereof, such claim will be submitted to and settled
by arbitration pursuant to Section 7.10 hereof.
Section 5.6 Escrowed Shares. Each Company Shareholder shall escrow
twenty percent (20%) of the Purchaser Common Stock to be issued to such Company
Shareholder to be available for distribution to Purchaser in the event of an
Indemnified Claim not paid in cash by the Indemnifying Party. The number of
Purchaser Shares to be delivered to Purchaser in the event that there is an
Indemnifiable Claim for which Purchaser Shares are to be distributed to satisfy
such an Indemnifiable Claim pursuant to this Section 5.6 shall be calculated by
dividing the amount of the award for the Indemnifiable Claim by the twenty-day
average trading price of Purchaser Common Stock as quoted on the Nasdaq National
Market System for the twenty-day period ending on the date that the
Indemnifiable Claim is made. Such escrow shall expire on the date not less than
eighteen (18) months after the Date of Closing, when there shall be no pending
Indemnification Claim for which notice has been given
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<PAGE> 46
under Section 5.4, and upon such expiration the share certificates shall be
delivered to the Company Shareholders. Not later than the Closing Date the
parties shall enter into a Pledge, Security and Escrow Agreement in
substantially the form and substance attached hereto as Exhibit 5.6(a). In the
event that Purchaser elects to waive the Profit Surplus Adjustment and the
Profit Shortfall Adjustment pursuant to Section 1.3(h) hereof, the amount of
Purchaser Common Stock placed in escrow pursuant to this Section 5.6 shall be
increased by the amount of Purchaser Common Stock then in the escrow account
established by Section 1.3(e) that is transferred to the escrow account
established by this Section 5.6.
ARTICLE VI
TERMINATION AND CONDITIONS SUBSEQUENT
Section 6.1 Termination.
(a) At any time prior to the time of Closing, this Agreement may be
terminated by express written consent of Purchaser, Acquisition Sub, the Company
and each of the Company Shareholders.
(b) Purchaser or Acquisition Sub may terminate this Agreement in the
event the conditions set forth in Section 4.1 of this Agreement have not been
satisfied or waived prior to the time of Closing.
(c) Each of the Company and the Company Shareholders may terminate this
Agreement in the event the conditions set forth in Section 4.2 of this Agreement
have not been satisfied or waived prior to the time of Closing.
(d) If the failure of such conditions to be fulfilled arises from the
fault or intentional act of a party hereto, such party shall be liable to the
other parties up to the amount of the documented out-of-pocket expense incurred
by such parties in negotiating, structuring and documenting the transaction
contemplated by this Agreement. No party shall be responsible for indirect,
special or expectancy damages for such nonfulfillment of conditions.
Section 6.2 Effect of Termination. In the event of termination as
provided in Section 6.1 above, Sections 3.1, 7.4 and 7.11 shall survive such
termination and continue in full force and effect.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 Notice. All notices and other communications required or
permitted under this Agreement shall be delivered to the parties at the address
set forth below their respective signature blocks, or at such other address that
they designate by notice to all other parties in accordance with this Section
7.1. Any party delivering notice to Purchaser or Acquisition Sub shall deliver a
copy to: Wade Stribling, Nelson Mullins Riley & Scarborough, L.L.P., First Union
Plaza, Suite 1400, 999 Peachtree Street, N.E., Atlanta, Georgia 30309. Any party
delivering notice to Company or Company Shareholder shall deliver a copy to Cary
H. Hall, Jr., Wyche, Burgess, Freeman & Parham, P.A., 44 East Camperdown Way,
P.O. Box 728,Greenville, South Carolina 29602-0728. All notices and
communications shall be deemed to have been received unless otherwise set forth
herein: (i) in the case of personal delivery, on the date of such delivery; (ii)
in the case of telex or facsimile transmission, on
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<PAGE> 47
the date on which the sender receives confirmation by telex or facsimile
transmission that such notice was received by the addressee, provided that a
copy of such transmission is additionally sent by mail as set forth in (iv)
below; (iii) in the case of recognized, nationwide overnight air courier, on the
second business day following the day sent, with receipt confirmed by the
overnight courier; and (iv) in the case of mailing by first class certified or
registered mail, postage prepaid, return receipt requested, on the fifth
business day following such mailing.
Section 7.2 Entire Agreement. This Agreement, the exhibits and schedules
hereto, and the documents referred to herein embody the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof,
and supersede all prior and contemporaneous agreements and understandings, oral
or written, relative to said subject matter.
Section 7.3 Binding Effect: Assignment. This Agreement and the various
rights and obligations arising hereunder shall inure to the benefit of and be
binding upon the Company and the Company Shareholders, their respective
successors and permitted assigns, and Purchaser, Acquisition Sub and their
successors and permitted assigns. Neither this Agreement nor any of the rights,
interests, or obligations in this Agreement shall be transferred or assigned (by
operation of law or otherwise) by the Company or the Company Shareholders
without the prior written consent of Acquisition Sub or Purchaser or their
assignees. Acquisition Sub and Purchaser may assign their rights, interests or
obligations hereunder without the prior written consent of the Company or the
Company Shareholders.
Section 7.4 Expenses of Transaction. Each party shall pay its
professional fees and expenses incurred in connection with the negotiation and
closing of this Agreement and the Related Agreements. The expenses of the
preparation of the Financial Statements shall be borne by Company except for the
1997 Audited Financial Statements, which shall be paid by Acquisition Sub.
Company and/or Company Shareholders, as the case may be, shall pay all
applicable sales, income, use, excise, transfer, documentary, and any other
taxes arising out of the transactions contemplated in this Agreement.
Section 7.5 Waiver; Consent. This Agreement may not be changed, amended,
terminated, augmented, rescinded, or discharged (other than by performance), in
whole or in part, except by a writing executed by the parties hereto, and no
waiver of any of the provisions or conditions of this Agreement or any of the
rights of a party hereto shall be effective or binding unless such waiver shall
be in writing and signed by the party claimed to have given or consented
thereto. Except to the extent that a party hereto may have otherwise agreed in
writing, no waiver by that party of any condition of this Agreement or breach by
the other party of any of its obligations or representations hereunder or
thereunder shall be deemed to be a waiver of any other condition or subsequent
or prior breach of the same or any other obligation or representation by the
other party, nor shall any forbearance by the first party to seek a remedy for
any noncompliance or breach by the other party be deemed to be a waiver by the
first party of its rights and remedies with respect to such noncompliance or
breach.
Section 7.6 Counterparts. This Agreement may be executed simultaneously
in multiple counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
Section 7.7 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable statute, regulation or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform to such statute,
regulation or rule of law, and the remainder of this Agreement and the
application of any such
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<PAGE> 48
invalid or unenforceable provision to parties, jurisdictions or circumstances
other than to whom or to which it is held invalid or unenforceable shall not be
affected thereby nor shall the same affect the validity or enforceability of any
other provision of this Agreement.
Section 7.8 Remedies of the Parties. The Company and the Company
Shareholders acknowledge that, in addition to all other remedies to which
Purchaser and Acquisition Sub are entitled, Purchaser and Acquisition Sub shall
have the right to enforce the terms of this Agreement by a decree of specific
performance, provided Purchaser or Acquisition Sub is not in material default
hereunder. The parties also agree that the rights and remedies of each party to
this Agreement set forth in this Agreement and in all of the exhibits and
schedules attached hereto and documents referred to herein shall be cumulative
and share inure to the benefit of each such party.
Section 7.9 Governing Law. This Agreement shall in all respects be
construed in accordance with and governed by the laws of the State of Georgia.
Section 7.10 Arbitration; Attorneys' Fees.
(a) The parties agree to use reasonable efforts to resolve any dispute
arising out of this Agreement, but should a dispute remain unresolved ten (10)
days following notice of the dispute to the other party (but in no event prior
to said ten (10) days, except as specifically provided otherwise herein), such
dispute shall be finally settled by binding arbitration in Atlanta, Georgia in
accordance with the then current Commercial Arbitration Rules of the American
Arbitration Association (the "AAA") or such other mediation or arbitration
service as shall be mutually agreeable to the parties, and judgment upon the
award rendered by the arbitrator shall be final and binding on the parties and
may be entered in any court having jurisdiction thereof; provided, however, that
any party shall be entitled to appeal a question of law or determination of law
to a court of competent jurisdiction; and provided, further, however, that the
parties may first seek appropriate injunctive relief prior to, and/or in
addition to pursuing negotiation or arbitration. Such arbitration shall be
conducted by an arbitrator chosen by mutual agreement of the parties, or failing
such agreement, an arbitrator appointed by the AAA. There shall be limited
discovery prior to the arbitration hearing as follows: (a) exchange of witness
lists and copies of documentary evidence and documents related to or arising out
of the issues to be arbitrated, (b) depositions of all party witnesses, and (c)
such other depositions as may be allowed by the arbitrator upon a showing of
good cause. Depositions shall be conducted in accordance with the Georgia Code
of Civil Procedure and questions of evidence in any hearings shall be resolved
in accordance with the Federal Rules of Evidence. The arbitrator shall be
required to provide in writing to the parties the basis for the award or order
of such arbitrator, and a court reporter shall record all hearings (unless
otherwise agreed to by the parties), with such record constituting the official
transcript of such proceedings.
(b) In the event of arbitration or litigation filed or instituted
between the parties with respect to this Agreement or the Related Agreements,
the prevailing party will be entitled to receive from the other party all costs,
damages and expenses, including reasonable attorney's fees, incurred by the
prevailing party in connection with that action or proceeding whether or not the
controversy is reduced to judgment or award. The prevailing party will be that
party who may be fairly said by the arbitrator(s) or the court to have prevailed
on the major disputed issues.
Section 7.11 Cooperation and Records Retention. Each of the Company
Shareholders and Acquisition Sub shall (i) provide the other with access to such
records, original or copies, or assistance as may reasonably be requested by
them in connection with the preparation of any Tax Return, in
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<PAGE> 49
connection with any audit or other examination by any Taxing authority or any
judicial or administrative proceedings relating to liability for Taxes, or
financial reporting obligations, (ii) each retain and provide the other, with
any records or other information which may be relevant to any such Tax Return,
audit or examination, proceeding or determination, or financial reporting
obligations, and (iii) each provide the other with any final determination of
any such audit or examination, proceeding or determination that affects any
amount required to be shown on any Tax Return of the other for any period. All
Tax Returns, supporting work schedules and other records or information which
may be relevant to such Tax Returns for all tax periods or portions thereof
ending before or including the Closing Date shall remain with Acquisition Sub or
the Company and shall be made available for inspection and copying by the
parties hereto during normal business hours.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
"Purchaser"
TEKGRAF, INC.
By: /s/ Dan Bailey
----------------------------------
Dan Bailey
President
Address: 2979 Pacific Drive, Suite B
Norcross, Georgia 30071
"Acquisition Sub"
TEKGRAF SUB I, INC.
By: /s/ William M. Rychel
----------------------------------
William M. Rychel
President
Address: 2979 Pacific Drive, Suite B
Norcross, Georgia 30071
[Signatures continued on next page.
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<PAGE> 50
"Company"
COMPUTER GRAPHICS TECHNOLOGY, INC.
By: /s/ Scott Barker
----------------------------------
Scott Barker, [President]
Address:
"Company Shareholders"
By: /s/ Scott Barker
----------------------------------
Scott Barker
Address:
By: /s/ Bob Shumaker
----------------------------------
Bob Shumaker
Address:
By: /s/ Tom Mills
----------------------------------
Tom Mills
Address:
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<PAGE> 51
[Georgia] EXHIBIT A
CERTIFICATE OF MERGER
MERGING
COMPUTER GRAPHICS TECHNOLOGY, INC.
(a South Carolina corporation)
WITH AND INTO
TEKGRAF SUB I, INC.
(a Georgia corporation)
The undersigned corporation, organized and existing under the laws of
the State of Georgia, DOES HEREBY CERTIFY:
1. That the name and state of incorporation of each of the constituent
corporations (the "Constituent Corporations") of the merger is as follows:
<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C>
Computer Graphics Technology, Inc. South Carolina
Tekgraf Sub I, Inc. Georgia
</TABLE>
2. That the surviving corporation of the merger shall be Tekgraf Sub I,
Inc.
3. That the Certificate of Incorporation of Tekgraf Sub I, Inc. shall
be the Certificate of Incorporation of the surviving corporation.
4. That the executed Agreement and Plan of Merger among the Constituent
Corporations and Tekgraf, Inc., a Delaware corporation, is on the file at the
principal place of business of the surviving corporation. The address of the
principal place of business of the surviving corporation is
--------------------
- ---------------------------------.
5. That a copy of the Agreement and Plan of Merger will be furnished by
the surviving corporation, on request and without cost, to any shareholder of
any of the Constituent Corporations.
6. That the Agreement and Plan of Merger has been duly approved by the
shareholders of each of the Constituent Corporations in accordance with the
provisions of applicable law.
<PAGE> 52
IN WITNESS WHEREOF, the undersigned corporation has caused this
Certificate to be signed by its duly authorized officer, this ______ day of
_______________, 1998.
TEKGRAF SUB I, INC.
By:
----------------------------------
Name:
-----------------------
Title:
----------------------
<PAGE> 53
EXHIBIT B
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF MERGER
Pursuant to Section 33-11-105 of the 1976 South Carolina Code, as
amended, the undersigned as the surviving corporation in a merger or the
acquiring corporation in a share exchange, as the case may be, hereby submits
the following information:
1. The name of the surviving or acquiring corporation is Computer Graphics
Technology, Inc. (formerly known as TekGraf Sub I, Inc.), a Georgia
corporation.
2. Attached hereto and made a part hereof is a copy of the Plan of Merger
or Share Exchange (see Sections 33-11-101 (merger), 33-11-102 (share
exchange), 33-11-104 (merger of subsidiary into parent), 33-11-107
(merger or share exchange with a foreign corporation), and 33-11-108
(merger of a parent corporation into one of its subsidiaries)).
3. Complete the following information to the extent it is relevant with
respect to each corporation which is a party to the transaction:
(a) Name of the corporation: Computer Graphics Technology, Inc., a
Georgia corporation (formerly known as TekGraf Sub I, Inc.)
Complete either (1) or (2), whichever is applicable:
(1) Shareholder approval of the merger or stock
----- exchange was not required (See Sections
33-11-103(h), 33-11-104(a), and
33-11-108(a)).
(2) X The Plan of Merger or Share Exchange was
----- duly approved by shareholders of the
corporation as follows:
<TABLE>
<CAPTION>
Number of Number of Number of Votes Number of Undisputed*
Voting Outstanding Votes Entitled Represented at Shares Voted
Group Shares to be Cast the Meeting For Against
- ------ ----------- -------------- ---------------- ----- -------
<S> <C> <C> <C> <C> <C>
common
</TABLE>
*NOTE: Pursuant to the Section 33-11-105(a)(3)(ii), the corporation
can alternatively state the total number of undisputed shares
cast for the amendment by each voting group together with a
statement that that number cast for the amendment by each
voting group was sufficient for approval by that voting group.
<PAGE> 54
(b) Name of the corporation: Computer Graphics Technology, Inc. a
Georgia corporation (formerly known as TekGraf Sub I, Inc.)
Complete either (1) or (2), whichever is applicable:
(1) Shareholder approval of the merger or stock
----- exchange was not required (See Sections
33-11-103(h), 33-11-104(a), and
33-11-108(a)).
(2) X The Plan of Merger or Share Exchange was
----- duly approved by shareholders of the
corporation as follows:
<TABLE>
<CAPTION>
Number of Number of Number of Votes Number of Undisputed*
Voting Outstanding Votes Entitled Represented at Shares Voted
Group Shares to be Cast the Meeting For Against
- ----- ------ ---------- ----------- --- -------
<S> <C> <C> <C> <C> <C>
common
</TABLE>
*NOTE: Pursuant to the Section 33-11-105(a)(3)(ii), the corporation
can alternatively state the total number of undisputed shares
cast for the amendment by each voting group together with a
statement that that number cast for the amendment by each
voting group was sufficient for approval by that voting group.
4. Unless a delayed date is specified, the effective date of this
document shall be the date it is accepted for filing by the
Secretary of State (See Sections 33-1-230(b)):
-------------------------.
Computer Graphics Technology, Inc. (formerly
known as TekGraf Sub I, Inc.), the Surviving
Corporation
Date: ___________________________
By:
---------------------------------
________________________PRESIDENT
(Signature and Office)
<PAGE> 55
FILING INSTRUCTIONS
1. Two copies of this form, the original and either a duplicate original
or a conformed copy, must be filed.
2. Filing Fee (payable to the Secretary of State at the time of filing of
this document.)
<TABLE>
<S> <C>
Filing Fee $ 10.00
Filing Tax 100.00
</TABLE>
3. TWO COPIES OF THE PLAN OF MERGER OR SHARE EXCHANGE MUST BE FILED WITH
THIS FORM AS AN ATTACHMENT.
Form Approved by South Carolina
Secretary of State 1/90
<PAGE> 56
Plan of Merger of
COMPUTER GRAPHICS TECHNOLOGY, INC.
(A South Carolina Corporation)
Into
TEKGRAF SUB I, INC.
(A Georgia Corporation)
This Plan of Merger (the "Plan") by and between Computer Graphics
Technology, Inc. ("CGT"), a corporation organized and existing under the laws of
the State of South Carolina, and TekGraf Sub I, Inc. ("TSI"), a corporation
organized and existing under the laws of the State of Georgia (collectively the
"Parties").
WHEREAS, CGT and TSI deem it advisable and to the advantage, welfare
and best interest of each of them and their respective shareholders to merge and
consolidate their corporations pursuant to the terms and conditions of this Plan
(the "Merger");
WHEREAS, the directors and shareholders of each of the Parties have
approved and recommended the Merger of the two corporations; and
WHEREAS, the Parties and the shareholders of CGT have executed the
Agreement and Plan of Merger dated __________, 1998 (the "Agreement") providing,
among other things, for the merger of CGT into TSI in accordance with this Plan
of Merger.
NOW, THEREFORE, the Plan of Merger is as follows:
THE MERGER
1. Merger of CGT into TSI. Subject to the terms and conditions of this
Plan, the Agreement and in accordance with the provisions of the South Carolina
Business Corporations Act (the "Act") and the Georgia Business Corporation Code,
CGT shall be merged with and into TSI and the separate corporation existence of
CGT shall cease.
2. Effect of the Merger. TSI, the name of which shall be changed to
"Computer Graphics Technology, Inc." shall be the surviving corporation in the
Merger (sometimes hereinafter referred to as the "Surviving Corporation"). The
said Surviving Corporation shall, by virtue of the Merger, and in accordance
with the Act, possess all of the rights, privileges, powers, franchises and
properties and be subject to all the liabilities of CGT. The Surviving
Corporation shall be renamed Computer Graphics Technology, Inc.
3. Articles of Incorporation. The Articles of Incorporation of TSI in
effect immediately prior to the Merger shall be the Articles of Incorporation of
the Surviving Corporation except the name of the Surviving Corporation shall be
changed to Computer Graphics Technology, Inc.
<PAGE> 57
4. By-laws. The By-laws of TSI in effect immediately prior to the
Merger shall be the By-laws of the Surviving Corporation unless and until
altered, amended or repealed as provided therein or in the Articles of
Incorporation of the Surviving Corporation, as amended.
5. Directors and Officers. The Directors and Officers of TSI
immediately prior to the Merger shall be the Directors and Officers of the
Surviving Corporation until their respective successors are duly elected or
qualified.
6. Principal Office. The principal office of the Surviving Corporation
in the State of South Carolina is located at ___________.
CAPITALIZATION AND CONVERSION OF SHARES
7. Capitalization of the Parties. The total number of shares of common
stock which TSI has authority to issue is ______ shares. There were _______
shares issued and outstanding on the date hereof. The total number of shares of
common stock which CGT has authority to issue is ______ shares. There were _____
shares issued and outstanding on the date hereof.
8. CGT Shares. On the date of the Merger, each issued and outstanding
share of common stock of CGT shall be converted into its pro rata share of Five
Hundred Thousand ($500,000) Dollars (the "Cash Consideration") and an aggregate
of 330,000 shares of the Class A Common Stock of TekGraf, Inc., the corporation
parent and the Equity Consideration are subject to post-closing adjustments,
escrow requirements and all of the other terms and conditions of the Agreement.
9. TSI Shares. The outstanding shares of TSI shall remain outstanding,
unaffected by the Merger.
10. All Necessary Action. The officers of the parties will promptly
cause to be executed, filed and/or recorded any documents prescribed by the laws
of the States of South Carolina and Delaware, and will cause to be performed all
necessary acts within said jurisdictions and elsewhere to effectuate the Merger.
The officers of CGT and of TSI are hereby authorized, empowered and directed to
do any and all acts and things, 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 Agreement.
<PAGE> 58
EXHIBIT D
DIRECTORS
1. Phillip C. Aginsky
2. William M. Rychel
3. Soctt Barker
<PAGE> 59
Exhibit 1.3(e)
ESCROW AGREEMENT
This Escrow Agreement (this "Agreement") is entered into as of
______________, 1998, by and among TEKGRAF, INC., a Georgia corporation (the
"Purchaser"), TEKGRAF SUB ___, INC., a __________ corporation ("Acquisition
Sub"), __________________ (the "Company"), ___________________ (the "Company
Shareholders"), and ________________ (the "Shareholder Representative") and
_________________________________________ (the "Escrow Agent").
WHEREAS, the Purchaser and the Company have entered into an Agreement
and Plan of Merger (the "Merger Agreement") by and among the Company, the
Company Shareholders, Acquisition Sub and the Purchaser.
WHEREAS, the Merger Agreement provides that escrow accounts will be
established to secure the Company Shareholders' guaranty with respect to the
Warranted Pre-Tax Profit and the Warranted Tangible Net Asset Value of the
Company (each as defined in the Merger Agreement) on the terms and conditions
set forth herein.
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which such escrow accounts will be established and
maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given them in the Merger Agreement.
2. Consent of Company Shareholders. By virtue of the Company
Shareholders' approval of the Merger Agreement, the Company Shareholders who may
indirectly or directly receive cash and shares of Purchaser Common Stock
pursuant to the Merger Agreement have, without any further act of any Company
Shareholder, consented to: (a) the establishment of this escrow to secure the
Company Shareholders' guaranty with respect to the Warranted Pre-Tax Profit and
the Warranted Tangible Net Asset Value of the Company in the manner set forth
herein and in the Merger Agreement, (b) the appointment of the Shareholder
Representatives as their representatives for purposes of this Agreement and as
attorneys-in-fact and agents for and on behalf of each Company Shareholder, and
the taking by the Shareholder Representatives of any and all actions and the
making of any decisions required or permitted to be taken or made by them under
this Agreement, and (c) all of the other terms, conditions and limitations in
this Agreement and the Merger Agreement.
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3. Escrow and Warranty.
(a) Escrow of Cash. On the Closing Date, the Purchaser shall deposit
with the Escrow Agent $100,000 of the Cash Consideration. The Escrowed Cash
shall be held as a trust fund and shall not be subject to any lien, attachment,
trustee process or any other judicial process of any creditor of any party
hereto. The Escrow Agent agrees to accept delivery of the Escrowed Cash and to
hold the Escrowed Cash in an interest-bearing escrow account (the "Cash Escrow
Account"), subject to the terms and conditions of this Agreement.
(b) Escrow of Shares. On the Closing Date, the Purchaser shall deposit
with the Escrow Agent a certificate for the number of Escrowed Shares specified
in Section 1.3(e) of the Merger Agreement, issued in the name of the Escrow
Agent or its nominee. The Escrowed Shares shall be held as a trust fund and
shall not be subject to any lien, attachment, trustee process or any other
judicial process of any creditor of any party hereto. The Escrow Agent agrees to
accept delivery of the Escrowed Shares and to hold the Escrowed Shares in an
escrow account (the "Share Escrow Account"), subject to the terms and conditions
of this Agreement.
(c) Warranty. The Company Shareholders have agreed in Article I of the
Merger Agreement that the Warranted Pre-Tax Profit and the Warranted Tangible
Net Asset Value of the Company shall not be less than the amounts set forth in
Section 1.3(a) of the Merger Agreement. The Escrowed Shares shall be security
for such warranty obligation of the Company Shareholders, subject to the
limitations, and in the manner provided, in this Agreement.
(d) Dividends, Etc. Any securities distributable to the Company
Shareholders in respect of or in exchange for any of the Escrowed Shares,
whether by way of stock dividends, stock splits or otherwise, shall be delivered
to the Escrow Agent, who shall hold such securities in the Share Escrow Account.
Such securities shall be issued in the name of the Escrow Agent or its nominee
and shall be considered Escrowed Shares for purposes hereof. Any cash dividends
distributable to the Company Shareholders in respect of the Escrowed Shares
shall be distributed to the Company Shareholders.
(e) Voting of Shares. The Shareholder Representatives shall have the
right, in their sole discretion, on behalf of the Company Shareholders, to
direct the Escrow Agent in writing as to the exercise of any voting rights
pertaining to the Escrowed Shares, and the Escrow Agent shall comply with any
such written instructions. In the absence of such instructions, the Escrow Agent
shall not vote any of the Escrowed Shares.
(f) Transferability. The respective interests of the Company
Shareholders in the Escrowed Shares shall not be assignable or transferable,
other than by operation of law. Notice of any such assignment or transfer by
operation of law shall be given to the Escrow Agent and the Purchaser, and no
such assignment or transfer shall be valid until such notice is given.
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(g) Transfer of Shares Upon Waiver of Warranty. In the event the
Purchaser elects, pursuant to the provisions of Section 1.3(h) of the Merger
Agreement, to waive the Profit Shortfall Adjustment and the Profit Surplus
Adjustment, the Escrowed Shares shall be transferred, upon receipt of notice by
Escrow Agent from Purchaser of such waiver, into the escrow account created
pursuant to that certain Pledge, Security and Escrow Agreement dated as of even
date herewith, to be treated in all respects as escrow shares thereunder and the
Escrowed Shares in such case shall be distributed to the Company Shareholders
pursuant to the terms thereof.
4. Administration of Cash Escrow Account. The Escrow Agent shall
administer the Cash Escrow Account as follows:
(a) In the event that there is a Net Asset Value Shortfall (including
any Collection Shortfall or Inventory Shortfall that remains unpaid ten (10)
days after demand for payment thereof by Purchaser or Acquisition Sub to the
Company Shareholders), the Purchase Price shall be reduced by the amount of such
Net Asset Value Shortfall. Purchaser or Acquisition Sub shall provide to the
Escrow Agent and the Shareholder Representatives written notice of the amount of
such Net Asset Value Shortfall, and such amount, including any interest accrued
thereon (or such lesser amount as is then held in the Cash Escrow Account),
shall be paid to Purchaser by Escrow Agent within three (3) business days after
receipt of such notice.
(b) Any cash remaining in the Cash Escrow Account after payment of the
Net Asset Value Shortfall amount as set forth in subsection (a) above, shall be
distributed to the Company Shareholders pursuant to Section 6(a) hereof.
(c) In the event that the Net Asset Value Shortfall exceeds the amount
of Escrowed Cash available, Purchaser's recovery of cash pursuant to Section 1.3
of the Merger Agreement shall not be limited to the amount of Escrowed Cash
available.
5. Administration of Share Escrow Account. The Escrow Agent shall
administer the Share Escrow Account as follows:
(a) In the event that the Warranted Pre-Tax Profit exceeds the Actual
Pre-Tax Profit for the Year (or the Alternative Year, if applicable), the
Purchase Price shall be reduced by the number of Purchaser Shares equal to the
Profit Shortfall Adjustment, subject to the Adjustment Floor. In such event,
Purchaser or Acquisition Sub and the Shareholder Representatives shall provide
written notice to the Escrow Agent of the amount of the Profit Shortfall
Adjustment, and the Escrow Agent shall transfer, deliver and assign to Purchaser
such number of Escrowed Shares held in the Share Escrow Account which have a
Fair Market Value equal to the Profit Shortfall Adjustment (or such lesser
number of Purchaser Shares as is then held in the Share Escrow Account). The
Fair Market Value of the Escrowed Shares to be distributed shall be determined
in accordance with Section 7 hereof.
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(b) On the first anniversary of the Closing Date (or if the Alternative
Year is elected, at the end of the Alternative Year), the Escrow Agent shall
distribute to the Company Shareholders, in accordance with Sections 6(a) and (b)
below, one half of the Escrowed Shares remaining in the Share Escrow Account not
required for redistribution pursuant to Section 5(a) hereof. Any Escrowed Shares
remaining in the Share Escrow Account after payment of the Profit Shortfall
Adjustment amount as set forth in subsection (a) above, shall be distributed to
the Company Shareholders pursuant to Sections 6(a) and (b) hereof.
(c) In the event that the Profit Shortfall Adjustment exceeds the
number of Escrowed Shares available, Purchaser's recovery of Purchaser Shares
pursuant to Section 1.3 of the Merger Agreement shall not be limited to the
amount of Escrowed Shares available.
6. Release of Escrowed Cash and Escrowed Shares.
(a) Any distribution of all or a portion of the Escrowed Cash or the
Escrowed Shares to the Company Shareholders shall be made in accordance with the
percentages set forth opposite such holders' respective names on Exhibit B
attached hereto; provided, however, that the Escrow Agent shall withhold the
distribution of the portion of the Escrowed Cash or the Escrowed Shares
otherwise distributable to Company Shareholders who have not, according to
written notice provided by the Purchaser to the Escrow Agent, prior to such
distribution, surrendered their respective Certificates pursuant to the terms
and conditions of the Merger Agreement. Any such withheld cash or shares shall
be delivered to the Purchaser promptly after the Termination Date, and shall be
delivered by the Purchaser to the Company Shareholders to whom such shares would
have otherwise been distributed upon surrender of their respective Certificates.
Distributions of Escrowed Shares to the Company Shareholders shall be made by
mailing stock certificates to such holders at their respective addresses shown
on Exhibit B (or such other address as may be provided in writing to the Escrow
Agent by any such holder).
(b) No fractional Escrowed Shares shall be distributed to Purchaser or
Company Shareholders pursuant to this Agreement. Instead, the number of shares
that Purchaser or each Company Shareholder shall receive shall be rounded down
to the nearest whole number; and the Escrow Agent shall sell such number of
Escrowed Shares as is equal to the aggregate of the fractional shares that would
otherwise be distributed to the Purchaser or the Company Shareholders, as the
case may be, and shall distribute the proceeds of such sale to the Purchaser or
the Company Shareholders otherwise entitled to a fractional Escrowed Share based
upon the fraction of an Escrowed Share to which Purchaser or each such Company
Shareholder is otherwise entitled, as the case may be.
7. Valuation of Escrowed Shares. For purposes of this Agreement, the
Fair Market Value of the Escrowed Shares to be released from the Share Escrow
Account after a final determination of the Profit Shortfall Adjustment shall be
determined based upon the average closing prices of the Purchaser's Common Stock
on the Nasdaq National Market System for the twenty trading days immediately
preceding the date of such final determination.
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8. Fees and Expenses of Escrow Agent. The Purchaser, on the one hand,
and the Company Shareholders, on the other hand, shall each pay one-half of the
fees of the Escrow Agent for the services to be rendered by the Escrow Agent
hereunder.
9. Limitation of Escrow Agent's Liability.
(a) The Escrow Agent shall incur no liability with respect to any
action taken or suffered by it in reliance upon any notice, direction,
instruction, consent, statement or other documents believed by it to be genuine
and duly authorized, nor for other action or inaction except its own willful
misconduct or gross negligence. The Escrow Agent shall not be responsible for
the validity or sufficiency of this Agreement. In all questions arising under
the Escrow Agreement, the Escrow Agent may rely on the advice of counsel, and
for anything done, omitted or suffered in good faith by the Escrow Agent based
on such advice the Escrow Agent shall not be liable to anyone. The Escrow Agent
shall not be required to take any action hereunder involving any expense unless
the payment of such expense is made or provided for in a manner reasonably
satisfactory to it.
(b) The Purchaser and the Company Shareholders hereby, jointly and
severally, agree to indemnify the Escrow Agent for, and hold it harmless
against, any loss, liability or expense incurred without gross negligence or
willful misconduct on the part of Escrow Agent, arising out of or in connection
with its carrying out of its duties hereunder. The Purchaser, on the one hand,
and the Company Shareholders, on the other hand, shall each be liable for
one-half of such amounts.
10. Liability and Authority of Shareholder Representatives; Successors
and Assignees.
(a) The Shareholder Representatives shall incur no liability to the
Company Shareholders with respect to any action taken or suffered by them in
reliance upon any note, direction, instruction, consent, statement or other
documents believed by them to be genuinely and duly authorized, nor for other
action or inaction except their own willful misconduct or gross negligence. The
Shareholder Representatives may, in all questions arising under the Escrow
Agreement, rely on the advice of counsel and for anything done, omitted or
suffered in good faith by the Shareholder Representatives based on such advice,
the Shareholder Representatives shall not be liable to the Company Shareholders.
(b) In the event of the death or permanent disability of either
Shareholder Representative, or his resignation as a Shareholder Representative,
a successor Shareholder Representative shall be appointed by the other
Shareholder Representative or, absent its appointment, a successor Shareholder
Representative shall be elected by a majority vote of the Company Shareholders,
with each such Company Shareholder (or his or her successors or assigns) to be
given a vote equal to the number of votes represented by the Company Shares held
by such Company Shareholder immediately prior to the Effective Time. Each
successor
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<PAGE> 64
Shareholder Representative shall have all of the power, authority, rights and
privileges conferred by this Agreement upon the original Shareholder
Representatives, and the term "Shareholder Representatives" as used herein shall
be deemed to include successor Shareholder Representatives.
(c) The Shareholder Representatives, acting jointly but not singly,
shall have full power and authority to represent the Company Shareholders, and
their successors, with respect to all matters arising under this Agreement and
all actions taken by any Shareholder Representative hereunder shall be binding
upon the Company Shareholders, and their successors, as if expressly confirmed
and ratified in writing by each of them. Without limiting the generality of the
foregoing, the Shareholder Representatives, acting jointly but not singly, shall
have full power and authority to interpret all of the terms and provisions of
this Agreement, to compromise any claims asserted hereunder and to authorize
payments to be made with respect thereto, on behalf of the Company Shareholders
and their successors. All actions to be taken by the Shareholder Representatives
hereunder shall be evidenced by, and taken upon, the written direction of a
majority thereof.
11. Amounts Payable by Company Shareholders. The amounts payable by
the Company Shareholders under this Agreement (i.e., the fees and expenses of
arbitrators payable pursuant to Section 16, the fees of the Escrow Agent payable
pursuant to Section 8 and the indemnification obligations pursuant to Sections
9(b)) shall be payable solely as follows. The Shareholder Representatives shall
notify the Escrow Agent of any such amount payable by the Company Shareholders
as soon as they become aware that any such amount is payable, with a copy of
such notice to the Purchaser. On the sixth business day after the delivery of
such notice, the Escrow Agent shall sell such number of Escrowed Shares (up to
the number of Escrowed Shares then available in the Escrow Account), subject to
compliance with all applicable securities laws, as is necessary to raise such
amount, and shall disburse such proceeds to the party to whom such amount is
owed in accordance with the instructions of the Shareholder Representatives;
provided that if the Purchaser delivers to the Escrow Agent (with a copy to the
Shareholder Representatives), within five business days after delivery of such
notice by the Shareholder Representatives, a written notice contesting the
legitimacy or reasonableness of such amount, then the Escrow Agent shall not
sell Escrowed Shares to raise the disputed portion of such claimed amount, and
such dispute shall be resolved by the Purchaser and the Shareholder
Representatives in accordance with the procedures set forth in Section 16.
12. Termination. This Agreement shall terminate upon the distribution
by the Escrow Agent of all of the Escrowed Cash and all of the Escrowed Shares
in accordance with this Agreement; provided that the provisions of Sections 9
and 10 shall survive such termination.
13. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid,
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or (ii) via a reputable nationwide overnight courier service, in each case to
the address set forth below. Any such notice, instruction or communication shall
be deemed to have been delivered two business days after it is sent by
registered or certified mail, return receipt requested, postage prepaid, or one
business day after it is sent via a reputable nationwide overnight courier
service.
If to the Purchaser and/or the Acquisition Sub:
Tekgraf, Inc.
2979 Pacific Concourse Drive, Suite B
Norcross, Georgia 30071
If to the Company:
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If to the Shareholder Representative:
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If to the Escrow Agent:
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Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 13.
14. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by
delivering a resignation to the parties to this Escrow Agreement, not less than
60 days' prior to the date when such resignation shall take effect. The
Purchaser and the Shareholder Representatives shall appoint a successor
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Escrow Agent and neither party shall unreasonably withhold approval of such
successor Escrow Agent. If, within such notice period, the Purchaser provides to
the Escrow Agent written instructions with respect to the appointment of a
successor Escrow Agent and directions for the transfer of any Escrowed Shares
then held by the Escrow Agent to such successor, the Escrow Agent shall act in
accordance with such instructions and promptly transfer such Escrowed Shares to
such designated successor.
15. General.
(a) Governing Law, Assigns. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Georgia without
regard to conflict-of-law principles and shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) Entire Agreement. Except for those provisions of the Merger
Agreement referenced herein, this Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of any
breach of any provision of this Escrow Agreement shall be effective unless in
writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(e) Amendment. This Agreement may be amended only with the written
consent of the Purchaser, the Escrow Agent and the Shareholder Representatives.
16. Arbitration; Attorneys' Fees.
(a) The parties agree to use reasonable efforts to resolve any dispute
arising out of this Agreement, but should a dispute remain unresolved ten (10)
days following notice of the dispute to the other party (but in no event prior
to said ten (10) days, except as specifically provided otherwise herein), such
dispute shall be finally settled by binding arbitration in Atlanta, Georgia in
accordance with the then current Commercial Arbitration Rules of the American
Arbitration Association (the "AAA") or such other mediation or arbitration
service as shall be mutually agreeable to the parties, and judgment upon the
award rendered by the arbitrator shall be final and binding on the parties and
may be entered in any court having jurisdiction thereof; provided, however, that
any party shall be entitled to appeal a question of
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law or determination of law to a court of competent jurisdiction; and provided,
further, however, that the parties may first seek appropriate injunctive relief
prior to, and/or in addition to pursuing negotiation or arbitration. Such
arbitration shall be conducted by an arbitrator chosen by mutual agreement of
the parties, or failing such agreement, an arbitrator appointed by the AAA.
There shall be limited discovery prior to the arbitration hearing as follows:
(a) exchange of witness lists and copies of documentary evidence and documents
related to or arising out of the issues to be arbitrated, (b) depositions of all
party witnesses, and (c) such other depositions as may be allowed by the
arbitrator upon a showing of good cause. Depositions shall be conducted in
accordance with the Georgia Code of Civil Procedure and questions of evidence in
all hearings shall be resolved in accordance with the Federal Rules of Evidence.
The arbitrator shall be required to provide in writing to the parties the basis
for the award or order of such arbitrator, and a court reporter shall record all
hearings (unless otherwise agreed to by the parties), with such record
constituting the official transcript of such proceedings.
(b) In the event of arbitration or litigation filed or instituted
between the parties with respect to this Agreement, the prevailing party will be
entitled to receive from the other party all costs, damages and expenses,
including reasonable attorney's fees, incurred by the prevailing party in
connection with that action or proceeding whether or not the controversy is
reduced to judgment or award. The prevailing party will be that party who may be
fairly said by the arbitrator(s) or the court to have prevailed on the major
disputed issues.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER:
TEKGRAF, INC.
By:
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Dan I. Bailey, President
ACQUISITION SUB:
TEKGRAF SUB __, INC.
By:
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__________, President
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SHAREHOLDER REPRESENTATIVE:
(SEAL)
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ESCROW AGENT:
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By: -------------------------------------
Name:
--------------------------------
Title:
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COMPANY:
By:
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___________, President
COMPANY SHAREHOLDERS:
(SEAL)
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(SEAL)
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(SEAL)
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EXHIBIT B
<TABLE>
<CAPTION>
Company Shareholder Percentage
- ------------------- ----------
<S> <C>
%
%
%
</TABLE>
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<PAGE> 70
EXHIBIT 3.7(a)
NON-SOLICITATION
NONE
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Exhibit 5.6(a)
PLEDGE, SECURITY AND ESCROW AGREEMENT
This Pledge, Security and Escrow Agreement (this "Agreement") is
entered into as of ______________, 1998, by and among TEKGRAF, INC., a Georgia
corporation (the "Purchaser"), TEKGRAF SUB ___, INC. ("Acquisition Sub"),
[_________________ _______________________________], INC., a ____________
corporation (the "Company"), [_________________________________] (the "Company
Shareholders"), and ________ _________________ (the "Indemnification
Representatives") and [________________________________________] (the "Escrow
Agent").
WHEREAS, the Purchaser and the Company have entered into an Agreement
and Plan of Merger (the "Merger Agreement") by and among the Company, the
Company Shareholders, Acquisition Sub and the Purchaser.
WHEREAS, the Merger Agreement provides that an escrow account will be
established to secure the Company's and the Company Shareholders'
indemnification obligations to the Indemnified Parties under the Merger
Agreement on the terms and conditions set forth herein.
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which such escrow account will be established and
maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given them in the Merger Agreement.
2. Consent of Company Shareholders. By virtue of the Company
Shareholders' approval of the Merger Agreement, the Company Shareholders who may
indirectly or directly receive shares of Purchaser Common Stock pursuant to the
Merger Agreement (the "Indemnifying Shareholders") have, without any further act
of any Company Stockholder, consented to: (a) the establishment of this escrow
to secure the Company Shareholders' indemnification obligations under Article V
of the Merger Agreement in the manner set forth herein and therein, (b) the
appointment of the Indemnification Representatives as their representatives for
purposes of this Agreement and as attorneys-in-fact and agents for and on behalf
of each Indemnifying Shareholder, and the taking by the Indemnification
Representatives of any and all actions and the making of any decisions required
or permitted to be taken or made by them under this Agreement, and (c) all of
the other terms, conditions and limitations in this Agreement and the Merger
Agreement.
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3. Escrow and Indemnification.
(a) Escrow of Shares. On the Closing Date, the Purchaser shall deposit
with the Escrow Agent a certificate for the number of Purchaser Shares specified
in Section 5.6 of the Merger Agreement (the "Escrow Shares"), issued in the name
of the Escrow Agent or its nominee. In addition, in the event the Purchaser
elects, pursuant to the provisions of Section 1.3(h) of the Merger Agreement, to
waive the Profit Shortfall Adjustment and the Profit Surplus Adjustment, the
shares of Purchaser common stock held in the escrow account established by
Section 1.3(e) of the Merger Agreement shall be transferred into the escrow
account created pursuant to this Escrow Agreement (the "Transferred Shares"), to
be treated in all respects as Escrow Shares hereunder and the Transferred Shares
shall be distributed to the Company Shareholders pursuant to Section 5(a)
hereof. The Escrow Shares shall be held as a trust fund and shall not be subject
to any lien, attachment, trustee process or any other judicial process of any
creditor of any party hereto. The Escrow Agent agrees to accept delivery of the
Escrow Shares and to hold the Escrow Shares in an escrow account (the "Escrow
Account"), subject to the terms and conditions of this Agreement.
(b) Indemnification. The Indemnifying Shareholders have agreed in
Article V of the Merger Agreement to indemnify and hold harmless the Indemnified
Parties from and against specified Damages. The Escrow Shares shall be security
for such indemnity obligation of the Indemnifying Shareholders, subject to the
limitations, and in the manner provided, in this Agreement.
(c) Dividends, Etc. Any securities distributable to the Indemnifying
Shareholders in respect of or in exchange for any of the Escrow Shares, whether
by way of stock dividends, stock splits or otherwise, shall be delivered to the
Escrow Agent, who shall hold such securities in the Escrow Account. Such
securities shall be issued in the name of the Escrow Agent or its nominee and
shall be considered Escrow Shares for purposes hereof. Any cash dividends
distributable to the Indemnifying Shareholders in respect of the Escrow Shares
shall be distributed to the Indemnifying Shareholders.
(d) Voting of Shares. The Indemnification Representatives shall have
the right, in their sole discretion, on behalf of the Indemnifying Shareholders,
to direct the Escrow Agent in writing as to the exercise of any voting rights
pertaining to the Escrow Shares, and the Escrow Agent shall comply with any such
written instructions. In the absence of such instructions, the Escrow Agent
shall not vote any of the Escrow Shares.
(e) Transferability. The respective interests of the Indemnifying
Shareholders in the Escrow Shares shall not be assignable or transferable, other
than by operation of law. Notice of any such assignment or transfer by operation
of law shall be given to the Escrow Agent and the Purchaser, and no such
assignment or transfer shall be valid until such notice is given.
4. Administration of Escrow Account. The Escrow Agent shall administer
the Escrow Account as follows:
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(a) If an Indemnified Party has incurred or suffered Damages for which
it is entitled to indemnification under Article V of the Merger Agreement, the
Indemnified Party shall, on or before the date of the expiration of the
representation, warranty, covenant or agreement to which such claim relates,
give written notice of such claim (a "Claim Notice") to the Indemnification
Representatives and the Escrow Agent. Each Claim Notice shall state the amount
of claimed Damages (the "Claimed Amount") and the basis for such claim. The date
which is eighteen (18) months after the Date of Closing.
(b) Within 20 days after delivery of a Claim Notice, the
Indemnification Representatives shall provide to the Indemnified Party, with a
copy to the Escrow Agent, a written response (the "Response Notice") in which
the Indemnification Representatives shall: (i) agree that Escrow Shares having a
Fair Market Value (as computed pursuant to Section 6) equal to the full Claimed
Amount may be released from the Escrow Account to the Indemnified Party, (ii)
agree that Escrow Shares having a Fair Market Value equal to part, but not all,
of the Claimed Amount (the "Agreed Amount") may be released from the Escrow
Account to the Indemnified Party or (iii) contest that any of the Escrow Shares
may be released from the Escrow Account to the Indemnified Party. The
Indemnification Representatives may contest the release of Escrow Shares having
a Fair Market Value equal to all or a portion of the Claimed Amount only based
upon a good faith belief that all or such portion of the Claimed Amount does not
constitute Damages for which the Indemnified Party is entitled to
indemnification under Article V of the Merger Agreement. If no Response Notice
is delivered by the Indemnification Representatives within such 20-day period,
the Indemnification Representatives shall be deemed to have agreed that Escrow
Shares having a Fair Market Value equal to all of the Claimed Amount may be
released to the Indemnified Party from the Escrow Account.
(c) If the Indemnification Representatives in the Response Notice agree
(or are deemed to have agreed) that Escrow Shares having a Fair Market Value
equal to all of the Claimed Amount may be released from the Escrow Account to
the Indemnified Party, the Escrow Agent shall, promptly following the earlier of
the required delivery date for the Response Notice or the delivery of the
Response Notice, transfer, deliver and assign to the Indemnified Party such
number of Escrow Shares held in the Escrow Account which have a Fair Market
Value equal to the Claimed Amount (or such lesser number of Escrow Shares as is
then held in the Escrow Account).
(d) If the Indemnification Representatives in the Response Notice agree
that Escrow Shares having a Fair Market Value equal to part, but not all, of the
Claimed Amount may be released from the Escrow Account to the Indemnified Party,
the Escrow Agent shall promptly following the delivery of the Response Notice
transfer, deliver and assign to the Indemnified Party such number of Escrow
Shares held in the Escrow Account which have a Fair Market Value equal to the
Agreed Amount (or such lesser number of Escrow Shares as is then held in the
Escrow Account). A determination with respect to the remainder of the Claimed
Amount shall be made in accordance with subsection 4(e) below.
(e) If the Indemnification Representatives in the Response Notice
contest the release of Escrow Shares having a Fair Market Value equal to all or
part of the Claimed Amount (the
<PAGE> 74
"Contested Amount"), the matter shall be settled by binding arbitration in
Atlanta, Georgia. All claims shall be settled by three arbitrators in accordance
with the Commercial Arbitration Rules then in effect of the American Arbitration
Association (the "AAA Rules"). The Indemnification Representatives and the
Indemnified Party shall each designate one arbitrator within 15 days of the
delivery of the Indemnification Representatives' Response Notice contesting the
Claimed Amount. The Indemnification Representatives and the Indemnified Party
shall cause such designated arbitrators mutually to agree upon and designate a
third arbitrator; provided, however, that (i) failing such agreement within 45
days of delivery of the Indemnification Representatives' Response Notice, the
third arbitrator shall be appointed in accordance with the AAA Rules and (ii) if
either the Indemnification Representatives or the Indemnified Party fail to
timely designate an arbitrator, the dispute shall be resolved by the one
arbitrator timely designated. The Indemnifying Shareholders and the Indemnified
Party shall pay the fees and expenses of their respectively designated
arbitrators and shall bear equally the fees and expenses of the third
arbitrator. The Indemnification Representatives and the Indemnified Party shall
cause the arbitrators to decide the matter to be arbitrated pursuant hereto
within 60 days after the appointment of the last arbitrator. The arbitrators'
decision shall relate solely to whether the Indemnified Party is entitled to
receive the Contested Amount (or a portion thereof) pursuant to the applicable
terms of the Merger Agreement and this Agreement. The final decision of the
majority of the arbitrators shall be furnished to the Indemnification
Representatives, the Indemnified Party and the Escrow Agent in writing and shall
constitute a conclusive determination of the issue in question, binding upon the
Indemnification Representatives, the Indemnifying Shareholders, the Indemnified
Party and the Escrow Agent, and shall not be contested by any of them. Such
decision may be used in a court of law only for the purpose of seeking
enforcement of the arbitrators' award. After delivery of a Response Notice that
the Claimed Amount is contested by the Indemnification Representatives, the
Escrow Agent shall continue to hold in the Escrow Account a number of Escrow
Shares having a Fair Market Value sufficient to cover the Contested Amount (up
to the number of Escrow Shares then available in the Escrow Account),
notwithstanding the occurrence of the Termination Date, until (i) delivery of a
copy of a settlement agreement executed by the Indemnified Party and the
Indemnification Representatives setting forth instructions to the Escrow Agent
as to the release of Escrow Shares, if any, that shall be made with respect to
the Contested Amount or (ii) delivery of a copy of the final award of the
majority of the arbitrators setting forth instructions to the Escrow Agent as to
the release of Escrow Shares, if any, that shall be made with respect to the
Contested Amount. The Escrow Agent shall thereupon release Escrow Shares from
the Escrow Account (to the extent Escrow Shares are then held in the Escrow
Account) in accordance with such agreement or instructions; provided, however,
if the claim related to a third party claim the amount of which is contested and
the subject of litigation, the Escrow Agent shall not release the Escrow Shares
being held in connection with the Contested Amount of such third party claim
until a final order or other final resolution or settlement has been entered or
reached in the underlying litigation determining the amount of such claim,
whereupon the Escrow Agent shall release Escrow Shares from the Escrow Account
(to the extent Escrow Shares are then held in the Escrow Account) in accordance
with such final order or final resolution or settlement.
<PAGE> 75
5. Release of Escrow Shares.
(a) In the event that Purchaser elects, pursuant to the provisions of
Section 1.3(h) of the Merger Agreement, to waive the Profit Shortfall Adjustment
and the Profit Surplus Adjustment, one half of the Transferred Shares shall be
distributed to the Indemnifying Shareholders on the first anniversary of the
Closing Date. Promptly after the Termination Date, the Escrow Agent shall
distribute to the Indemnifying Shareholders all of the Escrow Shares (including
any remaining Transferred Shares) then held in escrow. Notwithstanding the
foregoing, if an Indemnified Party has previously given a Claim Notice which has
not then been resolved in accordance with Section 4, the Escrow Agent shall
retain in the Escrow Account after the Termination Date a number of Escrow
Shares (including Transferred Shares if necessary) having a Fair Market Value
equal to the Claimed Amount covered by any Claim Notice which has not then been
resolved. Any funds so retained in escrow shall be disbursed in accordance with
the terms of the resolution of such claims.
(b) Any distribution of all or a portion of the Escrow Shares to the
Indemnifying Shareholders shall be made in accordance with the percentages set
forth opposite such holders' respective names on Exhibit B attached hereto;
provided, however, that the Escrow Agent shall withhold the distribution of the
portion of the Escrow Shares otherwise distributable to Indemnifying
Shareholders who have not, according to written notice provided by the Purchaser
to the Escrow Agent, prior to such distribution, surrendered their respective
Certificates pursuant to the terms and conditions of the Merger Agreement. Any
such withheld shares shall be delivered to the Purchaser promptly after the
Termination Date, and shall be delivered by the Purchaser to the Indemnifying
Shareholders to whom such shares would have otherwise been distributed upon
surrender of their respective Certificates. Distributions to the Indemnifying
Shareholders shall be made by mailing stock certificates to such holders at
their respective addresses shown on Exhibit B (or such other address as may be
provided in writing to the Escrow Agent by any such holder). No fractional
Escrow Shares shall be distributed to Indemnifying Shareholders pursuant to this
Agreement. Instead, the number of shares that each Indemnifying Shareholder
shall receive shall be rounded down to the nearest whole number; and the Escrow
Agent shall sell such number of Escrow Shares as is equal to the aggregate of
the fractional shares that would otherwise be distributed to the Indemnifying
Shareholders and shall distribute the proceeds of such sale to the Indemnifying
Shareholders other-wise entitled to a fractional Escrow Share pro rata based
upon the fraction of an Escrow Shares to which each such Indemnifying
Shareholder is otherwise entitled.
6. Valuation of Escrow Shares. For purposes of this Agreement, the
Fair Market Value of the Escrow Shares to be retained in the Escrow Account
pending a final resolution of a claim shall be determined based upon the average
of the closing prices of the Purchaser Common Stock on the Nasdaq National
Market System for the twenty trading days immediately preceding the date on
which the claim is made. The Fair Market Value of the Escrow Shares to be
released from the Escrow Account after a final determination/resolution of a
claim shall be determined based upon the average closing prices of the
Purchaser's Common Stock on the Nasdaq National Market System for the twenty
trading days immediately preceding the date of such final
determination/resolution.
<PAGE> 76
7. Fees and Expenses of Escrow Agent. The Purchaser, on the one hand,
and the Indemnifying Shareholders, on the other hand, shall each pay one-half of
the fees of the Escrow Agent for the services to be rendered by the Escrow Agent
hereunder.
8. Limitation of Escrow Agent's Liability.
(a) The Escrow Agent shall incur no liability with respect to any
action taken or suffered by it in reliance upon any notice, direction,
instruction, consent, statement or other documents believed by it to be genuine
and duly authorized, nor for other action or inaction except its own willful
misconduct or gross negligence. The Escrow Agent shall not be responsible for
the validity or sufficiency of this Agreement. In all questions arising under
the Escrow Agreement, the Escrow Agent may rely on the advice of counsel, and
for anything done, omitted or suffered in good faith by the Escrow Agent based
on such advice the Escrow Agent shall not be liable to anyone. The Escrow Agent
shall not be required to take any action hereunder involving any expense unless
the payment of such expense is made or provided for in a manner reasonably
satisfactory to it.
(b) The Purchaser and the Indemnifying Shareholders hereby, jointly and
severally, agree to indemnify the Escrow Agent for, and hold it harmless
against, any loss, liability or expense incurred without gross negligence or
willful misconduct on the part of Escrow Agent, arising out of or in connection
with its carrying out of its duties hereunder. The Purchaser, on the one hand,
and the Indemnifying Shareholders, on the other hand, shall each be liable for
one-half of such amounts.
9. Liability and Authority of Indemnification Representatives;
Successors and Assignees.
(a) The Indemnification Representatives shall incur no liability to the
Indemnifying Shareholders with respect to any action taken or suffered by them
in reliance upon any note, direction, instruction, consent, statement or other
documents believed by them to be genuinely and duly authorized, nor for other
action or inaction except their own willful misconduct or gross negligence. The
Indemnification Representatives may, in all questions arising under the Escrow
Agreement, rely on the advice of counsel and for anything done, omitted or
suffered in good faith by the Indemnification Representatives based on such
advice, the Indemnification Representatives shall not be liable to the
Indemnifying Shareholders.
(b) In the event of the death or permanent disability of either
Indemnification Representative, or his resignation as an Indemnification
Representative, a successor Indemnification Representative shall be appointed by
the other Indemnification Representative or, absent its appointment, a successor
Indemnification Representative shall be elected by a majority vote of the
Indemnifying Shareholders, with each such Indemnifying Shareholder (or his or
her successors or assigns) to be given a vote equal to the number of votes
represented by the Company Shares held by such Indemnifying Shareholder
immediately prior to the Effective Time. Each successor Indemnification
Representative shall have all of the power, authority, rights and privileges
conferred by this Agreement upon the original Indemnification
<PAGE> 77
Representatives, and the term "Indemnification Representatives" as used herein
shall be deemed to include successor Indemnification Representatives.
(c) The Indemnification Representatives, acting jointly but not singly,
shall have full power and authority to represent the Indemnifying Shareholders,
and their successors, with respect to all matters arising under this Agreement
and all actions taken by any Indemnification Representative hereunder shall be
binding upon the Indemnifying Shareholders, and their successors, as if
expressly confirmed and ratified in writing by each of them. Without limiting
the generality of the foregoing, the Indemnification Representatives, acting
jointly but not singly, shall have full power and authority to interpret all of
the terms and provisions of this Agreement, to compromise any claims asserted
hereunder and to authorize payments to be made with respect thereto, on behalf
of the Indemnifying Shareholders and their successors. All actions to be taken
by the Indemnification Representatives hereunder shall be evidenced by, and
taken upon, the written direction of a majority thereof.
10. Amounts Payable by Indemnifying Shareholders. The amounts payable
by the Indemnifying Shareholders under this Agreement (i.e., the fees and
expenses of arbitrators payable pursuant to Section 4(e), the fees of the Escrow
Agent payable pursuant to Section 7 and the indemnification obligations pursuant
to Sections 8(b)) shall be payable solely as follows. The Indemnification
Representatives shall notify the Escrow Agent of any such amount payable by the
Indemnifying Shareholders as soon as they become aware that any such amount is
payable, with a copy of such notice to the Purchaser. On the sixth business day
after the delivery of such notice, the Escrow Agent shall sell such number of
Escrow Shares (up to the number of Escrow Shares then available in the Escrow
Account), subject to compliance with all applicable securities laws, as is
necessary to raise such amount, and shall disburse such proceeds to the party to
whom such amount is owed in accordance with the instructions of the
Indemnification Representatives; provided that if the Purchaser delivers to the
Escrow Agent (with a copy to the Indemnification Representatives), within five
business days after delivery of such notice by the Indemnification
Representatives, a written notice contesting the legitimacy or reasonableness of
such amount, then the Escrow Agent shall not sell Escrow Shares to raise the
disputed portion of such claimed amount, and such dispute shall be resolved by
the Purchaser and the Indemnification Representatives in accordance with the
procedures set forth in Section 4(e).
11. Termination. This Agreement shall terminate upon the later of the
Termination Date or the distribution by the Escrow Agent of all of the Escrow
Shares in accordance with this Agreement; provided that the provisions of
Sections 8 and 9 shall survive such termination.
12. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested,
<PAGE> 78
postage prepaid, or (ii) via a reputable nationwide overnight courier service,
in each case to the address set forth below. Any such notice, instruction or
communication shall be deemed to have been delivered two business days after it
is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service.
If to the Purchaser and/or the Acquisition Sub:
Tekgraf, Inc.
2979 Pacific Concourse Drive, Suite B
Norcross, Georgia 30071
If to the Company:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
If to the Indemnification Representatives:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
If to the Escrow Agent:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 12.
13. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by
delivering a resignation to the parties to this Escrow Agreement, not less than
60 days' prior to the date when such resignation shall take effect. The
Purchaser and the Indemnification Representatives shall appoint a successor
Escrow Agent and neither party shall unreasonably withhold approval of such
successor Escrow Agent. If, within such notice period, the Purchaser provides to
the Escrow Agent written instructions with respect to the appointment of a
successor Escrow Agent and directions
<PAGE> 79
for the transfer of any Escrow Shares then held by the Escrow Agent to such
successor, the Escrow Agent shall act in accordance with such instructions and
promptly transfer such Escrow Shares to such designated successor.
14. General.
(a) Governing Law, Assigns. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Georgia without
regard to conflict-of-law principles and shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) Entire Agreement. Except for those provisions of the Merger
Agreement referenced herein, this Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of any
breach of any provision of this Escrow Agreement shall be effective unless in
writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(e) Amendment. This Agreement may be amended only with the written
consent of the Purchaser, the Escrow Agent and the Indemnification
Representatives.
<PAGE> 80
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER
TEKGRAF, INC.
By:
-----------------------------------------
Dan I. Bailey
President
ACQUISITION SUB:
TEKGRAF SUB ___, INC.
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
ESCROW AGENT
-----------------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE> 81
[INDEMNIFICATION REPRESENTATIVE]
(SEAL)
--------------------------------------
Name:
---------------------------------------
COMPANY:
------------------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
COMPANY SHAREHOLDERS:
(SEAL)
--------------------------------------
Name:
---------------------------------------
(SEAL)
--------------------------------------
Name:
---------------------------------------
(SEAL)
--------------------------------------
Name:
---------------------------------------
<PAGE> 82
EXHIBIT B
Indemnifying Shareholder Percentage
<PAGE> 1
EXHIBIT 10.23
AGREEMENT AND PLAN OF MERGER
by and among
Tekgraf, Inc., a Delaware corporation,
Tekgraf Sub II, Inc., a Georgia corporation,
and
Martec, Inc.
a California corporation, and its shareholders
Dated as of March 23, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.3 Purchase Price Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.4 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.5 Dissenting Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.6 Certain Tax Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE II REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1 Representations and Warranties of the Company and the
Company Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.2 Representations and Warranties of Acquisition Sub
and Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.3 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.4 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.5 Investment Representation of Company Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE III COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.1 Covenants Against Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.2 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.3 Interim Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.4 Completion of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.5 On and After Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.6 Continuity of Business Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.7 Non-Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.8 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.9 Company Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.10 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IV CONDITIONS PRECEDENT TO OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.1 Conditions to Obligations of Acquisition Sub . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.2 Conditions to Obligations of the Company and the Company Shareholders . . . . . . . . . . . . . . . 39
ARTICLE V INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.1 Survival of Representations, Warranties, Covenants and Agreements . . . . . . . . . . . . . . . . . 40
5.2 Indemnification of Acquisition Sub and Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.3 Indemnification of the Company Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.4 Procedure for Indemnification with Respect to Third-Party Claims . . . . . . . . . . . . . . . . . 41
5.5 Procedure For Indemnification with Respect to Non-Third Party Claims. . . . . . . . . . . . . . . . 42
5.6 Escrowed Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE VI TERMINATION AND CONDITIONS SUBSEQUENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE VII MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.1 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.2 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.3 Binding Effect: Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.4 Expenses of Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.5 Waiver; Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.8 Remedies of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.9 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.10 Arbitration; Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.11 Cooperation and Records Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
ii
<PAGE> 4
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of March ___, 1998, is
made and entered into by and among TEKGRAF, INC., a Delaware corporation
("Purchaser"), TEKGRAF SUB II, a Georgia corporation ("Acquisition Sub"),
MARTEC, INC., a California corporation doing business as Media Graphics
Distribution and as MGD (the "Company"), and the shareholders set forth on the
signature page of this Agreement (the "Company Shareholders"). Acquisition Sub
and the Company are hereinafter sometimes referred to as the "Constituent
Corporations" and Acquisition Sub as the "Surviving Corporation".
WHEREAS, Purchaser, Acquisition Sub, and the Company desire that the
Company merge with and into Acquisition Sub (the "Merger"), upon the terms and
conditions set forth herein and in accordance with the Georgia Business
Corporation Code and the California General Corporation Law, with the result
that Acquisition Sub shall continue as the surviving corporation and the
separate existence of the Company (except as it may be continued by operation
of law) shall cease;
WHEREAS, Purchaser, Acquisition Sub, and the Company desire that, upon
the Merger, at the Effective Time (as hereinafter defined), all outstanding
shares of common [and preferred] stock of the Company be converted into shares
of common stock of Purchaser and cash as provided herein;
WHEREAS, the respective Boards of Directors of Purchaser, Acquisition
Sub, and the Company have approved the Merger; and
WHEREAS, the parties intend for the Merger to be accomplished under
Section 368(a)(2)(D) under the Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, for and in consideration of the mutual
representations, warranties, covenants, agreements and conditions contained
herein, and in order to set forth the terms and conditions of the Merger and
the mode of carrying the same into effect, the parties hereto hereby agree as
follows:
DEFINITIONS
"Accounts Receivable" has the meaning set forth in Section 2.1(kk).
"Accredited Investor" has the meaning set forth in Regulation D
promulgated under the Securities Act of 1933.
"Acquisition Sub" means Tekgraf Sub II, Inc., a Georgia corporation.
"Acquisition Sub Common Stock" means the common stock of Tekgraf Sub
II, Inc., par value $.001 per share.
"Acquisition Sub Indemnifiable Claims" has the meaning set forth in
Section 5.3.
"Acquisition Sub Share" means a share of Acquisition Sub Common Stock.
<PAGE> 5
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934.
"Affiliated Group" means any affiliated group within the meaning of
Code Section 1504(a).
"Articles of Merger" means the Articles of Merger respecting the
Merger as filed by the Parties with the Secretary of State of the State of
California.
"Audited Balance Sheet" has the meaning set forth in Section 2.1(e).
"Business" shall mean, collectively, the businesses conducted by the
Company including, among other things, the business of computer integration and
wholesale distribution of computer products.
"Capital Stock" has the meaning set forth in Section 2.1(b).
"Cash Consideration" has the meaning set forth in Section 1.2(e).
"Certificate of Merger" means the Certificate of Merger respecting the
Merger filed by the Parties with the Secretary of State of the State of
Georgia.
"Claim" has the meaning set forth in Section 2.1(bb).
"Closing" has the meaning set forth in Section 1.4 below.
"Closing Date" has the meaning set forth in Section 1.4 below.
"Code" has the meaning set forth in Section 2.1(k).
"Company" means Martec, Inc., a California corporation doing business
as Media Graphics Distribution and MGD.
"Company Indemnifiable Claims" has the meaning set forth in Section
5.2.
"Company Share" means a share of common stock of the Company, no par
value.
"Company Shareholder(s)" means any shareholder(s) of the Company.
"Company State" means the state of incorporation of the Company.
"Confidential Material" has the meaning set forth in Section 3.1(a).
"Contracts" has the meaning set forth in Section 2.1(r).
"Customers" has the meaning set forth in Section 2.1(dd).
"Damages" has the meaning set forth in Section 5.2.
"Dissenting Share" means any Company Share which any shareholder who
or which has exercised his or its appraisal rights under the California
Corporate Code holds of record.
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"Effective Time" has the meaning set forth in Section 1.2(a) below.
"Employees" has the meaning set forth in Section 2.1(z).
"Environmental Laws" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Resource Conservation and Recovery
Act of 1976, and the Occupational Safety and Health Act of 1970, each as
amended, together with all other laws (including rules, regulations, codes,
plans, injunctions, judgments, orders, decrees, rulings, and charges
thereunder) of federal, state, local, and foreign governments (and all agencies
thereof) concerning pollution or protection of the environment, public health
and safety, or employee health and safety, including laws relating to
emissions, discharges, releases, or threatened releases of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or wastes
into ambient air, surface water, ground water, or lands or otherwise relating
to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, or chemical,
industrial, hazardous, or toxic materials or wastes.
"Equity Consideration" has the meaning set forth in Section 1.2(e).
"ERISA" has the meaning set forth in Section 2.1(hh).
"Financial Statements" has the meaning set forth in Section 2.1(e).
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Hazardous Substance Issues" has the meaning set forth in Section
2.1(bb).
"Indemnifiable Claims" has the meaning set forth in Section 5.4(a).
"Indemnified Party" has the meaning set forth in Section 5.4(a).
"Indemnifying Party" has the meaning set forth in Section 5.4(a).
"Intellectual Property" means (a) all inventions (whether patentable
or unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures, together
with all reissuances, continuations, continuations-in-part, revisions,
extensions, and reexaminations thereof, (b) all trademarks, service marks,
trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including all applications, registrations, and renewals in connection
therewith), (f) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing, the production process and techniques, technical data, designs,
drawings, specifications, customer and supplier lists, pricing and cost
information, and
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business and marketing plans and proposals), (g) all computer software
(including data and related documentation), (h) all other proprietary rights,
and (i) all copies and tangible embodiments thereof (in whatever form or
medium).
"Inventory" has the meaning set forth in Section 2.1(j).
"IRS" means the Internal Revenue Service.
"Knowledge" means the actual knowledge of all officers, directors and
shareholders of the Company, after reasonable investigation and due inquiry.
"Leased Properties" has the meaning set forth in Section 2.1(gg).
"Liens" has the meaning set forth in Section 2.1(i).
"Managing Shareholder" shall mean Mark Lewis, the current president of
Martec, Inc.
"Materials" has the meaning set forth in Section 2.1(r).
"Merger" has the meaning set forth in the recitals above and in
Section 1.1 below.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" means a party to this Agreement and the Merger.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Plan" has the meaning set forth in Section 2.1(hh).
"Purchaser Common Stock" shall mean the Class A Common Stock of
Purchaser, par value $.001 per share.
"Purchaser Shares" means shares of Purchaser Common Stock.
"Qualified Plans" has the meaning set forth in Section 2.1(hh).
"Related Agreements" shall mean any and all escrow agreements and
employment agreements required to be executed in connection with this
Agreement.
"Related Property" has the meaning set forth in Section 2.1(t).
"Representatives" has the meaning set forth in Section 2.1(aa).
"Returns" has the meaning set forth in Section 2.1(k).
"SEC" means the Securities and Exchange Commission.
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"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended.
directors.
"Suppliers" has the meaning set forth in Section 2.1(r).
"Surviving Corporation" has the meaning set forth in Section 1.1
below.
"State" shall have the meaning set forth in Section 2.1(a).
"Taxes" has the meaning set forth in Section 2.1(k).
"Territory" has the meaning set forth in Section 3.5(a).
"Unaudited Annual Financial Statements" has the meaning set forth in
Section 2.1(e).
"Unaudited Financial Statements" has the meaning set forth in Section
2.1(e).
"Unaudited Interim Financial Statements" has the meaning set forth in
Section 2.1(e).
ARTICLE I
THE MERGER
Section 1.1 The Merger. On and subject to the terms and
conditions of this Agreement, the Company will merge with and into Acquisition
Sub (the "Merger") at the Effective Time. From and after the Effective Time,
the separate corporate existence of the Company shall cease, and Acquisition
Sub shall continue as the corporation surviving the Merger (the "Surviving
Corporation"). Immediately after the Effective Time, the Surviving Corporation
shall change its name to "Media Graphics Distribution, Inc." and shall file
with the Secretary of State of the State of California its qualification to do
business as a foreign corporation. The parties shall cause the Certificate of
Merger to be filed with the Secretary of State of the State of Georgia and the
Secretary of State of the State of California promptly following the Closing.
Section 1.2 Effect of Merger.
(a) General. The Merger shall become effective at the time (the
"Effective Time") when the Articles of Merger filed with the Secretary of State
of the State of California and the Certificate of Merger filed with the
Secretary of State of the State of Georgia have become effective in accordance
with their terms and in accordance with the laws of each State. The Merger
shall have the effect set forth in Chapter 11 of the California General
Corporation Law and Section 14-2-1106 of the Georgia Business Corporation Code.
The Surviving Corporation may, at any time after the Effective Time, take any
action (including executing and delivering any document) in the name and on
behalf of the Surviving Corporation in order to carry out and effectuate the
transactions contemplated by this Agreement. Further, the Surviving
Corporation shall possess all of the rights, privileges, powers and franchises,
and be subject to all the restrictions, disabilities and duties, of each of the
Constituent
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Corporations; and the rights, privileges, powers and franchises of each of the
Constituent Corporations, and all property of and all debts due to any of the
Constituent Corporations on whatever account, shall be vested in the Surviving
Corporation; and all property, rights, privileges, powers and franchises, and
all and every other interest shall be thereafter as effectually the property of
the Surviving Corporation as they were of the Constituent Corporations, and the
title to any real estate vested by deed or otherwise in any of the Constituent
Corporations shall not revert or be in any way impaired by reason of the
Merger, but all rights of creditors and all liens upon any property of any of
the Constituent Corporations shall be preserved unimpaired, and all debts,
liabilities and duties of the Constituent Corporations shall attach to the
Surviving Corporation and may be enforced against it to the same extent as if
said debts, liabilities and duties had been incurred or contracted by it.
(b) Articles of Incorporation. The Articles of Incorporation of
Acquisition Sub in effect at and as of the Effective Time will remain the
Articles of Incorporation of the Surviving Corporation without any modification
or amendment, other than the change of the name of the Surviving Corporation,
in the Merger.
(c) Bylaws. The Bylaws of Acquisition Sub in effect at and as of
the Effective Time will remain the Bylaws of the Surviving Corporation without
any modification or amendment, other than the change of the name of the
Surviving Corporation, in the Merger.
(d) Directors and Officers. The initial directors of the
Surviving Corporation at and as of the Effective Time shall be comprised of the
current Acquisition Sub directors, and those persons listed on Exhibit D. The
principal officers of the Surviving Corporation at and as of the Effective Time
shall be as set forth in Exhibit D.
(e) Conversion of Shares. At and as of the Effective Time, in
consideration for the Capital Stock and in full payment therefor, each Company
Share shall be converted into the right to receive its pro rata share of (i)
Five Hundred Thousand Dollars ($500,000.00) (the "Cash Consideration") and (ii)
an aggregate of 300,000 shares of Purchaser Common Stock (the "Equity
Consideration," together with the Cash Consideration, hereinafter referred to
collectively as the "Purchase Price"), subject to the adjustments to the
Purchase Price set out in Section 1.3. All shares of Purchaser Common Stock
issued as herein described shall have identical rights as to dividends, voting
and all other matters. Except as expressly provided in this Agreement, there
shall be no other consideration paid to or for the account of the Company
Shareholders in connection with or relating to the transactions contemplated
hereby. However, the Equity Consideration shall be subject to equitable
adjustment in the event of a stock split, stock dividend, reverse stock split,
or other change in the number of Purchaser Shares outstanding. Each
Dissenting Share shall be converted into the right to receive payment from the
Surviving Corporation with respect thereto in accordance with the provisions
set forth in Section 1.5. No Company Share shall be deemed to be outstanding
or to have any rights other than those set forth above in this Section 1.2(e)
after the Effective Time. No fractional Purchaser Shares shall be issued, and,
to the extent that any shareholder would be entitled to receive fractional
shares of Purchaser Common Stock pursuant this Section, the number of Purchaser
Shares that such Company Shareholder is entitled to receive shall be rounded
down to the next lower whole number. Any such fractional share interests will
not entitle the holder thereof to vote or to any rights of a shareholder of
Purchaser.
(f) All shares of Capital Stock held by the Company as treasury
stock shall be retired and canceled and no shares of Purchaser Common Stock or
other consideration shall be delivered or paid in exchange therefor.
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(g) Each Purchaser Share issued and outstanding at and as of the
Effective Time will remain issued and outstanding thereafter.
Section 1.3 Purchase Price Adjustment.
(a) As used in this Section 1.3, the following capitalized terms
shall have the meanings set forth below:
"Actual Pre-Tax Profit" shall mean the pre-tax profit of the Surviving
Corporation, determined in accordance with generally accepted accounting
principles consistently applied ("GAAP"), for the Year. Except as otherwise
stated herein, the accounting principles employed shall be the same as those
applied by the Company on a consistent basis in prior years. Depreciation for
all plant and equipment shall be computed as follows: (i) items with a useful
life of three years or less when placed in service shall be depreciated using
the straight-line method of depreciation; (ii) items with a useful life of
greater than three years when placed in service shall be depreciated using the
declining- declining-balance method of depreciation; (iii) items with a value
of less than $400.00 when purchased shall be expensed and written off
immediately; (iv) prior period adjustments and extraordinary items, as
defined in APB Opinion 9, APB Opinion 20 and FASB Statement 15 will be excluded
from the definition of "Actual Pre-Tax Profit;" and, (v) inventories will be
accounted for on a cost basis consistent with prior years, determined on a
first-in, first-out basis and providing for a write down to market value in
those instances where the cost exceeds the market value as of the date of the
balance sheet. The "Actual Pre-Tax Profit" shall be adjusted on a pro forma
basis, as and if required, to reflect profit or losses normally attributable to
the Company/Surviving Corporation due to the manufacturers' co-op, advertising,
market development or discount programs, if such profit or losses are not
received by or charged to Acquisition Sub.
"Actual Tangible Net Asset Value" shall mean the aggregate amount of
the Current Assets less Liabilities on the Closing Date.
"Alternative Actual Pre-Tax Profit" shall mean the pre-tax profit of
the Surviving Corporation, determined in accordance with generally accepted
accounting principles consistently applied ("GAAP"), for the Alternative Year.
Other than the period for which it is calculated, it shall be computed in the
same manner as the Actual Pre-Tax Profit.
"Alternative Warranted Pre-Tax Profit" shall mean $500,000.
"Alternative Year" means the twelve month period beginning on the date
which is three months after the day after the Closing Date and ending on the
date which is fifteen months after the Closing Date.
"Current Assets" shall be used in all respects in accordance with GAAP
and comprises the aggregate of all cash, cash equivalents, receivables and
inventory, but specifically excludes all other fixed or current assets as
determined in accordance with GAAP and any deferred assets, including without
limitation deferred tax and deferred income, and valued in accordance with
GAAP, and on a basis in all material respects consistent with that adopted for
the purposes of the last audited financial statements of the Company and the
value of all receivables and inventory has been written down to realizable
market value and adequate provision has been made therefor.
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"Fixed Assets" shall be used in all respects in accordance with GAAP
and shall mean fixed assets at the values at which they were included in the
latest audited financial statements (or if acquired after the balance sheet
date, their cost), less depreciation calculated in accordance with the method
adopted in the financial statements. Fixed Assets shall specifically exclude,
and no value shall be attributable to, any intangible assets (including without
limitation goodwill, trademarks, service marks, formulas, franchise rights and
patents), and no asset shall be written up or revalued above its original cost
less applicable depreciation.
"Liabilities" shall be used in all respects in accordance with GAAP
and shall mean all liabilities, whether long-term or current, including without
limitation Taxes, all actual liabilities of the Company on the Closing Date,
with proper provision in accordance with GAAP, having been made therein for all
other liabilities of the Company then outstanding whether contingent,
quantified, disputed or not, that are known or reasonably should have been
known, including without limitation the cost of any work or material for which
payment has been received or credit taken, any future loss which may arise in
connection with uncompleted contracts and any claims against the Company in
respect of completed contracts.
"Net Asset Value Shortfall" means the excess, if any, of the Warranted
Tangible Net Asset Value over the Actual Tangible Net Asset Value on the
Closing Date, subject to the limitations set forth in this Section 1.3.
"Net Asset Value Surplus" means the excess, if any, of the Actual
Tangible Net Asset Value over the Warranted Tangible Net Asset Value on the
Closing Date, subject to the limitations set forth in this Section 1.3.
"Profit Shortfall" means the excess, if any, of the Warranted Pre-Tax
Profit over the Actual Pre-Tax Profit, subject to the limitations set forth in
this Section 1.3.
"Profit Surplus" means the excess, if any, of the Actual Pre-Tax
Profit over $500,000, subject to the limitations set forth in this Section 1.3.
"Warranted Pre-Tax Profit" shall mean $450,000.
"Warranted Tangible Net Asset Value" shall mean $260,000.
"Year" means the twelve month period beginning on the day after the
Closing Date and ending on the first anniversary of the Closing Date.
(b) Each Company Shareholder agrees that the Warranted Pre-Tax
Profit and the Warranted Tangible Net Asset Value of the Company shall be not
less than the amounts set forth above. To the extent that any of the
conditions set forth below are met, the corresponding adjustments to the
Purchase Price payable to the Company Shareholders or the Purchaser, as the
case may be, shall be made:
(i) In the event that there is a Net Asset Value Surplus,
the Purchase Price shall be increased by the amount of the Net Asset
Value Surplus. Such amount will be paid by the Purchaser, in cash, to
the Company Shareholders within ninety (90) days after the
determination of Actual Tangible Net Asset Value.
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(ii) In the event that there is a Net Asset Value
Shortfall, the Purchase Price shall be reduced by the amount of the
Net Asset Value Shortfall. Such amount will be paid, in cash, by the
Company Shareholders to Purchaser within thirty (30) days after the
determination of the Actual Tangible Net Asset Value.
(iii) In addition to any adjustments made pursuant to
subsections (i) and (ii) above, if the Actual Pre-Tax Profit for the
Year (or for the Alternative Year, if applicable) exceeds $500,000,
the Purchase Price shall be increased by the number of Purchaser
Shares determined by the following formula (the "Profit Surplus
Adjustment"):
(Actual Pre-Tax Profit/$500,000 x 400,000) - 400,000
In no event, however, shall the Purchase Price be increased by
more than 40,000 Purchaser Shares pursuant to this Profit Surplus
Adjustment (the "Adjustment Ceiling").
(iv) The number of Purchaser Shares required for the
Profit Surplus Adjustment shall be transferred to Company Shareholders
within three business days after the final determination of the amount
of such Profit Surplus Adjustment. Also in addition to any
adjustments made pursuant to subsections (i) and (ii) above, in the
event that the Warranted Pre-Tax Profit exceeds the Actual Pre-Tax
Profit for the Year (or the for Alternative Year, if applicable), the
Purchase Price shall be reduced by the number of Purchaser Shares
determined by the following formula (the "Profit Shortfall
Adjustment"):
400,000 - (Actual Pre-Tax Profit/$500,000 x 400,000)
The number of Purchaser Shares required for the Shortfall
Surplus Adjustment shall be transferred to Purchaser within three
business days after the receipt of notice from Purchaser of the amount
of such Profit Shortfall Adjustment. In no event, however, shall the
Purchase Price be reduced by more than 75,000 Purchaser Shares
pursuant to this Profit Shortfall Adjustment (the "Adjustment
Floor").
(v) In the event that there is a stock split, stock
dividend, reverse stock split or other change in the number of
Purchaser Shares outstanding, the formulae set forth in subsections
(iii) and (iv) above, the Adjustment Ceiling and the Adjustment Floor
shall be proportionately adjusted to reflect such a change in the
number of Purchaser Shares.
(c) Any receivable of the Company existing as of the Closing Date
that remains uncollected by the Surviving Corporation or its successor 90 days
after the Closing Date, or such later date as determined by the Extension
Option below (the "Measurement Date"), or, as of such date, has been collected
at less than its full value as shown in Current Assets on the Closing Date
shall be considered a "Collection Shortfall." The Company Shareholders shall
have the option to extend the Measurement Date to a date that is 120 days after
the Closing Date by giving notice of such extension to Purchaser and Surviving
Corporation no later than the date which is 60 days after the Closing Date (the
"Extension Option"). In the event that there is a Collection Shortfall, (i)
the Surviving Corporation shall have the option of assigning such receivable to
the Company Shareholders, without representation or warranty, not more than 30
days after the Measurement Date, and demanding the amount of the Collection
Shortfall, and upon such assignment, such Company Shareholders shall pay to the
Surviving Corporation such amount, in cash, within ten (10) days after demand;
provided that Surviving Corporation shall have exercised all reasonable efforts
at collecting such receivable at such full value;
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and (ii) the Company Shareholders shall have the option of causing the
Surviving Corporation to sell such receivable to the Company Shareholders,
without representation or warranty, not more than 120 days after the Closing
Date, and paying the amount of the Collection Shortfall, and upon such
assignment, the Company Shareholders shall pay Surviving Corporation such
amount, in cash, within ten (10) days after demand. The Company Shareholders
shall thereafter be free to pursue such collection measures as they in their
sole discretion shall deem necessary or appropriate. To the extent, if any,
that the Collection Shortfall remains unpaid after such ten (10) day period,
Surviving Corporation shall adjust the Purchase Price, effective as of the
Closing Date, in accordance with the provisions set forth in Section 1.3(b)(ii)
above, adding Collection Shortfall to the Net Asset Value Shortfall.
(d) Any items of the Company's inventory existing as of the
Closing Date that remain unsold by the Surviving Corporation or its successor
90 days thereafter, or such later date as chosen by the Company Shareholders
upon exercise of the Extension Option, set forth in Section 1.3(c) above, or
which have been sold at less than full value as shown in Current Assets on the
Closing Date shall be considered "Inventory Shortfall." Not more than thirty
(30) days after the Measurement Date, Surviving Corporation shall deliver and
transfer such unsold inventory to the Company Shareholders without
representation or warranty and shall demand the amount of the Inventory
Shortfall, and upon such transfer and delivery, the Company Shareholders shall
pay the Surviving Corporation such amount, in cash, within ten (10) days of
demand; provided that Surviving Corporation shall have exercised all reasonable
efforts at selling such inventory at such full value. Such Company
Shareholders shall, at any time after Surviving Corporation's demand of the
Inventory Shortfall, be free to sell such inventory as they in their sole
discretion shall deem necessary or appropriate. To the extent, if any, that
the Inventory Shortfall remains unpaid after such ten (10) day period,
Surviving Corporation shall adjust the Purchase Price, effective as of the
Closing Date, in accordance with the provisions set forth in Section 1.3(b)(ii)
above, adding Inventory Shortfall to the Net Asset Value Shortfall.
(e) Each Company Shareholder shall escrow twenty percent (20%) of
the Equity Consideration (the "Escrowed Shares") and the Company Shareholders
shall collectively escrow $150,000 of the Cash Consideration (the "Escrowed
Cash"), to be subject to redistribution by Purchaser and Acquisition Sub in the
circumstances described in this Section 1.3. The terms of the escrow shall be
substantially as set forth in the form of Escrow Agreement attached as Exhibit
1.3(e) hereto. Any Escrowed Cash not subject to redistribution for purposes of
this Section shall be released to the Company Shareholders after final
determination of the Actual Tangible Net Asset Value. The Escrowed Cash
released to the Company Shareholders shall include interest earned on such
released Escrowed Cash, to the extent that the Company Shareholders provide the
escrow agent with the appropriate paperwork required to invest such funds on a
timely basis. Upon determination of either a Profit Surplus Adjustment or a
Profit Shortfall Adjustment pursuant to the terms of Section 1.3(b), the number
of Escrowed Shares to be used to satisfy such Adjustment shall be calculated by
dividing the amount of the Adjustment by the twenty-day average trading price
of Purchaser Common Stock as quoted on the Nasdaq National Market System for
the twenty-day period ending on the date that the Adjustment is determined. Any
Escrowed Shares not subject to redistribution for the purposes of this Section
shall be released to the Company Shareholders as follows: one-half within
thirty (30) days after the determination of the application of this Section
1.3 pursuant to the provisions of subsection (b), (c) or (d) above, as the case
may be, and one-half on the first anniversary of the Closing Date, or, in the
event that the Company Shareholders elect to exercise the Alternative Year
provisions set forth in Section 1.3(g), at the end of the Alternative Year. In
the event that the Purchase Price Adjustment described in this Section 1.3
exceeds the number of Escrowed Shares and the amount of Escrowed Cash
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available, Purchaser's recovery of shares or cash pursuant to the Purchase
Price Adjustment shall not be limited to the number of available Escrowed
Shares or the amount of Escrowed Cash. In the event that Purchaser elects,
pursuant to Section 1.3(h), to waive the Profit Surplus Adjustment of Section
1.3(b)(iii) and the Profit Shortfall Adjustment of Section 1.3(b)(iv), the
Escrowed Shares shall be transferred to the escrow account established under
Section 5.6 hereof, and such shares shall become subject to all of the terms
and conditions under Section 5.6, except that such shares shall be released to
the Company Shareholders pursuant to the provisions of that certain Pledge,
Security and Escrow Agreement executed in connection with Section 5.6 hereof.
(f) As an example of the application of subsections (b) and (c)
above, in the event that the Actual Tangible Net Asset Value shall be $240,000
on the Closing Date rather than the Warranted Tangible Net Asset Value of
$260,000, being a $20,000 shortfall in Warranted Tangible Net Asset Value, and
an additional shortfall is determined under subsection (c) above in the amount
of $10,000 and such amount remains unpaid, and in the event that the Actual
Pre-Tax Profit shall be $430,000, rather than the Warranted Pre-Tax Profit of
$450,000, being a $20,000 shortfall in Warranted Pre-Tax Profit, then the
amount of Cash Consideration shall be reduced by $30,000 and the number of
Purchaser Shares to be distributed to the Company Shareholders shall be reduced
by 56,000 shares, computed as follows:
400,000 - ($430,000 / $500,000 x 400,000) = 56,000 Shares
(g) For purposes of calculating the Purchase Price Adjustment
under this Section 1.3, the Company Shareholders shall have the option, at the
end of the Year, to calculate the Profit Surplus Adjustment, as set forth in
Section 1.3(b)(iii), and the Profit Shortfall Adjustment, as set forth in
Section 1.3(b)(iv), based on the Alternative Year rather than the Year. If the
Company Shareholders elect to exercise this option, the following substitutions
shall be made to the provisions of Sections 1.3(b)(iii) and (iv): the
Alternative Actual Pre-Tax Profit shall be substituted for the Actual Pre-Tax
Profit and the Alternative Warranted Pre-Tax Profit shall be substituted for
the Warranted Pre-Tax Profit. Once the Company Shareholders elect to exercise
this option, the decision shall be final, and the Company Shareholders shall
not be entitled to calculate the Purchase Price Adjustment based on the Actual
Pre-Tax Profit and the Warranted Pre-Tax Profit.
(h) Purchaser shall have the exclusive option to waive the Profit
Surplus Adjustment set forth in Section 1.3(b)(iii) and the Profit Shortfall
Adjustment set forth in Section 1.3(b)(iv) by giving notice of its election to
exercise such option within 120 days after the Closing Date. In the event that
Purchaser makes such an election, there shall be no adjustments whatsoever
pursuant to Sections 1.3(b)(iii) and (iv).
(i) Until the end of the Year (or the end of the Alternative Year,
if the Shareholders elect to calculate the Purchase Price Adjustment on that
basis), the Purchaser covenants and agrees as follows:
(i) The business and assets of the Company, to which the
Surviving Corporation will succeed in the Merger, will be maintained
intact as a business unit, under the management and control of the
Managing Shareholder, and operating in substantially the same manner
as prior to the Merger, with substantially the same managerial and
support staff, working capital, and other business resources, as prior
to the Merger, so the Company Shareholders will not be disadvantaged,
in their attempt to achieve the maximum Actual or Alternative Pre-Tax
Profit, by factors such as the combination of the Company's business
and assets with other businesses,
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or the diversion of managers, employees, working capital and other
resources to other activities of Purchaser or its affiliates. In this
connection, all dealings and transactions between the Surviving
Corporation and the Purchaser and Purchaser's affiliates will be
conducted on an arm's length basis, except as set forth below, and on
terms at least as favorable to the Company as it could obtain from an
unrelated third party.
(ii) The Surviving Corporation shall be entitled to "Most
Favored Distributor" status, in that it shall be entitled to deal with
Purchaser and its affiliates on terms at least as favorable as any
other person or entity acting as a distributor, representative or in a
similar capacity for the Purchaser or any affiliate, and without
limitation, will be given the reasonable opportunity to become a
distributor, representative or seller of each of the products and
product lines offered now or in the future by Purchaser or its
affiliates, except to the extent that such products are licensed
directly to Purchaser or one or more affiliates of Purchaser by a
third party.
(a) Specific service requests by Purchaser to
Surviving Corporation and vice versa for technical
aid, special services, advertising, and similar
services will be charged on a basis of cost.
Operating capital advanced to Acquisition Sub.,
Surviving Corporation or their successor by Purchaser
will bear interest at the Prime Rate charged by
NationsBank N.A. of Delaware, or at the rate
Purchaser pays for the funds.
(b) General services such as auditing, tax,
legal, etc. provided or paid for by Purchaser for the
Surviving Corporation in lieu of obtaining such
services from other sources will be charged to the
Surviving Corporation at cost on a basis consistent
with Purchaser's current practice. However, charges
for such services shall be limited to services
provided and shall not exceed costs at which
Surviving Corporation could reasonably expect to
obtain similar services from other sources.
Arbitrary charges by Purchaser for management or
administrative services which are neither
controllable by Surviving Corporation nor properly
chargeable against Surviving Corporations operations
will be excluded from any determination of Company's
Actual or Alternative Pre-Tax Profit.
(iii) The Surviving Corporation shall receive credit, in
the calculation of Actual or Alternative Pre-Tax Profit, for all
credits from its vendors and manufacturers for items such as
advertising, rebates, market development funds, and the like that are
properly attributable to Surviving Corporation.
(iv) The Surviving Corporation will be given credit for
all available anticipation, prepay or early pay discounts on
vendor/manufacturer charges and invoices that are properly
attributable to Surviving Corporation.
(j) In the event that a "Change of Control," as defined below,
occurs prior to the end of the Year (or the Alternative Year, if Shareholders
elect to calculate the Purchase Price Adjustment on that basis), then, at
Shareholder's option, the Purchase Price Adjustment shall be waived, no such
adjustment shall occur and the Escrows provided under Section 1.3(e) shall be
released. For purposes hereof, a "change of Control" shall mean any
transaction in which: (a) individuals who were directors of the Purchaser,
immediately prior to a Control Transaction shall cease, within one year of any
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<PAGE> 16
Control Transaction, to constitute a majority of the Purchaser's Board of
Directors (or of the Board of Directors of any successor to Purchaser or to all
or substantially all of its assets), or (b) any entity, person or group which
is not currently a shareholder of the Purchaser acquires shares of the
Purchaser in a transaction or series of transactions that result in such
entity, person or group directly or indirectly owning beneficially 51% or more
of the outstanding shares. Notwithstanding the foregoing, an issuance of
shares by the Purchaser to more than one party in connection with a
capital-raising transaction shall not constitute a Change in Control. "Control
Transaction" shall mean (aa) any tender offer for or acquisition of capital
stock of Purchaser, (bb) any merger, consolidation, or sale of all or
substantially all of the assets of Purchaser which has been approved by the
shareholders, (cc) any contested election of directors of Purchaser which
results in a change in the majority of the Board of Directors of Purchaser, or
(dd) any combination of the foregoing which results in a change in voting power
sufficient to elect a majority of the Board of Directors of Purchaser.
Section 1.4 The Closing. Subject to termination of this
Agreement as provided in Article VI below, the closing and consummation of the
transactions contemplated by this Agreement shall take place in the offices of
Purchaser's attorneys on such date that the conditions of closing set forth in
Article IV hereof have been satisfied or waived, or such other date as the
parties hereto may mutually select (the "Closing Date"), which in no event
shall be after April 1, 1998, unless extended as provided herein. Purchaser
and Acquisition Sub on the one hand, and Company and Company Shareholders on
the other hand, shall each have the unilateral option to extend the Closing
Date to a date which is not more than 30 days after April 1, 1998, provided
that the party electing to exercise such option shall give written notice of
its election to do so not later than three (3) business days prior to April 1,
1998. Thereafter, the parties may extend the Closing Date by mutual consent.
The "Closing" shall mean the deliveries to be made by the parties hereto on the
Closing Date in accordance with this Agreement, as follows: (i) Company will
deliver to Acquisition Sub and Purchaser the various certificates, instruments
and documents referred to in Section 4.1 below; (ii) Acquisition Sub and
Purchaser will deliver to Company the various certificates, instruments and
documents referred to in Section 4.2 below; (iii) each Company Shareholder
shall deliver to Acquisition Sub and Purchaser for cancellation the
certificates representing his shares of Capital Stock; (iv) Acquisition Sub and
Purchaser will deliver the consideration specified in Section 1.2 above,
subject to any adjustments made pursuant to Section 1.3; and (v) the Parties
will file a Certificate of Merger with the Secretary of State of the State of
Georgia in substantially the form attached hereto as Exhibit A and will file
Articles of Merger with the Secretary of State of the State of California in
substantially the form attached hereto as Exhibit B. The Merger shall be
deemed to have become effective as of 12:01 a.m. Atlanta, Georgia Time on the
Closing Date.
Section 1.5 Dissenting Shareholders. In the event that any
holder of Company Shares elects to exercise its dissenters rights pursuant to
the applicable provisions of the California General Corporation Law, and in the
event that Purchaser or Acquisition Sub have not otherwise terminated this
Agreement pursuant to Section 6.1, Purchaser and Acquisition Sub shall have the
right to terminate this Agreement on account of such shareholder's election.
If Purchaser and Acquisition Sub do not elect to terminate this Agreement, any
holder of Company Shares who perfects his or her dissenters' rights of
appraisal in accordance with and as contemplated by the applicable provisions
of the California General Corporation Law shall be entitled to receive the
value of such shares in cash as determined pursuant to such provision of the
California General Corporation Law, provided that no such payment shall be made
to any dissenting shareholder unless and until such dissenting shareholder has
complied with the applicable provisions of the California General Corporation
Law and surrendered to the Company the certificate or certificates
representing the shares for which payment is being made. In the event that
after the Effective Time a dissenting shareholder fails to perfect or
effectively withdraws or loses his or
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<PAGE> 17
her right to appraisal and of payment for his or her shares, Surviving
Corporation shall issue and deliver the consideration to which such holder of
shares is entitled under this Article I (without interest) upon surrender by
such holder of the certificate or certificates representing the shares held by
him or her.
Section 1.6 Certain Tax Agreements. The Parties intend to adopt
this Agreement and Merger as a tax-free reorganization under Section
368(a)(2)(D) of the Internal Revenue Code of 1986, as amended. The parties
shall not take a position on any tax return or engage in any activities
inconsistent with this Section 1.6. The adoption of this Agreement and the
approval of the Merger by the Company Shareholders shall constitute the
agreement by each Company Shareholder that, without limiting the foregoing:
(a) Such Company Shareholder has not sold, exchanged, transferred
or disposed of Company Shares in contemplation of the Merger except as
disclosed on Schedule 1.6 attached hereto, and such Company Shareholder has no
present intent to and will not sell, exchange, transfer, dispose of or receive
any such stock in contemplation of the Merger, nor has such Company Shareholder
entered into any discussions or negotiations with regard to the possible sale,
exchange, transfer or other disposition of such stock.
(b) Such Company Shareholder is not subject to any obligation to
sell, exchange, transfer or otherwise dispose of all or any Purchaser Shares to
be received by such Company Shareholder in the Merger. Such Company
Shareholder has not entered into any discussion or negotiations with regard to
the possible sale, exchange, transfer or other disposition of all or any of the
Purchaser Shares. Such Company Shareholder has no plan or intent to engage in
any transaction or arrangement that would reduce such Company Shareholder's
risk of ownership in any way, including, without limitation, a short sale,
hedging transaction or otherwise, with respect to any or all of such Purchaser
Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 Representations and Warranties of the Company and the
Company Shareholders. All representations and warranties of the Company and
the Company Shareholders are accurate and material and are being made in order
to induce Purchaser and Acquisition Sub to enter into this Agreement. The
Company and each of the Company Shareholders hereby jointly and severally
represent and warrant to Purchaser and Acquisition Sub that:
(a) Organization. The Company is a corporation duly organized and
validly existing under the laws of the State of California (the "State"), and
has all requisite power and authority to lease, own, and operate its properties
and carry on the Business and operations and to directly own, lease, and
operate its assets. The Company is duly qualified or licensed to do business as
a corporation, and is in good standing in the State. The Company has
delivered to Purchaser and Acquisition Sub complete and accurate copies of its
Articles of Incorporation and Bylaws and all amendments thereto, and all
minutes and actions of its Board of Directors and shareholders. To the best of
Company's and Company Shareholders' Knowledge, neither the Company nor any of
the Company Shareholders is in violation of any of the provisions of the
Articles of Incorporation or the Bylaws.
(b) Capitalization and Ownership. The authorized and outstanding
capital stock of the Company (including without limitation all voting
securities) (the "Capital Stock") and its par value per
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<PAGE> 18
share, if any, is as set forth on Schedule 2.1(b) hereto. Each person listed on
Schedule 2.1(b) is the lawful owner of that number of the issued and
outstanding shares of capital stock of the Company set forth opposite such
person's name, free and clear of any restrictions upon transfer except as
indicated in Schedule 2.1(b), all of which restrictions shall be removed no
later than the Closing Date. The shares of Capital Stock (the "Company
Shares") set forth on Schedule 2.1(b) constitute all of the shares of capital
stock of the Company and all such shares have been duly authorized and are
validly issued, fully paid and nonassessable, and to the best of the Knowledge
and belief of the Company and the Company Shareholders, have been issued in
compliance with all applicable federal and state securities laws. There are no
outstanding subscriptions, warrants, calls, options, conversion rights, rights
of exchange or other commitments, plans, agreements, or arrangements of any
nature under which the Company or the Company Shareholder may be obligated to
issue, assign, exchange, purchase, redeem or transfer any shares of capital
stock of the Company, and there are no shareholders' agreements to which the
Company or the Company Shareholders is a party, or proxies, voting trust
agreements or similar agreements or options executed by the Company or the
Company Shareholders or to which the Company Shares are subject. There are no
outstanding subscriptions, options, warrants, rights, convertible securities or
other agreements or commitments of any character relating to the issued or
unissued capital stock or other securities of the Company obligating the
Company or the Company Shareholders to grant, extend or enter into any
subscription, option, warrant, right, convertible security or other similar
agreement or commitment. The Company has satisfied all of its obligations to
all current and past shareholders, and none of such current or past
shareholders has any claims, or any basis therefor, against the Company arising
out of or relating to obligations of the Company to such current or past
shareholders. None of the shares of the Company's Capital Stock was issued
pursuant to awards, grants, or bonuses.
(c) Subsidiaries. Except as set forth in Schedule 2.1(c), the
Company does not own, directly or indirectly, any capital stock or other equity
or ownership or proprietary interest in any corporation, partnership,
association, limited liability company, trust, joint venture or other entity.
(d) Authorization. The Company and each of the Company
Shareholders have full power and authority to enter into this Agreement, to
perform their respective obligations hereunder and to consummate the
transactions contemplated hereby. Each corporate Company Shareholder is duly
organized and existing under the laws of the jurisdiction of its incorporation.
The Company and/or each of the Company Shareholders, as appropriate, have taken
all necessary and appropriate corporate action with respect to the execution
and delivery of this Agreement. This Agreement constitutes a valid and binding
obligation of the Company and the Company Shareholders (to the extent to which
each is a party), enforceable in accordance with its terms; except as limited
by applicable bankruptcy, insolvency, moratorium, reorganization or other laws
affecting contracts, creditors' rights and other laws and remedies generally.
(e) Financial Information. The Company will deliver its unaudited
consolidated balance sheets and related statements of operations and cash flows
at and for the fiscal years ended 1995, 1996 and 1997 (the "Unaudited Annual
Financial Statements") and will deliver the unaudited statements of operations
and cash flows at and for the period from the end of the Company's 1997 fiscal
year through February 28, 1998 (the "Unaudited Interim Financial Statements,"
together with the Unaudited Annual Financial Statements, collectively referred
to herein as the "Unaudited Financial Statements") within seven (7) days after
the execution of this Agreement. Within thirty (30) days after the Closing
Date the Company will also deliver an unaudited balance sheet as of the Closing
Date (the "Unaudited Balance Sheet," together with the Unaudited Financial
Statements, collectively referred to herein as the "Financial Statements"). To
the best of the Knowledge and belief of the Company and the Company
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<PAGE> 19
Shareholders, the Financial Statements will be prepared in accordance with
Generally Accepted Accounting Principles ("GAAP") on a consistent basis
throughout the periods indicated and with each other and will present
accurately the financial condition of the Company as of the respective dates
thereof and the results of operations for the periods then ended. All of the
Company's general ledgers, books, and records are located at the Company's
principal place of business in the State or at the offices of its accountant.
Purchaser or Acquisition Sub may, at their option, elect to engage, at their
own cost and expense, an accounting firm selected by them and reasonably
acceptable to the Company to audit the Unaudited Financial Statements as of the
Closing Date.
(f) Deposit Accounts; Powers of Attorney. Schedule 2.1(f) hereto
lists:
(i) the name of each financial institution in which the
Company has accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account; and
(iv) the name of each person authorized to draw thereon or
have access thereto.
There are no persons, corporations, firms or other entities holding a
general or special power of attorney from the Company.
(g) Liabilities and Obligations. Other than as set forth in the
Unaudited Financial Statements, Schedule 2.1(g) sets forth an accurate list at
the date of this Agreement of all liabilities of the Company, and any
significant liabilities incurred thereafter in the ordinary course of business
or liabilities which are not reflected in the balance sheet of any kind,
character, or description, whether accrued, absolute, secured or unsecured,
contingent or otherwise, together with, in the case of those liabilities which
are not fixed, an estimate of the maximum amount which may be payable. For each
such liability for which the amount is not fixed or is contested, whether in
litigation or otherwise, the Company shall provide the following information:
(i) a summary description of the liability together with
the following:
(a) copies of all material relevant documentation
relating thereto;
(b) amounts claimed and any other action or
relief sought; and
(c) name of claimant and all other parties to the
claim, suit, or proceeding.
(ii) the name of each court or agency before which such
claim, suit, or proceeding is pending;
(iii) the date such claim, suit, or proceeding was
instituted;
(iv) a reasonable estimate by the Company of the maximum
amount, if any, which is likely to become payable with respect to each
such liability. If no estimate is provided, the Company's best
estimate shall for purposes of this Agreement be deemed to be zero.
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<PAGE> 20
(h) Product and Service Warranties and Reserves. To the best of
Company's and Company Shareholders' Knowledge, except as set forth in Schedule
2.1(h), there are no product warranty claims relating to sales of the Company's
products occurring on or prior to the date of this Agreement. To the best of
Company's and Company Shareholders' Knowledge, the only express warranties,
written or oral, with respect to the products or services sold by the Company
are set forth in Schedule 2.1(h).
(i) Absence of Certain Changes and Events. Except as set forth in
Schedule 2.1(i) hereto, to the best of the Knowledge and belief of the Company
and the Company Shareholders, since the date of the Unaudited Annual Financial
Statements there has not been:
(i) Any material adverse change in the financial
condition, results of operation, assets, liabilities or prospects of
the Company or the Business, or any occurrence, circumstance, or
combination thereof which reasonably could be expected to result in
any such material adverse change;
(ii) Any transaction relating to or involving the Company,
the Business, the assets of the Company or the Company Shareholders
which was entered into or carried out by the Company or the Company
Shareholders other than for fair consideration in the Ordinary Course
of Business;
(iii) Any change by the Company in its accounting or tax
practices or procedures;
(iv) Any incurrence of any liability, other than
liabilities incurred in the Ordinary Course of Business consistent
with past practices;
(v) Any sale, lease, or disposition of, or any agreement
to sell, lease, or dispose of any of its properties (whether leased or
owned), or the assets of the Company, other than sales, leases, or
dispositions of goods, materials, or equipment in the Ordinary Course
of Business or as contemplated by this Agreement;
(vi) Any event permitting any of the assets or the
properties of the Company (whether leased or owned) to be subjected to
any pledge, encumbrance, security interest, lien, charge, or claim of
any kind whatsoever (direct or indirect) (collectively, "Liens");
(vii) Any increase in compensation or any adoption of, or
increase in, any bonus, incentive compensation, pension, profit
sharing, retirement, insurance, medical reimbursement or other
employee benefit plan, payment or arrangement to, for, or with any
employee of the Company, other than certain bonuses paid to the
Company Shareholders and disclosed in writing to the Acquisition Sub
and Purchaser;
(viii) Any payment or distribution of any bonus to, or
cancellation of indebtedness owing from, or incurring of any liability
relating to any employees, consultants, directors, officers, or
agents, or any persons related thereto, other than certain bonuses
paid to the Company Shareholders and to two (2) key employees of the
Company;
(ix) Any notice (written or unwritten) from any employee
of the Company that such employee has terminated, or intends to
terminate, such employee's employment with the Company;
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<PAGE> 21
(x) Any adverse relationship or condition with Suppliers
(as defined in Section 2.1 (q)(i) hereof), vendors, or Customers (as
defined in Section 2.1(ee) hereof) that may have an adverse effect on
the Company, the Business, or the assets of the Company;
(xi) Any event, including, without limitation, shortage of
materials or supplies, fire, explosion, accident, requisition or
taking of property by any governmental agency, flood, drought,
earthquake, or other natural event, riot, act of God or a public
enemy, or damage, destruction, or other casualty, whether covered by
insurance or not, which has had an adverse effect on the Company, the
properties (whether leased or owned), the Business, or the assets of
the Company or any such event which could be expected to have an
adverse effect on the Company, the properties (whether leased or
owned), the Business, or the assets of the Company;
(xii) Any modification, waiver, change, amendment, release,
rescission, accord and satisfaction, or termination of, or with
respect to, any term, condition, or provision of any contract,
agreement, license, or other instrument to which the Company or a
Company Shareholder is a party and relating to or affecting the
Business or the assets of the Company other than any satisfaction by
performance in accordance with the terms thereof in the Ordinary
Course of Business;
(xiii) Any discharge or satisfaction of any Lien or payment
of any liabilities, other than in the Ordinary Course of Business;
(xiv) Any waiver of any rights of substantial value by the
Company, other than waivers having no material adverse effect on the
Company;
(xv) Any issuance of equity securities of the Company or
any issuance of warrants, calls, options or other rights calling for
the issuance, sale, or delivery of the Company's equity securities;
(xvi) Any declaration of any dividend or any distribution
of any shares of its capital stock, or redemption, purchase, or other
acquisition of any shares of its capital stock or any grant of an
option, warrant, or other right to purchase or acquire any such
shares;
(xvii) Any amendment, or agreement to amend, the Company's
Articles of Incorporation or Bylaws, or any merger or consolidation
with, or any agreement to merge or consolidate with, any other
corporation, partnership, limited liability company or any other
entity;
(xviii) Any reduction, or agreement to reduce, the cash or
short-term investments of the Company, other than to meet cash needs
arising in the Ordinary Course of Business;
(xix) Any work interruptions, labor grievances or claims
filed, proposed law or regulation or any event of any character,
materially adversely affecting the Business or future prospects of the
Company;
(xx) Any revaluation by the Company of any of its assets;
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<PAGE> 22
(xxi) Any loan by the Company to any person or entity, or
any guaranty by the Company of any loan; or
(xxii) To the best Knowledge of the Company and the Company
Shareholders, any other event or condition of any character which
materially adversely affects, or reasonably may be expected to so
affect, the assets of the Company, the Business, or the properties
(whether leased or owned) of the Company.
(j) Inventory. Schedule 2.1(j) sets forth the reasonable value of
the Company's inventory. All inventory is owned by the Company, including all
goods customarily sold and/or rented by the Company in connection with the
Business (whether located on the premises of the Company, in transit to or from
such premises, in other storage facilities, or otherwise) (collectively, the
"Inventory"), and the Company maintains appropriate records of such inventory.
The Company has continued to replenish the Inventory in a normal and customary
manner consistent with past practices. To the Knowledge of the Company and the
Company Shareholders, the Company has not received written or oral notice that
the Company will experience in the future any difficulty in obtaining, in the
desired quantity and quality and upon reasonable terms and conditions, the
vehicles, materials, supplies, or equipment required for the Business.
(k) Taxes.
(i) Definitions. For purposes of this Agreement:
(a) the term "Taxes" means (A) all federal,
state, local, foreign and other net income, gross
income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease,
service, service use, withholding, payroll,
employment, excise, severance, stamp, occupation,
premium, property, windfall profits, customs, duties
or other taxes, fees, assessments or charges of any
kind whatever, together with any interest and any
penalties, additions to tax or additional amounts
with respect thereto, (B) any liability for payment
of amounts described in clause (A) whether as a
result of transferee liability, of being a member of
an affiliated, consolidated, combined or unitary
group for any period, or otherwise through operation
of law, and (C) any liability for the payment of
amounts described in clauses (A) or (B) as a result
of any tax sharing, tax indemnity or tax allocation
agreement or any other express or implied agreement
to indemnify any other person; and the term "Tax"
means any one of the foregoing Taxes; and
(b) the term "Returns" means all returns,
declarations, reports, statements, claims for refund
and other documents required to be filed in respect
of Taxes, and the term "Return" means any one of the
foregoing Returns.
(ii) To the best of the Knowledge and belief of the
Company and the Company Shareholders, the Company has properly
completed and filed on a timely basis (including extensions) and in
correct form all Returns required to be filed on or prior to the
Closing Date. As of the time of filing, the foregoing Returns
correctly reflected the facts regarding the income, business, assets,
operations, activities, status or other matters of the Company or any
other information required to be shown thereon. In particular, to the
best of the Knowledge of the Company and the Company Shareholders, the
foregoing Returns are not subject to unpaid
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<PAGE> 23
penalties under Section 6662 of the Internal Revenue Code of 1986, as
amended (the "Code"), relating to accuracy-related penalties (or any
corresponding provision of state, local or foreign Tax law) or any
other unpaid penalties.
(iii) To the best of the Knowledge and belief of the
Company and the Company Shareholders, with respect to all amounts in
respect of Taxes imposed upon the Company, or for which the Company is
liable, whether to taxing authorities (as, for example, under law) or
to other persons or entities (as, for example, under tax allocation
agreements), with respect to all taxable periods ending on or before
the Closing Date and portions of periods commencing before the Closing
Date and ending after the Closing Date, all applicable tax laws and
agreements have been fully complied with, and all such amounts
required to be paid by the Company to taxing authorities or others on
or before the Closing Date have been paid, and all such amounts
required to be paid by the Company to taxing authorities or others
after the Closing which have not been paid are reflected on the
Financial Statements of the Company.
(iv) No notices raising tax issues have been received by
the Company from any taxing authority in connection with any of the
Returns. No extensions or waivers of statutes of limitations with
respect to the Returns have been given by or requested from the
Company. Schedule 2.1(l)(iv) sets forth taxable years for which
examinations have been completed, those years for which examinations
are presently being conducted, and those years for which required
Returns have not yet been filed. Except to the extent indicated in
Schedule 2.1(l)(iv), all deficiencies asserted or assessments made as
a result of any examinations have been fully paid, or are fully
reflected as a liability in the Financial Statements of the Company,
or are being contested and an adequate reserve therefor has been
established and is fully reflected in the Financial Statements of the
Company.
(v) There are no liens for Taxes (other than for current
Taxes not yet due and payable) upon the assets of the Company.
(vi) The Company is not a party to or bound by (nor will
the Company become a party to or become bound by) any tax indemnity,
tax sharing or tax allocation agreement.
(vii) The Company has never been a member of an affiliated
group of corporations within the meaning of Section 1504 of the Code.
(viii) The Company has not filed a consent pursuant to the
collapsible corporation provisions of Section 341(f) of the Code (or
any corresponding provision of state, local or foreign income Tax law)
or agreed to have Section 341(f)(2) of the Code (or any corresponding
provision of state, local or foreign income Tax law) apply to any
disposition of any asset owned by it.
(ix) None of the assets of the Company directly or
indirectly secures any debt the interest on which is tax exempt under
Section 103(a) of the Code.
(x) None of the assets of the Company is "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
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<PAGE> 24
(xi) The Company has not made and will not make a deemed
dividend election under Treas. Reg. ss.1.1502-32(f)(2) or a consent
dividend election under Section 565 of the Code.
(xii) The Company has not agreed to make, nor is it
required to make, any adjustment under Sections 481(a) or 263A of the
Code or any comparable provision of state or foreign tax laws by
reason of a change in accounting method or otherwise.
(xiii) None of the Company Shareholders is other than a
United States person within the meaning of the Code.
(xiv) The Company is not party to any joint venture,
partnership, or other arrangement or contract which could be treated
as a partnership for federal income tax purposes.
(xv) The Company's tax basis of each of its assets is
reflected in its Unaudited Financial Statements.
(xvi) All elections with respect to Taxes made during the
fiscal years ended December 31, 1995, December 31, 1996 and December
31, 1997 are reflected on the Returns for such periods, copies of
which have been provided to Purchaser.
(l) Employee Payments.
(i) The hours worked by and payments made to the
Company's employees have not been in violation in any respect of the
Fair Labor Standards Act or any other applicable federal, foreign,
state or local laws dealing with such matters.
(ii) All payments due from the Company on account of
employee health and welfare insurance have been paid or accrued.
(iii) All severance, sick, or vacation payments by the
Company, which are or were due under the terms of any agreement or
otherwise have been paid or are described in Schedule 2.1(l)(iii).
(m) Compliance With Law. The Company has complied and is in
compliance with all applicable zoning decisions and, to the best of the
Knowledge of the Company and the Company Shareholders, has complied and is in
compliance with all applicable federal, state, and local laws, statutes,
licensing requirements, rules, and regulations, and judicial or administrative
decisions. To the best of the Knowledge and belief of the Company and the
Company Shareholders, the Company has been granted all licenses, permits
(temporary and otherwise), authorizations, and approvals from federal, state,
and local government regulatory or zoning bodies necessary to carry on the
Business and maintain the assets of the Company, all of which are currently
valid and in full force and effect. All such licenses, permits, authorizations
and approvals shall be valid and in full force and effect upon the consummation
of the transactions contemplated by this Agreement to the same extent as if the
Company prior to the Closing Date were continuing the Business and operations of
the Company. To the best of the Knowledge and belief of the Company and the
Company Shareholders, there is no order issued, or proceeding pending or
threatened, or notice served with respect to any violation of any law,
ordinance, order, writ, decree, rule, or regulation issued by any federal state,
local, or foreign court or
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<PAGE> 25
governmental agency or instrumentality applicable to the Company. The Company
has valid business licenses to carry on its operations.
(n) No Disclosure Items. Except as otherwise indicated in
Schedule 2.1(n), there is no adverse information with respect to the Company,
the Company Shareholder(s) or any officer, director or employee of the Company
which information would require disclosure in connection with a filing by the
Company under the federal securities acts. Neither the Company nor any Company
Shareholder has failed to disclose any material fact which would be required to
be disclosed for purposes of a proxy statement or other communication involved
in a public offering in accordance with the provisions of Rule 10b-5 or Rule
14a-9(a) of the U.S. Securities and Exchange Commission.
(o) Governmental Consents. To the best of the Knowledge of the
Company and the Company Shareholders, no consent, approval, order, or
authorization of, or registration, qualification, designation, declaration, or
filing with, any federal, state, local, or provincial governmental authority on
the part of the Company or the Company Shareholders is required in connection
with the consummation of the transactions contemplated hereunder.
(p) Intellectual Property.
(i) The Company and its subsidiaries own or have the
right to use pursuant to license, sublicense, agreement, or permission
all Intellectual Property necessary or desirable for the operation of
the business of the Company and its subsidiaries as presently
conducted and as presently proposed to be conducted by the Managing
Shareholder. Each item of Intellectual Property owned or used by any
of the Company and its subsidiaries immediately prior to the closing
hereunder will be owned or available for use by the Company, its
subsidiaries, Surviving Corporation or its subsidiaries on identical
terms and conditions immediately subsequent to the closing hereunder.
Each of the Company and its subsidiaries has taken all necessary and
desirable action to maintain and protect each item of Intellectual
Property that it owns or uses.
(ii) None of the Company and its subsidiaries has
interfered with, infringed upon, misappropriated, or otherwise come
into conflict with any Intellectual Property rights of third parties,
and none of the Company Shareholders and the directors and officers
(and employees with responsibility for Intellectual Property matters)
of the Company and its subsidiaries has ever received any charge,
complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that
any of the company and its subsidiaries must license or refrain from
using any Intellectual Property rights of any third party). To the
Knowledge of any of the Company Shareholders and the directors and
officers (and employees with responsibility for Intellectual Property
matters) of the Company and its subsidiaries, no third party has
interfered with, infringed upon, misappropriated, or otherwise come
into conflict with any Intellectual Property rights of any of the
Company and its subsidiaries.
(iii) Schedule 2.1(p)(iii) identifies each patent or
registration which has been issued to any of the Company and its
subsidiaries with respect to any of its Intellectual Property,
identifies each pending patent application or application for
registration which any of the Company and its subsidiaries has made
with respect to any of its Intellectual Property, and identifies each
license, agreement, or other permission which any of the Company and
its subsidiaries has granted to any third party with respect to any of
its Intellectual Property
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(together with any exceptions). The Company has delivered to the
Acquisition Sub correct and complete copies of all such patents,
registrations, applications, licenses, agreements, and permission (as
amended to date) and has made available to the Acquisition Sub correct
and complete copies of all other written documentation evidencing
ownership and prosecution (if applicable) of each such item. Schedule
2.1(p)(iii) also identifies each trade name or unregistered trademark
used by any of the Company and its subsidiaries in connection with any
of its businesses. With respect to each item of Intellectual Property
required to be identified in Schedule 2.1(p)(iii):
(a) the Company and its subsidiaries possess all
right, title, and interest in and to the item, free
and clear of any security interest, license, or other
restriction;
(b) the item is not subject to any outstanding
injunction, judgment, order, decree, ruling, or
charge;
(c) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is
pending or, to the Knowledge of any of the Company
Shareholders and the directors and officers (and
employees with responsibility for Intellectual
Property matters) of the Company and its
subsidiaries, is threatened which challenges the
legality, validity, enforceability, use, or ownership
of the item; and
(d) none of the Company and its subsidiaries has
ever agreed to indemnify any Person for or against
any interference, infringement, misappropriation, or
other conflict with respect to the item.
(iv) Schedule 2.1(p)(iv) identifies each item of
Intellectual Property that any third party owns and that any of the
Company and its subsidiaries uses pursuant to license, sublicense,
agreement, or permission. The Company has delivered to Purchaser and
Acquisition Sub correct and complete copies of all such licenses,
sublicenses, agreements, and permission (as amended to date). With
respect to each item of Intellectual Property required to be
identified in Schedule 2.1(p)(iv):
(a) the license, sublicense, agreement, or
permission covering the item is legal valid, binding,
enforceable, and in full force and effect.
(b) the license, sublicense, agreement, or
permission will continue to be legal, valid, binding,
enforceable, and in full force and effect on
identical terms following the consummation of the
transactions contemplated hereby (including the
assignments and assumptions referred to above);
(c) no party to the license, sublicense,
agreement, or permission is in breach or default, and
no event has occurred which with notice or lapse of
time would constitute a breach of default or permit
termination, modification, or acceleration
thereunder;
(d) no party to the license, sublicense,
agreement, or permission has repudiated any provision
thereof;
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<PAGE> 27
(e) with respect to each sublicense, the
representations and warranties set forth in
subsections (A) through (D) above are true and
correct with respect to the underlying license;
(f) the underlying item of Intellectual Property
is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(g) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is
pending or, to the Knowledge of any of the Company
Shareholders and the directors and officers (and
employees with responsibility for Intellectual
Property matters) of the Company and its
subsidiaries, is threatened which challenges the
legality, validity, or enforceability of the
underlying item of Intellectual Property; and
(h) none of the Company and its subsidiaries has
granted any sublicense or similar right with respect
to the license, sublicense, agreement, or permission.
(v) None of the Company Shareholders and the directors
and officers (and employees with responsibility for Intellectual
Property matters) of the company and its subsidiaries has any
Knowledge of any new products, inventions, procedures, or methods of
manufacturing or processing that any competitors or other third
parties have developed which reasonably could be expected to supersede
or make obsolete any product or process of any of the Company and its
subsidiaries.
(q) Restrictive Documents or Orders. To the best of the Knowledge
of the Company and the Company Shareholders, the Company is not a party to nor
bound under any agreement, contract, order, judgment, or decree, or any similar
restriction which adversely affects, or reasonably could be expected to
adversely affect (i) the continued operation by Surviving Corporation of the
Business and operations of the Company on and after the Closing Date on
substantially the same basis as said business was theretofore operated or (ii)
the consummation of the transactions contemplated by this Agreement.
(r) Contracts and Commitments.
(i) Schedule 2.1(r)(i) hereto sets forth a list of all
material written agreements and contracts, contract rights, licenses,
and other executory commitments (written or unwritten if known or if
the Company or the Company Shareholders reasonably should have known)
other than purchase and sale orders and quotations (collectively, the
"Contracts") including, without limitation, those contracts with
insurance companies, credit companies, governmental agencies, rental
agencies, and all others under which the Company is supplied with
materials, supplies, or equipment ("Materials") (such suppliers shall
be referred to herein as "Suppliers") to which the Company is a party
or to which any of the assets of the Company are subject. To the best
of the Knowledge and belief of the Company and the Company
Shareholders, there are no oral agreements or commitments that would
have a material adverse effect on the Company.
(ii) The Company Shareholders and the Company have
performed all of their obligations under the terms of each Contract,
and are not in default thereunder, except as described in Schedule
2.1(r)(ii). No event or omission has occurred which but for the giving
of
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<PAGE> 28
notice or lapse of time or both would constitute a default by any
party thereto under any such Contract. Each such Contract is valid
and binding on all parties thereto and in full force and effect, and
each Contract will continue to be valid and binding on identical terms
following the consummation of the transaction contemplated hereby.
The Company has received no written or unwritten notice of default,
cancellation, or termination in connection with any such Contract. The
Company is not now and has never been a party to any governmental
contracts subject to price redetermination or renegotiation.
(iii) There has not been any notice (written or unwritten)
from any Supplier that any such Supplier will not continue to supply
the current level and type of Materials currently being provided by
such Supplier upon the same terms and conditions.
(s) Debt. Schedule 2.1(s) sets forth a list of all agreements for
the incurring of indebtedness for borrowed money and all agreements relating to
industrial development bonds to which the Company is a party or guarantor.
None of the obligations pursuant to such agreements are subject to acceleration
by reason of the consummation of the transactions contemplated hereby, nor
would the execution of this Agreement or the consummation of the transactions
contemplated hereby result in any default under such agreements. The Company
has furnished Purchaser and Acquisition Sub with true and correct copies of
each such agreement listed in Schedule 2.1(s). The Company is not in default
under any of the agreements listed thereon, nor is the Company aware of any
event that, with the passage of time, or notice, or both, would result in an
event of default thereunder.
(t) Related Property. Schedule 2.1(t)(i) hereto lists all of the
Company's ownership interests (except for leasehold interests set forth in
Schedule 2.1(gg)) in real property, machinery, equipment, tooling, furniture,
fixtures, motor vehicles, supplies, spare parts, computer equipment, printers,
copiers, software, telecommunications equipment, miscellaneous supplies, tools,
repair and maintenance parts, chemicals, and fixed assets related to the
Business and operations of the Company (the "Related Property"). To the best
Knowledge of the Company and the Company Shareholders, all of the Related
Property is in good operating condition, normal wear and tear excepted, and is
adequate and suitable for the purposes for which it is presently being used.
Schedule 2.1(t)(ii) hereto lists certain property that belongs solely to and
shall be retained by the Company Shareholders.
(u) Assets. The assets of the Company include all the assets
necessary to operate the Business in the same manner as the Business was
operated by the Company immediately prior to the Closing Date, and none of the
Company Shareholders, nor any family member or entity affiliated with the
Company Shareholders or any such family member, owns, or has any interest in,
any asset used in the operation of the Company.
(v) Title to the Property. The Company has good and marketable
title to the assets of the Company (including, but not limited to the Related
Property) and a valid and subsisting leasehold interest in all leased property.
Except as described in Schedule 2.1(v), the Company owns all of its assets and
property free and clear of any lien.
(w) Litigation. Except as described in Schedule 2.1(w), none of
the Company, the Company Shareholders nor any of the Company's officers or
directors is engaged in, or has received any threat of, any litigation,
arbitration, investigation, or other proceeding relating to the Company, any of
the Company Shareholders, or the Company's officers, directors, employees,
benefit plans, properties, Proprietary Rights, the Business, or the assets,
licenses, permits, or goodwill of the Company; or against or affecting this
Agreement, the Related Agreements or the actions taken or
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<PAGE> 29
contemplated in connection herewith and therewith, nor, to the best of each's
Knowledge, is there any reasonable basis therefor. There is no action, suit,
proceeding, or (to the best Knowledge of the Company and the Company
Shareholders) investigation pending or threatened against the Company, or any
of the Company Shareholders, or the officers or directors of the Company, that
questions the validity of this Agreement, the Related Agreements, or the right
of the Company or the Company Shareholders to enter into this Agreement, the
Related Agreements, any documents to be delivered in connection with the
Closing, or to consummate the transactions contemplated hereby or thereby, or
which might result in any adverse change in the assets of the Company, the
Business, conditions, or properties of the Company, or the financial condition
of the Company or the Company Shareholders. There is no action, suit,
proceeding, or investigation by the Company or the Company Shareholders
currently pending or which any of them currently intends to initiate. None of
the Company, the Company Shareholders, nor any of the Company's officers or
directors is bound by any judgment, decree, injunction, ruling or order of any
court, governmental, regulatory or administrative department, commission,
agency or instrumentality, arbitrator or any other person which would or could
have a material adverse effect on the Business or the assets of the Company.
(x) No Conflict or Default. To the best of the Knowledge and
belief of the Company and the Company Shareholders, neither the execution and
delivery of this Agreement or the Related Agreements, nor compliance with the
terms and provisions hereof and thereof including, without limitation, the
consummation of the transactions contemplated hereby and thereby, will violate
any statute, regulation, or ordinance of any governmental or administrative
authority, or conflict with or result in the breach of any term, condition, or
provision of the Company's Articles of Incorporation or Bylaws, as presently in
effect, or of any agreement, deed, contract, mortgage, indenture, writ, order,
decree, legal obligation, or instrument to which the Company or the Company
Shareholders is a party or by which it or he or any of the assets of the
Company are or may be bound, or constitute a default (or an event which, with
the lapse of time or the giving of notice, or both, would constitute a default)
thereunder.
(y) Consents. To the best of the Knowledge and belief of the
Company and the Company Shareholders, no consent, approval, or authorization of
any person, agency or third party or on the part of the Company or the Company
Shareholders is required in connection with the consummation of the
transactions contemplated hereunder.
(z) Labor Relations.
(i) To the best of the Knowledge and belief of the
Company and the Company Shareholders, with respect to the Business and
operation of the Company, the Company has not failed to comply in any
respect with Title VII of the Civil Rights Act of 1964, as amended,
the Fair Labor Standards Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, all applicable federal, state, and
local laws, rules, and regulations relating to employment, and all
applicable laws, rules and regulations governing payment of minimum
wages and overtime rates, and the withholding and payment of taxes
from compensation of employees.
(ii) There are no labor controversies pending or, to the
Knowledge of the Company or the Company Shareholders, threatened
between the Company and any of its employees (the "Employees") or any
labor union or other collective bargaining unit representing any of
the Employees.
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<PAGE> 30
(iii) The Company has never entered into a collective
bargaining agreement or other labor union contract relating to the
Business and applicable to the Employees.
(iv) Except as set forth in Schedule 2.1(z), there are no
written employment or separation agreements, or oral employment or
separation agreements other than (1) those establishing an "at will"
employment relationship between the Company and any of the Employees
and which do not provide for any advance notice requirements to
terminate an Employee's employment or any severance or salary or
benefits continuation obligations on the part of the Company and (2)
any unknown future claims for wrongful termination based upon a theory
of implied agreements arising out of course of conduct.
(aa) Brokers' and Finders' Fees/Contractual Limitations. Neither
the Company Shareholders nor the Company is obligated to pay any other fees or
expenses of any broker or finder in connection with the origin, negotiation, or
execution of this Agreement, the Related Agreements, or in connection with any
transactions contemplated hereby and thereby. None of the Company Shareholders,
the Company, or any officer, director, employee, agent, or representative of
the Company (collectively, the "Representatives") is or has been subject to any
agreement, letter of intent, or understanding of any kind which prohibits,
limits, or restricts the Company, the Company Shareholders or the
Representatives from negotiating, entering into, and consummating this
Agreement, the Related Agreements, and the transactions contemplated hereby and
thereby.
(bb) Environmental and Safety Matters.
(i) To the best of the Knowledge and belief of the
Company and the Company Shareholders, the Company has all permits,
licenses, approvals and registrations required to be issued under
applicable Environmental Laws including federal, state and local laws,
statutes and regulations relating to the protection of human health,
safety, the environment and natural resources and, to the best of the
Knowledge of the Company and the Company Shareholders, is in
compliance with the terms and conditions thereunder. To the best of
the Knowledge and belief of the Company and the Company Shareholders,
the Company is in compliance with and there are no past or present
conditions, activities, actions, or plans which may prevent compliance
with, any current or past law related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or
handling, or the release, emission, or discharge of any hazardous
substance or hazardous waste ("Hazardous Substance Issues") or any
regulations, plans, judgments, injunctions, or notices promulgated or
approved thereunder: (1) which are applicable to the operations of the
Company, or the Company Shareholders, or the property owned or leased
by the Company or the Company Shareholders, or the assets of the
Company, or the Business or operations of the Company, or (2) which
may give rise to any liability of the Company, or the Company
Shareholders or otherwise form the basis of any ongoing or threatened
claims, actions, demands, suits, proceedings, hearings, studies, or
investigations against or relating to the Company, the property owned
or leased by the Company or the Company Shareholders, or the Business,
or the assets of the Company, that are based on or related to any
Hazardous Substance Issues.
(ii) To the best of the Knowledge of the Company and the
Company Shareholders, no release of a hazardous substance has come to
be located on or beneath and remain located on or beneath any of the
real property upon which the Business is conducted or upon which any
of the property owned or leased currently or in the past by the
Company or the Company
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<PAGE> 31
Shareholders or any predecessor which relates to the Business or
operations of the Company are held or maintained.
(iii) Schedule 2.1(bb) sets forth all reports, studies, and
evaluations conducted by the Company or the Company Shareholders, or
received by the Company or the Company Shareholders with respect to
such matters.
(iv) Neither the Company nor any of the Company
Shareholders has any Knowledge of the possible or actual presence,
disposal, release or threatened release of any hazardous substance or
hazardous waste on or under any adjacent properties.
(v) To the best of the Knowledge of the Company and the
Company Shareholders, the Company has not been alleged to be in
violation of, or been subject to any administrative, judicial, or
regulatory proceeding pursuant to, any applicable Environmental Laws
either now or any time during the past. No Claims (as hereinafter
defined) have been or are currently asserted against the Company based
on the Company's or any of the Company Shareholders' acts or failures
to act prior to the Closing Date with respect to hazardous substances
or hazardous wastes. As used herein, "Claim" shall mean any and all
claims, demands, orders, causes of action, suits, proceedings,
administrative proceedings, losses, judgments, decrees, debts,
damages, liabilities, court costs, attorneys' fees, and any other
expenses incurred, assessed or sustained by or against the Company or
the Company Shareholders.
(vi) To the best of the Knowledge of the Company and the
Company Shareholders, none of the properties owned, leased, or
operated by the Company or any predecessor thereof are now, or were in
the past, listed on the National Priorities List of Superfund Sites,
the Comprehensive Environmental Response, Compensation and Liability
Information System, or any other state or local environmental
database.
(cc) Certain Payments. To the best of the Company's and Company
Shareholders' Knowledge, the Company has not, and no person directly or
indirectly on behalf of the Company has, made or received any payment that was
not legal to make or receive.
(dd) Customers. To the best of the Knowledge and belief of the
Company and the Company Shareholders, Schedule 2.1(dd) hereto lists all of the
customers of the Company for the year 1997 to date (such customers referred to
herein individually as a "Customer"). No single Customer of the Company
accounted for more than ten percent (10%) of the net sales or rentals of the
Company (calculated on a unit basis) during 1997 except as set forth in
Schedule 2.1(dd). The Company has furnished Purchaser and Acquisition Sub with
complete and accurate copies or descriptions of all current agreements (written
or unwritten) with such Customers. Neither the Company nor any of the Company
Shareholders is aware of any event, happening, or fact which would lead it or
him to believe that any of such Customers will not continue its current level
of purchases and/or rentals after the Closing Date.
(ee) Books and Records. The books and records of the Company to
which Purchaser and Acquisition Sub and their accountants and attorneys have
been given access are the true books and records of the Company and truly and
fairly reflect the underlying facts and transactions in all respects.
(ff) Complete Disclosure. To the best of the Knowledge and belief
of the Company and the Company Shareholders, no representation or warranty by
the Company or the Company Shareholders
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<PAGE> 32
in this Agreement, and no exhibit, schedule, statement, certificate, or other
writing furnished to Purchaser and Acquisition Sub pursuant to this Agreement
or the Related Agreements or in connection with the transactions contemplated
hereby and thereby, contains or will contain any untrue statement or omits or
will omit to state any fact necessary to make the statements contained herein
and therein not materially misleading. If the Company or any of the Company
Shareholders becomes aware of any fact or circumstance which would change a
representation or warranty of the Company or the Shareholders, the Company and
the Shareholders shall immediately give notice of such fact or circumstance to
Purchaser and Acquisition Sub. However, such notification shall not relieve
either the Company or the Shareholders of their respective obligations under
this Agreement.
(gg) Leased Properties. The Financial Statements and Schedule
2.1(gg) hereto together list all personal property (including equipment leases)
and real property leased by the Company or by the Company Shareholders in
connection with the Business (the "Leased Properties") and the aggregate annual
rent or other fees payable under all such leases. The Company has a valid
leasehold or ownership interest in all of the Leased Properties, free and clear
of any liens. The negotiation and consummation of this Agreement and the
transactions contemplated hereby will not result in any penalties, the
acceleration of payments or the termination of any lease of Leased Properties.
(hh) Employees and Employee Benefit Plans.
(i) Other than as set forth in Schedule 2.1(hh) hereto,
the Company is not a party to any pension, profit sharing, savings,
retirement or other deferred compensation plan, or any bonus (whether
payable in cash or stock) or incentive program, or any group health
plan (whether insured or self-funded), or any disability or group life
insurance plan or other employee welfare benefit plan, or to any
collective bargaining agreement or other agreement, written or oral,
with any trade or labor union, employees' association or similar
organization. The Company is not a party to, nor has made any
contribution to or otherwise incurred any obligation under, any
"multi-employer plan" as defined in Section 3(37) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
(ii) With respect to each such plan set forth in Schedule
2.1(hh) (a "Plan"), the Company has furnished to Purchaser,
Acquisition Sub or their counsel complete and accurate copies of the
Plan documents (including trust documents, insurance policies or
contracts, employee booklets, summary plan descriptions and other
authorizing documents, and any material employee communications). With
respect to each Plan subject to ERISA as either an employee pension
benefit plan within the meaning of Section 3(2) of ERISA or an
employee welfare benefit plan within the meaning of Section 3(1) of
ERISA, the Company has prepared in good faith and timely filed all
requisite governmental reports and, to the best of Company's and
Company Shareholders' Knowledge, has properly and timely posted, or
distributed all notices and reports to employees required to be filed,
posted, or distributed with respect to each Plan. Each Plan has at all
times been properly and completely funded by the Company and has been
operated and administered in all respects in accordance with its terms
and all applicable laws, including, but not limited to, ERISA and the
Code.
(iii) All Plans that are intended to qualify (the
"Qualified Plans") under Section 401(a) of the Code have been
determined by the Internal Revenue Service to be so qualified, and
copies of such determination letters are included as part of Schedule
2.1(hh) hereof. Except as disclosed on Schedule 2.1(hh), all reports
and other documents required to be filed with any governmental agency
or distributed to plan participants or beneficiaries have been
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<PAGE> 33
timely filed and distributed, and copies thereof are included as part
of Schedule 2.1(hh) hereof. The Company further represents that:
(a) there have been no terminations, partial
terminations, or discontinuance of contributions to
any such Qualified Plan intended to qualify under
Section 401(a) of the Code without notice to and
approval by the Internal Revenue Service;
(b) no such plan listed in Schedule 2.1(hh)
subject to the provisions of Title IV of ERISA has
been terminated;
(c) there have been no "reportable events" (as
that phrase is defined in Section 4043 of ERISA) with
respect to any such plan listed in Schedule 2.1(hh);
and
(d) The Company has not incurred any liability
under Section 4062 of ERISA.
(iv) Neither the Company nor any of the Company
Shareholders has made any oral or written communications to its
current or former employees that guarantee current or former employees
continuation of employer-provided benefits or retirement coverage
under the Company's welfare benefit plans or which would have any
effect on the Surviving Corporation's ability to terminate retiree or
any other benefits to all current or former employees.
(v) To the best of the Knowledge of the Company and the
Company Shareholders, the Company has not violated any of the health
care continuation coverage requirements of the Consolidated Omnibus
Budget Reconciliation Act of 1985 applicable to its Employees prior to
the Closing Date or any prior actions of or transactions entered into
by the Company or the Company Shareholders.
(ii) Compensation. The Company has delivered to Purchaser and
Acquisition Sub an accurate schedule, attached to this Agreement as Schedule
2.1 (ii), showing all officers, directors, and key employees of the Company and
the rate of compensation (and the portions thereof attributable to salary,
bonus, and other compensation, respectively) of the directors, officers, and
key employees.
(jj) Insurance. The Company maintains policies of insurance
covering the assets of the Company, properties, and Business in types and
amounts as set forth in Schedule 2.1(jj). To the best of the Knowledge and
belief of the Company and the Company Shareholders, the Company is in
compliance with each of such policies such that none of the coverage provided
under such policies has been invalidated and the Company has not received any
written notice of cancellation of any such policies. Schedule 2.1(jj) lists
and describes all the Company insurance policies in effect immediately prior to
the time of Closing. To the Knowledge of the Company and the Company
Shareholders, such policies are with reputable insurers and are in amounts
sufficient for the prudent protection of the properties and the Business of the
Company.
(kk) Accounts and Notes Receivable. Schedule 2.1(kk) hereto sets
forth all accounts and notes receivable of the Company ("Accounts Receivable").
Schedule 2.1(kk) shows the aging of Accounts Receivable in amounts due in
thirty-day aging categories. Except for the accounts receivable
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<PAGE> 34
incurred by Martec Marketing, Inc., all Accounts Receivable represent sales or
rentals actually made or services actually performed in the ordinary and usual
course of the Company's business.
(ll) Representations and Warranties on the Closing Date. The
Company's and the Company Shareholders' representations and warranties
contained in this Article II shall be true on and as of the Closing Date with
the same force and effect as though such representations and warranties had
been made on such date, except to the extent any such representations and
warranties were made as of a specified date, in which case such representations
and warranties shall continue on the Closing Date to have been true in all
material respects as of such specified date.
Section 2.2 Representations and Warranties of Acquisition Sub and
Purchaser. Acquisition Sub and Purchaser hereby represent and warrant to the
Company and the Company Shareholders that immediately prior to the time of
Closing:
(a) Organization and Standing. Acquisition Sub is a corporation
duly organized and validly existing under the laws of the State of Georgia, and
has all requisite power and authority to lease, own, and operate its properties
and carry on its business and operations and to directly own, lease, and
operate its assets. Acquisition Sub has delivered to the Company complete and
accurate copies of its Certificate of Incorporation and Bylaws and all
amendments thereto, and all minutes and actions of its Boards of Directors and
shareholders. Acquisition Sub is not in violation of any of the provisions of
its Certificates of Incorporation or Bylaws.
(b) Capitalization and Ownership. The authorized and outstanding
capital stock of Purchaser and its par value per share are as set forth on
Purchaser's Registration Statement on Form S-1, as updated and amended by
reports filed with the SEC pursuant to the requirements of the Securities Act
of 1933 and the Securities Exchange Act of 1934. The shares of Purchaser
Common Stock set forth in such Registration Statement and subsequent reports
and filings made with the SEC constitute all of the shares of capital stock of
the Purchaser issued and outstanding and have been duly authorized and validly
issued, fully paid and nonassessable, and to the best of the Knowledge and
belief of Purchaser, issued in compliance with all applicable federal and state
securities laws. Except as provided in such Registration Statement and
subsequent reports and filings made with the SEC, there are no outstanding
subscriptions, warrants, calls, options, conversion rights, rights of exchange
or other commitments, plans, agreements, or arrangements of any nature under
which the Purchaser may be obligated to issue, assign, exchange, purchase,
redeem or transfer any shares of its capital stock, and there are no
shareholders' agreements to which the Purchaser or its shareholders is a party,
or proxies, voting trust agreements or similar agreements or options executed
by Purchaser or to which the Purchaser Common Stock is subject. Except as
provided in such Registration Statement and subsequent reports and filings made
with the SEC, there are no outstanding subscriptions, options, warrants,
rights, convertible securities or other agreements or commitments of any
character relating to the issued or unissued capital stock or other securities
of the Purchaser obligating Purchaser or, to the best Knowledge of Purchaser,
its shareholders to grant, extend or enter into any subscription, option,
warrant, right, convertible security or other similar agreement or commitment.
Upon issuance of shares of Purchaser Common Stock, as set forth herein, the
Company Shareholders shall acquire good and marketable title to the shares of
Purchaser Common Stock, free and clear of any liens, pledges, encumbrances,
security interests, charges, equities or restrictions of any nature imposed by
Purchaser, except as set forth in this Agreement. All of the issued and
outstanding capital stock of Acquisition Sub is owned by Purchaser. All of the
issued and outstanding capital stock of Acquisition Sub has been duly
authorized and validly issued, is fully paid and nonassessable, was offered,
issued, sold and delivered by Acquisition Sub in compliance with all applicable
state and federal laws concerning the
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issuance of securities, and was not issued in violation of the preemptive
rights of any past or present shareholder. No capital stock of Acquisition Sub
will be conveyed to the Company Shareholders in the Merger. Within a
reasonable time prior to Closing, Purchaser will provide to Company
Shareholders copies of its Registration Statement on Form S-1 and copies of all
subsequent Forms 10-K and 10-Q, to the extent that such copies are reasonably
available to Purchaser.
(c) Authorization. Acquisition Sub and Purchaser have full
corporate power and authority to enter into this Agreement, the Related
Agreements, to perform their obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby, including, without
limitation, the execution and delivery of this Agreement and the Related
Agreements. Acquisition Sub and Purchaser have taken all necessary and
appropriate corporate action with respect to the execution and delivery of this
Agreement and the Related Agreements. This Agreement and the Related Agreements
constitute valid and binding obligations of Acquisition Sub, enforceable in
accordance with their respective terms; except as limited by applicable
bankruptcy, insolvency, moratorium, reorganization, or other laws affecting
creditors' rights and remedies generally, and other laws and remedies.
(d) Brokers' and Finders' Fees/Contractual Limitations. Neither
Purchaser nor Acquisition Sub is obligated to pay any fees or expenses of any
broker or finder in connection with the origin, negotiation, or execution of
this Agreement, the Related Agreements, or in connection with any transactions
contemplated hereby. Neither Purchaser, Acquisition Sub nor any officer,
director, employee, agent, or representative of Purchaser or Acquisition Sub
(collectively, the "Acquisition Sub Representatives") is or has been subject to
any agreement, letter of intent, or understanding of any kind which prohibits,
limits, or restricts Purchaser, Acquisition Sub or the Acquisition Sub
Representatives from negotiating, entering into, and consummating this
Agreement, the Related Agreements, and the transactions contemplated hereby and
thereby.
(e) Governmental Consents. To the best of the Knowledge of
Purchaser and Acquisition Sub, no consent, approval, order, or authorization
of, or registration, qualification, designation, declaration, or filing with,
any federal, state, local, or provincial governmental authority on the part of
Acquisition Sub or Purchaser is required in connection with the consummation of
the transactions contemplated hereunder.
(f) Complete Disclosure. To the best of the Knowledge and belief
of Purchaser and Acquisition Sub, no representation or warranty by Purchaser or
Acquisition Sub in this Agreement, and no exhibit, schedule, statement,
certificate, or other writing furnished to Company and Company Shareholders
pursuant to this Agreement or the Related Agreements or in connection with the
transactions contemplated hereby and thereby, contains or will contain any
untrue statement or omits or will omit to state any fact necessary to make the
statements contained herein and therein not materially misleading. If
Purchaser or Acquisition Sub becomes aware of any fact or circumstance which
would change a representation or warranty of Purchaser or Acquisition Sub,
Purchaser and Acquisition Sub shall immediately give notice of such fact or
circumstance to Company and Company Shareholders. However, such notification
shall not relieve either Purchaser or Acquisition Sub of their respective
obligations under this Agreement.
Section 2.3 Disclosure. Disclosure of any item on any schedule
hereto shall be deemed adequate disclosure of such item on all other schedules,
provided a specific cross-reference is set forth in each such other schedule.
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Section 2.4 Investment Representation of Company Shareholders.
Each Company Shareholder (i) understands that the shares of Purchaser Common
Stock have not been, and will not be, registered under the Securities Act of
1933, or under any state securities laws, and are being offered and sold in
reliance upon federal and state exemptions for transactions not involving any
public offering, (ii) is acquiring the shares of Purchaser Common Stock solely
for his or its own account for investment purposes, and not with a view of the
distribution thereof, (iii) is a sophisticated investor with knowledge and
experience in business and financial matters, (iv) has received certain
information concerning Purchaser and has had the opportunity to obtain
additional information as desired in order to evaluate the merits and the risks
inherent in holding the Purchaser Common Stock, (v) is able to bear the
economic risk and lack of liquidity inherent in holding the Purchaser Common
Stock, and (vi) is an Accredited Investor for the reasons set forth in the
annexed subscription documents and investment letter.
ARTICLE III
COVENANTS
Section 3.1 Covenants Against Disclosure.
(a) The terms and provisions of this Agreement, and any
information heretofore disclosed or to be disclosed in the future in connection
herewith by any party hereto to any other party, other than information which
is in the public domain or which the disclosing party authorizes the receiving
party in writing to disclose (such terms, provisions and information herein
called the "Confidential Material") shall be treated confidentially by the
parties; provided that any party may disclose Confidential Material of another
party to the receiving party's employees, accountants, attorneys and advisors,
including personal financial planners and advisors, who need to know the same
(it being understood that they shall be informed by the receiving party of the
confidential nature of the Confidential Material, and that the receiving party
shall cause them to treat the same confidentially), and otherwise to the extent
required by law; and provided further that any party may disclose the terms and
provisions of this Agreement after the later of six months after the Closing
Date or December 31, 1998. Furthermore, the parties may disclose the terms of
this Agreement to the managing shareholder and company shareholders of Computer
Graphics Technology, Inc., a South Carolina corporation, and to the managing
shareholder and company shareholders of New England Computer Graphics, Inc., a
Massachusetts corporation, and their attorneys and accountants for the purpose
of arriving at an agreement acceptable to all parties. The parties acknowledge
that remedies at law would be inadequate to enforce the covenants contained in
this Section 3.1 and therefore agree that a party aggrieved hereunder may
enforce such covenants through the remedy of specific performance or other
equitable relief. Should an aggrieved party have cause to seek such relief, no
bond shall be required, and the breaching party shall pay all attorney's fees
and court costs which the aggrieved party may incur in enforcing the provisions
of this Section.
(b) The parties shall, by mutual agreement, draft a press release
for public dissemination. No party shall disseminate (except to the parties to
this Agreement) any press release or announcement concerning the transactions
contemplated by this Agreement or the Related Agreements or the parties hereto
or thereto without the prior written consent of the Company, Purchaser and
Acquisition Sub, except as required by law.
Section 3.2 Access to Information. Through April 1, 1998 (or
such later Closing Date as may be established), the Company will give
Purchaser, Acquisition Sub and their accountants, legal
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counsel, and other representatives reasonable access, during normal business
hours, at times mutually agreeable among the parties, to all of the properties,
books, contracts, commitments, and records relating to the Business and the
Company and to all officers and managers of the Company, and the Company will
furnish to Purchaser and Acquisition Sub, their accountants, legal counsel and
other representatives, at the Company's expense (which expense shall not
include the costs and fees of Acquisition Sub's or Purchaser's accountants,
legal counsel, and other representatives), all such information that Company
and the Company Shareholders are reasonably able to produce concerning the
Business or the Company as Acquisition Sub and Purchaser may request.
Acquisition Sub and Purchaser agree to indemnify and hold the Company harmless
from and against loss or damage the Company may incur as a result of
Purchaser's or Acquisition Sub's activities or the activities of their agents,
representatives or designees upon property owned or occupied by the Company and
against any and all claims for death or injury to persons or properties arising
out of or connected with Purchaser's or Acquisition Sub's (or their agents',
representatives' or designees') going upon such property pursuant to the
provisions of this Agreement. Such indemnification shall be provided in
accordance with the provisions of Article V hereof.
Section 3.3 Interim Period.
(a) During the period commencing on the date of this Agreement and
ending with the earlier to occur of the Closing Date or the termination of this
Agreement in accordance with its terms, the Company agrees that it will, except
as set forth on Schedule 3.3(a):
(i) carry on its respective businesses in substantially
the same manner as it has heretofore and not introduce any material
new method of management, operation or accounting;
(ii) maintain its respective properties and facilities,
including those held under leases, in as good working order and
condition as at present, ordinary wear and tear excepted;
(iii) perform all of its respective obligations under
agreements relating to or affecting its respective assets, properties,
or rights;
(iv) keep in full force and effect present insurance
policies or other comparable insurance coverage;
(v) use its best efforts to maintain and preserve its
business organization intact, retain its respective present key
employees, and maintain its respective relationships with suppliers,
customers, and others having business relations with it;
(vi) maintain compliance with all permits laws, rules and
regulations, consent orders, and all other orders of applicable
courts, regulatory agencies, and similar governmental authorities;
(vii) maintain present debt and lease instruments and not
enter into new or amended debt or lease instruments; and
(viii) maintain present salaries and commission levels for
all officers, directors, employees and agents.
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(b) During the period commencing on the date of this Agreement and
ending with the earlier to occur of the Closing Date or the termination of this
Agreement in accordance with its terms, the Company agrees that it will not,
except as set forth on Schedule 3.3(b):
(i) make any change in its Certificate or Articles of
Incorporation or Bylaws;
(ii) issue any securities, options, warrants, calls,
conversion rights or commitments relating to its securities of any
kind;
(iii) declare or pay any dividend, or make any distribution
in respect of its stock whether now or hereafter outstanding, or
purchase, redeem or otherwise acquire or retire for value any shares
of its stock or declare any dividends or make any distributions (other
than S Corporation distributions), nor pay out any extraordinary
bonuses in excess of pro rata bonuses customarily paid, or fees, or
commissions to the Shareholders, directors, management or other
personnel;
(iv) sell, assign, lease, or otherwise transfer or dispose
of any property or equipment except in the normal course of business;
(v) negotiate for the acquisition of any business or the
start-up of any new business;
(vi) merge or consolidate or agree to merge or consolidate
with or into any other corporation;
(vii) waive any material rights or claims;
(viii) commit a material breach of or amend or terminate any
material agreement or Permit;
(ix) enter into any other transaction outside the ordinary
course of its business consistent with past business practice or
prohibited hereunder; or
(x) change its accounts receivable collection practice or
factor its accounts receivable in any way.
Section 3.4 Completion of Schedules. The parties acknowledge
that all of the Schedules hereto may not be completed as of the date of
execution of this Agreement. All missing or incomplete schedules shall be
compiled and agreed upon within 15 days after execution of this Agreement.
Section 3.5 On and After Closing.
(a) On and after the Closing Date, none of the shares of stock of
Purchaser which are subject to the escrow provisions of this Agreement shall be
transferred or pledged except pursuant to the provisions of this Agreement. The
voting rights with respect to such shares shall be exercisable by the owners of
such shares. Dividends, if any, declared on the Purchaser Common Stock during
the effectiveness of such escrow provisions shall be paid to and reinvested by
the escrow agent as the parties shall agree.
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(b) After the Closing Date, the Managing Shareholder and Surviving
Corporation agree that they will not without the consent of Purchaser, which
consent shall not be unreasonably withheld:
(i) enter into any contract or commitment or incur, or
agree to incur, any liability or make any capital expenditures, except
in the normal course of business consistent with past practice
involving amounts less than $5,000;
(ii) create, assume, or permit to exist mortgage, pledge,
or other lien or encumbrance upon any assets or properties whether now
owned or hereafter acquired, except (1) with respect to purchase money
liens incurred in connection with the acquisition of equipment with an
aggregate cost not in excess of $10,000 necessary or desirable for the
conduct of the businesses of the Company, (2) liens for taxes either
not yet due or being contested in good faith and by appropriate
proceedings (and for which contested taxes adequate reserves have been
established and are being maintained) or materialmen's, mechanics',
workers', repairmen's, employees', or other like liens arising in the
ordinary course of business (the liens set forth in clause (2) being
referred to herein as "Statutory Liens"), or (3) liens set forth on
Schedule 2.1(v) hereto;
Section 3.6 Continuity of Business Enterprise. Surviving Company
will continue a historic business of the Company, or use or cause to be used, a
significant portion of the Company's business, in a manner which satisfies the
continuity of business enterprise requirement at Treas. Reg. Section
1.365-1(d).
Section 3.7 Non-Solicitation.
(a) Except as set forth on Exhibit 3.7(a) hereto, commencing as of
the Closing Date and continuing for three (3) years thereafter, each of the
Company Shareholders agrees that it/he shall not engage (except in its/his
respective capacity as an employee of Surviving Corporation, Purchaser, or a
subsidiary of either Surviving Corporation or Purchaser, if applicable),
directly or indirectly, whether on its/his own account or as a shareholder
(other than as a less than 1 % shareholder of a publicly-held company),
partner, joint venturer, employee, consultant, advisor, and/or agent, of any
person, firm, corporation, or other entity, in any or all of the following
activities:
(i) Solicit or attempt to solicit customers, suppliers,
or business patronage of the Company, Surviving Corporation, the
Business of either Surviving Corporation or Purchaser, or any of
their affiliates for the purpose of inducing him, her or it to
purchase or receive products or services competitive with those
offered by Surviving Corporation or Purchaser (provided, however, that
this restriction shall apply only to customers with whom such Company
Shareholder had material contact in connection with services provided
by the Company Shareholder for or on behalf of the Company within the
three years prior to the date of this Agreement); or,
(ii) Encourage or solicit any Employees of or service
providers to Surviving Corporation, Purchaser, the Business of either
Surviving Corporation or Purchaser, or any of their affiliates to
leave the employment of or terminate their service relationship with
Surviving Corporation, Purchaser or any of their affiliates for any
reason.
(b) All proprietary and confidential data or information (whether
in tangible form or held as personal knowledge) of the Company pertaining to
its business, other than Trade Secrets (as defined
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below), which is not generally known to the public, including, without
limitation, information regarding the Company's customers or prospective
customers (such as lists containing the names, addresses, and telephone numbers
and/or account information of customers and prospective customers), marketing
plans and methods, short-term and long-term business plans, research and
development, manufacturing costs and processes, pricing, cost or profit
factors, quality programs, contracts and bids, or personnel gained by a Company
Shareholder as a result of his, her or its relationship with the Company shall
be considered "Company Confidential Information". The Company Shareholders
shall regard and treat each item constituting Company Confidential Information
as strictly confidential and wholly-owned by Surviving Corporation and
Purchaser until the third anniversary of the Closing Date, and the Company
Shareholders shall not, for any reason in any fashion, either directly or
indirectly, use, sell, lend, lease, distribute, license, give, transfer,
assign, show, disclose, disseminate, reproduce, copy, appropriate or otherwise
communicate any such item or information to any entity for any purpose other
than strictly in accordance with the express terms of this Agreement.
(c) All information constituting "trade secrets" of the Company as
generally recognized under applicable law shall be considered "Company Trade
Secrets". The Company Shareholders, at all times during which such item
continues to constitute a Company Trade Secret, shall regard and treat each
item constituting a Company Trade Secret as strictly confidential and
wholly-owned by Surviving Corporation and Purchaser, and the Company
Shareholders shall not, for any reason in any fashion, either directly or
indirectly, use, sell, lend, lease, distribute, license, give, transfer,
assign, show, disclose, disseminate, reproduce, copy, appropriate or otherwise
communicate any such item or information to any entity for any purpose other
than strictly in accordance with the express terms of this Agreement.
(d) The parties agree that due to the unique nature of the
services and capabilities of the Company and the Company Shareholders, there
can be no adequate remedy at law for any breach of their respective obligations
under this Article III, that any such breach may allow the Company Shareholders
and/or third parties to unfairly compete with Surviving Corporation, Purchaser
or their affiliates resulting in irreparable harm to Surviving Corporation,
Purchaser or their affiliates, and therefore, that upon any such breach or any
threat thereof, Surviving Corporation, Purchaser or their affiliates shall be
entitled to appropriate equitable relief in addition to whatever remedies it
might have at law.
(e) Each of the Company Shareholders acknowledges, represents and
warrants to Acquisition Sub and Purchaser that the covenants of each in this
Section 3.7 are reasonably necessary for the protection of Acquisition Sub's
and Purchaser's interests under this Agreement and are not unduly restrictive
upon him.
Section 3.8 Registration Statement. Purchaser shall use its best
efforts, when it next files with the SEC a registration statement, to prepare
and file at its costs and expense such amendment to such registration statement
to cover the shares of Purchaser Common Stock issuable to the Company
Shareholders, and to keep same effective for a period of at least ninety(90)
days so as to permit Company or the Company Shareholders, as the case may be,
to resell such shares during such period of not less than ninety (90) days.
Purchaser shall further use its best efforts to list the shares on the Nasdaq
National Market System subject to official notice of issuance under the
Securities Exchange Act of 1934.
Section 3.9 Company Indebtedness. Acquisition Sub and Purchaser
will use their best efforts to arrange with Company's banks and/or lending
institutions to assign Company's line of credit
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or other indebtedness to Acquisition Sub and will coordinate with Company
Shareholder to effect a release of Company Shareholder's personal guarantees.
In the event that such attempts are unsuccessful at Closing, Purchaser shall
loan to Acquisition Sub an amount sufficient to discharge such indebtedness and
release such guarantees. Such loan shall bear interest at the rate being
charged by the bank or lending institution whose loan is being discharged.
Section 3.10 Further Assurances. On or after the Closing Date,
each party shall prepare, execute, and deliver, at the preparer's expense, such
further instruments, and shall take or cause to be taken such other or further
action, as any party shall reasonably request of any other party at any time or
from time to time in order to consummate, in any other manner, the terms and
provisions of this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT TO OBLIGATIONS
Section 4.1 Conditions to Obligations of Purchaser and
Acquisition Sub. Each and every obligation of Purchaser and Acquisition Sub to
be performed on the Closing Date shall be subject to the satisfaction on or
before the Closing Date of the following conditions (unless waived in writing
by Purchaser or Acquisition Sub), and the Company and the Company Shareholders
shall exercise all reasonable efforts in good faith to satisfy such conditions:
(a) Representations and Warranties. The representations and
warranties of each of the Company Shareholders and the Company set forth in
Section 2.1 of this Agreement shall have been true and correct when made and
shall be true and correct at and as of the Closing Date as if such
representations and warranties were made as of such date and time.
(b) Performance of Agreement. All covenants, conditions, and
other obligations under this Agreement and the Related Agreements which are to
be performed or complied with by the Company or each of the Company
Shareholders, as the case may be, including Boards of Directors approval and
delivery of the Balance Sheet, shall have been fully performed and complied
with at or prior to the Closing Date.
(c) No Material Adverse Change. Since the date of the Unaudited
Annual Financial Statements, there shall have occurred no material adverse
change in the financial condition, the business, the assets of the Company, or
properties of the Company which adversely affects the conduct of the Business
as presently being conducted, the assets of the Company, or the financial
condition or properties of the Company.
(d) Absence of Governmental or Other Objection. There shall be no
pending or threatened lawsuit challenging the transaction by any body or agency
of the federal, state, or local government or by any third party, and the
consummation of the transaction shall not have been enjoined by a court of
competent jurisdiction as of the Closing Date and any applicable waiting period
under any applicable federal law shall have expired.
(e) Due Diligence Review. Purchaser and Acquisition Sub shall
have completed to its reasonable satisfaction their due diligence review of the
Company and its operations, the Business, the assets and financial condition of
the Company, and Purchaser and Acquisition Sub shall have received favorable
reviews from its advisors of the results of their due diligence review of the
Business.
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(f) Certificate of President and Shareholders. The Company shall
have delivered to Purchaser and Acquisition Sub a certificate executed by its
President and the Company Shareholders, dated the date of the Closing Date, to
the effect that the conditions set forth in subsections (a)-(d) of this Section
4.1 have been satisfied with respect to the Company and the Company
Shareholders.
(g) Approval of Documents. The form and substance of all
certificates, instruments, opinions, and other documents delivered or to be
delivered to Purchaser and Acquisition Sub under this Agreement shall be
reasonably satisfactory to Purchaser and Acquisition Sub and their counsel.
(h) Execution of Related Agreements. Purchaser and Acquisition
Sub shall have received fully executed copies of the Related Agreements.
(i) Licenses. Acquisition Sub shall have received all licenses
from all appropriate governmental agencies to operate the Business in the same
manner as the Company operated the Business prior to the Closing Date and shall
have received a certificate, dated as of no earlier than ten (10) days prior to
the Closing Date, duly issued by the appropriate governmental authority in the
Company's State of Incorporation and in each state in which the Company is
authorized to do business, showing that the Company is in good standing and
authorized to do business and that all state franchise and/or income tax
returns and taxes for the Company for all periods prior to the Closing have
been filed and paid. This condition shall be deemed satisfied in the event
that the Acquisition Sub fails to use reasonable diligence in applying for and
pursuing such licenses.
(j) Consents. Purchaser and Acquisition Sub shall have received
each and every consent, approval and waiver (if any) required for the execution
of this Agreement and the consummation of the transactions contemplated hereby.
(k) Resignations. The officers and directors of the Company shall
have delivered their resignations, effective upon delivery.
(l) Delivery of Share Certificates. The Company Shareholders
shall have delivered for cancellation their certificates representing all of
the outstanding Company Shares owned by each of them.
Section 4.2 Conditions to Obligations of the Company and the
Company Shareholders. Each and every obligation of the Company and the Company
Shareholders to be performed on the Closing Date shall be subject to the
satisfaction as of or before the Closing Date of the following conditions
(unless waived in writing by the Company Shareholders or the Company), and
Purchaser and Acquisition Sub shall exercise all reasonable efforts in good
faith to satisfy such conditions:
(a) Representations and Warranties. The representations and
warranties of Acquisition Sub and Purchaser set forth in Section 2.2 of this
Agreement shall have been true and correct when made and shall be true and
correct on and as of the Closing Date as if such representations and warranties
were made as of such date and time.
(b) Performance of Agreement. All covenants, conditions, and
other obligations under this Agreement and the Related Agreements which are to
be performed or complied with by Acquisition Sub, as the case may be, including
Board of Directors and shareholder approval, as applicable, shall have been
fully performed and complied with at or prior to the Closing Date.
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(c) Absence of Governmental or Other Objection. There shall be no
pending or threatened lawsuit challenging the transaction by any body or agency
of the federal, state, or local government or by any third party, and the
consummation of the transaction shall not have been enjoined by a court of
competent jurisdiction as of the Closing Date and any applicable waiting period
under any applicable federal law shall have expired.
(d) Certificate of Officers. Acquisition Sub shall have delivered
to the Company a certificate executed by its authorized officer, dated the date
of the Closing Date, to the effect that the conditions set forth in subsections
(a)-(c) of this Section 4.2 have been satisfied.
(e) Execution of Related Agreements. The Company shall have
received fully executed copies of the Related Agreements (and all other
documents required hereunder).
(f) Approval of Documents. The form and substance of all
certificates, instruments, opinions, and other documents delivered or to be
delivered to the Company Shareholders under this Agreement shall be reasonably
satisfactory to each of the Company Shareholders and their counsel.
ARTICLE V
INDEMNIFICATION
Section 5.1 Survival of Representations, Warranties, Covenants and
Agreements.
(a) All representations, warranties, covenants, and agreements of
the Company, the Company Shareholders, Purchaser and Acquisition Sub shall
survive the execution, delivery, and performance of this Agreement for two
years from the Closing Date. All representations and warranties of the Company,
the Company Shareholders, Purchaser and Acquisition Sub set forth in this
Agreement shall be deemed to have been made again by the Company, the Company
Shareholders, Purchaser and Acquisition Sub on and as of the Closing Date.
(b) As used in this Article V, except as otherwise indicated in
this Article V, any reference to a representation, warranty, agreement, or
covenant contained in any section of this Agreement shall include the schedule
relating to such section.
Section 5.2 Indemnification of Acquisition Sub and Purchaser.
Each of the Company Shareholders hereby agrees to indemnify and hold harmless
Acquisition Sub and Purchaser and their affiliates, the Company and the other
Company Shareholders (collectively the "Indemnified Parties") against any and
all losses, liabilities, damages, demands, claims, suits, actions, judgments,
causes of action, assessments, costs, and expenses, including, without
limitation, interest, penalties, attorneys' fees, any and all expenses incurred
in investigating, preparing, and defending against any litigation, commenced or
threatened, and any claim whatsoever, and any and all amounts paid in
settlement of any claim or litigation (collectively, "Damages"), asserted
against, reasonably resulting from, imposed upon, or incurred or suffered by
the Indemnified Parties, directly or indirectly, as a result of or arising from
any inaccuracy in or breach or nonfulfillment of any of the representations,
warranties, covenants, or agreements made by the Company or the Company
Shareholders in this Agreement or the Related Agreements or any facts or
circumstances constituting such an inaccuracy, breach, or nonfulfillment (all
of which shall be referred to as "Company Indemnifiable Claims").
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Section 5.3 Indemnification of the Company Shareholders.
Acquisition Sub hereby agrees to indemnify and hold harmless each of the
Company Shareholders against any and all Damages(as defined in Section 5.2
above) asserted against, reasonably resulting from, imposed upon, or incurred
or suffered by such Company Shareholders, directly or indirectly, as a result
of or arising from any inaccuracy in or breach or nonfulfillment of any of the
representations, warranties, covenants, or agreements made by Acquisition Sub
in this Agreement or the Related Agreements or any facts or circumstances
constituting such an inaccuracy, breach, or nonfulfillment or any claim against
the Company which is attributable to occurrences on or after the Closing Date
(all of which shall be referred to as "Acquisition Sub Indemnifiable Claims").
Section 5.4 Procedure for Indemnification with Respect to
Third-Party Claims.
(a) If any party hereto determines to seek indemnification (the
party seeking such indemnification hereinafter referred to as the "Indemnified
Party" and the party against whom such indemnification is sought is hereinafter
referred to as the "Indemnifying Party") under this Article V with respect to
Company Indemnifiable Claims where the Indemnified Party is Acquisition Sub or
any of its affiliates or Acquisition Sub Indemnifiable Claims where the
Indemnified Party is any of the Company Shareholders (such Claims shall be
referred to herein as "Indemnifiable Claims") resulting from the assertion of
liability by third parties, the Indemnified Party shall give notice to the
Indemnifying Parties within 60 days of the Indemnified Party becoming aware of
any such Indemnifiable Claim or of facts upon which any such Indemnifiable
Claim will be based; the notice shall set forth such material information with
respect thereto as is then reasonably available to the Indemnified Party. In
case any such liability is asserted against the Indemnified Party or its
affiliates, and the Indemnified Party notifies the Indemnifying Parties
thereof, the Indemnifying Parties will be entitled, if such Indemnifying
Parties so elect by written notice delivered to the Indemnified Party within 20
days after receiving the Indemnified Party's notice, to assume the defense
thereof with competent and experienced counsel subject to the written consent
of the Indemnified Party, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, (i) the Indemnified Party or its affiliates
shall also have the right to employ its own counsel in any such case, but the
fees and expenses of such counsel shall be at the expense of the Indemnified
Party unless the Indemnified Party or its affiliates shall reasonably determine
that there is a conflict of interest between or among the Indemnified Party or
its affiliates and any Indemnifying Party with respect to such Indemnifiable
Claim, in which case the Indemnified Party shall select another attorney,
subject to the consent of Indemnifying Party, which consent shall not be
unreasonably withheld, and the fees and expenses of such counsel will be borne
by such Indemnifying Parties, (ii) the Indemnified Party shall have no
obligation to give any notice of any assertion of liability by a third party
unless such assertion is in writing, and (iii) the rights of the Indemnified
Party or its affiliates to be indemnified hereunder in respect of Indemnifiable
Claims resulting from the assertion of liability by third parties shall not be
adversely affected by their failure to give notice pursuant to the foregoing
unless, and, if so, only to the extent that, such Indemnifying Parties are
materially prejudiced thereby; provided, however, the Indemnifying Party shall
not be liable for attorneys fees and expenses incurred by the Indemnified Party
prior to the Indemnified Party's giving notice to the Indemnifying Party of an
Indemnifiable Claim. With respect to any assertion of liability by a third
party that results in an Indemnifiable Claim, the parties hereto shall make
available to each other all relevant information in their possession material
to any such assertion.
(b) In the event that such Indemnifying Parties, within 20 days
after receipt of the aforesaid notice of an Indemnifiable Claim fail to assume
the defense of the Indemnified Party or its affiliates against such
Indemnifiable Claim, the Indemnified Party or its affiliates shall have the
right to
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undertake the defense, compromise, or settlement of such action on behalf of
and for the account, expense, and risk of such Indemnifying Parties.
(c) Notwithstanding anything in this Article V to the contrary,
(i) if there is a reasonable probability that an Indemnifiable Claim may
materially adversely affect the Indemnified Party or its affiliates, the
Indemnified Party or its affiliates shall have the right to participate in such
defense, compromise, or settlement and such Indemnifying Parties shall not,
without the Indemnified Party's written consent (which consent shall not be
unreasonably withheld), settle or compromise any Indemnifiable Claim or consent
to entry of any judgment in respect thereof unless such settlement, compromise,
or consent includes as an unconditional term thereof the giving by the claimant
or the plaintiff to the Indemnified Party a release from all liability in
respect of such Indemnifiable Claim.
Section 5.5 Procedure For Indemnification with Respect to
Non-Third Party Claims. In the event that the Indemnified Party asserts the
existence of a claim giving rise to Damages (but excluding claims resulting
from the assertion of liability by third parties), it shall give written notice
to the Indemnifying Parties. Such written notice shall state that it is being
given pursuant to this Section 5.5, specify the nature and amount of the claim
asserted and indicate the date on which such assertion shall be deemed accepted
and the amount of the claim deemed a valid claim (such date to be established
in accordance with the next sentence). If such Indemnifying Parties, within 30
days after the receipt of notice by the Indemnified Party, shall not give
written notice to the Indemnified Party announcing their intent to contest such
assertion of the Indemnified Party, such assertion shall be deemed accepted and
the amount of claim shall be deemed a valid claim. In the event, however, that
such Indemnifying Parties contest the assertion of a claim by giving such
written notice to the Indemnified Party within said period, then the parties
shall act in good faith to reach agreement regarding such claim. If the parties
hereto, acting in good faith, cannot reach agreement with respect to such claim
within ten (10) days after notice thereof, such claim will be submitted to and
settled by arbitration pursuant to Section 7.10 hereof.
Section 5.6 Escrowed Shares. Each Company Shareholder shall
escrow twenty percent (20%) of the Purchaser Common Stock to be issued to such
Company Shareholder to be available for distribution to Purchaser in the event
of an Indemnified Claim not paid in cash by the Indemnifying Party. The number
of Purchaser Shares to be delivered to Purchaser in the event that there is an
Indemnifiable Claim for which Purchaser Shares are to be distributed to satisfy
such an Indemnifiable Claim pursuant to this Section 5.6 shall be calculated
by dividing the amount of the award for the Indemnifiable Claim by the
twenty-day average trading price of Purchaser Common Stock as quoted on the
Nasdaq National Market System for the twenty-day period ending on the date that
the Indemnifiable Claim is made. Such escrow shall expire on the date not less
than eighteen (18) months after the Date of Closing, when there shall be no
pending Indemnification Claim for which notice has been given under Section
5.4, and upon such expiration the share certificates shall be delivered to the
Company Shareholders. Not later than the Closing Date the parties shall enter
into a Pledge, Security and Escrow Agreement in substantially the form and
substance attached hereto as Exhibit 5.6(a). In the event that Purchaser elects
to waive the Profit Surplus Adjustment and the Profit Shortfall Adjustment
pursuant to Section 1.3(h) hereof, the amount of Purchaser Common Stock placed
in escrow pursuant to this Section 5.6 shall be increased by the amount of
Purchaser Common Stock then in the escrow account established by Section 1.3(e)
that is transferred to the escrow account established by this Section 5.6.
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<PAGE> 46
ARTICLE VI
TERMINATION AND CONDITIONS SUBSEQUENT
Section 6.1 Termination.
(a) At any time prior to the time of Closing, this Agreement may
be terminated by express written consent of Purchaser, Acquisition Sub, the
Company and each of the Company Shareholders.
(b) Purchaser or Acquisition Sub may terminate this Agreement in
the event the conditions set forth in Section 4.1 of this Agreement have not
been satisfied or waived prior to the time of Closing.
(c) Each of the Company and the Company Shareholders may terminate
this Agreement in the event the conditions set forth in Section 4.2 of this
Agreement have not been satisfied or waived prior to the time of Closing.
(d) If the failure of such conditions to be fulfilled arises from
the fault or intentional act of a party hereto, such party shall be liable to
the other parties up to the amount of the documented out-of-pocket expense
incurred by such parties in negotiating, structuring and documenting the
transaction contemplated by this Agreement. No party shall be responsible for
indirect, special or expectancy damages for such nonfulfillment of conditions.
Section 6.2 Effect of Termination. In the event of termination
as provided in Section 6.1 above, Sections 3.1, 7.4 and 7.11 shall survive such
termination and continue in full force and effect.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 Notice. All notices and other communications
required or permitted under this Agreement shall be delivered to the parties at
the address set forth below their respective signature blocks, or at such other
address that they designate by notice to all other parties in accordance with
this Section 7.1. Any party delivering notice to Purchaser or Acquisition Sub
shall deliver a copy to: Wade Stribling, Nelson Mullins Riley & Scarborough,
L.L.P., First Union Plaza, Suite 1400, 999 Peachtree Street, N.E., Atlanta,
Georgia 30309. Any party delivering notice to Company or Company Shareholder
shall deliver a copy to Barry A. Schulman, Law Offices of Schulman and Miller,
Suite 515, Beverly Hills, California 90210-4608. All notices and
communications shall be deemed to have been received unless otherwise set forth
herein: (i) in the case of personal delivery, on the date of such delivery;
(ii) in the case of telex or facsimile transmission, on the date on which the
sender receives confirmation by telex or facsimile transmission that such
notice was received by the addressee, provided that a copy of such transmission
is additionally sent by mail as set forth in (iv) below; (iii) in the case of
recognized, nationwide overnight air courier, on the second business day
following the day sent, with receipt confirmed by the overnight courier; and
(iv) in the case of mailing by first class certified or registered mail,
postage prepaid, return receipt requested, on the fifth business day following
such mailing.
Section 7.2 Entire Agreement. This Agreement, the exhibits and
schedules hereto, and the documents referred to herein embody the entire
agreement and understanding of the parties hereto with
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<PAGE> 47
respect to the subject matter hereof, and supersede all prior and
contemporaneous agreements and understandings, oral or written, relative to
said subject matter.
Section 7.3 Binding Effect: Assignment. This Agreement and the
various rights and obligations arising hereunder shall inure to the benefit of
and be binding upon the Company and the Company Shareholders, their respective
successors and permitted assigns, and Purchaser, Acquisition Sub and their
successors and permitted assigns. Neither this Agreement nor any of the
rights, interests, or obligations in this Agreement shall be transferred or
assigned (by operation of law or otherwise) by the Company or the Company
Shareholders without the prior written consent of Acquisition Sub or Purchaser
or their assignees. Acquisition Sub and Purchaser may assign their rights,
interests or obligations hereunder without the prior written consent of the
Company or the Company Shareholders.
Section 7.4 Expenses of Transaction. Each party shall pay its
professional fees and expenses incurred in connection with the negotiation and
closing of this Agreement and the Related Agreements. The expenses of the
preparation of the Financial Statements shall be borne by Company except for
the 1997 Audited Financial Statements, which shall be paid by Acquisition Sub.
Company and/or Company Shareholders, as the case may be, shall pay all
applicable sales, income, use, excise, transfer, documentary, and any other
taxes arising out of the transactions contemplated in this Agreement.
Section 7.5 Waiver; Consent. This Agreement may not be changed,
amended, terminated, augmented, rescinded, or discharged (other than by
performance), in whole or in part, except by a writing executed by the parties
hereto, and no waiver of any of the provisions or conditions of this Agreement
or any of the rights of a party hereto shall be effective or binding unless
such waiver shall be in writing and signed by the party claimed to have given
or consented thereto. Except to the extent that a party hereto may have
otherwise agreed in writing, no waiver by that party of any condition of this
Agreement or breach by the other party of any of its obligations or
representations hereunder or thereunder shall be deemed to be a waiver of any
other condition or subsequent or prior breach of the same or any other
obligation or representation by the other party, nor shall any forbearance by
the first party to seek a remedy for any noncompliance or breach by the other
party be deemed to be a waiver by the first party of its rights and remedies
with respect to such noncompliance or breach.
Section 7.6 Counterparts. This Agreement may be executed
simultaneously in multiple counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
Section 7.7 Severability. If one or more provisions of this
Agreement are held to be unenforceable under applicable statute, regulation or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform to such
statute, regulation or rule of law, and the remainder of this Agreement and the
application of any such invalid or unenforceable provision to parties,
jurisdictions or circumstances other than to whom or to which it is held
invalid or unenforceable shall not be affected thereby nor shall the same
affect the validity or enforceability of any other provision of this Agreement.
Section 7.8 Remedies of the Parties. The Company and the Company
Shareholders acknowledge that, in addition to all other remedies to which
Purchaser and Acquisition Sub are entitled, Purchaser and Acquisition Sub shall
have the right to enforce the terms of this Agreement by a decree of specific
performance, provided Purchaser or Acquisition Sub is not in material default
hereunder. The parties also agree that the rights and remedies of each party to
this Agreement set forth in this
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<PAGE> 48
Agreement and in all of the exhibits and schedules attached hereto and
documents referred to herein shall be cumulative and share inure to the benefit
of each such party.
Section 7.9 Governing Law. This Agreement shall in all respects
be construed in accordance with and governed by the laws of the State of
Georgia.
Section 7.10 Arbitration; Attorneys' Fees.
(a) The parties agree to use reasonable efforts to resolve any
dispute arising out of this Agreement, but should a dispute remain unresolved
ten (10) days following notice of the dispute to the other party (but in no
event prior to said ten (10) days, except as specifically provided otherwise
herein), such dispute shall be finally settled by binding arbitration in
Atlanta, Georgia in accordance with the then current Commercial Arbitration
Rules of the American Arbitration Association (the "AAA") or such other
mediation or arbitration service as shall be mutually agreeable to the parties,
and judgment upon the award rendered by the arbitrator shall be final and
binding on the parties and may be entered in any court having jurisdiction
thereof; provided, however, that any party shall be entitled to appeal a
question of law or determination of law to a court of competent jurisdiction;
and provided, further, however, that the parties may first seek appropriate
injunctive relief prior to, and/or in addition to pursuing negotiation or
arbitration. Such arbitration shall be conducted by an arbitrator chosen by
mutual agreement of the parties, or failing such agreement, an arbitrator
appointed by the AAA. There shall be limited discovery prior to the arbitration
hearing as follows: (a) exchange of witness lists and copies of documentary
evidence and documents related to or arising out of the issues to be
arbitrated, (b) depositions of all party witnesses, and (c) such other
depositions as may be allowed by the arbitrator upon a showing of good cause.
Depositions shall be conducted in accordance with the Georgia Code of Civil
Procedure and questions of evidence in any hearings shall be resolved in
accordance with the Federal Rules of Evidence. The arbitrator shall be
required to provide in writing to the parties the basis for the award or order
of such arbitrator, and a court reporter shall record all hearings (unless
otherwise agreed to by the parties), with such record constituting the official
transcript of such proceedings.
(b) In the event of arbitration or litigation filed or instituted
between the parties with respect to this Agreement or the Related Agreements,
the prevailing party will be entitled to receive from the other party all
costs, damages and expenses, including reasonable attorney's fees, incurred by
the prevailing party in connection with that action or proceeding whether or
not the controversy is reduced to judgment or award. The prevailing party will
be that party who may be fairly said by the arbitrator(s) or the court to have
prevailed on the major disputed issues.
Section 7.11 Cooperation and Records Retention. Each of the
Company Shareholders and Acquisition Sub shall (i) provide the other with
access to such records, original or copies, or assistance as may reasonably be
requested by them in connection with the preparation of any Tax Return, in
connection with any audit or other examination by any Taxing authority or any
judicial or administrative proceedings relating to liability for Taxes, or
financial reporting obligations, (ii) each retain and provide the other, with
any records or other information which may be relevant to any such Tax Return,
audit or examination, proceeding or determination, or financial reporting
obligations, and (iii) each provide the other with any final determination of
any such audit or examination, proceeding or determination that affects any
amount required to be shown on any Tax Return of the other for any period. All
Tax Returns, supporting work schedules and other records or information which
may be relevant to such Tax Returns for all tax periods or portions thereof
ending before or including the
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<PAGE> 49
Closing Date shall remain with Acquisition Sub or the Company and shall be made
available for inspection and copying by the parties hereto during normal
business hours.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
"Purchaser"
TEKGRAF, INC.
By: /s/ Dan Bailey
---------------------------------------
Dan Bailey
President
Address: 2979 Pacific Drive, Suite B
Norcross, Georgia 30071
By: /s/ Dan Bailey
---------------------------------------
Name: Dan Bailey
----------------------------------
Secretary
"Acquisition Sub"
TEKGRAF SUB II, INC.
By: /s/ William M. Rychel
---------------------------------------
William M. Rychel
President
Address: 2979 Pacific Drive, Suite B
Norcross, Georgia 30071
By: /s/ Dan Bailey
---------------------------------------
Name: Dan Bailey
----------------------------------
Secretary
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<PAGE> 50
"Company"
MARTEC, INC.
By: /s/ Mark Lewis
---------------------------------------
Mark Lewis, [President]
Address:
By: /s/ Mark Lewis
---------------------------------------
Name: Mark Lewis
----------------------------------
Secretary
"Company Shareholders"
By: /s/ Mark Lewis
---------------------------------------
Mark Lewis
Address:
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<PAGE> 51
[Georgia] EXHIBIT A
CERTIFICATE OF MERGER
MERGING
MARTEC, INC.
(a California corporation)
WITH AND INTO
TEKGRAF SUB II, INC.
(a Georgia corporation)
The undersigned corporation, organized and existing under the laws of the
State of Georgia, DOES HEREBY CERTIFY:
1. That the name and state of incorporation of each of the constituent
corporations (the "Constituent Corporations") of the merger is as follows:
Name State of Incorporation
Martec, Inc. California
Tekgraf Sub II, Inc. Georgia
2. That the surviving corporation of the merger shall be Tekgraf Sub II,
Inc.
3. That the Certificate of Incorporation of Tekgraf Sub II, Inc. shall be
the Certificate of Incorporation of the surviving corporation.
4. That the executed Agreement and Plan of Merger among the Constituent
Corporations and Tekgraf, Inc., a Delaware corporation, is on the file at the
principal place of business of the surviving corporation. The address of the
principal place of business of the surviving corporation is ________________.
5. That a copy of the Agreement and Plan of Merger will be furnished by
the surviving corporation, on request and without cost, to any shareholder of
any of the Constituent Corporations.
6. That the Agreement and Plan of Merger has been duly approved by the
shareholders of each of the Constituent Corporations in accordance with the
provisions of applicable law.
<PAGE> 52
IN WITNESS WHEREOF, the undersigned corporation has caused this
Certificate to be signed by its duly authorized officer, this ______ day of
_______________, 1998.
TEKGRAF SUB II, INC.
By:
---------------------------
Name:
------------------------
Title:
------------------------
<PAGE> 53
EXHIBIT B
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
(MARTEC, INC.)
In accordance with Section 1103 of the California General Corporation Law,
Mark Lewis and ________________________ hereby certify that:
1. They are the president and the secretary, respectively, of
MARTEC, INC., a California corporation (the "Corporation").
2. The Agreement of Merger in the form attached hereto was duly
approved by the Board of Directors and shareholders of the
Corporation.
3. The principal terms of the Agreement of Merger attached
hereto were approved by the Corporation by a vote of the number of
shares of each class which equalled or exceeded the vote required.
4. There is one class of common stock of the Corporation
outstanding, and the number of shares outstanding for such voting
class is ____.
5. The percentage vote required of holders of the class entitled
to vote is a vote greater than [50%].
[6. The merger shall become effective at 10:00 a.m. eastern time
on _____________, 1998.]
<PAGE> 54
On the date set forth below, in the City of _________________ in the State
of California, each of the undersigned does hereby declare, under penalty of
perjury under the laws of the State of California, that the matters set forth
in this Certificate are true and correct.
Dated this _______ day of _________________, 1998.
------------------------------
Name:
President
------------------------------
Name:
Secretary
<PAGE> 55
EXHIBIT D
DIRECTORS
1. Phillip C. Aginsky
2. William M. Rychel
3. Mark Lewis
<PAGE> 56
Exhibit 1.3(e)
ESCROW AGREEMENT
This Escrow Agreement (this "Agreement") is entered into as of
______________, 1998, by and among TEKGRAF, INC., a Georgia corporation (the
"Purchaser"), TEKGRAF SUB __, INC. ("Acquisition Sub"), _________, a _________
corporation (the "Company"), __________ (the "Company Shareholders"), and
__________ (the "Shareholder Representative") and _________________________ (the
"Escrow Agent").
WHEREAS, the Purchaser and the Company have entered into an Agreement
and Plan of Merger (the "Merger Agreement") by and among the Company, the
Company Shareholders, Acquisition Sub and the Purchaser.
WHEREAS, the Merger Agreement provides that escrow accounts will be
established to secure the Company Shareholders' guaranty with respect to the
Warranted Pre-Tax Profit and the Warranted Tangible Net Asset Value of the
Company (each as defined in the Merger Agreement) on the terms and conditions
set forth herein.
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which such escrow accounts will be established and
maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given them in the Merger Agreement.
2. Consent of Company Shareholders. By virtue of the Company
Shareholders' approval of the Merger Agreement, the Company Shareholders who may
indirectly or directly receive cash and shares of Purchaser Common Stock
pursuant to the Merger Agreement have, without any further act of any Company
Shareholder, consented to: (a) the establishment of this escrow to secure the
Company Shareholders' guaranty with respect to the Warranted Pre-Tax Profit and
the Warranted Tangible Net Asset Value of the Company in the manner set forth
herein and in the Merger Agreement, (b) the appointment of the Shareholder
Representatives as their representatives for purposes of this Agreement and as
attorneys-in-fact and agents for and on behalf of each Company Shareholder, and
the taking by the Shareholder Representatives of any and all actions and the
making of any decisions required or permitted to be taken or made by them under
this Agreement, and (c) all of the other terms, conditions and limitations in
this Agreement and the Merger Agreement.
<PAGE> 57
3. Escrow and Warranty.
(a) Escrow of Cash. On the Closing Date, the Purchaser shall deposit
with the Escrow Agent $150,000 of the Cash Consideration. The Escrowed Cash
shall be held as a trust fund and shall not be subject to any lien, attachment,
trustee process or any other judicial process of any creditor of any party
hereto. The Escrow Agent agrees to accept delivery of the Escrowed Cash and to
hold the Escrowed Cash in an interest-bearing escrow account (the "Cash Escrow
Account"), subject to the terms and conditions of this Agreement.
(b) Escrow of Shares. On the Closing Date, the Purchaser shall deposit
with the Escrow Agent a certificate for the number of Escrowed Shares specified
in Section 1.3(e) of the Merger Agreement, issued in the name of the Escrow
Agent or its nominee. The Escrowed Shares shall be held as a trust fund and
shall not be subject to any lien, attachment, trustee process or any other
judicial process of any creditor of any party hereto. The Escrow Agent agrees to
accept delivery of the Escrowed Shares and to hold the Escrowed Shares in an
escrow account (the "Share Escrow Account"), subject to the terms and conditions
of this Agreement.
(c) Warranty. The Company Shareholders have agreed in Article I of the
Merger Agreement that the Warranted Pre-Tax Profit and the Warranted Tangible
Net Asset Value of the Company shall not be less than the amounts set forth in
Section 1.3(a) of the Merger Agreement. The Escrowed Shares shall be security
for such warranty obligation of the Company Shareholders, subject to the
limitations, and in the manner provided, in this Agreement.
(d) Dividends, Etc. Any securities distributable to the Company
Shareholders in respect of or in exchange for any of the Escrowed Shares,
whether by way of stock dividends, stock splits or otherwise, shall be delivered
to the Escrow Agent, who shall hold such securities in the Share Escrow Account.
Such securities shall be issued in the name of the Escrow Agent or its nominee
and shall be considered Escrowed Shares for purposes hereof. Any cash dividends
distributable to the Company Shareholders in respect of the Escrowed Shares
shall be distributed to the Company Shareholders.
(e) Voting of Shares. The Shareholder Representatives shall have the
right, in their sole discretion, on behalf of the Company Shareholders, to
direct the Escrow Agent in writing as to the exercise of any voting rights
pertaining to the Escrowed Shares, and the Escrow Agent shall comply with any
such written instructions. In the absence of such instructions, the Escrow Agent
shall not vote any of the Escrowed Shares.
(f) Transferability. The respective interests of the Company
Shareholders in the Escrowed Shares shall not be assignable or transferable,
other than by operation of law. Notice of any such assignment or transfer by
operation of law shall be given to the Escrow Agent and the Purchaser, and no
such assignment or transfer shall be valid until such notice is given.
2
<PAGE> 58
(g) Transfer of Shares Upon Waiver of Warranty. In the event the
Purchaser elects, pursuant to the provisions of Section 1.3(h) of the Merger
Agreement, to waive the Profit Shortfall Adjustment and the Profit Surplus
Adjustment, the Escrowed Shares shall be transferred, upon receipt of notice by
Escrow Agent from Purchaser of such waiver, into the escrow account created
pursuant to that certain Pledge, Security and Escrow Agreement dated as of even
date herewith, to be treated in all respects as escrow shares thereunder and the
Escrowed Shares in such case shall be distributed to the Company Shareholders
pursuant to the terms thereof.
4. Administration of Cash Escrow Account. The Escrow Agent shall
administer the Cash Escrow Account as follows:
(a) In the event that there is a Net Asset Value Shortfall (including
any Collection Shortfall or Inventory Shortfall that remains unpaid ten (10)
days after demand for payment thereof by Purchaser or Acquisition Sub to the
Company Shareholders), the Purchase Price shall be reduced by the amount of such
Net Asset Value Shortfall. Purchaser or Acquisition Sub shall provide to the
Escrow Agent and the Shareholder Representatives written notice of the amount of
such Net Asset Value Shortfall, and such amount, including any interest accrued
thereon (or such lesser amount as is then held in the Cash Escrow Account),
shall be paid to Purchaser by Escrow Agent within three (3) business days after
receipt of such notice.
(b) Any cash remaining in the Cash Escrow Account after payment of the
Net Asset Value Shortfall amount as set forth in subsection (a) above, shall be
distributed to the Company Shareholders pursuant to Section 6(a) hereof.
(c) In the event that the Net Asset Value Shortfall exceeds the amount
of Escrowed Cash available, Purchaser's recovery of cash pursuant to Section 1.3
of the Merger Agreement shall not be limited to the amount of Escrowed Cash
available.
5. Administration of Share Escrow Account. The Escrow Agent shall
administer the Share Escrow Account as follows:
(a) In the event that the Warranted Pre-Tax Profit exceeds the Actual
Pre-Tax Profit for the Year (or the Alternative Year, if applicable), the
Purchase Price shall be reduced by the number of Purchaser Shares equal to the
Profit Shortfall Adjustment, subject to the Adjustment Floor. In such event,
Purchaser or Acquisition Sub and the Shareholder Representatives shall provide
written notice to the Escrow Agent of the amount of the Profit Shortfall
Adjustment, and the Escrow Agent shall transfer, deliver and assign to Purchaser
such number of Escrowed Shares held in the Share Escrow Account which have a
Fair Market Value equal to the Profit Shortfall Adjustment (or such lesser
number of Purchaser Shares as is then held in the Share Escrow Account). The
Fair Market Value of the Escrowed Shares to be distributed shall be determined
in accordance with Section 7 hereof.
3
<PAGE> 59
(b) On the first anniversary of the Closing Date (or if the Alternative
Year is elected, at the end of the Alternative Year), the Escrow Agent shall
distribute to the Company Shareholders, in accordance with Sections 6(a) and (b)
below, one half of the Escrowed Shares remaining in the Share Escrow Account not
required for redistribution pursuant to Section 5(a) hereof. Any Escrowed Shares
remaining in the Share Escrow Account after payment of the Profit Shortfall
Adjustment amount as set forth in subsection (a) above, shall be distributed to
the Company Shareholders pursuant to Sections 6(a) and (b) hereof.
(c) In the event that the Profit Shortfall Adjustment exceeds the
number of Escrowed Shares available, Purchaser's recovery of Purchaser Shares
pursuant to Section 1.3 of the Merger Agreement shall not be limited to the
amount of Escrowed Shares available.
6. Release of Escrowed Cash and Escrowed Shares.
(a) Any distribution of all or a portion of the Escrowed Cash or the
Escrowed Shares to the Company Shareholders shall be made in accordance with the
percentages set forth opposite such holders' respective names on Exhibit B
attached hereto; provided, however, that the Escrow Agent shall withhold the
distribution of the portion of the Escrowed Cash or the Escrowed Shares
otherwise distributable to Company Shareholders who have not, according to
written notice provided by the Purchaser to the Escrow Agent, prior to such
distribution, surrendered their respective Certificates pursuant to the terms
and conditions of the Merger Agreement. Any such withheld cash or shares shall
be delivered to the Purchaser promptly after the Termination Date, and shall be
delivered by the Purchaser to the Company Shareholders to whom such shares would
have otherwise been distributed upon surrender of their respective Certificates.
Distributions of Escrowed Shares to the Company Shareholders shall be made by
mailing stock certificates to such holders at their respective addresses shown
on Exhibit B (or such other address as may be provided in writing to the Escrow
Agent by any such holder).
(b) No fractional Escrowed Shares shall be distributed to Purchaser or
Company Shareholders pursuant to this Agreement. Instead, the number of shares
that Purchaser or each Company Shareholder shall receive shall be rounded down
to the nearest whole number; and the Escrow Agent shall sell such number of
Escrowed Shares as is equal to the aggregate of the fractional shares that would
otherwise be distributed to the Purchaser or the Company Shareholders, as the
case may be, and shall distribute the proceeds of such sale to the Purchaser or
the Company Shareholders otherwise entitled to a fractional Escrowed Share based
upon the fraction of an Escrowed Share to which Purchaser or each such Company
Shareholder is otherwise entitled, as the case may be.
7. Valuation of Escrowed Shares. For purposes of this Agreement, the
Fair Market Value of the Escrowed Shares to be released from the Share Escrow
Account after a final determination of the Profit Shortfall Adjustment shall be
determined based upon the average closing prices of the Purchaser's Common Stock
on the Nasdaq National Market System for the twenty trading days immediately
preceding the date of such final determination.
4
<PAGE> 60
8. Fees and Expenses of Escrow Agent. The Purchaser, on the one hand,
and the Company Shareholders, on the other hand, shall each pay one-half of the
fees of the Escrow Agent for the services to be rendered by the Escrow Agent
hereunder.
9. Limitation of Escrow Agent's Liability.
(a) The Escrow Agent shall incur no liability with respect to any
action taken or suffered by it in reliance upon any notice, direction,
instruction, consent, statement or other documents believed by it to be genuine
and duly authorized, nor for other action or inaction except its own willful
misconduct or gross negligence. The Escrow Agent shall not be responsible for
the validity or sufficiency of this Agreement. In all questions arising under
the Escrow Agreement, the Escrow Agent may rely on the advice of counsel, and
for anything done, omitted or suffered in good faith by the Escrow Agent based
on such advice the Escrow Agent shall not be liable to anyone. The Escrow Agent
shall not be required to take any action hereunder involving any expense unless
the payment of such expense is made or provided for in a manner reasonably
satisfactory to it.
(b) The Purchaser and the Company Shareholders hereby, jointly and
severally, agree to indemnify the Escrow Agent for, and hold it harmless
against, any loss, liability or expense incurred without gross negligence or
willful misconduct on the part of Escrow Agent, arising out of or in connection
with its carrying out of its duties hereunder. The Purchaser, on the one hand,
and the Company Shareholders, on the other hand, shall each be liable for
one-half of such amounts.
10. Liability and Authority of Shareholder Representatives; Successors
and Assignees.
(a) The Shareholder Representatives shall incur no liability to the
Company Shareholders with respect to any action taken or suffered by them in
reliance upon any note, direction, instruction, consent, statement or other
documents believed by them to be genuinely and duly authorized, nor for other
action or inaction except their own willful misconduct or gross negligence. The
Shareholder Representatives may, in all questions arising under the Escrow
Agreement, rely on the advice of counsel and for anything done, omitted or
suffered in good faith by the Shareholder Representatives based on such advice,
the Shareholder Representatives shall not be liable to the Company Shareholders.
(b) In the event of the death or permanent disability of either
Shareholder Representative, or his resignation as a Shareholder Representative,
a successor Shareholder Representative shall be appointed by the other
Shareholder Representative or, absent its appointment, a successor Shareholder
Representative shall be elected by a majority vote of the Company Shareholders,
with each such Company Shareholder (or his or her successors or assigns) to be
given a vote equal to the number of votes represented by the Company Shares held
by such Company Shareholder immediately prior to the Effective Time. Each
successor
5
<PAGE> 61
Shareholder Representative shall have all of the power, authority, rights and
privileges conferred by this Agreement upon the original Shareholder
Representatives, and the term "Shareholder Representatives" as used herein shall
be deemed to include successor Shareholder Representatives.
(c) The Shareholder Representatives, acting jointly but not singly,
shall have full power and authority to represent the Company Shareholders, and
their successors, with respect to all matters arising under this Agreement and
all actions taken by any Shareholder Representative hereunder shall be binding
upon the Company Shareholders, and their successors, as if expressly confirmed
and ratified in writing by each of them. Without limiting the generality of the
foregoing, the Shareholder Representatives, acting jointly but not singly, shall
have full power and authority to interpret all of the terms and provisions of
this Agreement, to compromise any claims asserted hereunder and to authorize
payments to be made with respect thereto, on behalf of the Company Shareholders
and their successors. All actions to be taken by the Shareholder Representatives
hereunder shall be evidenced by, and taken upon, the written direction of a
majority thereof.
11. Amounts Payable by Company Shareholders. The amounts payable by
the Company Shareholders under this Agreement (i.e., the fees and expenses of
arbitrators payable pursuant to Section 16, the fees of the Escrow Agent payable
pursuant to Section 8 and the indemnification obligations pursuant to Sections
9(b)) shall be payable solely as follows. The Shareholder Representatives shall
notify the Escrow Agent of any such amount payable by the Company Shareholders
as soon as they become aware that any such amount is payable, with a copy of
such notice to the Purchaser. On the sixth business day after the delivery of
such notice, the Escrow Agent shall sell such number of Escrowed Shares (up to
the number of Escrowed Shares then available in the Escrow Account), subject to
compliance with all applicable securities laws, as is necessary to raise such
amount, and shall disburse such proceeds to the party to whom such amount is
owed in accordance with the instructions of the Shareholder Representatives;
provided that if the Purchaser delivers to the Escrow Agent (with a copy to the
Shareholder Representatives), within five business days after delivery of such
notice by the Shareholder Representatives, a written notice contesting the
legitimacy or reasonableness of such amount, then the Escrow Agent shall not
sell Escrowed Shares to raise the disputed portion of such claimed amount, and
such dispute shall be resolved by the Purchaser and the Shareholder
Representatives in accordance with the procedures set forth in Section 16.
12. Termination. This Agreement shall terminate upon the distribution
by the Escrow Agent of all of the Escrowed Cash and all of the Escrowed Shares
in accordance with this Agreement; provided that the provisions of Sections 9
and 10 shall survive such termination.
13. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid,
6
<PAGE> 62
or (ii) via a reputable nationwide overnight courier service, in each case to
the address set forth below. Any such notice, instruction or communication shall
be deemed to have been delivered two business days after it is sent by
registered or certified mail, return receipt requested, postage prepaid, or one
business day after it is sent via a reputable nationwide overnight courier
service.
If to the Purchaser and/or the Acquisition Sub:
Tekgraf, Inc.
2979 Pacific Concourse Drive, Suite B
Norcross, Georgia 30071
If to the Company:
----------------------------------
----------------------------------
----------------------------------
If to the Shareholder Representative:
----------------------------------
----------------------------------
----------------------------------
If to the Escrow Agent:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 13.
14. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by
delivering a resignation to the parties to this Escrow Agreement, not less than
60 days' prior to the date when such resignation shall take effect. The
Purchaser and the Shareholder Representatives shall appoint a successor
7
<PAGE> 63
Escrow Agent and neither party shall unreasonably withhold approval of such
successor Escrow Agent. If, within such notice period, the Purchaser provides to
the Escrow Agent written instructions with respect to the appointment of a
successor Escrow Agent and directions for the transfer of any Escrowed Shares
then held by the Escrow Agent to such successor, the Escrow Agent shall act in
accordance with such instructions and promptly transfer such Escrowed Shares to
such designated successor.
15. General.
(a) Governing Law, Assigns. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Georgia without
regard to conflict-of-law principles and shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) Entire Agreement. Except for those provisions of the Merger
Agreement referenced herein, this Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of any
breach of any provision of this Escrow Agreement shall be effective unless in
writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(e) Amendment. This Agreement may be amended only with the written
consent of the Purchaser, the Escrow Agent and the Shareholder Representatives.
16. Arbitration; Attorneys' Fees.
(a) The parties agree to use reasonable efforts to resolve any dispute
arising out of this Agreement, but should a dispute remain unresolved ten (10)
days following notice of the dispute to the other party (but in no event prior
to said ten (10) days, except as specifically provided otherwise herein), such
dispute shall be finally settled by binding arbitration in Atlanta, Georgia in
accordance with the then current Commercial Arbitration Rules of the American
Arbitration Association (the "AAA") or such other mediation or arbitration
service as shall be mutually agreeable to the parties, and judgment upon the
award rendered by the arbitrator shall be final and binding on the parties and
may be entered in any court having jurisdiction thereof; provided, however, that
any party shall be entitled to appeal a question of
8
<PAGE> 64
law or determination of law to a court of competent jurisdiction; and provided,
further, however, that the parties may first seek appropriate injunctive relief
prior to, and/or in addition to pursuing negotiation or arbitration. Such
arbitration shall be conducted by an arbitrator chosen by mutual agreement of
the parties, or failing such agreement, an arbitrator appointed by the AAA.
There shall be limited discovery prior to the arbitration hearing as follows:
(a) exchange of witness lists and copies of documentary evidence and documents
related to or arising out of the issues to be arbitrated, (b) depositions of all
party witnesses, and (c) such other depositions as may be allowed by the
arbitrator upon a showing of good cause. Depositions shall be conducted in
accordance with the Georgia Code of Civil Procedure and questions of evidence in
all hearings shall be resolved in accordance with the Federal Rules of Evidence.
The arbitrator shall be required to provide in writing to the parties the basis
for the award or order of such arbitrator, and a court reporter shall record all
hearings (unless otherwise agreed to by the parties), with such record
constituting the official transcript of such proceedings.
(b) In the event of arbitration or litigation filed or instituted
between the parties with respect to this Agreement, the prevailing party will be
entitled to receive from the other party all costs, damages and expenses,
including reasonable attorney's fees, incurred by the prevailing party in
connection with that action or proceeding whether or not the controversy is
reduced to judgment or award. The prevailing party will be that party who may be
fairly said by the arbitrator(s) or the court to have prevailed on the major
disputed issues.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER:
TEKGRAF, INC.
By:
------------------------------------
Dan I. Bailey, President
ACQUISITION SUB:
TEKGRAF SUB __, INC.
By:
------------------------------------
_________________, President
9
<PAGE> 65
SHAREHOLDER REPRESENTATIVE:
(SEAL)
-----------------------------------
ESCROW AGENT:
-----------------------------------------
By: -------------------------------------
Name:
--------------------------------
Title:
-------------------------------
COMPANY:
---------------------------------
By:
--------------------------------------
, President
COMPANY SHAREHOLDERS:
(SEAL)
----------------------------------
(SEAL)
----------------------------------
(SEAL)
----------------------------------
10
<PAGE> 66
EXHIBIT B
<TABLE>
<CAPTION>
Company Shareholder Percentage
- ------------------- ----------
<S> <C>
</TABLE>
11
<PAGE> 67
EXHIBIT 3.7(a)
NON-SOLICITATION
NONE
<PAGE> 68
Exhibit 5.6(a)
PLEDGE, SECURITY AND ESCROW AGREEMENT
This Pledge, Security and Escrow Agreement (this "Agreement") is
entered into as of ______________, 1998, by and among TEKGRAF, INC., a Georgia
corporation (the "Purchaser"), TEKGRAF SUB ___, INC. ("Acquisition Sub"),
[_________________ _______________________________], INC., a ____________
corporation (the "Company"), [_________________________________] (the "Company
Shareholders"), and ________ _________________ (the "Indemnification
Representatives") and [________________________________________] (the "Escrow
Agent").
WHEREAS, the Purchaser and the Company have entered into an Agreement
and Plan of Merger (the "Merger Agreement") by and among the Company, the
Company Shareholders, Acquisition Sub and the Purchaser.
WHEREAS, the Merger Agreement provides that an escrow account will be
established to secure the Company's and the Company Shareholders'
indemnification obligations to the Indemnified Parties under the Merger
Agreement on the terms and conditions set forth herein.
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which such escrow account will be established and
maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given them in the Merger Agreement.
2. Consent of Company Shareholders. By virtue of the Company
Shareholders' approval of the Merger Agreement, the Company Shareholders who may
indirectly or directly receive shares of Purchaser Common Stock pursuant to the
Merger Agreement (the "Indemnifying Shareholders") have, without any further act
of any Company Stockholder, consented to: (a) the establishment of this escrow
to secure the Company Shareholders' indemnification obligations under Article V
of the Merger Agreement in the manner set forth herein and therein, (b) the
appointment of the Indemnification Representatives as their representatives for
purposes of this Agreement and as attorneys-in-fact and agents for and on behalf
of each Indemnifying Shareholder, and the taking by the Indemnification
Representatives of any and all actions and the making of any decisions required
or permitted to be taken or made by them under this Agreement, and (c) all of
the other terms, conditions and limitations in this Agreement and the Merger
Agreement.
<PAGE> 69
3. Escrow and Indemnification.
(a) Escrow of Shares. On the Closing Date, the Purchaser shall deposit
with the Escrow Agent a certificate for the number of Purchaser Shares specified
in Section 5.6 of the Merger Agreement (the "Escrow Shares"), issued in the name
of the Escrow Agent or its nominee. In addition, in the event the Purchaser
elects, pursuant to the provisions of Section 1.3(h) of the Merger Agreement, to
waive the Profit Shortfall Adjustment and the Profit Surplus Adjustment, the
shares of Purchaser common stock held in the escrow account established by
Section 1.3(e) of the Merger Agreement shall be transferred into the escrow
account created pursuant to this Escrow Agreement (the "Transferred Shares"), to
be treated in all respects as Escrow Shares hereunder and the Transferred Shares
shall be distributed to the Company Shareholders pursuant to Section 5(a)
hereof. The Escrow Shares shall be held as a trust fund and shall not be subject
to any lien, attachment, trustee process or any other judicial process of any
creditor of any party hereto. The Escrow Agent agrees to accept delivery of the
Escrow Shares and to hold the Escrow Shares in an escrow account (the "Escrow
Account"), subject to the terms and conditions of this Agreement.
(b) Indemnification. The Indemnifying Shareholders have agreed in
Article V of the Merger Agreement to indemnify and hold harmless the Indemnified
Parties from and against specified Damages. The Escrow Shares shall be security
for such indemnity obligation of the Indemnifying Shareholders, subject to the
limitations, and in the manner provided, in this Agreement.
(c) Dividends, Etc. Any securities distributable to the Indemnifying
Shareholders in respect of or in exchange for any of the Escrow Shares, whether
by way of stock dividends, stock splits or otherwise, shall be delivered to the
Escrow Agent, who shall hold such securities in the Escrow Account. Such
securities shall be issued in the name of the Escrow Agent or its nominee and
shall be considered Escrow Shares for purposes hereof. Any cash dividends
distributable to the Indemnifying Shareholders in respect of the Escrow Shares
shall be distributed to the Indemnifying Shareholders.
(d) Voting of Shares. The Indemnification Representatives shall have
the right, in their sole discretion, on behalf of the Indemnifying Shareholders,
to direct the Escrow Agent in writing as to the exercise of any voting rights
pertaining to the Escrow Shares, and the Escrow Agent shall comply with any such
written instructions. In the absence of such instructions, the Escrow Agent
shall not vote any of the Escrow Shares.
(e) Transferability. The respective interests of the Indemnifying
Shareholders in the Escrow Shares shall not be assignable or transferable, other
than by operation of law. Notice of any such assignment or transfer by operation
of law shall be given to the Escrow Agent and the Purchaser, and no such
assignment or transfer shall be valid until such notice is given.
4. Administration of Escrow Account. The Escrow Agent shall administer
the Escrow Account as follows:
<PAGE> 70
(a) If an Indemnified Party has incurred or suffered Damages for which
it is entitled to indemnification under Article V of the Merger Agreement, the
Indemnified Party shall, on or before the date of the expiration of the
representation, warranty, covenant or agreement to which such claim relates,
give written notice of such claim (a "Claim Notice") to the Indemnification
Representatives and the Escrow Agent. Each Claim Notice shall state the amount
of claimed Damages (the "Claimed Amount") and the basis for such claim. The date
which is eighteen (18) months after the Date of Closing.
(b) Within 20 days after delivery of a Claim Notice, the
Indemnification Representatives shall provide to the Indemnified Party, with a
copy to the Escrow Agent, a written response (the "Response Notice") in which
the Indemnification Representatives shall: (i) agree that Escrow Shares having a
Fair Market Value (as computed pursuant to Section 6) equal to the full Claimed
Amount may be released from the Escrow Account to the Indemnified Party, (ii)
agree that Escrow Shares having a Fair Market Value equal to part, but not all,
of the Claimed Amount (the "Agreed Amount") may be released from the Escrow
Account to the Indemnified Party or (iii) contest that any of the Escrow Shares
may be released from the Escrow Account to the Indemnified Party. The
Indemnification Representatives may contest the release of Escrow Shares having
a Fair Market Value equal to all or a portion of the Claimed Amount only based
upon a good faith belief that all or such portion of the Claimed Amount does not
constitute Damages for which the Indemnified Party is entitled to
indemnification under Article V of the Merger Agreement. If no Response Notice
is delivered by the Indemnification Representatives within such 20-day period,
the Indemnification Representatives shall be deemed to have agreed that Escrow
Shares having a Fair Market Value equal to all of the Claimed Amount may be
released to the Indemnified Party from the Escrow Account.
(c) If the Indemnification Representatives in the Response Notice agree
(or are deemed to have agreed) that Escrow Shares having a Fair Market Value
equal to all of the Claimed Amount may be released from the Escrow Account to
the Indemnified Party, the Escrow Agent shall, promptly following the earlier of
the required delivery date for the Response Notice or the delivery of the
Response Notice, transfer, deliver and assign to the Indemnified Party such
number of Escrow Shares held in the Escrow Account which have a Fair Market
Value equal to the Claimed Amount (or such lesser number of Escrow Shares as is
then held in the Escrow Account).
(d) If the Indemnification Representatives in the Response Notice agree
that Escrow Shares having a Fair Market Value equal to part, but not all, of the
Claimed Amount may be released from the Escrow Account to the Indemnified Party,
the Escrow Agent shall promptly following the delivery of the Response Notice
transfer, deliver and assign to the Indemnified Party such number of Escrow
Shares held in the Escrow Account which have a Fair Market Value equal to the
Agreed Amount (or such lesser number of Escrow Shares as is then held in the
Escrow Account). A determination with respect to the remainder of the Claimed
Amount shall be made in accordance with subsection 4(e) below.
(e) If the Indemnification Representatives in the Response Notice
contest the release of Escrow Shares having a Fair Market Value equal to all or
part of the Claimed Amount (the
<PAGE> 71
"Contested Amount"), the matter shall be settled by binding arbitration in
Atlanta, Georgia. All claims shall be settled by three arbitrators in accordance
with the Commercial Arbitration Rules then in effect of the American Arbitration
Association (the "AAA Rules"). The Indemnification Representatives and the
Indemnified Party shall each designate one arbitrator within 15 days of the
delivery of the Indemnification Representatives' Response Notice contesting the
Claimed Amount. The Indemnification Representatives and the Indemnified Party
shall cause such designated arbitrators mutually to agree upon and designate a
third arbitrator; provided, however, that (i) failing such agreement within 45
days of delivery of the Indemnification Representatives' Response Notice, the
third arbitrator shall be appointed in accordance with the AAA Rules and (ii) if
either the Indemnification Representatives or the Indemnified Party fail to
timely designate an arbitrator, the dispute shall be resolved by the one
arbitrator timely designated. The Indemnifying Shareholders and the Indemnified
Party shall pay the fees and expenses of their respectively designated
arbitrators and shall bear equally the fees and expenses of the third
arbitrator. The Indemnification Representatives and the Indemnified Party shall
cause the arbitrators to decide the matter to be arbitrated pursuant hereto
within 60 days after the appointment of the last arbitrator. The arbitrators'
decision shall relate solely to whether the Indemnified Party is entitled to
receive the Contested Amount (or a portion thereof) pursuant to the applicable
terms of the Merger Agreement and this Agreement. The final decision of the
majority of the arbitrators shall be furnished to the Indemnification
Representatives, the Indemnified Party and the Escrow Agent in writing and shall
constitute a conclusive determination of the issue in question, binding upon the
Indemnification Representatives, the Indemnifying Shareholders, the Indemnified
Party and the Escrow Agent, and shall not be contested by any of them. Such
decision may be used in a court of law only for the purpose of seeking
enforcement of the arbitrators' award. After delivery of a Response Notice that
the Claimed Amount is contested by the Indemnification Representatives, the
Escrow Agent shall continue to hold in the Escrow Account a number of Escrow
Shares having a Fair Market Value sufficient to cover the Contested Amount (up
to the number of Escrow Shares then available in the Escrow Account),
notwithstanding the occurrence of the Termination Date, until (i) delivery of a
copy of a settlement agreement executed by the Indemnified Party and the
Indemnification Representatives setting forth instructions to the Escrow Agent
as to the release of Escrow Shares, if any, that shall be made with respect to
the Contested Amount or (ii) delivery of a copy of the final award of the
majority of the arbitrators setting forth instructions to the Escrow Agent as to
the release of Escrow Shares, if any, that shall be made with respect to the
Contested Amount. The Escrow Agent shall thereupon release Escrow Shares from
the Escrow Account (to the extent Escrow Shares are then held in the Escrow
Account) in accordance with such agreement or instructions; provided, however,
if the claim related to a third party claim the amount of which is contested and
the subject of litigation, the Escrow Agent shall not release the Escrow Shares
being held in connection with the Contested Amount of such third party claim
until a final order or other final resolution or settlement has been entered or
reached in the underlying litigation determining the amount of such claim,
whereupon the Escrow Agent shall release Escrow Shares from the Escrow Account
(to the extent Escrow Shares are then held in the Escrow Account) in accordance
with such final order or final resolution or settlement.
<PAGE> 72
5. Release of Escrow Shares.
(a) In the event that Purchaser elects, pursuant to the provisions of
Section 1.3(h) of the Merger Agreement, to waive the Profit Shortfall Adjustment
and the Profit Surplus Adjustment, one half of the Transferred Shares shall be
distributed to the Indemnifying Shareholders on the first anniversary of the
Closing Date. Promptly after the Termination Date, the Escrow Agent shall
distribute to the Indemnifying Shareholders all of the Escrow Shares (including
any remaining Transferred Shares) then held in escrow. Notwithstanding the
foregoing, if an Indemnified Party has previously given a Claim Notice which has
not then been resolved in accordance with Section 4, the Escrow Agent shall
retain in the Escrow Account after the Termination Date a number of Escrow
Shares (including Transferred Shares if necessary) having a Fair Market Value
equal to the Claimed Amount covered by any Claim Notice which has not then been
resolved. Any funds so retained in escrow shall be disbursed in accordance with
the terms of the resolution of such claims.
(b) Any distribution of all or a portion of the Escrow Shares to the
Indemnifying Shareholders shall be made in accordance with the percentages set
forth opposite such holders' respective names on Exhibit B attached hereto;
provided, however, that the Escrow Agent shall withhold the distribution of the
portion of the Escrow Shares otherwise distributable to Indemnifying
Shareholders who have not, according to written notice provided by the Purchaser
to the Escrow Agent, prior to such distribution, surrendered their respective
Certificates pursuant to the terms and conditions of the Merger Agreement. Any
such withheld shares shall be delivered to the Purchaser promptly after the
Termination Date, and shall be delivered by the Purchaser to the Indemnifying
Shareholders to whom such shares would have otherwise been distributed upon
surrender of their respective Certificates. Distributions to the Indemnifying
Shareholders shall be made by mailing stock certificates to such holders at
their respective addresses shown on Exhibit B (or such other address as may be
provided in writing to the Escrow Agent by any such holder). No fractional
Escrow Shares shall be distributed to Indemnifying Shareholders pursuant to this
Agreement. Instead, the number of shares that each Indemnifying Shareholder
shall receive shall be rounded down to the nearest whole number; and the Escrow
Agent shall sell such number of Escrow Shares as is equal to the aggregate of
the fractional shares that would otherwise be distributed to the Indemnifying
Shareholders and shall distribute the proceeds of such sale to the Indemnifying
Shareholders other-wise entitled to a fractional Escrow Share pro rata based
upon the fraction of an Escrow Shares to which each such Indemnifying
Shareholder is otherwise entitled.
6. Valuation of Escrow Shares. For purposes of this Agreement, the
Fair Market Value of the Escrow Shares to be retained in the Escrow Account
pending a final resolution of a claim shall be determined based upon the average
of the closing prices of the Purchaser Common Stock on the Nasdaq National
Market System for the twenty trading days immediately preceding the date on
which the claim is made. The Fair Market Value of the Escrow Shares to be
released from the Escrow Account after a final determination/resolution of a
claim shall be determined based upon the average closing prices of the
Purchaser's Common Stock on the Nasdaq National Market System for the twenty
trading days immediately preceding the date of such final
determination/resolution.
<PAGE> 73
7. Fees and Expenses of Escrow Agent. The Purchaser, on the one hand,
and the Indemnifying Shareholders, on the other hand, shall each pay one-half of
the fees of the Escrow Agent for the services to be rendered by the Escrow Agent
hereunder.
8. Limitation of Escrow Agent's Liability.
(a) The Escrow Agent shall incur no liability with respect to any
action taken or suffered by it in reliance upon any notice, direction,
instruction, consent, statement or other documents believed by it to be genuine
and duly authorized, nor for other action or inaction except its own willful
misconduct or gross negligence. The Escrow Agent shall not be responsible for
the validity or sufficiency of this Agreement. In all questions arising under
the Escrow Agreement, the Escrow Agent may rely on the advice of counsel, and
for anything done, omitted or suffered in good faith by the Escrow Agent based
on such advice the Escrow Agent shall not be liable to anyone. The Escrow Agent
shall not be required to take any action hereunder involving any expense unless
the payment of such expense is made or provided for in a manner reasonably
satisfactory to it.
(b) The Purchaser and the Indemnifying Shareholders hereby, jointly and
severally, agree to indemnify the Escrow Agent for, and hold it harmless
against, any loss, liability or expense incurred without gross negligence or
willful misconduct on the part of Escrow Agent, arising out of or in connection
with its carrying out of its duties hereunder. The Purchaser, on the one hand,
and the Indemnifying Shareholders, on the other hand, shall each be liable for
one-half of such amounts.
9. Liability and Authority of Indemnification Representatives;
Successors and Assignees.
(a) The Indemnification Representatives shall incur no liability to the
Indemnifying Shareholders with respect to any action taken or suffered by them
in reliance upon any note, direction, instruction, consent, statement or other
documents believed by them to be genuinely and duly authorized, nor for other
action or inaction except their own willful misconduct or gross negligence. The
Indemnification Representatives may, in all questions arising under the Escrow
Agreement, rely on the advice of counsel and for anything done, omitted or
suffered in good faith by the Indemnification Representatives based on such
advice, the Indemnification Representatives shall not be liable to the
Indemnifying Shareholders.
(b) In the event of the death or permanent disability of either
Indemnification Representative, or his resignation as an Indemnification
Representative, a successor Indemnification Representative shall be appointed by
the other Indemnification Representative or, absent its appointment, a successor
Indemnification Representative shall be elected by a majority vote of the
Indemnifying Shareholders, with each such Indemnifying Shareholder (or his or
her successors or assigns) to be given a vote equal to the number of votes
represented by the Company Shares held by such Indemnifying Shareholder
immediately prior to the Effective Time. Each successor Indemnification
Representative shall have all of the power, authority, rights and privileges
conferred by this Agreement upon the original Indemnification
<PAGE> 74
Representatives, and the term "Indemnification Representatives" as used herein
shall be deemed to include successor Indemnification Representatives.
(c) The Indemnification Representatives, acting jointly but not singly,
shall have full power and authority to represent the Indemnifying Shareholders,
and their successors, with respect to all matters arising under this Agreement
and all actions taken by any Indemnification Representative hereunder shall be
binding upon the Indemnifying Shareholders, and their successors, as if
expressly confirmed and ratified in writing by each of them. Without limiting
the generality of the foregoing, the Indemnification Representatives, acting
jointly but not singly, shall have full power and authority to interpret all of
the terms and provisions of this Agreement, to compromise any claims asserted
hereunder and to authorize payments to be made with respect thereto, on behalf
of the Indemnifying Shareholders and their successors. All actions to be taken
by the Indemnification Representatives hereunder shall be evidenced by, and
taken upon, the written direction of a majority thereof.
10. Amounts Payable by Indemnifying Shareholders. The amounts payable
by the Indemnifying Shareholders under this Agreement (i.e., the fees and
expenses of arbitrators payable pursuant to Section 4(e), the fees of the Escrow
Agent payable pursuant to Section 7 and the indemnification obligations pursuant
to Sections 8(b)) shall be payable solely as follows. The Indemnification
Representatives shall notify the Escrow Agent of any such amount payable by the
Indemnifying Shareholders as soon as they become aware that any such amount is
payable, with a copy of such notice to the Purchaser. On the sixth business day
after the delivery of such notice, the Escrow Agent shall sell such number of
Escrow Shares (up to the number of Escrow Shares then available in the Escrow
Account), subject to compliance with all applicable securities laws, as is
necessary to raise such amount, and shall disburse such proceeds to the party to
whom such amount is owed in accordance with the instructions of the
Indemnification Representatives; provided that if the Purchaser delivers to the
Escrow Agent (with a copy to the Indemnification Representatives), within five
business days after delivery of such notice by the Indemnification
Representatives, a written notice contesting the legitimacy or reasonableness of
such amount, then the Escrow Agent shall not sell Escrow Shares to raise the
disputed portion of such claimed amount, and such dispute shall be resolved by
the Purchaser and the Indemnification Representatives in accordance with the
procedures set forth in Section 4(e).
11. Termination. This Agreement shall terminate upon the later of the
Termination Date or the distribution by the Escrow Agent of all of the Escrow
Shares in accordance with this Agreement; provided that the provisions of
Sections 8 and 9 shall survive such termination.
12. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested,
<PAGE> 75
postage prepaid, or (ii) via a reputable nationwide overnight courier service,
in each case to the address set forth below. Any such notice, instruction or
communication shall be deemed to have been delivered two business days after it
is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service.
If to the Purchaser and/or the Acquisition Sub:
Tekgraf, Inc.
2979 Pacific Concourse Drive, Suite B
Norcross, Georgia 30071
If to the Company:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
If to the Indemnification Representatives:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
If to the Escrow Agent:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 12.
13. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by
delivering a resignation to the parties to this Escrow Agreement, not less than
60 days' prior to the date when such resignation shall take effect. The
Purchaser and the Indemnification Representatives shall appoint a successor
Escrow Agent and neither party shall unreasonably withhold approval of such
successor Escrow Agent. If, within such notice period, the Purchaser provides to
the Escrow Agent written instructions with respect to the appointment of a
successor Escrow Agent and directions
<PAGE> 76
for the transfer of any Escrow Shares then held by the Escrow Agent to such
successor, the Escrow Agent shall act in accordance with such instructions and
promptly transfer such Escrow Shares to such designated successor.
14. General.
(a) Governing Law, Assigns. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Georgia without
regard to conflict-of-law principles and shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) Entire Agreement. Except for those provisions of the Merger
Agreement referenced herein, this Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of any
breach of any provision of this Escrow Agreement shall be effective unless in
writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(e) Amendment. This Agreement may be amended only with the written
consent of the Purchaser, the Escrow Agent and the Indemnification
Representatives.
<PAGE> 77
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER
TEKGRAF, INC.
By:
-----------------------------------------
Dan I. Bailey
President
ACQUISITION SUB:
TEKGRAF SUB ___, INC.
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
ESCROW AGENT
-----------------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE> 78
[INDEMNIFICATION REPRESENTATIVE]
(SEAL)
--------------------------------------
Name:
---------------------------------------
COMPANY:
------------------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
COMPANY SHAREHOLDERS:
(SEAL)
--------------------------------------
Name:
---------------------------------------
(SEAL)
--------------------------------------
Name:
---------------------------------------
(SEAL)
--------------------------------------
Name:
---------------------------------------
<PAGE> 79
EXHIBIT B
Indemnifying Shareholder Percentage
<PAGE> 1
EXHIBIT 10.24
AGREEMENT AND PLAN OF MERGER
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
Dated as of March 25, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I THE MERGER ............................................................................. 5
1.1 The Merger .......................................................................... 5
1.2 Effect of Merger .................................................................... 5
1.3 Purchase Price Adjustment ........................................................... 7
1.4 The Closing ......................................................................... 13
1.5 Dissenting Shareholders ............................................................. 14
1.6 Certain Tax Agreements .............................................................. 14
ARTICLE II REPRESENTATIONS AND WARRANTIES ........................................................ 15
2.1 Representations and Warranties of the Company and the Company Shareholders .......... 15
2.2 Representations and Warranties of Acquisition Sub and Purchaser...................... 32
2.3 Disclosure .......................................................................... 33
2.4 Disclosure .......................................................................... 33
2.5 Investment Representation of Company Shareholders ................................... 33
ARTICLE III COVENANTS ............................................................................ 34
3.1 Covenants Against Disclosure ........................................................ 34
3.2 Access to Information ............................................................... 34
3.3 Interim Period ...................................................................... 35
3.4 Completion of Schedules ............................................................. 36
3.5 On and After Closing ................................................................ 36
3.6 Continuity of Business Enterprise ................................................... 37
3.7 Non-Competition ..................................................................... 37
3.8 Registration Statement .............................................................. 38
3.9 Company Indebtedness ................................................................ 39
3.10 Further Assurances ................................................................. 39
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IV CONDITIONS PRECEDENT TO OBLIGATIONS ................................................... 39
4.1 Conditions to Obligations of Acquisition Sub ........................................ 39
4.2 Conditions to Obligations of the Company and the Company Shareholders................ 40
ARTICLE V INDEMNIFICATION ........................................................................ 41
5.1 Survival of Representations, Warranties, Covenants and Agreements.................... 41
5.2 Indemnification of Acquisition Sub and Purchaser .................................... 42
5.3 Indemnification of the Company Shareholders ......................................... 42
5.4 Procedure for Indemnification with Respect to Third-Party Claims .................... 42
5.5 Procedure For Indemnification with Respect to Non-Third Party Claims ................ 43
5.6 Escrowed Shares ..................................................................... 44
ARTICLE VI TERMINATION AND CONDITIONS SUBSEQUENT ................................................. 44
6.1 Termination ......................................................................... 44
6.2 Effect of Termination ............................................................... 44
ARTICLE VII MISCELLANEOUS PROVISIONS ............................................................. 45
7.1 Notice .............................................................................. 45
7.2 Entire Agreement .................................................................... 45
7.3 Binding Effect: Assignment .......................................................... 45
7.4 Expenses of Transaction ............................................................. 45
7.5 Waiver; Consent ..................................................................... 45
7.6 Counterparts ........................................................................ 46
7.7 Severability ........................................................................ 46
7.8 Remedies of the Parties ............................................................. 46
7.9 Governing Law ....................................................................... 46
7.10 Arbitration; Attorneys' Fees ....................................................... 46
7.11 Cooperation and Records Retention .................................................. 47
</TABLE>
ii
<PAGE> 4
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of March ___, 1998, is made
and entered into by and among TEKGRAF, INC., a Delaware corporation
("Purchaser"), TEKGRAF SUB III, INC., a Georgia corporation ("Acquisition Sub"),
NEW ENGLAND COMPUTER GRAPHICS, INC., a Massachusetts corporation (the
"Company"), and the shareholders set forth on the signature page of this
Agreement (the "Company Shareholders"). Acquisition Sub and the Company are
hereinafter sometimes referred to as the "Constituent Corporations" and
Acquisition Sub as the "Surviving Corporation".
WHEREAS, Purchaser, Acquisition Sub, and the Company desire that the
Company merge with and into Acquisition Sub (the "Merger"), upon the terms and
conditions set forth herein and in accordance with the Georgia Business
Corporation Code and the Massachusetts Business General Corporation Law, with
the result that Acquisition Sub shall continue as the surviving corporation and
the separate existence of the Company (except as it may be continued by
operation of law) shall cease;
WHEREAS, Purchaser, Acquisition Sub, and the Company desire that, upon
the Merger, at the Effective Time (as hereinafter defined), all outstanding
shares of common [and preferred] stock of the Company be converted into shares
of common stock of Purchaser and cash as provided herein;
WHEREAS, the respective Boards of Directors of Purchaser, Acquisition
Sub, and the Company have approved the Merger; and
WHEREAS, the parties intend for the Merger to be accomplished under
Section 368(a)(2)(D) under the Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, for and in consideration of the mutual representations,
warranties, covenants, agreements and conditions contained herein, and in order
to set forth the terms and conditions of the Merger and the mode of carrying the
same into effect, the parties hereto hereby agree as follows:
DEFINITIONS
"Accounts Receivable" has the meaning set forth in Section 2.1(kk).
"Accredited Investor" has the meaning set forth in Regulation D
promulgated under the Securities Act of 1933.
"Acquisition Sub" means Tekgraf Sub III, Inc., a Georgia
corporation.
"Acquisition Sub Common Stock" means the common stock of Tekgraf Sub
III, Inc., par value $.001 per share.
"Acquisition Sub Indemnifiable Claims" has the meaning set forth in
Section 5.3.
"Acquisition Sub Share" means a share of Acquisition Sub Common Stock.
<PAGE> 5
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934.
"Affiliated Group" means any affiliated group within the meaning of
Code (0) 1504(a).
"Articles of Merger" means the Articles of Merger respecting the Merger
as filed by the Parties with the Secretary of State of the Commonwealth of
Massachusetts.
"Audited Balance Sheet" has the meaning set forth in Section 2.1(e).
"Business" shall mean, collectively, the businesses conducted by the
Company including, among other things, the business of computer integration and
wholesale distribution of computer products.
"Capital Stock" has the meaning set forth in Section 2.1(b).
"Cash Consideration" has the meaning set forth in Section 1.2(e).
"Certificate of Merger" means the Certificate of Merger respecting the
Merger filed by the Parties with the Secretary of State of the State of Georgia.
"Claim" has the meaning set forth in Section 2.1(bb).
"Closing" has the meaning set forth in Section 1.4 below.
"Closing Date" has the meaning set forth in Section 1.4 below.
"Code" has the meaning set forth in Section 2.1(k).
"Company" means New England Computer Graphics, Inc., a Massachusetts
corporation.
"Company Indemnifiable Claims" has the meaning set forth in Section
5.2.
"Company Share" means a share of common stock of the Company, par value
$___.___ per share.
"Company Shareholder(s)" means any shareholder(s) of the Company.
"Company State" means the state of incorporation of the Company.
"Confidential Material" has the meaning set forth in Section 3.1(a).
"Contracts" has the meaning set forth in Section 2.1(r).
"Customers" has the meaning set forth in Section 2.1(dd).
"Damages" has the meaning set forth in Section 5.2.
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<PAGE> 6
"Dissenting Share" means any Company Share which any shareholder who or
which has exercised his or its appraisal rights under the Massachusetts
Corporate Code holds of record.
"Effective Time" has the meaning set forth in Section 1.2(a) below.
"Employees" has the meaning set forth in Section 2.1(z).
"Environmental Laws" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Resource Conservation and Recovery
Act of 1976, and the Occupational Safety and Health Act of 1970, each as
amended, together with all other laws (including rules, regulations, codes,
plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder)
of federal, state, local, and foreign governments (and all agencies thereof)
concerning pollution or protection of the environment, public health and safety,
or employee health and safety, including laws relating to emissions, discharges,
releases, or threatened releases of pollutants, contaminants, or chemical,
industrial, hazardous, or toxic materials or wastes into ambient air, surface
water, ground water, or lands or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes.
"Equity Consideration" has the meaning set forth in Section 1.2(e).
"ERISA" has the meaning set forth in Section 2.1(hh).
"Financial Statements" has the meaning set forth in Section 2.1(e).
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Hazardous Substance Issues" has the meaning set forth in Section
2.1(bb).
"Indemnifiable Claims" has the meaning set forth in Section 5.4(a).
"Indemnified Party" has the meaning set forth in Section 5.4(a).
"Indemnifying Party" has the meaning set forth in Section 5.4(a).
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, (c) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e) all trade
secrets and confidential business information (including all applications,
registrations, and renewals in connection therewith), (f)
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<PAGE> 7
all trade secrets and confidential business information (including ideas,
research and development, know-how, formulas, compositions, manufacturing, the
production process and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost information, and
business and marketing plans and proposals), (g) all computer software
(including data and related documentation), (h) all other proprietary rights,
and (i) all copies and tangible embodiments thereof (in whatever form or
medium).
"Inventory" has the meaning set forth in Section 2.1(j).
"IRS" means the Internal Revenue Service.
"Knowledge" means the actual knowledge of all officers, directors and
shareholders of the Company, after reasonable investigation and due inquiry.
"Leased Properties" has the meaning set forth in Section
2.1(gg).
"Liens" has the meaning set forth in Section 2.1(i).
"Managing Shareholder" shall mean David Boston, the current
president of the Company.
"Materials" has the meaning set forth in Section 2.1(r).
"Merger" has the meaning set forth in the recitals above and in Section
1.1 below.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party" means a party to this Agreement and the Merger.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Plan" has the meaning set forth in Section 2.1(hh).
"Purchaser Common Stock" shall mean the Class A Common Stock of
Purchaser, par value $.001 per share.
"Purchaser Shares" means shares of Purchaser Common Stock.
"Qualified Plans" has the meaning set forth in Section 2.1(hh).
"Related Property" has the meaning set forth in Section 2.1(t).
"Related Agreements" shall mean any and all escrow agreements and
employment agreements required to be executed in connection with this Agreement.
"Representatives" has the meaning set forth in Section 2.1(aa).
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<PAGE> 8
"Returns" has the meaning set forth in Section 2.1(k).
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Suppliers" has the meaning set forth in Section 2.1(r).
"Surviving Corporation" has the meaning set forth in Section 1.1 below.
"State" shall have the meaning set forth in Section 2.1(a).
"Taxes" has the meaning set forth in Section 2.1(k).
"Territory" has the meaning set forth in Section 3.5(a).
"Unaudited Annual Financial Statements" has the meaning set forth in
Section 2.1(e).
"Unaudited Financial Statements" has the meaning set forth in Section
2.1(e).
"Unaudited Interim Financial Statements" has the meaning set forth in
Section 2.1(e).
ARTICLE I
THE MERGER
Section 1.1 The Merger. On and subject to the terms and conditions of
this Agreement, the Company will merge with and into Acquisition Sub (the
"Merger") at the Effective Time. From and after the Effective Time, the separate
corporate existence of the Company shall cease, and Acquisition Sub shall
continue as the corporation surviving the Merger (the "Surviving Corporation").
Immediately after the Effective Time, the Surviving Corporation shall change its
name to"New England Computer Graphics, Inc." and shall file with the Secretary
of State of the Commonwealth of Massachusetts its qualification to do business
as a foreign corporation. The parties shall cause the Certificate of Merger to
be filed with the Secretary of State of the State of Georgia and the Articles of
Merger to be filed with the Secretary of State of the Commonwealth of
Massachusetts promptly following the Closing.
Section 1.2 Effect of Merger.
(a) General. The Merger shall become effective at the time (the
"Effective Time") when the Articles of Merger filed with the Secretary of State
of the Commonwealth of Massachusetts and the Certificate of Merger filed with
the Secretary of State of the State of Georgia have become effective in
accordance with their terms and in accordance with the laws of each State. The
Merger shall have the effect set forth in Section 80 of the Massachusetts
Business Corporation Law and Section 14-2-1106 of the Georgia Business
Corporation Code. The Surviving Corporation may, at any time after the Effective
Time, take any action (including executing and delivering any document) in the
name and on
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<PAGE> 9
behalf of the Surviving Corporation in order to carry out and effectuate the
transactions contemplated by this Agreement. Further, the Surviving Corporation
shall possess all of the rights, privileges, powers and franchises, and be
subject to all the restrictions, disabilities and duties, of each of the
Constituent Corporations; and the rights, privileges, powers and franchises of
each of the Constituent Corporations, and all property of and all debts due to
any of the Constituent Corporations on whatever account, shall be vested in the
Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest shall be thereafter as effectually
the property of the Surviving Corporation as they were of the Constituent
Corporations, and the title to any real estate vested by deed or otherwise in
any of the Constituent Corporations shall not revert or be in any way impaired
by reason of the Merger, but all rights of creditors and all liens upon any
property of any of the Constituent Corporations shall be preserved unimpaired,
and all debts, liabilities and duties of the Constituent Corporations shall
attach to the Surviving Corporation and may be enforced against it to the same
extent as if said debts, liabilities and duties had been incurred or contracted
by it.
(b) Articles of Incorporation. The Articles of Incorporation of
Acquisition Sub in effect at and as of the Effective Time will remain the
Articles of Incorporation of the Surviving Corporation without any modification
or amendment, other than the change of the name of the Surviving Corporation, in
the Merger.
(c) Bylaws. The Bylaws of Acquisition Sub in effect at and as of the
Effective Time will remain the Bylaws of the Surviving Corporation without any
modification or amendment, other than the change of the name of the Surviving
Corporation, in the Merger.
(d) Directors and Officers. The initial directors of the Surviving
Corporation at and as of the Effective Time shall be comprised of the current
Acquisition Sub directors, and those persons listed on Exhibit D. The principal
officers of the Surviving Corporation at and as of the Effective Time shall be
as set forth in Exhibit D.
(e) Conversion of Shares. At and as of the Effective Time, in
consideration for the Capital Stock and in full payment therefor, each Company
Share shall be converted into the right to receive its pro rata share of (i) Two
Hundred Forty Thousand Dollars ($240,000) (the "Cash Consideration") and (ii) an
aggregate of 300,000 shares of Purchaser Common Stock (the "Equity
Consideration," together with the Cash Consideration, hereinafter referred to
collectively as the "Purchase Price"), subject to the adjustments to the
Purchase Price set out in Section 1.3. All shares of Purchaser Common Stock
issued as herein described shall have identical rights as to dividends, voting
and all other matters. Except as expressly provided in this Agreement, there
shall be no other consideration paid to or for the account of the Company
Shareholders in connection with or relating to the transactions contemplated
hereby. However, the Equity Consideration shall be subject to equitable
adjustment in the event of a stock split, stock dividend, reverse stock split,
or other change in the number of Purchaser Shares outstanding. Each Dissenting
Share shall be converted into the right to receive payment from the Surviving
Corporation with respect thereto in accordance with the provisions set forth in
Section 1.5. No Company Share shall be deemed to be outstanding or to have any
rights other than those set forth above in this Section 1.2(e) after the
Effective Time. No fractional Purchaser Shares shall be issued, and, to the
extent that any shareholder would be entitled to receive fractional shares of
Purchaser Common Stock pursuant this Section, the number of Purchaser Shares
that such Company Shareholder is entitled to receive shall be rounded down to
the next lower whole number. Any such fractional share interests will not
entitle the holder thereof to vote or to any rights of a shareholder of
Purchaser.
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<PAGE> 10
(f) All shares of Capital Stock held by the Company as treasury stock
shall be retired and canceled and no shares of Purchaser Common Stock or other
consideration shall be delivered or paid in exchange therefor.
(g) Each Purchaser Share issued and outstanding at and as of the
Effective Time will remain issued and outstanding thereafter.
Section 1.3 Purchase Price Adjustment.
(a) As used in this Section 1.3, the following capitalized terms shall
have the meanings set forth below:
"Actual Pre-Tax Profit" shall mean the pre-tax profit of the Surviving
Corporation, determined in accordance with generally accepted accounting
principles consistently applied ("GAAP"), for the Year. Except as otherwise
stated herein, the accounting principles employed shall be the same as those
applied by the Company on a consistent basis in prior years. Depreciation for
all plant and equipment shall be computed as follows: (i) items with a useful
life of three years or less when placed in service shall be depreciated using
the straight-line method of depreciation; (ii) items with a useful life of
greater than three years when placed in service shall be depreciated using the
declining-balance method of depreciation; (iii) items with a value of less than
$400.00 when purchased shall be expensed and written off immediately; (iv) prior
period adjustments and extraordinary items, as defined in APB Opinion 9, APB
Opinion 20 and FASB Statement 15 will be excluded from the definition of "Actual
Pre-Tax Profit;" and, (v) inventories will be accounted for on a cost basis
consistent with prior years, determined on a first-in, first-out basis and
providing for a write down to market value in those instances where the cost
exceeds the market value as of the date of the balance sheet. The "Actual
Pre-Tax Profit" shall be adjusted on a pro forma basis, as and if required, to
reflect profit or losses normally attributable to the Company/Surviving
Corporation due to the manufacturers' co-op, advertising, market development or
discount programs, if such profit or losses are not received by or charged to
Acquisition Sub.
"Actual Tangible Net Asset Value" shall mean the aggregate amount of
the Current Assets less Liabilities on the Closing Date.
"Alternative Actual Pre-Tax Profit" shall mean the pre-tax profit of
the Surviving Corporation, determined in accordance with generally accepted
accounting principles consistently applied ("GAAP"), for the Alternative Year.
Other than the period for which it is calculated, it shall be computed in the
same manner as the Actual Pre-Tax Profit.
"Alternative Warranted Pre-Tax Profit" shall mean $525,000.
"Alternative Year" means the twelve month period beginning on the date
which is three months after the day after the Closing Date and ending on the
date which is fifteen months after the Closing Date.
"Current Assets" shall be used in all respects in accordance with GAAP
and comprises the aggregate of all cash, cash equivalents, receivables and
inventory, but specifically excludes all other fixed or current assets as
determined in accordance with GAAP and any deferred assets, including
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<PAGE> 11
without limitation deferred tax and deferred income, and valued in accordance
with GAAP, and on a basis in all material respects consistent with that adopted
for the purposes of the last audited financial statements of the Company and the
value of all receivables and inventory has been written down to realizable
market value and adequate provision has been made therefor.
"Fixed Assets" shall be used in all respects in accordance with GAAP
and shall mean fixed assets at the values at which they were included in the
latest audited financial statements (or if acquired after the balance sheet
date, their cost), less depreciation calculated in accordance with the method
adopted in the financial statements. Fixed Assets shall specifically exclude,
and no value shall be attributable to, any intangible assets (including without
limitation goodwill, trademarks, service marks, formulas, franchise rights and
patents), and no asset shall be written up or revalued above its original cost
less applicable depreciation.
"Liabilities" shall be used in all respects in accordance with GAAP and
shall mean all liabilities, whether long-term or current, including without
limitation Taxes, all actual liabilities of the Company on the Closing Date,
with proper provision in accordance with GAAP, having been made therein for all
other liabilities of the Company then outstanding whether contingent,
quantified, disputed or not, that are known or reasonably should have been
known, including without limitation the cost of any work or material for which
payment has been received or credit taken, any future loss which may arise in
connection with uncompleted contracts and any claims against the Company in
respect of completed contracts.
"Net Asset Value Shortfall" means the excess, if any, of the Warranted
Tangible Net Asset Value over the Actual Tangible Net Asset Value on the Closing
Date, subject to the limitations set forth in this Section 1.3.
"Net Asset Value Surplus" means the excess, if any, of the Actual
Tangible Net Asset Value over the Warranted Tangible Net Asset Value on the
Closing Date, subject to the limitations set forth in this Section 1.3.
"Profit Shortfall" means the excess, if any, of the Warranted Pre-Tax
Profit over the Actual Pre-Tax Profit, subject to the limitations set forth in
this Section 1.3.
"Profit Surplus" means the excess, if any, of the Actual Pre-Tax Profit
over $500,000, subject to the limitations set forth in this Section 1.3.
"Warranted Pre-Tax Profit" shall mean $475,000.
"Warranted Tangible Net Asset Value" shall mean 0.
"Year" means the twelve month period beginning on the day after the
Closing Date and ending on the first anniversary of the Closing Date.
(b) Each Company Shareholder agrees that the Warranted Pre-Tax Profit
and the Warranted Tangible Net Asset Value of the Company shall be not less than
the amounts set forth above. To the extent that any of the conditions set forth
below are met, the corresponding adjustments to the Purchase Price payable to
the Company Shareholders or the Purchaser, as the case may be shall be made:
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<PAGE> 12
(i) In the event that there is a Net Asset Value Surplus,
the Purchase Price shall be increased by the amount of the Net Asset
Value Surplus. Such amount will be paid by the Purchaser, in cash, to
the Company Shareholders within ninety (90) days after the
determination of Actual Tangible Net Asset Value.
(ii) In the event that there is a Net Asset Value Shortfall,
the Purchase Price shall be reduced by the amount of the Net Asset
Value Shortfall. Such amount will be paid, in cash, by the Company
Shareholders to Purchaser within thirty (30) days after the
determination of the Actual Tangible Net Asset Value.
(iii) In addition to any adjustments made pursuant to
subsections (i) and (ii) above, if the Actual Pre-Tax Profit for the
Year (or for the Alternative Year, if applicable) exceeds $500,000, the
Purchase Price shall be increased by the number of Purchaser Shares
determined by the following formula (the "Profit Surplus Adjustment"):
(Actual Pre-Tax Profit/$500,000 x 400,000) - 400,000
The number of Purchaser Shares required for the Profit Surplus
Adjustment shall be transferred to Company Shareholders within three
business days after the final determination of the amount of such
Profit Surplus Adjustment. In no event, however, shall the Purchase
Price be increased by more than 40,000 Purchaser Shares pursuant to
this Profit Surplus Adjustment (the "Adjustment Ceiling").
(iv) Also in addition to any adjustments made pursuant to
subsections (i) and (ii) above, in the event that the Warranted Pre-Tax
Profit exceeds the Actual Pre-Tax Profit for the Year (or the for
Alternative Year, if applicable), the Purchase Price shall be reduced
by the number of Purchaser Shares determined by the following formula
(the "Profit Shortfall Adjustment"):
400,000 - (Actual Pre-Tax Profit/$500,000 x 400,000)
The number of Purchaser Shares required for the Profit
Shortfall Adjustment shall be transferred to Purchaser within three
business days after receiving notice from Purchaser of the amount of
such Profit Shortfall Adjustment. In no event, however, shall the
Purchase Price be reduced by more than 200,000 Purchaser Shares
pursuant to this Profit Shortfall Adjustment (the "Adjustment Floor").
(v) In the event that there is a stock split, stock
dividend, reverse stock split or other change in the number of
Purchaser Shares outstanding, the formulae set forth in subsections
(iii) and (iv) above, the Adjustment Ceiling and the Adjustment Floor
shall be proportionately adjusted to reflect such a change in the
number of Purchaser Shares.
(c) Any receivable of the Company existing as of the Closing Date that
remains uncollected by the Surviving Corporation or its successor 90 days after
the Closing Date, or such later date as determined by the Extension Option below
(the "Measurement Date"), or, as of such date, has been collected at less than
its full value as shown in Current Assets on the Closing Date shall be
considered a "Collection Shortfall." The Company Shareholders shall have the
option to extend the Measurement
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<PAGE> 13
Date to a date that is 120 days after the Closing Date by giving notice of such
extension to Purchaser and Surviving Corporation no later than the date which is
60 days after the Closing Date (the "Extension Option"). In the event that there
is a Collection Shortfall, (i) the Surviving Corporation shall have the option
of assigning such receivable to the Company Shareholders, without representation
or warranty, not more than 30 days after the Measurement Date, and demanding the
amount of the Collection Shortfall, and upon such assignment, such Company
Shareholders shall pay to the Surviving Corporation such amount, in cash, within
ten (10) days after demand; provided that Surviving Corporation shall have
exercised all reasonable efforts at collecting such receivable at such full
value; and (ii) the Company Shareholders shall have the option of causing the
Surviving Corporation to sell such receivable to the Company Shareholders,
without representation or warranty, not more than 120 days after the Closing
Date, and paying the amount of the Collection Shortfall, and upon such
assignment, the Company Shareholders shall pay Surviving Corporation such
amount, in cash, within ten (10) days after demand. The Company Shareholders
shall thereafter be free to pursue such collection measures as they in their
sole discretion shall deem necessary or appropriate. To the extent, if any, that
the Collection Shortfall remains unpaid after such ten (10) day period,
Surviving Corporation shall adjust the Purchase Price, effective as of the
Closing Date, in accordance with the provisions set forth in Section 1.3(b)(ii)
above, adding Collection Shortfall to the Net Asset Value Shortfall.
(d) Any items of the Company's inventory existing as of the Closing
Date that remain unsold by the Surviving Corporation or its successor 90 days
thereafter, or such later date as chosen by the Company Shareholders upon
exercise of the Extension Option, set forth in Section 1.3(c) above, or which
have been sold at less than full value as shown in Current Assets on the Closing
Date shall be considered "Inventory Shortfall." Not more than thirty (30) days
after the Measurement Date, Surviving Corporation shall deliver and transfer
such unsold inventory to the Company Shareholders without representation or
warranty and shall demand the amount of the Inventory Shortfall, and upon such
transfer and delivery, the Company Shareholders shall pay the Surviving
Corporation such amount, in cash, within ten (10) days of demand; provided that
Surviving Corporation shall have exercised all reasonable efforts at selling
such inventory at such full value. Such Company Shareholders shall, at any time
after Surviving Corporation's demand of the Inventory Shortfall, be free to sell
such inventory as they in their sole discretion shall deem necessary or
appropriate. To the extent, if any, that the Inventory Shortfall remains unpaid
after such ten (10) day period, Surviving Corporation shall adjust the Purchase
Price, effective as of the Closing Date, in accordance with the provisions set
forth in Section 1.3(b)(ii) above, adding Inventory Shortfall to the Net Asset
Value Shortfall.
(e) Each Company Shareholder shall escrow twenty percent (20%) of the
Equity Consideration (the "Escrowed Shares") and the Company Shareholders shall
collectively escrow $75,000 of the Cash Consideration (the "Escrowed Cash"), to
be subject to redistribution by Purchaser and Acquisition Sub in the
circumstances described in this Section 1.3. The terms of the escrow shall be
substantially as set forth in the form of Escrow Agreement attached as Exhibit
1.3(e) hereto. Any Escrowed Cash not subject to redistribution for purposes of
this Section shall be released to the Company Shareholders after final
determination of the Actual Tangible Net Asset Value. The Escrowed Cash released
to the Company Shareholders shall include interest earned on such released
Escrowed Cash, to the extent that the Company Shareholders provide the escrow
agent with the appropriate paperwork required to invest such funds on a timely
basis. Upon determination of either a Profit Surplus Adjustment or a Profit
Shortfall Adjustment pursuant to the terms of Section 1.3(b), the number of
Escrowed Shares to be used to satisfy such Adjustment shall be calculated by
dividing the
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<PAGE> 14
amount of the Adjustment by the twenty-day average trading price of Purchaser
Common Stock as quoted on the Nasdaq National Market System for the twenty-day
period ending on the date that the Adjustment is determined. Any Escrowed Shares
not subject to redistribution for the purposes of this Section shall be released
to the Company Shareholders as follows: one-half within thirty (30) days after
the determination of the application of this Section 1.3 pursuant to the
provisions of subsection (b), (c) or (d) above, as the case may be, and one-half
on the first anniversary of the Closing Date, or, in the event that the Company
Shareholders elect to exercise the Alternative Year provisions set forth in
Section 1.3(g), at the end of the Alternative Year. In the event that the
Purchase Price Adjustment described in this Section 1.3 exceeds the number of
Escrowed Shares and the amount of Escrowed Cash available, Purchaser's recovery
of shares or cash pursuant to the Purchase Price Adjustment shall not be limited
to the number of available Escrowed Shares or the amount of Escrowed Cash. In
the event that Purchaser elects, pursuant to Section 1.3(h), to waive the Profit
Surplus Adjustment of Section 1.3(b)(iii) and the Profit Shortfall Adjustment of
Section 1.3(b)(iv), the Escrowed Shares shall be transferred to the escrow
account established under Section 5.6 hereof, and such shares shall become
subject to all of the terms and conditions under Section 5.6, except that such
shares shall be released to the Company Shareholders pursuant to the provisions
of that certain Pledge, Security and Escrow Agreement executed in connection
with Section 5.6 hereof.
(f) As an example of the application of subsections (b) and (c) above,
in the event that the Actual Tangible Net Asset Value shall be $245,000 on the
Closing Date rather than the Warranted Tangible Net Asset Value of $260,000,
being a $15,000 shortfall in Warranted Tangible Net Asset Value, and an
additional shortfall is determined under subsection (c) above in the amount of
$10,000 and such amount remains unpaid, and in the event that the Actual Pre-Tax
Profit shall be $450,000, rather than the Warranted Pre-Tax Profit of $475,000,
being a $25,000 shortfall in Warranted Pre-Tax Profit, then the amount of Cash
Consideration shall be reduced by $25,000 and the number of Purchaser Shares to
be distributed to the Company Shareholders shall be reduced by 40,000 shares,
computed as follows:
400,000 - ($450,000 / $500,000 x 400,000) = 40,000 Shares
(g) For purposes of calculating the Purchase Price Adjustment under
this Section 1.3, the Company Shareholders shall have the option, at the end of
the Year, to calculate the Profit Surplus Adjustment, as set forth in Section
1.3(b)(iii), and the Profit Shortfall Adjustment, as set forth in Section
1.3(b)(iv), based on the Alternative Year rather than the Year. If the Company
Shareholders elect to exercise this option, the following substitutions shall be
made to the provisions of Sections 1.3(b)(iii) and (iv): the Alternative Actual
Pre-Tax Profit shall be substituted for the Actual Pre-Tax Profit and the
Alternative Warranted Pre-Tax Profit shall be substituted for the Warranted
Pre-Tax Profit. Once the Company Shareholders elect to exercise this option, the
decision shall be final, and the Company Shareholders shall not be entitled to
calculate the Purchase Price Adjustment based on the Actual Pre-Tax Profit and
the Warranted Pre-Tax Profit.
(h) Purchaser shall have the exclusive option to waive the Profit
Surplus Adjustment set forth in Section 1.3(b)(iii) and the Profit Shortfall
Adjustment set forth in Section 1.3(b)(iv) by giving notice of its election to
exercise such option within 120 days after the Closing Date. In the event that
Purchaser makes such an election, there shall be no adjustments whatsoever
pursuant to Sections 1.3(b)(iii) and (iv).
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<PAGE> 15
(i) Until the end of the Year (or the end of the Alternative Year, if
the Shareholders elect to calculate the Purchase Price Adjustment on that
basis), the Purchaser covenants and agrees as follows:
(i) The business and assets of the Company, to which the
Surviving Corporation will succeed in the Merger, will be maintained
intact as a business unit, under the management and control of the
Managing Shareholder, and operating in substantially the same manner as
prior to the Merger, with substantially the same managerial and support
staff, working capital, and other business resources, as prior to the
Merger, so the Company Shareholders will not be disadvantaged, in their
attempt to achieve the maximum Actual or Alternative Pre-Tax Profit, by
factors such as the combination of the Company's business and assets
with other businesses, or the diversion of managers, employees, working
capital and other resources to other activities of Purchaser or its
affiliates. In this connection, all dealings and transactions between
the Surviving Corporation and the Purchaser and Purchaser's affiliates
will be conducted on an arm's length basis, except as set forth below,
and on terms at least as favorable to the Company as it could obtain
from an unrelated third party.
(ii) The Surviving Corporation shall be entitled to "Most
Favored Distributor" status, in that it shall be entitled to deal with
Purchaser and its affiliates on terms at least as favorable as any
other person or entity acting as a distributor, representative or in a
similar capacity for the Purchaser or any affiliate, and without
limitation, will be given the reasonable opportunity to become a
distributor, representative or seller of each of the products and
product lines offered now or in the future by Purchaser or its
affiliates, except to the extent that such products are licensed
directly to Purchaser or one or more affiliates of Purchaser by a third
party.
(a) Specific service requests by Purchaser to
Surviving Corporation and vice versa for technical
aid, special services, advertising, and similar
services will be charged on a basis of cost.
Operating capital advanced to Acquisition Sub.,
Surviving Corporation or their successor by Purchaser
will bear interest at the Prime Rate charged by
NationsBank N.A. of Delaware, or at the rate
Purchaser pays for the funds.
(b) General services such as auditing, tax, legal,
etc. provided or paid for by Purchaser for the
Surviving Corporation in lieu of obtaining such
services from other sources will be charged to the
Surviving Corporation at cost on a basis consistent
with Purchaser's current practice. However, charges
for such services shall be limited to services
provided and shall not exceed costs at which
Surviving Corporation could reasonably expect to
obtain similar services from other sources. Arbitrary
charges by Purchaser for management or administrative
services which are neither controllable by Surviving
Corporation nor properly chargeable against Surviving
Corporations operations will be excluded from any
determination of Company's Actual or Alternative
Pre-Tax Profit.
(iii) The Surviving Corporation shall receive credit, in the
calculation of Actual or Alternative Pre-Tax Profit, for all credits
from its vendors and manufacturers for items such as
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<PAGE> 16
advertising, rebates, market development funds, and the like that are
properly attributable to Surviving Corporation.
(iv) The Surviving Corporation will be given credit for all
available anticipation, prepay or early pay discounts on
vendor/manufacturer charges and invoices that are properly attributable
to Surviving Corporation.
(j) In the event that a "Change of Control," as defined below, occurs
prior to the end of the Year (or the Alternative Year, if Shareholders elect to
calculate the Purchase Price Adjustment on that basis), then, at Shareholder's
option, the Purchase Price Adjustment shall be waived, no such adjustment shall
occur and the Escrows provided under Section 1.3(e) shall be released. For
purposes hereof, a "change of Control" shall mean any transaction in which: (a)
individuals who were directors of the Purchaser, immediately prior to a Control
Transaction shall cease, within one year of any Control Transaction, to
constitute a majority of the Purchaser's Board of Directors (or of the Board of
Directors of any successor to Purchaser or to all or substantially all of its
assets), or (b) any entity, person or group which is not currently a shareholder
of the Purchaser acquires shares of the Purchaser in a transaction or series of
transactions that result in such entity, person or group directly or indirectly
owning beneficially 51% or more of the outstanding shares. Notwithstanding the
foregoing, an issuance of shares by the Purchaser to more than one party in
connection with a capital-raising transaction shall not constitute a Change in
Control. "Control Transaction" shall mean (aa) any tender offer for or
acquisition of capital stock of Purchaser, (bb) any merger, consolidation, or
sale of all or substantially all of the assets of Purchaser which has been
approved by the shareholders, (cc) any contested election of directors of
Purchaser which results in a change in the majority of the Board of Directors of
Purchaser, or (dd) any combination of the foregoing which results in a change in
voting power sufficient to elect a majority of the Board of Directors of
Purchaser.
Section 1.4 The Closing. Subject to termination of this Agreement as
provided in Article VI below, the closing and consummation of the transactions
contemplated by this Agreement shall take place in the offices of Purchaser's
attorneys on such date that the conditions of closing set forth in Article IV
hereof have been satisfied or waived, or such other date as the parties hereto
may mutually select (the "Closing Date"), which in no event shall be after April
1, 1998, unless extended as provided herein. Purchaser and Acquisition Sub on
the one hand, and Company and Company Shareholders on the other hand, shall each
have the unilateral option to extend the Closing Date to a date which is not
more than 30 days after April 1, 1998, provided that the party electing to
exercise such option shall give written notice of its election to do so not
later than three (3) business days prior to April 1, 1998. Thereafter, the
parties may extend the Closing Date by mutual consent. The "Closing" shall mean
the deliveries to be made by the parties hereto on the Closing Date in
accordance with this Agreement, as follows: (i) Company will deliver to
Acquisition Sub and Purchaser the various certificates, instruments and
documents referred to in Section 4.1 below; (ii) Acquisition Sub and Purchaser
will deliver to Company the various certificates, instruments and documents
referred to in Section 4.2 below; (iii) each Company Shareholder shall deliver
to Acquisition Sub and Purchaser for cancellation the certificates representing
his shares of Capital Stock; (iv) Acquisition Sub and Purchaser will deliver the
consideration specified in Section 1.2 above, subject to any adjustments made
pursuant to Section 1.3; and (v) the Parties will file a certificate of Merger
with the Secretary of State of the State of Georgia in substantially the form
attached hereto as Exhibit A and will file Articles of Merger with the Secretary
of State of the Commonwealth of Massachusetts in substantially the form attached
hereto as Exhibit B. The Merger shall be deemed to have become effective as of
12:01 a.m. Atlanta, Georgia Time on the Closing Date.
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<PAGE> 17
Section 1.5 Dissenting Shareholders. In the event that any holder of
Company Shares elects to exercise its dissenters rights pursuant to the
applicable provisions of the Massachusetts Business Corporation Law, and in the
event that Purchaser or Acquisition Sub have not otherwise terminated this
Agreement pursuant to Section 6.1, Purchaser and Acquisition Sub shall have the
right to terminate this Agreement on account of such shareholder's election. If
Purchaser and Acquisition Sub do not elect to terminate this Agreement, any
holder of Company Shares who perfects his or her dissenters' rights of
appraisal in accordance with and as contemplated by the applicable provisions of
the Massachusetts Business Corporation Law shall be entitled to receive the
value of such shares in cash as determined pursuant to such provision of the
Massachusetts Business Corporation Law, provided that no such payment shall be
made to any dissenting shareholder unless and until such dissenting shareholder
has complied with the applicable provisions of the Massachusetts Business
Corporation Law and surrendered to the Company the certificate or certificates
representing the shares for which payment is being made. In the event that after
the Effective Time a dissenting shareholder fails to perfect or effectively
withdraws or loses his or her right to appraisal and of payment for his or her
shares, Surviving Corporation shall issue and deliver the consideration to which
such holder of shares is entitled under this Article I (without interest) upon
surrender by such holder of the certificate or certificates representing the
shares held by him or her.
Section 1.6 Certain Tax Agreements. The Parties intend to adopt this
Agreement and Merger as a tax-free reorganization under Section 368(a)(2)(D) of
the Internal Revenue Code of 1986, as amended. The parties shall not take a
position on any tax return or engage in any activities inconsistent with this
Section 1.6. The adoption of this Agreement and the approval of the Merger by
the Company Shareholders shall constitute the agreement by each Company
Shareholder that, without limiting the foregoing:
(a) Such Company Shareholder has not sold, exchanged, transferred or
disposed of Company Shares in contemplation of the Merger except as disclosed on
Schedule 1.6 attached hereto, and such Company Shareholder has no present intent
to and will not sell, exchange, transfer, dispose of or receive any such stock
in contemplation of the Merger, nor has such Company Shareholder entered into
any discussions or negotiations with regard to the possible sale, exchange,
transfer or other disposition of such stock.
(b) Such Company Shareholder is not subject to any obligation to sell,
exchange, transfer or otherwise dispose of all or any Purchaser Shares to be
received by such Company Shareholder in the Merger. Such Company Shareholder has
not entered into any discussion or negotiations with regard to the possible
sale, exchange, transfer or other disposition of all or any of the Purchaser
Shares. Such Company Shareholder has no plan or intent to engage in any
transaction or arrangement that would reduce such Company Shareholder's risk of
ownership in any way, including, without limitation, a short sale, hedging
transaction or otherwise, with respect to any or all of such Purchaser Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 Representations and Warranties of the Company and the
Company Shareholders. All representations and warranties of the Company and the
Company Shareholders are accurate and material and are being made in order to
induce Purchaser and Acquisition Sub to enter into
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<PAGE> 18
this Agreement. The Company and each of the Company Shareholders hereby jointly
and severally represent and warrant to Purchaser and Acquisition Sub that:
(a) Organization. The Company is a corporation duly organized and
validly existing under the laws of the Commonwealth of Massachusetts (the
"State"), and has all requisite power and authority to lease, own, and operate
its properties and carry on the Business and operations and to directly own,
lease, and operate its assets. The Company is duly qualified or licensed to do
business as a corporation, and is in good standing in the State. The Company has
delivered to Purchaser and Acquisition Sub complete and accurate copies of its
Articles of Incorporation and Bylaws and all amendments thereto, and all minutes
and actions of its Board of Directors and shareholders. To the best of Company's
and Company Shareholders' Knowledge, neither the Company nor any of the Company
Shareholders is in violation of any of the provisions of the Articles of
Incorporation or the Bylaws.
(b) Capitalization and Ownership. The authorized and outstanding
capital stock of the Company (including without limitation all voting
securities) (the "Capital Stock") and its par value per share, if any, is as set
forth on Schedule 2.1(b) hereto. Each person listed on Schedule 2.1(b) is the
lawful owner of that number of the issued and outstanding shares of capital
stock of the Company set forth opposite such person's name, free and clear of
any restrictions upon transfer except as indicated in Schedule 2.1(b), all of
which restrictions shall be removed no later than the Closing Date. The shares
of Capital Stock (the "Company Shares") set forth on Schedule 2.1(b) constitute
all of the shares of capital stock of the Company and all such shares have been
duly authorized and are validly issued, fully paid and nonassessable, and to the
best of the Knowledge and belief of the Company and the Company Shareholders,
have been issued in compliance with all applicable federal and state securities
laws. There are no outstanding subscriptions, warrants, calls, options,
conversion rights, rights of exchange or other commitments, plans, agreements,
or arrangements of any nature under which the Company or the Company Shareholder
may be obligated to issue, assign, exchange, purchase, redeem or transfer any
shares of capital stock of the Company, and there are no shareholders'
agreements to which the Company or the Company Shareholders is a party, or
proxies, voting trust agreements or similar agreements or options executed by
the Company or the Company Shareholders or to which the Company Shares are
subject. There are no outstanding subscriptions, options, warrants, rights,
convertible securities or other agreements or commitments of any character
relating to the issued or unissued capital stock or other securities of the
Company obligating the Company or the Company Shareholders to grant, extend or
enter into any subscription, option, warrant, right, convertible security or
other similar agreement or commitment. The Company has satisfied all of its
obligations to all current and past shareholders, and none of such current or
past shareholders has any claims, or any basis therefor, against the Company
arising out of or relating to obligations of the Company to such current or past
shareholders. None of the shares of the Company's Capital Stock was issued
pursuant to awards, grants, or bonuses.
(c) Subsidiaries. Except as set forth in Schedule 2.1(c), the Company
does not own, directly or indirectly, any capital stock or other equity or
ownership or proprietary interest in any corporation, partnership, association,
limited liability company, trust, joint venture or other entity.
(d) Authorization. The Company and each of the Company Shareholders
have full power and authority to enter into this Agreement, to perform their
respective obligations hereunder and to consummate the transactions contemplated
hereby. Each corporate Company Shareholder is duly organized and existing under
the laws of the jurisdiction of its incorporation. The Company and/or each of
the Company Shareholders, as appropriate, have taken all necessary and
appropriate corporate action
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<PAGE> 19
with respect to the execution and delivery of this Agreement. This Agreement
constitutes a valid and binding obligation of the Company and the Company
Shareholders (to the extent to which each is a party), enforceable in accordance
with its terms; except as limited by applicable bankruptcy, insolvency,
moratorium, reorganization or other laws affecting contracts, creditors' rights
and other laws and remedies generally.
(e) Financial Information. The Company will deliver its unaudited
consolidated balance sheets and related statements of operations and cash flows
at and for the fiscal years ended 1995, 1996 and 1997 (the "Unaudited Annual
Financial Statements") and will deliver the unaudited statements of operations
and cash flows at and for the period from the end of the Company's 1997 fiscal
year through February 28, 1998 (the "Unaudited Interim Financial Statements,"
together with the Unaudited Annual Financial Statements, collectively referred
to herein as the "Unaudited Financial Statements") within seven (7) days after
the execution of this Agreement. Within thirty (30) days after the Closing Date
the Company will also deliver an unaudited balance sheet as of the Closing Date
(the "Unaudited Balance Sheet," together with the Unaudited Financial
Statements, collectively referred to herein as the "Financial Statements"). To
the best of the Knowledge and belief of the Company and the Company
Shareholders, the Financial Statements will be prepared in accordance with
Generally Accepted Accounting Principles ("GAAP") on a consistent basis
throughout the periods indicated and with each other and will present accurately
the financial condition of the Company as of the respective dates thereof and
the results of operations for the periods then ended. All of the Company's
general ledgers, books, and records are located at the Company's principal place
of business in the State or at the offices of its accountant. Purchaser or
Acquisition Sub may, at their option, elect to engage, at their own cost and
expense, an accounting firm selected by them and reasonably acceptable to the
Company to audit the Unaudited Financial Statements as of the Closing Date.
(f) Deposit Accounts; Powers of Attorney. Schedule 2.1(f) hereto lists:
(i) the name of each financial institution in which the
Company has accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account; and
(iv) the name of each person authorized to draw thereon or
have access thereto.
There are no persons, corporations, firms or other entities holding a
general or special power of attorney from the Company.
(g) Liabilities and Obligations. Other than as set forth in the
Unaudited Financial Statements, Schedule 2.1(g) sets forth an accurate list at
the date of this Agreement of all liabilities of the Company, and any
significant liabilities incurred thereafter in the ordinary course of business
or liabilities which are not reflected in the balance sheet of any kind,
character, or description, whether accrued, absolute, secured or unsecured,
contingent or otherwise, together with, in the case of those liabilities which
are not fixed, an estimate of the maximum amount which may be payable. For each
such liability for which the amount is not fixed or is contested, whether in
litigation or otherwise, the Company shall provide the following information:
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<PAGE> 20
(i) a summary description of the liability together with the
following:
(a) copies of all material relevant documentation
relating thereto;
(b) amounts claimed and any other action or relief
sought; and
(c) name of claimant and all other parties to the
claim, suit, or proceeding.
(ii) the name of each court or agency before which such
claim, suit, or proceeding is pending;
(iii) the date such claim, suit, or proceeding was instituted;
(iv) a reasonable estimate by the Company of the maximum
amount, if any, which is likely to become payable with respect to each
such liability. If no estimate is provided, the Company's best estimate
shall for purposes of this Agreement be deemed to be zero.
(h) Product and Service Warranties and Reserves. To the best of
Company's and Company Shareholders' Knowledge, except as set forth in Schedule
2.1(h), there are no product warranty claims relating to sales of the Company's
products occurring on or prior to the date of this Agreement. To the best of
Company's and Company Shareholders' Knowledge, the only express warranties,
written or oral, with respect to the products or services sold by the Company
are set forth in Schedule 2.1(h).
(i) Absence of Certain Changes and Events. Except as set forth in
Schedule 2.1(i) hereto, to the best of the Knowledge and belief of the Company
and the Company Shareholders, since the date of the Unaudited Annual Financial
Statements there has not been:
(i) Any material adverse change in the financial condition,
results of operation, assets, liabilities or prospects of the Company
or the Business, or any occurrence, circumstance, or combination
thereof which reasonably could be expected to result in any such
material adverse change;
(ii) Any transaction relating to or involving the Company,
the Business, the assets of the Company or the Company Shareholders
which was entered into or carried out by the Company or the Company
Shareholders other than for fair consideration in the Ordinary Course
of Business;
(iii) Any change by the Company in its accounting or tax
practices or procedures;
(iv) Any incurrence of any liability, other than liabilities
incurred in the Ordinary Course of Business consistent with past
practices;
(v) Any sale, lease, or disposition of, or any agreement to
sell, lease, or dispose of any of its properties (whether leased or
owned), or the assets of the Company, other than sales, leases, or
dispositions of goods, materials, or equipment in the Ordinary Course
of Business or as contemplated by this Agreement;
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(vi) Any event permitting any of the assets or the
properties of the Company (whether leased or owned) to be subjected to
any pledge, encumbrance, security interest, lien, charge, or claim of
any kind whatsoever (direct or indirect) (collectively, "Liens");
(vii) Any increase in compensation or any adoption of, or
increase in, any bonus, incentive compensation, pension, profit
sharing, retirement, insurance, medical reimbursement or other employee
benefit plan, payment or arrangement to, for, or with any employee of
the Company, other than certain bonuses paid to the Company
Shareholders and disclosed in writing to the Acquisition Sub and
Purchaser;
(viii) Any payment or distribution of any bonus to, or
cancellation of indebtedness owing from, or incurring of any liability
relating to any employees, consultants, directors, officers, or agents,
or any persons related thereto, other than certain bonuses paid to the
Company Shareholders;
(ix) Any notice (written or unwritten) from any employee of
the Company that such employee has terminated, or intends to terminate,
such employee's employment with the Company;
(x) Any adverse relationship or condition with Suppliers
(as defined in Section 2.1 (q)(i) hereof), vendors, or Customers (as
defined in Section 2.1(ee) hereof) that may have an adverse effect on
the Company, the Business, or the assets of the Company;
(xi) Any event, including, without limitation, shortage of
materials or supplies, fire, explosion, accident, requisition or taking
of property by any governmental agency, flood, drought, earthquake, or
other natural event, riot, act of God or a public enemy, or damage,
destruction, or other casualty, whether covered by insurance or not,
which has had an adverse effect on the Company, the properties (whether
leased or owned), the Business, or the assets of the Company or any
such event which could be expected to have an adverse effect on the
Company, the properties (whether leased or owned), the Business, or the
assets of the Company;
(xii) Any modification, waiver, change, amendment, release,
rescission, accord and satisfaction, or termination of, or with respect
to, any term, condition, or provision of any contract, agreement,
license, or other instrument to which the Company or a Company
Shareholder is a party and relating to or affecting the Business or the
assets of the Company other than any satisfaction by performance in
accordance with the terms thereof in the Ordinary Course of Business;
(xiii) Any discharge or satisfaction of any Lien or payment of
any liabilities, other than in the Ordinary Course of Business;
(xiv) Any waiver of any rights of substantial value by the
Company, other than waivers having no material adverse effect on the
Company;
(xv) Any issuance of equity securities of the Company or any
issuance of warrants, calls, options or other rights calling for the
issuance, sale, or delivery of the Company's equity securities;
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(xvi) Any declaration of any dividend or any distribution of
any shares of its capital stock, or redemption, purchase, or other
acquisition of any shares of its capital stock or any grant of an
option, warrant, or other right to purchase or acquire any such shares;
(xvii) Any amendment, or agreement to amend, the Company's
Articles of Incorporation or Bylaws, or any merger or consolidation
with, or any agreement to merge or consolidate with, any other
corporation, partnership, limited liability company or any other
entity;
(xviii) Any reduction, or agreement to reduce, the cash or
short-term investments of the Company, other than to meet cash needs
arising in the Ordinary Course of Business;
(xix) Any work interruptions, labor grievances or claims
filed, proposed law or regulation or any event of any character,
materially adversely affecting the Business or future prospects of the
Company;
(xx) Any revaluation by the Company of any of its assets;
(xxi) Any loan by the Company to any person or entity, or
any guaranty by the Company of any loan; or
(xxii) To the best Knowledge of the Company and the Company
Shareholders, any other event or condition of any character which
materially adversely affects, or reasonably may be expected to so
affect, the assets of the Company, the Business, or the properties
(whether leased or owned) of the Company.
(j) Inventory. Schedule 2.1(j) sets forth the reasonable value of the
Company's inventory. All inventory is owned by the Company, including all goods
customarily sold and/or rented by the Company in connection with the Business
(whether located on the premises of the Company, in transit to or from such
premises, in other storage facilities, or otherwise) (collectively, the
"Inventory"), and the Company maintains appropriate records of such inventory.
The Company has continued to replenish the Inventory in a normal and customary
manner consistent with past practices. To the Knowledge of the Company and the
Company Shareholders, the Company has not received written or oral notice that
the Company will experience in the future any difficulty in obtaining, in the
desired quantity and quality and upon reasonable terms and conditions, the
vehicles, materials, supplies, or equipment required for the Business.
(k) Taxes.
(i) Definitions. For purposes of this Agreement:
(a) the term "Taxes" means (A) all federal, state,
local, foreign and other net income, gross income,
gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, lease, service, service
use, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property,
windfall profits, customs, duties or other taxes,
fees, assessments or charges of any kind whatever,
together with any interest and any penalties,
additions to tax
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or additional amounts with respect thereto, (B) any
liability for payment of amounts described in clause
(A) whether as a result of transferee liability, of
being a member of an affiliated, consolidated,
combined or unitary group for any period, or
otherwise through operation of law, and (C) any
liability for the payment of amounts described in
clauses (A) or (B) as a result of any tax sharing,
tax indemnity or tax allocation agreement or any
other express or implied agreement to indemnify any
other person; and the term "Tax" means any one of the
foregoing Taxes; and
(b) the term "Returns" means all returns,
declarations, reports, statements, claims for refund
and other documents required to be filed in respect
of Taxes, and the term "Return" means any one of the
foregoing Returns.
(ii) To the best of the Knowledge and belief of the Company
and the Company Shareholders, the Company has properly completed and
filed on a timely basis (including extensions) and in correct form all
Returns required to be filed on or prior to the Closing Date. As of the
time of filing, the foregoing Returns correctly reflected the facts
regarding the income, business, assets, operations, activities, status
or other matters of the Company or any other information required to be
shown thereon. In particular, to the best of the Knowledge of the
Company and the Company Shareholders, the foregoing Returns are not
subject to unpaid penalties under Section 6662 of the Internal Revenue
Code of 1986, as amended (the "Code"), relating to accuracy-related
penalties (or any corresponding provision of state, local or foreign
Tax law) or any other unpaid penalties.
(iii) To the best of the Knowledge and belief of the Company
and the Company Shareholders, with respect to all amounts in respect of
Taxes imposed upon the Company, or for which the Company is liable,
whether to taxing authorities (as, for example, under law) or to other
persons or entities (as, for example, under tax allocation agreements),
with respect to all taxable periods ending on or before the Closing
Date and portions of periods commencing before the Closing Date and
ending after the Closing Date, all applicable tax laws and agreements
have been fully complied with, and all such amounts required to be paid
by the Company to taxing authorities or others on or before the Closing
Date have been paid, and all such amounts required to be paid by the
Company to taxing authorities or others after the Closing which have
not been paid are reflected on the Financial Statements of the Company.
(iv) No notices raising tax issues have been received by the
Company from any taxing authority in connection with any of the
Returns. No extensions or waivers of statutes of limitations with
respect to the Returns have been given by or requested from the
Company. Schedule 2.1(l)(iv) sets forth taxable years for which
examinations have been completed, those years for which examinations
are presently being conducted, and those years for which required
Returns have not yet been filed. Except to the extent indicated in
Schedule 2.1(l)(iv), all deficiencies asserted or assessments made as a
result of any examinations have been fully paid, or are fully reflected
as a liability in the Financial Statements of the Company, or are being
contested and an adequate reserve therefor has been established and is
fully reflected in the Financial Statements of the Company.
(v) There are no liens for Taxes (other than for current
Taxes not yet due and payable) upon the assets of the Company.
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<PAGE> 24
(vi) The Company is not a party to or bound by (nor will the
Company become a party to or become bound by) any tax indemnity, tax
sharing or tax allocation agreement.
(vii) The Company has never been a member of an affiliated
group of corporations within the meaning of Section 1504 of the Code.
(viii) The Company has not filed a consent pursuant to the
collapsible corporation provisions of Section 341(f) of the Code (or
any corresponding provision of state, local or foreign income Tax law)
or agreed to have Section 341(f)(2) of the Code (or any corresponding
provision of state, local or foreign income Tax law) apply to any
disposition of any asset owned by it.
(ix) None of the assets of the Company directly or
indirectly secures any debt the interest on which is tax exempt under
Section 103(a) of the Code.
(x) None of the assets of the Company is "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(xi) The Company has not made and will not make a deemed
dividend election under Treas. Reg. ss.1.1502-32(f)(2) or a consent
dividend election under Section 565 of the Code.
(xii) The Company has not agreed to make, nor is it required
to make, any adjustment under Sections 481(a) or 263A of the Code or
any comparable provision of state or foreign tax laws by reason of a
change in accounting method or otherwise.
(xiii) None of the Company Shareholders is other than a United
States person within the meaning of the Code.
(xiv) The Company is not party to any joint venture,
partnership, or other arrangement or contract which could be treated as
a partnership for federal income tax purposes.
(xv) The Company's tax basis of each of its assets is
reflected in its Unaudited Financial Statements.
(xvi) All elections with respect to Taxes made during the
fiscal years ended December 31, 1995, December 31, 1996 and December
31, 1997 are reflected on the Returns for such periods, copies of which
have been provided to Purchaser.
(l) Employee Payments.
(i) The hours worked by and payments made to the Company's
employees have not been in violation in any respect of the Fair Labor
Standards Act or any other applicable federal, foreign, state or local
laws dealing with such matters.
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<PAGE> 25
(ii) All payments due from the Company on account of employee
health and welfare insurance have been paid or accrued.
(iii) All severance, sick, or vacation payments by the
Company, which are or were due under the terms of any agreement or
otherwise have been paid or are described in Schedule 2.1(l)(iii).
(m) Compliance With Law. The Company has complied and is in compliance
with all applicable zoning decisions and, to the best of the Knowledge of the
Company and the Company Shareholders, has complied and is in compliance with all
applicable federal, state, and local laws, statutes, licensing requirements,
rules, and regulations, and judicial or administrative decisions. To the best of
the Knowledge and belief of the Company and the Company Shareholders, the
Company has been granted all licenses, permits (temporary and otherwise),
authorizations, and approvals from federal, state, and local government
regulatory or zoning bodies necessary to carry on the Business and maintain the
assets of the Company, all of which are currently valid and in full force and
effect. All such licenses, permits, authorizations and approvals shall be valid
and in full force and effect upon the consummation of the transactions
contemplated by this Agreement to the same extent as if the Company prior to the
Closing Date were continuing the Business and operations of the Company. To the
best of the Knowledge and belief of the Company and the Company Shareholders,
there is no order issued, or proceeding pending or threatened, or notice served
with respect to any violation of any law, ordinance, order, writ, decree, rule,
or regulation issued by any federal state, local, or foreign court or
governmental agency or instrumentality applicable to the Company. The Company
has valid business licenses to carry on its operations.
(n) No Disclosure Items. Except as otherwise indicated in Schedule
2.1(n), there is no adverse information with respect to the Company, the Company
Shareholder(s) or any officer, director or employee of the Company which
information would require disclosure in connection with a filing by the Company
under the federal securities acts. Neither the Company nor any Company
Shareholder has failed to disclose any material fact which would be required to
be disclosed for purposes of a proxy statement or other communication involved
in a public offering in accordance with the provisions of Rule 10b-5 or Rule
14a-9(a) of the U.S. Securities and Exchange Commission.
(o) Governmental Consents. To the best of the Knowledge of the Company
and the Company Shareholders, no consent, approval, order, or authorization of,
or registration, qualification, designation, declaration, or filing with, any
federal, state, local, or provincial governmental authority on the part of the
Company or the Company Shareholders is required in connection with the
consummation of the transactions contemplated hereunder.
(p) Intellectual Property.
(i) The Company and its subsidiaries own or have the right to
use pursuant to license, sublicense, agreement, or permission all
Intellectual Property necessary or desirable for the operation of the
business of the Company and its subsidiaries as presently conducted and
as presently proposed to be conducted by the Managing Shareholder. Each
item of Intellectual Property owned or used by any of the Company and
its subsidiaries immediately prior to the closing hereunder will be
owned or available for use by the Company, its subsidiaries, Surviving
Corporation or its subsidiaries on identical terms and conditions
immediately subsequent to the closing hereunder. Each of the Company
and its subsidiaries has taken all
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<PAGE> 26
necessary and desirable action to maintain and protect each item of
Intellectual Property that it owns or uses.
(ii) None of the Company and its subsidiaries has interfered
with, infringed upon, misappropriated, or otherwise come into conflict
with any Intellectual Property rights of third parties, and none of the
Company Shareholders and the directors and officers (and employees with
responsibility for Intellectual Property matters) of the Company and
its subsidiaries has ever received any charge, complaint, claim,
demand, or notice alleging any such interference, infringement,
misappropriation, or violation (including any claim that any of the
company and its subsidiaries must license or refrain from using any
Intellectual Property rights of any third party). To the Knowledge of
any of the Company Shareholders and the directors and officers (and
employees with responsibility for Intellectual Property matters) of the
Company and its subsidiaries, no third party has interfered with,
infringed upon, misappropriated, or otherwise come into conflict with
any Intellectual Property rights of any of the Company and its
subsidiaries.
(iii) Schedule 2.1(p)(iii) identifies each patent or
registration which has been issued to any of the Company and its
subsidiaries with respect to any of its Intellectual Property,
identifies each pending patent application or application for
registration which any of the Company and its subsidiaries has made
with respect to any of its Intellectual Property, and identifies each
license, agreement, or other permission which any of the Company and
its subsidiaries has granted to any third party with respect to any of
its Intellectual Property (together with any exceptions). The Company
has delivered to the Acquisition Sub correct and complete copies of all
such patents, registrations, applications, licenses, agreements, and
permission (as amended to date) and has made available to the
Acquisition Sub correct and complete copies of all other written
documentation evidencing ownership and prosecution (if applicable) of
each such item. Schedule 2.1(p)(iii) also identifies each trade name or
unregistered trademark used by any of the Company and its subsidiaries
in connection with any of its businesses. With respect to each item of
Intellectual Property required to be identified in Schedule
2.1(p)(iii):
(a) the Company and its subsidiaries possess all
right, title, and interest in and to the item, free
and clear of any security interest, license, or other
restriction;
(b) the item is not subject to any outstanding
injunction, judgment, order, decree, ruling, or
charge;
(c) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is
pending or, to the Knowledge of any of the Company
Shareholders and the directors and officers (and
employees with responsibility for Intellectual
Property matters) of the Company and its
subsidiaries, is threatened which challenges the
legality, validity, enforceability, use, or ownership
of the item; and
(d) none of the Company and its subsidiaries has ever
agreed to indemnify any Person for or against any
interference, infringement, misappropriation, or
other conflict with respect to the item.
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<PAGE> 27
(iv) Schedule 2.1(p)(iv) identifies each item of Intellectual
Property that any third party owns and that any of the Company and its
subsidiaries uses pursuant to license, sublicense, agreement, or
permission. The Company has delivered to Purchaser and Acquisition Sub
correct and complete copies of all such licenses, sublicenses,
agreements, and permission (as amended to date). With respect to each
item of Intellectual Property required to be identified in Schedule
2.1(p)(iv):
(a) the license, sublicense, agreement, or permission
covering the item is legal valid, binding,
enforceable, and in full force and effect.
(b) the license, sublicense, agreement, or permission
will continue to be legal, valid, binding,
enforceable, and in full force and effect on
identical terms following the consummation of the
transactions contemplated hereby (including the
assignments and assumptions referred to above);
(c) no party to the license, sublicense, agreement,
or permission is in breach or default, and no event
has occurred which with notice or lapse of time would
constitute a breach of default or permit termination,
modification, or acceleration thereunder;
(d) no party to the license, sublicense, agreement,
or permission has repudiated any provision thereof;
(e) with respect to each sublicense, the
representations and warranties set forth in
subsections (A) through (D) above are true and
correct with respect to the underlying license;
(f) the underlying item of Intellectual Property is
not subject to any outstanding injunction, judgment,
order, decree, ruling, or charge;
(g) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is
pending or, to the Knowledge of any of the Company
Shareholders and the directors and officers (and
employees with responsibility for Intellectual
Property matters) of the Company and its
subsidiaries, is threatened which challenges the
legality, validity, or enforceability of the
underlying item of Intellectual Property; and
(h) none of the Company and its subsidiaries has
granted any sublicense or similar right with respect
to the license, sublicense, agreement, or permission.
(v) None of the Company Shareholders and the directors and
officers (and employees with responsibility for Intellectual Property
matters) of the company and its subsidiaries has any Knowledge of any
new products, inventions, procedures, or methods of manufacturing or
processing that any competitors or other third parties have developed
which reasonably could be expected to supersede or make obsolete any
product or process of any of the Company and its subsidiaries.
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<PAGE> 28
(q) Restrictive Documents or Orders. To the best of the Knowledge of
the Company and the Company Shareholders, the Company is not a party to nor
bound under any agreement, contract, order, judgment, or decree, or any similar
restriction which adversely affects, or reasonably could be expected to
adversely affect (i) the continued operation by Surviving Corporation of the
Business and operations of the Company on and after the Closing Date on
substantially the same basis as said business was theretofore operated or (ii)
the consummation of the transactions contemplated by this Agreement.
(r) Contracts and Commitments.
(i) Schedule 2.1(r)(i) hereto sets forth a list of all
material written agreements and contracts, contract rights, licenses,
and other executory commitments (written or unwritten if known or if
the Company or the Company Shareholders reasonably should have known)
other than purchase and sale orders and quotations (collectively, the
"Contracts") including, without limitation, those contracts with
insurance companies, credit companies, governmental agencies, rental
agencies, and all others under which the Company is supplied with
materials, supplies, or equipment ("Materials") (such suppliers shall
be referred to herein as "Suppliers") to which the Company is a party
or to which any of the assets of the Company are subject. To the best
of the Knowledge and belief of the Company and the Company
Shareholders, there are no oral agreements or commitments that would
have a material adverse effect on the Company.
(ii) The Company Shareholders and the Company have performed
all of their obligations under the terms of each Contract, and are not
in default thereunder, except as described in Schedule 2.1(r)(ii). No
event or omission has occurred which but for the giving of notice or
lapse of time or both would constitute a default by any party thereto
under any such Contract. Each such Contract is valid and binding on all
parties thereto and in full force and effect, and each Contract will
continue to be valid and binding on identical terms following the
consummation of the transaction contemplated hereby. The Company has
received no written or unwritten notice of default, cancellation, or
termination in connection with any such Contract. The Company is not
now and has never been a party to any governmental contracts subject to
price redetermination or renegotiation.
(iii) There has not been any notice (written or unwritten)
from any Supplier that any such Supplier will not continue to supply
the current level and type of Materials currently being provided by
such Supplier upon the same terms and conditions.
(s) Debt. Schedule 2.1(s) sets forth a list of all agreements for the
incurring of indebtedness for borrowed money and all agreements relating to
industrial development bonds to which the Company is a party or guarantor. None
of the obligations pursuant to such agreements are subject to acceleration by
reason of the consummation of the transactions contemplated hereby, nor would
the execution of this Agreement or the consummation of the transactions
contemplated hereby result in any default under such agreements. The Company has
furnished Purchaser and Acquisition Sub with true and correct copies of each
such agreement listed in Schedule 2.1(s). The Company is not in default under
any of the agreements listed thereon, nor is the Company aware of any event
that, with the passage of time, or notice, or both, would result in an event of
default thereunder.
(t) Related Property. Schedule 2.1(t)(i) hereto lists all of the
Company's ownership interests (except for leasehold interests set forth in
Schedule 2.1(gg)) in real property, machinery,
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<PAGE> 29
equipment, tooling, furniture, fixtures, motor vehicles, supplies, spare parts,
computer equipment, printers, copiers, software, telecommunications equipment,
miscellaneous supplies, tools, repair and maintenance parts, chemicals, and
fixed assets related to the Business and operations of the Company (the "Related
Property"). To the best Knowledge of the Company and the Company Shareholders,
all of the Related Property is in good operating condition, normal wear and tear
excepted, and is adequate and suitable for the purposes for which it is
presently being used. Schedule 2.1(t)(ii) hereto lists certain property that
belongs solely to and shall be retained by the Company Shareholders.
(u) Assets. The assets of the Company include all the assets necessary
to operate the Business in the same manner as the Business was operated by the
Company immediately prior to the Closing Date, and none of the Company
Shareholders, nor any family member or entity affiliated with the Company
Shareholders or any such family member, owns, or has any interest in, any asset
used in the operation of the Company.
(v) Title to the Property. The Company has good and marketable title to
the assets of the Company (including, but not limited to the Related Property)
and a valid and subsisting leasehold interest in all leased property. Except as
described in Schedule 2.1(v), the Company owns all of its assets and property
free and clear of any lien.
(w) Litigation. Except as described in Schedule 2.1(w), none of the
Company, the Company Shareholders nor any of the Company's officers or directors
is engaged in, or has received any threat of, any litigation, arbitration,
investigation, or other proceeding relating to the Company, any of the Company
Shareholders, or the Company's officers, directors, employees, benefit plans,
properties, Proprietary Rights, the Business, or the assets, licenses, permits,
or goodwill of the Company; or against or affecting this Agreement, the Related
Agreements or the actions taken or contemplated in connection herewith and
therewith, nor, to the best of each's Knowledge, is there any reasonable basis
therefor. There is no action, suit, proceeding, or (to the best Knowledge of the
Company and the Company Shareholders) investigation pending or threatened
against the Company, or any of the Company Shareholders, or the officers or
directors of the Company, that questions the validity of this Agreement, the
Related Agreements, or the right of the Company or the Company Shareholders to
enter into this Agreement, the Related Agreements, any documents to be delivered
in connection with the Closing, or to consummate the transactions contemplated
hereby or thereby, or which might result in any adverse change in the assets of
the Company, the Business, conditions, or properties of the Company, or the
financial condition of the Company or the Company Shareholders. There is no
action, suit, proceeding, or investigation by the Company or the Company
Shareholders currently pending or which any of them currently intends to
initiate. None of the Company, the Company Shareholders, nor any of the
Company's officers or directors is bound by any judgment, decree, injunction,
ruling or order of any court, governmental, regulatory or administrative
department, commission, agency or instrumentality, arbitrator or any other
person which would or could have a material adverse effect on the Business or
the assets of the Company.
(x) No Conflict or Default. To the best of the Knowledge and belief of
the Company and the Company Shareholders, neither the execution and delivery of
this Agreement or the Related Agreements, nor compliance with the terms and
provisions hereof and thereof including, without limitation, the consummation of
the transactions contemplated hereby and thereby, will violate any statute,
regulation, or ordinance of any governmental or administrative authority, or
conflict with or result in the breach of any term, condition, or provision of
the Company's Articles of Incorporation or Bylaws, as presently in effect, or of
any agreement, deed, contract, mortgage, indenture, writ, order,
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<PAGE> 30
decree, legal obligation, or instrument to which the Company or the Company
Shareholders is a party or by which it or he or any of the assets of the Company
are or may be bound, or constitute a default (or an event which, with the lapse
of time or the giving of notice, or both, would constitute a default)
thereunder.
(y) Consents. To the best of the Knowledge and belief of the Company
and the Company Shareholders, no consent, approval, or authorization of any
person, agency or third party or on the part of the Company or the Company
Shareholders is required in connection with the consummation of the transactions
contemplated hereunder.
(z) Labor Relations.
(i) To the best of the Knowledge and belief of the Company
and the Company Shareholders, with respect to the Business and
operation of the Company, the Company has not failed to comply in any
respect with Title VII of the Civil Rights Act of 1964, as amended, the
Fair Labor Standards Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, all applicable federal, state, and
local laws, rules, and regulations relating to employment, and all
applicable laws, rules and regulations governing payment of minimum
wages and overtime rates, and the withholding and payment of taxes from
compensation of employees.
(ii) There are no labor controversies pending or, to the
Knowledge of the Company or the Company Shareholders, threatened
between the Company and any of its employees (the "Employees") or any
labor union or other collective bargaining unit representing any of the
Employees.
(iii) The Company has never entered into a collective
bargaining agreement or other labor union contract relating to the
Business and applicable to the Employees.
(iv) Except as set forth in Schedule 2.1(z), there are no
written employment or separation agreements, or oral employment or
separation agreements other than (1) those establishing an "at will"
employment relationship between the Company and any of the Employees
and which do not provide for any advance notice requirements to
terminate an Employee's employment or any severance or salary or
benefits continuation obligations on the part of the Company and (2)
any unknown future claims for wrongful termination based upon a theory
of implied agreements arising out of course of conduct.
(aa) Brokers' and Finders' Fees/Contractual Limitations. Neither the
Company Shareholders nor the Company is obligated to pay any other fees or
expenses of any broker or finder in connection with the origin, negotiation, or
execution of this Agreement, the Related Agreements, or in connection with any
transactions contemplated hereby and thereby. None of the Company Shareholders,
the Company, or any officer, director, employee, agent, or representative of the
Company (collectively, the "Representatives") is or has been subject to any
agreement, letter of intent, or understanding of any kind which prohibits,
limits, or restricts the Company, the Company Shareholders or the
Representatives from negotiating, entering into, and consummating this
Agreement, the Related Agreements, and the transactions contemplated hereby and
thereby.
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<PAGE> 31
(bb) Environmental and Safety Matters.
(i) To the best of the Knowledge and belief of the Company
and the Company Shareholders, the Company has all permits, licenses,
approvals and registrations required to be issued under applicable
Environmental Laws including federal, state and local laws, statutes
and regulations relating to the protection of human health, safety, the
environment and natural resources and, to the best of the Knowledge of
the Company and the Company Shareholders, is in compliance with the
terms and conditions thereunder. To the best of the Knowledge and
belief of the Company and the Company Shareholders, the Company is in
compliance with and there are no past or present conditions,
activities, actions, or plans which may prevent compliance with, any
current or past law related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or
handling, or the release, emission, or discharge of any hazardous
substance or hazardous waste ("Hazardous Substance Issues") or any
regulations, plans, judgments, injunctions, or notices promulgated or
approved thereunder: (1) which are applicable to the operations of the
Company, or the Company Shareholders, or the property owned or leased
by the Company or the Company Shareholders, or the assets of the
Company, or the Business or operations of the Company, or (2) which may
give rise to any liability of the Company, or the Company Shareholders
or otherwise form the basis of any ongoing or threatened claims,
actions, demands, suits, proceedings, hearings, studies, or
investigations against or relating to the Company, the property owned
or leased by the Company or the Company Shareholders, or the Business,
or the assets of the Company, that are based on or related to any
Hazardous Substance Issues.
(ii) To the best of the Knowledge of the Company and the
Company Shareholders, no release of a hazardous substance has come to
be located on or beneath and remain located on or beneath any of the
real property upon which the Business is conducted or upon which any of
the property owned or leased currently or in the past by the Company or
the Company Shareholders or any predecessor which relates to the
Business or operations of the Company are held or maintained.
(iii) Schedule 2.1(bb) sets forth all reports, studies, and
evaluations conducted by the Company or the Company Shareholders, or
received by the Company or the Company Shareholders with respect to
such matters.
(iv) Neither the Company nor any of the Company Shareholders
has any Knowledge of the possible or actual presence, disposal, release
or threatened release of any hazardous substance or hazardous waste on
or under any adjacent properties.
(v) To the best of the Knowledge of the Company and the
Company Shareholders, the Company has not been alleged to be in
violation of, or been subject to any administrative, judicial, or
regulatory proceeding pursuant to, any applicable Environmental Laws
either now or any time during the past. No Claims (as hereinafter
defined) have been or are currently asserted against the Company based
on the Company's or any of the Company Shareholders' acts or failures
to act prior to the Closing Date with respect to hazardous substances
or hazardous wastes. As used herein, "Claim" shall mean any and all
claims, demands, orders, causes of action, suits, proceedings,
administrative proceedings, losses, judgments, decrees, debts, damages,
liabilities, court costs, attorneys' fees, and any other expenses
incurred, assessed or sustained by or against the Company or the
Company Shareholders.
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(vi) To the best of the Knowledge of the Company and the
Company Shareholders, none of the properties owned, leased, or operated
by the Company or any predecessor thereof are now, or were in the past,
listed on the National Priorities List of Superfund Sites, the
Comprehensive Environmental Response, Compensation and Liability
Information System, or any other state or local environmental database.
(cc) Certain Payments. To the best of the Company's and Company
Shareholders' Knowledge, the Company has not, and no person directly or
indirectly on behalf of the Company has, made or received any payment that was
not legal to make or receive.
(dd) Customers. To the best of the Knowledge and belief of the Company
and the Company Shareholders, Schedule 2.1(dd) hereto lists all of the customers
of the Company for the year 1997 to date (such customers referred to herein
individually as a "Customer"). No single Customer of the Company accounted for
more than ten percent (10%) of the net sales or rentals of the Company
(calculated on a unit basis) during 1997 except as set forth in Schedule
2.1(dd). The Company has furnished Purchaser and Acquisition Sub with complete
and accurate copies or descriptions of all current agreements (written or
unwritten) with such Customers. Neither the Company nor any of the Company
Shareholders is aware of any event, happening, or fact which would lead it or
him to believe that any of such Customers will not continue its current level of
purchases and/or rentals after the Closing Date.
(ee) Books and Records. The books and records of the Company to which
Purchaser and Acquisition Sub and their accountants and attorneys have been
given access are the true books and records of the Company and truly and fairly
reflect the underlying facts and transactions in all respects.
(ff) Complete Disclosure. To the best of the Knowledge and belief of
the Company and the Company Shareholders, no representation or warranty by the
Company or the Company Shareholders in this Agreement, and no exhibit, schedule,
statement, certificate, or other writing furnished to Purchaser and Acquisition
Sub pursuant to this Agreement or the Related Agreements or in connection with
the transactions contemplated hereby and thereby, contains or will contain any
untrue statement or omits or will omit to state any fact necessary to make the
statements contained herein and therein not materially misleading. If the
Company or any of the Company Shareholders becomes aware of any fact or
circumstance which would change a representation or warranty of the Company or
the Shareholders, the Company and the Shareholders shall immediately give notice
of such fact or circumstance to Purchaser and Acquisition Sub. However, such
notification shall not relieve either the Company or the Shareholders of their
respective obligations under this Agreement.
(gg) Leased Properties. The Financial Statements and Schedule 2.1(gg)
hereto together list all personal property (including equipment leases) and real
property leased by the Company or by the Company Shareholders in connection with
the Business (the "Leased Properties") and the aggregate annual rent or other
fees payable under all such leases. The Company has a valid leasehold or
ownership interest in all of the Leased Properties, free and clear of any liens.
The negotiation and consummation of this Agreement and the transactions
contemplated hereby will not result in any penalties, the acceleration of
payments or the termination of any lease of Leased Properties.
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(hh) Employees and Employee Benefit Plans.
(i) Other than as set forth in Schedule 2.1(hh) hereto, the
Company is not a party to any pension, profit sharing, savings,
retirement or other deferred compensation plan, or any bonus (whether
payable in cash or stock) or incentive program, or any group health
plan (whether insured or self-funded), or any disability or group life
insurance plan or other employee welfare benefit plan, or to any
collective bargaining agreement or other agreement, written or oral,
with any trade or labor union, employees' association or similar
organization. The Company is not a party to, nor has made any
contribution to or otherwise incurred any obligation under, any
"multi-employer plan" as defined in Section 3(37) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
(ii) With respect to each such plan set forth in Schedule
2.1(hh) (a "Plan"), the Company has furnished to Purchaser, Acquisition
Sub or their counsel complete and accurate copies of the Plan documents
(including trust documents, insurance policies or contracts, employee
booklets, summary plan descriptions and other authorizing documents,
and any material employee communications). With respect to each Plan
subject to ERISA as either an employee pension benefit plan within the
meaning of Section 3(2) of ERISA or an employee welfare benefit plan
within the meaning of Section 3(1) of ERISA, the Company has prepared
in good faith and timely filed all requisite governmental reports and,
to the best of Company's and Company Shareholders' Knowledge, has
properly and timely posted, or distributed all notices and reports to
employees required to be filed, posted, or distributed with respect to
each Plan. Each Plan has at all times been properly and completely
funded by the Company and has been operated and administered in all
respects in accordance with its terms and all applicable laws,
including, but not limited to, ERISA and the Code.
(iii) All Plans that are intended to qualify (the "Qualified
Plans") under Section 401(a) of the Code have been determined by the
Internal Revenue Service to be so qualified, and copies of such
determination letters are included as part of Schedule 2.1(hh) hereof.
Except as disclosed on Schedule 2.1(hh), all reports and other
documents required to be filed with any governmental agency or
distributed to plan participants or beneficiaries have been timely
filed and distributed, and copies thereof are included as part of
Schedule 2.1(hh) hereof. The Company further represents that:
(a) there have been no terminations, partial
terminations, or discontinuance of contributions to
any such Qualified Plan intended to qualify under
Section 401(a) of the Code without notice to and
approval by the Internal Revenue Service;
(b) no such plan listed in Schedule 2.1(hh) subject
to the provisions of Title IV of ERISA has been
terminated;
(c) there have been no "reportable events" (as that
phrase is defined in Section 4043 of ERISA) with
respect to any such plan listed in Schedule 2.1(hh);
and
(d) The Company has not incurred any liability under
Section 4062 of ERISA.
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(iv) Neither the Company nor any of the Company Shareholders
has made any oral or written communications to its current or former
employees that guarantee current or former employees continuation of
employer-provided benefits or retirement coverage under the Company's
welfare benefit plans or which would have any effect on the Surviving
Corporation's ability to terminate retiree or any other benefits to all
current or former employees.
(v) To the best of the Knowledge of the Company and the
Company Shareholders, the Company has not violated any of the health
care continuation coverage requirements of the Consolidated Omnibus
Budget Reconciliation Act of 1985 applicable to its Employees prior to
the Closing Date or any prior actions of or transactions entered into
by the Company or the Company Shareholders.
(ii) Compensation. The Company has delivered to Purchaser and
Acquisition Sub an accurate schedule, attached to this Agreement as Schedule 2.1
(ii), showing all officers, directors, and key employees of the Company and the
rate of compensation (and the portions thereof attributable to salary, bonus,
and other compensation, respectively) of the directors, officers, and key
employees.
(jj) Insurance. The Company maintains policies of insurance covering
the assets of the Company, properties, and Business in types and amounts as set
forth in Schedule 2.1(jj). To the best of the Knowledge and belief of the
Company and the Company Shareholders, the Company is in compliance with each of
such policies such that none of the coverage provided under such policies has
been invalidated and the Company has not received any written notice of
cancellation of any such policies. Schedule 2.1(jj) lists and describes all the
Company insurance policies in effect immediately prior to the time of Closing.
To the Knowledge of the Company and the Company Shareholders, such policies are
with reputable insurers and are in amounts sufficient for the prudent protection
of the properties and the Business of the Company.
(kk) Accounts and Notes Receivable. Schedule 2.1(kk) hereto sets forth
all accounts and notes receivable of the Company ("Accounts Receivable").
Schedule 2.1(kk) shows the aging of Accounts Receivable in amounts due in
thirty-day aging categories. All Accounts Receivable represent sales or rentals
actually made or services actually performed in the ordinary and usual course of
the Company's business.
(ll) Representations and Warranties on the Closing Date. The Company's
and the Company Shareholders' representations and warranties contained in this
Article II shall be true on and as of the Closing Date with the same force and
effect as though such representations and warranties had been made on such date,
except to the extent any such representations and warranties were made as of a
specified date, in which case such representations and warranties shall continue
on the Closing Date to have been true in all material respects as of such
specified date.
Section 2.2 Representations and Warranties of Acquisition Sub and
Purchaser. Acquisition Sub and Purchaser hereby represent and warrant to the
Company and the Company Shareholders that immediately prior to the time of
Closing:
(a) Organization and Standing. Acquisition Sub is a corporation duly
organized and validly existing under the laws of the State of Georgia, and has
all requisite power and authority to lease, own,
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and operate its properties and carry on its business and operations and to
directly own, lease, and operate its assets. Acquisition Sub has delivered to
the Company complete and accurate copies of its Certificate of Incorporation and
Bylaws and all amendments thereto, and all minutes and actions of its Boards of
Directors and shareholders. Acquisition Sub is not in violation of any of the
provisions of its Certificates of Incorporation or Bylaws.
(b) Capitalization and Ownership. The authorized and outstanding
capital stock of Purchaser and its par value per share are as set forth on
Purchaser's Registration Statement on Form S-1, as updated and amended by
reports filed with the SEC pursuant to the requirements of the Securities Act of
1933 and the Securities Exchange Act of 1934. The shares of Purchaser Common
Stock set forth in such Registration Statement and subsequent reports and
filings made with the SEC constitute all of the shares of capital stock of the
Purchaser issued and outstanding and have been duly authorized and validly
issued, fully paid and nonassessable, and to the best of the Knowledge and
belief of Purchaser, issued in compliance with all applicable federal and state
securities laws. Except as provided in such Registration Statement and
subsequent reports and filings made with the SEC, there are no outstanding
subscriptions, warrants, calls, options, conversion rights, rights of exchange
or other commitments, plans, agreements, or arrangements of any nature under
which the Purchaser may be obligated to issue, assign, exchange, purchase,
redeem or transfer any shares of its capital stock, and there are no
shareholders' agreements to which the Purchaser or its shareholders is a party,
or proxies, voting trust agreements or similar agreements or options executed by
Purchaser or to which the Purchaser Common Stock is subject. Except as provided
in such Registration Statement and subsequent reports and filings made with the
SEC, there are no outstanding subscriptions, options, warrants, rights,
convertible securities or other agreements or commitments of any character
relating to the issued or unissued capital stock or other securities of the
Purchaser obligating Purchaser or, to the best Knowledge of Purchaser, its
shareholders to grant, extend or enter into any subscription, option, warrant,
right, convertible security or other similar agreement or commitment. Upon
issuance of shares of Purchaser Common Stock, as set forth herein, the Company
Shareholders shall acquire good and marketable title to the shares of Purchaser
Common Stock, free and clear of any liens, pledges, encumbrances, security
interests, charges, equities or restrictions of any nature imposed by Purchaser,
except as set forth in this Agreement. All of the issued and outstanding capital
stock of Acquisition Sub is owned by Purchaser. All of the issued and
outstanding capital stock of Acquisition Sub has been duly authorized and
validly issued, is fully paid and nonassessable, was offered, issued, sold and
delivered by Acquisition Sub in compliance with all applicable state and federal
laws concerning the issuance of securities, and was not issued in violation of
the preemptive rights of any past or present shareholder. No capital stock of
Acquisition Sub will be conveyed to the Company Shareholders in the Merger.
Within a reasonable time prior to Closing, Purchaser will provide to Company
Shareholders copies of its Registration Statement on Form S-1 and copies of all
subsequent Forms 10-K and 10-Q, to the extent that such copies are reasonably
available to Purchaser.
(c) Authorization. Acquisition Sub and Purchaser have full corporate
power and authority to enter into this Agreement, the Related Agreements, to
perform their obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby, including, without limitation, the
execution and delivery of this Agreement and the Related Agreements. Acquisition
Sub and Purchaser have taken all necessary and appropriate corporate action with
respect to the execution and delivery of this Agreement and the Related
Agreements. This Agreement and the Related Agreements constitute valid and
binding obligations of Acquisition Sub, enforceable in accordance with their
respective terms; except as limited by applicable bankruptcy, insolvency,
moratorium,
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<PAGE> 36
reorganization, or other laws affecting creditors' rights and remedies
generally, and other laws and remedies.
(d) Brokers' and Finders' Fees/Contractual Limitations. Neither
Purchaser nor Acquisition Sub is obligated to pay any fees or expenses of any
broker or finder in connection with the origin, negotiation, or execution of
this Agreement, the Related Agreements, or in connection with any transactions
contemplated hereby. Neither Purchaser, Acquisition Sub nor any officer,
director, employee, agent, or representative of Purchaser or Acquisition Sub
(collectively, the "Acquisition Sub Representatives") is or has been subject to
any agreement, letter of intent, or understanding of any kind which prohibits,
limits, or restricts Purchaser, Acquisition Sub or the Acquisition Sub
Representatives from negotiating, entering into, and consummating this
Agreement, the Related Agreements, and the transactions contemplated hereby and
thereby.
(e) Governmental Consents. To the best of the Knowledge of Purchaser
and Acquisition Sub, no consent, approval, order, or authorization of, or
registration, qualification, designation, declaration, or filing with, any
federal, state, local, or provincial governmental authority on the part of
Acquisition Sub or Purchaser is required in connection with the consummation of
the transactions contemplated hereunder.
(f) Complete Disclosure. To the best of the Knowledge and belief of
Purchaser and Acquisition Sub, no representation or warranty by Purchaser or
Acquisition Sub in this Agreement, and no exhibit, schedule, statement,
certificate, or other writing furnished to Company and Company Shareholders
pursuant to this Agreement or the Related Agreements or in connection with the
transactions contemplated hereby and thereby, contains or will contain any
untrue statement or omits or will omit to state any fact necessary to make the
statements contained herein and therein not materially misleading. If Purchaser
or Acquisition Sub becomes aware of any fact or circumstance which would change
a representation or warranty of Purchaser or Acquisition Sub, Purchaser and
Acquisition Sub shall immediately give notice of such fact or circumstance to
Company and Company Shareholders. However, such notification shall not relieve
either Purchaser or Acquisition Sub of their respective obligations under this
Agreement.
Section 2.3 Disclosure. Disclosure of any item on any schedule hereto
shall be deemed adequate disclosure of such item on all other schedules,
provided a specific cross-reference is set forth in each such other schedule.
Section 2.4 Investment Representation of Company Shareholders. Each
Company Shareholder (i) understands that the shares of Purchaser Common Stock
have not been, and will not be, registered under the Securities Act of 1933, or
under any state securities laws, and are being offered and sold in reliance upon
federal and state exemptions for transactions not involving any public offering,
(ii) is acquiring the shares of Purchaser Common Stock solely for his or its own
account for investment purposes, and not with a view of the distribution
thereof, (iii) is a sophisticated investor with knowledge and experience in
business and financial matters, (iv) has received certain information concerning
Purchaser and has had the opportunity to obtain additional information as
desired in order to evaluate the merits and the risks inherent in holding the
Purchaser Common Stock, (v) is able to bear the economic risk and lack of
liquidity inherent in holding the Purchaser Common Stock, and (vi) is an
Accredited Investor for the reasons set forth in the annexed subscription
documents and investment letter.
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ARTICLE III
COVENANTS
Section 3.1 Covenants Against Disclosure.
(a) The terms and provisions of this Agreement, and any information
heretofore disclosed or to be disclosed in the future in connection herewith by
any party hereto to any other party, other than information which is in the
public domain or which the disclosing party authorizes the receiving party in
writing to disclose (such terms, provisions and information herein called the
"Confidential Material") shall be treated confidentially by the parties;
provided that any party may disclose Confidential Material of another party to
the receiving party's employees, accountants, attorneys and advisors, including
personal financial planners and advisors, who need to know the same (it being
understood that they shall be informed by the receiving party of the
confidential nature of the Confidential Material, and that the receiving party
shall cause them to treat the same confidentially), and otherwise to the extent
required by law; and provided further that any party may disclose the general
terms and provisions of this Agreement after the later of six months after the
Closing Date or December 31, 1998. Furthermore, the parties may disclose the
terms of this Agreement to the managing shareholder and company shareholders of
Computer Graphics Technology, Inc., a South Carolina corporation, and to the
managing shareholder and company shareholders of Martec, Inc., a California
corporation, and their attorneys and accountants for the purpose of arriving at
an agreement acceptable to all parties. The parties acknowledge that remedies at
law would be inadequate to enforce the covenants contained in this Section 3.1
and therefore agree that a party aggrieved hereunder may enforce such covenants
through the remedy of specific performance or other equitable relief. Should an
aggrieved party have cause to seek such relief, no bond shall be required, and
the breaching party shall pay all attorney's fees and court costs which the
aggrieved party may incur in enforcing the provisions of this Section.
(b) The parties shall, by mutual agreement, draft a press release for
public dissemination. No party shall disseminate (except to the parties to this
Agreement) any press release or announcement concerning the transactions
contemplated by this Agreement or the Related Agreements or the parties hereto
or thereto without the prior written consent of the Company, Purchaser and
Acquisition Sub, except as required by law.
Section 3.2 Access to Information. Through April 1, 1998 (or such later
Closing Date as may be established), the Company will give Purchaser,
Acquisition Sub and their accountants, legal counsel, and other representatives
reasonable access, during normal business hours, at times mutually agreeable
among the parties, to all of the properties, books, contracts, commitments, and
records relating to the Business and the Company and to all officers and
managers of the Company, and the Company will furnish to Purchaser and
Acquisition Sub, their accountants, legal counsel and other representatives, at
the Company's expense (which expense shall not include the costs and fees of
Acquisition Sub's or Purchaser's accountants, legal counsel, and other
representatives), all such information that Company and the Company Shareholders
are reasonably able to produce concerning the Business or the Company as
Acquisition Sub and Purchaser may request. Acquisition Sub and Purchaser agree
to indemnify and hold the Company harmless from and against loss or damage the
Company may incur as a result of Purchaser's or Acquisition Sub's activities or
the activities of their agents, representatives or designees upon property owned
or occupied by the Company and against any and all claims for death or injury to
persons or properties arising out of or connected with Purchaser's or
Acquisition Sub's (or their agents', representatives' or designees') going upon
such property
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<PAGE> 38
pursuant to the provisions of this Agreement. Such indemnification shall be
provided in accordance with the provisions of Article V hereof.
Section 3.3 Interim Period.
(a) During the period commencing on the date of this Agreement and
ending with the earlier to occur of the Closing Date or the termination of this
Agreement in accordance with its terms, the Company agrees that it will, except
as set forth on Schedule 3.3(a):
(i) carry on its respective businesses in substantially the
same manner as it has heretofore and not introduce any material new
method of management, operation or accounting;
(ii) maintain its respective properties and facilities,
including those held under leases, in as good working order and
condition as at present, ordinary wear and tear excepted;
(iii) perform all of its respective obligations under
agreements relating to or affecting its respective assets, properties,
or rights;
(iv) keep in full force and effect present insurance
policies or other comparable insurance coverage;
(v) use its best efforts to maintain and preserve its
business organization intact, retain its respective present key
employees, and maintain its respective relationships with suppliers,
customers, and others having business relations with it;
(vi) maintain compliance with all permits laws, rules and
regulations, consent orders, and all other orders of applicable courts,
regulatory agencies, and similar governmental authorities;
(vii) maintain present debt and lease instruments and not
enter into new or amended debt or lease instruments; and
(viii) maintain present salaries and commission levels for all
officers, directors, employees and agents.
(b) During the period commencing on the date of this Agreement and
ending with the earlier to occur of the Closing Date or the termination of this
Agreement in accordance with its terms, the Company agrees that it will not,
except as set forth on Schedule 3.3(b):
(i) make any change in its Certificate or Articles of
Incorporation or Bylaws;
(ii) issue any securities, options, warrants, calls,
conversion rights or commitments relating to its securities of any
kind;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or purchase,
redeem or otherwise acquire or retire for value any shares of its stock
or declare any dividends or make any distributions (other than S
Corporation distributions), nor pay out any extraordinary bonuses in
excess of pro rata bonuses
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<PAGE> 39
customarily paid, or fees, or commissions to the Shareholders,
directors, management or other personnel;
(iv) sell, assign, lease, or otherwise transfer or dispose
of any property or equipment except in the normal course of business;
(v) negotiate for the acquisition of any business or the
start-up of any new business;
(vi) merge or consolidate or agree to merge or consolidate
with or into any other corporation;
(vii) waive any material rights or claims;
(viii) commit a material breach of or amend or terminate any
material agreement or Permit;
(ix) enter into any other transaction outside the ordinary
course of its business consistent with past business practice or
prohibited hereunder; or
(x) change its accounts receivable collection practice or
factor its accounts receivable in any way.
Section 3.4 Completion of Schedules. The parties acknowledge that all
of the Schedules hereto may not be completed as of the date of execution of this
Agreement. All missing or incomplete schedules shall be compiled and agreed upon
within 15 days after execution of this Agreement.
Section 3.5 On and After Closing.
(a) On and after the Closing Date, none of the shares of stock of
Purchaser which are subject to the escrow provisions of this Agreement shall be
transferred or pledged except pursuant to the provisions of this Agreement. The
voting rights with respect to such shares shall be exercisable by the owners of
such shares. Dividends, if any, declared on the Purchaser Common Stock during
the effectiveness of such escrow provisions shall be paid to and reinvested by
the escrow agent as the parties shall agree.
(b) After the Closing Date, the Managing Shareholder and Surviving
Corporation agree that they will not without the consent of Purchaser, which
consent shall not be unreasonably withheld:
(i) enter into any contract or commitment or incur, or agree
to incur, any liability or make any capital expenditures, except in the
normal course of business consistent with past practice involving
amounts less than $5,000;
(ii) create, assume, or permit to exist mortgage, pledge, or
other lien or encumbrance upon any assets or properties whether now
owned or hereafter acquired, except (1) with respect to purchase money
liens incurred in connection with the acquisition of equipment with an
aggregate cost not in excess of $10,000 necessary or desirable for the
conduct of the businesses of the Company, (2) liens for taxes either
not yet due or being contested in good faith and by appropriate
proceedings (and for which contested taxes adequate
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reserves have been established and are being maintained) or
materialmen's, mechanics', workers', repairmen's, employees', or other
like liens arising in the ordinary course of business (the liens set
forth in clause (2) being referred to herein as "Statutory Liens"), or
(3) liens set forth on Schedule 2.1(v) hereto;
Section 3.6 Continuity of Business Enterprise. Surviving Company will
continue a historic business of the Company, or use or cause to be used, a
significant portion of the Company's business, in a manner which satisfies the
continuity of business enterprise requirement at Treas. Reg. (0) 1.365-1(d).
Section 3.7 Non-Solicitation.
(a) Except as set forth on Exhibit 3.7(a) hereto, commencing as of the
Closing Date and continuing for three (3) years thereafter, each of the Company
Shareholders agrees that it/he shall not engage (except in its/his respective
capacity as an employee of Surviving Corporation, Purchaser, or a subsidiary of
either Surviving Corporation or Purchaser, if applicable), directly or
indirectly, whether on its/his own account or as a shareholder (other than as a
less than 1 % shareholder of a publicly-held company), partner, joint venturer,
employee, consultant, advisor, and/or agent, of any person, firm, corporation,
or other entity, in any or all of the following activities:
(i) Solicit or attempt to solicit customers, suppliers, or
business patronage of the Company, Surviving Corporation, the Business
of either Surviving Corporation or Purchaser, or any of their
affiliates for the purpose of inducing him, her or it to purchase or
receive products or services competitive with those offered by
Surviving Corporation or Purchaser (provided, however, that this
restriction shall apply only to customers with whom such Company
Shareholder had material contact in connection with services provided
by the Company Shareholder for or on behalf of the Company within the
three years prior to the date of this Agreement); or,
(ii) Encourage or solicit any Employees of or service
providers to Surviving Corporation, Purchaser, the Business of either
Surviving Corporation or Purchaser, or any of their affiliates to leave
the employment of or terminate their service relationship with
Surviving Corporation, Purchaser or any of their affiliates for any
reason.
(b) All proprietary and confidential data or information (whether in
tangible form or held as personal knowledge) of the Company pertaining to its
business, other than Trade Secrets (as defined below), which is not generally
known to the public, including, without limitation, information regarding the
Company's customers or prospective customers (such as lists containing the
names, addresses, and telephone numbers and/or account information of customers
and prospective customers), marketing plans and methods, short-term and
long-term business plans, research and development, manufacturing costs and
processes, pricing, cost or profit factors, quality programs, contracts and
bids, or personnel gained by a Company Shareholder as a result of his, her or
its relationship with the Company shall be considered oCompany Confidential
Informationo. The Company Shareholders shall regard and treat each item
constituting Company Confidential Information as strictly confidential and
wholly-owned by Surviving Corporation and Purchaser until the third anniversary
of the Closing Date, and the Company Shareholders shall not, for any reason in
any fashion, either directly or indirectly, use, sell, lend, lease, distribute,
license, give, transfer, assign, show, disclose, disseminate, reproduce, copy,
appropriate or
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<PAGE> 41
otherwise communicate any such item or information to any entity for any purpose
other than strictly in accordance with the express terms of this Agreement.
(c) All information constituting "trade secrets" of the Company as
generally recognized under applicable law shall be considered "Company Trade
Secrets". The Company Shareholders, at all times during which such item
continues to constitute a Company Trade Secret, shall regard and treat each item
constituting a Company Trade Secret as strictly confidential and wholly-owned by
Surviving Corporation and Purchaser, and the Company Shareholders shall not, for
any reason in any fashion, either directly or indirectly, use, sell, lend,
lease, distribute, license, give, transfer, assign, show, disclose, disseminate,
reproduce, copy, appropriate or otherwise communicate any such item or
information to any entity for any purpose other than strictly in accordance with
the express terms of this Agreement.
(d) The parties agree that due to the unique nature of the services and
capabilities of the Company and the Company Shareholders, there can be no
adequate remedy at law for any breach of their respective obligations under this
Article III, that any such breach may allow the Company Shareholders and/or
third parties to unfairly compete with Surviving Corporation, Purchaser or their
affiliates resulting in irreparable harm to Surviving Corporation, Purchaser or
their affiliates, and therefore, that upon any such breach or any threat
thereof, Surviving Corporation, Purchaser or their affiliates shall be entitled
to appropriate equitable relief in addition to whatever remedies it might have
at law.
(e) Each of the Company Shareholders acknowledges, represents and
warrants to Acquisition Sub and Purchaser that the covenants of each in this
Section 3.7 are reasonably necessary for the protection of Acquisition Sub's and
Purchaser's interests under this Agreement and are not unduly restrictive upon
him.
Section 3.8 Registration Statement. Purchaser shall use its best
efforts, when it next files with the SEC a registration statement, to prepare
and file at its costs and expense such amendment to such registration statement
to cover the shares of Purchaser Common Stock issuable to the Company
Shareholders, and to keep same effective for a period of at least ninety(90)
days so as to permit Company or the Company Shareholders, as the case may be, to
resell such shares during such period of not less than ninety (90) days.
Purchaser shall further use its best efforts to list the shares on the Nasdaq
National Market System subject to official notice of issuance under the
Securities Exchange Act of 1934.
Section 3.9 Company Indebtedness. Acquisition Sub and Purchaser will
use their best efforts to arrange with Company's banks and/or lending
institutions to assign Company's line of credit or other indebtedness to
Acquisition Sub and will coordinate with Company Shareholder to effect a release
of Company Shareholder's personal guarantees. In the event that such attempts
are unsuccessful at Closing, Purchaser shall loan to Acquisition Sub an amount
sufficient to discharge such indebtedness and release such guarantees. Such loan
shall bear interest at the rate being charged by the bank or lending institution
whose loan is being discharged.
Section 3.10 Further Assurances. On or after the Closing Date, each
party shall prepare, execute, and deliver, at the preparer's expense, such
further instruments, and shall take or cause to be taken such other or further
action, as any party shall reasonably request of any other party at any time
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<PAGE> 42
or from time to time in order to consummate, in any other manner, the terms and
provisions of this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT TO OBLIGATIONS
Section 4.1 Conditions to Obligations of Purchaser and Acquisition Sub.
Each and every obligation of Purchaser and Acquisition Sub to be performed on
the Closing Date shall be subject to the satisfaction on or before the Closing
Date of the following conditions (unless waived in writing by Purchaser or
Acquisition Sub), and the Company and the Company Shareholders shall exercise
all reasonable efforts in good faith to satisfy such conditions:
(a) Representations and Warranties. The representations and warranties
of each of the Company Shareholders and the Company set forth in Section 2.1 of
this Agreement shall have been true and correct when made and shall be true and
correct at and as of the Closing Date as if such representations and warranties
were made as of such date and time.
(b) Performance of Agreement. All covenants, conditions, and other
obligations under this Agreement and the Related Agreements which are to be
performed or complied with by the Company or each of the Company Shareholders,
as the case may be, including Boards of Directors approval and delivery of the
Balance Sheet, shall have been fully performed and complied with at or prior to
the Closing Date.
(c) No Material Adverse Change. Since the date of the Unaudited Annual
Financial Statements, there shall have occurred no material adverse change in
the financial condition, the business, the assets of the Company, or properties
of the Company which adversely affects the conduct of the Business as presently
being conducted, the assets of the Company, or the financial condition or
properties of the Company.
(d) Absence of Governmental or Other Objection. There shall be no
pending or threatened lawsuit challenging the transaction by any body or agency
of the federal, state, or local government or by any third party, and the
consummation of the transaction shall not have been enjoined by a court of
competent jurisdiction as of the Closing Date and any applicable waiting period
under any applicable federal law shall have expired.
(e) Due Diligence Review. Purchaser and Acquisition Sub shall have
completed to its reasonable satisfaction their due diligence review of the
Company and its operations, the Business, the assets and financial condition of
the Company, and Purchaser and Acquisition Sub shall have received favorable
reviews from its advisors of the results of their due diligence review of the
Business.
(f) Certificate of President and Shareholders. The Company shall have
delivered to Purchaser and Acquisition Sub a certificate executed by its
President and the Company Shareholders, dated the date of the Closing Date, to
the effect that the conditions set forth in subsections (a)-(d) of this Section
4.1 have been satisfied with respect to the Company and the Company
Shareholders.
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<PAGE> 43
(g) Approval of Documents. The form and substance of all certificates,
instruments, opinions, and other documents delivered or to be delivered to
Purchaser and Acquisition Sub under this Agreement shall be reasonably
satisfactory to Purchaser and Acquisition Sub and their counsel.
(h) Execution of Related Agreements. Purchaser and Acquisition Sub
shall have received fully executed copies of the Related Agreements.
(i) Licenses. Acquisition Sub shall have received all licenses from all
appropriate governmental agencies to operate the Business in the same manner as
the Company operated the Business prior to the Closing Date and shall have
received a certificate, dated as of no earlier than ten (10) days prior to the
Closing Date, duly issued by the appropriate governmental authority in the
Company's State of Incorporation and in each state in which the Company is
authorized to do business, showing that the Company is in good standing and
authorized to do business and that all state franchise and/or income tax returns
and taxes for the Company for all periods prior to the Closing have been filed
and paid. This condition shall be deemed satisfied in the event that the
Acquisition Sub fails to use reasonable diligence in applying for and pursuing
such licenses.
(j) Consents. Purchaser and Acquisition Sub shall have received each
and every consent, approval and waiver (if any) required for the execution of
this Agreement and the consummation of the transactions contemplated hereby.
(k) Resignations. The officers and directors of the Company shall have
delivered their resignations, effective upon delivery.
(l) Delivery of Share Certificates. The Company Shareholders shall have
delivered for cancellation their certificates representing all of the
outstanding Company Shares owned by each of them.
Section 4.2 Conditions to Obligations of the Company and the Company
Shareholders. Each and every obligation of the Company and the Company
Shareholders to be performed on the Closing Date shall be subject to the
satisfaction as of or before the Closing Date of the following conditions
(unless waived in writing by the Company Shareholders or the Company), and
Purchaser and Acquisition Sub shall exercise all reasonable efforts in good
faith to satisfy such conditions:
(a) Representations and Warranties. The representations and warranties
of Acquisition Sub and Purchaser set forth in Section 2.2 of this Agreement
shall have been true and correct when made and shall be true and correct on and
as of the Closing Date as if such representations and warranties were made as of
such date and time.
(b) Performance of Agreement. All covenants, conditions, and other
obligations under this Agreement and the Related Agreements which are to be
performed or complied with by Acquisition Sub, as the case may be, including
Board of Directors and shareholder approval, as applicable, shall have been
fully performed and complied with at or prior to the Closing Date.
(c) Absence of Governmental or Other Objection. There shall be no
pending or threatened lawsuit challenging the transaction by any body or agency
of the federal, state, or local government or by any third party, and the
consummation of the transaction shall not have been enjoined by a court of
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<PAGE> 44
competent jurisdiction as of the Closing Date and any applicable waiting period
under any applicable federal law shall have expired.
(d) Certificate of Officers. Acquisition Sub shall have delivered to
the Company a certificate executed by its authorized officer, dated the date of
the Closing Date, to the effect that the conditions set forth in subsections
(a)-(c) of this Section 4.2 have been satisfied.
(e) Execution of Related Agreements. The Company shall have received
fully executed copies of the Related Agreements (and all other documents
required hereunder).
(f) Approval of Documents. The form and substance of all certificates,
instruments, opinions, and other documents delivered or to be delivered to the
Company Shareholders under this Agreement shall be reasonably satisfactory to
each of the Company Shareholders and their counsel.
ARTICLE V
INDEMNIFICATION
Section 5.1 Survival of Representations, Warranties, Covenants and
Agreements.
(a) All representations, warranties, covenants, and agreements of the
Company, the Company Shareholders, Purchaser and Acquisition Sub shall survive
the execution, delivery, and performance of this Agreement for two years from
the Closing Date. All representations and warranties of the Company, the Company
Shareholders, Purchaser and Acquisition Sub set forth in this Agreement shall be
deemed to have been made again by the Company, the Company Shareholders,
Purchaser and Acquisition Sub on and as of the Closing Date.
(b) As used in this Article V, except as otherwise indicated in this
Article V, any reference to a representation, warranty, agreement, or covenant
contained in any section of this Agreement shall include the schedule relating
to such section.
Section 5.2 Indemnification of Acquisition Sub and Purchaser. Each of
the Company Shareholders hereby agrees to indemnify and hold harmless
Acquisition Sub and Purchaser and their affiliates, the Company and the other
Company Shareholders (collectively the "Indemnified Parties") against any and
all losses, liabilities, damages, demands, claims, suits, actions, judgments,
causes of action, assessments, costs, and expenses, including, without
limitation, interest, penalties, attorneys' fees, any and all expenses incurred
in investigating, preparing, and defending against any litigation, commenced or
threatened, and any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation (collectively, "Damages"), asserted against,
reasonably resulting from, imposed upon, or incurred or suffered by the
Indemnified Parties, directly or indirectly, as a result of or arising from any
inaccuracy in or breach or nonfulfillment of any of the representations,
warranties, covenants, or agreements made by the Company or the Company
Shareholders in this Agreement or the Related Agreements or any facts or
circumstances constituting such an inaccuracy, breach, or nonfulfillment (all of
which shall be referred to as "Company Indemnifiable Claims").
Section 5.3 Indemnification of the Company Shareholders. Acquisition
Sub hereby agrees to indemnify and hold harmless each of the Company
Shareholders against any and all Damages (as defined in Section 5.2 above)
asserted against, reasonably resulting from, imposed upon, or incurred or
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<PAGE> 45
suffered by such Company Shareholders, directly or indirectly, as a result of or
arising from any inaccuracy in or breach or nonfulfillment of any of the
representations, warranties, covenants, or agreements made by Acquisition Sub in
this Agreement or the Related Agreements or any facts or circumstances
constituting such an inaccuracy, breach, or nonfulfillment or any claim against
the Company which is attributable to occurrences on or after the Closing Date
(all of which shall be referred to as "Acquisition Sub Indemnifiable Claims").
Section 5.4 Procedure for Indemnification with Respect to Third-Party
Claims.
(a) If any party hereto determines to seek indemnification (the party
seeking such indemnification hereinafter referred to as the "Indemnified Party"
and the party against whom such indemnification is sought is hereinafter
referred to as the "Indemnifying Party") under this Article V with respect to
Company Indemnifiable Claims where the Indemnified Party is Acquisition Sub or
any of its affiliates or Acquisition Sub Indemnifiable Claims where the
Indemnified Party is any of the Company Shareholders (such Claims shall be
referred to herein as "Indemnifiable Claims") resulting from the assertion of
liability by third parties, the Indemnified Party shall give notice to the
Indemnifying Parties within 60 days of the Indemnified Party becoming aware of
any such Indemnifiable Claim or of facts upon which any such Indemnifiable Claim
will be based; the notice shall set forth such material information with respect
thereto as is then reasonably available to the Indemnified Party. In case any
such liability is asserted against the Indemnified Party or its affiliates, and
the Indemnified Party notifies the Indemnifying Parties thereof, the
Indemnifying Parties will be entitled, if such Indemnifying Parties so elect by
written notice delivered to the Indemnified Party within 20 days after receiving
the Indemnified Party's notice, to assume the defense thereof with competent and
experienced counsel subject to the written consent of the Indemnified Party,
which consent shall not be unreasonably withheld. Notwithstanding the foregoing,
(i) the Indemnified Party or its affiliates shall also have the right to employ
its own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of the Indemnified Party unless the Indemnified Party or
its affiliates shall reasonably determine that there is a conflict of interest
between or among the Indemnified Party or its affiliates and any Indemnifying
Party with respect to such Indemnifiable Claim, in which case the Indemnified
Party shall select another attorney, subject to the consent of Indemnifying
Party, which consent shall not be unreasonably withheld, and the fees and
expenses of such counsel will be borne by such Indemnifying Parties, (ii) the
Indemnified Party shall have no obligation to give any notice of any assertion
of liability by a third party unless such assertion is in writing, and (iii) the
rights of the Indemnified Party or its affiliates to be indemnified hereunder in
respect of Indemnifiable Claims resulting from the assertion of liability by
third parties shall not be adversely affected by their failure to give notice
pursuant to the foregoing unless, and, if so, only to the extent that, such
Indemnifying Parties are materially prejudiced thereby; provided, however, the
Indemnifying Party shall not be liable for attorneys fees and expenses incurred
by the Indemnified Party prior to the Indemnified Party's giving notice to the
Indemnifying Party of an Indemnifiable Claim. With respect to any assertion of
liability by a third party that results in an Indemnifiable Claim, the parties
hereto shall make available to each other all relevant information in their
possession material to any such assertion.
(b) In the event that such Indemnifying Parties, within 20 days after
receipt of the aforesaid notice of an Indemnifiable Claim fail to assume the
defense of the Indemnified Party or its affiliates against such Indemnifiable
Claim, the Indemnified Party or its affiliates shall have the right to undertake
the defense, compromise, or settlement of such action on behalf of and for the
account, expense, and risk of such Indemnifying Parties.
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<PAGE> 46
(c) Notwithstanding anything in this Article V to the contrary, (i) if
there is a reasonable probability that an Indemnifiable Claim may materially
adversely affect the Indemnified Party or its affiliates, the Indemnified Party
or its affiliates shall have the right to participate in such defense,
compromise, or settlement and such Indemnifying Parties shall not, without the
Indemnified Party's written consent (which consent shall not be unreasonably
withheld), settle or compromise any Indemnifiable Claim or consent to entry of
any judgment in respect thereof unless such settlement, compromise, or consent
includes as an unconditional term thereof the giving by the claimant or the
plaintiff to the Indemnified Party a release from all liability in respect of
such Indemnifiable Claim.
Section 5.5 Procedure For Indemnification with Respect to Non-Third
Party Claims. In the event that the Indemnified Party asserts the existence of a
claim giving rise to Damages (but excluding claims resulting from the assertion
of liability by third parties), it shall give written notice to the Indemnifying
Parties. Such written notice shall state that it is being given pursuant to this
Section 5.5, specify the nature and amount of the claim asserted and indicate
the date on which such assertion shall be deemed accepted and the amount of the
claim deemed a valid claim (such date to be established in accordance with the
next sentence). If such Indemnifying Parties, within 30 days after the receipt
of notice by the Indemnified Party, shall not give written notice to the
Indemnified Party announcing their intent to contest such assertion of the
Indemnified Party, such assertion shall be deemed accepted and the amount of
claim shall be deemed a valid claim. In the event, however, that such
Indemnifying Parties contest the assertion of a claim by giving such written
notice to the Indemnified Party within said period, then the parties shall act
in good faith to reach agreement regarding such claim. If the parties hereto,
acting in good faith, cannot reach agreement with respect to such claim within
ten (10) days after notice thereof, such claim will be submitted to and settled
by arbitration pursuant to Section 7.10 hereof.
Section 5.6 Escrowed Shares. Each Company Shareholder shall escrow
twenty percent (20%) of the Purchaser Common Stock to be issued to such Company
Shareholder to be available for distribution to Purchaser in the event of an
Indemnified Claim not paid in cash by the Indemnifying Party. The number of
Purchaser Shares to be delivered to Purchaser in the event that there is an
Indemnifiable Claim for which Purchaser Shares are to be distributed to satisfy
such an Indemnifiable Claim pursuant to this Section 5.6 shall be calculated by
dividing the amount of the award for the Indemnifiable Claim by the twenty-day
average trading price of Purchaser Common Stock as quoted on the Nasdaq National
Market System for the twenty-day period ending on the date that the
Indemnifiable Claim is made. Such escrow shall expire on the date not less than
eighteen (18) months after the Date of Closing, when there shall be no pending
Indemnification Claim for which notice has been given under Section 5.4, and
upon such expiration the share certificates shall be delivered to the Company
Shareholders. Not later than the Closing Date the parties shall enter into a
Pledge, Security and Escrow Agreement in substantially the form and substance
attached hereto as Exhibit 5.6(a). In the event that Purchaser elects to waive
the Profit Surplus Adjustment and the Profit Shortfall Adjustment pursuant to
Section 1.3(h) hereof, the amount of Purchaser Common Stock placed in escrow
pursuant to this Section 5.6 shall be increased by the amount of Purchaser
Common Stock then in the escrow account established by Section 1.3(e) that is
transferred to the escrow account established by this Section 5.6.
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<PAGE> 47
ARTICLE VI
TERMINATION AND CONDITIONS SUBSEQUENT
Section 6.1 Termination.
(a) At any time prior to the time of Closing, this Agreement may be
terminated by express written consent of Purchaser, Acquisition Sub, the Company
and each of the Company Shareholders.
(b) Purchaser or Acquisition Sub may terminate this Agreement in the
event the conditions set forth in Section 4.1 of this Agreement have not been
satisfied or waived prior to the time of Closing.
(c) Each of the Company and the Company Shareholders may terminate this
Agreement in the event the conditions set forth in Section 4.2 of this Agreement
have not been satisfied or waived prior to the time of Closing.
(d) If the failure of such conditions to be fulfilled arises from the
fault or intentional act of a party hereto, such party shall be liable to the
other parties up to the amount of the documented out-of-pocket expense incurred
by such parties in negotiating, structuring and documenting the transaction
contemplated by this Agreement. No party shall be responsible for indirect,
special or expectancy damages for such nonfulfillment of conditions.
Section 6.2 Effect of Termination. In the event of termination as
provided in Section 6.1 above, Sections 3.1, 7.4 and 7.11 shall survive such
termination and continue in full force and effect.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 Notice. All notices and other communications required or
permitted under this Agreement shall be delivered to the parties at the address
set forth below their respective signature blocks, or at such other address that
they designate by notice to all other parties in accordance with this Section
7.1. Any party delivering notice to Purchaser or Acquisition Sub shall deliver a
copy to: Wade Stribling, Nelson Mullins Riley & Scarborough, L.L.P., First Union
Plaza, Suite 1400, 999 Peachtree Street, N.E., Atlanta, Georgia 30309. All
notices and communications shall be deemed to have been received unless
otherwise set forth herein: (i) in the case of personal delivery, on the date of
such delivery; (ii) in the case of telex or facsimile transmission, on the date
on which the sender receives confirmation by telex or facsimile transmission
that such notice was received by the addressee, provided that a copy of such
transmission is additionally sent by mail as set forth in (iv) below; (iii) in
the case of recognized, nationwide overnight air courier, on the second business
day following the day sent, with receipt confirmed by the overnight courier; and
(iv) in the case of mailing by first class certified or registered mail, postage
prepaid, return receipt requested, on the fifth business day following such
mailing.
Section 7.2 Entire Agreement. This Agreement, the exhibits and
schedules hereto, and the documents referred to herein embody the entire
agreement and understanding of the parties hereto with
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<PAGE> 48
respect to the subject matter hereof, and supersede all prior and
contemporaneous agreements and understandings, oral or written, relative to said
subject matter.
Section 7.3 Binding Effect: Assignment. This Agreement and the various
rights and obligations arising hereunder shall inure to the benefit of and be
binding upon the Company and the Company Shareholders, their respective
successors and permitted assigns, and Purchaser, Acquisition Sub and their
successors and permitted assigns. Neither this Agreement nor any of the rights,
interests, or obligations in this Agreement shall be transferred or assigned (by
operation of law or otherwise) by the Company or the Company Shareholders
without the prior written consent of Acquisition Sub or Purchaser or their
assignees. Acquisition Sub and Purchaser may assign their rights, interests or
obligations hereunder without the prior written consent of the Company or the
Company Shareholders.
Section 7.4 Expenses of Transaction. Each party shall pay its
professional fees and expenses incurred in connection with the negotiation and
closing of this Agreement and the Related Agreements. The expenses of the
preparation of the Financial Statements shall be borne by Company except for the
1997 Audited Financial Statements, which shall be paid by Acquisition Sub.
Company and/or Company Shareholders, as the case may be, shall pay all
applicable sales, income, use, excise, transfer, documentary, and any other
taxes arising out of the transactions contemplated in this Agreement.
Section 7.5 Waiver; Consent. This Agreement may not be changed,
amended, terminated, augmented, rescinded, or discharged (other than by
performance), in whole or in part, except by a writing executed by the parties
hereto, and no waiver of any of the provisions or conditions of this Agreement
or any of the rights of a party hereto shall be effective or binding unless such
waiver shall be in writing and signed by the party claimed to have given or
consented thereto. Except to the extent that a party hereto may have otherwise
agreed in writing, no waiver by that party of any condition of this Agreement or
breach by the other party of any of its obligations or representations hereunder
or thereunder shall be deemed to be a waiver of any other condition or
subsequent or prior breach of the same or any other obligation or representation
by the other party, nor shall any forbearance by the first party to seek a
remedy for any noncompliance or breach by the other party be deemed to be a
waiver by the first party of its rights and remedies with respect to such
noncompliance or breach.
Section 7.6 Counterparts. This Agreement may be executed simultaneously
in multiple counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
Section 7.7 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable statute, regulation or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform to such statute,
regulation or rule of law, and the remainder of this Agreement and the
application of any such invalid or unenforceable provision to parties,
jurisdictions or circumstances other than to whom or to which it is held invalid
or unenforceable shall not be affected thereby nor shall the same affect the
validity or enforceability of any other provision of this Agreement.
Section 7.8 Remedies of the Parties. The Company and the Company
Shareholders acknowledge that, in addition to all other remedies to which
Purchaser and Acquisition Sub are entitled, Purchaser and Acquisition Sub shall
have the right to enforce the terms of this Agreement by a decree of specific
performance, provided Purchaser or Acquisition Sub is not in material default
hereunder.
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<PAGE> 49
The parties also agree that the rights and remedies of each party to this
Agreement set forth in this Agreement and in all of the exhibits and schedules
attached hereto and documents referred to herein shall be cumulative and share
inure to the benefit of each such party.
Section 7.9 Governing Law. This Agreement shall in all respects be
construed in accordance with and governed by the laws of the State of Georgia.
Section 7.10 Arbitration; Attorneys' Fees.
(a) The parties agree to use reasonable efforts to resolve any dispute
arising out of this Agreement, but should a dispute remain unresolved ten (10)
days following notice of the dispute to the other party (but in no event prior
to said ten (10) days, except as specifically provided otherwise herein), such
dispute shall be finally settled by binding arbitration in Atlanta, Georgia in
accordance with the then current Commercial Arbitration Rules of the American
Arbitration Association (the "AAA") or such other mediation or arbitration
service as shall be mutually agreeable to the parties, and judgment upon the
award rendered by the arbitrator shall be final and binding on the parties and
may be entered in any court having jurisdiction thereof; provided, however, that
any party shall be entitled to appeal a question of law or determination of law
to a court of competent jurisdiction; and provided, further, however, that the
parties may first seek appropriate injunctive relief prior to, and/or in
addition to pursuing negotiation or arbitration. Such arbitration shall be
conducted by an arbitrator chosen by mutual agreement of the parties, or failing
such agreement, an arbitrator appointed by the AAA. There shall be limited
discovery prior to the arbitration hearing as follows: (a) exchange of witness
lists and copies of documentary evidence and documents related to or arising out
of the issues to be arbitrated, (b) depositions of all party witnesses, and (c)
such other depositions as may be allowed by the arbitrator upon a showing of
good cause. Depositions shall be conducted in accordance with the Georgia Code
of Civil Procedure and questions of evidence in any hearings shall be resolved
in accordance with the Federal Rules of Evidence. The arbitrator shall be
required to provide in writing to the parties the basis for the award or order
of such arbitrator, and a court reporter shall record all hearings (unless
otherwise agreed to by the parties), with such record constituting the official
transcript of such proceedings.
(b) In the event of arbitration or litigation filed or instituted
between the parties with respect to this Agreement or the Related Agreements,
the prevailing party will be entitled to receive from the other party all costs,
damages and expenses, including reasonable attorney's fees, incurred by the
prevailing party in connection with that action or proceeding whether or not the
controversy is reduced to judgment or award. The prevailing party will be that
party who may be fairly said by the arbitrator(s) or the court to have prevailed
on the major disputed issues.
Section 7.11 Cooperation and Records Retention. Each of the Company
Shareholders and Acquisition Sub shall (i) provide the other with access to such
records, original or copies, or assistance as may reasonably be requested by
them in connection with the preparation of any Tax Return, in connection with
any audit or other examination by any Taxing authority or any judicial or
administrative proceedings relating to liability for Taxes, or financial
reporting obligations, (ii) each retain and provide the other, with any records
or other information which may be relevant to any such Tax Return, audit or
examination, proceeding or determination, or financial reporting obligations,
and (iii) each provide the other with any final determination of any such audit
or examination, proceeding or determination that affects any amount required to
be shown on any Tax Return of the other for any period. All Tax Returns,
supporting work schedules and other records or information which may be
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<PAGE> 50
relevant to such Tax Returns for all tax periods or portions thereof ending
before or including the Closing Date shall remain with Acquisition Sub or the
Company and shall be made available for inspection and copying by the parties
hereto during normal business hours.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
"Purchaser"
TEKGRAF, INC.
By: /s/ Dan Bailey
---------------------------------
Dan Bailey
President
Address: 2979 Pacific Drive, Suite B
Norcross, Georgia 30071
"Acquisition Sub"
TEKGRAF SUB III, INC.
By: /s/ Phillip C. Aginsky
-----------------------------------
[NAME]
President
Address: 2979 Pacific Drive, Suite B
Norcross, Georgia 30071
By: /s/ Dan Bailey
------------------------------------
Secretary
"Company"
NEW ENGLAND COMPUTER GRAPHICS, INC.
By: /s/ David Boston
------------------------------------
David Boston, [President]
Address:
By: /s/ David Boston
------------------------------------
Secretary
"Company Shareholders"
By: /s/ David Boston
---------------------------------
David Boston
Address:
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<PAGE> 51
"Company Shareholders" (continued from
previous page)
By: /s/ Lowell Nerenberg
----------------------------------
Lowell Nerenberg
Address:
By: /s/ William Rychel
-----------------------------------
William Rychel
Address:
By: /s/ Thomas Gust
-----------------------------------
Thomas Gust
Address:
By: /s/ Robert Shumaker
-----------------------------------
Robert Shumaker
Address:
By: /s/ Thomas Mills
-----------------------------------
Thomas Mills
Address:
By: /s/ Scott Barker
-----------------------------------
Scott Barker
Address:
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<PAGE> 52
[Georgia] EXHIBIT A
CERTIFICATE OF MERGER
MERGING
NEW ENGLAND COMPUTER GRAPHICS, INC.
(a Massachusetts corporation)
WITH AND INTO
TEKGRAF SUB III, INC.
(a Georgia corporation)
The undersigned corporation, organized and existing under the laws of
the State of Georgia, DOES HEREBY CERTIFY:
1. That the name and state of incorporation of each of the constituent
corporations (the "Constituent Corporations") of the merger is as follows:
<TABLE>
<S> <C>
Name State of Incorporation
---- ----------------------
New England Computer Graphics, Inc. Massachusetts
Tekgraf Sub III, Inc. Georgia
</TABLE>
2. That the surviving corporation of the merger shall be Tekgraf Sub
III, Inc.
3. That the Certificate of Incorporation of Tekgraf Sub III, Inc. shall
be the Certificate of Incorporation of the surviving corporation.
4. That the executed Agreement and Plan of Merger among the Constituent
Corporations and Tekgraf, Inc., a Delaware corporation, is on the file at the
principal place of business of the surviving corporation. The address of the
principal place of business of the surviving corporation is
--------------------.
5. That a copy of the Agreement and Plan of Merger will be furnished by
the surviving corporation, on request and without cost, to any shareholder of
any of the Constituent Corporations.
6. That the Agreement and Plan of Merger has been duly approved by the
shareholders of each of the Constituent Corporations in accordance with the
provisions of applicable law.
<PAGE> 53
IN WITNESS WHEREOF, the undersigned corporation has caused this
Certificate to be signed by its duly authorized officer, this ______ day of
_______________, 1998.
TEKGRAF SUB III, INC.
By:
---------------------------------
Name:
-----------------------
Title:
----------------------
<PAGE> 54
EXHIBIT B
THE COMMONWEALTH OF MASSACHUSETTS
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF MERGER
(GENERAL LAWS, CHAPTER 156B, SECTION 79)
Merger of New England Computer Graphics, Inc., a
Massachusetts corporation
and
Tekgraf Sub III, a Georgia corporation
the constituent corporations, into
Tekgraf Sub III,
a new corporation organized under the laws of Georgia.
The undersigned officers of each of the constituent corporations certify under
the penalties of perjury as follows:
1. An agreement of merger has been duly adopted in compliance with the
requirements of General Laws, Chapter 156B, Section 79, and will be kept as
provided by Subsection (c) thereof. The surviving corporation will furnish a
copy of said agreement to any to its stockholders, or to any person who was a
stockholder of any constituent corporation, upon written request and without
charge.
2. The effective date of the merger determined pursuant to the agreement of
merger shall be the date approved and filed by the Secretary of the
Commonwealth.
3. The following amendments to the Articles of Organization of the surviving
corporation has been effected pursuant to the agreement of merger:
See attached "Continuation Sheet - Articles of Organization."
4. The surviving corporation hereby agrees that it may be sued in the
Commonwealth of Massachusetts for any prior obligation of any constituent
Massachusetts corporation, any prior obligation of any constituent foreign
corporation qualified under General Laws, Chapter 181, and any obligations
hereafter incurred by the surviving corporation, including the obligation
created by General Laws, Chapter 156B, Section 85, so long as any liability
remains outstanding against the corporation in the Commonwealth of
Massachusetts, and it hereby irrevocably appoints the Secretary of the
Commonwealth as its agent to accept service of process in any action for the
enforcement of any such obligation, including taxes, in the same manner as
provided in Chapter 181.
<PAGE> 55
FOR CORPORATIONS ORGANIZED IN A STATE OTHER THAN MASSACHUSETTS
The undersigned, _________________________ and ______________________________,
of Tekgraf Sub III, a corporation organized under the laws of Georgia, further
state under the penalties of perjury that the agreement of merger has been duly
adopted by such corporation in the manner required by the laws of Georgia.
--------------------------------------
--------------------------------------
<PAGE> 56
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF MERGER
(GENERAL LAWS, CHAPTER 156B, SECTION 79)
I hereby approve the within Articles of Merger and, the filing fee in the amount
of $_______________, having been paid, said articles are deemed to have been
filed with me this _____ day of __________________________, 19____.
Effective date ______________________________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Telephone:
-----------------------------------------
<PAGE> 57
EXHIBIT D
DIRECTORS
1. Phillip C. Aginsky
2. William M. Rychel
3. David Boston
<PAGE> 58
Exhibit 1.3(e)
ESCROW AGREEMENT
This Escrow Agreement (this "Agreement") is entered into as of
______________, 1998, by and among TEKGRAF, INC., a Georgia corporation (the
"Purchaser"), TEKGRAF SUB __, INC. ("Acquisition Sub"), ______________,
______________ corporation (the "Company"), ___________________ (the "Company
Shareholders"), and _________________ (the "Shareholder Representative") and
_________________________________________ (the "Escrow Agent").
WHEREAS, the Purchaser and the Company have entered into an Agreement
and Plan of Merger (the "Merger Agreement") by and among the Company, the
Company Shareholders, Acquisition Sub and the Purchaser.
WHEREAS, the Merger Agreement provides that escrow accounts will be
established to secure the Company Shareholders' guaranty with respect to the
Warranted Pre-Tax Profit and the Warranted Tangible Net Asset Value of the
Company (each as defined in the Merger Agreement) on the terms and conditions
set forth herein.
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which such escrow accounts will be established and
maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given them in the Merger Agreement.
2. Consent of Company Shareholders. By virtue of the Company
Shareholders' approval of the Merger Agreement, the Company Shareholders who may
indirectly or directly receive cash and shares of Purchaser Common Stock
pursuant to the Merger Agreement have, without any further act of any Company
Shareholder, consented to: (a) the establishment of this escrow to secure the
Company Shareholders' guaranty with respect to the Warranted Pre-Tax Profit and
the Warranted Tangible Net Asset Value of the Company in the manner set forth
herein and in the Merger Agreement, (b) the appointment of the Shareholder
Representatives as their representatives for purposes of this Agreement and as
attorneys-in-fact and agents for and on behalf of each Company Shareholder, and
the taking by the Shareholder Representatives of any and all actions and the
making of any decisions required or permitted to be taken or made by them under
this Agreement, and (c) all of the other terms, conditions and limitations in
this Agreement and the Merger Agreement.
<PAGE> 59
3. Escrow and Warranty.
(a) Escrow of Cash. On the Closing Date, the Purchaser shall deposit
with the Escrow Agent $75,000 of the Cash Consideration. The Escrowed Cash
shall be held as a trust fund and shall not be subject to any lien, attachment,
trustee process or any other judicial process of any creditor of any party
hereto. The Escrow Agent agrees to accept delivery of the Escrowed Cash and to
hold the Escrowed Cash in an interest-bearing escrow account (the "Cash Escrow
Account"), subject to the terms and conditions of this Agreement.
(b) Escrow of Shares. On the Closing Date, the Purchaser shall deposit
with the Escrow Agent a certificate for the number of Escrowed Shares specified
in Section 1.3(e) of the Merger Agreement, issued in the name of the Escrow
Agent or its nominee. The Escrowed Shares shall be held as a trust fund and
shall not be subject to any lien, attachment, trustee process or any other
judicial process of any creditor of any party hereto. The Escrow Agent agrees to
accept delivery of the Escrowed Shares and to hold the Escrowed Shares in an
escrow account (the "Share Escrow Account"), subject to the terms and conditions
of this Agreement.
(c) Warranty. The Company Shareholders have agreed in Article I of the
Merger Agreement that the Warranted Pre-Tax Profit and the Warranted Tangible
Net Asset Value of the Company shall not be less than the amounts set forth in
Section 1.3(a) of the Merger Agreement. The Escrowed Shares shall be security
for such warranty obligation of the Company Shareholders, subject to the
limitations, and in the manner provided, in this Agreement.
(d) Dividends, Etc. Any securities distributable to the Company
Shareholders in respect of or in exchange for any of the Escrowed Shares,
whether by way of stock dividends, stock splits or otherwise, shall be delivered
to the Escrow Agent, who shall hold such securities in the Share Escrow Account.
Such securities shall be issued in the name of the Escrow Agent or its nominee
and shall be considered Escrowed Shares for purposes hereof. Any cash dividends
distributable to the Company Shareholders in respect of the Escrowed Shares
shall be distributed to the Company Shareholders.
(e) Voting of Shares. The Shareholder Representatives shall have the
right, in their sole discretion, on behalf of the Company Shareholders, to
direct the Escrow Agent in writing as to the exercise of any voting rights
pertaining to the Escrowed Shares, and the Escrow Agent shall comply with any
such written instructions. In the absence of such instructions, the Escrow Agent
shall not vote any of the Escrowed Shares.
(f) Transferability. The respective interests of the Company
Shareholders in the Escrowed Shares shall not be assignable or transferable,
other than by operation of law. Notice of any such assignment or transfer by
operation of law shall be given to the Escrow Agent and the Purchaser, and no
such assignment or transfer shall be valid until such notice is given.
2
<PAGE> 60
(g) Transfer of Shares Upon Waiver of Warranty. In the event the
Purchaser elects, pursuant to the provisions of Section 1.3(h) of the Merger
Agreement, to waive the Profit Shortfall Adjustment and the Profit Surplus
Adjustment, the Escrowed Shares shall be transferred, upon receipt of notice by
Escrow Agent from Purchaser of such waiver, into the escrow account created
pursuant to that certain Pledge, Security and Escrow Agreement dated as of even
date herewith, to be treated in all respects as escrow shares thereunder and the
Escrowed Shares in such case shall be distributed to the Company Shareholders
pursuant to the terms thereof.
4. Administration of Cash Escrow Account. The Escrow Agent shall
administer the Cash Escrow Account as follows:
(a) In the event that there is a Net Asset Value Shortfall (including
any Collection Shortfall or Inventory Shortfall that remains unpaid ten (10)
days after demand for payment thereof by Purchaser or Acquisition Sub to the
Company Shareholders), the Purchase Price shall be reduced by the amount of such
Net Asset Value Shortfall. Purchaser or Acquisition Sub shall provide to the
Escrow Agent and the Shareholder Representatives written notice of the amount of
such Net Asset Value Shortfall, and such amount, including any interest accrued
thereon (or such lesser amount as is then held in the Cash Escrow Account),
shall be paid to Purchaser by Escrow Agent within three (3) business days after
receipt of such notice.
(b) Any cash remaining in the Cash Escrow Account after payment of the
Net Asset Value Shortfall amount as set forth in subsection (a) above, shall be
distributed to the Company Shareholders pursuant to Section 6(a) hereof.
(c) In the event that the Net Asset Value Shortfall exceeds the amount
of Escrowed Cash available, Purchaser's recovery of cash pursuant to Section 1.3
of the Merger Agreement shall not be limited to the amount of Escrowed Cash
available.
5. Administration of Share Escrow Account. The Escrow Agent shall
administer the Share Escrow Account as follows:
(a) In the event that the Warranted Pre-Tax Profit exceeds the Actual
Pre-Tax Profit for the Year (or the Alternative Year, if applicable), the
Purchase Price shall be reduced by the number of Purchaser Shares equal to the
Profit Shortfall Adjustment, subject to the Adjustment Floor. In such event,
Purchaser or Acquisition Sub and the Shareholder Representatives shall provide
written notice to the Escrow Agent of the amount of the Profit Shortfall
Adjustment, and the Escrow Agent shall transfer, deliver and assign to Purchaser
such number of Escrowed Shares held in the Share Escrow Account which have a
Fair Market Value equal to the Profit Shortfall Adjustment (or such lesser
number of Purchaser Shares as is then held in the Share Escrow Account). The
Fair Market Value of the Escrowed Shares to be distributed shall be determined
in accordance with Section 7 hereof.
3
<PAGE> 61
(b) On the first anniversary of the Closing Date (or if the Alternative
Year is elected, at the end of the Alternative Year), the Escrow Agent shall
distribute to the Company Shareholders, in accordance with Sections 6(a) and (b)
below, one half of the Escrowed Shares remaining in the Share Escrow Account not
required for redistribution pursuant to Section 5(a) hereof. Any Escrowed Shares
remaining in the Share Escrow Account after payment of the Profit Shortfall
Adjustment amount as set forth in subsection (a) above, shall be distributed to
the Company Shareholders pursuant to Sections 6(a) and (b) hereof.
(c) In the event that the Profit Shortfall Adjustment exceeds the
number of Escrowed Shares available, Purchaser's recovery of Purchaser Shares
pursuant to Section 1.3 of the Merger Agreement shall not be limited to the
amount of Escrowed Shares available.
6. Release of Escrowed Cash and Escrowed Shares.
(a) Any distribution of all or a portion of the Escrowed Cash or the
Escrowed Shares to the Company Shareholders shall be made in accordance with the
percentages set forth opposite such holders' respective names on Exhibit B
attached hereto; provided, however, that the Escrow Agent shall withhold the
distribution of the portion of the Escrowed Cash or the Escrowed Shares
otherwise distributable to Company Shareholders who have not, according to
written notice provided by the Purchaser to the Escrow Agent, prior to such
distribution, surrendered their respective Certificates pursuant to the terms
and conditions of the Merger Agreement. Any such withheld cash or shares shall
be delivered to the Purchaser promptly after the Termination Date, and shall be
delivered by the Purchaser to the Company Shareholders to whom such shares would
have otherwise been distributed upon surrender of their respective Certificates.
Distributions of Escrowed Shares to the Company Shareholders shall be made by
mailing stock certificates to such holders at their respective addresses shown
on Exhibit B (or such other address as may be provided in writing to the Escrow
Agent by any such holder).
(b) No fractional Escrowed Shares shall be distributed to Purchaser or
Company Shareholders pursuant to this Agreement. Instead, the number of shares
that Purchaser or each Company Shareholder shall receive shall be rounded down
to the nearest whole number; and the Escrow Agent shall sell such number of
Escrowed Shares as is equal to the aggregate of the fractional shares that would
otherwise be distributed to the Purchaser or the Company Shareholders, as the
case may be, and shall distribute the proceeds of such sale to the Purchaser or
the Company Shareholders otherwise entitled to a fractional Escrowed Share based
upon the fraction of an Escrowed Share to which Purchaser or each such Company
Shareholder is otherwise entitled, as the case may be.
7. Valuation of Escrowed Shares. For purposes of this Agreement, the
Fair Market Value of the Escrowed Shares to be released from the Share Escrow
Account after a final determination of the Profit Shortfall Adjustment shall be
determined based upon the average closing prices of the Purchaser's Common Stock
on the Nasdaq National Market System for the twenty trading days immediately
preceding the date of such final determination.
4
<PAGE> 62
8. Fees and Expenses of Escrow Agent. The Purchaser, on the one hand,
and the Company Shareholders, on the other hand, shall each pay one-half of the
fees of the Escrow Agent for the services to be rendered by the Escrow Agent
hereunder.
9. Limitation of Escrow Agent's Liability.
(a) The Escrow Agent shall incur no liability with respect to any
action taken or suffered by it in reliance upon any notice, direction,
instruction, consent, statement or other documents believed by it to be genuine
and duly authorized, nor for other action or inaction except its own willful
misconduct or gross negligence. The Escrow Agent shall not be responsible for
the validity or sufficiency of this Agreement. In all questions arising under
the Escrow Agreement, the Escrow Agent may rely on the advice of counsel, and
for anything done, omitted or suffered in good faith by the Escrow Agent based
on such advice the Escrow Agent shall not be liable to anyone. The Escrow Agent
shall not be required to take any action hereunder involving any expense unless
the payment of such expense is made or provided for in a manner reasonably
satisfactory to it.
(b) The Purchaser and the Company Shareholders hereby, jointly and
severally, agree to indemnify the Escrow Agent for, and hold it harmless
against, any loss, liability or expense incurred without gross negligence or
willful misconduct on the part of Escrow Agent, arising out of or in connection
with its carrying out of its duties hereunder. The Purchaser, on the one hand,
and the Company Shareholders, on the other hand, shall each be liable for
one-half of such amounts.
10. Liability and Authority of Shareholder Representatives; Successors
and Assignees.
(a) The Shareholder Representatives shall incur no liability to the
Company Shareholders with respect to any action taken or suffered by them in
reliance upon any note, direction, instruction, consent, statement or other
documents believed by them to be genuinely and duly authorized, nor for other
action or inaction except their own willful misconduct or gross negligence. The
Shareholder Representatives may, in all questions arising under the Escrow
Agreement, rely on the advice of counsel and for anything done, omitted or
suffered in good faith by the Shareholder Representatives based on such advice,
the Shareholder Representatives shall not be liable to the Company Shareholders.
(b) In the event of the death or permanent disability of either
Shareholder Representative, or his resignation as a Shareholder Representative,
a successor Shareholder Representative shall be appointed by the other
Shareholder Representative or, absent its appointment, a successor Shareholder
Representative shall be elected by a majority vote of the Company Shareholders,
with each such Company Shareholder (or his or her successors or assigns) to be
given a vote equal to the number of votes represented by the Company Shares held
by such Company Shareholder immediately prior to the Effective Time. Each
successor
5
<PAGE> 63
Shareholder Representative shall have all of the power, authority, rights and
privileges conferred by this Agreement upon the original Shareholder
Representatives, and the term "Shareholder Representatives" as used herein shall
be deemed to include successor Shareholder Representatives.
(c) The Shareholder Representatives, acting jointly but not singly,
shall have full power and authority to represent the Company Shareholders, and
their successors, with respect to all matters arising under this Agreement and
all actions taken by any Shareholder Representative hereunder shall be binding
upon the Company Shareholders, and their successors, as if expressly confirmed
and ratified in writing by each of them. Without limiting the generality of the
foregoing, the Shareholder Representatives, acting jointly but not singly, shall
have full power and authority to interpret all of the terms and provisions of
this Agreement, to compromise any claims asserted hereunder and to authorize
payments to be made with respect thereto, on behalf of the Company Shareholders
and their successors. All actions to be taken by the Shareholder Representatives
hereunder shall be evidenced by, and taken upon, the written direction of a
majority thereof.
11. Amounts Payable by Company Shareholders. The amounts payable by
the Company Shareholders under this Agreement (i.e., the fees and expenses of
arbitrators payable pursuant to Section 16, the fees of the Escrow Agent payable
pursuant to Section 8 and the indemnification obligations pursuant to Sections
9(b)) shall be payable solely as follows. The Shareholder Representatives shall
notify the Escrow Agent of any such amount payable by the Company Shareholders
as soon as they become aware that any such amount is payable, with a copy of
such notice to the Purchaser. On the sixth business day after the delivery of
such notice, the Escrow Agent shall sell such number of Escrowed Shares (up to
the number of Escrowed Shares then available in the Escrow Account), subject to
compliance with all applicable securities laws, as is necessary to raise such
amount, and shall disburse such proceeds to the party to whom such amount is
owed in accordance with the instructions of the Shareholder Representatives;
provided that if the Purchaser delivers to the Escrow Agent (with a copy to the
Shareholder Representatives), within five business days after delivery of such
notice by the Shareholder Representatives, a written notice contesting the
legitimacy or reasonableness of such amount, then the Escrow Agent shall not
sell Escrowed Shares to raise the disputed portion of such claimed amount, and
such dispute shall be resolved by the Purchaser and the Shareholder
Representatives in accordance with the procedures set forth in Section 16.
12. Termination. This Agreement shall terminate upon the distribution
by the Escrow Agent of all of the Escrowed Cash and all of the Escrowed Shares
in accordance with this Agreement; provided that the provisions of Sections 9
and 10 shall survive such termination.
13. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid,
6
<PAGE> 64
or (ii) via a reputable nationwide overnight courier service, in each case to
the address set forth below. Any such notice, instruction or communication shall
be deemed to have been delivered two business days after it is sent by
registered or certified mail, return receipt requested, postage prepaid, or one
business day after it is sent via a reputable nationwide overnight courier
service.
If to the Purchaser and/or the Acquisition Sub:
Tekgraf, Inc.
2979 Pacific Concourse Drive, Suite B
Norcross, Georgia 30071
If to the Company:
----------------------------------
----------------------------------
----------------------------------
If to the Shareholder Representative:
----------------------------------
----------------------------------
----------------------------------
If to the Escrow Agent:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 13.
14. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by
delivering a resignation to the parties to this Escrow Agreement, not less than
60 days' prior to the date when such resignation shall take effect. The
Purchaser and the Shareholder Representatives shall appoint a successor
7
<PAGE> 65
Escrow Agent and neither party shall unreasonably withhold approval of such
successor Escrow Agent. If, within such notice period, the Purchaser provides to
the Escrow Agent written instructions with respect to the appointment of a
successor Escrow Agent and directions for the transfer of any Escrowed Shares
then held by the Escrow Agent to such successor, the Escrow Agent shall act in
accordance with such instructions and promptly transfer such Escrowed Shares to
such designated successor.
15. General.
(a) Governing Law, Assigns. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Georgia without
regard to conflict-of-law principles and shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) Entire Agreement. Except for those provisions of the Merger
Agreement referenced herein, this Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of any
breach of any provision of this Escrow Agreement shall be effective unless in
writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(e) Amendment. This Agreement may be amended only with the written
consent of the Purchaser, the Escrow Agent and the Shareholder Representatives.
16. Arbitration; Attorneys' Fees.
(a) The parties agree to use reasonable efforts to resolve any dispute
arising out of this Agreement, but should a dispute remain unresolved ten (10)
days following notice of the dispute to the other party (but in no event prior
to said ten (10) days, except as specifically provided otherwise herein), such
dispute shall be finally settled by binding arbitration in Atlanta, Georgia in
accordance with the then current Commercial Arbitration Rules of the American
Arbitration Association (the "AAA") or such other mediation or arbitration
service as shall be mutually agreeable to the parties, and judgment upon the
award rendered by the arbitrator shall be final and binding on the parties and
may be entered in any court having jurisdiction thereof; provided, however, that
any party shall be entitled to appeal a question of
8
<PAGE> 66
law or determination of law to a court of competent jurisdiction; and provided,
further, however, that the parties may first seek appropriate injunctive relief
prior to, and/or in addition to pursuing negotiation or arbitration. Such
arbitration shall be conducted by an arbitrator chosen by mutual agreement of
the parties, or failing such agreement, an arbitrator appointed by the AAA.
There shall be limited discovery prior to the arbitration hearing as follows:
(a) exchange of witness lists and copies of documentary evidence and documents
related to or arising out of the issues to be arbitrated, (b) depositions of all
party witnesses, and (c) such other depositions as may be allowed by the
arbitrator upon a showing of good cause. Depositions shall be conducted in
accordance with the Georgia Code of Civil Procedure and questions of evidence in
all hearings shall be resolved in accordance with the Federal Rules of Evidence.
The arbitrator shall be required to provide in writing to the parties the basis
for the award or order of such arbitrator, and a court reporter shall record all
hearings (unless otherwise agreed to by the parties), with such record
constituting the official transcript of such proceedings.
(b) In the event of arbitration or litigation filed or instituted
between the parties with respect to this Agreement, the prevailing party will be
entitled to receive from the other party all costs, damages and expenses,
including reasonable attorney's fees, incurred by the prevailing party in
connection with that action or proceeding whether or not the controversy is
reduced to judgment or award. The prevailing party will be that party who may be
fairly said by the arbitrator(s) or the court to have prevailed on the major
disputed issues.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER:
TEKGRAF, INC.
By:
------------------------------------
Dan I. Bailey, President
ACQUISITION SUB:
TEKGRAF SUB III, INC.
By:
------------------------------------
____________, President
9
<PAGE> 67
SHAREHOLDER REPRESENTATIVE:
(SEAL)
-----------------------------------
ESCROW AGENT:
-----------------------------------------
By: -------------------------------------
Name:
--------------------------------
Title:
-------------------------------
COMPANY:
By:
--------------------------------------
____________, President
COMPANY SHAREHOLDERS:
(SEAL)
----------------------------------
(SEAL)
----------------------------------
(SEAL)
----------------------------------
10
<PAGE> 68
EXHIBIT B
<TABLE>
<CAPTION>
Company Shareholder Percentage
- ------------------- ----------
<S> <C>
%
%
%
</TABLE>
11
<PAGE> 69
EXHIBIT 3.7(a)
NON-SOLICITATION
NONE
<PAGE> 70
Exhibit 5.6(a)
PLEDGE, SECURITY AND ESCROW AGREEMENT
This Pledge, Security and Escrow Agreement (this "Agreement") is
entered into as of ______________, 1998, by and among TEKGRAF, INC., a Georgia
corporation (the "Purchaser"), TEKGRAF SUB ___, INC. ("Acquisition Sub"),
[_________________ _______________________________], INC., a ____________
corporation (the "Company"), [_________________________________] (the "Company
Shareholders"), and ________ _________________ (the "Indemnification
Representatives") and [________________________________________] (the "Escrow
Agent").
WHEREAS, the Purchaser and the Company have entered into an Agreement
and Plan of Merger (the "Merger Agreement") by and among the Company, the
Company Shareholders, Acquisition Sub and the Purchaser.
WHEREAS, the Merger Agreement provides that an escrow account will be
established to secure the Company's and the Company Shareholders'
indemnification obligations to the Indemnified Parties under the Merger
Agreement on the terms and conditions set forth herein.
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which such escrow account will be established and
maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given them in the Merger Agreement.
2. Consent of Company Shareholders. By virtue of the Company
Shareholders' approval of the Merger Agreement, the Company Shareholders who may
indirectly or directly receive shares of Purchaser Common Stock pursuant to the
Merger Agreement (the "Indemnifying Shareholders") have, without any further act
of any Company Stockholder, consented to: (a) the establishment of this escrow
to secure the Company Shareholders' indemnification obligations under Article V
of the Merger Agreement in the manner set forth herein and therein, (b) the
appointment of the Indemnification Representatives as their representatives for
purposes of this Agreement and as attorneys-in-fact and agents for and on behalf
of each Indemnifying Shareholder, and the taking by the Indemnification
Representatives of any and all actions and the making of any decisions required
or permitted to be taken or made by them under this Agreement, and (c) all of
the other terms, conditions and limitations in this Agreement and the Merger
Agreement.
<PAGE> 71
3. Escrow and Indemnification.
(a) Escrow of Shares. On the Closing Date, the Purchaser shall deposit
with the Escrow Agent a certificate for the number of Purchaser Shares specified
in Section 5.6 of the Merger Agreement (the "Escrow Shares"), issued in the name
of the Escrow Agent or its nominee. In addition, in the event the Purchaser
elects, pursuant to the provisions of Section 1.3(h) of the Merger Agreement, to
waive the Profit Shortfall Adjustment and the Profit Surplus Adjustment, the
shares of Purchaser common stock held in the escrow account established by
Section 1.3(e) of the Merger Agreement shall be transferred into the escrow
account created pursuant to this Escrow Agreement (the "Transferred Shares"), to
be treated in all respects as Escrow Shares hereunder and the Transferred Shares
shall be distributed to the Company Shareholders pursuant to Section 5(a)
hereof. The Escrow Shares shall be held as a trust fund and shall not be subject
to any lien, attachment, trustee process or any other judicial process of any
creditor of any party hereto. The Escrow Agent agrees to accept delivery of the
Escrow Shares and to hold the Escrow Shares in an escrow account (the "Escrow
Account"), subject to the terms and conditions of this Agreement.
(b) Indemnification. The Indemnifying Shareholders have agreed in
Article V of the Merger Agreement to indemnify and hold harmless the Indemnified
Parties from and against specified Damages. The Escrow Shares shall be security
for such indemnity obligation of the Indemnifying Shareholders, subject to the
limitations, and in the manner provided, in this Agreement.
(c) Dividends, Etc. Any securities distributable to the Indemnifying
Shareholders in respect of or in exchange for any of the Escrow Shares, whether
by way of stock dividends, stock splits or otherwise, shall be delivered to the
Escrow Agent, who shall hold such securities in the Escrow Account. Such
securities shall be issued in the name of the Escrow Agent or its nominee and
shall be considered Escrow Shares for purposes hereof. Any cash dividends
distributable to the Indemnifying Shareholders in respect of the Escrow Shares
shall be distributed to the Indemnifying Shareholders.
(d) Voting of Shares. The Indemnification Representatives shall have
the right, in their sole discretion, on behalf of the Indemnifying Shareholders,
to direct the Escrow Agent in writing as to the exercise of any voting rights
pertaining to the Escrow Shares, and the Escrow Agent shall comply with any such
written instructions. In the absence of such instructions, the Escrow Agent
shall not vote any of the Escrow Shares.
(e) Transferability. The respective interests of the Indemnifying
Shareholders in the Escrow Shares shall not be assignable or transferable, other
than by operation of law. Notice of any such assignment or transfer by operation
of law shall be given to the Escrow Agent and the Purchaser, and no such
assignment or transfer shall be valid until such notice is given.
4. Administration of Escrow Account. The Escrow Agent shall administer
the Escrow Account as follows:
<PAGE> 72
(a) If an Indemnified Party has incurred or suffered Damages for which
it is entitled to indemnification under Article V of the Merger Agreement, the
Indemnified Party shall, on or before the date of the expiration of the
representation, warranty, covenant or agreement to which such claim relates,
give written notice of such claim (a "Claim Notice") to the Indemnification
Representatives and the Escrow Agent. Each Claim Notice shall state the amount
of claimed Damages (the "Claimed Amount") and the basis for such claim. The date
which is eighteen (18) months after the Date of Closing.
(b) Within 20 days after delivery of a Claim Notice, the
Indemnification Representatives shall provide to the Indemnified Party, with a
copy to the Escrow Agent, a written response (the "Response Notice") in which
the Indemnification Representatives shall: (i) agree that Escrow Shares having a
Fair Market Value (as computed pursuant to Section 6) equal to the full Claimed
Amount may be released from the Escrow Account to the Indemnified Party, (ii)
agree that Escrow Shares having a Fair Market Value equal to part, but not all,
of the Claimed Amount (the "Agreed Amount") may be released from the Escrow
Account to the Indemnified Party or (iii) contest that any of the Escrow Shares
may be released from the Escrow Account to the Indemnified Party. The
Indemnification Representatives may contest the release of Escrow Shares having
a Fair Market Value equal to all or a portion of the Claimed Amount only based
upon a good faith belief that all or such portion of the Claimed Amount does not
constitute Damages for which the Indemnified Party is entitled to
indemnification under Article V of the Merger Agreement. If no Response Notice
is delivered by the Indemnification Representatives within such 20-day period,
the Indemnification Representatives shall be deemed to have agreed that Escrow
Shares having a Fair Market Value equal to all of the Claimed Amount may be
released to the Indemnified Party from the Escrow Account.
(c) If the Indemnification Representatives in the Response Notice agree
(or are deemed to have agreed) that Escrow Shares having a Fair Market Value
equal to all of the Claimed Amount may be released from the Escrow Account to
the Indemnified Party, the Escrow Agent shall, promptly following the earlier of
the required delivery date for the Response Notice or the delivery of the
Response Notice, transfer, deliver and assign to the Indemnified Party such
number of Escrow Shares held in the Escrow Account which have a Fair Market
Value equal to the Claimed Amount (or such lesser number of Escrow Shares as is
then held in the Escrow Account).
(d) If the Indemnification Representatives in the Response Notice agree
that Escrow Shares having a Fair Market Value equal to part, but not all, of the
Claimed Amount may be released from the Escrow Account to the Indemnified Party,
the Escrow Agent shall promptly following the delivery of the Response Notice
transfer, deliver and assign to the Indemnified Party such number of Escrow
Shares held in the Escrow Account which have a Fair Market Value equal to the
Agreed Amount (or such lesser number of Escrow Shares as is then held in the
Escrow Account). A determination with respect to the remainder of the Claimed
Amount shall be made in accordance with subsection 4(e) below.
(e) If the Indemnification Representatives in the Response Notice
contest the release of Escrow Shares having a Fair Market Value equal to all or
part of the Claimed Amount (the
<PAGE> 73
"Contested Amount"), the matter shall be settled by binding arbitration in
Atlanta, Georgia. All claims shall be settled by three arbitrators in accordance
with the Commercial Arbitration Rules then in effect of the American Arbitration
Association (the "AAA Rules"). The Indemnification Representatives and the
Indemnified Party shall each designate one arbitrator within 15 days of the
delivery of the Indemnification Representatives' Response Notice contesting the
Claimed Amount. The Indemnification Representatives and the Indemnified Party
shall cause such designated arbitrators mutually to agree upon and designate a
third arbitrator; provided, however, that (i) failing such agreement within 45
days of delivery of the Indemnification Representatives' Response Notice, the
third arbitrator shall be appointed in accordance with the AAA Rules and (ii) if
either the Indemnification Representatives or the Indemnified Party fail to
timely designate an arbitrator, the dispute shall be resolved by the one
arbitrator timely designated. The Indemnifying Shareholders and the Indemnified
Party shall pay the fees and expenses of their respectively designated
arbitrators and shall bear equally the fees and expenses of the third
arbitrator. The Indemnification Representatives and the Indemnified Party shall
cause the arbitrators to decide the matter to be arbitrated pursuant hereto
within 60 days after the appointment of the last arbitrator. The arbitrators'
decision shall relate solely to whether the Indemnified Party is entitled to
receive the Contested Amount (or a portion thereof) pursuant to the applicable
terms of the Merger Agreement and this Agreement. The final decision of the
majority of the arbitrators shall be furnished to the Indemnification
Representatives, the Indemnified Party and the Escrow Agent in writing and shall
constitute a conclusive determination of the issue in question, binding upon the
Indemnification Representatives, the Indemnifying Shareholders, the Indemnified
Party and the Escrow Agent, and shall not be contested by any of them. Such
decision may be used in a court of law only for the purpose of seeking
enforcement of the arbitrators' award. After delivery of a Response Notice that
the Claimed Amount is contested by the Indemnification Representatives, the
Escrow Agent shall continue to hold in the Escrow Account a number of Escrow
Shares having a Fair Market Value sufficient to cover the Contested Amount (up
to the number of Escrow Shares then available in the Escrow Account),
notwithstanding the occurrence of the Termination Date, until (i) delivery of a
copy of a settlement agreement executed by the Indemnified Party and the
Indemnification Representatives setting forth instructions to the Escrow Agent
as to the release of Escrow Shares, if any, that shall be made with respect to
the Contested Amount or (ii) delivery of a copy of the final award of the
majority of the arbitrators setting forth instructions to the Escrow Agent as to
the release of Escrow Shares, if any, that shall be made with respect to the
Contested Amount. The Escrow Agent shall thereupon release Escrow Shares from
the Escrow Account (to the extent Escrow Shares are then held in the Escrow
Account) in accordance with such agreement or instructions; provided, however,
if the claim related to a third party claim the amount of which is contested and
the subject of litigation, the Escrow Agent shall not release the Escrow Shares
being held in connection with the Contested Amount of such third party claim
until a final order or other final resolution or settlement has been entered or
reached in the underlying litigation determining the amount of such claim,
whereupon the Escrow Agent shall release Escrow Shares from the Escrow Account
(to the extent Escrow Shares are then held in the Escrow Account) in accordance
with such final order or final resolution or settlement.
<PAGE> 74
5. Release of Escrow Shares.
(a) In the event that Purchaser elects, pursuant to the provisions of
Section 1.3(h) of the Merger Agreement, to waive the Profit Shortfall Adjustment
and the Profit Surplus Adjustment, one half of the Transferred Shares shall be
distributed to the Indemnifying Shareholders on the first anniversary of the
Closing Date. Promptly after the Termination Date, the Escrow Agent shall
distribute to the Indemnifying Shareholders all of the Escrow Shares (including
any remaining Transferred Shares) then held in escrow. Notwithstanding the
foregoing, if an Indemnified Party has previously given a Claim Notice which has
not then been resolved in accordance with Section 4, the Escrow Agent shall
retain in the Escrow Account after the Termination Date a number of Escrow
Shares (including Transferred Shares if necessary) having a Fair Market Value
equal to the Claimed Amount covered by any Claim Notice which has not then been
resolved. Any funds so retained in escrow shall be disbursed in accordance with
the terms of the resolution of such claims.
(b) Any distribution of all or a portion of the Escrow Shares to the
Indemnifying Shareholders shall be made in accordance with the percentages set
forth opposite such holders' respective names on Exhibit B attached hereto;
provided, however, that the Escrow Agent shall withhold the distribution of the
portion of the Escrow Shares otherwise distributable to Indemnifying
Shareholders who have not, according to written notice provided by the Purchaser
to the Escrow Agent, prior to such distribution, surrendered their respective
Certificates pursuant to the terms and conditions of the Merger Agreement. Any
such withheld shares shall be delivered to the Purchaser promptly after the
Termination Date, and shall be delivered by the Purchaser to the Indemnifying
Shareholders to whom such shares would have otherwise been distributed upon
surrender of their respective Certificates. Distributions to the Indemnifying
Shareholders shall be made by mailing stock certificates to such holders at
their respective addresses shown on Exhibit B (or such other address as may be
provided in writing to the Escrow Agent by any such holder). No fractional
Escrow Shares shall be distributed to Indemnifying Shareholders pursuant to this
Agreement. Instead, the number of shares that each Indemnifying Shareholder
shall receive shall be rounded down to the nearest whole number; and the Escrow
Agent shall sell such number of Escrow Shares as is equal to the aggregate of
the fractional shares that would otherwise be distributed to the Indemnifying
Shareholders and shall distribute the proceeds of such sale to the Indemnifying
Shareholders other-wise entitled to a fractional Escrow Share pro rata based
upon the fraction of an Escrow Shares to which each such Indemnifying
Shareholder is otherwise entitled.
6. Valuation of Escrow Shares. For purposes of this Agreement, the
Fair Market Value of the Escrow Shares to be retained in the Escrow Account
pending a final resolution of a claim shall be determined based upon the average
of the closing prices of the Purchaser Common Stock on the Nasdaq National
Market System for the twenty trading days immediately preceding the date on
which the claim is made. The Fair Market Value of the Escrow Shares to be
released from the Escrow Account after a final determination/resolution of a
claim shall be determined based upon the average closing prices of the
Purchaser's Common Stock on the Nasdaq National Market System for the twenty
trading days immediately preceding the date of such final
determination/resolution.
<PAGE> 75
7. Fees and Expenses of Escrow Agent. The Purchaser, on the one hand,
and the Indemnifying Shareholders, on the other hand, shall each pay one-half of
the fees of the Escrow Agent for the services to be rendered by the Escrow Agent
hereunder.
8. Limitation of Escrow Agent's Liability.
(a) The Escrow Agent shall incur no liability with respect to any
action taken or suffered by it in reliance upon any notice, direction,
instruction, consent, statement or other documents believed by it to be genuine
and duly authorized, nor for other action or inaction except its own willful
misconduct or gross negligence. The Escrow Agent shall not be responsible for
the validity or sufficiency of this Agreement. In all questions arising under
the Escrow Agreement, the Escrow Agent may rely on the advice of counsel, and
for anything done, omitted or suffered in good faith by the Escrow Agent based
on such advice the Escrow Agent shall not be liable to anyone. The Escrow Agent
shall not be required to take any action hereunder involving any expense unless
the payment of such expense is made or provided for in a manner reasonably
satisfactory to it.
(b) The Purchaser and the Indemnifying Shareholders hereby, jointly and
severally, agree to indemnify the Escrow Agent for, and hold it harmless
against, any loss, liability or expense incurred without gross negligence or
willful misconduct on the part of Escrow Agent, arising out of or in connection
with its carrying out of its duties hereunder. The Purchaser, on the one hand,
and the Indemnifying Shareholders, on the other hand, shall each be liable for
one-half of such amounts.
9. Liability and Authority of Indemnification Representatives;
Successors and Assignees.
(a) The Indemnification Representatives shall incur no liability to the
Indemnifying Shareholders with respect to any action taken or suffered by them
in reliance upon any note, direction, instruction, consent, statement or other
documents believed by them to be genuinely and duly authorized, nor for other
action or inaction except their own willful misconduct or gross negligence. The
Indemnification Representatives may, in all questions arising under the Escrow
Agreement, rely on the advice of counsel and for anything done, omitted or
suffered in good faith by the Indemnification Representatives based on such
advice, the Indemnification Representatives shall not be liable to the
Indemnifying Shareholders.
(b) In the event of the death or permanent disability of either
Indemnification Representative, or his resignation as an Indemnification
Representative, a successor Indemnification Representative shall be appointed by
the other Indemnification Representative or, absent its appointment, a successor
Indemnification Representative shall be elected by a majority vote of the
Indemnifying Shareholders, with each such Indemnifying Shareholder (or his or
her successors or assigns) to be given a vote equal to the number of votes
represented by the Company Shares held by such Indemnifying Shareholder
immediately prior to the Effective Time. Each successor Indemnification
Representative shall have all of the power, authority, rights and privileges
conferred by this Agreement upon the original Indemnification
<PAGE> 76
Representatives, and the term "Indemnification Representatives" as used herein
shall be deemed to include successor Indemnification Representatives.
(c) The Indemnification Representatives, acting jointly but not singly,
shall have full power and authority to represent the Indemnifying Shareholders,
and their successors, with respect to all matters arising under this Agreement
and all actions taken by any Indemnification Representative hereunder shall be
binding upon the Indemnifying Shareholders, and their successors, as if
expressly confirmed and ratified in writing by each of them. Without limiting
the generality of the foregoing, the Indemnification Representatives, acting
jointly but not singly, shall have full power and authority to interpret all of
the terms and provisions of this Agreement, to compromise any claims asserted
hereunder and to authorize payments to be made with respect thereto, on behalf
of the Indemnifying Shareholders and their successors. All actions to be taken
by the Indemnification Representatives hereunder shall be evidenced by, and
taken upon, the written direction of a majority thereof.
10. Amounts Payable by Indemnifying Shareholders. The amounts payable
by the Indemnifying Shareholders under this Agreement (i.e., the fees and
expenses of arbitrators payable pursuant to Section 4(e), the fees of the Escrow
Agent payable pursuant to Section 7 and the indemnification obligations pursuant
to Sections 8(b)) shall be payable solely as follows. The Indemnification
Representatives shall notify the Escrow Agent of any such amount payable by the
Indemnifying Shareholders as soon as they become aware that any such amount is
payable, with a copy of such notice to the Purchaser. On the sixth business day
after the delivery of such notice, the Escrow Agent shall sell such number of
Escrow Shares (up to the number of Escrow Shares then available in the Escrow
Account), subject to compliance with all applicable securities laws, as is
necessary to raise such amount, and shall disburse such proceeds to the party to
whom such amount is owed in accordance with the instructions of the
Indemnification Representatives; provided that if the Purchaser delivers to the
Escrow Agent (with a copy to the Indemnification Representatives), within five
business days after delivery of such notice by the Indemnification
Representatives, a written notice contesting the legitimacy or reasonableness of
such amount, then the Escrow Agent shall not sell Escrow Shares to raise the
disputed portion of such claimed amount, and such dispute shall be resolved by
the Purchaser and the Indemnification Representatives in accordance with the
procedures set forth in Section 4(e).
11. Termination. This Agreement shall terminate upon the later of the
Termination Date or the distribution by the Escrow Agent of all of the Escrow
Shares in accordance with this Agreement; provided that the provisions of
Sections 8 and 9 shall survive such termination.
12. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested,
<PAGE> 77
postage prepaid, or (ii) via a reputable nationwide overnight courier service,
in each case to the address set forth below. Any such notice, instruction or
communication shall be deemed to have been delivered two business days after it
is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service.
If to the Purchaser and/or the Acquisition Sub:
Tekgraf, Inc.
2979 Pacific Concourse Drive, Suite B
Norcross, Georgia 30071
If to the Company:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
If to the Indemnification Representatives:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
If to the Escrow Agent:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 12.
13. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by
delivering a resignation to the parties to this Escrow Agreement, not less than
60 days' prior to the date when such resignation shall take effect. The
Purchaser and the Indemnification Representatives shall appoint a successor
Escrow Agent and neither party shall unreasonably withhold approval of such
successor Escrow Agent. If, within such notice period, the Purchaser provides to
the Escrow Agent written instructions with respect to the appointment of a
successor Escrow Agent and directions
<PAGE> 78
for the transfer of any Escrow Shares then held by the Escrow Agent to such
successor, the Escrow Agent shall act in accordance with such instructions and
promptly transfer such Escrow Shares to such designated successor.
14. General.
(a) Governing Law, Assigns. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Georgia without
regard to conflict-of-law principles and shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) Entire Agreement. Except for those provisions of the Merger
Agreement referenced herein, this Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of any
breach of any provision of this Escrow Agreement shall be effective unless in
writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(e) Amendment. This Agreement may be amended only with the written
consent of the Purchaser, the Escrow Agent and the Indemnification
Representatives.
<PAGE> 79
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER
TEKGRAF, INC.
By:
-----------------------------------------
Dan I. Bailey
President
ACQUISITION SUB:
TEKGRAF SUB ___, INC.
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
ESCROW AGENT
-----------------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE> 80
[INDEMNIFICATION REPRESENTATIVE]
(SEAL)
--------------------------------------
Name:
---------------------------------------
COMPANY:
------------------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
COMPANY SHAREHOLDERS:
(SEAL)
--------------------------------------
Name:
---------------------------------------
(SEAL)
--------------------------------------
Name:
---------------------------------------
(SEAL)
--------------------------------------
Name:
---------------------------------------
<PAGE> 81
EXHIBIT B
Indemnifying Shareholder Percentage
<PAGE> 1
EXHIBIT 10.25
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
This First Amendment to Agreement and Plan of Merger (this "Amendment")
is entered into as of this _____ day of March, 1998, by and between among
TEKGRAF, INC., a Delaware corporation ("Purchaser"), TEKGRAF SUB III, INC., a
Georgia corporation ("Acquisition Sub"), NEW ENGLAND COMPUTER GRAPHICS, INC., a
Massachusetts corporation (the "Company"), and the shareholders set forth on the
signature page of this Agreement (the "Company Shareholders").
W I T N E S S E T H:
WHEREAS, the parties hereto have executed that certain Agreement and
Plan of Merger, dated as of March 25, 1998 (the "Merger Agreement"); and
WHEREAS, the parties have agreed to amend certain provisions of the
Merger Agreement as provided herein.
NOW, THEREFORE, in consideration of the premises set forth above, and
the mutual covenants herein contained, Owner and Manager hereby agree as
follows:
1. The first sentence of Section 1.2(e) of the Merger Agreement is
hereby deleted in its entirety and the following is inserted in lieu thereof:
"At and as of the Effective Time, in consideration for the Capital
Stock and in full payment therefor, each Company Share shall be
converted into the right to receive its pro rata share of (i) Four
Hundred Fifteen Thousand Dollars ($415,000.00) (the "Cash
Consideration") and (ii) an aggregate of 265,000 shares of Purchaser
Common Stock (the "Equity Consideration," together with the Cash
Consideration, hereinafter referred to collectively as the "Purchase
Price"), subject to the adjustments to the Purchase Price set out in
Section 1.3."
<PAGE> 2
2. Section 1.3(b)(iii) of the Merger Agreement is hereby deleted in its
entirety and the following is inserted in lieu thereof:
"(iii) In addition to any adjustments made pursuant to subsections (i)
and (ii) above, if the Actual Pre-Tax Profit for the Year (or for the
Alternative Year, if applicable) exceeds $500,000, the Purchase Price
shall be increased by either cash or the number of Purchaser Shares
determined by the following formula (the "Profit Surplus Adjustment"):
(Actual Pre-Tax Profit/$500,000 x 400,000) - 400,000
The cash or the number of Purchaser Shares required for the Profit
Surplus Adjustment shall be transferred to Company Shareholders within
three business days after the final determination of the amount of such
Profit Surplus Adjustment. The determination as to whether the Profit
Surplus Adjustment shall be paid in cash or in Purchaser Shares shall
be made by Purchaser in its sole discretion. In no event, however,
shall the Purchase Price be increased pursuant to this Profit Surplus
Adjustment by more than either $200,000 or 40,000 Purchaser Shares, as
the case may be (the "Adjustment Ceiling")."
3. The first sentence of Section 1.3(e) of the Merger Agreement is
hereby deleted in its entirety and the following is inserted in lieu thereof:
"Each Company Shareholder shall escrow twenty-five percent (25%) of the
Equity Consideration (the "Escrowed Shares") and the Company
Shareholders shall collectively escrow $75,000 of the Cash
Consideration (the "Escrowed Cash"), to be subject to redistribution by
Purchaser and Acquisition Sub in the circumstances described in this
Section 1.3."
4. The first sentence of Section 5.6 of the Merger Agreement is hereby
deleted in its entirety and the following is inserted in lieu thereof:
"Each Company Shareholder shall escrow twenty-five percent (25%) of the
Purchaser Common Stock to be
<PAGE> 3
issued to such Company Shareholder to be available for distribution to
Purchaser in the event of an Indemnified Claim not paid in cash by the
Indemnifying Party."
5. Except as herein modified, the Merger Agreement shall remain in full
and effect and the Merger Agreement, as so modified, is hereby ratified and
affirmed in all respects.
6. This Amendment may be executed in counterparts, each of which shall
constitute an original and all of which together shall constitute one and the
same original.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Agreement and Plan of Merger as of the day and year first
hereinabove written.
"Purchaser"
TEKGRAF, INC.
By: /s/ Dan Bailey
---------------------------------------
Dan Bailey
President
Address: 2979 Pacific Drive,
Suite B
Norcross, Georgia 30071
"Acquisition Sub"
TEKGRAF SUB III, INC.
By: /s/Phillip Aginsky
---------------------------------------
Phillip Aginsky
Chairman of the Board
Address: 2979 Pacific Drive,
Suite B
Norcross, Georgia 30071
By: /s/ Dan Bailey
---------------------------------------
Secretary
[Signatures continued on next page.]
<PAGE> 4
"Company"
NEW ENGLAND COMPUTER GRAPHICS, INC.
By: /s/ David Boston
---------------------------------------
David Boston, President
Address:
By: /s/ David Boston
---------------------------------------
Secretary
"Company Shareholders"
By: /s/ David Boston
---------------------------------------
David Boston
Address:
By: /s/ A. Lowell Nerenberg
---------------------------------------
A. Lowell Nerenberg
Address:
By: /s/ William Rychel
---------------------------------------
William Rychel
Address:
By: /s/ Thomas Gust
---------------------------------------
Thomas Gust
Address:
By: /s/ Robert Shumaker
---------------------------------------
Robert Shumaker
Address:
By: /s/ Thomas Mills
---------------------------------------
Thomas Mills
Address:
By: /s/ Scott Barker
---------------------------------------
Scott Barker
Address:
<PAGE> 1
EXHIBIT 11
Tekgraf, Inc.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1997
---- ------
<S> <C> <C>
Net income(loss)................................... $ 43 $ (393)
Basic and diluted weighted average number of common
shares Common shares.............................. 1,084 2,581
Basic and diluted net income(loss) per share $ 0.04 $(0.15)
</TABLE>
<PAGE> 1
EX-21.1
Subsidiaries of the Registrant
Exhibit 21.1
Subsidiaries of the Registrant
Prisym Technologies, Inc. of Georgia, a Georgia corporation
G&R Marketing, Inc., an Illinois corporation
Microsouth, Inc., a Georgia corporation
tekgraf, inc., a Texas corporation
Computer Graphics Distributing Company, a Maryland corporation
Intelligent Products Marketing, Inc., a California corporation
IG Distributing, Inc., a California corporation
Tekgraf Sub I, Inc., a Georgia corporation
Tekgraf Sub II, Inc., a Georgia corporation
Tekgraf Sub III, Inc., a Georgia corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,600,339
<SECURITIES> 0
<RECEIVABLES> 9,317,843
<ALLOWANCES> 100,000
<INVENTORY> 4,700,615
<CURRENT-ASSETS> 22,950,399
<PP&E> 531,922
<DEPRECIATION> (187,219)
<TOTAL-ASSETS> 29,952,348
<CURRENT-LIABILITIES> 9,884,328
<BONDS> 0
0
0
<COMMON> 5,433
<OTHER-SE> 20,049,799
<TOTAL-LIABILITY-AND-EQUITY> 29,952,348
<SALES> 48,732,391
<TOTAL-REVENUES> 48,732,391
<CGS> 41,249,611
<TOTAL-COSTS> 7,683,983
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 301,453
<INCOME-PRETAX> (434,323)
<INCOME-TAX> 40,986
<INCOME-CONTINUING> (393,337)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (393,337)
<EPS-PRIMARY> 0
<EPS-DILUTED> (.15)
</TABLE>
