SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 1997
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the period from _____ to _________.
Commission File No. 0-23221
TEKGRAF, INC.
Delaware 58-2033795
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2979 Pacific Drive, Suite B 30071
Norcross, Georgia (Zip Code)
(Address of principal executive
offices)
Registrar's telephone number, including area code (770) 441-1107
(Former name, former address and former fiscal year, if changed since last
report):
Not Applicable
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ____ No _X_
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practical date.
Class Outstanding at December 15, 1997
----- --------------------------------
Common Stock, $.001 par value 5,433,333 shares
<PAGE>
TEKGRAF, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
December 31, 1996 and September 30, 1997 ....................... 1-2
Consolidated Statements of Operations for the three and
nine months ended September 30, 1996 and 1997 .................. 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1997 .............................. 4
Notes to Consolidated Financial Statements .......................... 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 10-14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds .................. 15
Item 5. Other Information .......................................... 16
Item 6. Exhibit and Reports on Form 8-K ............................ 17
SIGNATURES ............................................................... 18
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
Tekgraf, Inc.
Consolidated Balance Sheets
December 31, September 30,
1996 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 633,027 $ 1,108,103
Accounts receivable, less allowance for
doubtful accounts of $35,000 and $86,000 at
December 31, 1996 and September 30, 1997,
respectively 1,621,180 11,065,716
Inventories, net 636,019 3,413,294
Due from related entities 189,609
Prepaid expenses and other assets 93,206
Deferred offering costs 536,692
Deferred income taxes 1,500 39,000
----------- ------------
Total current assets 2,891,726 16,445,620
----------- ------------
Property and equipment:
Furniture and fixtures 83,294 188,658
Computer equipment 36,225 343,790
----------- ------------
119,519 532,448
Less accumulated depreciation (62,765) (137,665)
----------- ------------
56,754 394,783
Goodwill, net 6,357,819
Other assets 58,629 112,649
----------- ------------
Total assets $ 3,007,109 $ 23,310,871
=========== ============
1
<PAGE>
Tekgraf, Inc.
Consolidated Balance Sheets, Continued
December 31, September 30,
1996 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current debt $3,087,182
Due to acquisition stockholders (see Note 4) 1,057,737
Note payable, stockholders 40,000
Due to stockholders, net $2,211,164
Due to related entities, net 2,119,632
Accounts payable 711,125 6,445,157
Accrued expenses 69,408 198,036
Income taxes payable 4,100 429,020
---------- -----------
Total current liabilities 2,995,797 13,376,764
---------- -----------
Debt, less current maturities 232,097
Note payable, stockholder 50,000
Deferred income taxes 1,200
Commitments and contingencies
Stockholders' equity:
Class A Common Stock, $.001 par value,
31,666,667 shares authorized; no shares
issued and outstanding at December 31, 1996
and September 30, 1997; holders of Class A
Common Stock are entitled to one vote per
share (see Note 8)
Class B Common Stock, $.001 par value, 3,333,333
shares authorized; 1,141,333 shares issued and
outstanding at December 31, 1996 and 3,333,333
shares issued and outstanding at September 30,
1997; holders of Class B Common Stock are
entitled to five votes per share (see Note 8) 1,141 3,333
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; no shares issued and outstanding at
December 31, 1996 and September 30, 1997
Due from acquisition stockholders (see Note 4) (433,882)
Due from pre-acquisition stockholders (see Note 4) (870,000)
Additional paid-in capital 10,613,766
Retained earnings 8,971 338,793
---------- -----------
Total stockholders' equity 10,112 9,652,010
---------- -----------
Total liabilities and stockholders' equity $3,007,109 $23,310,871
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
Tekgraf, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- ----------------------------
1996 1997 1996 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $3,282,468 $18,536,085 $10,132,798 $30,987,966
Cost of goods sold 2,624,390 15,526,519 8,322,766 26,132,832
---------- ----------- ----------- -----------
Gross profit 658,078 3,009,566 1,810,032 4,855,134
Operating expenses:
Selling, general and
administrative 644,332 2,384,393 1,560,479 3,799,626
Depreciation 1,441 40,451 16,787 74,900
Amortization 110,605 144,000
---------- ----------- ----------- -----------
Income from operations 12,305 474,117 232,766 836,608
Other income (expense), net (21,839) 43,245 18,182 64,093
Interest expense 37,000 138,489 97,000 246,759
---------- ----------- ----------- -----------
Income (loss) before provision for
income taxes and minority interest (46,534) 378,873 153,948 653,942
Provision for income taxes 191,416 13,000 314,000
---------- ----------- ----------- -----------
Income (loss) before minority interest (46,534) 187,457 140,948 339,942
Minority interest 14,268 4,509 (10,312) (10,120)
---------- ----------- ----------- -----------
Net income (loss) $ (32,266) $ 191,966 $ 130,636 $ 329,822
========== =========== =========== ===========
Primary and fully diluted weighted
average shares outstanding 1,084,266 3,166,666 1,084,266 2,009,777
========== =========== =========== ===========
Primary and fully diluted net income
(loss) per share $ (.03) $ .06 $ .12 $ .16
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
Tekgraf, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
---------------------------
1996 1997
(Unaudited)
Cash flows from operating activities:
Net income $ 130,636 $ 329,822
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 16,787 74,900
Minority interest 7,807
Amortization 144,000
Provision for doubtful
accounts receivable 10,000 50,834
Deferred income taxes 8,900 (38,700)
Changes in net assets
and liabilities, net of the
effects of the acquisitions:
Accounts receivable 32,941 (3,044,714)
Inventories (171,724) 1,023,294
Other assets and prepaid expenses (251) 155,142
Accounts payable and accrued expenses 66,265 402,292
Income taxes payable 4,100 352,700
Due from related entities 177,575
------------ ------------
Net cash provided (used) by
operating activities 105,461 (372,855)
------------ ------------
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 (47,691) (59,609)
------------ ------------
Net cash provided (used) by
investing activities (47,691) 289,873
------------ ------------
Cash flows from financing activities:
Advance to related entities (130,564)
Advance from stockholders 472,432
Repayment of advance from stockholders
and related entities (200,593)
Proceeds from debt 1,048,343
Payments for offering costs (289,692)
------------ ------------
Net cash provided by financing
activities 341,868 558,058
------------ ------------
Increase in cash and cash equivalents 399,638 475,076
Cash and cash equivalents, beginning of period 305,821 633,027
------------ ------------
Cash and cash equivalents, end of period $ 705,459 $ 1,108,103
============ ============
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 (12,055,245)
------------
Goodwill $ 6,501,819
============
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
Tekgraf, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation:
The accompanying unaudited interim consolidated financial statements as of
September 30, 1997 and for the three and nine months ended September 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 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. In addition, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Form S-1
filed with the Securities and Exchange Commission.
2. Inventories:
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out method) or market. At September 30, 1997, net inventory
consists of the following:
Component materials $ 861,070
Finished goods 2,552,224
----------
$3,413,294
==========
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.
5
<PAGE>
Notes to Consolidated Financial Statements (Unaudited), Continued
3. 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 4, 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 September 30, 1997.
4. Acquisitions:
Effective June 2, 1997, the Company completed the acquisition of 100% of
the outstanding common stock of G&R Marketing, Inc., Microsouth, Inc.,
Tekgraf, inc., Computer Graphics Distributing Company, Intelligent Products
Marketing, Inc., and IG Distribution, Inc. (collectively, the
"Subsidiaries") in exchange for the issuance of 2,192,000 shares of common
stock of the Company (the "Acquisitions"). The 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 stock purchase agreements (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 $1,058,000 will be distributed in cash to the stockholders of the
Subsidiaries. It is anticipated that the excess NAV will be distributed
during December 1997 and the first quarter of 1998 from cash balances. The
Subsidiaries' preliminary deficit NAV over the net book value of $434,000
will be collected from the former stockholders of the Subsidiaries. It is
anticipated that these amounts will be collected during the first quarter
of 1998.
Pursuant to the terms of the Agreements, the pre-acquisition stockholders
of the Company agreed to contribute approximately $870,000 to capital. This
contribution occurred during November 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 September 30, 1997 are included in the accompanying
unaudited consolidated financial statements of the Company. The purchase
prices have been allocated to assets acquired and liabilities assumed based
on the estimated fair value of the Company's common stock on the date of
Acquisitions.
6
<PAGE>
Notes to Consolidated Financial Statements (Unaudited), Continued
4. Acquisitions, continued:
The following unaudited pro forma summary combines the consolidated results
of the Company and the Subsidiaries as if the Acquisitions had occurred at
the beginning of the earliest period presented, after giving effect to
certain adjustments, including elimination of revenue and expenses related
to affiliated entities of the Subsidiaries which were not acquired by the
Company, adjustments in compensation levels that have been contractually
agreed to, elimination of amortization related to negative goodwill,
elimination of pro rata interest expense incurred on capital to be
contributed by the pre-combination stockholders of the Company, related
income tax effects, elimination of transactions between the Subsidiaries,
and amortization of intangible assets. In addition, the earnings per share
amounts give effect to the combination and subsequent recapitalization,
that the Company completed during November 1997 and the weighted average
shares outstanding exclude 166,667 escrow shares. The pro forma summary
does not purport to represent what the Company's results of operations
would actually have been if the Acquisitions 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 nine
months ended
September 30,
----------------------------
1996 1997
Net sales $50,364,326 $52,858,711
Gross profit 8,097,479 8,829,498
Income from operations 1,937,919 2,306,925
Income before taxes 1,748,082 2,146,839
Net income 898,690 1,106,236
Primary and fully diluted income
per share .28 .35
Weighted average shares outstanding 3,166,666 3,166,666
5. Income Taxes:
The Company's effective tax rate was 0% and 8.4% for the three months and
nine months ended September 30, 1996, respectively. The difference between
the Company's effective and statutory tax rates for both periods resulted
primarily from losses or actual annual income levels. The Company's
effective tax rate was 50.5% and 48.0% for the three months and nine months
ended September 30, 1997, respectively. The difference between the
Company's effective and statutory tax rates for both periods resulted
primarily from state taxes net of the federal benefit and the amortization
of non-deductible goodwill associated with the Acquisitions discussed in
Note 4.
7
<PAGE>
Notes to Consolidated Financial Statements (Unaudited), Continued
6. 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. There
were no common stock equivalents during each of the periods presented. At
September 30, 1997, the primary and fully diluted weighted average shares
exclude the escrow shares (Note 8) 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 974,222
Weighted average escrow shares (105,778)
---------
2,009,777
=========
7. 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 No. 131"), No. 130, Reporting Comprehensive
Income ("SFAS No. 130"), No. 129, Disclosure of Information About Capital
Structure ("SFAS No. 129"), and No. 128, Earnings Per Share ("SFAS No.
128"). SFAS No. 131 specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information
to be disclosed. SFAS No. 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 No. 129 consolidates the existing requirements to disclose certain
information about an entity's capital structure, and SFAS No. 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.
8
<PAGE>
Notes to Consolidated Financial Statements (Unaudited), Continued
8. Subsequent Events:
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.
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 .8333325-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.
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 financial statements have been retroactively adjusted for
these events. As part of the reincorporation, the Company changed its name
to Tekgraf, Inc.
Initial Public Offering
On November 10, 1997, the Company completed the initial public offering of
its securities.
In connection with the Company's registration of its securities, the
Company offered 2,100,000 units consisting of one share of Class A Common
Stock and one redeemable 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.
Letters of Intent
The Company has entered into letters of intent for the acquisition of four
computer graphic wholesale distribution companies. The letters of intent
provide for the issuance by the Company of an aggregate of 1,350,000 shares
of its Class A Common Stock in exchange for the acquisition of all of the
assets and the assumption of certain of the liabilities of the companies.
Completion of the proposed acquisitions is dependent upon completion of due
diligence and the negotiation of definitive asset purchase agreements and
there can be no assurance that all or any of such proposed acquisitions
will be consummated. The Company will account for these acquisitions as
purchases.
9
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Except for the descriptions of historical facts contained herein, statements
concerning future results, performance or expectations are forward-looking
statements that involve risks and uncertainties. Actual results, performance or
developments could differ materially for those implied by such forward-looking
statements as a result of known and unknown risks and other factors including
those described from time to time in the Company's filings with the Securities
and Exchange Commission under the heading "Risk Factors" and elsewhere, which
should be read in conjunction with this document. Among such factors are risks
relating to acquisitions, competition and pricing pressures, dependence on
acquiring and maintaining distribution arrangements with manufacturers,
dependence on certain suppliers and economic conditions.
Results of Operations
Effective June 2, 1997, the Company acquired the outstanding common stock of the
Subsidiaries. Accordingly, the results of operations for the three months ended
September 30, 1997 (the "1997 quarter") represents the first full quarter which
includes the consolidated results of operations of the Company and the
Subsidiaries.
The Company has included herein, in tabular form, results of operations and
period-to-period comparisons based on the consolidated results of operations of
the Company and the Subsidiaries, giving effect to certain pro forma
adjustments. However, the pro forma operating results do not purport to
represent what the Company's actual results of operations would have been had
the Acquisitions occurred at the beginning of each period presented.
Accordingly, the Company believes that explanations of period-to period
comparisons may not be meaningful.
The following table sets forth, for the periods indicated, the unaudited pro
forma consolidated results of operations of the Company and the Subsidiaries as
if the Acquisitions had occurred at the beginning of the earliest period
presented, after giving effect to certain adjustments, including elimination of
revenue and expenses related to affiliated entities of the Subsidiaries which
were not acquired by the Company, adjustments in compensation levels that have
been contractually agreed to, elimination of amortization related to negative
goodwill, elimination of the pro rata interest expense incurred on capital to be
contributed by the pre-combination stockholders of the Company, related income
tax effects, elimination of transactions between the Subsidiaries, and
amortization of intangible assets. The three and nine-month periods ended
September 30, 1997 include a pro forma adjustment to eliminate the effect of
certain inventory purchase accounting adjustments. The earnings per share
amounts give effect to the combination and subsequent recapitalization, and the
weighted average shares outstanding exclude 166,667 escrow shares.
The changes in operations on a historical basis, for both the three and
nine-month periods ended September 30, 1997 compared to the same periods in
1996, are due to the acquisitions which were effective June 2, 1997.
10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations, (Continued)
<TABLE>
<CAPTION>
Period-to-Period Change
Three Nine
Months Months
Ended Ended
September 30,
Three Months Ended Nine Months Ended ------------------------
September 30, September 30, 1996 1996
---------------------------- --------------------------- vs vs
1996 1997 1996 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C>
Net sales $16,892,184 $18,536,085 $50,364,326 $52,858,711 $1,643,901 $2,494,385
Cost of goods sold 14,046,301 15,321,832 42,266,847 44,029,213 1,275,531 1,762,366
----------- ----------- ----------- ----------- ---------- ----------
Gross profit 2,845,883 3,214,253 8,097,479 8,829,498 368,370 732,019
SGA 2,073,395 2,384,393 5,707,975 6,062,678 310,998 354,703
Depreciation 29,766 40,451 127,585 135,895 10,685 8,310
Amortization 108,000 108,000 324,000 324,000 -- --
----------- ----------- ----------- ----------- ---------- ----------
Income from operations 634,722 681,409 1,937,919 2,306,925 46,687 369,006
Other income 11,526 54,546 109,627 111,280 43,020 1,653
Interest expense 106,061 100,671 299,464 271,366 (5,390) (28,098)
----------- ----------- ----------- ----------- ---------- ----------
Income before taxes 540,187 635,284 1,748,082 2,146,839 95,097 398,757
Income taxes 259,290 304,936 839,080 1,030,483 45,646 191,403
----------- ----------- ----------- ----------- ---------- ----------
Income before minority interest 280,897 330,348 909,002 1,116,356 49,451 207,354
Minority interest 14,268 4,509 (10,312) (10,120) (9,759) 192
----------- ----------- ----------- ----------- ---------- ----------
Net income $ 295,165 $ 334,857 $ 898,690 $ 1,106,236 $ 39,692 $ 207,546
=========== =========== =========== =========== ========== ==========
Primary and fully-diluted
earnings per share $ .09 $ .11 $ .28 $ .35
=========== =========== =========== ===========
Weighted average shares
outstanding 3,166,666 3,166,666 3,166,666 3,166,666
=========== =========== =========== ===========
</TABLE>
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations, (Continued)
The following table sets forth, for the periods indicated, selected unaudited
pro forma financial information expressed as a percentage of net sales and the
period-to-period change in such information.
<TABLE>
<CAPTION>
Period-to-Period Change
Three Nine
Months Months
Ended Ended
September 30,
Three Months Ended Nine Months Ended -----------------------
September 30, September 30, 1996 1996
------------------- ------------------ vs vs
1996 1997 1996 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.00% 100.00% 100.00% 100.00% 9.73% 4.95%
Cost of goods sold 83.15 82.66 83.92 83.30 9.08 4.17
------ ------ ------ ------ ---- ------
Gross profit 16.85 17.34 16.08 16.70 12.94 9.04
SGA 12.27 12.86 11.33 11.47 15.00 6.21
Depreciation 0.18 0.22 0.25 0.26 35.90 6.51
Amortization 0.64 0.58 0.64 0.61 -- --
------ ------ ------ ------ ---- ------
Income from operations 3.76 3.68 3.85 4.36 7.36 19.04
Other income 0.07 0.29 0.22 0.21 373.26 1.51
Interest expense 0.63 0.54 0.59 0.51 (5.08) (9.38)
------ ------ ------ ------ ---- ------
Income before taxes 3.20 3.43 3.47 4.06 17.60 22.81
Income taxes 1.53 1.65 1.67 1.95 17.60 22.81
------ ------ ------ ------ ---- ------
Income before minority interest 1.66 1.78 1.80 2.11 17.60 22.81
Minority interest 0.08 0.02 (0.02) (0.02) (68.40) (1.86)
------ ------ ------ ------ ---- ------
Net income 1.75% 1.81% 1.78% 2.09% 13.45% 23.09%
====== ====== ====== ====== ==== ======
</TABLE>
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations, (Continued)
The Company had net sales of $18.54 million and $52.86 million for the 1997
quarter and the nine months ended September 30, 1997 (the "1997 nine months"),
respectively, reflecting increases of approximately 9.7% or $1.64 million and
5.0% or $2.5 million, respectively, from the comparable periods of 1996. Net
sales of the Graphics Division increased 3.0% to $14.38 million during the 1997
quarter and by 2.8% to $41.87 million during the 1997 nine months as a result of
the expansion of certain product lines from existing vendors. Net sales of the
Technology Division increased 26.6% to $4.16 million and 8.4% to $10.99 million
during the quarter and nine months ended September 30, 1997, respectively, as a
result of expanded sales in the high-end server market and an increase in
product demand.
Gross profit for the 1997 quarter was $3.2 million or 17.3% of net sales.
The Company experienced strong sales during October 1997; however, sales were
lower than anticipated during November 1997. The Company believes that such
trend has continued into December, and the fourth quarter of 1997 will be
adversely impacted.
Selling, general and administrative expenses as a percentage of net sales was
12.9% in the 1997 quarter.
Liquidity and Capital Resources
The following table sets forth the as adjusted stockholders' equity of the
Company as of September 30, 1997 giving effect to (i) the offering completed in
November 1997, (ii) the contribution to capital of $870,000 by the
pre-acquisition stockholders of the Company; and (iii) the payment and
collection of amounts due from the acquisition stockholders of approximately
$1,058,000 and $434,000, respectively.
Class A common stock $ 2,100
Class B common stock 3,333
Additional paid-in capital 20,990,766
Retained earnings 338,793
-----------
$21,334,992
===========
Historically, the Company has financed its operations through a combination of
cash flow from operations, bank borrowings and stockholder contributions to
capital. The Company's capital requirements have arisen primarily in connection
with purchases of fixed assets, including acquisitions.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations, (Continued)
In connection with the Company's initial public stock offering ("IPO") in
November 1997, the Company issued 2,100,000 units, each consisting of one share
of Class A Common Stock and one redeemable warrant, for $6.00 per unit for gross
proceeds of $12,600,000. After the payment of underwriting discounts and
commissions and other expenses of the offering, the net proceeds to the Company
were $10,377,000.
Proceeds from the IPO were also used to repay (i) bank debt of $1,391,000, (ii)
debt to an affiliated entity of $2,039,000 and (iii) debt to a stockholder of
the Company of $125,000. Concurrently with these payments, certain stockholders
of the Company made an aggregate capital contribution to the Company of
$870,000. In conjunction with repayment of the bank debt, the Company terminated
its line of credit facilities with the related banks.
The Company will make purchase price adjustments during December 1997 and the
first quarter of 1998 for excess net book value over net asset value ("NAV") to
former stockholders of the Subsidiaries of $1,058,000. In addition, deficit NAV
over net book value of $434,000 will be collected from former shareholders of
the Subsidiaries during the first quarter of 1998.
In November 1997, a company owned by affiliates of the Company sold an office
building and repaid related bank borrowings, which had been guaranteed by the
Company. Subsequent to the sale and repayment of the debt, the Company has no
further guarantees or obligations relating to the Company.
The Company believes that its cash balances and cash flows from operations will
be sufficient to meet its working capital and capital requirements for the
coming year.
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 it will be successful in acquiring such companies through the use
of common stock, cash or a combination of the two. The Company will also seek to
establish a secured or unsecured line of credit to be used for future
acquisitions if required.
Other Information
The Company is aware of recent published reports to the effect that the District
Attorney's office in New York County is conducting an investigation into various
activities of D.H. Blair & Co., Inc. a member of the selling group with respect
to the Company's IPO. The Company believes this negative publicity may have had
a material adverse impact on the market price of the Company's securities,
reputation and acquisition strategy and is consulting with its advisers to
redress these issues.
The Company has entered into letters of intent for the acquisition of four
computer graphics companies. See "Part II - Item 5. Other Information."
14
<PAGE>
Part II- Other Information
Item 2. Changes in Securities and Use of Proceeds
In November 1997, the Company completed an initial public stock offering of its
securities ("IPO") in which it issued 2,100,000 units, each unit consisting of
one share of Class A Common Stock and one redeemable common stock purchase
warrant, for gross proceeds of $12,600,000. The Company paid the underwriters of
the IPO $945,000 in underwriting discounts and commissions and $378,000 for
non-accountable expenses. The Company incurred additional expenses related to
the IPO of $900,000. These included $442,000 for accounting fees and expenses,
$267,000 for legal fees and expenses, $147,000 for printing and engraving
expenses, $40,000 for filing and registration fees and $4,000 in other expenses.
Proceeds from the IPO were also used to repay (i) bank debt of $1,291,000, (ii)
debt to an affiliated entity of $2,039,000 and (iii) debt to a stockholder of
the Company of $125,000. Concurrently with these payments, certain stockholders
of the Company made an aggregate capital contribution to the Company of
$870,000.
15
<PAGE>
Item 5. Other Information
The Company has entered into letters of intent for the acquisition of four
computer graphics wholesale distribution companies. The letters of intent
provide for the issuance by the Company of an aggregate of 1,350,000 shares of
its Class A Common Stock in exchange for the acquisition of all of the assets
and the assumption of certain of the liabilities of the companies. The number of
shares to be issued is subject to adjustment in the event warranted earnings
levels are either not met or are exceeded. Completion of the proposed
acquisitions is dependent upon completion of due diligence and the negotiation
of definitive asset purchase agreements and there can be no assurance that all
or any of such proposed acquisitions will be consummated. The Company will
account for these acquisitions as purchases.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEKGRAF, INC.
Date: December 22, 1997 By: /s/ Phillip C. Aginsky
-----------------------------
Phillip C. Aginsky, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date: December 22, 1997 By: /s/ Peter C. Armstrong
-----------------------------
Peter C. Armstrong,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
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