COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (the "Agreement") is
made as of December 28, 1998, among THE NETWORK CONNECTION, INC.,
a Georgia corporation (the "Company") and CACHE CAPITAL L.P. (the
"Purchaser").
R E C I T A L S
WHEREAS, the parties desire that upon the terms and subject
to the conditions contained herein, the Company shall issue to
the Purchaser, and the Purchaser shall purchase from the Company,
shares of the Company's Common Stock, $.001 par value per share
(the "Common Stock"), and Warrants to purchase up to 50,000
shares of the Company's Common Stock (the "Warrant") at a price
of 120% of closing bid price day of Closing (the "Warrant Price")
for an aggregate purchase price of eighty thousand shares of the
Company's Common Stock (80,000) shares at $3.50 per share
("Purchase Price"); and
WHEREAS, the purchase and sale of the Common Stock to the
Purchaser pursuant to the terms hereof will be made in reliance
upon the provisions of Section 4(2) of the Securities Act of
1933, as amended, Regulation D promulgated thereunder by the
United States Securities and Exchange Commission, such other
exemptions from the registration requirements of the Securities
Act of 1933, as amended, as may be available with respect to any
or all of the investments in Common Stock to be made hereunder.
NOW, THEREFORE, the parties in consideration of the mutual
agreements contained herein, and other good and valuable
consideration, acknowledged by each of the parties to be
satisfactory and adequate, do hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. As used in this Agreement, and unless the
context requires a different meaning, the following terms have
the meanings indicated:
"Agreement" means this Agreement (including the exhibits and
schedules hereto) as the same may be amended, supplemented or
modified in accordance with the terms hereof.
"Call Closing Date" has the meaning assigned in Section 2.6.
"Call Price" means the greater of one hundred thirty-three
percent (133%) of the Purchase Price of the Initial Shares or one
hundred percent (100%) of the Closing Bid Price of the Company's
Common Stock as reported by Bloomberg on the Call Closing Date
minus the Purchase Price.
"Closing" has the meaning assigned in Section 2.3.
"Closing Date" has the meaning assigned in Section 2.3.
"Commission" means the United States Securities and Exchange
Commission.
"Common Stock" means the common stock, $.001 par value, of
the Company.
"Company" means The Network Connection, Inc., a Georgia
corporation, and its successors, transfers and assigns.
"Disclosure Documents" has the meaning assigned in Section
5.2.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"First Repricing Date" means the effective date of the
Registration Statement on which 25% of the Initial Shares may be
repriced under the terms of Section 2.4(a).
"Initial Shares" shall mean that number of shares of Common
Stock determined by dividing the Purchase Price by the Share
Price determined as of the Closing Date, which number of shares
is set forth in Schedule I to this Agreement.
"Market Price" means, on any relevant date for
determination, the average closing bid price of the Common Stock
for the twenty (20) consecutive Trading Days immediately
preceding the relevant date for determination.
"Most Recent Filings Report" has the meaning assigned in
Section 5.2.
"Principal Market" means the Nasdaq National Market, the
Nasdaq SmallCap Market, the American Stock Exchange or the New
York Stock Exchange, or such other trading medium, whichever is
at the time the principal trading exchange or market for the
Common Stock.
"Purchase Price" means US $280,000 [80,000 shares multiplied
by $3.50].
"Registration Rights Agreement" means that certain
Registration Rights Agreement to be executed concurrently
herewith by and between the Company and the Purchaser, the form
of which is attached hereto as Exhibit "A".
"Repricing Dates" means the First Repricing Date, the Second
Repricing Date and the Third Repricing Date.
"Repricing Shares" means the shares of Common Stock issued
to the Purchaser pursuant to Section 2.4(a) hereof.
"Registration Statement" means a registration statement on
Form SB-2, Form S-3, or any successor or replacement forms
thereof, registering the resale of the Shares by the Purchaser
under the Securities Act.
"Regulation D" means Regulation D promulgated by the
Commission pursuant to Section 4(2) of the Securities Act, as
amended, and any successor or replacement rules or regulations.
"SEC Reports" has the meaning assigned in Section 5.2.
"Securities Act" means the Securities Act of 1933, as
amended, and the rules and regulation promulgated thereunder.
"Second Repricing Date" means the forth-fifth (45th) day
after the First Repricing Date, on which 25% of the Initial
Shares may be repriced under the terms of Section 2.4(a).
"Share Price" means, as of the closing, the closing bid
price of the Common Stock of the Company on the last Trading Day
preceding the Closing (including date of the Closing if the
Closing occurs on that date at 4:30 P.M. New York Time) as
reported by Bloomberg.
"Shares" means the Initial Shares and Repricing Shares
issued pursuant to this Agreement.
"Third Repricing Date" means the forth-fifth (45th) day
after the Second Repricing Date, on which 50% of the Initial
Shares may be repriced under the terms of Section 2.4(a).
"Trading Days" means any days during which the Principal
Market shall be open for business.
1.2 Accounting Terms. All accounting terms used herein not
expressly defined in this Agreement shall have the respective
meanings given to them in accordance with sound accounting
practice. The term "sound accounting practice" shall mean such
accounting practices as, in the opinion of independent certified
public accountants regularly retained by the Company, conforms at
the time to GAAP applied on a consistent basis except for changes
with which such accountants concur.
ARTICLE 2
CLOSING; REPRICING; CALL
2.1 Authorization. The Company has, or prior to the
Closing will have, authorized the issuance of up to 225,000
shares of Common Stock, subject to the terms and conditions set
forth herein.
2.2 Issuance of Shares. Subject to the terms and
conditions hereof, at the Closing (i) the Company will sell and
issue the Initial Shares to the Purchaser and (ii) in
consideration therefor the Company will receive the Purchase
Price from the Purchaser.
2.3 Closing. The issuance of the Initial Shares to the
Purchaser and the payment of the Purchase Price by the Purchaser
shall take place at the closing (the "Closing"), which shall
occur at such time and date as the parties hereto may agree (the
"Closing Date").
2.4 Repricing Dates.
(a) Issuance of Repricing Shares. Subject to Section
2.4(b), on each Repricing Date with respect to the number of the
Initial Shares to be repriced, the Company shall issue to the
Purchaser that number of Repricing Shares equal to a difference
between one hundred twenty-five percent (125%) of the Share Price
and the average of the lowest twenty (20) closing bid prices (the
"Average Price") during the forty-five (45) days prior to each
such Repricing Date (the "Discounted Share Price"), which
difference is multiplied by a fraction which equals the number of
Initial Shares subject to repricing divided by the Discounted
Share Price. There shall be no issuance of Repricing Shares of
the Discounted Share Price if the Company's Common Stock exceeds
one hundred twenty-five percent (125%) of the Share Price for the
Initial Shares issued.
(b) Notice of Repricing. On the business day immediately after
each Repricing Date, the Company shall send written notice to the
Purchaser informing the Purchaser of the applicable Discounted
Share Price, and the aggregate number of Repricing Shares issued
to the Purchaser pursuant to Section 2.4(a) on such Repricing
Date. Certificates for such Repricing Shares shall be delivered
to the Purchaser within five (5) business days after the notice
is sent.
(c) In order that the Company can comply with applicable Nasdaq
Rules concerning the issuance of shares of Common Stock in a
transaction in the absence of stockholder approval, the Company
shall be required to pay to the Purchaser the cash value [based
on the closing bid price of a share of Common Stock on the
principal market therefore on the Trading Day immediately
preceding the applicable Repricing Date] for each Repricing Share
that would otherwise have to be issued under the terms of Section
2.4(a), which Repricing Shares whose issuance would violate
Nasdaq Rule will not be issued by the Company.
2.5 Liquidated Damages. If the Company does not file a
Registration Statement within forty-five (45) days after the
Closing Date and have such registration effective one hundred
twenty (120) days thereafter or within ten (10) days of a no
comment letter, as specified in the Registration Rights
Agreement, the Company shall pay 1% per month, or a fraction
thereof, of the purchase price in cash to the Investor until such
registration is effective.
2.6 Call. At any time after the Closing Date, the
Company is entitled to purchase, and the Purchaser shall in such
event sell to the Company, any or all of the unsold outstanding
Shares pursuant to the terms of this Section 2.6 at the Call
Price defined herein. In order to exercise such right to
repurchase, the Company shall deliver written notice to the
Purchaser specifying (i) the date on which such repurchase is to
close (each a "Call Closing Date"), which shall be at least seven
(7) business days after such notice, (ii) the Call Price
applicable as of the specified Call Closing Date, and (iii) the
number of Shares that the Company will purchase from the
Purchaser on the Closing Date. On the specified Call Closing
Date, the Company shall deliver to the Purchaser an amount equal
to the Call Price multiplied by the number of Shares to be
purchased from the Purchaser and the Purchaser shall deliver to
the Company a certificate representing such Shares. If the Call
Closing Date shall pass without completion of the repurchase in
accordance with the terms above, such repurchase shall occur as
soon thereafter as practicable; provided, however, if such
closing of the repurchase shall not have closed on the Call
Closing Date through no fault of the Company, no adjustment to
the Call Price applicable to the repurchase if such repurchase
had closed on the specified Call Closing Date shall be made. If
Purchaser fails to deliver Shares being repurchased on Call
Closing Date, then Company shall be entitled to add stop transfer
restrictions on the shares with the Company's Transfer Agent, and
take such other steps as shall be reasonably necessary to prevent
transfers of the shares by the Purchaser.
2.7 If the Company does not make delivery of the Repricing
Shares, within eight (8) business days after date on which the
Company is required to deliver the Repricing Shares, then the
Company shall pay to the Purchaser an amount, in cash in
accordance with the following schedule, in which "No. Business
Days Late" is defined as the number of business days beyond the
eight (8) business days delivery period.
Late Payment for Each
$10,000 of Repricing
No. Business Days Late Shares to be Issued
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
>10 $1,000 + $200 for each
Business Day Beyond 10
The Company shall make any payments incurred under this
Section 2.7 in immediately available funds within five (5)
business days from incurring any specified late fee under the
terms hereof.
2.8 Right of Redemption.
The Company shall be allowed at any time to redeem
pursuant to Section 2.6 (the "Redemption Price"). Any such
notice of redemption shall be in writing to the Purchaser's
attention with payment within five Trading Days thereafter by
wire transfer to Purchaser pursuant to its Banking instructions.
If such redemption payment is not made timely, the redemption
shall be considered null and void and the Company shall pay as
damages a penalty in the amount of 10% of the redemption price in
cash.
2.9 Anti-Shorting, Hedging. The Purchaser agrees that it
will not take a short position or hedge against its position
during the filing and approval period of the Registration
Statement and further agrees, that during the Repricing Periods,
the Purchaser is entitled to take a short or hedge position only
to the extent of the number of free-trading shares of Common
Stock it has the potential to receive on the immediately
succeeding Repricing Date under the definitions provided in
Section 1.1.
2.10 Indemnification of Consultants. The Issuer and the
Purchaser recognize that the Consultants are an introducing party
of each and as such. No Consultant, nor its counsel, is
obligated nor responsible for any documentation, information,
financial data or other communications regarding this
transaction. The parties hereto agree that the Consultants shall
not be a party to any litigation involving any dispute which may
arise from this transaction and may not involve the Consultant in
any litigation that may arise out of this transaction in the
future, absent fraud or gross negligence, or willful misconduct
of Consultant..
2.11 First Right of Refusal to Future Equity Transactions.
Subject and subordinate to the priority Right of First Refusal
granted by the Company to The Shaar Fund Ltd. in the event the
Company proposes to offer to sell shares of Company Common Stock
at a price per share that is less than the then Market Price for
the Company Common Stock, the Company agrees that for a period of
up to 180 days after the Closing Date that it will first offer
such future equity transactions to the Purchaser in this
Agreement. Such offer shall be in writing and shall be delivered
in accordance with the Notice provision as herein defined. The
Purchaser agrees to respond in writing within two business days
of receiving such written offer and if Purchaser elects not to
acquire shares of Company Common Stock on the same terms as
stated in such written offer, then the Company is allowed to
close the future equity transaction with other parties. If the
Company closes any future equity transaction with another party
without first offering such transaction to the Purchaser herein,
then the Company shall be obligated to pay to the Purchaser as a
Penalty an amount equal to ten per cent (10%) of the net amount
raised by the Company in such equity transaction in cash with
such payment to be made within five business days of the Company
closing any such offer. If Purchaser accepts and determines to
proceed with the presented equity transaction, it must close that
transaction on the same terms as offered to the other parties
within two (2) business days of the effectiveness of its offer to
close the transaction (following rejection of the offer by The
Shaar Fund Ltd.) or forfeit its Right of First Refusal with
respect to future equity transactions proposed by the Company.
ARTICLE 3
CONDITIONS TO THE OBLIGATION OF PURCHASER TO CLOSE
The obligation of the Purchaser hereunder is conditioned
upon the occurrence of the following:
3.1 Documents. The Registration Rights Agreement shall have
been executed by the Company.
3.2 Market for Common Stock. The Company's Common Stock
shall be trading as of the Closing Date on the Nasdaq SmallCap
Market;
3.3 No Material Adverse Effect. There shall have been no
material adverse changes in the Company's business or financial
condition since the date of the latest balance sheet delivered to
the Purchaser as part of the Disclosure Documents.
3.4 Representations and Warranties. The representations
and warranties of the Company herein shall be true and correct in
all material respects on the Closing Date, as if made on such
date, and the Company shall deliver a certificate, signed by an
officer of the Company, to such effect to the Purchaser's Agent;
3.5 Reservation of Shares. The Company shall have reserved
225,000 for issuance pursuant to this Agreement.
ARTICLE 4
CONDITIONS TO THE OBLIGATION OF
THE COMPANY TO CLOSE
The obligations of the Company hereunder is conditioned
upon the occurrence of the following:
4.1 Representations and Warranties. The representations and
warranties of the Purchaser herein shall be true and correct in
all material respects on the Closing Date, as if made on such
date.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY TO PURCHASER
The Company hereby makes the following representations and
warranties to the Purchaser, except as disclosed in the
Disclosure Documents or otherwise disclosed to Purchaser, which
representations and warranties shall be true as of the date of
execution of this Agreement by the Company and as of Closing:
5.1 Organization, Good Standing, and Qualification. The
Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Georgia, and has all
requisite corporate power and authority to carry on its business
as now conducted and as currently proposed to be conducted. The
Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect on the business or
properties of the Company and its subsidiaries taken as a whole.
The Company is not the subject of any pending or, to its
knowledge, threatened or contemplated investigation or
administrative or legal proceeding by the Internal Revenue
Service, the taxing authorities of any state or local
jurisdiction, or the Commission, or any state securities
commission, or any other governmental entity, which are required
to be disclosed in the Disclosure Documents and have not been
disclosed.
5.2 Corporate Condition. The Company has timely filed all
forms, reports and documents with the Commission required to be
filed by it under the Exchange Act through the date hereof
(collectively, the "SEC Reports"). Each of the SEC Reports, at
the time filed, complied in all material respects with the
requirements of the Exchange Act. The Company has made available
to the Purchaser a copy of the Company's Form 10-KSB for the
fiscal year ended December 31, 1997, and a copy of each of the
Company's Forms 10-QSB and 8-K filed by the Company since
January 1, 1998 (the "Most Recent Filings Report"). Other than
as set forth in this Agreement, there have been no material
adverse changes in the Company's business, operations or
financial condition since the date of the Most Recent Filings
Report. The SEC Reports, together with this Agreement, and any
other documents listed herein and furnished by the Company to the
Purchaser are referred to collectively as the "Disclosure
Documents." The financial statements contained in the Disclosure
Documents have been prepared in accordance with generally
accepted accounting principles, consistently applied, and fairly
present, in all material respects, the consolidated financial
condition of the Company as of the dates of the balance sheets
included therein, and the consolidated results of its operations
and cash flows for the periods then ended. Without limiting the
foregoing, there are no material liabilities, contingent or
actual, that are not disclosed in the Disclosure Documents (other
than liabilities incurred by the Company in the ordinary course
of its business, consistent with its past practice, after the
periods covered by the Disclosure Documents). The Company has
paid all material taxes which are due, except for taxes which it
reasonably disputes. There is no material claim, litigation, or
administrative proceeding pending, or, to the best of the
Company's knowledge, threatened or contemplated against the
Company, except as disclosed in the Disclosure Documents.
5.3 Authorization. All corporate action on the part of the
Company by its officers, directors and shareholders necessary for
the authorization, execution and delivery of this Agreement, the
performance of all obligations of the Company hereunder and the
authorization, issuance and delivery of the Initial Shares and
reservation of any additional shares for issuance in accordance
with this Agreement have been taken, and this Agreement and the
Registration Rights Agreement constitute valid and legally
binding obligations of the Company, enforceable in accordance
with their terms; provided, however, that enforceability is
subject to: (i) applicable bankruptcy, reorganization,
insolvency, moratorium, fraudulent conveyance, and similar
federal and state laws affecting the rights and remedies of
creditors generally, and (ii) general principles of equity
limiting the availability of equitable remedies (including but
not limited to the remedy of specific performance), whether
considered in a proceeding at law or in equity. The Company has
obtained all consents and approvals required for it to execute,
deliver and perform this Agreement and the Registration Rights
Agreement.
5.4 Valid Issuance of Shares. The Shares, when and if
issued and delivered in accordance with the terms hereof, will be
validly issued, fully paid and nonassessable and, based in part
upon the representations of the Purchaser in this Agreement, will
be issued in compliance with all applicable federal and state
securities laws. The Shares will be issued free of any
preemptive rights.
5.5 Compliance with Other Instruments. The Company is not
in violation or default of any provisions of its Amended and
Restated Articles of Incorporation or Bylaws, as amended and in
effect on and as of the date of this Agreement, or of any
material provision of any material instrument or contract to
which it is a party or by which it is bound or, to its knowledge,
of any provision of any federal or state judgment, writ, decree,
order, statute, rule or governmental regulation applicable to the
Company, which would have a material adverse effect on the
Company's business, financial condition or results of operation,
except as described in the Disclosure Documents. The execution,
delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby will not result in any
such violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a
default under any such provision, instrument or contract or an
event which results in the creation of any lien, charge or
encumbrance upon any assets of the Company.
5.6 Reporting Company. The Company is subject to the
reporting requirements of the Exchange Act, and has a class of
securities registered under Section 12 or Section 15 of the
Exchange Act. When requested by the Purchaser, the Company shall
furnish copies of reports filed by the Company with the
Commission.
5.7 Authorized and Issued Shares. The authorized and
issued shares of Preferred Stock, Common Stock and warrants,
options, instruments convertible into Common Stock and rights to
acquire Preferred or Common Stock, as of December 23, 1998, are
as set forth in Exhibit "B".
5.8 Use of Proceeds. As of the date hereof, the Company
expects to use the proceeds from the issuance of the Shares (less
fees and expenses) for working capital, including the repayment
of outstanding indebtedness. These purposes are estimates and
are subject to change, but represent the Company's good faith
best estimate of anticipated uses.
5.9 Compliance with Laws. As of the date hereof, the
conduct of the business of the Company complies in all material
respects with all material statutes, laws, regulations,
ordinances, rules, judgments, orders or decrees applicable
thereto. The Company has not received notice of any alleged
violation of any statute, law, regulations, ordinance, rule,
judgment, order or decree from any governmental authority. The
Company shall comply with all applicable securities laws with
respect to the issuance of the Shares.
5.10 No Rights of Participation. No person or entity,
including, but not limited to, current or former shareholders of
the Company, underwriters, brokers, agents or other third
parties, has any right of first refusal, preemptive right, right
of participation, or any similar right to participate in the
acquisition of the Shares which has not been waived.
5.11 Disclosures. This Agreement and the Disclosure
Documents do not contain any untrue statement of material fact
and do not omit to state any material fact required to be stated
therein or herein necessary to make the statements contained
therein or herein not misleading in the light of the
circumstances under which they were made.
5.12 Representations True and Correct. The foregoing
representations, warranties and agreements are true, correct and
complete in all material respects, and shall survive the Closing
and the issuance of the Shares.
ARTICLE 6
REPRESENTATIONS AND
WARRANTIES OF PURCHASER
The Purchaser hereby makes the following
representations and warranties to the Company, which
representations and warranties shall be true as of the date of
execution of this Agreement by the Purchaser and as of the
Closing:
6.1 Accredited Investor. The Purchaser hereby represents
and warrants to the Company that it is an "accredited investor,"
as defined in Rule 501 of Regulation D.
6.2 Access to Information. The Purchaser or its
professional advisor has been granted the opportunity to ask
questions of and receive answers from representatives of the
Company, and its officers, directors, employees and agents
concerning the terms and conditions of the issuance of the
Shares, and the Company and its business and prospects, and to
obtain any additional information which the Purchaser or its
professional advisor deems necessary to verify the accuracy of
the information received. The foregoing, however, does not limit
or modify the Purchaser's right to rely upon representations and
warranties of the Company in Article 5 of this Agreement.
6.3 Ability to Evaluate. The Purchaser has such knowledge
and experience in financial and business matters that it is fully
capable of evaluating the merits and risks of an investment in
the Company, including without limitation those set forth in the
Disclosure Documents.
6.4 Disclosure Documents. The Purchaser has received and
reviewed the Disclosure Documents. The foregoing, however, does
not limit or modify the Purchaser's right to rely upon the
representations and warranties of the Company in Article 5 of
this Agreement.
6.5 Investment Experience; Fend for Self. The Purchaser
has substantial experience in investing in securities and has
made investments in securities other than those of the Company.
The Purchaser acknowledges that it is able to fend for itself in
the transaction contemplated by this Agreement and that it has
the ability to bear the economic risk of its investment in the
Company. The Purchaser has not been organized for the purpose of
investing in securities of the Company.
6.6 Not an Affiliate. The Purchaser is not now, and as a
result of the acquisition of the Initial Shares and any Repricing
Shares shall not become, an officer, director or "affiliate" (as
that term is defined in Rule 415 of the Securities Act) of the
Company.
6.7 Exempt Offering Under Regulation D.
(a) Investment; No Distribution. Without limiting the
rights of the Purchaser to sell the Shares under the Registration
Statement, the Purchaser is acquiring the Shares pursuant to this
Agreement solely for investment purposes and for the Purchaser's
own account (or for beneficiaries' accounts over which the
Purchaser has investment discretion but no discretionary
authority as to voting or disposition), and not with a view to a
distribution of all or any part thereof. The Purchaser is aware
that there are legal and practical limits on its ability to sell
or dispose of the Shares, and therefore, that the Purchaser must
bear the economic risk of its investment for an indefinite period
of time. The Purchaser has adequate means of providing for its
current needs and anticipated contingencies and has no need for
liquidity of this investment. The Purchaser's commitment to
illiquid investments is reasonable in relation to its net worth.
(b) No General Solicitation. The Shares were not
offered to the Purchaser through, and the Purchaser is not aware
of, any form of general solicitation or general advertising,
including, without limitation, (i) any advertisement, articles,
notice or other communication published in any newspaper,
magazine or similar media or broadcast over television or radio,
and (ii) any seminar or meeting whose attendees have been invited
by any general solicitation or general advertising.
(c) No Registration of Shares. The Purchaser
understands that the Shares are not registered and therefore are
"restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a
transaction not involving a public offering, and that, under such
laws and applicable regulations, such securities may not be
transferred or resold without registration under the Securities
Act or pursuant to an exemption therefrom. In this connection,
the Purchaser represents that it is familiar with Rule 144 under
the Securities Act, as presently in effect, and understands the
resale limitations imposed thereby and by the Securities Act.
The Purchaser further understands, however, pursuant to the terms
of the Registration Rights Agreement that the Company is
obligated to file a registration statement with the Commission to
register the Shares within forty-five (45) days from the Closing
Date and use its best efforts to cause such registration
statement to become effective within one hundred twenty (120)
days of the Closing Date.
6.8 Disposition. Without in any way limiting the
representations set forth in Section 6.7 above, the Purchaser
shall not sell, hold a short position in or any put or other
option to dispose of, any shares of Common Stock of the Company
or any securities convertible into shares of Common Stock or
otherwise make any disposition of all or any portion of the
Shares unless and until:
(a) There is then in effect a Registration Statement
covering such proposed disposition and such disposition is made
in accordance with such Registration Statement; or
(b) The Purchaser shall have notified the Company of
the proposed disposition and shall have furnished the Company
with a detailed statement of the circumstances surrounding the
proposed disposition, and if reasonably requested by the Company,
the Purchaser shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of the Shares under the
Securities Act.
6.9 Due Authorization.
(a) Authority. The Purchaser, if executing this
Agreement in a representative or fiduciary capacity, has full
power and authority to execute and deliver this Agreement and
each other document referred to herein for which a signature is
required in such capacity and on behalf of the subscribing
individual, partnership, trust, estate, corporation or other
entity for whom or which the Purchaser is executing this
Agreement.
(b) Due Authorization. The Purchaser is duly and
validly organized, validly existing and in good standing as such
entity under the laws of the jurisdiction of its organization,
with full power and authority to purchase the Shares and to
execute and deliver this Agreement.
6.10 Acknowledgments. The Purchaser is aware of the
following:
(a) Risks of Investment. The Purchaser recognizes
that investment in the Company involves certain risks, including
the potential loss of the Purchaser's investment herein.
(b) No Government Approval. The Purchaser
acknowledges that no federal, state or foreign agency has passed
upon or reviewed the terms and conditions of this Agreement or
the Shares or made any finding or determination as to the
fairness of this Agreement or the transactions contemplated
hereby.
(c) Restrictions on Transfer. The Purchaser may not
sell, transfer, assign, pledge or otherwise dispose of all or any
portion of the Shares in the absence of either an effective
Registration Statement or an exemption from the registration
requirements of the Securities Act and applicable state
securities law.
6.11 Exempt Transaction. The Shares are being offered and
sold in reliance on specific exemptions from the registration
requirements of federal and state law and the Purchaser's
representations, warranties, agreements, acknowledgments and
applicability of such exemptions and the suitability of the
Purchaser to acquire the Shares.
6.12 Legends. It is understood that any certificates
evidencing the Shares and shall bear the following legend:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS, NOR THE
SECURITIES LAWS OF ANY OTHER JURISDICTION. THEY MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THOSE SECURITIES
LAWS OR AN OPINION OF COUNSEL, REASONABLE SATISFACTORY
TO THE COMPANY, THAT THE SALE OR TRANSFER IS PURSUANT
TO AN EXEMPTION TO THE REGISTRATION REQUIREMENTS OF
THOSE SECURITIES LAWS."
ARTICLE 7
COVENANTS OF THE COMPANY
7.1 Independent Auditors. The Company shall, until at
least three (3) years after the Closing Date, maintain as its
independent auditors an accounting firm authorized to practice
before the Commission.
7.2 Corporate Existence and Taxes. The Company shall,
until at least three (3) years after the Closing Date, maintain
its corporate existence in good standing (provided, however, that
the foregoing covenant shall not prevent the Company from
entering into any merger or corporate reorganization so long as
the surviving entity in such transaction, if not the Company,
assumes all of the Company's obligations with respect to the
Shares) and shall pay all its taxes when due, except for taxes
which the Company disputes.
7.3 Registration of Shares. The Company will register the
Shares under the terms of the Registration Rights Agreement.
7.4 Filings with Commission. The Company shall provide
each Purchaser with copies of its annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB and current reports on Form 8-K
for as long as the Shares remain outstanding.
7.5 Removal of Legend Upon Registration. The restrictive
legend described in Section 6.12 above will be removed from the
Common Stock after the Registration Statement is effective,
subject to the Purchaser's covenant to sell the Shares pursuant
to the plan of distribution outlined in and upon delivery of the
final prospectus contained in such Registration Statement and in
compliance with the federal and state securities laws, and to
suspend sales of the shares at any time that the Company notifies
Purchaser that either there is not currently an effective
Registration Statement, the Registration Statement needs to be
amended or supplemented, or current sales would otherwise not be
in compliance with federal and state securities laws.
7.6 Listing. The Company shall use its best efforts to
maintain the listing of its Common Stock on the Nasdaq SmallCap
Market or another national securities exchange or national
quotation system.
ARTICLE 8
MISCELLANEOUS PROVISIONS
8.1 Representations and Warranties Survive the Closing;
Severability. The Purchaser's and the Company's representations
and warranties shall survive the Closing of the transaction
provided for hereby notwithstanding any due diligence
investigation made by or on behalf of the party seeking to rely
thereon. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in
full force and effect without said provision.
8.2 Successors and Assigns. The terms and conditions of
this Agreement shall inure to the benefit of and be binding upon
the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon
any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement. No party may assign its
rights hereunder without the prior written consent of the other
parties.
8.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Georgia without respect
to conflict of laws.
8.4 Execution in Counterparts Permitted. This Agreement
may be executed in any number of counterparts, each of which
shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one (1)
instrument.
8.5 Titles and Subtitles; Gender. The titles and subtitles
used in this Agreement are used for convenience only and are not
to be considered in construing or interpreting this Agreement.
The use in this Agreement of a masculine, feminine or neither
pronoun shall be deemed to include a reference to the others.
8.6 Written Notices, Etc. Any notice, demand or request
required or permitted to be given by the Company or a Purchaser
pursuant to the terms of this Agreement shall be in writing and
shall be deemed given when delivered personally, or by facsimile
(with a hard copy to follow by overnight or two (2) business day
courier), addressed to the parties at the addresses and/or
facsimile telephone number of the parties set forth in Schedule I
attached hereto or such other address as a party may request by
notifying the others in writing.
8.7 Expenses. Each of the Company and the Purchaser shall
pay all costs and expenses that it respectively incurs, with
respect to the negotiation, execution, delivery and performance
of this Agreement.
8.8 Entire Agreement; Written Amendments Required. This
Agreement, the Common Stock certificates, the Registration Rights
Agreement and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and
thereof, and no party shall be liable or bound to any other party
in any manner by any warranties, representations or covenants
except as specifically set forth herein. Neither this Agreement
nor any terms hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge
or termination is sought.
8.9 Rules of Construction. Unless the context otherwise
requires, "or" is not exclusive, and references to sections or
subsections refer to sections or subsections of this Agreement.
The Company and the Purchaser each acknowledge that it has had
the benefit of legal counsel of its own choice and has been
afforded an opportunity to review this Agreement with its legal
counsel and that this Agreement shall be construed as if jointly
drafted by the Company and the Purchaser.
8.10 No Fractional Shares. The Company shall not issue any
fraction of a Share in connection with this Agreement, and in any
case where the Purchaser would otherwise be entitled under the
terms of this Agreement to receive a fraction of a Share, the
Company shall issue the largest number of whole Shares issuable
under this Agreement. The Company shall not be required to make
any cash or other adjustment in respect of such fraction of a
Share to which the Purchaser would otherwise be entitled. The
Purchaser expressly waives its right to receive a certificate for
any fraction of a Share under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
"COMPANY"
THE NETWORK CONNECTION, INC.,
a Georgia corporation
By:
Xxxxxx Xxxxx
Chairman of the Board and CEO
"PURCHASER"
CACHE CAPITAL L.P.
By:
Name:
Title:
SCHEDULE I
Number of Initial
Purchaser Purchase Price Shares Purchased
3.50 80,000
Cache Capital L.P.
Company's Notice Address:
The Network Connection, Inc.
0000 Xxxxx Xxxx Xxxx
Xxxxxxxxxx, Xxxxxxx 00000
Attn: Xxxxxx Xxxxx
Telephone: (000) 000-0000
Nixon, Hargrave, Devans & Xxxxx, L.L.P.
000 Xxxxxxx Xxxxxx
Xxx Xxxx, XX 00000-0000
Facsimile: (000) 000-0000
Attn: Xxxxx X. Xxxxxxxx, Esq.
Purchaser's Notice Address:
Name: Cache Capital L.P.
Address: X.X. Xxxxx, Inc.
Atlanta Financial Center, East Tower
0000 Xxxxxxxxx Xxxx, Xxxxx 000
Xxxxxxx, Xxxxxxx 00000
Attn: Xxxx Xxxxxxx
Telephone: 000 000-0000
Facsimile: 000 000-0000
EXHIBIT "A"
REGISTRATION RIGHTS AGREEMENT
[Follows Directly Behind This Page]
EXHIBIT "B"
The Network Connection, Inc.
Capitalization of Company
December 23, 1998
Common Stock, $.001 par value
Authorized 10,000,000 Shares
Issued and Outstanding - 4,959,696 Shares
Preferred Stock, $.01 par value
Authorized 2,500,000 Shares
Issued and Outstanding: 1,500 Shares Convertible
Series B
180,000 Warrants at $5.50 - expire 1/06/03
150,000 Warrants at $4.125 - expire 7/1/03
62,500 Warrants at $3.65 - expire 6/30/03
32,500 Warrants at $3.64 - expire 8/12/01
27,500 Warrants at $4.10 - expire 12/11/01
726,328 employee stock options currently outstanding at
exercise prices ranging from $2.00 through $11.62 per share.
The Capitalization referenced above does not reflect the
issuance of up to (i) 125,000 shares of Common Stock upon the
exercise of warrants and (ii) Conversion to common shares not to
exceed 991,443 common shares underlying 1,500 shares of Series B
Convertible preferred stock ($10 stated value) to The Shaar Fund
Ltd. under the terms of the Securities Purchase Agreement, dated
as of October 23, 1998, should the Company elect not to redeem in
cash $1,500,000 of preferred stock on January 15, 1999.
Conversion price is equal to the lower of a) the average of the
closing bid prices as reported on the Nasdaq Smallcap Market for
the lowest five of the twenty trading days immediately preceding
the closing date or b) 80% of the market price on the date of
closing.
The Capitalization referenced above does not reflect the
issuance in the aggregate of up to (i) 65,000 shares of Common
Stock upon the exercise of warrants and (ii) 650 shares of Series
C Convertible preferred stock ($10 stated value) to individual
investors under the terms of Securities Purchase Agreements,
dated as of October 12, 1998, should the Company elect not to
repay in cash $704,082 of indebtedness on January 12, 1999.
Conversion price is equal to the lower of a) the average of the
closing bid prices as reported on the Nasdaq Smallcap Market for
the lowest five of the twenty trading days immediately preceding
the closing date or b) 80% of the market price on the date of
closing. Conversion to common shares shall not exceed 991,443
common shares.
The Capitalization referenced above does not reflect the
issuance in the aggregate of up to (i) 35,000 shares of Common
Stock upon the exercise of warrants and (ii) 350 shares of Series
D Convertible preferred stock ($10 stated value) to individual
investors under the terms of Securities Purchase Agreements,
dated as of October 21, 1998, should the Company elect not to
repay in cash $350,000 of indebtedness on January 18, 1999.
Conversion price is equal to the lower of a) the average of the
closing bid prices as reported on the Nasdaq Smallcap Market for
the lowest five of the twenty trading days immediately preceding
the closing date or b) 80% of the market price on the date of
closing. Conversion to common shares shall not exceed 991,443
common shares.
The Capitalization referenced above does not reflect the
issuance in the aggregate of up to (i) 55,000 shares of Common
Stock upon the exercise of warrants and (ii) 550 shares of Series
E Convertible preferred stock ($10 stated value) to individual
investors under the terms of Securities Purchase Agreements,
dated as of November17, 1998, should the Company elect not to
repay in cash $550,000 of indebtedness on January 16, 1999.
Conversion price is equal to the lower of a) the average of the
closing bid prices as reported on the Nasdaq Smallcap Market for
the lowest five of the twenty trading days immediately preceding
the closing date or b) 80% of the market price on the date of
closing. Conversion to common shares shall not exceed 991,443
common shares.
RISK FACTORS
An investment in the Common Stock offered hereby involves a
high degree of risk and should not be made by persons who cannot
afford the loss of their entire investment. In analyzing an
investment in the Common Stock offered hereby, prospective
investors should carefully consider, along with the other matters
referred to herein, the following factors:
Early Stage of Business
The Company was organized in 1986. Although it has had prior
operating history as a VAD for products manufactured by others,
the Company's current business as a designer, manufacturer and
distributor of its own products did not become its principal
business until 1991. As a result, the Company has and may
continue to experience many of the problems, delays and expenses
encountered by any business in the early stage of its
development, some of which are beyond the Company's control.
These include, but are not limited to, substantial delays and
expenses related to testing and development of new products,
production and marketing problems in connection with existing
products, lack of market acceptance of such products, and other
unforeseen difficulties.
History of Losses; and Uncertainty of Profitability
For the two fiscal years ended December 31, 1997, and
through the nine months ended September 30, 1998, the Company
incurred accumulated losses of ($10,097,407), with such losses
decreasing from ($3,252,899) in fiscal 1996 to ($2,025,628) in
fiscal 1997. However, the Company's loss increased from
($1,072,123) for the nine months ended September 30, 1997, to
($3,943,117) for the nine months ended September 30, 1998. As it
expands its marketing efforts for existing products and develops
additional future products, the Company may incur significant
additional losses. There is no assurance that the Company will
be able to achieve or sustain profitability in the future.
Need for Additional Financing
Cash liquidity will be required to finance anticipated
growth in the Company's accounts receivable and inventories. The
Company has been in discussions with commercial and other lenders
for further financing, and it is very likely that the Company
will seek to obtain another revolving credit agreement, to supply
additional financing which may be necessary to support future
growth. Should it be successful in obtaining such revolving
credit financing, the Company will, in all likelihood, secure
borrowings with the granting of security interests in
substantially all of its assets in addition to its operating
facility (which is already subject to a mortgage with an
institutional lender due in 2009). In the event that the Company
should require additional financing, there can be no assurance
that such financing will be available on commercially reasonable
terms. If future financing is not available when needed, the
Company may be forced to curtail or discontinue operations. In
such event, the stockholders, including investors in the Common
Stock offered hereby, may lose, or experience a substantial
reduction in, the value of their investment in the Company.
Dependence on Growth of Market for Superservers
Currently, PCs are the dominant server platform for LANs and
WANs. The market for superservers, similar to those produced and
distributed by the Company, is not PC-based. The superserver
market is new and developing, currently comprises only a small
portion of the worldwide server market, and represents the
high-end (e.g., in terms of cost) and high performance segment of
the overall computer network server market. To date, the
superserver market is primarily motivated by cost considerations.
The current low penetration of superservers in the overall server
market may be attributed to the fact that the vast majority of
existing computer networks are small in size and have relatively
simple file, application and print sharing needs that do not
require a superserver and the costs attendant to their purchase.
Although the Company has not conducted its own market studies,
the Company believes that its future success will depend in part
upon the continued growth of the portion of the market for
networking servers and workstations consisting of more complex
and higher performance network equipment capable of interfacing
with increasingly sophisticated applications, where the benefits
of a superserver may more fully be realized. Businesses and
government agencies with sophisticated computing requirements
have traditionally relied on mainframes and minicomputers to
perform these functions. The Company's future success is
dependent, in part, upon the development of new sophisticated
application software products for LANs and WANs, and on the
willingness of mainframe and minicomputer users to migrate such
applications to superserver controlled networks. Enterprises
that have traditionally relied on mainframes and minicomputers to
implement business-critical applications may be reluctant to
implement such applications on networks, which traditionally have
not offered the performance and availability characteristic of
mainframes and minicomputers. Accordingly, there can be no
assurance that these applications will be developed or that end
users will implement these applications on LANs and WANs.
Dependence on Market Acceptance of the Products
The future of the Company is largely dependent upon the
success of the current and future generations of the Company's
superservers and other multimedia computer products. These
products are relatively new and have not been marketed
extensively. It is, therefore, not possible to predict when, if
at all, they will achieve the market acceptance anticipated by
the Company. Such acceptance is necessary for the Company to
achieve profitable operations.
Competition; Technological Change and Obsolescence
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 computer network users that
are served by the Company. All such market participants will
compete intensely to maintain or improve their market shares and
revenues. Most of the companies with which the Company 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 developing market for superservers and network
workstations, it can be expected that the Company will encounter
a number of significant long-term competitors, including such
major industry participants as IBM, Microsoft Corporation,
Novell, Inc. and Compaq Computers, Inc. Accordingly, there is no
assurance that the Company's products will gain 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. Many of the new and
smaller companies which are active in the network equipment
industry, such as Allin Communications and Interactive Flight
Technologies, have recently announced operating and financial
difficulties.
In addition, one or more of the Company's competitors may
succeed in developing technologies and products that are more
effective than any of those developed or being developed by the
Company, rendering the Company's technology and products obsolete
or noncompetitive. In the event that the high end of the network
equipment market does not develop as anticipated, the Company
will be required to continue to compete with PC-based servers
manufactured by IBM, Compaq, Dell and other major computer
manufacturers for a majority of its revenues.
Customer Concentration
The Company typically sells significant amounts of equipment
to a small number of customers, the composition of which changes
from year to year as customer equipment needs vary. Therefore,
at any one time, a large portion of the Company's revenues may be
derived from a limited number of customers. During the fiscal
year ended 1997, and for the nine months ended September 30,
1998, three customers accounted for approximately 79% and 80%,
respectively, but no other customer accounted for more than 10%,
of the Company's revenues during either period. The loss of any
of these major customers would have a material adverse effect on
the Company's operations if the Company does not replace such
customer on a timely basis. Moreover, although the Company's
contracts with each such major customer does not permit
unilateral termination of the Company's contract (but see
"Government Contracts," below), the Company's contracts provide
for contract termination in the event that the Company's
products, following installation, do not perform in accordance
with the contract terms. Should the Company's contract with any
of such major customers be terminated based upon a failure of
product performance, it would have a material, adverse effect on
the Company and its results of operations.
Risk Associated With International Sales
The Company currently derives a significant portion of its
revenues from international operations. For the fiscal year
ended 1997, and for the nine months ended September 30, 1998,
international sales accounted for approximately 76% and 80%,
respectively, of the Company's revenues. International sales are
subject to a variety of risks, including difficulties in
establishing and managing international distribution channels,
obtaining export licensing, servicing and supporting overseas
products and in translating product interfaces into foreign
languages. International operations are subject to difficulties
in collecting accounts receivable and as a result could affect
the timing of revenue recognition and bad debt reserves. Other
factors that can adversely affect international operations
include difficulties in staffing and managing personnel,
enforcing intellectual property rights, fluctuations in the value
of foreign currencies and currency exchange rates, changes in
import export duties and quotas, introduction of tariff or non-
tariff barriers and regulatory, economic or political changes in
international markets.
Reliance on Outside Manufacturers, Suppliers and Other
Contractors
The Company assembles the products that it sells principally
from standardized components purchased from independent sources,
and it is dependent upon such outside vendors for all of the
components and end-products it sells to customers. There can be
no assurance that these suppliers will be able to provide
adequately for the future equipment needs of the Company's
customers. In the event that any of its current suppliers should
suffer quality control problems or financial difficulties, the
Company would be required to find alternative sources, which
could result in temporary business dislocations and a decline in
revenues.
The Company's ability to develop additional products and
product enhancements is dependent upon the development activities
of its major vendors, as well as other companies that create
computer hardware and software products. To the extent that any
particular product release by the Company utilizes a component
expected to be developed by a third party, and that third party's
development activities are delayed or aborted, the Company's
product development activities can be jeopardized, resulting in
product release delays or terminations. In either event, the
resulting impact on the Company's product marketing efforts
and/or its ability to offer a comprehensive suite of products to
customers could have a material, adverse effect upon the
Company's future success and results of operations.
Finally, due to the Company's lack of expertise and
capabilities in avionics and the FAA approval process, in order
to install the AirView system on aircraft the Company must engage
an independent contractor to assist it in completing its
performance under any AirView system program contract. The
Company currently has an ongoing relationship with one such
contractor to assist it in completing installations of the
AirView system. Were that relationship to terminate, or
deteriorate, without the Company locating a substitute contractor
to provide the same installation services, the Company could not
complete its performance under AirView System program contracts
and its ability to market the AirView System program would be
materially, adversely affected.
Lack of Patent Protection; Possible Infringement
The Company's ability to compete with other companies will
depend to a great extent on maintaining the proprietary nature of
its technologies. The Company currently neither holds nor
licenses patents for the technologies included in its products.
In addition, there can be no assurance that any patents that may
be applied for by the Company in the future will ultimately be
issued in its favor, or that any patent so issued, or any patent
rights assigned or licensed to the Company, will afford necessary
protection or will be upheld in the event of a challenge.
There is also no assurance that the Company's products will
not infringe the patents of third parties. Problems with patents
could potentially increase the cost of the Company's products, or
delay or preclude new product development and commercialization
by the Company. If infringement claims against the Company are
deemed valid, the Company may seek licenses which might not be
available on acceptable terms or at all. Litigation could be
costly and time-consuming but may be necessary to protect the
Company's future patent and/or technology license positions, or
to defend against infringement claims. A successful challenge to
the Company's technology could have a materially adverse effect
on the Company and its business prospects. There can be no
assurance that any application of the Company's technology will
not infringe upon the proprietary rights of others or that
licenses required by the Company from others will be available on
commercially reasonable terms, if at all.
The Company relies heavily upon trade secrets and other
unpatented proprietary technology. No assurance exists that
other persons will not independently develop or acquire
technology substantially equivalent to the Company's, or that the
Company will successfully protect its unpatented technology and
trade secrets from misappropriation by others.
Dependence on Key Personnel
The professional and general development of the Company
largely depends upon the efforts of key management, engineering
and selling and marketing personnel, many of whom would be
difficult to replace. The Company does not have employment
agreements with its employees other than its principal executive
officers. The loss of the services of any of the key personnel
would have a material adverse effect on the Company's operations
and prospects. The success of the Company's future operations is
further dependent upon the Company's ability to attract and
retain additional qualified personnel, particularly those with
marketing expertise.
Certain Provisions in the Articles of Incorporation and Bylaws
The Company's Articles of Incorporation and Bylaws contain
certain provisions that could have the effect of delaying or
preventing a change of control of the Company, which could limit
stockholders' ability to dispose of their Common Stock in such
transactions. The Company's Articles of Incorporation authorizes
the Board of Directors to issue one or more series of preferred
stock and to establish the rights, privileges and preferences
inherent in ownership of such shares of preferred stock, without
shareholder approval. Shares of such preferred stock, if and
when issued, could have voting or other rights that adversely
affect the voting power of the holders of Common Stock.
The Company's Articles of Incorporation and Bylaws were
amended by vote of the shareholders of the Company at the annual
meeting of shareholders held on June 7, 1996, to (1) classify the
Board of Directors into three classes, as nearly equal in number
as possible, each of which, after an interim arrangement, will
serve for three years, with one class being elected each year;
(2) provide that directors may be removed only with cause and the
approval of the holders of at least 66.66% of the voting power of
each class or series of outstanding stock of the Company entitled
to vote generally in the election of directors; (3) provide that
special meetings of stockholders may not be called by
stockholders unless pursuant to a written demand by the holders
of at least 66.66% of the voting power of each class or series of
outstanding stock of the Company entitled to vote on the matter
requiring the special meeting; (4) delete the provisions from the
Amended Articles which authorize stockholders to act in lieu of
holding a meeting upon the written consent of the holders of a
majority of the stock of the Company entitled to vote thereon;
and (5) increase the stockholder vote required to alter, amend or
repeal the foregoing amendments from a majority to 66.66% of the
voting power of each class or series of outstanding stock of the
Company.
Such amendments to the Articles of Incorporation and Bylaws
of the Company, together with certain other provisions therein,
could have the effect of discouraging a third party from making a
tender offer or otherwise attempting to obtain control of the
Company even though such an attempt might be beneficial to the
Company and its stockholders. In addition, since the amendments
are designed to discourage accumulations of large blocks of the
Company's stock by purchasers whose objective is to have such
stock repurchased by the Company at a premium, adoption of the
amendments could tend to reduce the temporary fluctuations in the
market price of the Company's stock which are caused by
accumulations of large blocks of the Company's stock.
Accordingly, stockholders could be deprived of certain
opportunities to sell their stock at a higher market price.
Georgia Anti-Takeover Law
The provisions of the Georgia Business Corporation Code
relating to fair price requirements with respect to the Common
Stock and business combinations with interested stockholders are
applicable to the Company. Essentially, the fair price
provisions require any material transaction or series of
transactions of the Company with or for the benefit of an
interested stockholder or an affiliate thereof to be approved by
all of the directors who are unaffiliated with the interested
stockholder or by 2/3rds of such unaffiliated directors and the
holders of a majority of the shares of the Company entitled to
vote on such transaction or transactions, other than shares held
by the interested stockholder. The business combination
provisions generally prohibit the Company from entering into any
material transaction with an interested stockholder for a period
of five years after the stockholder became an interested
stockholder. The provisions do not apply if the transaction was
approved prior to the time that the stockholder became an
interested stockholder or if the interested stockholder holds 90%
or more of the Company's voting stock. The fair price and
business combination provisions of the Georgia Business
Corporation Code may render more difficult or discourage an
attempt to obtain control of the Company by means of a proxy
contest, tender offer, merger or otherwise, and thereby preserves
the continuity of the Company's management. In addition, in
certain cases, these provisions may prevent the Company's
stockholders from realizing a premium upon the sale of their
shares in any tender offer or merger opposed by the Company's
management.
No Dividends
Other than for certain distributions to stockholders under
Subchapter S of the Internal Revenue Code of 1986 made by the
Company prior to December 31, 1994, the Company has never paid
cash dividends on its capital stock and does not anticipate
paying cash dividends in the foreseeable future, but rather
intends instead to retain future earnings, if any, for
reinvestment in its business to the extent permissible under the
terms of its contractual obligations. The Company has the option
to pay dividends on the Preferred Stock in shares of Common Stock
rather than in cash. However, the Company is prohibited from
paying dividends on the Preferred Stock, to the extent the number
of such dividend shares, when added to the number of shares of
Common Stock which may be acquired upon conversion of the
Preferred Stock (along with the exercise of the Warrants),
respectively, aggregates 20% or more of the number of outstanding
shares of Common Stock on the date of purchase of the Preferred
Stock. Such prohibition is required in order for the Company to
comply with requirements of the Nasdaq Stock Market. As a
result, the Company intends to declare and pay dividends on the
Preferred Stock in the form of Common Stock to the fullest extent
possible without exceeding this 20% limit; but depending upon the
period of time prior to full conversion of the outstanding
Preferred Stock, and the applicable conversion ratios in effect
at the time of preferred stock conversions, the Company may be
required to pay an unspecified amount of dividends on the
Preferred Stock in cash, rather than in shares of Common Stock,
in order to avoid exceeding such 20% limit. In addition, the
Company's Certificate of Incorporation (with regard to the
Preferred Stock) contains restrictions, and any credit agreements
which in the future may be entered into by the Company with
institutional lenders will in all likelihood contain
restrictions, on the payment of dividends by the Company.
Moreover, any future determination to pay cash dividends on the
Common Stock will be at the discretion of the Board of Directors
and will be dependent upon the Company's financial condition,
results of operations, capital requirements and such other
factors as the Board of Directors deems relevant. Investors
should, therefore, be aware that it is highly unlikely that any
cash dividends will be paid on the Common Stock in the
foreseeable future.
Adequacy of Insurance
Although the Company maintains insurance coverage that it
believes to be customary and generally consistent with industry
practice, to the extent that such coverage is inadequate and it
incurs losses which are uninsured such losses could have a
materially adverse effect upon the Company and its capital
resources. The Company currently has in place a $2,000,000
umbrella general liability insurance policy which includes
coverage of product liability claims, to protect it against
product liability claims brought by customers in connection with
such customers' purchases of products sold by the Company. The
Company does not believe that its operations expose it to
potentially significant product liability claims, and it has not
experienced any such claims in the past.
Risk of Low-Priced Stocks
If the Company's securities were delisted from Nasdaq, and
no other exclusion from the definition of a "xxxxx stock" under
applicable Securities and Exchange Commission regulations were
available, such securities would be subject to the xxxxx stock
rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally defined
as investors with net worth in excess of $1,000,000 or annual
income exceeding $200,000, or $300,000 together with a spouse).
For transactions covered by these rules, the broker-dealer must
make a special suitability determination for the purchase and
must have received the purchaser's written consent to the
transaction prior to sale. Consequently, delisting from Nasdaq,
if it were to occur, would affect the ability of broker-dealers
to sell the Company's securities and the ability of purchasers of
the Common Stock to sell their securities in the secondary
market, when the ability to make public sales became available.
Elimination of Liability for Directors
The Company's Articles of Incorporation contain provisions
which eliminate the personal liability of directors, both to the
Company and to its stockholders, for monetary damages resulting
from breaches of certain of their fiduciary duties as directors
of the Company. As a result of such charter provisions, the
rights of Company shareholders to recover monetary damages from
directors of the Company for breaches of directors' fiduciary
duties may be significantly limited.
Beneficial Conversion Feature of Preferred Stock
The Company's convertible preferred stock contains a
beneficial conversion feature which will result in a non-cash
charge to dividends paid on preferred stock equal to $375,000 in
the fourth quarter ended December 31, 1998. This dividend does
not impact the number of shares into which the preferred stock is
convertible and will result in an increase in additional paid-in-
capital when and if the conversions are effected.
FOR ALL OF THE FOREGOING REASONS THE SECURITIES OFFERED
HEREBY INVOLVE A HIGH DEGREE OF RISK. ANY PERSON
CONSIDERING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY
SHOULD BE AWARE OF THESE AND OTHER FACTORS. THOSE
SECURITIES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN
AFFORD A TOTAL LOSS OF THEIR INVESTMENT IN THE COMPANY.
