PROSPECTUS
TEKGRAF, INC.
2,100,000 Units
Consisting of 2,100,000 Shares of Class A Common Stock
and 2,100,000 Redeemable Warrants
Each unit ("Unit") offered by Tekgraf, Inc. (the "Company") consists of one
share of Class A common stock, $.001 par value ("Class A Common Stock") and one
redeemable warrant ("Warrant"). The components of the Units will be separately
transferable immediately upon issuance. Each Warrant entitles the holder to
purchase one share of Class A Common Stock at an exercise price of $8.40,
subject to adjustment, at any time through the fifth anniversary of the date of
this Prospectus. Commencing one year from the date hereof, the Warrants are
subject to redemption by the Company at a redemption price of $.05 per Warrant
on 30 days' written notice, provided the closing bid price of the Class A Common
Stock averages in excess of $11.75 per share for any 30 consecutive trading days
ending within 15 days of the notice of redemption. See "Description of
Securities." Certain officers, directors and principal stockholders of the
Company have agreed to purchase an aggregate of 100,000 Units in this offering
(the "Offering").
As of the date hereof, 3,333,333 shares of Class B common stock, $.001 par
value ("Class B Common Stock") of the Company are outstanding. The Class A
Common Stock and the Class B Common Stock are substantially identical on a
share-for-share basis, except that the holders of Class B Common Stock have five
votes per share and the holders of Class A Common Stock have one vote per share
on each matter considered by stockholders. See "Description of Securities."
Prior to the Offering, there has been no public market for the Units, Class
A Common Stock or Warrants and there can be no assurance that such a market will
develop. The Class A Common Stock and Warrants have been approved for quotation
on The Nasdaq National Market ("Nasdaq") under the symbols TKGFA and TKGFW,
respectively. The Units will not trade on Nasdaq. The initial public offering of
the Units and the exercise price and other terms of the Warrants were
arbitrarily determined by negotiation between the Company and D. H. Blair
Investment Banking Corp. (the "Representative"), as Representative of the
several underwriters (the "Underwriters"). For information concerning a
Securities and Exchange Commission investigation relating to the Representative,
see "Risk Factors" and "Underwriting."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 7 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Underwriting Discounts
and
Price to Public Commissions (1) Proceeds to Company (2)
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Per Unit..... $6.00 $.45 $5.55
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Total (3).... $12,600,000 $945,000 $11,655,000
================================================================================
(1) Does not include additional compensation to be received by the
Representative in the form of (i) a non-accountable expense allowance of
$378,000, or $.18 per Unit ($434,700 if the over-allotment option is
exercised in full); and (ii) an option, exercisable over a period of three
years commencing two years from the date of this Prospectus, to purchase
up to 210,000 Units at $7.80 per Unit (the "Unit Purchase Option"). The
Company has also agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated expenses of $1,350,000 payable by the Company,
including the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters a 30-day option (which may be
exercised by the Representative, individually) to purchase up to 315,000
additional Units on the same terms and conditions as set forth above,
solely to cover over-allotments, if any. If the over-allotment option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $14,490,000, $1,086,750 and
$13,403,250, respectively. See "Underwriting."
The Units are being offered on a "firm commitment" basis by the
Underwriters when, as and if delivered to and accepted by the Underwriters,
subject to their right to reject orders in whole or in part and subject to
certain other conditions. It is expected that the delivery of the certificates
representing the Units will be made against payment at the offices of D. H.
Blair Investment Banking Corp., 44 Wall Street, New York, New York on or about
November 13, 1997.
D. H. BLAIR INVESTMENT BANKING CORP.
The date of this Prospectus is November 10, 1997
<PAGE>
[PHOTOS OF SAMPLE PRODUCTS]
The Company intends to furnish its stockholders and holders of Warrants
with annual reports containing consolidated financial statements audited by its
independent accountants.
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CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, THE CLASS A
COMMON STOCK AND/OR THE WARRANTS. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF
SECURITIES FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT
POSITION IN THE UNITS, THE CLASS A COMMON STOCK AND/OR THE WARRANTS OR FOR THE
PURPOSE OF MAINTAINING THE PRICE OF THE UNITS, THE CLASS A COMMON STOCK AND/OR
THE WARRANTS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
Except as otherwise noted, all information in this Prospectus (i) assumes no
exercise of (a) the Underwriters' over-allotment option; (b) the Warrants; (c)
the Unit Purchase Option; or (d) options granted or available for grant under
the Company's stock option plan; and (ii) gives effect to (a) a stock split
effected in May 1997; (b) the reincorporation of the Company by merger under the
laws of the State of Delaware and a recapitalization effected in June 1997; (c)
a .83333325-for-one reverse stock split effected in October 1997; and (d) the
Acquisitions. See "The Acquisitions and Recapitalization," "Capitalization," and
"Management - Stock Option Plan."
The Company
The Company is engaged in the manufacture, configuration, distribution and
servicing of computers and computer peripherals, hardware and software. The
operations of the Company are conducted through its Graphics Division and its
Technology Division.
The Graphics Division currently consists of five regional distributors
which specialize in marketing, sales, support and wholesale distribution of
high-end computer graphics technologies (i.e. peripherals, software, subsystems
and consumable products) to value-added resellers ("VARs"), dealers and systems
integrators in the digital prepress, presentation graphics, professional color
desktop publishing, large format display graphics, digital imaging, electronic
drawing management ("EDMS"), computer-aided design ("CAD") and other emerging
computer graphics technologies markets. Among the products the Graphics Division
distributes and sells are color scanners, color digital film recorders, digital
cameras, color laser printers, color-calibrated monitors, audio-visual
presentation systems, raster image processors ("RIPs"), ink jet printers,
plotters, pre-press software, image setters, color proofers and mass storage
devices. With the exception of Southern California, Arizona, New Mexico and New
England, the Graphics Division gives computer graphics manufacturers a national
distribution presence with the benefits of local, technical sales and support
through facilities located in Chicago, Baltimore, Oakland, Atlanta and Houston.
The Graphics Division was established as a result of the Company's recent
acquisition of five operating companies. See "The Acquisitions and
Recapitalization" below. The establishment of this division reflects the
Company's overall business strategy to become a nationally-recognized,
vertically-integrated provider of computer products and services.
The activities of the Technology Division consist primarily of the
configuration, design and assembly of custom designed network and internet
servers and workstations in the form of personal computers ("PCs") under the
Crescent Computer brand and the resale of Digital Equipment Corporation ("DEC")
equipment to the nationwide DEC-installed customer base. The Crescent Computer
is a PC which can be assembled in a number of different configurations using
standard component parts. Customization enables the Company to accommodate
customer computer needs with respect to storage capacity, speed, price,
applications, size, configuration and a range of other considerations that can
be accommodated in whole or in part by the selection of appropriate components.
The Company also provides services to its customers, including system
architecture design, customization, hardware consulting and continuing support
and assistance in the maintenance and operations of Company purchased products.
Crescent Computers are currently being used to operate non-sterile heart
catheterization diagnostic equipment, as voice mail/auto attendant controllers,
in informational kiosks and in other process-control applications.
The Company will seek to expand its operations through internal growth of
both of its operating divisions. Additionally, the Company will seek to increase
the customer base of the Technology Division by increased marketing of its
products utilizing the marketing and distribution structure established by the
Graphics Division. Further, the Company intends to expand the Graphics
Division's national marketing network.
The Company also intends to continue to expand its operations through the
acquisition of complementary businesses. The Company will focus its acquisition
activities on profitable technology companies that can be consolidated into the
Company's existing divisional structure, increase divisional revenues, expand
the geographic
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3
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and technical scope of the Company's operations, and offer a greater range of
products and services to existing and potential customers. Although the Company
continually explores acquisition possibilities and has targeted a number of
computer graphics distributors, including New England Computer Graphics ("NECG")
in Westford, Massachusetts, it is not currently involved in any active
discussions or negotiations with respect to any potential acquisitions. There
can be no assurance that the Company's acquisition program will be successful,
that the NECG or any other acquisition will be successfully completed, that any
entities acquired will be successfully integrated into the Company or will
result in significant additional revenues or profits to the Company.
The Company was incorporated in the State of Georgia in February 1993 under
the name Crescent Computers, Inc. ("Crescent") and was the successor to Crescent
Computer Services which was founded in 1988. Crescent acquired a controlling
interest in Prisym Technologies, Inc., a Georgia corporation ("Prisym"), upon
the inception of such company in December 1994. In June 1997, the Company
completed the acquisition of all of the outstanding capital stock of each of G&R
Marketing, Inc., an Illinois corporation ("G&R"), Microsouth, Inc., a Georgia
corporation ("Microsouth"), tekgraf, inc., a Texas corporation ("tekgraf
Texas"), Computer Graphics Distributing Company, a Maryland corporation ("CGD"),
Intelligent Products Marketing, Inc. ("IPM") and IG Distribution, Inc. ("IG"),
each a California corporation and together doing business as Intelligent
Graphics Distribution ("IGD"). See "The Acquisitions and Recapitalization"
below. Subsequent to the Acquisitions (as defined below), the Company
reincorporated by merger under the laws of the State of Delaware into a
wholly-owned Delaware subsidiary (the "Merger") thereby changing its name to
Tekgraf, Inc. The Company's executive offices are located at 2979 Pacific Drive,
Norcross, Georgia, 30071 and its telephone number is (770) 441-1107. Unless
otherwise indicated, all references herein to the Company include Crescent,
Prisym, G&R, Microsouth, tekgraf Texas, CGD and IGD.
The Acquisitions and Recapitalization
In June 1997, Crescent completed the acquisition (the "Acquisitions") of
the outstanding capital stock of G&R, Microsouth, tekgraf Texas, CGD, IPM and IG
(collectively, the "Subsidiaries" and each a "Subsidiary") in exchange for the
issuance of an aggregate of 2,192,000 shares of its Class B Common Stock (giving
effect to the Merger and a 400-for-one stock split and recapitalization effected
in June 1993 and a .83333325-for-one reverse stock split effected in October
1997 (collectively, the "Recapitalization")). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions - The Acquisitions." The Acquisitions are being accounted for under
the purchase method of accounting. See "Unaudited Pro Forma Combined Financial
Statements."
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4
<PAGE>
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The Offering
Securities Offered........................... 2,100,000 Units, each Unit
consisting of one share of Class
A Common Stock and one Warrant.
Each Warrant entitles the holder
to purchase one share of Class A
Common Stock at an exercise
price of $8.40, subject to
adjustment, at any time through
the fifth anniversary of the
date of this Prospectus. The
Warrants are subject to
redemption in certain
circumstances. Holders of Class
A Common Stock are entitled to
one vote per share on all
matters while holders of Class B
Common Stock are entitled to
five votes per share. See
"Description of Securities."
Common Stock Outstanding Before Offering (1):
Class A Common Stock..................... 0 shares
Class B Common Stock..................... 3,333,333 shares (2)
---------
Total ................................. 3,333,333 shares (2)
=========
Common Stock Outstanding After Offering (1):
Class A Common Stock..................... 2,100,000 shares (3)
Class B Common Stock..................... 3,333,333 shares (2)
---------
Total ................................. 5,433,333 shares (2)(3)
=========
Use of Proceeds.............................. For repayment of bank and other
debt; purchase price adjustments
in connection with the
Acquisitions; future
acquisitions; consolidation
expenses; sales and marketing;
and for working capital. See
"Use of Proceeds."
Nasdaq Symbols............................... Class A Common Stock-- TKGFA
Warrants--TKGFW
Risk Factors................................. The securities being sold in the
Offering involve a high degree
of risk and immediate
substantial dilution. See "Risk
Factors" and "Dilution."
- ----------
(1) For a description of the Class A Common Stock and Class B Common Stock
(collectively, the "Common Stock"), see "Description of Securities - Common
Stock."
(2) Includes an aggregate of 166,667 shares of Class B Common Stock (the
"Escrow Shares") which have been deposited into escrow by the holders
thereof. The Escrow Shares are subject to cancellation and will be
contributed to the capital of the Company if the Company does not attain
certain earnings levels or the market price of the Company's Class A Common
Stock does not achieve certain levels. If such earnings or market price
levels are met, the Company will record a substantial non-cash charge to
earnings, for financial reporting purposes, as compensation expense
relating to the value of the Escrow Shares released to Company officers,
directors and employees. See "Risk Factors - Charge to Income in the Event
of Release of Escrow Shares and Escrow Options," "Capitalization" and
"Principal Stockholders." Also includes an aggregate of 1,333,333 shares of
Class B Common Stock (the "Indemnification Shares") which were deposited in
escrow by the holders thereof to cover potential claims for indemnification
by the Company under the stock purchase agreements entered into in
connection with the Acquisitions. See "Certain Transactions - The
Acquisitions."
(3) Excludes (i) up to 630,000 shares of Class A Common Stock issuable upon
exercise of the Underwriters' over-allotment option and the Warrants
included in such option; (ii) 2,100,000 shares of Class A Common Stock
issuable upon exercise of the Warrants included in the Units offered
hereby; (iii) 420,000 shares of Class A Common Stock issuable upon exercise
of the Unit Purchase Option and the Warrants included in such option; and
(iv) 300,000 shares of Class A Common Stock reserved for issuance under the
Company's 1997 Stock Option Plan. See "Management - Stock Option Plan,"
"Certain Transactions" and "Description of Securities."
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5
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Summary Selected Pro Forma Combined Financial Data
Effective June 2, 1997, Crescent acquired all of the outstanding common
stock of the Subsidiaries. The following summary unaudited pro forma combined
financial data presents certain actual, pro forma and as adjusted data for the
combined Company. As set forth in the footnotes to the following table, the pro
forma data gives effect to adjustments which are reflective of the combined
entity going forward. All amounts are presented in thousands except share and
per share data.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, --------------------------
1996 1996 1997
------------ -------- --------
<S> <C> <C> <C>
Combined Pro Forma Statement of Income Data(1):
Net sales(2)................................................. $ 68,902 $33,928 $ 34,684
Cost of goods sold(3)........................................ 57,643 28,217 28,582
Gross profit................................................. 11,259 5,710 6,103
Selling, general and administrative(4).................... 7,500 4,141 4,166
Depreciation.............................................. 162 98 95
Amortization(5)..................................... 401 200 200
Operating income............................................. 3,197 1,271 1,641
Other income(6)........................................... 116 98 57
Interest expense(7)....................................... 431 193 171
Income before taxes, minority interest and
extraordinary gain.................................... 2,883 1,176 1,527
Provision for income taxes(8)................................ 1,281 537 674
Income before minority interest and extraordinary gain....... 1,603 639 853
Minority interest............................... -- 25 15
Income before extraordinary gain........................ 1,603 614 839
Pro forma income per share before extraordinary
gain - primary and fully diluted.......................... $ .51 $ .19 $ .26
============ ========= ========
Estimated pro forma weighted average shares
outstanding - primary and fully diluted (9)............... 3,166,666 3,166,666 3,166,666
============ ========= =========
</TABLE>
At June 30, 1997
--------------------------
Actual As Adjusted(10)
Balance Sheet Data:
Working capital ....................... $2,512 $14,495
Total assets .......................... 23,587 29,638
Total debt ............................ 5,984 --
Stockholders' equity .................. 9,163 20,877
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(1) See "Unaudited Pro Forma Combined Financial Statements" for the year ended
December 31, 1996, the six months ended June 30, 1996 and the six months
ended June 30, 1997.
(2) Adjusted to reflect the Acquisitions and the elimination of revenue related
to affiliated entities of the Subsidiaries not acquired by the Company.
(3) Adjusted to reflect the Acquisitions and the elimination of expenses of
affiliated entities of the Subsidiaries not acquired by the Company.
(4) Adjusted to reflect the Acquisitions and the reductions in compensation
levels that certain former stockholders of the Subsidiaries and officers of
the Company have contractually agreed to receive from the Company
subsequent to the Acquisitions.
(5) Adjusted to reflect the amortization of the estimated goodwill recorded in
connection with the Acquisitions.
(6) Adjusted to reflect the elimination of expenses between IPM and IG.
(7) Adjusted for the elimination of pro rata interest expense on capital to be
contributed by the pre-Acquisition stockholders of the Company.
(8) Gives effect to the estimated provision to reflect federal and state income
taxes as if all of the Subsidiaries had been C Corporations and the
incremental provision for the pro forma adjustments.
(9) Gives effect to the Acquisitions and subsequent Recapitalization. Weighted
average shares outstanding excludes the Escrow Shares.
(10) Adjusted to reflect (i) the sale of 2,100,000 Units offered hereby; (ii)
the repayment, upon completion of the Offering, of bank debt ($2,598,650 at
June 30, 1997); (iii) the repayment, upon completion of the Offering, of
outstanding indebtedness to current and former stockholders (an aggregate
of $2,299,000 at June 30, 1997); (iv) the contribution to capital, upon
completion of the Offering, of an aggregate of $990,000 by the
pre-Acquisition stockholders; and (v) the payment and collection, after the
Offering, of estimated purchase price adjustments relating to the
Acquisitions. See "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Certain
Transactions."
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6
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RISK FACTORS
The securities offered hereby are speculative in nature and an investment
in the Units offered hereby involves a high degree of risk. Statements in this
Prospectus that are not historical facts are forward-looking statements that are
subject to risks and uncertainties. Statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future are based
on information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statements. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in this Prospectus. In evaluating the Company's
business and an investment in the Units offered hereby, prospective investors
should carefully consider the following risk factors in addition to the other
information included in this Prospectus.
No Prior Combined Operating History and Risks Associated with Combined
Operations. The Company has no operating history as a combined entity. Although
the members of the Graphics Division in the past several years have cooperated
in a number of business ventures in connection with their membership in certain
trade organizations, each of G&R, Microsouth, tekgraf Texas, CGD and IGD have
operated as independent businesses with independent management for more than the
past eight years. The Company's success will depend, in part, on its ability to
manage and combine the operations of these companies in a single organizational
structure. There can be no assurance that the businesses of such companies can
be successfully integrated or that the combination into one larger entity will
not place a significant strain on the management and key technical resources of
the Company. The Company has only recently commenced planning for the
centralization of certain administrative functions from the existing six
locations to its executive offices in Georgia, and there can be no assurance
that unanticipated delays in consolidation will not occur. There can be no
assurance that the Company will be able to implement its business plans as a
consolidated entity or continue to achieve profitable operations.
Risk of Expansion. The sales of the Company's Graphics Division are
currently derived from sales in most geographic regions of the United States,
with the exception of Southern California, Arizona, New Mexico and New England.
The Company is seeking to expand its market for computer graphics technology
sales to include the remainder of the United States and Canada, and to increase
both the number of product lines it resells from manufacturers for whom it
currently performs outsourcing and the number of manufacturers whose products it
offers for resale. While the Company's sales force is established in its
existing market areas, there can be no assurance that the Company's efforts to
establish a national sales force will be successful. Further, there can be no
assurance that the Company will be successful in the transition from separate
companies operating in distinct regional areas into one entity servicing a large
portion of the United States. If the Company were unable to make the necessary
adjustments in its methods of operations and in its orientation and focus, it
would have an adverse effect on the ability of the Company's Graphics Division
to achieve successful national expansion. See "Business - Strategy."
Competition; Technological Change and Obsolescence. The business of
manufacturing and selling computers and computer peripheral equipment is
intensely competitive and rapidly changing. The Company believes that the
principal competitive factors in this industry include relative price and
performance, product availability, technical expertise, financial stability,
service, support and reputation. The Crescent Computers manufactured by the
Company's Technology Division are constructed with standardized parts which are
available to others in the market. The Technology Division's competitors include
established computer product manufacturers, some of which supply products to the
Company, computer resellers, distributors and service providers. Some of the
Technology Division's current and potential competitors have substantially
greater financial, managerial, development, sales, marketing, technical and
other competitive resources than those of the Company. As a result, the
Technology Division's competitors may be able to devote greater resources than
the Company to the sales and service of their computer products. As the computer
market in which the Technology Division competes has matured, product price
competition has intensified and is likely to continue to intensify, which may
make it too costly for the Company to continue its "made-to-order" method of
doing business. One of the results of this competition may be to lower sales
prices and decrease profit margins.
Technological competition from other and more established computer hardware
manufacturers and software developers is significant and expected to increase.
The Company's Technology Division expects that hardware manufacturers and
software developers will continue to enter the market to provide and package
integrated
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<PAGE>
information distribution solutions to the same customer base served by the
Company's Technology Division. All such market participants will compete
intensely to maintain or improve their market shares and revenues. Most of the
companies with which the Company's Technology Division competes have
substantially greater capital resources, research and development staffs,
marketing and distribution programs, and facilities, and many of them have
substantially greater experience in the production and marketing of products
than that of the Company.
In the development market for network servers and workstations, the Company
experiences competition from hundreds of small companies and a number of
significant competitors, including such major industry participants as IBM,
Compaq Computers, Inc. and Dell Computer Corp. Accordingly, there is no
assurance that the Crescent Computer will continue to achieve sufficient market
acceptance to assure the Company's future success and long range profitability
in the face of competition with such significantly larger and better capitalized
companies.
The Company's Graphics Division competes primarily with computer equipment
manufacturers that either utilize an in-house sales force to market their
products to resellers and directly to end-users or utilize the services of
large, national fulfillment distributors. See "Business - Competition."
Risks Relating to Acquisitions; Charge to Earnings for Amortization of
Goodwill from Acquisitions; Possible Issuance of Additional Common Stock in
Acquisitions. A key element of the Company's strategy is to continue to expand
through acquisitions of companies engaged in the distribution and/or marketing
of computers and/or computer hardware, software and peripherals. The Company
believes that its future growth depends, in part, upon the successful
implementation of this program. See "Business - Strategy." The failure of the
acquisition program could have a material adverse effect on the Company. The
Company has allocated a substantial portion of the proceeds of the Offering to
pursue potential acquisition opportunities, although there can be no assurance
that the Company will consummate such acquisitions or, if any such acquisitions
do occur, that they will be successful in enhancing the Company's business.
Acquisitions may adversely affect the Company's operations in the short-term,
depending on many factors, including capital requirements and the accounting
treatment of such acquisitions. For example, the Company estimates that
approximately $6.01 million of goodwill will be recognized relating to the
Acquisitions, which will be charged to earnings as it is amortized over the next
15 years. In addition to the amortization of acquired intangible assets (such as
goodwill), the Company's acquisition strategy could pose a number of special
risks, including the diversion of management's attention, the assimilation of
the operations and personnel of the acquired companies, the incorporation of
acquired products into existing product lines, adverse short-term effects on
reported operating results, the loss of key employees and the difficulty of
presenting a unified corporate image. There can be no assurance that the Company
will successfully identify, complete or integrate acquisitions or that any
acquisitions, if completed successfully, will perform as expected, will not
result in significant unexpected liabilities or will ever contribute significant
revenues or profits to the Company. The failure to successfully integrate the
business of any entity acquired by the Company would have a material adverse
affect on the Company.
Further, the consideration for acquisitions may involve cash, notes and a
significant number of shares of Common Stock or warrants to purchase shares of
Common Stock, depending on the size of the acquisition. The Company may issue a
substantial number of additional shares of Common Stock if it consummates
several acquisitions, which may result in dilution to investors in the Offering
and may not be accretive in earnings per share.
Broad Discretion as to Use of Proceeds; Absence of Substantive Disclosure
Relating to, and Inability of Stockholders to Evaluate, Future Acquisitions. The
Company has broad discretion with respect to the specific application of a
significant portion of the net proceeds of the Offering, as approximately 16.1%
of the net proceeds will be applied to working capital and approximately 35.9%
of the net proceeds are intended to be applied towards consummating
acquisitions. Further, if all or a portion of the Underwriters' over-allotment
option is exercised, it is anticipated that the net proceeds therefrom will be
utilized for acquisitions and working capital purposes. Although the Company
continually explores acquisition possibilities and has targeted a number of
companies, including NECG, an entity owned by certain officers and stockholders
of the Company, it is not currently negotiating any acquisitions and has no
agreements, arrangements or understandings regarding potential acquisitions. See
"- Potential Conflicts of Interest; Transactions with Affiliates." There can be
no assurance that the acquisition of NECG will be successfully completed, that
the Company will make any additional acquisitions or, if made, that any such
acquisitions will be successful. A Company decision to utilize a substantial
portion of the net proceeds of the
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Offering for acquisitions reduces the resources available to complete its other
expansion and growth objectives. In such event, the Company may be required to
obtain additional financing to achieve such objectives. There can be no
assurance that such financing will be available, or, if available, will be on
terms acceptable to the Company. Although management of the Company will
endeavor to evaluate the risks inherent in any particular acquisition, there can
be no assurance that the Company will properly ascertain all such risks.
Management of the Company will have virtually unrestricted flexibility in
identifying and selecting prospective acquisition candidates. The Company does
not intend to seek stockholder approval for any acquisitions unless required by
applicable law or regulations and stockholders will most likely not have an
opportunity to review financial information on an acquisition candidate prior to
consummation of an acquisition. See "Use of Proceeds" and "Business - Strategy."
Dependence of Graphics Division on Distribution Arrangements with
Manufacturers; Risk of Termination of Agreements. The Company's relationships
with computer product manufacturers are based substantially on mutual
satisfaction with the relationships in addition to the terms of the contractual
arrangements between the parties. The Company's distribution agreements
generally provide for termination by either party without cause on either 30 or
60 days' notice and for the Company to act as a distributor on a non-exclusive
basis for specified geographic territories. The Company's Graphics Division
relies on a limited number of suppliers of computer products for a significant
portion of its revenues. There can be no assurance that some or any of the
Company's suppliers will not elect to change distributors or their method of
distribution, e.g., utilize an in-house sales force. The loss of any significant
supplier or the loss of any significant product line could adversely affect the
Company's ability to service customers and, as a result, could have a material
adverse effect on the Company's operating results. There can be no assurance
that the Company would be able to fully replace the loss of any significant
supplier. Further, although part of the Company's growth strategy after the
Offering will be to expand the number of manufacturers whose products it
distributes and the number of product lines it distributes generally, there can
be no assurance that the Company will achieve such expansion. See "Business -
The Company's Divisions and Products."
Dependence of Technology Division on Suppliers; Reliance on DEC. The
Company assembles the Crescent Computer principally from standardized components
from outside sources and relies on such outside sources to manufacture the
components of the Crescent Computer, none of which are contractually obligated
to meet the long-term requirements of the Company. In the event that any of the
Company's current suppliers suffer quality control problems or financial
difficulties, the Company would be required to find alternative sources of
supply. While the Company is aware of a number of sources of supply for most
components, there can be no assurance that current or alternative sources will
be able to supply all of the Company's demands on a timely basis or that the
Company would be able to locate alternative sources of supply to deliver high
quality components on a timely basis or at all. Further, substitution of
alternative suppliers could result in delays in the delivery of any such
components, temporary business dislocations and a decline in sales. In addition,
reliance on outside sources reduces the Company's control over production costs.
The Company, through its Prisym subsidiary, is an authorized DEC reseller.
During the year ended December 31, 1996 and the six months ended June 30, 1997,
revenues derived from the sale of DEC and DEC-related products accounted for
37.5% and 41.7%, respectively, of the Technology Division's revenues. Prisym has
no written supply agreement with DEC. In addition, DEC has historically
experienced production problems which have led to supply shortages. The
termination of the Company's relationship with DEC or the inability to obtain
product supplies when needed could have a material adverse effect on the
Company's financial condition and results of operations. See "Business - The
Company's Divisions and Products - Technology Division."
Customer Concentration in Technology Division. The Company's Technology
Division typically sells significant amounts of equipment to a small number of
customers, the composition of which changes from year to year as customer
equipment needs vary. Therefore, at any one time, a large portion of the
Technology Division's sales may be derived from a limited number of customers.
During the year ended December 31, 1996 and the six months ended June 30, 1997,
three customers accounted for an aggregate of approximately 14% and 10.1% of the
Technology Division's sales, respectively. The loss of such customers could have
a material adverse effect on the Company's operations if the Company does not
replace such customers on a timely basis. See "Business - The Company's
Divisions and Products."
9
<PAGE>
Possible Need for Additional Financing. Although the Company believes that
the net proceeds from the Offering, together with available funds, will enable
it to fund its operations and acquisition strategy for at least 12 months, in
the event the Company fails to generate sufficient revenues during such period,
the Company may be required to seek substantial additional financing to continue
its activities and to implement its acquisition plan, which may include debt
financing. Significant growth could also require the Company to seek additional
financing. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business - Strategy."
Fluctuations in Financial Results. The Company's sales and operating
results may vary significantly from year to year and from quarter to quarter as
a result of a variety of factors, including the introduction of new products by
competitors, pricing pressures, the timing of the completion or the cancellation
of projects, the evolving and unpredictable nature of the markets in which
computer products are sold and economic conditions generally or in certain
geographic areas in which the Company's customers do business. Furthermore, the
Company may be unable to control spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, there can be no assurance that
sales and net income, if any, in any particular quarter will not be lower than
sales and net income, if any, in a preceding or comparable quarter or quarters.
In addition, sales and net income, if any, in any particular quarter are not
likely to be indicative of the results of operations for the Company for any
other quarter or for the full year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The trading prices of the
Company's securities may fluctuate significantly in response to variations in
the Company's quarterly or annual results of operations.
Potential Conflicts of Interest; Transactions with Affiliates. William
Rychel, the Co-President and a director of the Company, is a principal
stockholder of NECG, a distributor of computer graphic products located in
Massachusetts. Thomas Gust, a principal stockholder of the Company, and A.
Lowell Nerenberg, a stockholder and employee of the Company, are also principal
stockholders of NECG. The Company has targeted NECG as an entity it may seek to
acquire after the completion of the Offering, although the terms and conditions
of such acquisition have not yet been negotiated.
Benefits of the Offering to Current Stockholders. After completion of the
Offering, the Company intends to make certain distributions and payments to, or
for the benefit of, certain officers, directors and stockholders of the Company
as follows: approximately (i) $1,086,000 in cash will be distributed to Martyn
L. Cooper and J. Thomas Woolsey, the former stockholders of Microsouth and
tekgraf Texas and currently officers and directors of the Company, as purchase
price adjustments in connection with the Acquisitions to reflect differences
between such Subsidiaries' guaranteed and actual net asset values (such
payments, together with other payments to be made to or collected from the
former stockholders of the Subsidiaries, the "Purchase Price Adjustments"); (ii)
$2,161,000 will be paid to Alongal Extrusions, Inc. ("Alongal"), a company owned
by Anita, Ltd. ("Anita"), a principal stockholder of the Company, in repayment
of working capital advances; (iii) $2,598,650 will be used to repay amounts
outstanding under bank lines of credit currently maintained by G&R, CGD and IGD
which are personally guaranteed by certain of the Company's stockholders,
including William M. Rychel, Co-President and a director of the Company; (iv)
$90,000 of outstanding indebtedness will be repaid to two former stockholders of
CGD; and (v) $125,000 of outstanding indebtedness will be repaid to a former
stockholder of IPM and IG. The foregoing payments will be funded by excess cash
of approximately $419,000 to be contributed in connection with the Acquisitions,
contributions to capital of $990,000 to be made by certain stockholders of the
Company and net proceeds of the Offering of approximately $3,642,000. Current
stockholders of the Company will also benefit by the creation of a public market
for the Company's Common Stock. See "--Immediate Dilution; Recent Exchange of
Common Stock at Prices Substantially Below Initial Public Offering Price," "Use
of Proceeds," "Dividends and Distributions" and "Certain Transactions."
Lack of Patents; Reliance on Proprietary Rights. The Company has no patents
and its success will depend, in part, on its ability to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties. The Company seeks to protect its trade secrets and proprietary
know-how, in part, by confidentiality agreements with employees, consultants,
advisors, and others. There can be no assurance that such employees,
consultants, advisors, or others will maintain the confidentiality of such trade
secrets or proprietary information, or that the trade secrets or proprietary
know-how of the Company will not otherwise become known or be independently
developed by competitors in such a manner that the Company will have no
practical recourse.
Dependence on Key Personnel. The Company is highly dependent on the
services of its Chairman, Phillip C. Aginsky, and its Co-Presidents, Dan I.
Bailey and William M. Rychel, as well as the other principal members of
management and technical staff of the Company. The future success of the Company
depends in large part upon its
10
<PAGE>
ability to attract and retain highly qualified personnel. The Company faces
intense competition for such highly qualified personnel from other technology
companies and may have to pay higher salaries to attract and retain such
personnel. There can be no assurance that sufficient qualified personnel can be
hired on a timely basis or retained. The loss of such key personnel or failure
to recruit additional key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. Messrs.
Aginsky, Bailey and Rychel have entered into employment agreements with the
Company which contain non-competition provisions. Such provisions may be
unenforceable in certain states. See "Management."
Control by Insiders; Potential Anti-Takeover Effect of Shares Having
Disproportionate Voting Rights. Upon completion of the Offering, the existing
stockholders of the Company, as the holders of Class B Common Stock, will
beneficially own approximately 61.3% of the outstanding Common Stock (including
the Escrow Shares and the Indemnification Shares) of the Company, representing
approximately 88.8% of the voting power and will be able to elect the Company's
directors and thereby direct the policies of the Company. Furthermore, the
disproportionate vote afforded the Class B Common Stock could also serve to
impede or prevent a change of control of the Company. As a result, potential
acquirers may be discouraged from seeking to acquire control of the Company
through the purchase of Class A Common Stock, which could have a depressive
effect on the price of the Company's securities. See "Principal Stockholders"
and "Description of Securities."
Immediate Dilution; Recent Exchange of Common Stock at Prices Substantially
Below Initial Public Offering Price. In connection with the Acquisitions,
William M. Rychel, J. Thomas Woolsey and Martyn L. Cooper, officers and
directors of the Company, and the other stockholders of G&R, Microsouth, tekgraf
Texas, CGD and IGD were issued an aggregate of 2,192,000 shares of Class B
Common Stock (including the Escrow Shares) at an effective purchase price of
$4.33 per share. Accordingly, such shareholders will realize a per share
increase in the value of such shares of $1.67, or 38.6%, upon the Offering
(allocating no value to the Warrants included in the Units). The purchasers of
the Units in the Offering will incur an immediate dilution of approximately
$3.26, or 54.3%, in the pro forma per share net tangible book value of their
Class A Common Stock, allocating no value to the Warrants included in the Units
($3.14, or 52.3%, if the Underwriters' over-allotment option is exercised in
full). Additional dilution to public investors, if any, may result to the extent
that the Warrants and/or the Representative's Unit Purchase Option are exercised
at a time when the net tangible book value per share of Common Stock exceeds the
exercise price of any such securities. See "Dilution."
Charge to Earnings in the Event of Release of Escrow Shares. In the event
any shares are released from escrow to the holders who are officers, directors,
employees or consultants of the Company, a compensation expense will be recorded
for financial reporting purposes. Accordingly, in the event of the release of
the Escrow Shares, the Company will recognize during the period in which the
earnings thresholds are probable of being met or such stock levels achieved, a
substantial non-cash charge to earnings equal to the fair market value of such
shares and options on the date of their release, which would have the effect of
significantly increasing the Company's loss or reducing or eliminating earnings,
if any, at such time. The recognition of such compensation expense may have a
depressive effect on the market price of the Company's securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Release of Escrow Shares," "Principal Stockholders" and
"Description of Securities." Notwithstanding the foregoing discussion, there can
be no assurance that the Company will attain the targets which would enable the
Escrow Shares to be released from escrow.
Potential Adverse Effects of Preferred Stock. The Company's Certificate of
Incorporation authorizes the issuance of shares of "blank check" preferred
stock, which will have such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval (but subject to
applicable government regulatory restrictions), to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the Common Stock. In
the event of such issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention to issue
any shares of preferred stock, there can be no assurance that the Company will
not do so in the future. See "Description of Securities Preferred Stock."
No Dividends. The Company does not expect to declare or pay any cash or
other dividends on its Common Stock in the foreseeable future. See "Dividends
and Distributions."
11
<PAGE>
No Public Market for Securities; Possible Volatility of Market Price;
Arbitrary Determination of Offering Price. Prior to the Offering, there has not
been any market for any of the Company's securities, and there can be no
assurance that an active trading market will develop or be sustained after the
Offering. The initial public offering price of the Units and the exercise price
and other terms of the Warrants have been determined by negotiation between the
Company and the Representative and are not necessarily related to the Company's
asset value, net worth, results of operations or any other criteria of value and
may not be indicative of the prices that may prevail in the public market. The
market prices of the Class A Common Stock and Warrants could also be subject to
significant fluctuations in response to variations in the Company's operations,
expansion plans, general trends in the industry and other factors, including
extreme price and volume fluctuations which have been experienced by the
securities markets from time to time. See "Underwriting."
Outstanding Warrants and Options; Exercise of Registration Rights. Upon
completion of the Offering, the Company will have outstanding (i) 2,100,000
Warrants to purchase an aggregate of 2,100,000 shares of Class A Common Stock;
and (ii) the Unit Purchase Option to purchase an aggregate of 420,000 shares of
Class A Common Stock, assuming exercise of the underlying Warrants. The Company
also has 300,000 shares of Class A Common Stock reserved for issuance upon
exercise of options under its 1997 Stock Option Plan, of which options to
purchase 215,000 shares will be granted on the date of this Prospectus.
Holders of such warrants and options are likely to exercise them when, in all
likelihood, the Company could obtain additional capital on terms more favorable
than those provided by warrants and options. Further, while such warrants and
options are outstanding, the Company's ability to obtain additional financing on
favorable terms may be adversely affected. The holders of the Unit Purchase
Option have certain demand and "piggy-back" registration rights with respect to
their securities. Exercise of such rights could involve substantial expense to
the Company. See "Management - Stock Option Plan," "Description of Securities"
and "Underwriting."
Potential Adverse Effect of Redemption of Warrants. Commencing one year
from the date of this Prospectus, the Warrants may be redeemed by the Company at
a redemption price of $.05 per Warrant upon not less than 30 days' prior written
notice if the closing bid price of the Common Stock shall have averaged in
excess of $11.75 per share for 30 consecutive trading days ending within 15 days
of the notice of redemption. Redemption of the Warrants could force the holders
to (i) exercise the Warrants and pay the exercise price therefor at a time when
it may be disadvantageous for the holders to do so, (ii) sell the Warrants at
the then current market price when they might otherwise wish to hold the
Warrants, or (iii) accept the nominal redemption price which, at the time the
Warrants are called for redemption, is likely to be substantially less than the
market value of the Warrants. The Company has agreed not to redeem the Warrants
unless a prospectus covering the shares of Class A Common Stock underlying the
Warrants is in effect through the date fixed for redemption. See "Description of
Securities - Redeemable Warrants."
Current Prospectus and State Registration to Exercise Warrants. Holders of
Warrants will be able to exercise the Warrants only if (i) a current prospectus
under the Securities Act relating to the securities underlying the Warrants is
then in effect and (ii) such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of Warrants reside. Although the Company has undertaken and
intends to use its best efforts to maintain a current prospectus covering the
securities underlying the Warrants following completion of the Offering to the
extent required by Federal securities laws, there can be no assurance that the
Company will be able to do so. The value of the Warrants may be greatly reduced
if a prospectus covering the securities issuable upon the exercise of the
Warrants is not kept current or if the securities are not qualified, or exempt
from qualification, in the states in which the holders of Warrants reside.
Persons holding Warrants who reside in jurisdictions in which such securities
are not qualified and in which there is no exemption will be unable to exercise
their Warrants and would either have to sell their Warrants in the open market
or allow them to expire unexercised. If and when the Warrants become redeemable
by the terms thereof, the Company may exercise its redemption right even if it
is unable to qualify the underlying securities for sale under all applicable
state securities laws. See "Description of Securities - Redeemable Warrants."
Possible Adverse Effect on the Liquidity of the Company's Securities Due to
Securities and Exchange Commission Investigation of the Representative and Blair
& Co. and Recent Settlement by Blair & Co. with NASD. The Securities and
Exchange Commission (the "Commission") is conducting an investigation concerning
various business activities of the Representative and D. H. Blair & Co., Inc., a
selling group member which will distribute a substantial portion of the Units
offered hereby ("Blair & Co."). The Company has been advised by the
Representative that the investigation has been ongoing since at least 1989 and
that it is cooperating with the
12
<PAGE>
investigation. The Representative cannot predict whether this investigation will
ever result in any type of formal enforcement action against the Representative
or Blair & Co.
In July 1997, Blair & Co., its Chief Executive Officer and its head trader
consented, without admitting or denying any violations, to a settlement with
NASD Regulation, Inc. ("NASDR"), the regulatory oversight subsidiary of the
National Association of Securities Dealers, Inc. ("NASD"), District Business
Conduct Committee for District No. 10 to resolve allegations of NASD rule and
securities law violations in connection with mark-up and pricing practices and
adequacy of disclosures to customers regarding market-making activities of Blair
& Co. in connection with certain securities issues during the period from June
1993 through May 1995 where Blair & Co. was the primary selling group member.
NASDR alleged the firm dominated and controlled after-market trading, thereby
causing the firm to charge its customers excessive mark-ups. NASDR also alleged
the firm did not make adequate disclosure to customers about its market-making
activities in two issues. As part of the settlement, Blair & Co. has consented
to a censure and has agreed to pay a $2 million fine, make $2.4 million in
restitution to retail customers, employ an independent consultant for two years
to review and make recommendations to strengthen the firm's compliance
procedures, and has undertaken for 12 months not to sell to its retail customers
(excluding banks and other institutional investors) more than 60% of the total
securities sold in any securities offering in which it participates as an
underwriter or selling group member. The Chief Executive Officer of Blair & Co.
has agreed to settle failure to supervise charges by consenting to a censure,
the imposition of a $225,000 fine and a 60-day suspension from associating with
any NASD member firm and to take a requalification examination. The firm's head
trader has agreed to settle charges against him by consenting to a censure, the
imposition of a $300,000 fine and a 90-day suspension from associating with any
member firm and has undertaken to take certain requalification examinations. The
settlement with NASDR does not involve or relate to the Representative, its
chief executive officer or any of its other officers or directors.
The Company has been advised that Blair & Co. intends to make a market in
the Company's securities after the Offering. The Company is unable to predict
whether Blair & Co.'s settlement with the NASDR or any unfavorable resolution of
the Commission's investigation will have any effect on such firm's ability to
make a market in the Company's securities and, if so, whether the liquidity or
price of the Company's securities would be adversely affected. See
"Underwriting."
Possible Restrictions on Market-Making Activities in Company's Securities.
The Representative has advised the Company that Blair & Co. intends to make a
market in the Company's securities. Regulation M under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), may prohibit Blair & Co. from
engaging in any market-making activities with regard to the Company's securities
for the period of up to five business days (or such other applicable period as
Regulation M may provide) prior to any solicitation activities or the
termination (by waiver or otherwise) of any right that the Representative may
have to receive a fee for the exercise of Warrants following such solicitation.
As a result, Blair & Co. may be unable to provide a market for the Company's
securities during certain periods while the Warrants are exercisable. Any
temporary cessation of such market-making activities could have an adverse
effect on the market price of the Company's securities. See "Shares Eligible for
Future Sale" and "Underwriting."
Shares Eligible for Future Sale. Future sales of Common Stock by existing
stockholders pursuant to Rule 144 under the Securities Act or otherwise, could
have an adverse effect on the price of the Company's securities. Upon the sale
of the 2,100,000 Units offered hereby, the Company will have outstanding
2,100,000 shares of Class A Common Stock, 3,333,333 shares of Class B Common
Stock and 2,100,000 Warrants (2,415,000 shares of Class A Common Stock and
2,415,000 Warrants if the Underwriters' over-allotment option is exercised in
full). The 3,333,333 outstanding shares of Class B Common Stock are "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be sold publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. Of such shares,
1,141,333 are currently eligible for sale in the public market pursuant to Rule
144 and the remainder will become so eligible commencing June 1998 (subject to
the restrictions on transferability relating to the Escrow Shares and volume
limitations). However, all the holders of the shares of Class B Common Stock
outstanding prior to the Offering have agreed not to sell or otherwise dispose
of any securities of the Company for a period of 13 months from the date of this
Prospectus without the Representative's prior written consent and for the 10
months thereafter not to sell more than 10% of their holdings in any month on a
cumulative basis without such consent. The holders of the Unit Purchase Option
have certain demand and "piggy-back" registration rights with respect to their
securities. The exercise of such rights could involve significant expense to the
Company. Sales of Common Stock, or the possibility of such sales, in the public
market may adversely affect the market price of the securities offered hereby.
See "Description of Securities," "Shares Eligible for Future Sale" and
"Underwriting."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,100,000 Units
offered hereby, after deducting underwriting discounts and commissions and other
expenses of the Offering, are estimated to be approximately $10,305,000
($11,996,550 if the Underwriters' over-allotment option is exercised in full).
The Company expects the net proceeds to be utilized approximately as follows:
Approximate
Amount
Application of Net Proceeds
---------------------- ---------------
Repayment of Bank Debt (1) ........................... $1,600,000
Repayment of Debt to Affiliated Entities, net (2) .... 1,385,000
Purchase Price Adjustments, net (3) .................. 657,000
Future Acquisitions .................................. 3,700,000
Consolidation Expenses (4) ........................... 800,000
Sales and Marketing (5) .............................. 500,000
Working Capital (6) .................................. 1,663,000
------------
Total ........................................... $ 10,305,000
============
- ----------
(1) Represents amounts incurred for working capital purposes under bank lines
of credit currently maintained by CGD, G&R and IGD which bear interest at
prime plus 2%, prime plus .5% and prime plus .75%, respectively, and mature
on November 30, 1997, December 31, 1997 and January 10, 1998, respectively.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
(2) Represents outstanding indebtedness to Alongal and certain other
stockholders of the Company in the aggregate amount of approximately
$2,375,000 which was incurred by the Company and certain of the
Subsidiaries for working capital purposes, net of an aggregate of $990,000
of capital contributions to be made by the pre-Acquisition stockholders of
the Company upon consummation of the Offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources" and "Certain Transactions."
(3) Represents an estimated aggregate of $1,086,000 due to the former
stockholders of tekgraf Texas and Microsouth, net of an estimated aggregate
amount of $419,000 due from the former stockholders of CGD and G&R, related
to the guaranteed net asset values provided for in the stock purchase
agreements entered into in connection with the Acquisitions. The actual
amounts to be paid and collected are subject to final adjustment for the
collection of receivables and inventory. See "Certain Transactions - The
Acquisitions."
(4) Includes installation of high speed telecommunications lines and an MIS
System. See "Business - Facilities and Administrative Functions."
(5) Includes implementation of a national promotional campaign. See "Business -
Customers, Sales and Marketing."
(6) Represents amounts for general corporate purposes, including inventory
purchases, the financing of receivables, and general and administrative
expenses.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering during the next approximately 12 months. This
estimate is based on certain assumptions, including that the consolidation of
the acquired companies is successfully completed, revenues from operations do
not fall below anticipated levels, no events occur which would cause the Company
to abandon any particular efforts and that competitive conditions remain stable.
The amounts actually expended for each purpose may vary significantly in the
event any of these assumptions prove inaccurate. The Company reserves the right
to change its use of proceeds as unanticipated events may cause the Company to
redirect its priorities and reallocate the proceeds accordingly.
Any additional proceeds received upon exercise of the Underwriters'
over-allotment option will be added to working capital. Pending utilization, the
net proceeds of the Offering will be invested in short-term, interest-bearing
investments.
DIVIDENDS AND DISTRIBUTIONS
After completion of the Offering, approximately $1,086,000 in cash will be
distributed to Martyn Cooper and J. Thomas Woolsey, officers and directors of
the Company, as Purchase Price Adjustments in connection with the acquisitions
of tekgraf Texas and Microsouth. See "Use of Proceeds" and "Certain Transactions
- - The Acquisitions."
The Company does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. The Company currently intends to retain all earnings,
if any, for use in the expansion of the Company's business. The declaration and
payment of future dividends, if any, will be at the sole discretion of the Board
of Directors and will depend upon the Company's profitability, financial
condition, cash requirements, future prospects and other factors deemed relevant
by the Board of Directors. The Company is not a party to any agreement which
effectively restricts the payment of cash dividends.
14
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1997 and the as adjusted capitalization of the Company as of June
30, 1997 giving effect to (i) the sale of 2,100,000 Units offered hereby; (ii)
the repayment, upon completion of the Offering, of bank debt ($2,598,650 at June
30, 1997); (iii) the repayment, upon completion of the Offering, of outstanding
indebtedness to current and former stockholders (an aggregate of $2,249,000 at
June 30, 1997); (iv) the contribution to capital, upon completion of the
Offering, of an aggregate of $990,000 by the pre-Acquisition stockholders; and
(v) the payment and collection, after the Offering, of the estimated Purchase
Price Adjustments. This table should be read in conjunction with the audited
historical consolidated financial statements of the Company, and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
--------------------
Actual As Adjusted
------ -----------
(in thousands, except share data)
<S> <C> <C>
Due to related entities, net .......................................... $ 2,159 $ --
Minority interest ..................................................... 15 15
Due to stockholders (1) ............................................... 1,226 --
Bank debt ............................................................. 2,599 --
-------- -------
Stockholders' Equity:(2)
Preferred Stock, $.001 par value; 5,000,000 shares authorized; no
shares issued and outstanding actual and as adjusted ............ -- --
Class A Common Stock, $.001 par value, 31,666,667 shares authorized;
no shares issued and outstanding actual; 2,100,000 shares issued
and outstanding as adjusted (3) ................................. -- 2
Class B Common Stock, $.001 par value, 3,333,333 shares authorized,
issued and outstanding actual and as adjusted (4) .............. 3 3
Additional paid-in capital ......................................... 10,422 19,316
Due from stockholders (5) ............................................. (419) --
Due from stockholders as capital contributions (6) .................... (990) --
Retained earnings ..................................................... 147 147
-------- -------
Total stockholders' equity ......................................... 9,163 19,468
-------- -------
Total capitalization ............................................... 15,162 19,483
======== =======
</TABLE>
- ----------
(1) Represents (i) estimated amounts owed to the former stockholders of
Microsouth and tekgraf Texas as Purchase Price Adjustments and (ii) notes
payable to shareholders of $140,000. See "Certain Transactions."
(2) Shares authorized reflects an amendment to the Company's Certificate of
Incorporation filed in October 1997.
(3) Excludes (i) up to 630,000 shares issuable upon exercise of the
Underwriters' over-allotment option and the Warrants included in such
option; (ii) 2,100,000 shares issuable upon exercise of the Warrants
included in the Units offered hereby; (iii) 420,000 shares issuable upon
exercise of the Unit Purchase Option and the Warrants included in such
option; and (iv) 300,000 shares reserved for issuance under the Company's
1997 Stock Option Plan. See "Management - Stock Option Plan," "Certain
Transactions" and "Description of Securities."
(4) Includes the Escrow Shares and the Indemnification Shares. See "Principal
Stockholders - Escrow Shares" and "Certain Transactions - The
Acquisitions."
(5) Represents estimated amounts owed by the former stockholders of G&R and CGD
as Purchase Price Adjustments. See "Certain Transactions - The
Acquisitions."
(6) Represents amounts owed by the pre-Acquisition stockholders of the Company.
See "Certain Transactions - The Acquisitions."
15
<PAGE>
DILUTION
The following discussion and tables allocate no value to the Warrants
contained in the Units. Such discussion and tables should be read in conjunction
with the historical consolidated financial statements of the Company and the
notes thereto included elsewhere in this Prospectus.
Dilution represents the difference between the initial public offering
price paid by the purchasers in the Offering and the net tangible book value per
share immediately after completion of the Offering. Net tangible book value per
share represents the amount of the Company's total assets minus the amount of
its intangible assets and liabilities, divided by the number of shares of Common
Stock outstanding. At June 30, 1997, the Company had a net tangible book value
of approximately $3,185,000, or $.96 per share ($1.01 per share excluding the
Escrow Shares). After giving retroactive effect to the sale of 2,100,000 Units
offered hereby, and the Company's receipt of the net proceeds therefrom less
underwriting discounts, commissions and other estimated expenses of the Offering
(anticipated to aggregate $1,350,000), the net tangible book value of the
Company, as adjusted, at June 30, 1997 would have been $14,899,000 or $2.74 per
share ($2.83 per share excluding the Escrow Shares). This would result in an
immediate dilution to the public investors of $3.26 per share ($3.17 per share
excluding the Escrow Shares) and the aggregate increase in the pro forma net
tangible book value to present stockholders would be $1.78 per share ($1.82 per
share if the Escrow Shares were excluded). The following table illustrates this
pro forma per share dilution:
Assumed public offering price per share ......................... $6.00
Pro forma net tangible book value per share
before Offering ........................................... $ .96
Increase per share attributable to new investors ............. $1.78
-----
Pro forma net tangible book value per share after Offering ...... $2.74
-----
Dilution per shares to new investors (1) ........................ $3.26
=====
- ----------
(1) If the over-allotment option is exercised in full, the net tangible book
value after the Offering would be approximately $2.89 per share, resulting
in dilution to new investors in the Offering of $3.11 per share.
The following table summarizes the differences between the pre-Acquisition
stockholders, the Acquisition stockholders and new investors with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by the
pre-Acquisition stockholders of the Company, by the Acquisition stockholders and
by new investors:
<TABLE>
<CAPTION>
Total
Consideration Average
Shares Purchased Paid Price
--------------------- ----------------------- Per
Number Percent Amount Percent Share
--------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Pre-Acquisition Stockholders 1,141,333(1) 21.01% $ 990,000(2) 7.28% $ .87(2)
Acquisition Stockholders ... 2,192,000(1) 40.34 --(3) -- --(3)
New Investors .............. 2,100,000 38.65 $12,600,000 92.72 6.00
--------- ------ ----------- ------
Total ...................... 5,433,333 100.00% $13,590,000 100.00%
========= ====== =========== ======
</TABLE>
- ----------
(1) Includes the Escrow Shares and Indemnification Shares.
(2) Represents amounts to be contributed to the capital of the Company prior to
the Offering by Anita, a principal stockholder of the Company, and the
other pre-Acquisition stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions - Other Transactions."
(3) Exclusive of the consideration provided in connection with the
Acquisitions. See "Certain Transactions." The effective purchase price of
these shares was $4.33 per share (excluding the Escrow Shares).
The foregoing table does not give effect to exercise of any outstanding
options or warrants. To the extent such options or warrants are exercised there
will be further dilution to new investors. See "Management - Stock Option Plan"
and "Description of Securities."
16
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Effective June 2, 1997, Crescent acquired the outstanding common stock of
G&R, Microsouth, tekgraf Texas, CGD, IPM and IG. Based upon the provisions of
APB 16 "Accounting for Business Combinations" and SAB 97, the Acquisitions will
be accounted for as purchases. APB16 and SAB 97 provide technical accounting
guidance on business combinations, business combinations prior to an initial
public offering, and the determination of the acquiring company. In accordance
with this guidance, Crescent was determined to be the accounting acquiror. The
unaudited pro forma combined statements of operations give effect to the
Acquisitions as if they had occurred at the beginning of the earliest period
presented. The pro forma adjustments are based on preliminary estimates,
available information and certain assumptions that management deems appropriate.
The pro forma financial data does not purport to represent what the Company's
financial position or results of operations would actually have been if such
transactions in fact had occurred on those dates or to project the Company's
financial position or results of operations for any future period. See "Risk
Factors" included elsewhere herein.
The accompanying unaudited pro forma combined statements of operations
present Crescent combined with the Subsidiaries and give effect to the following
pro forma adjustments: (i) the elimination of expenses related to affiliated
entities of the Subsidiaries not acquired by Crescent; (ii) the reductions in
compensation levels that certain former stockholders of the Subsidiaries and
officers of Crescent have contractually agreed to receive subsequent to the
Acquisitions; (iii) the amortization of the estimated goodwill recorded in
connection with the Acquisitions; (iv) the elimination of interest expense on
capital to be contributed by the pre-Acquisition stockholders of Crescent; and
(v) gives effect to the estimated provision to reflect federal and state income
taxes as if all of the Subsidiaries had been C Corporations and the incremental
provision for the pro forma adjustments. These statements are derived from the
historical financial statements of the Company and the Subsidiaries which are
included elsewhere.
The Company has performed a preliminary analysis of the savings that it
expects to realize as a result of (i) consolidating certain general and
administrative functions; (ii) the interest earned on the net proceeds of the
Offering remaining after payment of the expenses of the Offering and cash to pay
outstanding debt; and (iii) efficiencies in other general and administrative
areas. The Company does not believe that these savings can be accurately
quantified; however, the Company estimates the amount of such savings to be
approximately $200,000 annually, although there can be no assurance that actual
savings will not be significantly below such amount. It is anticipated that
these savings will be partially offset by costs of being a public company.
However, these costs, like the savings that they offset, cannot be quantified
accurately; however, the Company 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 item has been included in the accompanying pro forma
financial information.
These pro forma combined statements of operations should be read in
conjunction with other information contained elsewhere under the heading
"Selected Financial and Operating Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the historical financial
statements of Crescent and the Subsidiaries. See "Index to Financial
Statements."
17
<PAGE>
Tekgraf, Inc.
Unaudited Pro Forma Combined Statement of Operations
for the year ended December 31, 1996
<TABLE>
<CAPTION>
Intelligent Computer
Tekgraf, Inc. Products IG Distri- Graphics G&R Combined
(formerly Crescent Microsouth, tekgraf, inc. Marketing, bution, Distributing Marketing, Acquired
Computers, Inc.) Inc. (Texas) Inc. Inc. Company Inc. Companies
----------- ------------ ----------- ---------- ------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ................ $13,414,131 $ 10,325,373 $ 4,062,901 $9,058,790 $44,715 $11,002,868 $21,038,228 $ 55,532,875
Cost of goods sold ....... 10,951,551 8,594,719 3,380,486 7,578,307 -- 9,143,743 18,117,338 46,814,593
----------- ------------ ----------- ---------- ------- ----------- ----------- ------------
Gross profit .......... 2,462,580 1,730,654 682,415 1,480,483 44,715 1,859,125 2,920,890 8,718,282
Operating expenses:
Selling, general and
administrative ...... 2,244,924 1,256,356 317,909 1,333,230 474 1,608,903 2,551,281 7,068,153
Depreciation .......... 16,999 8,566 9,858 42,961 -- 26,787 56,549 144,721
Amortization .......... -- (66,990) (31,412) -- -- -- -- (98,402)
----------- ------------ ----------- ---------- ------- ----------- ----------- ------------
Income from operations ... 200,657 532,722 386,060 104,292 44,241 223,435 313,060 1,603,810
Other income (expense) ... 14,916 27,625 -- (25,903) -- 54,861 182(6) 56,765
Interest expense ......... 159,500 60,000 15,000 -- -- 123,675 140,194 338,869
----------- ------------ ----------- ---------- ------- ----------- ----------- ------------
Income before provision
for income taxes ...... 56,073 500,347 371,060 78,389 44,241 154,621 173,048 1,321,706
Provision for income taxes 13,000 -- -- 22,064 7,782 50,758 3,600 84,204
----------- ------------ ----------- ---------- ------- ----------- ----------- ------------
Net income ............... $ 43,073 $ 500,347 $ 371,060 $ 56,325 $36,459 $ 103,863 $ 169,448 $ 1,237,502
=========== ============ =========== ========== ======= =========== =========== ============
Pro forma net income
per share -- primary and
fully diluted
Estimated pro forma
weighted average
shares outstanding --
primary and fully diluted
</TABLE>
Pro Forma Adjustments Pro Forma
---------------------------- -----------
Net sales ................ -- $ (44,715)(6) $68,902,291
Cost of goods sold ....... $ (123,338)(1) -- 57,642,806
----------- ----------- -----------
Gross profit .......... 123,338 (44,715) 11,259,485
Operating expenses:
Selling, general and
administrative ...... (1,671,428)(2) (142,002)(1) 7,499,647
Depreciation .......... -- -- 161,720
Amortization .......... 98,402(3) 400,739(7) 400,739
----------- ----------- -----------
Income from operations ... 1,696,364 (303,452) 3,197,379
Other income (expense) ... 44,715(6) 116,396
Interest expense ......... (67,860)(4) -- 430,509
----------- ----------- -----------
Income before provision
for income taxes ...... 1,764,224 (258,737) 2,883,266
Provision for income taxes -- 1,183,558(5) 1,280,762
----------- ----------- -----------
Net income ............... $ 1,764,224 $(1,442,295) $ 1,602,504
=========== =========== ===========
Pro forma net income
per share -- primary and
fully diluted ......... $.51
====
Estimated pro forma
weighted average
shares outstanding --
primary and fully diluted 3,166,666(8)
=========
- ----------
(1) Reflects the elimination of expenses related to affiliated entities of the
Subsidiaries which were not acquired by the Company.
(2) Adjusted to reflect the reductions in compensation levels that certain
former stockholders of the Subsidiaries who served as officers,
administrators or salespeople of their respective companies and officers of
the Company (the "Continuing Employees") have contractually agreed to
receive from the Company subsequent to the Acquisitions. This estimate is
based on the elimination of (i) base compensation in excess of the
specified amounts included in employment contracts signed by the Continuing
Employees, (ii) bonuses, based on a determination by the Board of Directors
that bonuses will not be granted by the Company during the fiscal years
ended December 31, 1997 and 1998, and (iii) various compensation related
expenses which, effective June 2, 1997, were no longer allowed pursuant to
expense policies approved by the Board of Directors of the Company. The
Company believes that the duties and
(Footnotes continued on following page)
18
<PAGE>
(Continued from preceding page)
responsibilities of the Continuing Employees will not be diminished as a
result of the Acquisitions. Accordingly, the Company believes that no other
costs will be incurred to offset the reductions in compensation levels of
the Continuing Employees. The Company believes that this information is
necessary for investors to realistically assess the impact of the
Acquisitions. Certain former stockholders of the Subsidiaries (the
"Noncontinuing Employees"), including Edward H.L. Mason, Margaret Mason,
Eric Nerenberg and Thomas A. Gust, were compensated for services provided
to the Subsidiaries prior to the Acquisitions and will not be employed by
the Company subsequent to the Offering. The compensation paid to the
Noncontinuing Employees has been considered in the adjustment. The Company
believes that the duties and responsibilities of the Noncontinuing
Employees will be absorbed by the Continuing Employees. Additionally, a
management fee was paid to Alongal prior to the Acquisitions and the
Company does not intend to pay a management fee to Alongal after completion
of the Offering. The adjustments are summarized as follows:
Pro Forma
Company Adjustment
------- ----------
Tekgraf, Inc. (formerly Crescent) ................................. (636,773)
Microsouth ........................................................ (45,150)
tekgraf Texas ..................................................... 51,684
IPM/IG ............................................................ (295,483)
CGD ............................................................... (282,262)
G&R ............................................................... (463,444)
----------
(1,671,428)
==========
(3) Reflects the elimination of amortization related to negative goodwill.
(4) Reflects the elimination of the pro rata interest expense incurred on
capital to be contributed by the pre-Acquisition stockholders of the
Company.
(5) Gives effect to the estimated provision to reflect federal and state income
taxes as if all of the Subsidiaries had been C Corporations and the
incremental provision for the pro forma adjustments. This adjustment
records income tax expense at an effective combined tax rate of 39%,
adjusted for non-deductible goodwill amortization.
(6) Reflects the elimination of transactions between IPM and IG.
(7) Adjusted to reflect the amortization of the estimated goodwill recorded in
connection with the Acquisitions. Goodwill is being amortized over 15
years.
(8) Gives effect to the Acquisitions and subsequent Recapitalization. Weighted
average shares outstanding excludes the 166,667 Escrow Shares. The Escrow
Shares will be released from escrow only in the event that one or more of
the following conditions are met:
(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (all as audited by the
Company's independent public accountants) (the "Minimum Pretax
Income") amounts to at least $8,700,000 for the fiscal year ended
December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $13,000,000 for the
fiscal year ending December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $17,900,000 for the
fiscal year ending December 31, 2000;
(iv) the Closing Price (as defined in the Escrow Agreement) of the Class A
Common Stock averages in excess of $16.25 per share for 30 consecutive
business days during the 18-month period commencing on the date of
this Prospectus;
(v) the Closing Price of the Class A Common Stock averages in excess of
$20.00 per share for 30 consecutive business days during the 18-month
period commencing 18 months from the date of this Prospectus. See
"Principal Stockholders - Escrow Shares."
19
<PAGE>
Tekgraf, Inc.
Unaudited Pro Forma Combined Statement of Operations
for the six months ended June 30, 1996
<TABLE>
<CAPTION>
Intelligent Computer
Tekgraf, Inc. Products IG Graphics G&R
(formerly Crescent Microsouth, tekgraf, inc. Marketing, Distribution, Distributing Marketing,
Computers, Inc.) Inc. (Texas) Inc. Inc. Company Inc.
---------------- ----------- ------------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ................... $6,850,330 $4,745,813 $1,947,646 $5,441,239 $ 26,138 $5,129,621 $ 9,787,042
Cost of goods sold .......... 5,698,376 3,900,605 1,632,336 4,186,533 4,337,898 8,389,438
---------- ---------- ---------- ---------- ---------- ---------- -----------
Gross profit ............ 1,151,954 845,208 315,310 1,254,706 26,138 791,723 1,397,604
Operating expenses:
Selling, general and
administrative........ 916,147 547,764 163,493 1,154,283 399 741,736 1,175,490
Depreciation ............ 15,346 6,000 10,923 30,000 -- 8,550 27,000
Amortization ............ -- (33,495) (16,748) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- -----------
Income from operations ...... 220,461 324,939 157,642 70,423 25,739 41,437 195,114
Other income (expense)....... 40,021 26,080 32,278 27,888 -- 31,899 (60,065)
Interest expense ............ 60,000 25,000 10,000 -- -- 53,279 69,124
---------- ---------- ---------- ---------- ---------- ---------- -----------
Income before provision for
income taxes and
minority interest........ 200,482 326,019 179,920 98,311 25,739 20,057 65,925
Provision for income taxes .. 13,000 -- -- 12,420 5,782 6,618 --
---------- ---------- ---------- ---------- ---------- ---------- -----------
Income before minority
interest................. 187,482 326,019 179,920 85,891 19,957 13,439 65,925
Minority interest ........... 24,580 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- -----------
Net income .................. $ 162,902 $ 326,019 $ 179,920 $ 85,891 $19,957 $ 13,439 $ 65,925
========== ========== ========= ========== ======= ========== ===========
Pro forma net income per
share -- primary and
fully diluted ..............
Estimated pro forma weighted
average shares outstanding
-- primary and fully diluted
</TABLE>
<TABLE>
<CAPTION>
Combined
Acquired
Companies Pro Forma Adjustments Pro Forma
------------ --------------------------- ---------
<S> <C> <C> <C> <C>
Net sales .................... $27,077,499 -- $33,927,829
Cost of goods sold ........... 22,446,810 $ 72,185(1) -- 28,217,371
----------- --------- --------- -----------
Gross profit ............. 4,630,689 (72,185) -- 5,710,458
Operating expenses:
Selling, general and
administrative ........ 3,783,165 (557,925)(2) -- 4,141,387
Depreciation ............. 82,473 -- 97,819
Amortization ............. (50,243) 50,243(3) 200,369(6) 200,369
----------- --------- --------- -----------
Income from operations ....... 815,294 435,497 (200,369) 1,270,883
Other income (expense) ....... 58,080 -- 98,101
Interest expense ............. 157,403 (24,000)(4) -- 193,403
----------- --------- --------- -----------
Income before provision for
income taxes and
minority interest......... 715,971 459,497 -- 1,175,581
Provision for income taxes ... 24,820 498,800(5) (200,369) 536,620
----------- --------- --------- -----------
Income before minority
interest ................. 691,151 (39,303) (200,369) 638,961
Minority interest ............ -- -- -- 24,580
----------- --------- --------- -----------
Net income.................... $ 691,151 $ (39,303) $(200,369) $ 614,381
=========== ========= ========= ===========
Pro forma net income per
share -- primary and
fully diluted .............. $.19
====
Estimated pro forma weighted
average shares outstanding
-- primary and fully diluted 3,166,666(7)
=========
</TABLE>
(1) Reflects the elimination of expenses related to affiliated entities of the
Subsidiaries which were not acquired by the Company.
(2) Adjusted to reflect the reductions in compensation levels that certain
former stockholders of the Subsidiaries who served as officers,
administrators or salespeople of their respective companies and officers of
the Company have contractually agreed to receive from the Company
subsequent to the Acquisitions. This estimate is based on the elimination
of (i) base compensation in excess of the specified amounts included in
employment contracts signed by the Continuing Employees, (ii) bonuses,
based on a determination by the Board of Directors that bonuses will not be
granted by the Company during the fiscal years ended December 31, 1997 and
1998, and (iii) various compensation related expenses which, effective June
2, 1997, were no longer allowed pursuant to expense policies approved by
the Board of Directors of the Company. The Company believes that the duties
and responsibilities of the Continuing Employees will not be diminished as
a result of the Acquisitions. Accordingly, the Company believes that no
other costs will be incurred to offset the
(Footnotes continued on following page)
20
<PAGE>
(Continued from preceding page)
reductions in compensation levels of the Continuing Employees. The Company
believes that this information is necessary for investors to realistically
assess the impact of the Acquisitions. Certain former stockholders of the
Subsidiaries, including Edward H.L. Mason, Margaret Mason, Eric Nerenberg
and Thomas A. Gust, were compensated for services provided to the
Subsidiaries prior to the Acquisitions and will not be employed by the
Company subsequent to the Offering. The compensation paid to the
Noncontinuing Employees has been considered in the adjustment. The Company
believes that the duties and responsibilities of the Noncontinuing
Employees will be absorbed by the Continuing Employees. Additionally, a
management fee was paid to Alongal prior to the Acquisitions and the
Company does not intend to pay a management fee to Alongal after completion
of the Offering. The adjustments are summarized as follows:
Pro Forma
Company Adjustment
------- ----------
Tekgraf, Inc. (formerly Crescent)................................... (116,640)
Microsouth ......................................................... 19,645
tekgraf Texas ...................................................... 36,384
IPM/IG ............................................................. (136,683)
CGD ................................................................ (161,450)
G&R ................................................................ (199,181)
--------
(557,925)
========
(3) Reflects the elimination of amortization related to negative goodwill.
(4) Reflects the elimination of the pro rata interest expense incurred on
capital to be contributed by the pre-Acquisition stockholders of the
Company.
(5) Gives effect to the estimated provision to reflect federal and state income
taxes as if all of the Subsidiaries had been C Corporations and the
incremental provision for the pro forma adjustments. This adjustment
records income tax expense at an effective combined tax rate of 39%,
adjusted for non-deductible goodwill amortization.
(6) Adjusted to reflect the amortization of the estimated goodwill recorded in
connection with the Acquisitions. Goodwill is being amortized over 15
years.
(7) Gives effect to the Acquisitions and subsequent Recapitalization. Weighted
average shares outstanding excludes the 166,667 Escrow Shares. The Escrow
Shares will be released from escrow only in the event that one or more of
the following conditions are met:
(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (all as audited by the
Company's independent public accountants) (the "Minimum Pretax
Income") amounts to at least $8,700,000 for the fiscal year ended
December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $13,000,000 for the
fiscal year ending December 31, 1999;
(iii)the Minimum Pretax Income amounts to at least $17,900,000 for the
fiscal year ending December 31, 2000;
(iv) the Closing Price (as defined in the Escrow Agreement) of the Class A
Common Stock averages in excess of $16.25 per share for 30 consecutive
business days during the 18-month period commencing on the date of
this Prospectus;
(v) the Closing Price of the Class A Common Stock averages in excess of
$20.00 per share for 30 consecutive business days during the 18-month
period commencing 18 months from the date of this Prospectus. See
"Principal Stockholders - Escrow Shares."
21
<PAGE>
Tekgraf, Inc.
Unaudited Pro Forma Combined Statement of Operations
for the six months ended June 30, 1997
<TABLE>
<CAPTION>
Intelligent Computer
Tekgraf, Inc. Products IG Graphics G&R
(formerly Crescent Microsouth, tekgraf, inc. Marketing, Distribution, Distributing Marketing,
Computers, Inc.) Inc. (Texas) Inc. Inc. Company Inc.
---------------- ----------- ------------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ...................... $6,830,960 $ 5,886,966 $ 2,039,816 $3,824,183 $ 13,531 $6,223,966 $9,907,544
Cost of goods sold ............. 5,590,055 4,907,177 1,665,708 2,809,596 -- 5,159,778 8,492,645
---------- ----------- ----------- ---------- --------- ---------- ----------
Gross profit ............... 1,240,905 979,789 374,108 1,014,587 13,531 1,064,188 1,414,899
Operating expenses:
Selling, general and
administrative .......... 834,255 542,753 141,555 885,850 451 859,511 1,123,633
Depreciation ............... 20,736 12,000 10,321 10,736 14,651 27,000
Amortization ............... -- (27,911) (13,088) -- -- -- --
---------- ----------- ----------- ---------- --------- ---------- ----------
Income from operations ......... 385,914 452,947 235,320 118,001 13,080 190,026 264,266
Other income ................... 14,410 14,452 5,752 22,120
Interest expense ............... 80,000 64,281 63,090
---------- ----------- ----------- ---------- --------- ---------- ----------
Income before income
taxes and extraordinary
gain ....................... 305,914 467,357 235,320 132,453 13,080 131,497 223,296
Provision for income taxes ..... 116,800 93,452 9,673 46,024
---------- ----------- ----------- ---------- --------- ---------- ----------
Income before minority
interest and
extraordinary gain ......... 189,114 467,357 235,320 39,001 3,407 85,473 223,296
Minority interest .............. 14,629 -- -- -- -- -- --
---------- ----------- ----------- ---------- --------- ---------- ----------
Income before extraordinary
gain ....................... $ 174,485 $ 467,357 $ 235,320 $ 39,001 $ 3,407 $ 85,473 $ 223,296
========== =========== =========== ========== ========= ========== ==========
Pro forma income before
extraordinary gain per
share -- primary and
fully diluted ..............
Estimated pro forma weighted
average shares outstanding
-- primary and fully diluted
</TABLE>
<TABLE>
<CAPTION>
Combined
Acquired
Companies Pro Forma Adjustments Pro Forma
------------ --------------------------- ---------
<S> <C> <C> <C> <C>
Net sales ...................... $ 27,896,006 $ (42,484)(1) $ 34,684,482
Cost of goods sold ............. 23,034,904 -- (43,097)(1) 28,581,862
------------ --------- ------------ -----------
Gross profit ............... 4,861,102 (42,484) 43,097 6,102,620
Operating expenses:
Selling, general and
administrative .......... 3,553,753 (222,348)(2) -- 4,165,660
Depreciation ............... 74,708 95,444
Amortization ............... (40,999) (40,999)(3) 200,369(6) 200,369
------------ --------- ------------ -----------
Income from operations ......... 1,273,640 138,865 (157,272) 1,641,147
Other income ................... 56,734 56,734
Interest expense ............... 127,371 (36,676)(4) -- 170,695
------------ --------- ------------ -----------
Income before income
taxes and extraordinary
gain ....................... 1,203,003 175,541 (157,272) 1,527,186
Provision for income taxes ..... 149,149 407,796(5) -- 673,745
------------ --------- ------------ -----------
Income before minority
interest and
extraordinary gain ......... 1,053,854 (232,255) (157,272) 853,441
Minority interest .............. -- -- -- 14,629
------------ --------- ------------ -----------
Income before extraordinary
gain ....................... $ 1,053,854 $(232,255) $ (157,272) $ 838,812
============ ========= ============ ===========
Pro forma income before
extraordinary gain per
share -- primary and
fully diluted .............. $.26
====
Estimated pro forma weighted
average shares outstanding
-- primary and fully diluted 3,166,666(7)
=========
</TABLE>
- ----------
(1) Reflects the elimination of expenses related to affiliated entities of the
Subsidiaries which were not acquired by the Company and the elimination of
revenue and expenses between IPM and IG.
(Footnotes continued on following page)
22
<PAGE>
(Continued from preceding page)
(2) Adjusted to reflect the reductions in compensation levels that certain
former stockholders of the Subsidiaries who served as officers,
administrators or salespeople of their respective companies and officers of
the Company have contractually agreed to receive from the Company
subsequent to the Acquisitions. This estimate is based on the elimination
of (i) base compensation in excess of the specified amounts included in
employment contracts signed by the Continuing Employees, (ii) bonuses,
based on a determination by the Board of Directors that bonuses will not be
granted by the Company during the fiscal years ended December 31, 1997 and
1998, and (iii) various compensation related expenses which, effective June
2, 1997, were no longer allowed pursuant to expense policies approved by
the Board of Directors of the Company. The Company believes that the duties
and responsibilities of the Continuing Employees will not be diminished as
a result of the Acquisitions. Accordingly, the Company believes that no
other costs will be incurred to offset the reductions in compensation
levels of the Continuing Employees. The Company believes that this
information is necessary for investors to realistically assess the impact
of the Acquisitions. Certain former stockholders of the Subsidiaries,
including Edward H.L. Mason, Margaret Mason, Eric Nerenberg and Thomas A.
Gust, were compensated for services provided to the Subsidiaries prior to
the Acquisitions and will not be employed by the Company subsequent to the
Offering. The compensation paid to the Noncontinuing Employees has been
considered in the adjustment. The Company believes that the duties and
responsibilities of the Noncontinuing Employees will be absorbed by the
Continuing Employees. Additionally, a management fee was paid to Alongal
prior to the Acquisitions and the Company does not intend to pay a
management fee to Alongal after completion of the Offering. The adjustments
are summarized as follows:
Pro Forma
Company Adjustment
------- ----------
Tekgraf, Inc. (formerly Crescent)................................... (27,500)
Microsouth ......................................................... 32,570
tekgraf Texas ...................................................... 62,250
IPM/IG ............................................................. (121,071)
CGD ................................................................ (53,300)
G&R ................................................................ (115,297)
--------
(222,348)
========
(3) Reflects the elimination of amortization related to negative goodwill.
(4) Reflects the elimination of the pro rata interest expense incurred on
capital to be contributed by the pre-Acquisition stockholders of the
Company.
(5) Gives effect to the estimated provision to reflect federal and state income
taxes as if all of the Subsidiaries had been C Corporations and the
incremental provision for the pro forma adjustments. This adjustment
records income tax expense at an effective combined tax rate of 39%,
adjusted for non-deductible goodwill amortization.
(6) Adjusted to reflect the amortization of the estimated goodwill recorded in
connection with the Acquisitions. Goodwill is being amortized over 15
years.
(7) Gives effect to the Acquisitions and subsequent Recapitalization. Weighted
average shares outstanding excludes the 166,667 Escrow Shares. The Escrow
Shares will be released from escrow only in the event that one or more of
the following conditions are met.
23
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
Effective June 2, 1997, Crescent acquired all of the outstanding common
stock of G&R, Microsouth, tekgraf Texas, CGD, IPM and IG. The financial
information presented below represents selected historical data for Crescent and
the Subsidiaries. For a discussion of the pro forma combined operating results,
see the "Unaudited Pro Forma Combined Statements of Operations" of the Company
and related notes thereto. The following selected financial and operating data
selected by the Company should be read in conjunction with the historical
financial statements of Crescent and the Subsidiaries and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The selected financial data of Crescent as of December 31, 1995 and 1996
and for each of the three years in the period ended December 31, 1996, of G&R
and CGD for each of the three years in the period ended December 31, 1996, of
IPM and IG for the years ended December 31, 1995 and 1996, of Microsouth for the
six month period ended December 31, 1995 and for the year ended December 31,
1996, and of tekgraf Texas for the year ended December 31, 1996, have been
derived from financial statements audited by Coopers & Lybrand L.L.P. which
appear elsewhere. The audited historical financial statements have been included
in accordance with Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 80. SAB 80 provides technical guidance on the application of Rule
3-05 of Regulation S-X in an initial public offering of a business built by the
aggregation of discrete businesses that remain substantially intact after the
acquisitions. Rule 3-05 establishes the financial statement requirements for
businesses acquired.
All other selected financial data have been derived from unaudited
financial statements which have been prepared on the same basis as the audited
financial statements and, in the opinion of management of Crescent and the
Subsidiaries, reflect all adjustments, consisting only of normal, recurring
adjustments, necessary for a fair presentation of such data. The selected data
for Crescent for the six month period ended June 30, 1997 excludes operations of
the Subsidiaries for the period from June 3, 1997 through June 30, 1997 for
which the Company operated as a combined entity. The selected data for the
Subsidiaries includes operations from June 3, 1997 through June 30, 1997. All
amounts are presented in thousands except share and per share data.
Crescent
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
-------------------------------------------- ---------------------
1993 1994 1995 1996 1996 1997
-------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data(1):
Net sales ............................. $4,943 $6,340 $12,277 $13,414 $6,850 $6,831
Cost of goods sold .................... 4,214 5,228 10,368 10,952 5,698 5,590
-------- ------- -------- --------- -------- ---------
Gross profit .......................... 729 1,111 1,910 2,463 1,152 1,241
Operating expenses:
Selling, general and
administrative ................. 772 1,082 1,761 2,245 916 834
Depreciation .......................... 4 8 28 17 15 21
-------- ------- -------- --------- -------- ---------
Operating income (loss) ............... (47) 21 120 201 220 386
Other income ....................... 39 -- -- 15 40 --
Interest expenses .................. 3 40 126 160 60 80
-------- ------- -------- --------- -------- ---------
Income (loss) before taxes and
minority interest .................. (11) (19) (5) 56 200 306
Provision (benefit) for income taxes .. (4) (4) (2) 13 13 117
-------- ------- -------- --------- -------- ---------
Income (loss) before minority ......... (15) (15) (4) 43 187 189
Minority interest ..................... -- -- -- -- 25 15
-------- ------- -------- --------- -------- ---------
Net income (loss) ..................... $ (15) $ (15) $ (4) $ 43 $ 163 $ 174
======== ======= ======== ========= ======== =========
</TABLE>
December 31, December 31, June 30,
1995 1996 1997
------------ ------------ --------
Balance Sheet Data:
Working capital ....................... $ (51) $ (104) $ (17)
Total assets .......................... 2,264 3,007 3,792
Due to stockholders, net .............. 1,616 2,211 2,159
Due to related entities ...............
Stockholders' equity (deficit) ........ (33) 10 199
- ----------
(1) Crescent began operations in March of 1993. Accordingly, data is provided
only for fiscal years 1993 through 1996.
24
<PAGE>
Microsouth
<TABLE>
<CAPTION>
Six Months Ended
Six Month Period Year Ended June 30,
Ended December 31, December 31, --------------------
1995 1996 1996 1997
------------------ ------------ ------- -------
<S> <C> <C> <C> <C>
Statement of Income Data:
Net sales ............................ $ 4,636 $ 10,325 $ 4,746 $ 5,887
Cost of goods sold ................... 3,933 8,595 3,901 4,907
------- -------- ------- -------
Gross profit ......................... 703 1,731 845 980
Selling, general and administrative 590 1,256 548 543
Depreciation ...................... 2 9 6 12
Amortization ...................... (33) (67) (33) (28)
------- -------- ------- -------
Operating income ..................... 145 533 325 453
Other income ...................... 16 28 26 14
Interest expenses ................. 5 60 25 --
------- -------- ------- -------
Income before extraordinary gain ..... 156 500 326 467
Extraordinary gain ................... -- -- -- 210
------- -------- ------- -------
Net income ........................... $ 156 $ 500 $ 326 $ 677
======= ======== ======= =======
</TABLE>
tekgraf Texas
Six Months Ended
Year Ended June 30,
December 31, ---------------------
1996 1996 1997
------ ------ ------
Statement of Income Data:
Net sales ............................ $ 4,063 $ 1,948 $ 2,040
Cost of goods sold ................... 3,380 1,632 1,666
------- ------- -------
Gross profit ......................... 682 315 374
Selling, general and administrative 318 131 142
Depreciation ...................... 10 10 10
Amortization ...................... (31) (16) (13)
------- ------- -------
Operating income ..................... 342 190 235
Interest expenses ................. 15 10 --
------- ------- -------
Income before extraordinary gain ..... 371 180 235
Extraordinary gain ................... -- -- 70
------- ------- -------
Net income ........................... $ 371 $ 180 $ 305
======= ======= =======
CGD
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ............................ $12,948 $11,095 $11,003 $5,130 $6,224
Cost of goods sold ................... 11,110 9,192 9,144 4,338 5,160
------- ------- ------- ------ ------
Gross profit ......................... 1,838 1,903 1,859 792 1,064
Selling, general and administrative 1,564 1,670 1,609 742 860
Depreciation ...................... 20 19 27 9 15
------- ------- ------- ------ ------
Operating income ..................... 255 214 223 41 190
Other income ...................... 23 17 55 32 6
Interest expense .................. 154 145 124 53 64
------- ------- ------- ------ ------
Income before taxes .................. 123 87 155 20 131
Provision for income taxes ........... 45 20 51 6 46
------- ------- ------- ------ ------
Net income ........................ $ 79 $ 66 $ 104 $ 13 $ 85
======= ======= ======= ====== ======
</TABLE>
25
<PAGE>
IGD (IPM and IG)
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------ -------------------------
1995 1996 1996 1997
------- ------- ------ ------
<S> <C> <C> <C> <C>
Statement of Income Data:
IPM(1):
Net sales ............................ $ 7,647 $ 9,059 $5,441 $3,824
Cost of goods sold ................... 6,344 7,578 4,187 2,810
------- ------- ------ ------
Gross profit ......................... 1,303 1,480 1,255 1,015
Selling, general and administrative 1,052 1,333 1,154 886
Depreciation ...................... 46 43 30 11
------- ------- ------ ------
Operating income (loss) .............. 205 104 70 118
Other income (expense) ............ (65) (26) 27 14
------- ------- ------ ------
Income (loss) before taxes ........... 140 78 98 132
Provision for income taxes ........... 46 22 12 93
------- ------- ------ ------
Net income (loss) .................... $ 94 $ 56 $ 86 $ 39
======= ======= ====== ======
IG:
Revenue .............................. $ 35 $ 45 $ 26 $ 14
Selling, general and administrative .. 1 1 -- 1
Operating income ..................... 34 44 26 13
Provision for income taxes ........... 10 8 6 10
------- ------- ------ ------
Net income ........................... $ 25 $ 36 $ 20 $ 3
======= ======= ====== ======
</TABLE>
- ----------
(1) The results of operations include the operations of a division not acquired
by the Company.
G&R
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ............................ $21,317 $20,784 $21,038 $ 9,787 $9,908
Cost of goods sold ................... 18,677 17,990 18,117 8,389 8,493
------- ------- ------- ------- ------
Gross profit ......................... 2,640 2,794 2,921 1,398 1,415
Selling, general and administrative 2,281 2,387 2,551 1,175 1,124
Depreciation ...................... 48 67 57 27 27
------- ------- ------- ------- ------
Operating income ..................... 311 339 313 195 264
Other income (expense) ............ -- 1 -- (60) 22
Interest expense .................. 137 166 140 69 63
------- ------- ------- ------- ------
Income before taxes .................. 174 174 173 66 223
Provision for income taxes ........... 3 3 4 -- --
------- ------- ------- ------- ------
Net income ........................ $ 170 $ 171 $ 169 $ 66 $ 223
======= ======= ======= ======= ======
</TABLE>
26
<PAGE>
Combined Companies
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1996 1997
------------ ----------------
<S> <C> <C>
Combined Pro Forma Statement of Income Data(1):
Net sales(2) ................................................................... $ 68,902 $ 34,684
Cost of goods sold(3) .......................................................... 57,643 28,582
---------- ----------
Gross profit ................................................................... 11,259 6,103
Selling, general and administrative(4) ...................................... 7,500 4,165
Depreciation ................................................................ 162 95
Amortization(5) ............................................................. 401 200
---------- ----------
Operating income: .............................................................. 3,197 1,641
Other income(6) ............................................................. 116 57
Interest expense ............................................................ 431 171
---------- ----------
Income before taxes minority interest
and extraordinary gain(7) ................................................ 2,883 1,527
Provision for income taxes(8) ............................................... 1,281 674
---------- ----------
Income before minority interest and extraordinary gain ...................... $ 1,603 $ 853
---------- ----------
Minority interest ........................................................... -- 15
---------- ----------
Income before extraordinary gain ............................................... $ 1,603 $ 839
---------- ----------
Pro forma income per share before extraordinary gain - primary and fully diluted $ .51 $ .26
========== ==========
Estimated pro forma weighted average shares outstanding - primary
and fully diluted(9) ........................................................ 3,166,666 3,166,666
========== ==========
</TABLE>
- ----------
(1) See "Unaudited Pro Forma Combined Financial Statements" of the Company for
the year ended December 31, 1996 and the six months ended June 30, 1997.
(2) Adjusted to reflect the Acquisitions, the elimination of revenue between
IPM and IG, and the elimination of expenses related to affiliated entities
of the Subsidiaries not acquired by the Company.
(3) Adjusted to reflect the Acquisitions and the elimination of expenses
related to affiliated entities of the Subsidiaries not acquired by the
Company.
(4) Adjusted to reflect the Acquisitions and the reductions in compensation
level that certain former stockholders of the Subsidiaries and officers of
the Company have agreed to receive from the Company subsequent to the
Acquisitions.
(5) Adjusted to reflect the amortization of the estimated goodwill recorded in
connection with the Acquisitions.
(6) Adjusted to reflect the elimination of expenses between IPM and IG.
(7) Adjusted for the elimination of the pro rata interest expense on capital to
be contributed by the pre-Acquisition stockholders of the Company.
(8) Gives effect to the estimated provision to reflect federal and state income
taxes as if all of the Subsidiaries been C Corporations and the incremental
provision for the pro forma adjustments.
(9) Gives effect to the Acquisitions and subsequent Recapitalization.
Fully-diluted weighted average shares outstanding excludes the Escrow
Shares.
June 30, 1997
-------------------------------
Actual As Adjusted(1)
------- --------------
Balance Sheet Data:
Working capital ........................ $ 2,512 $14,495
Total assets ........................... 23,587 29,368
Total debt ............................. 5,984 --
Stockholders' equity ................... 9,163 20,877
- ----------
(1) Adjusted to reflect (i) the sale of 2,100,000 Units offered hereby; (ii)
the repayment, upon completion of the Offering, of bank debt ($2,598,650 at
June 30, 1997); (iii) the repayment, upon completion of the Offering, of
outstanding indebtedness to current and former stockholders (an aggregate
of $2,249,000 at June 30, 1997); (iv) the contribution to capital, upon
completion of the Offering, of an aggregate of $990,000 by the
pre-Acquisition stockholders; and (v) the payment and collection, after the
Offering, of the estimated Purchase Price Adjustments. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Certain Transactions."
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's unaudited pro forma combined financial statements and the audited
financial statements of the Company and the Subsidiaries, and the notes thereto,
appearing elsewhere in this Prospectus.
Results of Operations
Overview
Crescent was incorporated in Georgia in February 1993. In December 1994,
Crescent completed the acquisition of a 60% interest in Prisym. In June 1997,
Crescent completed the acquisition of a 100% interest in each of the
Subsidiaries. The Acquisitions of each of the Subsidiaries has been accounted
for using the purchase method of accounting. Subsequent to the Acquisitions, the
Company completed the Merger pursuant to which it reincorporated in the State of
Delaware and effected a recapitalization pursuant to which each share of common
stock of the Georgia entity was exchanged for 400 shares of Class B Common Stock
of the Delaware entity.
The Subsidiaries have operated throughout the periods presented as
independent private companies, and, as such, their results of operations reflect
two structures, S Corporations and C Corporations. The particular corporate
structure of each Subsidiary has influenced, among other things, the historical
levels of compensation paid to its principals. Certain of such individuals have
contractually agreed to a reduction in their compensation and benefits in
connection with the Acquisitions. The compensation differential and the related
income tax effects have been reflected in the pro forma adjustments in the
accompanying pro forma information provided elsewhere in this Prospectus.
Net sales reflect the sale of the Company's products, net of allowances for
returns and other adjustments and include minimal revenues related to services
performed at the Company's premises. Sales are generated from the sale of
products in both the domestic and international markets. No individual customer
accounted for more than 6% of sales during 1996 or during the six months ended
June 30, 1997 on a combined basis.
Cost of goods sold consists primarily of product costs (cost of manufacture
or acquisition) and freight charges. Cost of sales also includes direct
expenses, such as labor and inventory, obtaining FCC certification of products
where required, the cost of shipping and delivery charges to bring the product
to the Company's premises, as well as overhead allocated to direct expenses,
incurred in manufacturing products sold by the Company. The direct cost
associated with providing services performed by the Company for its customers is
also included in the cost of goods sold.
Sales and gross profits depend in part on the volume and mix of components
and finished goods contained in the Company's inventory from time to time.
Manufactured product sales have a higher gross profit margin with a relatively
lower volume of sales per customer, while component sales have a comparably low
gross profit with a relatively high volume of sales per customer. The Company
expects that gross margins will continue at the levels experienced in 1996.
A large portion of the Company's operating expenses is relatively fixed.
Since the Company does not obtain long-term purchase orders or commitments from
its customers, it must anticipate the future volume of orders based upon
historical purchasing practices of its customers as to their future
requirements. Cancellations, reductions or delays in orders by a customer or
group of customers could have a material adverse effect on the Company's
business, financial condition and results of operations.
Selling, general and administrative ("SG&A") expenses include costs related
to the Company's sales force, which are comprised of both direct employees of
the Company and independent sales representatives. Included are direct labor
costs for in-house sales representatives as well as commissions paid to both
in-house and independent sales personnel. Costs associated with marketing and
advertising of the Company's products are also included in SG&A expenses, along
with expenses relating to corporate and administrative functions that serve to
support the existing products and service business of the Company, as well as to
provide the infrastructure for future growth. Also reflected as SG&A expenses
are certain management, supervisory and staff salaries and employee benefits,
data processing, training, rent, and office supply costs.
28
<PAGE>
Interest expense includes costs and expenses associated with working
capital indebtedness, as evidenced by outstanding balances on the Company's
principal credit facilities, and working capital advances made by certain
current and former stockholders.
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; however, the Company
estimates the amount of such savings to be approximately $200,000 annually,
although there can be no assurance that actual savings will not be significantly
below such amount. Offsetting these anticipated benefits are anticipated
increases in personnel costs and expenses to be incurred in developing the
Company's corporate infrastructure and the costs associated with being a public
company, 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 financial information included herein. See
the introduction to "Unaudited Pro Forma Combined Financial Statements." As a
result, historical combined results may not be comparable to, or indicative of,
future performance.
The following financial information has been rounded in order to simplify
its presentation. However, the percentages provided below are calculated using
the detailed financial information contained in the financial statements, the
notes thereto and the other financial data included elsewhere in the Prospectus.
Year-end comparisons are only presented for the periods for which full year
financial statements are included herein.
Crescent
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
Net Sales. Net sales decreased $19,000, or .3%, to $6.83 million for the
six months ended June 30, 1997 (the "1997 six months") compared to $6.85 million
for the six months ended June 30, 1996 (the "1996 six months"). The decrease in
net sales was primarily attributable to a shift in focus to higher margin sales
and a decrease in lower margin sales.
Gross Profit. Gross profit increased $89,000, or 7.7%, to $1.24 million
for the 1997 six months compared to $1.15 million for the 1996 six months. Gross
margin increased to 18.2% for the 1997 six months compared to 16.82% for the
1996 six months. The increases were primarily attributable to the shift to
higher margin sales.
SG&A Expenses. SG&A expenses decreased $82,000, or 9%, to $834,000 for
the 1997 six months compared to $916,000 for the 1996 six months. SG&A expenses
as a percentage of net sales decreased to 12.1% for the 1997 six months compared
to 13.4% for the 1996 six months. This change was primarily attributable to the
elimination of management fees charged by Alongal.
Operating Income. Operating income increased $100,000 to $386,000 for the
1997 six months compared to $220,000 for the 1996 six months.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Net sales. Net sales increased $1.14 million, or 9.3%, to $13.41 million
for the year ended December 31, 1996 ("1996") compared to $12.28 million for the
year ended December 31, 1995 ("1995"). The increase in net sales was primarily
attributable to strong sales in the OEM sector to both established and new OEM
customers as a result of a focus on systems sales and increased market
penetration by Prisym resulting from an expanded sales force.
Gross Profit. Gross profit increased $553,000, or 29%, to $2.46 million for
1996 compared to $1.91 million for 1995. Gross margin increased to 18.4% for
1996 compared to 15.6% for 1995, primarily as a result of the growth in system
sales to specialized OEMs.
SG&A Expenses. SG&A expenses increased $484,000, or 27.5%, to $2.24 million
for 1996 compared to $1.76 million for 1995. This increase was primarily
attributable to increased infrastructure and higher commissions. SG&A expenses
as a percentage of net sales increased to 16.7% for 1996 compared to 14.3% for
1995.
29
<PAGE>
Operating Income. Operating income increased $81,000, or 68%, to $201,000
for 1996 compared to $120,000 for 1995.
Year Ended December 31, 1995 Compared With Year Ended December 31, 1994
Net Sales. Net sales increased $5.94 million, or 94%, to $12.28 million for
1995 compared to $6.34 million for the year ended December 31, 1994 ("1994").
The increase in net sales was primarily attributable to the acquisition of
Prisym in December 1994.
Gross Profit. Gross profit increased $799,000, or 72%, to $1.91 million for
1995 compared to $1.11 million for 1994. Gross margin decreased to 15.6% for
1995 compared to 17.5% for 1994, primarily as a result of an increase in sales
by Prisym which operates at lower margins.
SG&A Expenses. SG&A expenses increased $679,000, or 62.8%, to $1.77 million
for 1995 compared to $1.08 million for 1994. This increase was primarily
attributable to the addition of the costs of Prisym. SG&A expenses as a
percentage of net sales decreased to 14.3% for 1995 compared to 17.1% for 1994.
Operating Income. Operating income increased $99,000 to $120,000 for 1995
compared to $21,000 for 1994.
tekgraf Texas
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
Net Sales. Net sales increased $90,000, or 4.6%, to $2.04 million for the
1997 six months compared to $1.95 million for the 1996 six months. The increase
resulted primarily from a broadening of tekgraf Texas' customer base combined
with greater market acceptance of certain of the company's principal products.
Gross Profit. Gross profit increased $59,000, or 18.7%, to $374,000 for the
1997 six months compared to $315,000 for the 1996 six months. Gross margin
increased to 18.3% for the 1997 six months compared to 16.2% for the 1996 six
months, primarily as a result of a shift in the company's business to the sale
of higher margin systems.
SG&A Expenses. SG&A expenses increased $11,000, or 8.4%, to $142,000 for
the 1997 six months compared to $131,000 for the 1996 six months. This increase
was primarily attributable to higher commissions associated with the increase in
higher margin sales. SG&A expenses as a percentage of net sales increased to 7%
for the 1997 six months compared to 6.7% for the 1996 six months, primarily as a
result of an increase in outside sales expenses.
Operating Income. Operating income increased $45,000 to $235,000 for the
1997 six months compared to $190,000 for the 1996 six months.
Included in the statement of operations for the 1997 six months was an
extraordinary gain of $70,000 resulting from the early extinguishment of a note
payable with the former parent of Tekgraf Texas. See "Certain Transactions -
Pre-Acquisition Transactions Between the Subsidiaries and Their Respective
Affiliates."
IGD (IPM and IG)
General
The following analysis includes operations of a division of IPM not
acquired by the Company and, accordingly, period to period comparisons may not
be meaningful.
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
Net Sales. Net sales decreased by $1.63 million, or 29.8%, to $3.84 million
for the 1997 six months compared to $5.47 million for the 1996 six months. The
decrease in IGD's net sales was primarily attributable to a reduction in demand
for low and mid-range scanner products and increased competition in the sale of
high-end proofing systems. In addition, an aggressive sale promotion run by a
vendor in the 1996 six months was not repeated in the 1997 six months.
Gross Profit. Gross profit decreased $250,000, or 19.5%, to $1.03 million
for the 1997 six months compared to $1.28 million for the 1996 six months, in
line with the decline in sales. Gross margin increased to 26.8% for the 1997 six
months compared to 23.4% for the 1996 six months, reflecting a shift in product
mix to higher margin sales.
SG&A Expenses. SG&A expenses decreased $269,000, or 23.3%, to $886,000 for
the 1997 six months compared to $1.15 million for the 1996 six months, primarily
as a result of reductions of costs in line with reduced sales. As a result of
the decrease in revenues, SG&A expenses as a percentage of net sales increased
to 23.1% for the 1997 six months compared to 21.1% for the 1996 six months.
30
<PAGE>
Operating Income. Operating income increased $35,000 to a gain of $131,000
for the 1997 six months compared to income of $96,000 for the 1996 six months.
Year Ended December 31 ,1996 Compared With Year Ended December 31, 1995
Net Sales. Net sales increased $1.42 million, or 18.5%, to $9.10 million
for 1996 compared to $7.68 million for 1995. The increase in net sales was
primarily attributable to increased sales in certain product lines and an
expanded customer base.
Gross Profit. Gross profit increased $187,000, or 14%, to $1.52 million
for 1996 compared to $1.34 million for 1995. Gross margin decreased to 16.7% for
1996 compared to 17.4% for 1995, primarily as a result of an increase in lower
margin sales.
SG&A Expenses. SG&A expenses increased $282,000, or 26.8%, to $1.33 million
for 1996 compared to $1.05 million for 1995. This increase was primarily
attributable to an increase in personnel and higher commissions. SG&A expenses
as a percentage of net sales increased to 14.7% for 1996 compared to 13.7% for
1995.
Operating Income. Operating income decreased $91,000 to $148,000 for 1996
compared to $239,000 for 1995.
CGD
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30,
1996.
Net Sales. Net sales increased $1.09 million, or 21.2%, to $6.22 million
for the 1997 six months compared to $5.13 million for the 1996 six months. The
increase in net sales was primarily attributable to the introduction of new
products and increased sales of one of the Company's existing product lines. In
addition, bad weather conditions adversely impacted sales during the first
quarter of 1996.
Gross Profit. Gross profit increased $272,000, or 34.3%, to $1.06 million
for the 1997 six months compared to $792,000 for the 1996 six months. Gross
margin increased to 17.1% for the 1997 quarter compared to 15.4% for the 1996
six months, primarily as a result of an increase in sales of higher margin
product lines.
SG&A Expenses. SG&A expenses increased $118,000, or 15.9%, to $860,000 for
the 1997 six months compared to $742,000 for the of 1996 six months. This
increase was primarily attributable to a net increase in personnel and sales
commissions. SG&A expenses as a percentage of net sales decreased to 13.8% for
the 1997 six months compared to 14.5% for the 1996 six months.
Operating Income. Operating income increased $149,000 to $190,000 for the
1997 six months compared to $41,000 for the 1996 six months.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Net Sales. Net sales decreased $92,000, or 1%, to $11.00 million for 1996
compared to $11.10 million for 1995. The decrease in 1996's net sales was
primarily attributable to an approximately $2.0 million decrease in sales of one
of the Company's product lines as its competitive advantages declined, which was
offset by an increase in net sales from a different product line.
Gross Profit. Gross profit decreased $44,000, or 2.3%, to $1.86 million for
1996 compared to $1.90 million for 1995. Gross margin decreased to 16.9% for
1996 compared to 17.2% for 1995, primarily as a result of the loss of a higher
margin product line and the increase in sales of lower margin products.
SG&A Expenses. SG&A expenses decreased $61,000, or 3.7%, to $1.61 million
for 1996 compared to $1.67 million for 1995. This decrease was primarily
attributable to decreases in commissions and profit sharing contributions. SG&A
expenses as a percentage of net sales decreased to 14.6% for 1996 compared to
15.1% for 1995.
Operating Income. Operating income increased $9,000 to $223,000 for 1996
compared to $214,000 for 1995.
Year Ended December 31, 1995 Compared With Year Ended December 31, 1994
Net Sales. Net sales decreased $1.85 million, or 14.3%, to $11.10 million
for 1995 compared to $12.95 million for 1994. The decrease in 1995's net sales
was primarily attributable to the loss of one product line as a result of the
applicable vendor's loss of its marketing rights to its top product. This
product line had accounted for in excess of $2.5 million in net sales in 1994.
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Gross Profit. Gross profit increased $65,000, or 3.5%, to $1.90 million for
1995 compared to $1.84 million for 1994. Gross margin increased to 17.2% for
1995 compared to 14.2% for 1994. The increases primarily resulted from the
discontinuation of low margin product lines such as color monitors and the
introduction of higher margin graphic arts related lines.
SG&A Expenses. SG&A expenses increased $106,000, or 6.8%, to $1.67 million
for 1995 compared to $1.56 million for 1994, primarily as a result of an
increase in bad debt write-offs. SG&A expenses as a percentage of net sales
increased to 15.1% for 1995 compared to 12.1% for 1994.
Operating Income. Operating income decreased $41,000 to $214,000 for 1995
compared to $254,000 for 1994.
G&R
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996
Net Sales. Net sales increased $120,000, or 1.2%, to $9.91 million for the
1997 six months compared to $9.79 million for the 1996 six months, primarily as
a result the addition of new product lines from existing vendors.
Gross Profit. Gross profit increased $10,000, or .7%, to $1.41 million for
the 1997 six months compared to $1.40 million for the 1996 six months. Gross
margin was 14.3% in both the 1997 and 1996 six months. The increase in gross
profit was primarily attributable to the increase in sales.
SG&A Expenses. SG&A expenses decreased $60,000, or 5.1%, to $1.12 million
for the 1997 six months compared to $1.18 million for the 1996 six months,
primarily as a result of a decrease in the sales commission rate. SG&A expenses
as a percentage of net sales decreased to 11.3% for the 1997 six months compared
to 12.0% for the 1996 six months.
Operating Income. Operating income increased $69,000 to $264,000 for the
1997 six months compared to $195,000 for the 1996 six months.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Net Sales. Net sales increased $254,000, or 1.2%, to $21.0 million for 1996
compared to $20.78 million for 1995, primarily as a result of the addition of
new product lines which offset the discontinuance of other product lines.
Gross Profit. Gross profit increased $127,000, or 4.5%, to $2.9 million for
1996 compared to $2.79 million for 1995. Gross margin increased to 13.9% for
1996 compared to 13.4% for 1995, primarily as a result of sales of higher margin
products.
SG&A Expenses. SG&A expenses increased $164,000, or 6.9%, to $2.55 million
for 1996 compared to $2.39 million for 1995, primarily as a result of a
commission rate change for 1996, and the addition of sales personnel. SG&A
expenses as a percentage of net sales increased to 12.1% for 1996 compared to
11.5% for 1995.
Operating Income. Operating income decreased $26,000 to $313,000 for 1996
compared to $339,000 for 1995.
Year Ended December 31, 1995 Compared With Year Ended December 31, 1994
Net Sales. Net sales decreased $533,000, or 2.5%, to $20.78 million for
1995 compared to $21.32 million for 1994, primarily as a result of the loss or
discontinuance of product lines.
Gross Profit. Gross profit increased $154,000, or 5.8%, to $2.79 million
for 1995 compared to $2.64 million for 1994. Gross margin increased to 13.4% for
1995 compared to 12.4% for 1994, primarily as a result of a shift to higher
margin product line sales.
SG&A Expenses. SG&A expenses increased $106,000, or 4.6%, to $2.39 million
for 1995 compared to $2.28 million for 1994. This increase was primarily
attributable to increased overhead associated with a facilities expansion. SG&A
expenses as a percentage of net sales increased to 11.5% for 1995 compared to
10.7% for 1994.
Operating Income. Operating income increased $28,000 to $339,000 for 1995
compared to $311,000 for 1994.
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Microsouth
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
Net Sales. Net sales increased $1.14 million, or 24.1%, to $5.89 million
for the 1997 six months compared to $4.75 million for the 1996 six months,
primarily as a result of the expansion of Microsouth's graphics product lines
from existing vendors. Microsouth also benefited by an increase in product sales
to one of its customers and the establishment of new vendor relationships.
Gross Profit. Gross profit increased $135,000, or 15.9%, to $980,000 for
the 1997 six months compared to $845,000 for the 1996 six months. Gross margin
decreased to 16.6% for the 1997 six months compared to 17.8% for the 1996 six
months, primarily as a result of increased sales of lower margin products to one
of its customers.
SG&A Expenses. SG&A expenses decreased $5,000, or 1.0%, to $543,000 for the
1997 six months compared to $548,000 for the 1996 six months. SG&A expenses as a
percentage of net sales decreased to 9.2% for the 1997 six months compared to
11.5% for the 1996 six months due to increased sales levels while costs remained
constant.
Operating Income. Operating income increased $128,000 to $453,000 for the
1997 six months compared to $325,000 for the 1996 six months.
Included in the statement of operations for the 1997 six months was an
extraordinary gain of $210,000 resulting from the early extinguishment of a note
payable with the former parent of Microsouth. See "Certain Transactions -
Pre-Acquisition Transactions Between the Subsidiaries and Their Respective
Affiliates."
Future Adoption of Recently Issued Accounting Standards
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of an Enterprise and
Related Information ("SFAS 131"), No. 130, Reporting Comprehensive Income ("SFAS
130"), No. 129, Disclosure of Information About Capital Structure ("SFAS 129"),
and No. 128, Earnings Per Share ("SFAS 128"). SFAS 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS 129 consolidates the existing requirements to disclose certain
information about an entity's capital structure, and SFAS 128 specifies the
computation, presentation, and disclosure requirements for earnings per share.
These Standards are effective for periods ending after December 31, 1997.
The Company believes that the impact of these Standards, when adopted, will
not have a material impact on the Company's financial statements and financial
statement presentation when presented on a comparable basis.
Impact of Inflation
Management believes that inflation has not had a material impact on the
Company's business.
Liquidity and Capital Resources
Since inception, the Company has financed its operations through a
combination of cash flow from operations, bank borrowings and equity capital.
The Company's capital requirements have arisen primarily in connection with
purchases of fixed assets, including acquisitions.
The Company maintains several bank lines of credit that provide for
borrowings up to $4.5 million. The Company has a revolving credit facility with
LaSalle Bank - Illinois (the "LaSalle Facility") that provides for borrowings up
to $2,000,000 based on a percentage of certain accounts receivable which matures
on December 31, 1997 and bears interest at the lender's prime rate plus .5%. The
LaSalle Facility is secured by G&R's accounts receivable, inventory, equipment
and fixtures and a portion is guaranteed by stockholders of the Company. At June
30, 1997, the outstanding balance on the LaSalle Facility was approximately
$1.29 million. The Company also has a revolving credit facility with NationsBank
of Maryland, N.A. (the "NationsBank Facility") that provides for borrowings up
to $2,250,000 based on a percentage of certain accounts receivable and inventory
which matures on November 30, 1997 and bears interest at the lender's prime rate
plus 2%. The NationsBank Facility is secured by
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CGD's accounts receivable, inventory and general intangibles and is guaranteed
by stockholders of the Company. At June 30, 1997, the outstanding balance on the
NationsBank Facility was approximately $757,000. The Company also has a
revolving line of credit with Wells Fargo Bank, National Association (the "Wells
Fargo Facility") in the principal amount of $250,000 which matures on January
10, 1998 and bears interest at the lender's prime rate plus .75%. The Wells
Fargo Facility is unsecured and is guaranteed by a stockholder of the Company.
At June 30, 1997, the outstanding balance on the Wells Fargo Facility was
$51,000.
The Company intends to repay the outstanding amounts on the LaSalle
Facility, the NationsBank Facility and the Wells Fargo Facility upon completion
of the Offering. It is anticipated that the Company will utilize proceeds of the
Offering, together with available cash, to repay such existing bank facilities.
See "Use of Proceeds."
The Company has guaranteed $496,000 of bank borrowings incurred by a
company owned by affiliates of the Company. See "Certain Transactions."
From time to time since the Company's inception, Alongal has made advances
to the Company for working capital purposes. At December 31, 1996 and June 30,
1997, amounts owed to Alongal were $2,109,000 and $2,161,000, respectively. Such
advances bear interest at the rate of 8% per annum and are payable on demand.
After completion of the Offering, the Company intends to repay such
indebtedness. At such time, the pre-Acquisition stockholders of the Company will
contribute an aggregate of $990,000 to the capital of the Company. See "Certain
Transactions."
After completion of the Offering, the Company will make payments in the
aggregate amount of approximately $1,086,000 to the stockholders of Microsouth
and tekgraf Texas, reflecting Purchase Price Adjustments in connection with the
Acquisitions. See "Dividends and Distributions" and "Certain Transactions - The
Acquisitions."
The Company's principal commitments at June 30, 1997 consisted primarily of
debt of (i) the Purchase Price Adjustments described above; (ii) approximately
$2,299,000 to Alongal and other related persons; (iii) leases of premises; and
(iv) the lines of credit described above. See "Certain Transactions."
After the application of the net proceeds of the Offering as set forth in
"Use of Proceeds," the Company believes that its cash balances, and cash flows
from operations will be sufficient to meet its working capital and capital
requirements for at least the next 12 months.
A key element of the Company's strategy is to continue to expand through
acquisitions of companies engaged in the distribution and/or marketing of
computers and/or computer hardware, software and peripherals. See "Business -
Strategy." Such acquisitions are expected to involve the issuance of stock,
cash, debt or a combination thereof.
Release of Escrow Shares
In connection with the Offering, the holders of the Company's Class B
Common Stock are placing a portion of their shares into escrow pending the
Company's attainment of certain earnings or market price goals. See "Principal
Stockholders." In the event the Escrow Shares are released from escrow to
directors, officers, employees or consultants of the Company, the release will
be treated, for financial reporting purposes, as compensation expense to the
Company. Accordingly, the Company will, in the event of the release of the
Escrow Shares recognize during the period in which the earnings or market price
targets are met, what could be a substantial one-time charge which would
substantially increase the Company's loss or reduce or eliminate earnings, if
any, at such time. The amount of compensation expense recognized by the Company
will not affect the Company's total stockholders' equity.
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BUSINESS
Overview
The Company commenced operations in February 1993 to engage in the
manufacture of custom or "made-to order" premium servers and network
workstations under the Crescent Computer brand name. In December 1994, the
Company acquired a controlling interest in Prisym, an authorized DEC Reseller.
In June 1997, the Company completed the acquisition of all of the outstanding
capital stock of G&R, Microsouth, tekgraf Texas, CGD, IPM and IG, all of which
are regional distributors specializing in computer graphics technologies.
Subsequent to the Acquisitions and in connection with the Merger, the Company
changed its name to Tekgraf, Inc. and organized its operations into two
divisions: the Graphics Division, a wholesale distribution network of high-end
computer graphics products; and the Technology Division, which is engaged in the
manufacture, sale and support of the Crescent Computer and distribution of
related components and DEC Reseller activities.
Strategy
The Company's overall business strategy is to become a
nationally-recognized, vertically-oriented provider of computer products and
services. The Company intends to accomplish this goal through internal growth of
its operating divisions, acquisitions of complementary businesses and expansion
into selected international markets.
Internal Growth. The Company anticipates that it will be able to expand its
operations through internal growth of each of its operating divisions. The
Company will seek to increase the customer base of the Technology Division by
utilizing the consolidated marketing and distribution structure of the Graphics
Division achieved as a result of the Acquisitions, by increased marketing of the
Crescent Computer to selected markets, and through enhanced product and service
offerings. The Company believes that the increased technical personnel and
capabilities will enable Prisym to achieve higher certifications with DEC,
thereby broadening the product mix it can make available to its customers.
Acquisitions. The Company intends to expand its operations through
acquisitions of complementary businesses. The Company intends to focus its
acquisition activities on profitable technology companies that can be integrated
into the Company's existing divisional structure, increase divisional revenues,
expand the geographic and technical scope of the Company's operations and offer
a greater range of products and services to existing and potential customers.
Although the Company continually explores acquisition possibilities and has
targeted a number of computer graphics distributors, including NECG in Westford
Massachusetts, it is not currently engaged in active discussions or negotiations
with respect to any potential acquisitions and has no agreements, arrangements
or understandings regarding any potential acquisitions. There can be no
assurance that the Company's acquisition program will be successful, that the
acquisition of NECG or any other company will be completed or that, if
completed, any companies acquired will be profitable, or will result in revenues
to the Company.
International Expansion. The Company intends to market the Crescent
Computer and components, as well as products and services distributed by the
Graphics Division, to selected international markets, such as Canada, the United
Kingdom, South Africa and Australia.
The Company's Divisions and Products
The Graphics Division
General
The Graphics Division currently consists of five regional wholesale
distributor subsidiaries which specialize in computer graphics technologies --
G&R, Microsouth, tekgraf Texas, CGD and IGD. The Graphics Division sells and
supports products in the digital prepress, presentation graphics, color desktop
publishing, large format display graphics, digital imaging, electronic drawing
management, CAD and other emerging computer graphics technologies markets. The
Company provides value-added sales, marketing, fulfillment, and logistics
support for more than 30 manufacturers of a broad array of complex computer
graphics hardware and software. See "-Products and Markets."
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Although initially comprised of six individual companies, central to the
business model of the Graphics Division and a core motivation for the
Acquisitions and the resulting business combination were the pre-existing
relationships among such companies and their principals. The desire to provide
manufacturers with national sales and marketing programs fostered close
cooperation among these regional firms, ultimately leading to the formation of
two trade associations, the David Group and the Vision Group. The purpose of
these associations was to facilitate joint marketing and promotion, product line
acquisitions, the sharing of technical resources and sales strategies, and the
transfer of excess inventory. All of the companies that make up the Graphics
Division are current or former members of one or both of such trade
associations.
The goal of the Graphics Division is to build on the aforementioned
historic inter-company cooperation and function as a single entity with respect
to sales, marketing, advertising, public relations, technical support and
technology evaluation. With the current exception of the areas of Southern
California, Arizona, New Mexico and New England, the Graphics Division is in a
position to provide computer graphics manufacturers a national distribution
presence with the key benefit of local technical sales and support. See "-
Customers, Sales and Marketing." After completion of the Offering, the Company
intends to acquire additional regional distributors of computer graphics
technology in order to increase the geographic scope of the operations of the
Graphics Division. There can be no assurance, however, that the Company will
successfully complete any such acquisitions.
During the year ended December 31, 1996 and the six months ended June 30,
1997, revenues from the Graphics Division accounted for 80.5% and 80.3%,
respectively, of the Company's total revenues on a pro forma combined basis.
Products and Markets
The Company's Graphics Division distributes and supports products of over
30 manufacturers, including Agfa Division of Bayer Corporation, Electronics For
Imaging (EFI) Encad, Inc., Epson America, Inc., Mitsubishi Electronics America,
Inc., Scitex America Corporation and Vidar Systems Corporation. Among the
products the Graphics Division distributes and sells are color scanners, color
digital film recorders, digital cameras, color laser printers, color-calibrated
monitors, audio-visual presentation systems, raster image processors (RIPs), ink
jet printers, plotters, pre-press software, image setters, color proofers, mass
storage devices and the consumable products used in many of such products.
Prices typically range from less than $100 to in excess of $100,000.
The Company's agreements with manufacturers are generally non-exclusive,
provide for wholesale distribution to dealers and resellers in specified
geographic territories and are terminable by either party without cause on
either 30 or 60 days' notice.
It is the intention of the Graphics Division to initially operate in the
following four vertical markets:
o Digital Pre-Press
o Computer-Aided Design (CAD)
o Electronic Drawing Management Systems (EDMS)
o Display Graphics
Digital Pre-Press. Over the last three years, there has been a dramatic
shift in the process printing industry from manual, analog production of printed
materials to the use of computers. Historically the production of a printed
brochure, magazine or catalog involved hundreds of manual steps using
photographic materials to produce the final press-ready copy.
With rapid advances in software and hardware, much of today's printed
materials are produced digitally. The print production process now allows a
printed piece to go from concept to imaged printing plate in a fully digital
environment. Copywriting, proofing and revisions all take place on a desktop
computer, increasing the speed and efficiency of the pre-press process, and
streamlining personnel requirements in the process. The Company believes this
market is in a period of rapid transition regarding the manner in which
electronics products are delivered to the traditional printing customer. When
digital pre-press systems sold for $200,000 per seat (user), most manufacturers
used a captive direct sales force to sell to the end-user. Today, the typical
seat sells for under $20,000, forcing manufacturers to utilize a reseller
channel to deliver their products.
The Graphics Division sells input, proofing, networking, color management
software and output devices, which are integral parts of a digital pre-press
system. These products are typically sold through two classes of resellers:
graphic arts dealers who have traditionally sold film, chemicals, printing
plates and other analog pre-press supplies, and graphics VARs who have
specialized in pre-press workflow technologies and the automation of the
pre-press process.
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Computer Aided Design (CAD). Over the last ten years, traditional drafting
tables have given way to the desktop computer. Today, most architectural and
engineering design and drafting in the United States is done using a desktop
computer or workstation.
The CAD market is a more mature digital market than digital pre-press. As a
result, the delivery mechanism for products into this market has adapted to the
combination of less expensive products and more informed buyers. According to
industry sources, over 90% of all CAD software and peripherals are delivered
using a multi-tiered reseller channel.
The Graphics Division sells primarily processing and output products in
this market, with plotters, high-resolution graphics displays and optical
storage representing the majority of sales.
Electronic Drawing Management Systems (EDMS). The use of CAD systems in the
engineering and architectural community has created a workflow problem for those
firms which have embraced CAD - what to do with the archive of manually drafted
drawings.
EDMS allow these customers to capture (i.e., scan) paper drawings and store
them digitally. When needed, they can be retrieved, annotated, printed or
converted to CAD format for further revision. Since most of these functions can
be performed using existing CAD workstations or PC's, the cost of converting to
an EDMS systems is relatively low, and the demand for such systems is growing
dramatically.
The Graphics Division sells all of the components necessary for the
installation of an EDMS system, including large format scanners, archiving and
manipulation software, optical storage systems and output devices.
Display Graphics. The most rapidly growing segment of the computer graphics
output market is display graphics. Display graphics, or large format graphics
describes a process that allows computer-generated or captured images to be
printed in sizes up to 60" wide.
Historically, these images could only be printed on color electrostatic
printers costing over $120,000. However, over the last three years, significant
advances in ink-jet technology, software, specialty inks and media have placed
the cost of entry for display graphics systems starting at under $10,000, and
market acceptance has been rapid. End-users of this technology include a wide
range of industries and markets, such as:
o Trade-show graphics - production of booth and arcade displays
o Point of Sale graphics - floor displays
o Sign Shops - traditional signage, fleet graphics
o Print-for-Pay (e.g., Kinkos, Sir Speedy)
o Package Design - package prototyping
o Graphic Arts - imposition proofing
Products sold to this market include large-format ink-jet printers (ENCAD),
faster image processing software (Amiable Technologies, EFI, Onyx Graphics,
PISA), lamination systems (Seal Products, a division of Hunt Manufacturing) and
a wide range of inks, papers and other specialty media.
Customers, Sales and Marketing
The Graphics Division's customers are principally value-added resellers
(VARs) and systems integrators (SIs), as well as, for certain products,
retailers, mass merchandisers and direct marketers. VARs typically focus on
sales to users in specific vertical markets where the selling organization has
unique knowledge and expertise concerning the prospective customer's
application. These customers purchase products from the Company and resell them
as an integrated solution bundled with installation services and post-sales
support. SIs typically purchase products from the Company for further
integration into a much larger solution comprised of components from many
sources. These solutions typically are very large in scale and may involve an
integration contract between the SI and the end-user customer. The Graphics
Division utilizes the retail, mass merchant and direct marketing sales channels
when product demand is firmly established and a lower cost mechanism of delivery
to the end user is warranted.
Currently, the Graphics Division has 21 outside and 18 inside sales
representatives and seven technical support representatives. The Company
believes that this constitutes the highest concentration of sales and technical
support professionals in the country devoted to the sales, marketing, and
support of high-end computer graphics products.
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The Company's sales representatives receive commissions based on sales. During
each of the years ended December 31, 1995 and 1996 and the six months ended June
30, 1997, compensation paid to outside sales representative amounted to less
than 5% of the Company's sales.
Each regional office of the Graphics Division maintains and has training
and demonstration facilities equipped with its manufacturers' hardware and
applications software. These resources are made available to prospects and
customers for product evaluations, product training, demonstrations, benchmark
testing and in-house and in-the-field seminars. In addition, the Graphics
Divisions' sales force and technical sales representatives are trained to
demonstrate the technology it distributes and the applications of such
technology. Inside and outside technical sales representatives are also trained
to understand their manufacturers' products, the competitors' products, related
applications, software and the relevant end-user markets.
The Company believes the service offered by the Graphics Division is unique
in providing face-to-face sales, marketing, and distribution of mid- to high-end
computer graphics products sold through vertical reseller channels. Typically,
products carried by the Graphics Division are relatively complex, requiring
technical sales training, product demonstrations, product training, pre-sale and
post-sale technical support and immediate product availability. Selling and
supporting products in these markets requires knowledge of many distinct types
of hardware and software as well as communications protocols, networking
architecture, file formats, compression techniques, and other systems
integration issues. Manufacturers of products with such a level of complexity
often need to leverage their own limited resources by selling and distributing
through reseller organizations. Similarly, reseller organizations are often
severely limited in the technical sales and marketing resources they can devote
to the sale of specific products. To address this problem, each regional office
of the Graphics Division augments both the manufacturer's and the reseller's
staff, capitalizing on its ongoing relationships with the local resellers and
end user community. Resellers are trained and assisted by Graphics Division
staff in all aspects of sales, marketing, distribution and installation of its
products.
The Company believes that the Acquisitions and the consolidation of the
operations of G&R, Microsouth, tekgraf Texas, CGD and IGD into the Graphics
Division will enable it to establish a national distribution network. In
addition to economies of scale achieved by the Company, the Company believes
that it will be more cost-effective for certain manufacturers of computer
graphics technology and peripheral equipment to utilize the Company as a
distributor than to maintain their own extensive internal sales forces.
The Technology Division
General
The operations of the Technology Division currently consist of the
manufacture of the Crescent Computer and the DEC Reseller activities of Prisym.
The Company custom designs, assembles and sells custom or "made-to-order"
premium servers or workstations (Crescent Computers) and related technology to
VARs, vertical solution providers ("VSPs"), corporations, universities and the
government. See "-- Customers, Sales and Marketing." The Company also provides
services to its customers, including system architecture design, hardware
consulting and customer support.
Products
The Crescent Computer is a PC which can be assembled in a number of
different configurations using standard component parts. Although many of the
Crescent Computers are based on standard configurations, customization enables
the Company to accommodate customer computer needs with respect to storage
capacity, speed, price, applications, size, configuration and a range of other
considerations that can be accommodated in whole or in part by the selection of
appropriate components. The Company works with SIs on network configuration. The
Company also provides its customers with continuing technical support and
assistance in the maintenance and operations of Company purchased products.
Crescent Computers are currently being used to operate non-sterile heart
catheterization diagnostic equipment, as voice mail/auto-attendant controllers,
in informational kiosks and in other process-control applications. The Company
also sells servers and RAID storage systems to VARs and other companies seeking
to create Internet websites, internal networks, graphics and CAD workstations
and application servers.
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Through Prisym, the Company provides DEC's Alpha-based Workstations and
servers, mass storage, printers, components and computer peripherals and
supplies to the nationwide installed base of DEC customers. Prisym's customers
include Fortune 500 companies, governmental agencies and educational
institutions.
During the year ended December 31, 1996 and the six months ended June 30,
1997, sales by the Technology Division accounted for 19.5% and 19.7% of the
Company's revenues, respectively, on a pro forma combined basis.
Manufacturing and Suppliers
The Company's manufacturing operations consist of the assembly of Crescent
Computers at its facility in Norcross, Georgia and the testing of the electronic
and mechanical components incorporated into its products.
The Company has elected to assemble its products utilizing principally
off-the-shelf electronic components parts available from multiple sources. The
Company believes that this practice helps to ensure better quality control and
pricing by allowing the Company to select the best manufactured and best
performing components available on the market (rather than a proprietary product
that may fall behind the "curve" in terms of either such characteristic), and to
purchase such components from marketplace sources that offer the best prices at
the time the particular components are needed for production (rather than to
have prices dictated by the limited sources able to provide a proprietary
component). The Company obtains component parts on a purchase order basis and
does not have long-term contracts with any of its suppliers. To date, the
Company has not experienced significant interruptions in the supply of such
component parts, and believes that numerous qualified suppliers are available.
The Company believes that the inability of any of its current suppliers, except
as specified below, to provide component parts to the Company would not
adversely affect the Company's operations and that alternate sources could be
readily established.
The Company currently obtains the motherboards (a primary component of the
PC) from two sources. Certain of the Company's file server products incorporate
a motherboard which is currently purchased from a sole supplier. Although the
Company has to date been able to obtain adequate supplies of this component and
does not anticipate any related sourcing problems, the inability in the future
to obtain sufficient numbers of such components or to develop alternative
sources could result in delays in product introductions or shipments. Such
delays could have a material and adverse effect on the Company's results of
operations. The Company plans to attempt development of additional alternative
sources to limit any adverse impact on the Company's result of operations.
The Company has established a comprehensive testing and qualification
program to ensure that all subassemblies meet the Company's specifications and
standards before final assembly and testing. The Company's quality control
program includes diagnostic tests, assembly, burn-in, final configuration and
final quality assurance tests and the employment of process controls at its
manufacturing facility. The Company has also implemented quality control
policies that are reviewed and accepted by the Company's major customers. The
Company believes that this procedure helps ensure a high-quality product.
The Company's own manufacturing facility totals approximately 4,000 square
feet. The Company believes that additional manufacturing facilities, if
necessary, are available. The Company is currently operating at approximately
50% of capacity at this facility. See "- Facilities and Administrative
Functions."
Customers, Sales and Marketing
Customers for the Crescent Computer include OEMs, other vertical market
computer resellers, computer dealers, universities, government entities and
corporations. The Technology Division does not market to individual end-users,
focusing instead on establishing relationships with entities which will
constitute repeat sales and have internal computer support personnel capable of
handling local issues prior to involvement of Company personnel.
Prisym markets to the current installed base of DEC customers. Such
customers primarily include Fortune 500 and other large corporations,
governmental agencies and educational institutions.
The Company currently distributes Technology Division products principally
through the efforts of its internal direct sales force. In the future, the
Company intends to offer Technology Division products through its recently
acquired Graphics Division sales force. Following completion of the Offering,
the Company will continue to expand its marketing efforts and seek to (i) expand
the customer base for the Crescent Computer, (ii) expand the geographic market
serviced by the Graphics Division and (iii) increase both the number of products
distributed and the number of manufacturers whose products are distributed by
the Graphics Division.
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Service and Support
The Company believes that customer service and support is a significant
competitive factor in the network systems market in which it sells the Crescent
Computer and will become more important as local area networks ("LANs") become
more complex and as more enterprises implement business-critical applications on
their networks. The Company supports its customers by providing rapid problem
resolutions both during and after the installation process. The Company
maintains a technical support organization that assists customers in
troubleshooting problems and providing replacement parts. The Company provides a
toll-free hotline to help diagnose and correct system interruptions as they
occur at customer sites and its support staff is available during normal
business hours.
The Company warrants all of its Crescent Computer servers and workstations
against defects in materials and workmanship for two years. During the warranty
period, the Company will repair or replace any Crescent Computer, or component
thereof, which the Company identifies as defective. The Company will, under
certain circumstances, send replacement parts to the customer site prior to
return of the defective component in order to minimize down time. The Company
has contracted with a service provider to furnish on-site service of Crescent
Computers to customers which choose that option.
The Company's product warranties do not materially differ from those
generally available in the industry. In most instances, the Company receives
warranties on its products from its vendors which are at least equivalent to
those it provides to its customers. To date, the Company has not experienced
significant claims under its warranties.
Backlog
The Company does not have significant backlog because (i) the Technology
Division is able to manufacture and deliver products generally within a few days
of order receipt and it has no long-term contracts to supply products to
customers (but rather manufactures and sells products on the basis of individual
purchase orders as and when received) and (ii) the Graphics Division generally
receives orders for shipment the same or next day. Accordingly, backlog at the
beginning of a quarter may not represent a significant percentage of the
products anticipated to be sold in that quarter. Quarterly revenues and
operating results depend on the volume and timing of bookings received during
the quarter, which are difficult to forecast. Therefore, management of the
Company does not consider order backlog a significant indicator of the Company's
future revenues.
Competition
The business of manufacturing and selling computers and computer peripheral
equipment is intensely competitive and rapidly changing. The Company believes
that the principal competitive factors in this industry include relative price
and performance, product availability, technical expertise, financial stability,
service, support and reputation.
The Company's Graphics Division competes primarily with computer equipment
manufacturers that either utilize an in-house sales force to market their
products to resellers and end-users or utilize the services of large, national
fulfillment distributors. The Company believes that its primary competition will
come from the latter category whose specialty is order fulfillment. The Company
believes that the key factors differentiating it from such competitors lies in
its ability to provide technical sales training, product demonstrations, product
training, pre- and post-sale technical support and evaluation units.
The Company's Crescent Computers are constructed with standardized parts
which are available to others in the market. The Company's competitors include
established computer product manufacturers, some of which supply products to the
Company, computer resellers, distributors and service providers. Some of the
Company's current and potential competitors have substantially greater
financial, sales, marketing, technical and other competitive resources than
those of the Company. As a result, the Company's competitors may be able to
devote greater resources than the Company to the sales and service of their
computer products. As the computer market in which the Company competes has
matured, product price competition has intensified and is likely to continue to
intensify, which may make it too costly for the Company to continue its "made to
order" method of doing business. One of the results of this competition may be
to lower sales prices and decrease profit margins.
40
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Technological competition from other and longer established computer
hardware manufacturers and software developers is significant and expected to
increase. The Company expects that hardware manufacturers and software
developers will continue to enter the market to provide and package integrated
information distribution solutions to the same customer base served by the
Company's Technology Division. All such market participants will compete
intensely to maintain or improve their market shares and revenues. Most of the
companies with which the Company's Technology Division competes have
substantially greater capital resources, research and development staffs,
marketing and distribution programs and facilities, and many of them have
substantially greater experience in the production and marketing of products.
In the development market for network servers and workstations, the Company
experiences competition from hundreds of small companies and a number of
significant competitors, including such major industry participants as IBM,
Microsoft Corporation, Novell, Inc. and Compaq Computers, Inc. Accordingly,
there is no assurance that the Crescent Computer will continue to achieve
sufficient market acceptance to assure the Company's future success and long
range profitability in the face of competition with such significantly larger
and better capitalized companies.
With respect to the Technology Division's DEC reseller activities, the
Company faces competition from several national and regional companies, many of
which are substantially larger and more established than the Company and have
national sales forces.
Intellectual Property
The Company has no patents and its success will depend, in part, on its
ability to preserve its trade secrets and proprietary know-how, and to operate
without infringing the proprietary rights of third parties.
The Company seeks to protect trade secrets and proprietary know-how, in
part, by confidentiality agreements with employees, consultants, advisors, and
others. There can be no assurance that such employees, consultants, advisors, or
others, will maintain the confidentiality of such trade secrets or proprietary
information, or that the trade secrets or proprietary know-how of the Company
will not otherwise become known or be independently developed by competitors in
such a manner that the Company will have no practical recourse.
Product Research and Market Development
The market for the Company's products is characterized by rapid
technological change and evolving industry standards, and it is highly
competitive with respect to timely product innovations. The introduction of
products embodying new technology and the emergence of new industry standards
can render existing products obsolete and unmarketable. The Company believes
that its future success will depend upon its ability to develop, manufacture and
market new products and enhancements to existing products on a cost-effective
and timely basis.
If the Company is unable for technological or other reasons to develop
products in a timely manner in response to changes in the industry, or if
products or product enhancements that the Company develops do not achieve market
acceptance, the Company's business will be materially and adversely affected.
The Company has in the past experienced delays in introducing certain of its
products and enhancements, and there can be no assurance that it will not
encounter technical or other difficulties that could in the future delay the
introduction of new products or enhancement. Such delays in the past have
generally resulted from the Company's need to obtain a requisite component from
a third-party vendor whose own development process has been delayed (e.g., the
RAID controller card for the Company's server products).
Employees
As of September 30, 1997, the Company had 94 full-time employees, 28 in the
Technology Division and 66 in the Graphics Division, and 10 part-time employees.
The Company intends to hire additional management, administrative, technical and
sales personnel upon completion of the Offering. None of the Company's employees
is represented by a labor union and the Company believes its relations with its
employees are satisfactory.
Facilities and Administrative Functions
The Company's executive offices and manufacturing and warehousing
facilities are located in approximately 7,600 square feet in Norcross, Georgia
pursuant to a lease expiring October 31, 1998 which provides for an annual
rental of $30,600. Prisym currently occupies space in a building owned by PDP,
Inc. ("PDP"), a corporation which
41
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is beneficially owned by certain officers, directors and stockholders of the
Company or members of their immediate families, for an annual rental of $36,000.
See "Certain Transactions." PDP has entered into an agreement for the sale of
such building. Prior to completion of such sale, Prisym will relocate to as yet
unidentified space in Norcross, Georgia.
The table below sets forth certain information with respect to leased
properties of the Graphics Division, all of which are leased from non-affiliated
lessors:
<TABLE>
<CAPTION>
Lease Terms
--------------------------
Approximate Square Expiration Annual
Location Footage Date Rental(1)
--------- ------------------ ---------- ---------
<S> <C> <C> <C> <C>
980 Corporate Woods Parkway
Vernon Hills, Illinois....................... 14,935 5/31/00 $159,058
645 Hembree Parkway
Roswell, Georgia............................. 10,447 4/30/98 $47,012
620 East Diamond Avenue
Gaithersburg, Maryland....................... 8,993 6/30/99 $91,368
7020 Knoll Center Parkway
Pleasanton, California....................... 7,892 12/8/01 $96,888(2)
6721 Port West
Houston, Texas............................... 5,495 2/28/98 $45,000
</TABLE>
- ----------
(1) Certain of these leases provide for moderate annual rental increases.
(2) A portion of these premises is being subleased to a company affiliated with
IGD for an annual rental of approximately $39,000.
The Company also maintains five regional warehouses for the Graphics
Division. As part of its ongoing consolidation, the Company is examining the
feasibility of reducing the number of warehouses to three.
The Company has recently begun examining centralization of administrative
and marketing functions from the existing seven locations to its executive
offices in Georgia. Management is currently evaluating accounting systems and
integrated Management Information Systems ("MIS") that will provide inventory
management, billing and collection management, accounts receivable and accounts
payable management and streamlined consolidated financial reporting. See "Use of
Proceeds." In addition, the MIS system being evaluated is intended to increase
the Company's customer service and sales capabilities by providing contact
management, customized management reports, facilitating order tracking and
automating sales projections.
Legal Proceedings
The Company is not involved in any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company:
Name Age Position
------ ---- -------
Phillip C. Aginsky(1)(2) . 44 Chief Executive Officer and
Chairman of the Board of Directors
Dan I. Bailey ............ 43 Co-President-Technology Division and Director
William M. Rychel(2) ..... 47 Co-President-Graphics Division and Director
Martyn L. Cooper ......... 48 Chief Operating Officer and Director
Peter C. Armstrong........ 50 Chief Financial Officer
J. Thomas Woolsey ........ 49 Director
Albert E. Sisto(3) ....... 48 Director
Frank X. Dalton, Jr.(3) .. 40 Director
- ----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Such individual will join the Board upon completion of the Offering and
will serve on the Audit Committee
Phillip C. Aginsky has served as Chairman of the Board of Directors of the
Company since March 1993 and as Chief Executive Officer since October 1997. From
September 1990 to February 1992, Mr. Aginsky was the Chairman and Chief
Executive Officer of Bennett & Fountain PLC, an electrical and electronic
wholesaler and an operating subsidiary of Voltex Holding Limited ("Voltex"). In
1981, he joined ElCentre Holdings Limited ("ElCentre"), South Africa's largest
electrical manufacturer and distributor, serving as Group Administrative
Director until 1989, and served in the same capacity at Voltex, ElCentre's
operating subsidiary, until the sale of ElCentre and its subsidiaries in 1992.
After the sale until joining the Company, Mr. Aginsky enjoyed a brief respite
from working while overseeing his personal investments. Mr. Aginsky earned a
Bachelor of Commerce, a Certificate in the Theory of Accounting, Higher Diplomas
in Tax Law and Company Law and a Master of Business Administration from the
University of Witwatersrand in Johannesburg, South Africa.
Dan I. Bailey has served as Co-President -- Technology Division and a
director of the Company since March 1993. He joined the Company's predecessor
entity as Sales Manager in September 1990. From April 1990 to September 1990,
Mr. Bailey owned Datanet, a computer hardware sales company. Prior thereto, he
was a police officer for ten years.
William M. Rychel became Co-President - Graphics Division and a director of
the Company upon completion of the Acquisitions in June 1997. Prior thereto, he
served as the President of G&R, a company he co-founded in 1985.
Martyn L. Cooper became a Regional Sales Director and a director of the
Company upon completion of the Acquisitions in June 1997 and Chief Operating
Officer in October 1997. Prior thereto, he served as the President of tekgraf
Texas, a company he founded in 1987. Mr. Cooper earned a bachelor of science
degree in mathematics from the University of Surrey in England.
Peter C. Armstrong, a Certified Public Accountant, joined the Company on
November 1, 1997. From April 1997 to November 1997, he provided business
planning, accounting and financial management consulting services to businesses
in the technology and entertainment industries. From September 1995 to April
1997, Mr. Armstrong served as Vice President and Chief Financial Officer of
Media Marketing Services, Inc., an incentive travel company based in Georgia.
From January 1994 until July 1995, he was employed as Senior Vice President and
Corporate Controller of First Data Corporation (formerly, First Financial
Management Corporation), a publicly-held information services company. Prior
thereto, from August 1992 to January 1994, Mr. Armstrong served as Vice
President and Chief Financial Officer of Premier Pharmacy, Inc. in Georgia. From
1986 until August 1992, he served as Vice President and Corporate Controller of
The Portman Companies, a real estate development and management company. Mr.
Armstrong earned a bachelor of science degree in business administration from
the University of Florida and attended the Stonier Graduate School of Banking at
Rutgers University.
J. Thomas Woolsey became a Regional Sales Director and a director of the
Company upon completion of the Acquisitions in June 1997. Prior thereto, he
served as the President and General Manager of Microsouth from 1989
43
<PAGE>
to June 1997. From 1983 to 1989, Mr. Woolsey was an outside sales and product
marketing specialist for Microsouth and a Professor of Engineering Technology at
Walters State Community College. Mr. Woolsey earned a bachelor of science degree
in industrial engineering and a master's degree in finance and marketing from
the University of Tennessee, Knoxville.
Albert E. Sisto has served as President, Chairman and Chief Executive
Officer of DocuMagix, Inc., a computer software company specializing in personal
content management, since October 1994. From September 1989 to October 1994, Mr.
Sisto was the President and Chief Executive Officer of PixelCraft, Inc.
(formerly BarneyScan Corporation), a manufacturer and marketer of prepress
scanners, image management software and color separation software for open
systems. Mr. Sisto earned a bachelor of science degree in engineering from the
Stevens Institute of Technology. Mr. Sisto also serves on the Board of Directors
of Insignia Solutions, plc., a computer software company.
Frank X. Dalton, Jr. has served as a Principal of Cordova Capital, a
venture capital firm, since November 1996. From January 1996 to November 1996,
Mr. Dalton was an Executive Vice President of Ambassador Capital Corporation, an
investment banking firm. From November 1989 to January 1996, Mr. Dalton was
employed by BDO Seidman, LLP, a public accounting firm, with his last position
being Partner. Mr. Dalton earned a bachelor of science in accounting from the
University of South Carolina and is a Certified Public Accountant.
Directors serve until the next annual meeting or until their successors are
elected and qualified. Officers serve at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment. See
"Management -Employment Agreements."
The Delaware General Corporation Law permits a corporation through its
Certificate of Incorporation to eliminate prospectively the personal liability
of its directors to the corporation or its stockholders for damages for breach
of fiduciary duty of care as a director, with certain exceptions. The exceptions
include acts or omissions in bad faith or which involve intentional misconduct
or knowing violations of law, improper declaration of dividends, and
transactions from which the director personally gained a financial profit or
other advantage to which he was not legally entitled. The Company's Certificate
of Incorporation eliminates personal liability of its directors to the extent
permitted by this statutory provision.
The Company has been advised that it is the position of the Securities and
Exchange Commission that insofar as the foregoing provision may be invoked to
disclaim liability for damages arising under the Securities Act, such provision
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
Board Committees and Designated Directors
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee makes recommendations to the Board concerning
salaries and incentive compensation for officers and employees of the Company
and may administer the Company's 1997 Stock Option Plan. See "Management - Stock
Option Plan." The Audit Committee reviews the results and scope of the audit and
other accounting related matters.
The Company has agreed, if requested by the Representative, to nominate a
designee of the Representative to the Company's Board of Directors for a period
of five years from the date of this Prospectus. See "Underwriting."
Director Compensation
After completion of the Offering, non-employee directors will receive $500
for each Board and committee meeting attended and will be reimbursed for their
expenses in attending such meetings. Directors are not precluded from serving
the Company in any other capacity and receiving compensation therefor. Directors
are also entitled to receive options under the Company Stock Option Plan.
44
<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation
awarded to, earned by, or paid for services rendered to the Company and its
Subsidiaries in all capacities during the fiscal year ended December 31, 1996,
by (i) the Company's principal executive officer and (ii) the Company's and the
Subsidiaries' most highly compensated executive officers whose salary and bonus
for such year exceeded $100,000.
Summary Compensation Table
Annual Compensation
----------------------- All Other
Name and Principal Position Salary($) Bonus($) Compensation($)
- --------------------------- --------- -------- ---------------
Phillip C. Aginsky (1) ............. -- 369,137 3,338(2)
Chairman of Crescent
Dan I. Bailey ...................... 60,000 131,000 1,820(2)
President of Crescent
Peter Goletz ....................... 60,000 131,000 1,820(2)
Vice President of Crescent
William M. Rychel .................. 120,000 50,000 67,889(3)
President of G&R
Patrick J. McLaughlin .............. 64,000 108,937 1,629(2)
Vice President of IGD
- ----------
(1) Includes $135,000 paid to Alongal as a management fee for providing Mr.
Aginsky's services to the Company. See "Certain Transactions." Mr. Aginsky
serves as President of Alongal.
(2) Consists of health insurance premiums paid by the Company.
(3) Includes $16,182 of life and health insurance premiums paid by G&R and
$51,707 of other perquisites, including club membership fees, automobile
allowances and personal travel.
Employment Agreements
In June 1997, the Company entered into two-year employment agreements with
each of Messrs. Aginsky, Bailey, Rychel, Cooper and Woolsey, as well as with
Patrick J. McLaughlin and A. Lowell Nerenberg, who serve as Regional Sales
Directors, each of which provides for a base annual compensation of $125,000.
On November 1, 1997, the Company entered into a two-year employment
agreement with Peter C. Armstrong to serve as Chief Financial Officer for a base
annual compensation of $120,000. Mr. Armstrong will be granted options to
purchase 15,000 shares of Common Stock at an exercise price of $6.00 per share
on the date of this Prospectus. He will also be granted incentive options to
purchase 15,000 shares of Common Stock on each of the first and second
anniversaries of the date of this Prospectus. See "-- Stock Option Plan."
All of the agreements also contain two-year post-termination
confidentiality and non-competition provisions. Public policy limitations and
the difficulty of obtaining injunctive relief may impair the Company's ability
to enforce the non-competition and nondisclosure covenants made by its
employees. The Company has determined that it will implement a bonus plan during
the year ending December 31, 1999 pursuant to which the foregoing individuals
will be eligible to participate in a bonus pool equal to a percentage of the
Company's pre-tax profits, if any, in excess of $3,000,000.
The Company has agreed with the Representative that the compensation of the
Company's executive officers, division managers and regional operating managers
will not exceed $125,000 for any of such individuals for a period of 13 months
from the closing of the Offering.
The Company has applied for key-person life insurance in the amount of
$2,000,000 on the lives of each of Messrs. Aginsky, Bailey and Rychel.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1996, Phillip C. Aginsky, Dan I.
Bailey and Peter Goletz participated in deliberations of the Company's Board of
Directors concerning executive officer compensation.
Key Personnel
A. Lowell Nerenberg became a Regional Sales Director of the Company upon
completion of the Acquisitions. Prior thereto, he served as President of CGD, a
company he founded in 1986.
Patrick J. McLaughlin became a Regional Sales Director of the Company upon
completion of the Acquisitions. Prior thereto, he served as Vice President of
IPM and IG, companies he co-founded in 1989.
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<PAGE>
Stock Option Plan
In August 1997, the Board of Directors adopted and the Company's
stockholders approved, the 1997 Stock Option Plan (the "Plan") covering 300,000
shares of the Company's Class A Common Stock pursuant to which employees,
officers and directors of, and consultants or advisers to, the Company and any
subsidiary corporations are eligible to receive incentive stock options
("incentive options") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") and/or options that do not qualify as
incentive options ("non-qualified options"). The Plan, which expires in August
2007, will be administered by the Board of Directors or a committee of the Board
of Directors, provided, however, that with respect to "officers" and
"directors," as such terms are defined for the purposes of Rule 16b-3 ("Rule
16b-3") promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"), such committee shall consist of "disinterested" directors as defined in
Rule 16b-3, but only if at least two directors meet the criteria of
"disinterested" directors as defined in Rule 16b-3. The purposes of the Plan are
to ensure the retention of existing and future executive personnel, key
employees, directors, consultants and advisors who are expected to contribute to
the CompanyOs future growth and success and to provide additional incentive by
permitting such individuals to participate in the ownership of the Company, and
the criteria to be utilized by the Board of Directors or the committee in
granting options pursuant to the Plan will be consistent with these purposes.
The Plan provides for automatic grants of options to certain directors in the
manner set forth below.
Options granted under the Plan may be either incentive options or
non-qualified options. Incentive options granted under the Plan are exercisable
for a period of up to 10 years from the date of grant at an exercise price which
is not less than the fair market value of the Class A Common Stock on the date
of the grant, except that the term of an incentive option granted under the Plan
to a stockholder owning more than 10% of the outstanding voting power may not
exceed five years and its exercise price may not be less than 110% of the fair
market value of the Class A Common Stock on the date of the grant. To the extent
that the aggregate fair market value, as of the date of grant, of the shares for
which incentive options become exercisable for the first time by an optionee
during the calendar year exceeds $100,000, the portion of such option which is
in excess of the $100,000 limitation will be treated as a non-qualified option.
Options granted under the Plan to officers, directors or employees of the
Company may be exercised only while the optionee is employed or retained by the
Company or within 90 days of the date of termination of the employment
relationship or directorship. However, options which are exercisable at the time
of termination by reason of death or permanent disability of the optionee may be
exercised within 12 months of the date of termination of the employment
relationship or directorship. Upon the exercise of an option, payment may be
made by cash or by any other means that the Board of Directors or the committee
determines. No option may be granted under the Plan after August 2007.
Options may be granted only to such employees, officers and directors of,
and consultants and advisors to, the Company or any subsidiary of the Company as
the Board of Directors or the committee shall select from time to time in its
sole discretion, provided that only employees of the Company or a subsidiary of
the Company shall be eligible to receive incentive options. An optionee may be
granted more than one option under the Plan. The Board of Directors or the
committee will, in its discretion, determine (subject to the terms of the Plan)
who will be granted options, the time or times at which options shall be
granted, and the number of shares subject to each option, whether the options
are incentive options or non-qualified options, and the manner in which options
may be exercised. In making such determination, consideration may be given to
the value of the services rendered by the respective individuals, their present
and potential contributions to the success of the Company and its subsidiaries
and such other factors deemed relevant in accomplishing the purpose of the Plan.
To date, no options have been granted under the Plan. The Company will
grant options to purchase 15,000 shares to Peter Armstrong on the date of this
Prospectus exercisable at $6.00 per share and vesting in full one year from the
date of grant. The Company will also grant options to purchase an aggregate of
200,000 shares to other employees. All of such options will be exercisable at
$6.00 per share and will vest in four equal annual installments commencing one
year from the date of grant.
Certain Statutory and Charter Provisions
Section 203 of the Delaware General Corporation Law provides, in general,
that a stockholder acquiring more than 15% of the outstanding voting shares of a
corporation subject to the statute (an "Interested Stockholder") but less than
85% of such shares may not engage in certain "Business Combinations" with the
corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder unless (i) prior to such date the
corporation's Board of Directors approved either the Business Combination or the
transaction in which
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<PAGE>
the stockholder became an Interested Stockholder or (ii) the Business
Combination is approved by the corporation's Board of Directors and authorized
by a vote of at least two-thirds of the outstanding voting stock of the
corporation not owned by the Interested Stockholder.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive a benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholders,
transactions with the corporation which increase the proportionate interest of
the Interested Stockholder or transactions in which the Interested Stockholder
receives certain other benefits.
These provisions could have the effect of delaying, deferring or preventing
a change of control of the Company. The Company's stockholders, by adopting an
amendment to the Certificate of Incorporation or bylaws of the Company, may
elect not to be governed by Section 203, effective 12 months after adoption.
Neither the Certificate of Incorporation nor the bylaws of the Company currently
excludes the Company from the restrictions imposed by Section 203.
The General Corporation Law of Delaware permits a corporation through its
Certificate of Incorporation to eliminate the personal liability of its
directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty of loyalty and care as a director, with certain exceptions.
The exceptions include a breach of the director's duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, improper declarations of dividends, and transactions from
which the directors derived an improper personal benefit. The Company's
Certificate of Incorporation exonerates its directors from monetary liability to
the fullest extent permitted by this statutory provision.
Limitation of Liability and Indemnification Matters
The Company intends to enter into indemnification agreements
("Indemnification Agreement(s)") with each of its directors and officers after
the Offering. Each such Indemnification Agreement will provide that the Company
will indemnify the indemnitee against expenses, including reasonable attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or officer.
Such indemnification will be available if the indemnitee acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Company, and, with respect to any criminal action, had no reasonable
cause to believe his conduct was unlawful. The Indemnification Agreements will
also require that the Company indemnify the director or other party thereto in
all cases to the fullest extent permitted by applicable law. Each
Indemnification Agreement will permit the director or officer that is party
thereto to bring suit to seek recovery or amounts due under the Indemnification
Agreement and to recover the expenses of such a suit if he is successful.
The Company's By-laws provide that the Company shall indemnify its
directors, officers, employees or agents to the full extent permitted by the
laws of Delaware, and the Company shall have the right to purchase and maintain
insurance on behalf of any such person whether or not the Company would have the
power to indemnify such person against the liability. The Company has not
currently purchased any such insurance policy on behalf on any of its directors,
officers, employees or agents.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for indemnification.
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CERTAIN TRANSACTIONS
Transactions with Alongal and Anita
Alongal Extrusions, Inc. is a Georgia corporation which is wholly-owned by
Anita, Ltd. ("Anita"), a principal stockholder of the Company. Anita is
wholly-owned by the New Freedom Trust, a trust for the benefit of the father of
Phillip C. Aginsky, Chairman of the Board of the Company. See "Principal
Stockholders." Mr. Aginsky serves as President of Alongal.
From time to time since the Company's inception, Alongal has made advances
to the Company for working capital purposes. During the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1997, the Company made
interest payments to Alongal of approximately $40,000, $126,000, $160,000 and
$80,000, respectively. At June 30, 1997, the amount owed to Alongal was
approximately $2,161,000. Such advances bear interest at the rate of 8% per
annum and are payable on demand. Prior to completion of the Offering, the
Company intends to repay such indebtedness. At the same time, Anita will
contribute $495,000 to the capital of the Company. See " - Other Transactions."
During the years ended December 31, 1994 and 1996, the Company paid Alongal
management fees of $45,000 and $135,000, respectively, for providing the
services of Mr. Aginsky. See OManagement - Executive Compensation.O The Company
does not intend to pay management fees to Alongal after completion of the
Offering.
Pre-Acquisition Transactions Between the Subsidiaries and Their Respective
Affiliates
William M. Rychel, Co-President and a director of the Company and the
President of G&R, and Thomas Gust, a principal stockholder of the Company, are
the co-owners, together with Mr. Gust's brother, of G/B Marketing, Inc. ("G/B"),
a manufacturers' representative in the computer graphics business which shares
office space with G&R. G&R makes payments on behalf of G/B for such firm's
portion of certain overhead expenses, including rent, telephone and facilities
maintenance. G/B generally reimburses G&R for such costs on a monthly basis.
During the years ended December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1997, the total amount of such payments made on behalf of G/B were
$115,000, $134,000, $82,000 and $40,000, respectively. From time to time G&R
also advances funds to G/B for working capital purposes. At December 31, 1996
and June 30, 1997, amounts owed by G/B to G&R were $72,000 and $0, respectively.
From time to time, G&R has sold inventory at cost to NECG. NECG is owned
15% by each of Messrs. Rychel and Thomas Gust, 30% by A. Lowell Nerenberg, an
officer and stockholder of the Company, and the balance by unaffiliated parties.
During the years ended December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1997, such transactions amounted to $785,000, $678,000, $521,000 and
$206,000, respectively.
J. Thomas Woolsey, a director of the Company and the former President of
Microsouth, was the owner of Americad, Inc. ("Americad"), a mail order computer
sales company which was in operation from April 1995 through April 1997.
Americad purchased products from various distributors, including Microsouth, for
resale to the end user. During the years ended December 31, 1995 and 1996 and
the six months ended June 30, 1997, Americad's purchases from Microsouth
aggregated $110,000, $103,000 and $8,000, respectively.
Prior to completion of the Acquisitions, Microsouth performed certain
software development services on behalf of JTW Acquisitions, L.P., an entity
owned by Mr. Woolsey, for which it was not reimbursed. During the years ended
December 31, 1995 and 1996 and the six months ended June 30, 1997, Microsouth
incurred charges of $42,000, $85,000 and $31,000, respectively, relating to this
project.
In March 1993, J. Thomas Woolsey and Martyn L. Cooper sold their 100%
interests in Microsouth and tekgraf Texas, respectively, to Network Imaging
Corporation, a publicly-held company ("NIC"). During the next several years,
such individuals continued to run their businesses as separate subsidiaries of
NIC. In June 1995, Messrs. Woolsey and Cooper repurchased their respective
companies from NIC for $1,000,000 and $375,000, respectively, which purchase
prices were represented by a combination of cash and promissory notes. In
connection with such repurchases, Messrs. Woolsey and Cooper borrowed $250,000
and $125,000, respectively, from their respective companies pursuant to five
year promissory notes bearing interest at 110% of the Applicable Federal Funds
Rate (8.25% at December 31, 1996) (the "NIC Notes"). In July 1995, the NIC Notes
were offset and cancelled in connection with a restructuring of Microsouth and
tekgraf Texas. In December 1996, tekgraf Texas paid $180,000
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<PAGE>
to NIC in consideration of the cancellation of its $250,000 note. Microsouth
paid $540,000 to NIC in cancellation of its $750,000 note. As a result of such
repurchases, tekgraf Texas and Microsouth recognized extraordinary gains of
$70,000 and $210,000, respectively. See "Selected Financial and Operating Data."
From time to time, Edward H. L. Mason, the former President of IGD, made
working capital advances to IGD. At September 30, 1997, the principal amount
owed to Mr. Mason was $125,000. Such advances bear interest at the rate of 9.25%
per annum and will be repaid prior to or upon completion of the Offering.
From time to time, Beverly and A. Lowell Nerenberg, former officers of CGD,
made working capital advances to CGD. At September 30, 1997, the principal
amount owed to the Nerenbergs was $90,000, $50,000 of which is subordinated to
amounts owed under the NationsBank Facility. Such advances bear interest at the
rate of 12% per annum and will be repaid after the Offering at such time as the
Purchase Price Adjustment to be collected from such individuals, if any, is
determined, See "- The Acquisitions."
The Acquisitions
In May 1997, the Company entered into stock purchase agreements (the
OAgreementsO) with each of the Subsidiaries pursuant to which the Company issued
an aggregate of 2,192,000 shares of its Class B Common Stock in exchange for all
of the outstanding capital stock of each of the Subsidiaries. Pursuant to the
terms of the Agreements, the Subsidiaries agreed to deliver a defined guaranteed
net asset value ("NAV") as of the closing date of June 2, 1997. In certain
cases, the excess net book value over the warranted NAV actually delivered by
the Subsidiaries will be distributed to the former stockholders of the
Subsidiaries as Purchase Price Adjustments. In other cases, former stockholders
of the Subsidiaries will be required to pay the Company any shortfall in NAV
actually delivered.
After completion of the Offering, the Company will make payments in the
approximate aggregate amount of $1,086,000 to the former stockholders of the
Subsidiaries, reflecting such Purchase Price Adjustments. Other former
stockholders will be required to pay the Company an approximate aggregate amount
of $419,000 as Purchase Price Adjustments. See "Use of Proceeds," "Dividends and
Distributions" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The following sets forth (i) the number of shares of Class B Common Stock
received in the Acquisitions by executive officers, directors and principal
stockholders of the Company and (ii) the estimated dollar amount to be paid to
or received from such individuals as a result of Purchase Price Adjustments:
Amount of Amount of
Adjustment to Adjustment to be
Number of be Paid to Received from
Name Shares(1) Stockholder(2) Stockholder(2)
----- --------- ------------ ------------
William M. Rychel .............. 409,000 $ -- $126,000
J. Thomas Woolsey .............. 528,667 $819,000 $ --
Martyn L. Cooper ............... 278,000 $267,000 $ --
Thomas A. Gust ................. 426,000 $ -- $121,000
- ----------
(1) Includes such individuals' Escrow Shares and Indemnification Shares.
(2) The Agreements provide that the actual amounts owed, as adjusted for the
collection of receivables and inventory, will be determined within 180 days
of the acquisition date and, accordingly, are expected to be paid or
collected in December 1997.
The Agreements provide that the representations and warranties contained
therein shall survive for a period of two years from the date of the Agreements.
An aggregate of 1,333,333 of the shares of Class B Common Stock issued pursuant
to the Agreements have been placed in escrow to cover potential claims for
indemnification under the Agreements for liabilities resulting from the breach
of any representation, warranty, covenant or agreement contained in the
Agreements.
Transactions with PDP
PDP is a Georgia corporation owned 24.5% by each of Dan I. Bailey,
Co-President and a director of the Company, and Peter Goletz, a principal
stockholder of the Company, and 51% by the wife of Phillip Aginsky. Prisym
currently occupies offices in a building owned by PDP. See "Business--Facilities
and Administrative
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<PAGE>
Functions." In connection with the acquisition of the aforementioned building,
PDP incurred bank indebtedness of $496,000. The bank loan was guaranteed by
Messrs. Bailey and Goletz and Alongal. The Company has also guaranteed repayment
of such debt. PDP will repay such loan from the proceeds of the sale of the
building.
Other Transactions
Certain stockholders of the Company, including Dan I. Bailey, Co-President
and a director of the Company, have made non-interest bearing working capital
advances to the Company over the past several years. At December 31, 1994, 1995
and 1996 and June 30, 1997, amounts owed to Mr. Bailey aggregated approximately
$35,000, $30,000, $64,000 and $16,000, respectively. Such advances are payable
on demand.
Prior to completion of the Offering, the pre-Acquisition stockholders of
the Company will contribute an aggregate of $990,000 to the capital of the
Company. Of such amount, Anita will contribute $504,900 and Dan I. Bailey,
Co-President and a director of the Company, and Peter Goletz, a principal
stockholder of the Company, will each contribute $222,750.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company has adopted a policy that all future
transactions, including loans, between the Company and its officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will continue to
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of Common Stock by (i) each person known by the Company to own beneficially more
than 5% of the outstanding Common Stock, (ii) each director of the Company,
(iii) each executive officer of the Company, and (iv) all executive officers and
directors of the Company as a group, (a) prior to the Offering and (b) as
adjusted to give effect to the sale of the 2,100,000 Units offered hereby:
<TABLE>
<CAPTION>
Percent of Shares
Beneficially Owned (3)
Shares ---------------------- Percent of
Beneficially Before After Voting Power
Name and Address of Beneficial Owner(1) Owned(2)(3) Offering Offering(4) After Offering(4)
- ------------------------------------- ------------ ------- ----------- ----------------
<S> <C> <C> <C> <C>
Anita, Ltd...................................... 1,191,333 35.74% 21.93% 31.74%
Phillip C. Aginsky.............................. 1,191,333(5) 35.74% 21.93% 31.74%
Dan I. Bailey................................... 257,000 7.71% 4.73% --
William M. Rychel............................... 366,709 11.00% 6.75% 9.77%
Martyn L. Cooper................................ 290,500 8.72% 5.35% 7.74%
Peter C. Armstrong.............................. -- -- -- --
J. Thomas Woolsey............................... 549,500 16.49% 10.11% 14.64%
Thomas A. Gust.................................. 376,625 11.30% 6.93% 10.03%
Peter Goletz.................................... 257,000 7.71% 4.73% --
Beverly Nerenberg............................... 213,333(6) 6.40% 3.93% 5.68%
All executive officers and directors
as a group (six persons)................... 2,138,000 64.14% 39.35% 56.96%
</TABLE>
- ----------
(1) The address of such individual is c/o the Company, 2979 Pacific Drive,
Norcross, Georgia 30071.
(2) All of such shares are Class B Common Stock. See "Description of
Securities." Includes such individuals' Escrow Shares and Indemnification
Shares. See "--Escrow Shares" and "Certain Transactions-The Acquisitions."
(3) Upon completion of the Offering, certain of the pre-Acquisition
stockholders, including Messrs. Bailey and Goletz, will pledge all of their
shares (an aggregate of 559,333 shares) to Anita in connection with
personal loans and will grant Anita voting proxies with respect to such
shares. The pledged shares have been included in the number and percent of
shares beneficially owned for both Anita and the respective pledgors. The
percent of voting power after the Offering; however, attributes the voting
power of such shares solely to Anita. Beneficial ownership also reflects
sales of an aggregate of 91,666 shares by Messrs. Rychel and Gust to
certain other current stockholders of the Company which will occur after
completion of the Offering.
(4) Does not reflect the shares of Class A Common Stock or Warrants underlying
an aggregate of 100,000 Units that Anita and certain officers and directors
will purchase in the Offering. The components of such Units may not be
sold or transferred for one year from the date of this Prospectus.
(5) Represents shares held by Anita, a company owned by the New Freedom Trust,
a trust for the benefit of Mr. Aginsky's father. The trustee of the New
Freedom Trust, appointed by Mr. Aginsky's father-in-law, as Protector, is
Riverbank, Ltd. Mr. Aginsky disclaims beneficial ownership of the shares
held by Anita.
(6) Includes shares held by her husband.
Escrow Shares
In connection with the Offering, the holders of the CompanyOs Class B
Common Stock have agreed to place an aggregate of 166,667 shares into escrow
pursuant to an escrow agreement (the "Escrow Agreement") with American Stock
Transfer & Trust Company, as escrow agent. The Escrow Shares may be voted, but
are not transferable or assignable other than to a permitted transferee (as
defined) who agrees to be bound by the Escrow Agreement.
The Escrow Shares will be released from escrow if, and only if, one or more
of the following conditions is/are met:
(a) the Company's net income before provision for income taxes and exclusive of
any extraordinary earnings (all as audited by the Company's independent
public accountants) (the "Minimum Pretax Income") amounts to at least
$8,700,000 for the fiscal year ending December 31, 1998;
(b) the Minimum Pretax Income amounts to at least $13,000,000 for the fiscal
year ending December 31, 1999;
(c) the Minimum Pretax Income amounts to at least $17,900,000 for the fiscal
year ending December 31, 2000;
(d) the Closing Price (as defined in the Escrow Agreement) of the Class A
Common Stock averages in excess of $16.25 per share for 30 consecutive
business days during the 18-month period commencing on the date of this
Prospectus;
(e) the Closing Price of the Class A Common Stock averages in excess of $20.00
per share for 30 consecutive business days during the 18-month period
commencing 18 months from the date of this Prospectus.
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<PAGE>
The Minimum Pretax Income amounts set forth above will be calculated
exclusive of any extraordinary earnings, including any charge to income
resulting from release of the Escrow Shares and any property distributed in
respect of such shares. Minimum Pretax Income will be calculated assuming
release of the Escrow Shares and conversion or exercise of all outstanding
equity securities of the Company convertible into or exchangeable for Common
Stock, whether or not convertible or exchangeable at the time of computation and
after adjustment for any stock dividends, stock splits or similar events. The
Closing Price amounts set forth above are subject to adjustment in the event of
any stock splits, reverse stock splits or other similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Shares, including any property distributed as dividends or pursuant to
any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Shares. If none of the applicable Minimum Pretax Income or Closing Price levels
set forth above have been met by March 31, 2001, the Escrow Shares, as well as
any dividends or other distributions made with respect thereto, will be
cancelled and contributed to the capital of the Company. The release of the
Escrow Shares to officers, directors, employees and consultants of the Company
will be deemed compensatory and, accordingly, will result in a substantial
charge to reportable earnings, which would equal the fair market value of such
shares on the date of release. Such charge could substantially reduce or
eliminate the Company's net income, if any, for financial reporting purposes for
the period during which such shares are, or become probable of being, released
from escrow. Although the amount of compensation expense recognized by the
Company will not affect the Company's total stockholders' equity, it may have a
negative effect on the market price of the Company's securities.
The Minimum Pretax Income and Closing Price levels set forth above were
determined by negotiation between the Company and the Representative and should
not be construed to imply or predict any future earnings by the Company or any
increase in the market price of its securities.
52
<PAGE>
DESCRIPTION OF SECURITIES
Units
Each Unit consists of one share of Class A Common Stock and one redeemable
Warrant. Each Warrant entitles the holder to purchase one share of Class A
Common Stock. The Class A Common Stock and Warrants comprising the Units are
transferable separately immediately upon issuance.
Common Stock
Class A Common Stock
ssue 31,666,667 shares of Class A Common
Stock, $.001 par value, none of which are currently issued and outstanding.
Holders of Class A Common Stock have the right to cast one vote for each share
held of record on all matters submitted to a vote of holders of Class A Common
Stock. The Class A Common Stock and Class B Common Stock vote together as a
single class on all matters on which stockholders may vote, except when class
voting is required by applicable law.
Holders of Class A Common Stock are entitled to dividends, together with
the holders of Class B Common Stock, pro rata based on the number of shares
held, when, as and if declared by the Board of Directors, from funds legally
available therefor subject to the rights of holders of preferred stock. In the
case of dividends or other distributions payable in stock of the Company,
including distributions pursuant to stock splits or division of stock of the
Company, only shares of Class A Common Stock will be distributed with respect to
Class A Common Stock. In the event of liquidation, dissolution or winding up of
the affairs of the Company, all assets and funds of the Company remaining after
the payment to creditors and to holders of preferred stock shall be distributed,
pro rata, among the holders of the Class A Common Stock and the Class B Common
Stock. Holders of Class A Common Stock are not entitled to preemptive,
subscription, cumulative voting or conversion rights, and there are no
redemption or sinking fund provisions applicable to the Class A Common Stock.
All shares of Class A Common Stock to be offered by the Company hereby, when
issued, will be fully paid and non-assessable.
Class B Common Stock
The Company is authorized to issue 3,333,333 shares of Class B Common
Stock, $.001 par value, all of which are issued and outstanding and held by 14
stockholders of record. Each share of Class B Common Stock is entitled to five
votes on all matters on which stockholders may vote, including the election of
directors. The Class A Common Stock and Class B Common Stock vote together as a
single class on all matters on which stockholders may vote, except when class
voting is required by Delaware law.
Holders of Class B Common Stock are entitled to participate together with
the holders of Class A Common Stock, pro rata based on the number of shares
held, in the payment of cash dividends and in the liquidation, dissolution and
winding up of the Company subject to the rights of holders of Preferred Stock.
In the case of dividends, or other distributions payable in stock of the
Company, including distributions pursuant to stock splits or divisions of stock
of the Company, only shares of Class A Common Stock shall be distributed with
respect to Class B Common Stock.
Each share of Class B Common Stock is convertible into one share of Class A
Common Stock at any time at the option of the holder or automatically upon (i)
its sale, gift or transfer, except in the case of a transfer to a trust for
which the original holder acts as sole trustee or to any other holder of Class B
Common Stock; (ii) the death of the original holder thereof, including in the
case of the original holder having transferred the Class B Common Stock to a
trust for which the original holder served as trustee during his or her
lifetime; or (iii) the conversion of an aggregate of 75% of the authorized
shares of Class B Common Stock into Class A Common Stock.
The difference in voting rights increases the voting power of the holders
of Class B Common Stock and accordingly has an anti-takeover effect. The
existence of the Class B Common Stock may make the Company a less attractive
target for a hostile takeover bid or render more difficult or discourage a
merger proposal, an unfriendly tender offer, a proxy contest, or the removal of
incumbent management, even if such transactions were favored by the stockholders
of the Company other than the holders of Class B Common Stock. Thus, the
stockholders may be deprived of an opportunity to sell their shares at a premium
over prevailing market prices in the event of a hostile takeover bid. Those
seeking to acquire the Company through a business combination will be compelled
to consult
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<PAGE>
first with the holders of Class B Common Stock in order to negotiate the terms
of such business combination. Any such proposed business combination will have
to be approved by the Board of Directors, which may be under the control of the
holders of Class B Common Stock, and if stockholder approval were required, the
approval of the holders of Class B Common Stock will be necessary before any
such business combination can be consummated.
Redeemable Warrants
Each Warrant entitles the registered holder to purchase one share of Class
A Common Stock at an exercise price of $8.40 at any time until 5:00 P.M., New
York City time, on November 10, 2002. Commencing one year from the date of this
Prospectus, the Warrants are redeemable by the Company on 30 days' written
notice at a redemption price of $.05 per Warrant if the "closing price" of the
CompanyOs Class A Common Stock for any 30 consecutive trading days ending within
15 days of the notice of redemption averages in excess of $11.75 per share.
"Closing price" shall mean the closing bid price if listed in the
over-the-counter market on Nasdaq or otherwise or the closing sale price if
listed on the Nasdaq National Market or a national securities exchange. The
Company has agreed not to redeem the Warrants unless a prospectus covering the
shares of Class A Common Stock underlying the Warrants is in effect through the
date fixed for redemption. All Warrants must be redeemed if any are redeemed.
The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") among the Company, the Representative and American Stock Transfer &
Trust Company, New York, New York, as warrant agent (the "Warrant Agent"), and
will be evidenced by warrant certificates in registered form. The Warrants
provide for adjustment of the exercise price and for a change in the number of
shares issuable upon exercise to protect holders against dilution in the event
of a stock dividend, stock split, combination or reclassification of the Common
Stock or upon issuance of shares of Common Stock at prices lower than the market
price of the Common Stock, with certain exceptions.
The exercise prices of the Warrants were determined by negotiation between
the Company and the Representative and should not be construed to be predictive
of or to imply that any price increases in the Company's securities will occur.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Class A Common Stock for issuance upon the
exercise of the Warrants. A Warrant may be exercised upon surrender of the
Warrant certificate on or prior to its expiration date (or earlier redemption
date) at the offices of the Warrant Agent, with the "Subscription Form" on the
reverse side of the Warrant certificate completed and executed as indicated,
accompanied by payment of the full exercise price (by certified or bank check
payable to the order of the Company) for the number of shares with respect to
which the Warrant is being exercised. Shares issued upon exercise of Warrants
and payment in accordance with the terms of the Warrants will be fully paid and
non-assessable.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market value of the Class A Common Stock, with a
resulting dilution in the interest of all other stockholders. So long as the
Warrants are outstanding, the terms on which the Company could obtain additional
capital may be adversely affected. The holders of the Warrants might be expected
to exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital by a new offering of securities on terms more
favorable than those provided for by the Warrants.
The Warrants do not confer upon the Warrantholder any voting or other
rights of a stockholder of the Company. Upon notice to the Warrantholders, the
Company has the right to reduce the exercise price or extend the expiration date
of the Warrants.
Unit Purchase Option
The Company has agreed to grant to the Representative and its designees,
upon the closing of the Offering, the Unit Purchase Option to purchase up to
210,000 Units. These Units will be identical to the Units offered hereby except
that the Warrants included in the Unit Purchase Option will only be subject to
redemption by the Company after the Unit Purchase Option has been exercised and
the underlying Warrants are outstanding. The Unit Purchase Option cannot be
transferred, sold, assigned or hypothecated for two years, except to any officer
of the Underwriters or members of the selling group or their respective
officers. The Unit Purchase Option is exercisable during the three-year period
commencing two years from the date of this Prospectus at an exercise price of
$7.80 per Unit (130% of the initial public offering price) subject to adjustment
in certain events to protect against dilution. The holders of the Unit Purchase
Option have certain demand and piggyback registration rights. See
"Underwriting."
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<PAGE>
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of "blank-check"
preferred stock (the "Preferred Stock"). The Board of Directors will have the
authority to issue this Preferred Stock in one or more series and to fix the
number of shares and the relative rights, conversion rights, voting rights and
terms of redemption (including sinking fund provisions) and liquidation
preferences, without further vote or action by the stockholders. If shares of
Preferred Stock with voting rights are issued, such issuance could affect the
voting rights of the holders of the Company's Common Stock by increasing the
number of outstanding shares having voting rights, and by the creation of class
or series voting rights. If the Board of Directors authorizes the issuance of
shares of Preferred Stock with conversion rights, the number of shares of Common
Stock outstanding could potentially be increased by up to the authorized amount.
Issuance of Preferred Stock could, under certain circumstances, have the effect
of delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Common Stock. Also, Preferred Stock could have
preferences over the Common Stock (and other series of preferred stock) with
respect to dividend and liquidation rights. The Company currently has no plans
to issue any Preferred Stock.
Anti-Takeover Protections
The voting provisions of the Class A Common Stock and Class B Common Stock
and the broad discretion conferred upon the Board of Directors with respect to
the issuance of series of Preferred Stock (including with respect to voting
rights) could substantially impede the ability of one or more stockholders
(acting in concert) to acquire sufficient influence over the election of
directors and other matters to effect a change in control or management of the
Company, and the Board of Directors' ability to issue Preferred Stock could also
be utilized to change the economic and control structure of the Company. As a
result, such provisions, together with certain other provisions of the By-Laws
summarized in the succeeding paragraph, may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in such stockholder's best interest, including
attempts that might result in a premium over the market price for the Common
Stock hold by stockholders.
Transfer Agent
American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
Registration Rights
The holders of the Unit Purchase Option will have demand and piggy-back
registration rights relating to such options and the underlying securities. See
"Underwriting."
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering the Company will have outstanding 2,100,000
shares of Class A Common Stock, 3,333,333 shares of Class B Common Stock and
2,100,000 Warrants. The 3,333,333 outstanding shares of Class B Common Stock are
"restricted securities" within the meaning of Rule 144 under the Securities Act
and may not be sold publicly unless they are registered under the Securities Act
or are sold pursuant to Rule 144 or another exemption from registration.
1,141,333 of such shares are currently eligible for sale in the public market
pursuant to Rule 144 and the remainder will become so eligible commencing June
1998 (subject to the restrictions on transferability relating to the Escrow
Shares and volume limitations). However, all the holders of the shares of Class
B Common Stock outstanding prior to the Offering have agreed not to sell or
otherwise dispose of any securities of the Company for a period of 13 months
after the date of this Prospectus without the Representative's prior written
consent and for the 10 months thereafter not to sell more than 10% of their
holdings in any month on a cumulative basis without such consent.
In general, under Rule 144 a person (or persons whose shares are
aggregated), including persons who may be deemed to be "affiliates" of the
Company as that term is defined under the Securities Act, is entitled to sell
within any three-month period a number of restricted shares beneficially owned
for at least one year that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) an amount equal to the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. However, a person who is not deemed an affiliate and has
beneficially owned such shares for at least three years is entitled to sell such
shares without regard to the volume or other resale requirements.
The Representative has demand and "piggy-back" registration rights with
respect to the securities underlying the Unit Purchase Option. See
"Underwriting."
Prior to the Offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.
56
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below have severally agreed to purchase from the Company on a
"firm commitment" basis, if any are purchased, the respective number of Units
set forth opposite their names.
Underwriter Number of Units
----------- ---------------
D. H. Blair Investment Banking Corp. .......................... 1,420,000
D. H. Blair & Co., Inc. ....................................... 60,000
Brean Murray & Co., Inc. ...................................... 60,000
Cruttenden Roth Incorporated .................................. 60,000
C.L. King & Associates, Inc. .................................. 60,000
Baird, Patrick & Co., Inc. .................................... 40,000
M.S. Farrell & Co., Inc. ...................................... 40,000
Frederick & Company, Inc. ..................................... 40,000
Hornblower & Weeks Incorporated ............................... 40,000
Sharpe Capital, Inc. .......................................... 40,000
Smith, Moore & Co. ............................................ 40,000
Stuart, Coleman & Co. Inc. .... ............................... 40,000
Trautman, Kramer & Company, Inc. .............................. 40,000
Walsh Manning Securities, LLC ................................. 40,000
Westport Resources Investment Services, Inc. .................. 40,000
Win Capital Corp. ............................................. 40,000
-------------
Total .............................. 2,100,000
=============
It is expected that Blair & Co. will distribute as a selling group member a
substantial portion (up to approximately 52%, including the over-allotment
option) of the Units offered hereby. It is also expected that Blair & Co. will
make a market in the Company's securities. Blair & Co. is substantially owned by
family members of J. Morton Davis. Mr. Davis is the sole stockholder of the
Representative.
The Underwriters have advised the Company that they propose to offer the
Units to the public at the public offering price set forth on the cover page of
this Prospectus and to certain dealers who are members of the NASD, at such
prices less concessions of not in excess of $.25 per Unit, of which a sum not
in excess of $.10 per Unit may in turn be reallowed to other dealers who are
members of the NASD. After the commencement of the Offering, the public offering
price, the concession and the reallowance may be changed by the Underwriters.
The Company has granted to the Underwriters (or, at is option, the
Representative, individually) an option, exercisable during the 30-day period
commencing on the date of this Prospectus, to purchase from the Company at the
public offering price, less underwriting discounts, up to 315,000 additional
Units for the purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriters a non-accountable expense allowance equal
to 3% of the gross proceeds derived from the sale of Units offered hereby,
including any Units purchased pursuant to the Underwriters' over-allotment
option, $40,000 of which has been paid to date.
Holders of all of the Company's outstanding shares of Class B Common Stock
have agreed not to sell, assign, transfer or otherwise dispose of any of their
shares for a period of 13 months from the date of this Prospectus without the
prior written consent of the Representative and for the 10 months thereafter not
to sell more than 10% of their holdings in any month on a cumulative basis
without such consent.
During the five-year period from the date of this Prospectus, in the event
the Representative originates a financing or a merger, acquisition or
transaction to which the Company is a party, the Representative will be entitled
to receive a finder's fee in consideration for origination of such transaction.
The fee is based on a percentage of the consideration paid in the transaction
ranging from 7% of the first $1,000,000 to 21/2% of any consideration in excess
of $9,000,000.
57
<PAGE>
The Company has agreed not to solicit Warrant exercises other than through
the Representative, unless the Representative declines to make such
solicitation. Upon any exercise of the Warrants after the first anniversary of
the date of this Prospectus, the Company will pay the Representative a fee of 5%
of the aggregate exercise price of the Warrants, if (i) the market price of the
Company's Common Stock on the date the Warrants are exercised is greater than
the then exercise price of the Warrants; (ii) the Warrant holder designates in
writing that the exercise of the Warrants was solicited by a member of the NASD
and designates in writing the broker-dealer to receive compensation for such
exercise; (iii) the Warrants are not held in a discretionary account; (iv)
disclosure of compensation arrangements was made both at the time of the
Offering and at the time of exercise of the Warrants; and (v) the solicitation
of exercise of the Warrant was not in violation of Regulation M promulgated
under the Exchange Act. The Representative may reallow a portion of such fee to
members of the NASD. The costs of the RepresentativeOs solicitation of exercise
or redemption of the Warrants will be borne by the Company.
Regulation M of the Exchange Act may prohibit Blair & Co. from engaging in
any market-making activities with regard to the Company's securities for the
period of up to five business days (or such other applicable period as
Regulation M may provide) prior to any solicitation by the Representative of the
exercise of Class A Warrants until the later of the termination of such
solicitation activity or the termination (by waiver or otherwise) of any right
that the Representative may have to receive a fee for the exercise of Class A
Warrants following such solicitation. As a result, Blair & Co. may be unable to
provide a market for the Company's securities during certain periods while the
Warrants are exercisable.
The Company has agreed to sell to the Representative and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 210,000 Units,
substantially identical to the Units being offered hereby, except that the
Warrants included therein are subject to redemption by the Company at any time
after the Unit Purchase Option has been exercised and the underlying warrants
are outstanding. The Unit Purchase Option will be exercisable during the
three-year period commencing two years from the date of this Prospectus at an
exercise price of $7.80 per Unit, subject to adjustment in certain events to
protect against dilution, and are not transferable for a period of two years
from the date of this Prospectus except to officers of the Underwriters or to
members of the selling group or their respective officers. The Company has
agreed to register during the four-year period commencing one year from the date
of this Prospectus, on two separate occasions, the securities issuable upon
exercise thereof under the Securities Act, the initial such registration to be
at the Company's expense and the second at the expense of the holders. The
Company has also granted certain "piggy-back" registration rights to holders of
the Unit Purchase Option.
The Representative has informed the Company that it does not expect to make
sales of the Units offered hereby to discretionary accounts.
The Securities and Exchange Commission (the "Commission") is conducting an
investigation concerning various business activities of the Representative. The
investigation appears to be broad in scope, involving numerous aspects of the
Representative's compliance with the Federal securities laws and compliance with
the Federal securities laws by issuers who securities were underwritten by the
Representative, or in which the Representative made over-the-counter markets,
persons associated with the Representative, such issuers and other persons. The
Company has been advised by the Representative that the investigation has been
ongoing since at least 1989 and that it is cooperating with the investigation.
The Representative cannot predict whether this investigation will ever result in
any type of formal enforcement action against the Representative, or, if so,
whether any such action might have an adverse effect on the Representative or
the securities offered hereby.
In connection with the Offering, the Underwriters and certain selling group
members may engage in certain transactions that stabilize, maintain or otherwise
affect the market price of the Units, the Class A Common Stock and the Warrants.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase the Units, the Class A Common Stock and the Warrants for the purpose of
pegging, fixing or maintaining the market price of such securities. The
Underwriters may also create a short position in the Units by selling more Units
in connection with the Offering than they are committed to purchase from the
Company, and in such case the Underwriters may reduce all or a portion of that
short position by purchasing the Units, the Class A Common Stock and the
Warrants in the open market. The Underwriters also may also elect to reduce any
short position by exercising all or any portion of the over-allotment option
described herein. In addition, the Representative may impose "penalty bids"
whereby selling commissions allowed to syndicate members or other broker-dealers
in respect of the Units sold in the Offering for their account may be reclaimed
by the Representative if the securities comprising the Units are repurchased by
the Representative
58
<PAGE>
or any syndicate member in stabilizing or covering transactions. Any of the
transactions described in this paragraph may stabilize or maintain the market
price of the Units, the Class A Common Stock and the Warrants at a level above
that which might otherwise prevail in the open market.
Neither the Company nor the Representative may make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Units, the Class A Common Stock and
the Warrants. In addition, neither the Company nor the Representative makes any
representation that the Representative or any syndicate member will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
Prior to the Offering, there has been no public market for any of the
securities offered hereby. Accordingly, the public offering price of the Units
offered hereby and the terms of the Warrants have been determined by negotiation
between the Company and the Representative and are not necessarily related to
the CompanyOs asset value, net worth or other established criteria of value.
Factors considered in determining such prices and terms, in addition to
prevailing market conditions, include the history of and the prospects for the
industry in which the Company competes, the present state of the Company's
development and its future prospects, an assessment of the Company's management,
the Company's capital structure, demand for similar securities of comparable
companies and such other factors as were deemed relevant.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York. Certain
legal matters will be passed upon for the Underwriters by Paul, Hastings,
Janofsky & Walker LLP, New York, New York. Bachner, Tally, Polevoy & Misher LLP
represents the Representative in other matters.
EXPERTS
The financial statements of Tekgraf, Inc. (formerly Crescent Computers,
Inc.), G&R Marketing, Inc. and Computer Graphics Distributing Company as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, of Intelligent Products Marketing, Inc. and IG Distribution,
Inc. as of December 31 ,1996 and 1995 and for the years then ended, of
Microsouth, Inc. as of December 31, 1996 and 1995 and for the year ended
December 31, 1996 and the six month period ended December 31, 1995, and of
tekgraf, inc. as of December 31, 1996 and for the year then ended appearing in
this Prospectus and Registration Statement have been audited by Coopers &
Lybrand L.L.P., independent accountants, as set forth in their reports thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company is not a reporting company under the Exchange Act. The Company
has filed a Registration Statement on Form S-1 under the Securities Act with the
Commission in Washington, D.C. with respect to the Units offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Units
offered hereby, reference is hereby made to the Registration Statement and such
exhibits, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at 500 West Madison (Suite 1400), Chicago, Illinois 60661. Copies
of such material may also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. In addition, the Commission maintains a Website
on the Internet that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's Website is http://www.sec.gov.
Following the Offering, the Company will be subject to the reporting and
other requirements of the Exchange Act and intends to furnish to its
stockholders annual reports containing audited financial statements and may
furnish interim reports as it deems appropriate.
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Historical Financial Statements of Tekgraf, Inc.
(formerly Crescent Computers, Inc.) and the Subsidiaries
Page
----
Tekgraf, Inc. (Formerly Cresent Computers, Inc.)
Report of Independent Accountants.................................... F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statements of Changes in Stockholder's Equity(Deficit).. F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7
Microsouth, Inc.
Report of Independent Accountants.................................... F-15
Balance Sheets....................................................... F-16
Statements of Income................................................. F-17
Statements of Changes in Stockholder's Equity........................ F-18
Statements of Cash Flows............................................. F-19
Notes to Financial Statements........................................ F-20
Computer Graphics Distributing Company
Report of Independent Accountants.................................... F-23
Balance Sheets....................................................... F-24
Statements of Income................................................. F-25
Statements of Changes in Stockholders' Equity........................ F-26
Statements of Cash Flows............................................. F-27
Notes to Financial Statements........................................ F-28
tekgraf, inc.
Report of Independent Accountants.................................... F-32
Balance Sheets....................................................... F-33
Statements of Income................................................. F-34
Statements of Changes in Stockholder's Equity........................ F-35
Statements of Cash Flows............................................. F-36
Notes to Financial Statements........................................ F-37
Intelligent Prouducts Marketing Inc.
Report of Independent Accountants.................................... F-40
Balance Sheets....................................................... F-41
Statements of Operations............................................. F-42
Statements of Changes in Stockholders' Equity........................ F-43
Statements of Cash Flows............................................. F-44
Notes to Financial Statements........................................ F-45
IG Distribution, Inc.
Report of Independent Accountants.................................... F-48
Balance Sheets....................................................... F-49
Statements of Income................................................. F-50
Statements of Changes in Stockholders' Equity........................ F-51
Statements of Cash Flows............................................. F-52
Notes to Financial Statements........................................ F-53
G&R Marketing, Inc.
Report of Independent Accountants.................................... F-54
Balance Sheets....................................................... F-55
Statements of Income................................................. F-56
Statements of Changes in Stockholders' Equity........................ F-57
Statements of Cash Flows............................................. F-58
Notes to Financial Statements........................................ F-59
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Tekgraf, Inc. (formerly Crescent Computers, Inc.)
We have audited the accompanying consolidated balance sheets of Tekgraf,
Inc. (formerly Crescent Computers, Inc.) as of December 31, 1995 and 1996, and
the related consolidated statements of operations, changes in stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tekgraf, Inc. (formerly Crescent Computers, Inc.) as of December 31, 1995 and
1996, and the results of their consolidated operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P .
Atlanta, Georgia
June 2, 1997 except for
Note 9 as to which the
date is October 9, 1997
F-2
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1995 1996 1997
----------- ------------ ----------
(Unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 305,821 $ 633,027 $ 971,696
Accounts receivable, less allowance for doubtful accounts of $17,000
and $35,000 at December 31, 1995 and 1996, respectively ......... 1,382,673 1,621,180 10,182,348
Inventories, net ................................................... 549,274 636,019 5,254,338
Other receivables .................................................. 154,120
Due from related entities .......................................... 44,539
Prepaid expenses and other assets .................................. 120,598
Deferred income taxes .............................................. 8,400 1,500 26,910
--------- --------- ----------
Total current assets ........................................... 2,246,168 2,891,726 16,754,549
--------- --------- ----------
Property and equipment:
Furniture and fixtures ............................................. 44,531 83,294 719,640
Computer equipment ................................................. 5,946 36,225 578,462
--------- --------- ----------
50,477 119,519 1,298,102
Less accumulated depreciation ...................................... (45,766) (62,765) (871,970)
--------- --------- ----------
4,711 56,754 426,132
Goodwill, net ......................................................... 5,977,685
Deferred income taxes ................................................. 800
Other assets .......................................................... 12,732 58,629 428,957
--------- --------- ----------
Total assets .................................................... $ 2,264,411 $ 3,007,109 $ 23,587,323
========= ========= ==========
LIABILITIES
Current liabilities:
Current debt ....................................................... $ 2,486,404
Due to acquisition stockholders (See Note 9) ....................... 1,086,000
Notes payable, stockholders ........................................ 90,000
Due to stockholders, net ........................................... $ 1,615,864 $ 2,211,164
Due to related entities, net ....................................... 2,159,424
Accounts payable ................................................... 649,206 711,125 8,016,289
Accrued expenses ................................................... 32,302 69,408 202,871
Income taxes payable ............................................... 4,100 201,168
--------- --------- ----------
Total current liabilities ....................................... 2,297,372 2,995,797 14,242,156
--------- --------- ----------
Debt, less current maturities ...................................... 112,246
Note payable, stockholder .......................................... 50,000
Deferred income taxes .............................................. 1,200 5,327
Minority interest .................................................. 14,629
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT)
Class A Common Stock $.001 par value, 31,666,667 shares
authorized; no shares issued and outstanding at December
31, 1995 and 1996; holders of Class A Common Stock are
entitled to one vote per share (See Note 9)
Class B Common Stock, $.001 par value, 3,333,333 shares
authorized; 1,141,333 shares issued and outstanding at
December 31, 1995 and 1996, respectively; holders of
Class B Common Stock are entitled
to five votes per share (See Note 9) ............................ 1,141 1,141 3,333
Preferred Stock, $.001 par value, 5,000,000 shares authorized;
no shares issued and outstanding at December 31, 1995 and 1996
Due from acquisition stockholders (See Note 9) ..................... (419,000)
Due from pre-acquisition stockholders .............................. (990,000)
Additional paid in capital.......................................... 10,421,806
Retained earnings (deficit) ........................................ (34,102) 8,971 146,826
--------- --------- ----------
Total stockholders' equity (deficit) ............................... (32,961) 10,112 9,162,965
--------- --------- ----------
Total liabilities and stockholders' equity ......................... $ 2,264,411 $3,007,109 $23,587,323
========= ========= ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
---------------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ------------ ----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales ........................................... $ 6,339,574 $ 12,277,340 $13,414,131 $6,850,330 $12,451,881
Cost of goods sold .................................. 5,228,141 10,367,789 10,951,551 5,698,376 10,606,313
----------- ------------ ----------- ---------- -----------
Gross profit .................................. 1,111,433 1,909,551 2,462,580 1,151,954 1,845,568
Operating expenses:
Selling, general and administrative .............. 1,082,370 1,760,957 2,244,924 916,147 1,415,233
Depreciation ..................................... 8,450 28,349 16,999 15,346 34,449
Amortization ..................................... 33,395
----------- ------------ ----------- ---------- -----------
Income from operations ........................ 20,613 120,245 200,657 220,461 362,491
Other income ........................................ 14,916 40,021 20,847
Interest expense .................................... 39,743 125,566 159,500 60,000 108,270
----------- ------------ ----------- ---------- -----------
Income (loss) before provision (benefit) for
income taxes taxes and minority interest ... (19,130) (5,321) 56,073 200,482 275,068
Provision (benefit) for income taxes ................ (3,900) (1,600) 13,000 13,000 122,584
----------- ------------ ----------- ---------- -----------
Income (loss) before minority interest ........ (15,230) (3,721) 43,073 187,482 152,484
Minority interest ................................... 24,580 14,629
----------- ------------ ----------- ---------- -----------
Net income (loss) ............................. $ (15,230) $ (3,721) $ 43,073 $ 162,902 $ 137,855
=========== ============ =========== ========== ===========
Primary and fully diluted weighted average shares
outstanding ...................................... 1,141,333 1,141,333 1,141,333 1,141,333 1,244,011
=========== ============ =========== ========== ===========
Primary and fully diluted net income (loss) per share $ (.01) $ -- $ .04 $ .14 $ .11
=========== ============ =========== ========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Class B
Common Due from Additional Retained
Number of Stock Stockholders Paid in Earnings
Shares (Note 9) (Note 9) Capital (Deficit) Total
--------- ------ ----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Balances, January 1, 1994 .............. 1,141,333 $1,141 $ (15,151) $ (14,010)
Net loss ............................ (15,230) (15,230)
--------- ------ ----------- ----------- --------- -----------
Balances, December 31, 1994 ............ 1,141,333 1,141 (30,381) (29,240)
Net loss ............................ (3,721) (3,721)
--------- ------ ----------- ----------- --------- -----------
Balances, December 31, 1995 ............ 1,141,333 1,141 (34,102) (32,961)
Net income .......................... 43,073 43,073
--------- ------ ----------- ----------- --------- -----------
Balances, December 31, 1996 ............ 1,141,333 1,141 8,971 10,112
Issuances of stock for
acquisitions (unaudited) ......... 2,192,000 2,192 9,012,806 9,014,998
Due from acquisition stockholders
(unaudited) ...................... (419,000) 419,000
Due from pre-acquisition stockholders
(unaudited) ...................... (990,000) 990,000
Net income (unaudited) .............. 137,855 137,855
--------- ------ ----------- ----------- --------- -----------
Balances, June 30, 1997 (unaudited) .... 3,333,333 $3,333 $(1,409,000) $10,421,806 146,826 $ 9,162,965
========= ====== =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- --------- ----------- --------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................. $ (15,230) $ (3,721) $ 43,073 $ 162,902 $ 137,855
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation ......................................... 8,450 28,349 16,999 15,346 34,449
Minority interest .................................... 24,580 14,629
Amortization ......................................... 33,395
Provision for doubtful accounts receivable ........... 8,474 2,800 18,000 11,000
Deferred income taxes ................................ (3,900) (1,600) 8,900 (4,200)
Changes in assets and liabilities,
net of the effects of the acquisitions:
Accounts receivable .................................. (487,281) (417,787) (256,507) (276,762) (1,995,720)
Inventories .......................................... (151,321) (137,289) (86,745) (43,944) (716,012)
Other assets ......................................... 4,090 1,456 (45,897) (7,012) (53,972)
Other receivables .................................... 23,455
Accounts payable and accrued expenses ................ 203,660 357,377 99,025 101,594 2,155,172
Income taxes payable ................................. 4,100 13,000 87,103
----------- --------- ----------- --------- ------------
Net cash provided (used) by operating activities .. (433,058) (170,415) (199,052) (10,296) (272,846)
----------- --------- ----------- --------- ------------
Cash flows from investing activities:
Cash acquired from acquisitions, net of acquisition
costs of $88,677 .................................. 349,482
Payments for purchase of property and equipment ...... (8,450) (33,060) (69,042) (153,286) (49,950)
----------- --------- ----------- --------- ------------
Net cash used by investing activities ............. (8,450) (33,060) (69,042) (153,286) 299,532
----------- --------- ----------- --------- ------------
Cash flows from financing activities:
Advance from stockholders ............................ 1,150,752 472,2721, 1,115,957 375,122 36,009
Repayment of advance from stockholders
and related entities .............................. (449,869) (280,130) (520,657) (15,731)
Proceeds from debt ................................... 327,714
----------- --------- ----------- --------- ------------
Net cash provided (used) by financing activities .. 700,883 192,142 595,300 375,122 311,983
----------- --------- ----------- --------- ------------
Increase (decrease) in cash and cash equivalents ........ 259,375 (11,333) 327,206 211,540 338,669
Cash and cash equivalents, beginning of period .......... 57,779 317,154 305,821 305,821 633,027
----------- --------- ----------- --------- ------------
Cash and cash equivalents, end of period ................ $ 317,154 $ 305,821 $ 633,027 $ 517,361 $ 971,696
=========== ========= =========== ========= ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ............... $ 39,743 $ 120,109 $ 159,500
=========== ========= ===========
Supplemental non-cash investing and financing activities:
June 2, 1997 acquisitions:
Fair value of stock issued ........................ $ 9,485,537
Other acquisition costs ........................... 88,677
Fair value of liabilities assumed ................. 8,982,850
Fair value of assets acquired ..................... (12,545,984)
------------
Goodwill ........................................... $ 6,011,080
============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Basis of Presentation and Nature of Operations:
Organization
The consolidated financial statements of Tekgraf, Inc., formerly Crescent
Computers, Inc. ("the Company" or "Tekgraf") include the accounts of Prisym
Technologies of Georgia, Inc. ("Prisym"), a 60% owned subsidiary. Minority
interest, if any, represents minority stockholder's proportionate share of the
equity in Prisym. All significant intercompany balances, transactions and
profits have been eliminated in consolidation.
Basis of Presentation
The consolidated financial statements are prepared on the basis of
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at December 31, 1995 and 1996 and reported amounts of
revenues and expenses for each of the three years in the period ended December
31, 1996. Significant estimates include primarily those made for the allowance
for doubtful accounts. Actual results could differ from those estimates made by
management.
Nature of Operations
Tekgraf is a manufacturer, integrator and distributor of premium personal
computers, workstations, and internet/intranet servers. Tekgraf's operations are
located in Atlanta, Georgia and products are sold either directly or through
distributors. Prisym markets workstations, printers, mass storage, components
and peripherals of a major U.S. manufacturer. Prisym has offices located in
Atlanta, Georgia and Greenville, South Carolina.
Inherent in the accompanying consolidated financial statements are certain
risks and uncertainties. These risks and uncertainties include, but are not
limited to: the impact of competitive products, competition, available sources
of supply and various technology related risks.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim consolidated financial statements as of
June 30, 1997 and for The accompanying notes are an integral part of the
consolidated financial statements. the six months ended June 30, 1996 and 1997
have not been audited by independent accountants. However, they have been
prepared in conformity with the accounting principles stated in the audited
financial statements for the three years in the period ended December 31, 1996
and include all adjustments, which were of a normal and recurring nature which,
in the opinion of management are necessary to present fairly the financial
position of the Company and the results of operations and cash flows for each of
the periods presented. The operating results for the interim periods are not
necessarily indicative of results for the full year.
As described in Note 9, the Company completed the acquisition of six
companies on June 2, 1997. Accordingly, the results of operations of the
acquired businesses have been included in the accompanying consolidated
financial statements from the date of acquisition.
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents. The
Company maintains cash balances at financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out method) or market. Inventory is comprised primarily of raw
materials and the Company maintains a reserve for its estimate of excess,
obsolete and damaged goods. In most instances, the Company receives warranties
on its products from its vendors which are at least equivalent to those it
provides to its customers.
F-7
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives which
range from 3 to 7 years. Amounts expended for maintenance and repairs are
charged to expense as incurred. Upon disposition, both the related cost and
accumulated depreciation accounts are relieved and the related gain or loss is
credited or charged to operations.
Goodwill
Goodwill is amortized over its estimated economic life or period of future
benefit. The Company is currently amortizing goodwill, associated with the
acquisitions described in Note 9, on a straight-line basis of 15 years. This
estimated life is a composite of many factors which are subject to change
because of the nature of the Company's operations. This is particularly true
because goodwill reflects value attributable to the going concern nature of
acquired businesses, the stability of their operations, market presence and
reputation. Accordingly, at each reporting period, the Company evaluates the
continued appropriateness of this life and recoverability of the carrying value
of the goodwill based upon current and future levels of income and cash flows as
well as the latest available economic factors and circumstances. Impairment of
value, if any, is recognized in the period in which it is determined. The
Company does not believe that there are any facts or circumstances indicating
impairment of goodwill at June 30, 1997.
Revenue
Sales are recognized upon the shipment of products to the customer or
distributor.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred tax liabilities and assets are determined based
on temporary differences between the bases of certain assets and liabilities for
income tax and financial reporting purposes. The deferred tax assets and
liabilities are classified according to the financial statement classification
of the assets and liabilities generating the differences. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Tekgraf and Prisym file separate federal income tax returns.
Fair Value of Financial Instruments
The Company's financial instruments include its debt obligations.
Management believes that substantially all of these instruments bear interest at
rates which approximate prevailing market rates for instruments with similar
characteristics and, accordingly, that the carrying values for these instruments
are reasonable estimates of fair value.
3. Related Party Transactions:
Included in the due to stockholder balance at December 31, 1995 and 1996
are advances from the Company's majority stockholder of $1,553,975 and
$2,109,325 (see Note 9), respectively, and advances from other stockholders of
$61,889 and $101,840, respectively. During each of the three years in the period
ended December 31, 1996, the Company recognized interest expense on the advances
from the majority stockholder of approximately $40,000, $126,000, and $160,000,
respectively. The advances from the majority stockholders bear interest at 8%.
The advances from other stockholder do not bear interest. All advances from
stockholders are due on demand. During January 1997, the Company's majority
stockholder transferred ownership of the outstanding common stock of the Company
to its parent. Accordingly, amounts previously classified as due to stockholders
in the consolidated balance sheet have been reported as amounts due to a related
entity in the consolidated balance sheet as of June 30, 1997.
F-8
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Related Party Transactions, continued:
During the years ended December 31, 1994 and 1996, the Company paid
management fees to the majority stockholder of $45,000 and $135,000,
respectively. During the six months ended June 30, 1996, the Company paid
management fees of approximately $149,000. During the six month period ended
June 30, 1997, no management fees were paid.
At December 31, 1996, the Company has guaranteed debt of an entity owned by
certain stockholders of the Company of $496,000.
The Company is affiliated through common ownership with entities whose
operating expenses, such as rent, utilities, insurance and other expenses were
shared with the subsidiaries of the Company prior to June 2, 1997. Amounts due
from these related entities under this arrangement were $44,539 at June 30,
1997.
The notes payable to stockholders, at June 30, 1997, bear interest at 12%
and 9.25% and have no stated maturity date.
4. Income Taxes:
The provision (benefit) for income taxes for the years ended December 31,
is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current ................................................................... $ -- -- $ 4,100
Deferred .................................................................. (3,900) $ (1,600) 8,900
-------- -------- --------
$ (3,900) $ (1,600) $ 13,000
======== ======== ========
</TABLE>
A reconciliation of federal statutory and effective income tax rates is as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate .................................... 15.0% 15.0% 15.0%
Effect of: State income taxes, net of federal benefit ..................... 5.0 5.0 5.0
Non-deductible meals and entertainment .................................... 8.0 1.5
Stockholder life insurance ................................................ 1.5
Other, net ................................................................ 2.0
-------- -------- --------
Effective rate ............................................................ 20.0% 30.0% 23.0%
======== ======== ========
</TABLE>
Benefits of approximately $8,400 were recognized due to operating loss
carryforwards during 1996.
An analysis of the deferred income tax assets and liabilities at December
31, is as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current deferred income tax assets:
Net operating loss carryforwards .................................... $ 8,400 $ 1,500
-------- --------
Total current deferred income tax assets ...................... $ 8,400 $ 1,500
======== ========
Non-current deferred income tax assets:
Net operating loss carryforwards .................................... $ 800
-------- --------
Total non-current deferred income tax assets .................... $ 800
======== ========
Non-current deferred income tax liabilities:
Property and equipment .............................................. $ (1,200)
-------- --------
Total non-current deferred income tax liabilities .............. $ (1,200)
======== ========
</TABLE>
The net operating loss carryforwards expire in 2011. Management believes
that realization of the net deferred tax assets is more likely than not due
primarily to anticipated future taxable income and the reversal of existing
taxable temporary differences.
F-9
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Debt
At June 30, 1997 debt consists of the following:
Line of credit with a bank totaling $ 2,250,000,
bearing interest at the bank's prime rate
(8.5% at June 30, 1997) plus 2%,
collateralized by accounts receivable and
inventory, subject to certain loan covenant
restrictions, and expires September 30, 1997 ........ $ 1,090,465
Various installment notes payable with banks bearing
interest at rates ranging from 7.5% to 8.5%,
payable in monthly installments through 1998,
collateralized by certain equipment ................. $ 51,547
Line of credit with a bank totaling $250,000, bearing
interest at the bank's prime rate (8.5% at June
30, 1997) plus .75%, guaranteed by certain
stockholders of the Company and expires
January 9, 1998 ..................................... $ 228,196
Line of credit with a bank totaling $3,000,000, bearing
interest at the bank's prime rate (8.5% at June
30, 1997) plus .5%, guaranteed by certain
stockholders of the Company, collateralized by
certain assets, and expires January 9, 1998 ........ $ 1,228,442
-----------
$ 2,598,650
Less current maturities ................................... $(2,486,404)
-----------
$ 112,246
===========
6. Commitments and Contingencies:
Operating Lease
The Company leases office space under an operating lease expiring in 1998.
At December 31, 1996 minimum rentals due under the lease were as follows:
1997 ...................................................... $27,216
1998 ...................................................... 22,680
-------
$49,896
=======
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
approximately $60,000, respectively.
An additional building is currently being leased from affiliated entity on
a month-to-month basis with monthly rentals of approximately $3,000.
Litigation
The Company is involved from time to time in litigation on matters which
are routine to the conduct of its business. Although the outcome of any
litigation cannot be predicted with certainty, the Company does not believe that
any outstanding litigation will have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
7. Net Income (Loss) Per Common Share:
Primary and fully diluted net income (loss) per common share are computed
by dividing net income (loss) by the weighted average number of common shares
and common share equivalents outstanding during the period.
F-10
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Net Income (Loss) Per Common Share, continued:
There were no common stock equivalents during each of the periods presented. At
June 30, 1997, the fully diluted weighted average shares exclude the Escrow
shares (Note 9) and was determined as follows:
Shares outstanding from beginning of period .......... 1,141,333
Weighted average shares issued on June 2, 1997
in connection with the acquisitions ............... 168,153
Escrow shares (Note 9) ............................... (65,475)
----------
1,244,011
==========
8. Future Adoption of Recently Issued Accounting Standards:
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of an Enterprise and
Related Information ("SFAS 131"), No. 130, Reporting Comprehensive Income ("SFAS
130"), No. 129, Disclosure of Information About Capital Structure ("SFAS 129"),
and No. 128, Earnings Per Share ("SFAS 128"). SFAS 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS 129 consolidates the existing requirements to disclose certain
information about an entity's capital structure, and SFAS 128 specifies the
computation, presentation, and disclosure requirements for earnings per share.
These Standards are effective for years beginning after December 15, 1997.
The Company believes that the impact of these Standards, when adopted, will
not have a material impact on the Company's consolidated financial statements.
9. Subsequent Events
Acquisitions
Effective June 2, 1997, the Company completed the acquisition of 100% of
the outstanding common stock of G&R Marketing, Inc. ("G&R"), Microsouth, Inc.
("Microsouth"), tekgraf, inc. ("tekgraf"), Computer Graphics Distributing
Company ("CGD"), Intelligent Products Marketing, Inc. ("IPM"), and IG
Distribution, Inc. ("IGD") (collectively the "Subsidiaries") in exchange for the
issuance of 2,192,000 (adjusted for the stock splits, reverse stock split and
including the 166,667 shares to be placed in escrow as required by the letter of
intent described below which if released will be accounted for as compensation)
shares of common stock of the Company and an aggregate of 1,333,333 shares which
were placed in escrow by the stockholders of the subsidiaries to cover potential
claims for indemnification by the Company pursuant to the stock purchase
agreements ("the Agreements"). Each stockholder of the Company has deposited 40%
of his shares in escrow. These subsidiaries are regional distributors and
marketers of computer graphics hardware and software. Customers consist
primarily of value added resellers and vertical solution providers.
Pursuant to the terms of the Agreements, the Subsidiaries are required to
deliver a defined guaranteed net asset value ("NAV"). The Subsidiaries
preliminary excess net book value over the NAV of $1,086,000 will be distributed
in cash to the stockholders of the Subsidiaries. It is anticipated that the
excess NAV will be distributed during December 1997 from cash balances or a line
of credit the Company expects to obtain. The subsidiaries preliminary deficit
NAV over the net book value of $419,000 will be collected from the former
stockholders of the subsidiaries. It is anticipated that these amounts will be
collected after the final calculation is completed during December 1997.
Pursuant to the terms of the Agreements, pre-acquisition Tekgraf
stockholders will contribute approximately $990,000 to capital. This
contribution is expected to occur during October 1997.
The Acquisitions were recorded under the purchase method of accounting; and
accordingly the results of operations of the Acquisitions for the period June 3,
1997 through June 30, 1997 are included in the accompanying unaudited
consolidated financial statements of the Company. The purchase prices have been
allocated to assets
F-11
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Subsequent Events, continued:
acquired and liabilities assumed based on the fair market value of the Company's
common stock at the dates of acquisition. The fair market value of the Company's
stock was estimated based on the proposed initial public offering price of the
Company's Units, a discount for lack of marketability, a premium for the voting
rights of the Class B Common Stock issued in connection with the acquisitions,
and the value of the warrants contained in the Units using the Black Scholes
model. The unaudited fair value of assets acquired and liabilities assumed,
after giving effect to the excess NAV, is summarized as follows:
<TABLE>
<CAPTION>
Microsouth tekgraf G&R CGD IPM/IGD Total
----------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fair value of stock issued and other
acquisition costs .................. $ 2,309,109 $ 1,214,248 $ 3,647,112 $ 1,093,406 $1,310,340 $9,574,214
Fair value of liabilities assumed ..... 1,780,956 830,361 3,848,415 2,355,314 167,804 8,982,850
Fair value of tangible and identifiable
assets acquired .................... (2,619,227) (1,134,757) (4,968,400) (3,249,229) (574,371) (12,545,984)
----------- ----------- ----------- ----------- ---------- ----------
Goodwill .............................. $ 1,470,838 $ 909,852 $ 2,527,127 $ 199,491 $ 903,773 $6,011,080
=========== =========== =========== =========== ========== ==========
</TABLE>
The following unaudited pro forma summary combines the consolidated results
of the Company and the Subsidiaries as if the Acquisitions had occurred at the
beginning of the earliest period presented, after giving effect to certain
adjustments. These adjustments include:
o elimination of expenses related to affiliated entities of the Subsidiaries
which were not acquired by the Company
o reductions in compensation levels that certain former stockholders of the
Subsidiaries who served as officers, administrators or salespeople of their
respective companies and officers of the Company (the "Continuing
Employees") have contractually agreed to receive from the Company
subsequent to the Acquisitions. This estimate is based on the elimination
of (i) base compensation in excess of the specified amounts included in
employment contracts signed by the Continuing Employees, (ii) bonuses,
based on a determination by the Board of Directors that bonuses will not be
granted by the Company during the fiscal years ended December 31, 1997 and
1998, and (iii) various compensation related expenses which, effective June
2, 1997, were no longer allowed pursuant to expense policies approved by
the Board of Directors of the Company. The Company believes that the duties
and responsibilities of the Continuing Employees will not be diminished as
a result of the Acquisitions. Accordingly, the Company believes that no
other costs will be incurred to offset the reductions in compensation
levels of the Continuing Employees. The Company believes that this
information is necessary for investors to realistically assess the impact
of the Acquisitions. Certain former stockholders of the Subsidiaries (the
"Noncontinuing Employees"), including Edward H.L. Mason, Margaret Mason,
Eric Nerenberg and Thomas A. Gust, were compensated for services provided
to the Subsidiaries prior to the Acquisitions and will not be employed by
the Company subsequent to the Offering. The compensation paid to the
Noncontinuing Employees has been considered in the adjustment. The Company
believes that the duties and responsibilities of the Noncontinuing
Employees will be absorbed by the Continuing Employees. Additionally, a
management fee was paid to Alongal prior to the Acquisitions and the
Company does not intend to pay a management fee to Alongal after completion
of the Offering. The adjustments are summarized as follows:
Year Ended Six Months Ended
December 31, 1996 June 30, 1997
----------------- -------------
Tekgraf, Inc. (formerly Crescent) ........ $ 636,773 $ 27,500
Microsouth ............................... 45,150 (32,570)
tekgraf Texas ............................ (51,684) (62,250)
G&R ...................................... 463,444 115,297
CGD ...................................... 282,262 53,300
IPM/IG ................................... 295,483 121,071
---------- --------
Total .................................... $1,671,428 $222,348
========== ========
o elimination of amortization related to negative goodwill
o elimination of the pro rata interest expense incurred on capital to be
contributed by the pre-Acquisition stockholders of the Company
o related income tax effects
o elimination of transactions between the Subsidiaries, and
o amortization of intangible assets
F-12
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Subsequent Events, continued:
In addition, the earnings per share amounts give effect to the combination,
subsequent recapitalization and the weighted average shares outstanding exclude
166,667 of escrow shares. The pro forma summary does not purport to represent
what the Company's results of operations would actually have been if such
transaction in fact had occurred at the beginning of the earliest period
presented or to project the Company's results of operations for any future
period.
For the For the
year ended six months ended
December 31, 1996 June 30, 1997
----------------- ----------------
Net sales ................................ $68,902,291 $34,684,482
Gross profit ............................. 11,259,485 6,102,620
Income from operations ................... 3,197,379 1,641,147
Income before taxes ...................... 2,883,266 1,527,186
Net income ............................... 1,602,504 853,441
Primary and fully diluted income per share .51 .26
Weighted average shares outstanding ...... 3,166,666 3,166,666
Stock Splits and Recapitalization
Class A Common Stock - On June 2, 1997, in connection with a
reincorporation in Delaware, the Company authorized 31,000,000 shares of Class A
Common Stock, $.001 par value, none of which are currently issued and
outstanding. Holders of Class A Common Stock have the right to cast one vote for
each share held of record on all matters submitted to a vote of holders of Class
A Common Stock. The Class A Common Stock and Class B Common Stock vote together
as a single class on all matters on which stockholders may vote, except when
class voting is required by applicable law. Holders of Class A Common Stock are
entitled to dividends, together with the holders of Class B Common Stock, pro
rata based on the number of shares held, when, as and if declared by the Board
of Directors, from funds legally available therefor subject to the rights of
holders of preferred stock. In the case of dividends or other distributions in
stock of the Company, including distributions pursuant to stock splits or
division of stock of the Company, only shares of Class A Common Stock will be
distributed with respect to Class A Common Stock. In the event of liquidation,
dissolution or winding up of the affairs of the Company, all assets and funds of
the Company remaining after the payment of creditors and to holders of the Class
A Common Stock and the Class B Common Stock. Holders of the Class A Common Stock
are not entitled to preemptive, subscription, cumulative voting or conversion
rights, and there are no redemption or sinking fund provisions applicable to the
Class A Common Stock.
Class B Common Stock - On May 1, 1997 the Company increased the outstanding
shares from 100 to 3,424 by declaring a 34.24 for 1 stock split of the Company's
common stock (par value of $1.00). On June 2, 1997, in connection with a
reincorporation in Delaware, the Company declared a 400 for 1 stock split of the
Company's common stock pursuant to which all of the Company's outstanding common
stock were exchanged for 4,000,000 shares of Class B Common Stock with a par
value of $.001. During October 1997, the Company effected a .83333325 for 1
reverse stock split pursuant to which the outstanding shares of Class B Common
Stock were exchanged for 3,333,333 shares of Class B Common Stock. At such time,
the Company authorized 31,666,667 shares of Class A Common Stock and 3,333,333
shares of Class B Common Stock. Each share of Class B Common Stock is entitled
to five votes on all matters on which stockholders may vote, including the
election of directors. The Class A Common Stock, described below, and Class B
Common Stock vote together as a single class on all matters on which
stockholders may vote, except when class voting is required by Delaware law.
Holders of Class B Common Stock are entitled to participate together with the
holders of Class A Common Stock, pro rata based on the number of shares held, in
the payment of cash dividends and the liquidation, dissolution and winding up of
the Company subject to the rights of holders of Preferred Stock. In the case of
dividends, or other distributions payable in stock of the Company, including
distributions pursuant to stock splits or divisions of stock of the Company,
only shares of Class A Common Stock shall be distributed with respect to Class B
Common Stock. Each share of Class B Common Stock is automatically converted into
one share of Class A Common Stock upon (i) its sale, gift of
F-13
<PAGE>
Tekgraf, Inc.
(formerly Crescent Computers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Subsequent Events, continued:
transfer, except in the case of a transfer to a trust for which the original
holder acts as sole trustee or to any other holder of Class B Common Stock, (ii)
the death of the original holder thereof, including in the case of the original
holder having transferred the Class B common Stock to a trust for which the
original holder served as trustee during his or her lifetime, or (iii) the
conversion of an aggregate of 75% of the authorized shares of Class B Common
Stock.
Preferred Stock - On June 2, 1997, in connection with a reincorporation in
Delaware, the Company authorized 5,000,000 shares of preferred stock. The Board
of Directors will have the authority to issue the preferred stock in one or more
series and to fix the number of shares and the relative rights, conversion
rights, voting rights and terms of redemption and liquidation preferences,
without further vote or action by the stockholders.
The consolidated balance sheets as of December 31, 1995 and 1996 have been
retroactively adjusted for these events. As part of the reincorporation, the
Company changed its name to Tekgraf, Inc.
Employment Agreements
Certain stockholders of the Company have entered into employment agreements
which provide for a set base salary, participation in future incentive bonus
plans, stock option plans, certain other benefits, and a covenant not to compete
following termination for such person's employment.
Letter of Intent
On June 17, 1997, the Company signed a non-binding letter of intent for an
initial public offering of its securities.
In connection with the Company's proposed registration of its securities,
the Company intends to offer 2,100,000 Units consisting of one share of Class A
Common Stock and one r
edeemable warrant. Each warrant would entitle the holder
to purchase one share of Class A Common Stock at an exercise price of $8.40,
which is subject to adjustment.
F-14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder
Microsouth, Inc.
We have audited the accompanying balance sheets of Microsouth, Inc. as of
December 31, 1995 and 1996, and the related statements of income, changes in
stockholder's equity and cash flows for the six month period ended December 31,
1995 and for the year ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Microsouth, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the six month period ended December 31, 1995 and for the year ended December
31, 1996 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
June 2, 1997
F-15
<PAGE>
Microsouth, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 2, 1997
1995 1996 (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 538,138 $ 519,568 $ 20,093
Accounts receivable, less allowance for doubtful
accounts of $94,966 and $12,616 at December 31, 1995
and 1996 ..................................................... 1,258,667 1,299,620 1,415,999
Inventories, net ............................................... 1,044,787 1,147,504 952,990
Due from related entity ........................................ 16,360 10,229 38,803
Prepaid expenses ............................................... 7,158 6,443 5,329
----------- ----------- -----------
Total current assets .................................. 2,865,110 2,983,364 2,433,214
----------- ----------- -----------
Property and equipment:
Furniture and equipment ........................................ 17,916 67,743 71,432
Less accumulated depreciation .................................. (1,792) (10,358) (19,358)
----------- ----------- -----------
16,124 57,385 52,074
Other assets ...................................................... 2,751 2,751 54,099
----------- ----------- -----------
Total assets .......................................... $ 2,883,985 $ 3,043,500 $ 2,539,387
=========== =========== ===========
LIABILITIES
Current liabilities:
Current maturities of long-term debt ........................... $ 225,000
Accounts payable ............................................... $ 1,312,705 1,557,229 $ 930,338
Accrued expenses ............................................... 29,166 35,800 31,618
Due to pre-acquisition stockholder (See Note 7) ................ 819,000
----------- ----------- -----------
Total current liabilities ............................. 1,341,871 1,818,029 1,780,956
----------- ----------- -----------
Long-term debt, less current maturities ........................ 750,000
Negative goodwill, net ......................................... 636,401 569,411 541,500
Commitments and contingencies
STOCKHOLDER'S EQUITY
Common stock, $.10 par value, 1,000,000 shares
authorized, 1,000 shares issued and outstanding at
December 31, 1995 and 1996 ...................................... 100 100 100
Retained earnings ................................................. 155,613 655,960 216,831
----------- ----------- -----------
Total stockholder's equity ............................ 155,713 656,060 216,931
----------- ----------- -----------
Total liabilities and stockholder's equity ............ $ 2,883,985 $ 3,043,500 $ 2,539,387
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE>
Microsouth, Inc.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the
Six Month Six Months Period January 1,
Period Ended Year Ended Ended 1997 through
December 31, December 31, June 30, June 2,
1995 1996 1996 1997
----------- ------------ ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales .............................. $ 4,636,127 $ 10,325,373 $ 4,745,813 $ 4,792,858
Cost of goods sold ..................... 3,933,444 8,594,719 3,900,605 4,026,223
----------- ------------ ----------- -----------
Gross profit .................. 702,683 1,730,654 845,208 766,635
Operating expenses:
Selling, general and administrative . 589,729 1,256,356 547,764 467,264
Depreciation ........................ 1,792 8,566 6,000 9,000
Amortization ........................ (33,495) (66,990) (33,495) (27,911)
----------- ------------ ----------- -----------
Income from operations .............. 144,657 532,722 324,939 318,282
Other income ........................... 15,956 27,625 26,080 8,389
Interest expense ....................... 5,000 60,000 25,000
----------- ------------ ----------- -----------
Income before extraordinary gain 155,613 500,347 326,019 326,671
Extraordinary gain .................... 210,000
----------- ------------ ----------- -----------
Net income .................... $ 155,613 $ 500,347 $ 326,019 $ 536,671
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE>
Microsouth, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Number
of Common Retained
Shares Stock Earnings Total
----- ---- --------- ---------
Balances, July 1, 1995 ................. 1,000 $100 $ $ 100
Net income .......................... 155,613 155,613
----- ---- --------- ---------
Balances, December 31, 1995 ............ 1,000 100 155,613 155,713
Net income .......................... 500,347 500,347
----- ---- --------- ---------
Balances, December 31, 1996 ............ 1,000 100 655,960 656,060
----- ---- --------- ---------
Stockholder distributions (unaudited) (975,800) (975,800)
Net income (unaudited) .............. 536,671 536,671
----- ---- --------- ---------
Balances, June 2, 1997 (unaudited) ..... 1,000 $100 $ 216,831 $ 216,931
===== ==== ========= =========
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
Microsouth, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Six Month Six Months Period January 1,
Period Ended Year Ended Ended 1997 through
December 31, December 31, June 30, June 2,
1995 1996 1996 1997
------------ ----------- ---------- -----------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ................................... $ 155,613 $ 500,347 $ 326,019 $ 536,671
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization .............. (30,703) (58,424) (10,749) (18,911)
Provision for doubtful accounts receivable . 94,966 22,350 15,000 17,384
Provision for inventory obsolescence ....... 21,000 10,000 8,000 14,000
Extraordinary gain ......................... (210,000)
Changes in assets and liabilities:
Accounts receivable .......................... (76,936) (63,303) (281,499) (133,763)
Inventories .................................. (178,373) (112,717) 188,420 180,514
Due from related entity ...................... (16,360) 6,131 (47,814) (28,574)
Prepaid expenses and other assets ............ 15,449 715 (1,654) (50,234)
Accounts payable and accrued expenses ........ 555,715 251,158 (304,056) (631,073)
--------- --------- --------- ---------
Net cash provided (used) by operating
activities ................................. 540,371 556,257 (108,333) (323,986)
--------- --------- --------- ---------
Cash flows from investing activities:
Payments for purchase of property and
equipment .................................. (17,916) (49,827) (15,448) (3,689)
--------- --------- --------- ---------
Net cash used by investing activities .... (17,916) (49,827) (15,448) (3,689)
--------- --------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt .................. (525,000) (15,000)
Stockholder distributions .................... (156,800)
--------- --------- --------- ---------
Net cash used by financing activities .... (525,000) (171,800)
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents 522,455 (18,570) (123,781) (499,475)
Cash and cash equivalents, beginning of period .. 15,683 538,138 538,138 519,568
--------- --------- --------- ---------
Cash and cash equivalents, end of period ........ $ 538,138 $ 519,568 $ 414,357 $ 20,093
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ..... $ 5,000 $ 60,000
========= =========
</TABLE>
Supplemental non-cash financing activities:
During 1997, the stockholder of the Company declared a distribution equal
to its estimated excess net asset value as described in Note 7.
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
Microsouth, Inc.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and Nature of Operations:
Basis of Presentation
The financial statements are prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1995 and 1996 and reported amounts of revenues and
expenses for the six month period ended December 31, 1995 and for the year ended
December 31, 1996. Significant estimates include those made for the allowance
for doubtful accounts and inventory reserves for excess, obsolete and damaged
products. Actual results could differ from those estimates made by management.
Nature of Operations
The Company is a distributor and marketer of a broad array of complex
computer graphics hardware and software in the southeastern United States.
Customers consist primarily of value added resellers and vertical solution
providers. The Company also provides technical support and training to its
customers.
Inherent in the accompanying financial statements are certain risks and
uncertainties. These risks and uncertainties include, but are not limited to:
the impact of competitive products, competition, and available sources of
supply.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 2, 1997
and for the six months ended June 30, 1996 and for the period January 1, 1997
through June 2, 1997 have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements for the six month period ended December 31,
1995 and for the year ended December 31, 1996 and include all adjustments, which
were of a normal and recurring nature, which in the opinion of management are
necessary to present fairly the financial position of the Company and the
results of operations and cash flows for each of the periods presented. The
operating results for the interim periods are not necessarily indicative of
results for the full year.
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents.The
Company maintains cash balances at financial institutions. Accounts a teach
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out method) or market. Inventory is comprised primarily of
finished goods and the Company maintains a reserve for its estimate of excess,
obsolete and damaged goods.
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives which
range from 3 to 7 years.
Amounts expended for maintenance and repairs are charged to expense as
incurred. Upon disposition, both the related cost and accumulated depreciation
accounts are relieved and the related gain or loss is credited or charged to
operations.
F-20
<PAGE>
Microsouth, Inc.
NOTES TO FINANCIAL STATEMENTS, Continued
Revenue
Sales are recognized upon the shipment of products to the customer.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations.
Income Taxes
Microsouth has elected S corporation status as defined by the Internal
Revenue Code. Under this election, taxable income and any applicable tax credits
are included in the income tax return of the stockholder, and any federal and
state income tax liability is borne by the stockholder.
Fair Value of Financial Instruments
The Company's financial instruments include its debt obligation. During
December of 1996 the Company renegotiated the terms of the debt obligation. See
Note 4. Accordingly, the fair value of the debt is approximately $15,000.
3. Negative Goodwill:
Effective June 30, 1995, TW Acquisitions ("TW") acquired all of the common
stock of Microsouth in exchange for $250,000 in cash and a note payable of
$750,000. The fair value of the assets acquired was approximately $2,454,152 and
liabilities assumed totaled $784,256. TW was a holding company with no
operations. In July 1995, TW and Microsouth were legally consolidated and their
name changed to Microsouth, Inc. As a result of the acquisition on June 30,
1995, negative goodwill of $669,896 was recognized as the purchase price was
less than the fair value of the net assets acquired. Negative goodwill is being
amortized, on a straight-line basis, over its estimated economic life of 10
years. Accumulated amortization amounted to approximately $33,495 and $100,485
at December 31, 1995 and 1996, respectively.
4. Note Payable:
Long-term debt at December 31, 1995 and 1996 consists of a note payable
with the former parent of Microsouth. This note was issued in connection with
the 1995 acquisition. The note bears interest at 8%, is collateralized by the
common stock of the Company, and the original terms required monthly principal
and quarterly interest payments beginning in January of 1997.
During December 1996, the Company entered into an agreement with the former
parent to renegotiate the terms of the original note. As a result, the Company
made payments to the former parent of $525,000 during December 1996 and the
remaining $15,000 during March 1997 which resulted in the recognition of an
extraordinary gain of $210,000 during the three month period ended March 31,
1997.
5. Related Party Transactions:
The Company is affiliated through common ownership with an entity whose
operating expenses, such as rent, utilities, insurance and other expenses are
shared with the Company. Amounts due from the related entity under this
arrangement were $16,360 and $10,229 at December 31, 1995 and 1996,
respectively.
F-21
<PAGE>
Microsouth, Inc.
NOTES TO FINANCIAL STATEMENTS, Continued
6. Commitments and Contingencies:
Operating Lease
The Company leases office space under an operating lease expiring in 1998.
At December 31, 1996 minimum rentals due under the lease were as follows:
1997 .......................................... $46,419
1998 .......................................... 15,671
-------
$62,090
=======
Rent expense for the six month period ended December 31, 1995 and for the
year ended December 31, 1996 was $22,322, and $44,644, respectively.
Litigation
The Company is involved from time to time in litigation on matters which
are routine to the conduct of its business. Although the outcome of any
litigation cannot be predicted with certainty, the Company does not believe that
any outstanding litigation will have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
7. Subsequent Events:
On June 2, 1997, the Company closed on a stock purchase agreement
(the"Agreement") completing the sale of all of the outstanding common stock of
Microsouth, Inc. in exchange for 1,586 shares of common stock of Tekgraf, Inc.
(formerly Crescent Computers, Inc.). The acquisition by Tekgraf, Inc. will be
accounted for under the purchase method of accounting. Pursuant to the
Agreement, the Company is required to deliver a defined guaranteed net asset
value ("NAV"). The Company's excess net book value over the NAV, of
approximately $819,000, will be distributed in cash to the Company's
stockholder. It is anticipated that the distribution will occur during December
1997. In addition, and also pursuant to the Agreement, the stockholder of the
Company has entered into an employment agreement with Tekgraf, Inc. which
provides for a set base salary, participation in future incentive bonus plans,
certain other benefits, and a covenant not to compete following termination of
such person's employment.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Computer Graphics Distributing Company
We have audited the accompanying balance sheets of Computer Graphics
Distributing Company as of December 31, 1995 and 1996, and the related
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Computer Graphics Distributing
Company as of December 31, 1995 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
McLean, Virginia
May 12, 1997, except for
Note 9 as to which the date
is September 30, 1997
F-23
<PAGE>
Computer Graphics Distributing Company
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 2, 1997
1995 1996 (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 400 $ 3,809 $ 400
Accounts receivable, less allowance for doubtful
accounts of $46,889 and $38,196 at December 31,
1995 and 1996, respectively ............................... 1,818,736 1,810,341 1,958,491
Inventories, net ............................................. 964,701 1,132,089 730,739
Prepaid expenses and other assets ............................ 78,745 63,060 79,686
Current deferred income taxes ................................ 16,438 17,180 20,410
----------- ----------- -----------
Total current assets ...................................... 2,879,020 3,026,479 2,789,726
----------- ----------- -----------
Property and equipment:
Furniture and equipment ...................................... 206,514 223,745 225,548
Automobiles .................................................. 47,020 109,565 109,565
----------- ----------- -----------
253,534 333,310 335,113
Less accumulated depreciation ................................ (184,089) (210,689) (221,936)
----------- ----------- -----------
69,445 122,621 113,177
Other assets .................................................... 55,837 65,828 115,867
----------- ----------- -----------
Total assets .............................................. $ 3,004,302 $ 3,214,928 $ 3,018,770
=========== =========== ===========
LIABILITIES
Current liabilities:
Current maturities of long-term debt and line of credit ...... $ 1,043,473 $ 1,371,241 $ 854,452
Note payable, stockholders ................................... 40,000 40,000
Accounts payable ............................................. 1,223,581 977,555 1,275,593
Accrued expenses ............................................. 193,542 123,622 73,182
Income taxes payable ......................................... 29,217 33,737
----------- ----------- -----------
Total current liabilities ................................. 2,460,596 2,541,635 2,276,964
----------- ----------- -----------
Long-term debt, less current maturities ...................... 13,661 36,258 25,023
Note payable, stockholders ................................... 50,000 50,000 50,000
Deferred income taxes ........................................ 200 3,327 3,327
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, no par value, 5,000 shares authorized; 3,730 shares
issued and outstanding ....................................... 18,762 18,762 18,762
Additional paid in capital ...................................... 172,000
Due from pre-aquisition stockholders (See Note 9) ............... (172,000)
Retained earnings ............................................... 461,083 564,946 644,694
----------- ----------- -----------
Total stockholders' equity ................................ 479,845 583,708 663,456
----------- ----------- -----------
Total liabilities and stockholders' equity ................ $ 3,004,302 $ 3,214,928 $ 3,018,770
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
Computer Graphics Distributing Company
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended Six months For the period
December 31 ended January 1,1997
------------------------------------------- June 30, through June 2,
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales .................................... $12,947,702 $11,095,229 $11,002,868 $5,129,621 $5,183,325
Cost of goods sold ........................... 11,109,707 9,192,033 9,143,743 4,337,898 4,272,780
----------- ----------- ----------- ---------- ----------
Gross profit ........................... 1,837,995 1,903,196 1,859,125 791,723 910,545
Operating expenses:
Selling, general and administrative ....... 1,563,669 1,669,761 1,608,903 741,736 725,184
Depreciation .............................. 19,613 19,356 26,787 8,550 11,247
----------- ----------- ----------- ---------- ----------
Income from operations ................. 254,713 214,079 223,435 41,437 174,114
Other income, net ............................ 22,750 17,070 54,861 31,899 4,670
Interest expense ............................. 153,967 144,620 123,675 53,279 56,095
----------- ----------- ----------- ---------- ----------
Income before provision for income taxes 123,496 86,529 154,621 20,057 122,689
Provision for income taxes ................... 44,815 20,328 50,758 6,618 42,941
----------- ----------- ----------- ---------- ----------
Net income ............................. $ 78,681 $ 66,201 $ 103,863 $ 13,439 $ 79,748
=========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
Computer Graphics Distributing Company
Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Due from
Additional Pre-aqusition
Number of Common Paid-in Stockholders Retained
Shares Stock Capital (Note 9) Earnings Total
----- ------- -------- --------- -------- --------
<S> <C> <C> <C> <C>
Balances, January 1, 1994 .... 3,630 $ 8,762 $316,201 $324,963
Net income ................ 78,681 78,681
----- ------- -------- --------- -------- --------
Balances, December 31, 1994 .. 3,630 8,762 394,882 403,644
Common stock issued ....... 100 10,000 10,000
Net income ................ 66,201 66,201
----- ------- -------- --------- -------- --------
Balances, December 31, 1995 .. 3,730 18,762 461,083 479,845
Net income ................ 103,863 103,863
----- ------- -------- --------- -------- --------
Balances, December 31, 1996 .. 3,730 18,762 564,946 583,708
Due from pre-acquisition
stockholders (unaudited) $172,000 $(172,000)
Net income (unaudited) .... 79,748 79,748
----- ------- -------- --------- -------- --------
Balances, June 2, 1997 (unaudited) 3,730 $18,762 $172,000 $(172,000) $644,694 $663,456
===== ======= ======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE>
Computer Graphics Distributing Company
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Six Months For the Period
December 31, Ended January 1,1997
----------------------------------------- June 30, Through June 2,
1994 1995 1996 1996 1997
--------- --------- --------- ---------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ................................... $ 78,681 $ 66,201 $ 103,863 $ 20,257 $ 79,748
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation ................................. 19,613 19,356 26,787 8,550 11,247
Provision for doubtful accounts receivable ... (73,173) 22,401 (8,693) 14,116
Provision for inventory obsolescence ......... 20,533 (51,334) 13,547 6,774 2,171
Deferred income taxes ........................ 14,862 8,145 2,385 369 (3,230)
Loss on disposal of equipment ................ 11,639 250
Changes in assets and liabilities:
Accounts receivable .......................... (746,779) 614,504 17,088 207,718 (162,266)
Inventories .................................. (214,240) 288,460 (184,738) (304,187) 399,179
Prepaid expenses ............................. (38,606) (1,338) 22,263 17,202 (20,576)
Other assets ................................. (4,576) (48,191) (16,569) 21,596 (46,089)
Accounts payable and accrued expenses ........ 349,318 135 (303,171) (24,918) 25,351
Income taxes payable ......................... 4,513 (13,462) 29,217 44,617 4,520
--------- --------- --------- --------- ---------
Net cash provided (used) by
operating activities .................... (589,854) 916,516 (297,771) (2,022) 304,171
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of equipment .............. 3,000 795
Payments for purchase of equipment ........... (2,864) (47,802) (77,205) (6,094) (1,803)
--------- --------- --------- --------- ---------
Net cash used by investing activities ..... (2,864) (44,802) (76,410) (6,094) (1,803)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in line of credit ........ 741,554 (928,814) 307,721 (271,404) (515,816)
Proceeds from long-term debt ................. 30,523 60,152
Repayment of long-term debt .................. (25,000) (6,922) (17,508) (4,861) (12,208)
Proceeds from note payable, stockholders ..... 40,000
Proceeds from issuance of common stock ....... 10,000
Bank overdraft ............................... (113,112) 12,775 (12,775) 284,381 222,247
--------- --------- --------- --------- ---------
Net cash provided (used) by
financing activities .................... 603,442 (882,438) 377,590 8,116 (305,777)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents 10,724 (10,724) 3,409 -- (3,409)
Cash and cash equivalents, beginning of period .. 400 11,124 400 400 3,809
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period ........ $ 11,124 $ 400 $ 3,809 $ 400 $ 400
========= ========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ..... $ 148,580 $ 151,351 $ 119,461
Cash paid during the period for income taxes . $ 35,372 $ 32,853 $ 1,618
</TABLE>
Supplemental non-cash investing and financing activities:
During 1994, 1995 and 1996, the Company transferred $3,688, $5,845 and $3,803,
respectively, from inventory to property and equipment.
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE>
Computer Graphics Distributing Company
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and Nature of Operations:
Basis of Presentation
The financial statements are prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1995 and 1996, and reported amounts of revenues and
expenses for each of the three years in the period ended December 31, 1996.
Significant estimates include those made for the allowance for doubtful accounts
and inventory reserves for excess, obsolete and damaged products. Actual results
could differ from those estimates made by management.
Nature of Operations
Computer Graphics Distributing Company ("the Company") is a distributor and
marketer of a broad array of complex computer graphics hardware and software in
the mid-Atlantic and northeastern United States. Customers consist primarily of
value added resellers and vertical solution providers.
Inherent in the accompanying financial statements are certain risks and
uncertainties. These risks and uncertainties include, but are not limited to:
the impact of competitive products, competition, and available sources of
supply.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 2, 1997
and for the six months ended June 30, 1996 and for the period January 1, 1997
through June 2, 1997, have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements for the three years in the period ended
December 31, 1996 and include all adjustments, which were of a normal and
recurring nature which, in the opinion of management, are necessary to present
fairly the financial position of the Company and the results of operations and
cash flows for the periods presented. The operating results for the interim
periods are not necessarily indicative of results for the full year.
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents. The
Company maintains cash balances at financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out method) or market. Inventory is comprised primarily of
finished goods. The Company maintains a reserve for its estimate of excess,
obsolete and damaged goods.
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives which
range from 3 to 7 years.
Amounts expended for maintenance and repairs are charged to expense as
incurred. Upon disposition, both the related cost and accumulated depreciation
accounts are relieved and the related gain or loss is credited or charged to
operations.
F-28
<PAGE>
Computer Graphics Distributing Company
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Revenue
Sales are recognized upon the shipment of products to the customer.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred tax liabilities and assets are determined based
on temporary differences between the bases of certain assets and liabilities for
income tax and financial reporting purposes. The deferred tax assets and
liabilities are classified according to the financial statement classification
of the assets and liabilities generating the differences. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Fair Value of Financial Instruments
The Company's financial instruments include its debt obligations.
Management believes that these instruments bear interest at rates which
approximate prevailing market rates for instruments with similar characteristics
and, accordingly, that the carrying values for these instruments are reasonable
estimates of fair value.
3. Long-Term Debt and Line of Credit:
Long-term debt and line of credit at December 31, 1995 and 1996 consists of
the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Line of credit with a bank totaling $2,250,000 bearing
interest at the bank's prime rate (8.25% at
December 31, 1996) plus 2%, collateralized by
accounts receivable and inventory, subject to
certain loan covenant restrictions relating
to minimum capital, and expires June 30, 1997
(see Note 9) ................................... $ 1,033,533 $ 1,341,254
Various installment notes payable with banks bearing
interest at rates ranging from 7.5% to 8.5%,
payable in monthly principal and interes
installments through 1998, collateralized
by certain equipment with a net book value of
$78,000 at December 31, 1996 ................... 23,601 66,245
Note payable to stockholders (see Note 5) ............ 50,000 90,000
----------- -----------
1,107,134 1,497,499
Less current maturities ........................... (1,043,473) (1,411,241)
----------- -----------
$ 63,661 $ 86,258
=========== ===========
</TABLE>
At December 31, 1996, aggregate maturities of long-term debt and line of
credit are as follows:
1997 .......................... $1,411,241
1998 .......................... 73,494
1999 .......................... 12,764
----------
$1,497,499
==========
F-29
<PAGE>
Computer Graphics Distributing Company
NOTES TO FINANCIAL STATEMENTS, Continued
4. Income Taxes:
The provision for income taxes for the years ended December 31, is as
follows:
Federal State Total
------- ------- -------
1994
Current ............... $22,575 $ 7,378 $29,953
Deferred .............. 12,633 2,229 14,862
------- ------- -------
$35,208 $ 9,607 $44,815
======= ======= =======
1995
Current ............... $ 8,778 $ 3,405 $12,183
Deferred .............. 6,923 1,222 8,145
------- ------- -------
$15,701 $ 4,627 $20,328
======= ======= =======
1996
Current ............... $40,523 $ 7,850 $48,373
Deferred .............. 2,027 358 2,385
------- ------- -------
$42,550 $ 8,208 $50,758
======= ======= =======
The sources and tax effects of the temporary differences comprising the
Company's net deferred tax assets at December 31, 1995 and 1996 are as follows:
1995 1996
-------- --------
Allowance for doubtful accounts receivable ..... $ 14,067 $ 11,459
Allowance for inventory obsolescence ........... -- 4,064
Allowance for sales returns .................... 2,371 1,657
Property and equipment ......................... (200) (3,327)
-------- --------
Net deferred tax assets ........................ $ 16,238 $ 13,853
======== ========
Management believes that realization of the net deferred tax assets is more
likely than not primarily on the basis of its evaluation of the Company's
anticipated profitability over the period of years that the temporary
differences are expected to become tax deductions. It believes that sufficient
book and taxable income will be generated to realize the benefit of these tax
assets.
The Company's effective income tax rate for the years ended December 31,
1994, 1995 and 1996 varied from the federal statutory income rate as a result of
the tax effect of the following factors:
1994 1995 1996
----- ---- ----
Statutory rate ................................. 25% 20% 28%
State income taxes, net of federal benefit ..... 6 4 4
Permanent differences .......................... 2 -- 1
Other .......................................... 3 (1) --
-- --- --
Effective tax rate ............................. 36% 23% 33%
== === ==
5. Related Party Transactions:
Included in long-term debt at December 31, 1995 and 1996 is a note payable
to stockholders of the Company amounting to $50,000 and $90,000, respectively.
The note bears interest at 12% and has no stated maturity date; however, the
stockholders have agreed not to require repayment of $50,000 of the balance
prior to January 1, 1999. The note payable is subordinate to the line of credit.
F-30
<PAGE>
Computer Graphics Distributing Company
NOTES TO FINANCIAL STATEMENTS, Continued
6. Commitments and Contingencies:
Operating Lease
The Company leases office space under an operating lease expiring in 1999.
At December 31, 1996 minimum rentals due under the lease were as follows:
$86,077 for 1997, $95,015 for 1998 and $49,408 for 1999.
Litigation
The Company is involved from time to time in litigation on matters which
are routine to the conduct of its business. Although the outcome of any
litigation cannot be predicted with certainty, the Company does not believe that
any outstanding litigation will have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
7. Employee Benefit Plan:
The Company has a profit-sharing plan for eligible employees as defined by
the plan, and participants are allowed to make voluntary non-forfeitable
contributions. The Company made discretionary contributions to the plan of
$35,367, $93,134 and $17,641 in 1994, 1995 and 1996, respectively.
8. Other Income, Net
Other income for the years ended December 31, 1994, 1995 and 1996 consists
of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Interest income ................................. $15,526 $ 13,842 $ --
Increase in cash surrender value-- life insurance 7,061 14,867 10,045
Loss on sale of equipment ....................... -- (11,639) (250)
Other ........................................... 163 -- 45,066
------- -------- --------
$22,750 $ 17,070 $ 54,861
======= ======== ========
</TABLE>
In 1996, the Company earned $45,000 by assisting a customer in completing
the necessary procedures required to have the customer's products added to
certain General Services Administration supply schedules.
9. Subsequent Events:
On June 2, 1997, the Company closed on a stock purchase agreement (the
"Agreement") completing the sale of all of the outstanding common stock of
Computer Graphics Distributing Company in exchange for 751 shares of common
stock of Tekgraf, Inc. (formerly Crescent Computers, Inc.). The acquisition by
Tekgraf, Inc. will be accounted for under the purchase method of accounting.
Pursuant to the Agreement, the Company is required to deliver a defined
guaranteed net asset value ("NAV"). The Company's NAV over the net book value,
of approximately $172,000, is expected to be contributed in cash or satisfied
with the Company's stock by the Company's stockholders. It is anticipated that
the distribution will occur during December 1997. In addition, and also pursuant
to the Agreement, the stockholders of the Company have entered into employment
agreements with Crescent which provide for a set base salary, participation in
future incentive bonus plans, certain other benefits, and a covenant not to
compete following termination of such person's employment.
During September, 1997, the Company extended the line of credit with a bank
through November 30, 1997.
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder
tekgraf, inc.
We have audited the accompanying balance sheet of tekgraf, inc. as of
December 31, 1996, and the related statements of income, changes in stockholder
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of tekgraf, inc. as of December
31, 1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 2, 1997
F-32
<PAGE>
tekgraf, inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, June 2, 1997
1996 (Unaudited)
--------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................... $ 386,680 $ 414,154
Accounts receivable, less allowance for doubtful
accounts of $5,956 at December 31, 1996 ....................... 316,126 311,211
Inventories, net .................................................. 227,814 330,010
Prepaid expenses and other assets ................................. 4,866 27,361
--------- -----------
Total current assets ........................................... 935,486 1,082,736
--------- -----------
Property and equipment:
Furniture and equipment ........................................... 68,629 61,007
Leasehold improvements ............................................ 425 425
Automobiles ....................................................... 25,188 25,188
--------- -----------
94,242 86,620
Less accumulated de preciation .................................... (65,543) (69,079)
--------- -----------
28,699 17,541
Employee note receivable .......................................... 14,585
Other assets, net ................................................. 8,260 8,180
--------- -----------
Total assets ................................................... $ 987,030 $ 1,108,457
========= ===========
LIABILITIES
Current liabilities:
Note payable ..................................................... $ 75,000
Accounts payable .................................................. 396,996 $ 563,361
Accrued expenses .................................................. 508
Due to pre-acquisition stockholder (see Note 6) ................... 267,000
--------- -----------
Total current liabilities ...................................... 472,504 830,361
--------- -----------
Negative goodwill, net ............................................ 271,367 263,405
Commitments and contingencies
STOCKHOLDER'S EQUITY
Common stock, $.10 par value, 1,000,000 shares
authorized; 1,000 shares issued and outstanding ................... 100 100
Retained earnings ................................................. 243,059 14,591
--------- -----------
Total stockholder's equity ..................................... 243,159 14,691
--------- -----------
Total liabilities and stockholder's equity ..................... $ 987,030 $ 1,108,457
========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE>
tekgraf, inc.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six months For the period
Year Ended ended January 1, 1997
December 31, June 30, through June 2,
1996 1996 1997
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Net sales ............................ $ 4,062,901 $ 1,947,646 $ 1,629,457
Cost of goods sold ................... 3,380,486 1,632,336 1,328,399
----------- ----------- -----------
Gross profit ................... 682,415 315,310 301,058
Operating expenses:
Selling, general and administrative .. 317,909 131,215 111,626
Depreciation ......................... 9,858 9,881 9,448
Amortization ......................... (31,412) (15,706) (13,088)
----------- ----------- -----------
Income from operations ......... 342,398 189,920 193,072
Interest expense ..................... 15,000 10,000 (11,289)
----------- ----------- -----------
Income before extraordinary item 371,060 179,920 204,361
Extraordinary gain ................... 70,000
----------- ----------- -----------
Net income ........................ $ 371,060 $ 179,920 $ 274,361
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-34
<PAGE>
tekgraf, inc.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Retained
Number of Common Earnings
Shares Stock (Deficit) Total
----- ---- --------- ---------
<S> <C> <C> <C> <C>
Balances, January 1, 1996 ............. 1,000 $100 $ (28,001) $ (27,901)
Stockholder distribution ........... (100,000) (100,000)
Net income ......................... 371,060 371,060
----- ---- --------- ---------
Balances, December 31, 1996 ........... 1,000 100 243,059 243,159
Stockholder distribution (unaudited) (502,829) (502,829)
Net income (unaudited) ............. 274,361 274,361
----- ---- --------- ---------
Balances, June 2, 1997 (unaudited) .... 1,000 100 14,591 14,691
===== ==== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE>
tekgraf, inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months For the Period
Year Ended Ended January 1, 1997
December 31, June 30, Through June 2,
1996 1996 1997
----------- ---------- --------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................... $ 371,060 $ 179,920 $ 274,361
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............. (21,554) (10,717) (3,640)
Provision for doubtful accounts receivable . 5,966
Extraordinary gain ......................... (70,000)
Changes in assets and liabilities:
Accounts receivable ........................... 1,915 105,476 4,915
Inventories ................................... (53,974) 113,536 (102,196)
Prepaid expenses .............................. (4,866) (4,965)
Employee notes receivable ..................... (14,585)
Other assets .................................. (2,422) (8,260)
Accounts payable and accrued expenses ......... 189,760 44,316 166,100
--------- --------- ---------
Net cash provided by operating activities .. 471,300 427,566 261,280
--------- --------- ---------
Cash flows from investing activities:
Payments for purchase of property and equipment (10,824) (4,430) (2,491)
--------- --------- ---------
Net cash used by investing activities ...... (10,824) (4,430) (2,491)
--------- --------- ---------
Cash flows from financing activities:
Distribution to stockholder ................... (100,000) (225,529)
Repayment of debt ............................. (175,000) (5,000)
--------- --------- ---------
Net cash used by financing activities ...... (275,000) (230,529)
--------- --------- ---------
Increase in cash and cash equivalents ............ 185,476 423,136 28,260
Cash and cash equivalents, beginning of period ... 201,204 201,204 386,680
--------- --------- ---------
Cash and cash equivalents, end of period ......... $ 386,680 $ 624,340 $ 414,940
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ... $ 15,000
=========
</TABLE>
Supplemental non-cash financing activities:
During 1997, the stockholder of the Company declared a distribution equal
to its estimated excess net asset value as described in Note 6.
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE>
tekgraf, inc.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and Nature of Operations:
Basis of Presentation
The financial statements are prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1996 and reported amounts of revenues and expenses
for the year then ended. Significant estimates include those made for the
allowance for doubtful accounts. Actual results could differ from those
estimates made by management.
Nature of Operations
tekgraf, inc. (the "Company") is a distributor and marketer of a broad
array of complex computer graphics hardware and software in the southwestern
United States. Customers consist primarily of value added resellers and vertical
solution providers. Inherent in the accompanying financial statements are
certain risks and uncertainties. These risks and uncertainties include, but are
not limited to: the impact of competitive products, competition, and available
sources of supply.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 2, 1997
and for the six months ended June 30, 1996 and for the period January 1, 1997
through June 2, 1997 have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements for the year ended December 31, 1996 and
include all adjustments, which were of a normal and recurring nature which, in
the opinion of management, are necessary to present fairly the financial
position of the Company and the results of operations and cash flows for the
periods presented. The operating results for the interim periods are not
necessarily indicative of results for the full year.
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents. The
Company maintains cash balances at financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out method) or market. Inventory is comprised primarily of
finished goods and the Company maintains a reserve for its estimate of excess,
obsolete and damaged goods.
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives which
range from 3 to 7 years.
Amounts expended for maintenance and repairs are charged to expense as
incurred. Upon disposition, both the related cost and accumulated depreciation
accounts are relieved and the related gain or loss is credited or charged to
operations.
Revenue
Sales are recognized upon the shipment of products to the customer.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations.
F-37
<PAGE>
tekgraf, inc.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. Summary of Significant Accounting Policies, continued:
Income Taxes
The Company has elected S corporation status as defined by the Internal
Revenue Code. Under this election, taxable income and any applicable tax credits
are included in the income tax return of the stockholder, and any federal and
state income tax liability is borne by the stockholder.
Fair Value of Financial Instruments
The Company's financial instruments include its note payable and employee
note receivable. Management believes that the employee notes receivable bear
interest at rates which approximate prevailing market rates for instruments with
similar characteristics and, accordingly, that the carrying value is a
reasonable estimate of fair value. During December of 1996 the Company
renogiated the terms of the note payable. See Note 4. Accordingly, the fair
value of the note payable at December 31, 1996 is approximately $5,000.
3. Negative Goodwill:
Effective June 30, 1995, MC Acquisitions ("MC") acquired all of the common
stock of tekgraf in exchange for $125,000 in cash and a note payable of
$245,000. MC was a holding company with no operations. In July 1995, MC and
tekgraf were legally consolidated and their name changed to tekgraf, inc. As a
result of the acquisition on June 30, 1995 negative goodwill of $318,486 was
recognized as the purchase price was less than the fair value of the net assets
acquired. Negative goodwill is being amortized, on a straight-line basis, based
its estimated economic life of 10 years. Accumulated amortization amounted to
approximately $47,119 at December 31, 1996.
4. Notes Payable:
Long-term debt at December 31, 1996 consists of a note payable with the
former parent of the Company. This note was issued in connection with the 1995
acquisition. The note bears interest at 8%, is collateralized by the common
stock of the Company, and the original terms required monthly principal and
interest payments beginning in July of 1997.
During December 1996, the Company entered into an agreement with the former
parent to renegotiate the terms of the original note. As a result, the Company
made payments to the former parent of $170,000 during December 1996 and the
remaining $5,000 during March 1997 which resulted in the recognition of an
extraordinary gain of $70,000 during the three month period ended March 31,
1997.
5. Commitments and Contingencies:
The Company leases office space under an operating lease expiring in 1998.
At December 31, 1996 minimum rentals due under the lease were as follows:
1997 ................................................. $44,094
1998 ................................................. 7,500
-------
$51,594
=======
Rent expense for the year ended December 31, 1996 was $41,089
F-38
<PAGE>
tekgraf, inc.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. Subsequent Events:
On June 2, 1997, the Company closed on a stock purchase agreement (the
"Agreement") completing the sale of all of the outstanding common stock of
tekgraf in exchange for 834 shares of common stock of Tekgraf, Inc. (formerly
Crescent Computers, Inc.). The acquisition by Tekgraf, Inc. will be accounted
for under the purchase method of accounting. Pursuant to the Agreement, the
Company is required to deliver a defined guaranteed net asset value ("NAV"). The
Company's excess net book value over the NAV of $267,000 will be distributed in
cash to the Company's stockholder. It is anticipated that the distribution will
occur during December 1997. In addition, and also pursuant to the Agreement, the
stockholder of the Company has entered into an employment agreement with
Tekgraf, Inc. which provide for a set base salary, participation in future
incentive bonus plans, certain other benefits, and a covenant not to compete
following termination of such person's employment.
F-39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Intelligent Products Marketing, Inc.
We have audited the accompanying balance sheets of Intelligent Products
Marketing, Inc. as of December 31, 1995 and 1996, and the related statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Intelligent Products
Marketing, Inc. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 2, 1997
F-40
<PAGE>
Intelligent Products Marketing, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 2, 1997
1995 1996 (Unaudited)
----------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 140,821 $ 700 $ 2,591
Accounts receivable, less allowance for
doubtful accounts of $34,850 at December 31, 1996 ........... 942,956 1,405,044 431,554
Inventories, net ............................................... 649,591 428,086
Other receivables .............................................. 27,087 38,595
Prepaid expenses ............................................... 10,003 6,201
Deferred income taxes .......................................... 42,874 58,228
----------- ----------- ---------
Total current assets ........................................ 1,813,332 1,936,854 434,145
----------- ----------- ---------
Property and equipment:
Furniture and equipment ........................................ 388,665 412,747 184,033
Leasehold improvements ......................................... 4,674 4,675
----------- ----------- ---------
393,339 417,422 184,033
Less accumulated depreciation .................................. (284,164) (327,125) (135,512)
----------- ----------- ---------
109,175 90,297 48,521
Other assets ...................................................... 4,930 5,315
----------- ----------- ---------
Total assets ................................................ $ 1,927,437 $ 2,032,466 $ 482,666
=========== =========== =========
LIABILITIES
Current liabilities:
Accounts payable ............................................... $ 832,376 $ 801,681
Accrued expenses ............................................... 136,069 146,243
Due to related entities ........................................ 181,335 127,829
Bank overdraft ................................................. 109,789
Income taxes payable ........................................... 33,524 45,286 $ 76,166
Deferred income taxes .......................................... 2,780 3,960
----------- ----------- ---------
Total current liabilities ................................... 1,186,084 1,234,788 76,166
----------- ----------- ---------
Long-term Debt .................................................... 91,638
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, no par value, 1,000 shares
authorized; 500 shares issued and outstanding at
December 31, 1995 and 1996 respectively ........................ 125,005 125,005 125,005
Retained earnings ................................................. 616,348 672,673 189,857
----------- ----------- ---------
Total stockholders' equity ..................................... 741,353 797,678 314,862
----------- ----------- ---------
Total liabilities and stockholders' equity ..................... $ 1,927,437 $ 2,032,466 $ 482,666
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE>
Intelligent Products Marketing, Inc.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
Years Ended Six Months January 1,
December 31, Ended 1997
---------------------------- June 30, Through June 2,
1995 1996 1996 1997
----------- ----------- ---------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales .................................. $ 7,646,803 $ 9,058,790 $5,441,239 $2,684,693
Cost of goods sold ......................... 6,343,894 7,578,307 4,186,533 1,789,662
----------- ----------- ---------- ----------
Gross profit ........................... 1,302,909 1,480,483 1,254,706 895,031
Operating expenses:
Selling, general and administrative ...... 1,051,974 1,333,230 1,154,283 795,321
Depreciation ............................. 46,210 42,961 30,000 8,800
----------- ----------- ---------- ----------
Income from operations ..................... 204,725 104,292 70,423 90,910
Other income (expense), net ................ (64,906) (25,903) 27,888 14,410
----------- ----------- ---------- ----------
Income before provision for income taxes 139,819 78,389 98,311 105,320
Provision for income taxes ................. 45,946 22,064 12,420 93,452
----------- ----------- ---------- ----------
Net income ............................. $ 93,873 $ 56,325 $ 85,891 $ 11,868
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE>
Intelligent Products Marketing, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Common Retained
Shares Stock Earnings Total
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Balances, January 1, 1995 .............. 500 $125,005 $522,475 $647,480
Net income .......................... 93,873 93,873
--- -------- -------- --------
Balances, December 31, 1995 ............ 500 125,005 616,348 741,353
Net income .......................... 56,325 56,325
--- -------- -------- --------
Balances, December 31, 1996 ............ 500 125,005 672,673 797,678
Stockholder distributions (unaudited) (494,684) (494,684)
Net income (unaudited) .............. 11,868 11,868
--- -------- -------- --------
Balances, June 2, 1997 (unaudited) ..... $500 $125,005 $189,857 $314,862
=== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE>
Intelligent Products Marketing, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Six Months For the Period
December 31, Ended January 1, 1997
------------------------ June 30, Through June 2,
1995 1996 1996 1997
--------- --------- ---------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................... $ 93,873 $ 56,325 $ 85,891 $ 11,868
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation .................................. 46,210 42,961 30,000 12,980
Provision for doubtful accounts receivable .... (31,878) 34,850
Provision for obsolete inventories ............ 34,333 (7,641)
Deferred income taxes ......................... (3,085) (14,174) 3,083 54,268
Changes in assets and liabilities net of effects
of distribution:
Accounts receivable .......................... (327,288) (496,938) (404,637) 353,725
Inventories .................................. (163,789) 229,146 (67,473) (368,369)
Other receivables ............................ 9,066 (11,508) 38,595
Prepaid expenses ............................. 8,756 3,802 (8,051) (40,404)
Other assets ................................. (150) (385) 490 150
Accounts payable and accrued expenses ........ 51,910 (20,521) 106,170 (210,140)
Due to related entities ...................... 181,335 (53,506)
Income taxes payable ......................... 27,314 11,762 15,363 35,673
--------- --------- --------- ---------
Net cash provided (used) by operating
activities ................................ (73,393) (225,827) (239,164) (111,654)
--------- --------- --------- ---------
Cash flows from investing activities:
Payments for purchase of property and equipment . (30,586) (24,083) (22,155) (13,821)
--------- --------- --------- ---------
Net cash used by investing activities ....... (30,586) (24,083) (22,155) (13,821)
--------- --------- --------- ---------
Cash flows from financing activities:
Payment on debt ................................. (92,901) (127,829)
Increase in line of credit ...................... 214,099 146,242
Bank overdraft .................................. 109,789 108,953
--------- --------- --------- ---------
Net cash provided by financing
activities ................................ 109,789 121,198 127,366
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents ... (103,979) (140,121) (140,121) 1,891
Cash and cash equivalents, beginning of period ..... 244,800 140,821 140,821 700
--------- --------- --------- ---------
Cash and cash equivalents, end of period ........... $ 140,821 $ 700 $ 700 $ 2,591
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ..... $ 21,717 $ 24,476
========= =========
Cash paid during the period for interest ......... $ 1,965 $ 5,214
========= =========
</TABLE>
Supplemental non-cash activity:
During 1997, the stockholders distributed assets and liabilities with a net
book value at approximately $1,511,000 and $1,016,000, respectively.
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE>
Intelligent Products Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and Nature of Operations:
Basis of Presentation
The financial statements are prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1995 and 1996 and reported amounts of revenues and
expenses for the years then ended. Significant estimates include those made for
the allowance for doubtful accounts and inventory reserves for excess, obsolete
and damaged products. Actual results could differ from those estimates made by
management.
Nature of Operations
Intelligent Products Marketing, Inc. ("the Company") is a distributor and
marketer of a broad array of complex computer graphics hardware and software in
the western United States. Customers consist primarily of value added resellers
and vertical solution providers. Distribution and representation contracts with
manufacturers are primarily held by two affiliated companies, IG Distribution,
Inc. and IP Marketing, Inc., which have granted the rights to execute these
contracts to the Company in exchange for a percentage of gross profit. Inherent
in the accompanying financial statements are certain risks and uncertainties.
These risks and uncertainties include, but are not limited to: the impact of
competitive products, competition, and available sources of supply.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 2, 1997
and for the six months ended June 30, 1996 and for the period January 1, 1997
through June 2, 1997 have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements for the year ended December 31, 1995 and 1996
and include all adjustments, which were of a normal and recurring nature which,
in the opinion of management, are necessary to present fairly the financial
position of the Company and the results of operations and cash flows for the
periods presented. The operating results for the interim periods are not
necessarily indicative of results for the full year.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. The
Company maintains cash balances at financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories are stated at the lower of cost, using the average method, or
market. Inventory is comprised primarily of finished goods and the Company
maintains a reserve for its estimate of excess, obsolete and damaged goods.
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives which
primarily range from 5 to 7 years. Amounts expended for maintenance and repairs
are charged to expense as incurred. Upon disposition, both the related cost and
accumulated depreciation accounts are relieved and the related gain or loss is
credited or charged to operations.
F-45
<PAGE>
Intelligent Products Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
2. Summary of Significant Accounting Policies, continued:
Revenue
Sales are recognized upon the shipment of products to the customer.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred tax liabilities and assets are determined based
on temporary differences between the bases of certain assets and liabilities for
income tax and financial reporting purposes. The deferred tax assets and
liabilities are classified according to the financial statement classification
of the assets and liabilities generating the differences. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments
including cash equivalents, accounts receivable, accounts payable and other
accrued liabilities approximate fair value due to their short maturities.
3. Line of Credit:
The Company has available a line of credit of $250,000 of which no amounts
were outstanding at December 31, 1996 and 1995. Interest is payable monthly at
the bank's prime lending rate (8.25% at December 31, 1996) plus .75% and expires
January 9, 1997. The line of credit is guaranteed by two stockholders of the
Company, and has been extended under the same conditions for an additional year.
4. Income Taxes:
The provision (benefit) for income taxes for the years ended December 31,
is as follows:
1995 1996
---- ----
Current .......................... $ 49,031 $ 36,238
Deferred ......................... (3,085) (14,174)
-------- --------
$ 45,946 $ 22,064
======== ========
The temporary differences between the tax bases of assets and liabilities
for income tax and financial reporting which give rise to deferred taxes at
December 31, 1995 and 1996 consist primarily of reserves for inventory and
accounts receivable and accrued bonuses. Management believes that realization of
the net deferred tax assets is more likely than not primarily due to anticipated
future taxable income. The Company's effective income tax rate varied from the
federal statutory income rate due primarily to state income taxes, net of the
federal income tax benefit, non-deductible meals and entertainment expenses and
federal sur-tax exemptions.
5. Related Party Transactions:
As of December 31, 1995 and 1996, amounts due to affiliated companies were
$181,335 and $127,829, respectively. In addition, commission expense related to
the execution of distribution contracts on behalf of an affiliated company is
$34,768 and $44,715 in 1995 and 1996, respectively.
F-46
<PAGE>
Intelligent Products Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS--CONTINUED
6. Commitments and Contingencies:
Operating Lease
The Company leases office space under noncancelable operating leases
expiring in 2001. At December 31, 1996 minimum rentals due under the lease were
as follows:
1997 ............................ $ 96,888
1998 ............................ 96,888
1999 ............................ 96,888
2000 ............................ 96,888
2001 ............................ 89,199
--------
$476,751
========
Rental expense under operating leases for 1995 and 1996 is $60,495 and
$60,507, respectively.
Litigation
The Company is involved from time to time in litigation on matters which
are routine to the conduct of its business. Although the outcome of any
litigation cannot be predicted with certainty, the Company does not believe that
any outstanding litigation will have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
7. Employee Benefit Plan:
The Company maintains a Profit Sharing Plan ("the Plan") under section
401(k) of the Internal Revenue Code. The Company's contributions to the Plan for
eligible employees are a percentage of compensation, up to a maximum of 15%,
depending on profitability. Total Company contributions under the Plan during
1995 and 1996 were $145,000 and $120,000, respectively.
8. Subsequent Events:
On June 2, 1997, the Company closed on a stock purchase agreement (the
"Agreement") completing the sale of all of the outstanding common stock of
Intelligent Products Marketing, Inc. and an affiliated company, IG Distribution,
Inc., in exchange for 900 shares of common stock of Tekgraf, Inc. (formerly
Crescent Computers, Inc.). The acquisition by Tekgraf, Inc. will be accounted
for under the purchase method of accounting. Pursuant to the Agreement, the
Company is required to deliver a defined guaranteed net asset value ("NAV"). The
Company's excess net book value over the NAV will be distributed in cash to the
Company's stockholders. It is anticipated that the distribution, if any, would
occur during December 1997. Management of the Company expects this amount to be
insignificant. In addition, and also pursuant to the Agreement, the stockholders
of the Company have entered into employment agreements with Tekgraf, Inc. which
provide for a set base salary, participation in future incentive bonus plans,
certain other benefits, and a covenant not to compete following termination of
such person's employment.
F-47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders
IG Distribution, Inc.
We have audited the accompanying balance sheets of IG Distribution, Inc. as of
December 31, 1995 and 1996, and the related statements of income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IG Distribution, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 2, 1997
F-48
<PAGE>
IG Distribution, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 2,
1995 1996 1997
------- ------- -------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Due from affiliate ............................ $49,006 $85,531 $91,639
Prepaid expenses .............................. 131 65 65
------- ------- -------
Total assets ................................ $49,137 $85,596 $91,704
======= ======= =======
STOCKHOLDERS' EQUITY
Common stock, no par value, 100,000
shares authorized; 1,000 shares issued and
outstanding at December 31, 1995 and 1996 ..... $ 1,000 $ 1,000 $ 1,000
Retained earnings ................................ 48,137 84,596 90,704
------- ------- -------
Total stockholders' equity .................. 49,137 $85,596 $91,704
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-49
<PAGE>
IG Distribution, Inc.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six For the
Years Ended Months Period
December 31, Ended January 1,
------------------- June 30, 1997 Through
1995 1996 1996 June 2, 1997
------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue ........................... $34,768 $44,715 $26,138 $13,531
Selling, general and administrative 482 474 399 451
------- ------- ------- -------
Income from operations ......... 34,286 44,241 25,739 13,080
Provision for income taxes, current 9,744 7,782 5,782 6,972
------- ------- ------- -------
Net income ........................ $24,542 $36,459 $19,957 $ 6,108
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-50
<PAGE>
IG DISTRIBUTION, INC.
Statements of Changes in Stockholders' Equity
Number of Common Retained
Shares Stock Earnings Total
--------- ------- -------- -------
Balances, January 1, 1995 ......... 1,000 $1,000 $23,595 $24,595
Net income ..................... 24,542 24,542
----- ------ ------- -------
Balances, December 31, 1995 ....... 1,000 1,000 48,137 49,137
Net income ..................... 36,459 36,459
----- ------ ------- -------
Balances, December 31, 1996 ....... 1,000 1,000 84,596 85,596
Net income (unaudited) ......... 6,108 6,108
----- ------ ------- -------
Balances, June 2, 1997 (unaudited). 1,000 $1,000 $90,704 $91,704
===== ====== ======= =======
The accompanying notes are an integral part of the financial statements.
F-51
<PAGE>
IG DISTRIBUTION, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six For the
Years Ended Months Period
December 31, Ended January 1,
------------------- June 30, 1997 Through
1995 1996 1996 June 2, 1997
-------- -------- -------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ................................. $ 24,542 $ 36,459 $ 19,957 $ 6,108
Changes in assets and liabilities:
Due from affiliate ......................... (24,607) (36,525) (19,957) (6,108)
Prepaid expenses ........................... 65 66
-------- -------- -------- --------
Net cash provided by operating activities -- --
Increase in cash and cash equivalents ......... -- --
-------- -------- -------- --------
Cash and cash equivalents, beginning of period -- -- -- --
-------- -------- -------- --------
Cash and cash equivalents, end of period ...... $ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-52
<PAGE>
IG DISTRIBUTION, INC.
Notes to Financial Statements
1. Nature of Operations and Basis of Presentation:
Basis of Presentation
The financial statements are prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1995 and 1996 and reported amounts of revenues and
expenses for the years then ended. Actual results could differ from those
estimates made by management.
Nature of Operations
IG Distribution, Inc. ("the Company") holds contracts with certain
manufacturers/importers for the distribution of a broad array of complex
computer graphics hardware and software in the western United States. Execution
of the contracts and distribution of the products is granted to an affiliated
company (Intelligent Products Marketing, Inc.) in return for a commission of 5%
of the gross profit.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 2, 1997
and for the six months ended June 30, 1996 and for the period January 1, 1997
through June 2, 1997 have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements for the year ended December 31, 1995 and 1996
and include all adjustments, which were of a normal and recurring nature which,
in the opinion of management, are necessary to present fairly the financial
position of the Company and the results of operations and cash flows for the
periods presented. The operating results for the interim periods are not
necessarily indicative of results for the full year.
Revenue
Revenue represents commission revenue and all revenue is derived from an
affiliated company.
Concentration of Credit Risk
Receivables are due from an affiliated company.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts
are determined in accordance with SFAS No. 109, "Accounting for Income Taxes"
("SFAS 109"). Under SFAS 109, deferred tax liabilities and assets are determined
based on temporary differences between the basis of certain assets and
liabilities for income tax and financial reporting purposes. As of December 31,
1995 and 1996, no such temporary differences exist. The Company's effective
income tax rate varied from the federal statutory income tax rate due primarily
to state income taxes and federal surtax exemptions.
3. Subsequent Events:
On June 2, 1997, the Company closed on a stock purchase agreement (the
"Agreement") completing the sale of all of the outstanding common stock of IG
Distribution, Inc. and an affiliated company, Intelligent Products Marketing,
Inc., in exchange for 900 shares of common stock of Tekgraf, Inc. (formerly
Crescent Computers, Inc.). The acquisition by Tekgraf, Inc. will be accounted
for under the purchase method of accounting. Pursuant to the Agreement, the
Company is required to deliver a defined guaranteed net asset value ("NAV"). In
addition, the stockholders of the Company have entered into employment
agreements with Tekgraf, Inc. which provide for a set base salary, participation
in future incentive bonus plans, certain other benefits, and a covenant not to
compete following termination of such person's employment.
F-53
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
G&R Marketing, Inc.
We have audited the accompanying balance sheets of G&R Marketing, Inc. as of
December 31, 1995 and 1996, and the related statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of G&R Marketing, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
May 12, 1997, except for
Note 7 as to which the date
is June 30, 1997
F-54
<PAGE>
G&R Marketing, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 2, 1997
1995 1996 (Unaudited)
------------ ----------- ------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 613 $ 591 $ 556
Accounts receivable, less allowance for doubtful accounts
of $25,822 and $25,000 at December 31, 1995 and 1996,
respectively ......................................... 2,402,683 2,539,987 2,456,493
Inventories, net ........................................ 1,887,081 1,907,441 1,598,760
Other receivables ....................................... 295,193 144,796 177,575
Due from related entities ............................... 119,686 177,241 41,745
Prepaid expenses and other assets ....................... 10,068 17,456 55,823
----------- ----------- -----------
Total current assets ................................. 4,715,324 4,787,512 4,330,952
----------- ----------- -----------
Property and equipment:
Furniture and equipment ................................. 453,738 365,869 426,182
Leasehold improvements .................................. 24,697 24,697 24,697
----------- ----------- -----------
478,435 390,566 450,879
Accumulated depreciation ................................ (355,484) (306,372) (328,872)
----------- ----------- -----------
122,951 84,194 122,007
Other assets ............................................... 24,115 3,200 90,543
----------- ----------- -----------
Total assets ......................................... $ 4,862,390 $ 4,874,906 $ 4,543,502
=========== =========== ===========
LIABILITIES
Current liabilities:
Line of credit .......................................... $ 1,188,596 $ 1,188,598 $ 1,299,823
Accounts payable ........................................ 2,964,941 2,902,969 2,526,932
Accrued expenses ........................................ 77,287 31,825 21,598
State income taxes payable .............................. 3,100 3,600 62
----------- ----------- -----------
Total current liabilities ............................ 4,233,924 4,126,992 3,848,415
----------- ----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, no par value, 1,000,000 shares
authorized; 1,000 shares issued and outstanding
at December 31, 1995 and 1996, respectively ............. 2,100 2,100 2,100
Due from pre-acquisition stockholders (see Note 7) ......... (247,000)
Additional paid-in capital ................................. 247,000
Retained earnings .......................................... 626,366 745,814 692,987
----------- ----------- -----------
Total stockholders' equity ........................... 628,466 747,914 695,087
----------- ----------- -----------
Total liabilities and stockholders' equity ........... $ 4,862,390 $ 4,874,906 $ 4,543,502
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-55
<PAGE>
G&R Marketing, Inc.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended Six Months For the Period
December 31, Ended January 1, 1997
------------------------------------- June 30, Through June 2,
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales ............................ $21,316,998 $20,783,843 $21,038,228 $ 9,787,042 $ 7,971,221
Cost of goods sold ................... 18,676,506 17,990,180 18,117,338 8,389,438 6,821,844
----------- ----------- ----------- ----------- -----------
Gross profit ................... 2,640,492 2,793,663 2,920,890 1,397,604 1,149,377
Operating expenses:
Selling, general and administrative 2,281,214 2,387,135 2,551,281 1,175,490 872,095
Depreciation ...................... 48,259 67,498 56,549 27,000 22,500
----------- ----------- ----------- ----------- -----------
Income from operations ............ 311,019 339,030 313,060 195,114 254,782
Other income (expense) ............... 12 1,136 182 (60,065) 19,719
Interest expense ..................... 137,486 166,114 140,194 69,124 51,801
----------- ----------- ----------- ----------- -----------
Income before provision for
state income taxes .... 173,545 174,052 173,048 65,925 222,700
Provision for state income taxes ..... 3,400 3,100 3,600
----------- ----------- ----------- ----------- -----------
Net income ........................ $ 170,145 $ 170,952 $ 169,448 $ 65,925 $ 222,700
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-56
<PAGE>
G&R Marketing, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Due from
Additional Pre-acquisition
Number of Common Paid-in stockholders Retained
Shares Stock Capital (Note 7) Earnings Total
------ ----- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994............... 1,000 $2,100 $314,681 $316,781
Net income........................... 170,145 170,145
----- ------ -------- -------- -------- --------
Balances, December 31, 1994............. 1,000 2,100 484,826 486,926
Stockholder distributions............ (29,412) (29,412)
Net income........................... 170,952 170,952
----- ------ -------- -------- -------- --------
Balances, December 31, 1995............. 1,000 2,100 626,366 628,466
Stockholder distributions............ (50,000) (50,000)
Net income........................... 169,448 169,448
----- ------ -------- -------- -------- --------
Balances, December 31, 1996............. 1,000 2,100 745,814 747,914
Due from pre-acquisition
stockholders (unaudited)............. $247,000 $(247,000)
Stockholder distributions (unaudited) (275,527) (275,527)
Net income (unaudited)............... 222,700 222,700
----- ------ -------- -------- -------- --------
Balances, June 2, 1997 (unaudited)...... 1,000 $2,100 $247,000 (247,000) $692,987 $695,087
===== ====== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-57
<PAGE>
G&R Marketing, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Six Months For the Period
December 31, Ended January 1, 1997
------------------------------ June 30, Through June 2,
1994 1995 1996 1996 1997
---- ----- ---- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ................................... $ 170,145 $ 170,952 $ 169,448 $ 65,926 $ 222,700
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation ................................. 48,259 67,498 56,549 27,000 22,500
Provision for doubtful accounts receivable ... 25,000 822
Changes in assets and liabilities:
Accounts receivable .......................... (857,177) 467,716 (137,304) 137,777 83,494
Other receivables ............................ 40,586 (89,039) 150,397 (32,779)
Due from related entities .................... (71,461) 15,631 (57,555) 135,496
Inventories .................................. (375,104) 162,122 (20,360) 3,613 308,681
Prepaid expenses ............................. 6,989 (4,528) (7,388) (6,670) (38,367)
Other assets ................................. 4,882 (11,721) 20,915 (87,343)
Accounts payable and accrued expenses ........ 72,259 217,902 (107,434) 29,508 (386,264)
State income taxes payable ................... 1,800 (300) 500 (3,538)
--------- --------- --------- --------- ---------
Net cash provided (used) by operating
activities .............................. (933,822) 997,055 67,768 257,154 224,580
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Payments for purchase of property
and equipment ............................. (54,748) (73,004) (17,792) (7,077) (60,313)
--------- --------- --------- --------- ---------
Net cash used by investing activities ..... (54,748) (73,004) (17,792) (7,077) (60,313)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds (repayment) from line of credit ..... 923,636 (904,993) 2 (250,106) 111,225
Stockholder distributions .................... (29,412) (50,000) (275,527)
--------- --------- --------- --------- ---------
Net cash provided (used) by financing
activities ................................. 923,636 (934,405) (49,998) (250,106) (164,302)
--------- --------- --------- --------- ---------
Decrease in cash and cash equivalents ........... (64,934) (10,354) (22) (29) (35)
Cash and cash equivalents, beginning of period .. 75,901 10,967 613 613 591
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period ........ $ 10,967 $ 613 $ 591 $ 584 $ 556
========= ========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ........ $ 150,128 $ 172,264 $ 128,363
========= ========= =========
Cash paid during the period for state
income taxes ................................. $ 1,605 $ 3,270 $ 3,158
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-58
<PAGE>
G&R Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation and Nature of Operations:
Nature of Operations
G&R Marketing, Inc. ("the Company") is a distributor and marketer of a
broad array of complex computer graphics hardware and software in the upper
midwestern United States. Customers consist primarily of value added resellers
and vertical solution providers.
Inherent in the accompanying financial statements are certain risks and
uncertainties. These risks and uncertainties include, but are not limited to:
the impact of competitive products, competition and available sources of supply.
Basis of Presentation
The financial statements are prepared on the basis of generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 1995 and 1996 and reported amounts of revenues and
expenses for each of the three years in the period ended December 31, 1996.
Significant estimates include those made for the allowance for doubtful accounts
and inventory reserves for excess, obsolete and damaged products. Actual results
could differ from those estimates made by management.
2. Summary of Significant Accounting Policies:
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 2, 1997
and for the six months ended June 30, 1996 and for the period January 1, 1997
through June 2, 1997 have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements for the three years in the period ended
December 31, 1996 and include all adjustments, which were of a normal and
recurring nature, which in the opinion of management are necessary to present
fairly the financial position of the Company and results of operations and cash
flows for the periods presented. The operating results for the interim periods
are not necessarily indicative of results for the full year.
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents. The
Company maintains cash balances at financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Inventories
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out method) or market. Inventory is comprised primarily of
finished goods. The Company maintains a reserve for its estimate of excess,
obsolete and damaged goods.
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a accelerated basis over their estimated useful lives which range
from 3 to 7 years.
Amounts expended for maintenance and repairs are charged to expense as
incurred. Upon disposition, both the related cost and accumulated depreciation
accounts are relieved and the related gain or loss is credited or charged to
operations.
F-59
<PAGE>
G&R Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, Continued:
Revenue
Sales are recognized upon the shipment of products to the customer.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be uncollectible. Such losses have historically been
within management's expectations.
Income Taxes
The Company has elected S corporation status as defined by the Internal
Revenue Code. Under this election, taxable income and any applicable tax credits
are included in the income tax return of the stockholders, and any federal
income tax liability is borne by the stockholders. The Company's tax status
insofar as state corporate income taxes are concerned is not effected by the
election. Accordingly, the provision for state income taxes and corresponding
balance sheet accounts are determined in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets
and liabilities are determined based on temporary differences between the basis
of certain assets and liabilities for income tax and financial reporting
purposes, if any. The deferred tax assets and liabilities are classified
according to the financial statement classification of the assets and
liabilities generating the differences. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
Fair Value of Financial Instruments
The Company utilizes a line of credit to finance short-term obligations.
Management believes that this financial instrument bears interest at a rate
which approximates prevailing market rates for instruments with similar
characteristics and, accordingly, that the carrying value for this instrument is
a reasonable estimate of fair value.
3. Line of Credit:
The Company has available a line of credit of $3,000,000 of which
$1,811,402 was unused at December 31, 1996. Interest is payable monthly at the
bank's prime lending rate (8.25% at December 31, 1996) plus .50% and expires
June 30, 1997. The line of credit is collateralized by the Company's assets, and
guaranteed by the stockholders of the Company.
4. Employee Benefit Plan:
Effective January 1, 1994, the Company established a defined contribution
plan which covers all eligible employees, as defined by the plan. All
contributions are made at the discretion of the Board of Directors. Profit
sharing contribution expense for the years ended December 31, 1994 and 1995 were
$55,057 and $54,124, respectively. There were no contributions made during 1996.
5. Related Party Transactions:
The Company is affiliated through common ownership with G/B Marketing,
Inc. ("G/B"). Various operating expenses, such as rent, utilities, insurance and
other expenses are allocated to G/B and received by the Company each month.
Total operating expenses charged to G/B for the three years in the period ended
December 31, 1996 were $114,900, $134,494, and $82,474, respectively. In
addition, the Company has advances of $14,430 and $71,985 due from G/B at
December 31, 1995 and 1996, respectively.
F-60
<PAGE>
G&R Marketing, Inc.
NOTES TO FINANCIAL STATEMENTS, Continued
5. Related Party Transactions, Continued:
The Company has advances to stockholders of $105,256 at December 31, 1995
and 1996. These advances are due on demand.
During the normal course of business, the Company sells inventory, at
cost, to a company in the same industry, but a different geographic region. This
Company is partially owned by stockholders of the Company. During the years in
the period ended December 31, 1996, these sales amounted to $784,862, $677,538,
and $521,087, respectively.
6. Commitments and Contingencies:
Operating Lease The Company leases office space under an operating lease
expiring in 2000. At December 31, 1996 future minimum rentals due under the
lease were as follows:
1997 ............................................... $158,062
1998 ............................................... 160,452
1999 ............................................... 162,842
2000 ............................................... 68,265
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$549,621
========
Rent expense, net of amounts allocated to G/B, for each of the three years
in the period ended December 31, 1996 were $91,502, $129,147 and $155,546,
respectively.
Litigation
The Company is involved from time to time in litigation on matters which
are routine to the conduct of its business. Although the outcome of any
litigation cannot be predicted with certainty, the Company does not believe that
any outstanding litigation will have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
7. Subsequent Events:
On June 2, 1997, the Company closed on a stock purchase agreement (the
"Agreement") completing the sale of all of the outstanding common stock of G&R
in exchange for 2,505 shares of common stock of Tekgraf, Inc. (formerly Crescent
Computers, Inc.). The acquisition by Tekgraf, Inc. will be accounted for under
the purchase method of accounting. Pursuant to the Agreement, the Company is
required to deliver a defined guaranteed net asset value ("NAV"). The Company's
NAV over the book value of approximately $247,000 is expected to be contributed
in cash or satisfied with the contribution of the Company's stock by the
Company's stockholders. It is anticipated that the contribution will occur
during December 1997. In addition, and also pursuant to the Agreement, the
stockholders of the Company have entered into employment agreements with
Tekgraf, Inc. which provide for a set base salary, participation in future
incentive bonus plans, certain other benefits, and a covenant not to compete
following termination of such person's employment.
On June 30, 1997, the Company extended the line of credit with a bank
through December 31, 1997.
F-61
<PAGE>
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No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by the Underwriters.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer, or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein contained is correct as of any time
subsequent to the date of this Prospectus.
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TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 7
Use of Proceeds ........................................................... 14
Dividends and Distributions ............................................... 14
Capitalization ............................................................ 15
Dilution .................................................................. 16
Unaudited Pro Forma Combined Financial
Statements .............................................................. 17
Selected Financial and Operating Data ..................................... 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................... 28
Business .................................................................. 35
Management ................................................................ 43
Certain Transactions ...................................................... 48
Principal Stockholders .................................................... 51
Description of Securities ................................................. 53
Shares Eligible for Future Sale ........................................... 56
Underwriting .............................................................. 57
Legal Matters ............................................................. 59
Experts ................................................................... 59
Additional Information .................................................... 59
Index to Financial Statements ............................................. F-1
--------------------
Until December 5, 1997, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
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2,100,000 Units
TEKGRAF, INC.
Consisting of 2,100,000 shares of
Class A Common Stock and
2,100,000 Redeemable Warrants
------------
PROSPECTUS
------------
D. H. BLAIR INVESTMENT
BANKING CORP.
November 10, 1997
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