<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the period from _____ to _____.
Commission File No. 0-23221
TEKGRAF, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Georgia 58-2033795
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6000 Lake Forrest Drive, Suite 110 30328
Atlanta, Georgia ----------
- ---------------------------------------- (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (404) 252-0201
Former Address: N/A
(Former name, former address and former fiscal year, if changed since last
report):
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes: X No:
----- -----
Indicate the number of shares outstanding of each of the issuer's
class of common stock, as of the latest practical date:
Class Outstanding at November 12, 1998
------- -------------------------------
Class A Common Stock, $.001 par value 2,994,998 shares
Class B Common Stock, $.001 par value 3,333,333 shares
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TEKGRAF, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Table of Contents
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and September 30, 1998 1
Consolidated Statements of Operations for the three and nine months ended September 30, 1997 and
September 30, 1998 3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and September 30, 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Securities Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Report on Form 8-K 11
SIGNATURES 14
Index of Exhibits E-1
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Tekgraf, Inc. Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,600,339 $ 33,186
Accounts receivable, less allowance for
doubtful accounts of $205,000 and $450,000 at
December 31, 1997 and September 30, 1998, respectively 9,217,843 15,008,342
Inventories, net 4,700,615 8,062,990
Prepaid expenses and other assets 368,770 1,136,687
Prepaid income taxes 31,197
Deferred income taxes 62,832 275,341
------------ ------------
Total current assets 22,950,399 24,547,743
------------ ------------
Property and equipment 531,922 1,080,905
Less accumulated depreciation
(187,219) (334,770)
------------ ------------
344,703 746,135
Goodwill, net 6,555,773 8,927,549
Other assets 52,633 90,955
Deferred income taxes 48,840 50,340
------------ ------------
Total assets $ 29,952,348 $ 34,362,722
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
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Tekgraf, Inc. Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt $ 23,474 $ 12,419
Due to acquisition stockholders 180,289 164,982
Note payable, stockholders 90,000
Due to stockholders and related entities 246,956
Accounts payable 8,345,388 10,828,978
Accrued expenses 928,121 1,520,944
Income taxes payable 70,100
------------ ------------
Total current liabilities 9,884,328 12,527,323
Debt, less current maturities 12,788 12,788
------------ ------------
9,897,116 12,540,111
------------ ------------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock, $.001 par value,
31,666,667 shares authorized; 2,100,000 and
2,994,998 shares issued and outstanding at
December 31, 1997 and September 30, 1998, respectively 2,100 2,995
Class B Common Stock, $.001 par value, 3,333,333
shares authorized; 3,333,333 shares issued and
outstanding at December 31, 1997 and September 30, 1998 3,333 3,333
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; no shares issued at December 31, 1997
and September 30, 1998
Due from acquisition stockholders (149,863) (392,439)
Additional paid-in capital 20,584,028 22,556,865
Retained earnings (deficit) (384,366) (348,143)
------------ ------------
Total stockholders' equity 20,055,232 21,822,611
------------ ------------
Total liabilities and stockholders' equity $ 29,952,348 $ 34,362,722
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 5
Tekgraf, Inc. Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- ----------------------------
1997 1998 1997 1998
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 18,536,085 $ 26,323,407 $30,987,966 $70,699,918
Cost of goods sold 15,526,519 22,347,868 26,132,832 59,645,434
------------ ------------ ----------- -----------
Gross profit 3,009,566 3,975,539 4,855,134 11,054,484
Operating expenses:
Selling, general and administrative 2,384,393 4,161,683 3,799,626 10,384,660
Depreciation 40,451 55,516 74,900 155,244
Amortization 110,605 160,620 144,000 443,619
------------ ------------ ----------- -----------
Income (loss) from operations 474,117 (402,280) 836,608 70,961
Other income/expense, net 43,245 82,056 64,093 354,942
Interest expense 138,489 13,439 246,759 23,795
------------ ------------ ----------- -----------
Income (loss) before provision (benefit)
for income taxes and minority interest 378,873 (333,663) 653,942 402,108
Provision (benefit) for income taxes 191,416 (85,000) 314,000 315,000
------------ ------------ ----------- -----------
Income (loss) before minority interest 187,457 (248,663) 339,942 87,108
Minority interest (4,509) 19,001 10,120 50,885
------------ ------------ ----------- -----------
Net income (loss) $ 191,966 $ (267,664) $ 329,822 $ 36,223
============ ============ =========== ===========
Basic and diluted weighted
average shares outstanding 3,166,666 6,161,664 2,009,777 5,797,727
============ ============ =========== ===========
Basic and diluted net income (loss) per share $ .06 $ (.04) $ .16 $ .01
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 6
Tekgraf, Inc. Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1997 1998
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 329,822 $ 36,223
Adjustments to reconcile net income to
net cash used in operating activities:
Provision for accounts receivable 50,834 281,210
Provision/writedown of inventory 157,425
Depreciation 74,900 155,244
Amortization 144,000 443,619
Deferred taxes (38,700) (214,009)
Minority interest 50,885
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (3,044,714) (1,484,070)
Inventories 1,023,294 (1,000,900)
Prepaid expenses and other assets 332,717 (630,740)
Accounts payable and accrued expenses 402,292 (1,943,956)
Income taxes 352,700 (101,297)
----------- -----------
Total adjustments (702,677) (4,286,589)
----------- -----------
Net cash used in operating activities (372,855) (4,250,366)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (59,609) (394,241)
Cash paid for acquisitions, including overdrafts
acquired from acquisitions (1,798,166)
Cash acquired from acquisitions, net of acquisition
costs of $88,677 349,482
----------- -----------
Net cash provided by (used in) investing activities 289,873 (2,192,407)
----------- -----------
Cash flows from financing activities:
Proceeds, net, from credit facility 7,152
Proceeds (repayment) of debt 1,048,343 (18,207)
Repayment of advances to
stockholders and related entities (200,593) (246,956)
Payment to stockholder for excess
net asset values (249,518)
Payments from stockholders for deficient
net asset values 177,742
Repayment of acquired companies' loans (1,984,322)
Proceeds from acquired companies' line of credit facilities 246,359
Payment of stock issuance costs (289,692) (56,630)
----------- -----------
Net cash provided by (used in) financing activities 558,058 (2,124,380)
----------- -----------
Increase (decrease) in cash and cash equivalents 475,076 (8,567,153)
Cash and cash equivalents, beginning of period 633,027 8,600,339
----------- -----------
Cash and cash equivalents, end of period $ 1,108,103 $ 33,186
=========== ===========
Supplemental non-cash investing and financing activities:
Fair value of stock issued $ 2,030,362
Cash paid in connection with acquisitions 1,415,000
Other acquisition costs 212,000
Fair value of liabilities assumed 6,923,314
Fair value of assets acquired (7,758,314)
-----------
Goodwill $ 2,822,362
===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 7
Tekgraf, Inc. Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accounting and reporting policies of Tekgraf, Inc. ("Tekgraf" or the
"Company") conform to generally accepted accounting principles. The interim
financial information included herein is unaudited but reflects all adjustments
which, in the opinion of management, are necessary for the fair presentation of
the consolidated financial position, results of operations and cash flows for
the interim periods presented. All adjustments reflected in the interim
financial statements are of a normal recurring nature. Such interim financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. The year-end balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year, or for any subsequent period.
2. Net Income (Loss) Per Common Share
Basic and 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 share
equivalents during either of the periods presented. The basic and diluted
weighted average shares outstanding exclude the escrow shares and were
determined as follows for the three and nine months ended September 30, 1998:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, 1998 Ended September 30, 1998
------------------------ ------------------------
<S> <C> <C>
Weighted average common shares outstanding 6,328,331 5,964,394
Weighted average escrow shares (166,667) (166,667)
---------- ----------
Basic and diluted weighted average shares 6,161,664 5,797,727
========== ==========
</TABLE>
3. Acquisitions
On May 8, 1998, the Company acquired New England Computer Graphics, Inc., a
Massachusetts corporation ("NECG"), by merging NECG into a wholly owned
subsidiary of the Company. The Company paid $415,000 in cash and issued an
aggregate of 264,998 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of NECG as
consideration in this acquisition.
On May 1, 1998, the Company acquired Martec, Inc., a California corporation
("Martec"), by merging Martec into a wholly owned subsidiary of the Company.
The Company paid $500,000 in cash and issued an aggregate of 300,000
unregistered shares of the Company's Class A Common Stock to the holder of all
of the outstanding shares of stock of Martec as consideration in this
acquisition.
On April 1, 1998, the Company acquired Computer Graphics Technology, Inc., a
South Carolina corporation ("CGT"), by merging CGT into a wholly owned
subsidiary of the Company. The Company paid $500,000 in cash and issued an
aggregate of 330,000 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of CGT as
consideration in this acquisition.
The purchase prices for the acquisitions (collectively, "the 1998
Acquisitions") described above are subject to adjustment based on certain net
asset value and profitability guarantees. In order to secure these guarantees,
a total of $325,000 of the cash consideration and 192,251 of the unregistered
shares of the Class A Common Stock issued in the 1998 Acquisitions were placed
in escrow. In addition to these escrowed amounts, a total of 192,250 shares of
the Class A Common Stock was placed in escrow to secure the various
representations, warranties and other provisions of the respective agreements.
The acquisitions were recorded under the purchase method of accounting and
accordingly, the results of operations of the acquired entities have been
included in the Company's statements of operations from the respective
acquisition dates. The acquired entities are regional distributors and
marketers of computer graphics hardware and software.
On June 2, 1997, the Company completed the acquisition of 100% of the
outstanding common stock of Microsouth, Inc., G&R Marketing, Inc., tekgraf,
inc., Computer Graphics Distributing Company, Intelligent Products Marketing,
Inc., and IG Distribution, Inc. (collectively, the "1997 Acquisitions") in
exchange for the issuance of 2,192,000 shares of Class B Common Stock of the
Company (giving effect to the Company's 400-for-one share exchange and
.83333325-for-one reverse stock split). The 1997
5
<PAGE> 8
Acquisitions are regional distributors and marketers of computer graphics
hardware and software. The 1997 Acquisitions were recorded under the purchase
method of accounting and accordingly, the results of operations have been
included in the Company's statements of operations from the acquisition date.
The following unaudited pro forma summary combines the consolidated results of
the Company and the 1997 Acquisitions and the 1998 Acquisitions as if the
acquisitions had occurred as of January 1, 1997. The pro forma summary also
gives effect, for the 1997 Acquisitions, to certain adjustments, including
elimination of revenue and expenses related to affiliated entities of the 1997
Acquisitions which were not acquired by the Company, adjustments in
compensation levels that have been contractually agreed to, elimination of
amortization related to negative goodwill, elimination of pro rata interest
expense incurred on capital to be contributed by the pre-combination
stockholders of the Company, related income tax effects, elimination of
transactions between the 1997 acquisition companies, and amortization of
intangible assets. In addition, the earnings (loss) per share amounts give
effect to the combination and subsequent recapitalization that the Company
completed during November 1997 and the weighted average shares outstanding
exclude 166,667 weighted average escrow shares for the three and nine months
ended September 30, 1997 and 1998, respectively. The pro forma summary does not
purport to represent what the Company's results of operations would have
actually been if the 1997 and 1998 Acquisitions had occurred as of January 1,
1997, or to project the Company's results of operations for any future period.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
1997 1998 1997 1998
Unaudited Unaudited
--------- ---------
Statement of Operations Data: (Pro forma (Actual) (Pro forma (Pro forma)
Combined) Combined) Combined)
<S> <C> <C> <C> <C>
Net sales $24,068,144 $ 26,323,407 $69,361,988 $ 80,463,788
Gross profit 3,796,957 3,975,539 11,795,830 12,509,501
Income (loss) from operations 587,793 (402,280) 2,412,463 (101,921)
Income (loss) before taxes 530,792 (333,663) 2,266,188 290,988
Net income (loss) 178,563 (267,664) 1,225,585 (74,897)
Basic and diluted income (loss) per share $ 0.03 $ (0.04) $ 0.20 $ (0.01)
Weighted average shares outstanding 6,161,664 6,161,664 6,161,664 6,161,664
</TABLE>
4. Income Taxes
The Company's effective tax rate was 50.5% and 25.5% for the three months ended
September 30, 1997 and 1998, respectively. The difference between the Company's
effective and statutory tax rates were primarily due to the amortization of
non-deductible goodwill and to state taxes net of the federal benefit.
6
<PAGE> 9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This report contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements appear in a number of places
in this report and include all statements that are not historical fact and that
relate to the intent, belief or current expectations of the Company, its
directors or its officers with respect to, among other things: (i) the Company's
financing plans, including the Company's ability to satisfy its current and
planned operations and its ability to obtain financing in the future; (ii)
trends affecting the Company's financial condition or results of operations;
(iii) the Company's growth strategy and operating strategy; (iv) the Company's
anticipated capital needs and capital expenditures; (v) the Company's plan for
addressing the potential delisting of the Class A Common Stock from the Nasdaq
National Market, its ability to maintain such listing, and any possible adverse
effects of delisting; (vi) projected outcomes and any effects on the Company of
any litigation or investigations concerning the Company; and (vii) the potential
impact of changes to, additions of or losses of distribution agreements with
manufacturers. Investors are cautioned that any such forward-looking statements
are not guarantees of future performance and that actual results, performance or
developments could differ materially from those implied by such forward-looking
statements as a result of known and unknown risks and other factors, including
those described from time to time in the Company's filings with the Securities
and Exchange Commission under the heading "Risk Factors" and elsewhere, which
should be read in conjunction with this document. Among such factors are risks
relating to acquisitions, competition and pricing pressures, dependence on
acquiring and maintaining distribution arrangements with manufacturers,
dependence on certain suppliers and economic conditions.
Overview
The Company was incorporated in Georgia in February 1993 and in December 1994
completed the acquisition of a 60% interest in Prisym Technologies, Inc. of
Georgia. In June 1997, the Company completed the acquisitions of 100% of the
outstanding capital stock of Microsouth, Inc., G&R Marketing, Inc., tekgraf,
inc., Computer Graphics Distributing Company, Tekgraf Northwest, Inc. (formerly
Intelligent Products Marketing, Incorporated) and IG Distribution, Inc. (the
"1997 Acquisitions"). The 1997 Acquisitions have been accounted for using the
purchase method of accounting. Subsequent to the 1997 Acquisitions, the Company
reincorporated in the State of Delaware and effected a recapitalization
pursuant to which each share of common stock of the Georgia entity was
exchanged for 400 shares of Class B Common Stock of the Delaware entity. After
the reincorporation, the Company completed a .83333325-for-one reverse stock
split of the Class B Common Stock. In connection with the 1997 acquisitions, a
total of 2,192,000 shares of Class B Common Stock (giving effect to the
recapitalization and the reverse stock split) of the Company was issued. In
November 1997, the Company completed its initial public offering of 2,100,000
shares of its Class A Common Stock.
On April 1, 1998, the Company acquired Computer Graphics Technology, Inc., a
South Carolina corporation ("CGT"), by merging CGT into a wholly owned Georgia
subsidiary of the Company. The Company paid $500,000 in cash and issued an
aggregate of 330,000 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of CGT as
consideration in this acquisition.
On May 1, 1998, the Company acquired Martec, Inc., a California corporation
("Martec"), by merging Martec into a wholly owned Georgia subsidiary of the
Company. The Company paid $500,000 in cash and issued an aggregate of 300,000
unregistered shares of the Company's Class A Common Stock to the holder of all
of the outstanding shares of stock of Martec as consideration in this
acquisition.
On May 8, 1998, the Company acquired New England Computer Graphics, Inc., a
Massachusetts corporation ("NECG"), by merging NECG into a wholly owned Georgia
subsidiary of the Company. The Company paid $415,000 in cash and issued an
aggregate of 264,998 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of NECG as
consideration in this acquisition.
The purchase prices for the acquisitions of CGT, Martec and NECG (collectively,
the "1998 Acquisitions") are subject to adjustment based on certain net asset
value and profitability guarantees. Accordingly, a total of $325,000 of the
cash consideration and 192,251 of the unregistered shares of Class A Common
Stock issued in consideration in the 1998 Acquisitions were placed in escrow to
secure these guarantees. In addition to these escrowed amounts, a total of
192,250 of the shares issued as consideration was placed in escrow to secure
the various representations, warranties and other indemnifiable provisions of
the respective agreements. The 1998 Acquisition companies are regional
distributors and marketers of computer graphics hardware and software. These
acquisitions were recorded under the purchase method of accounting.
On July 31, 1998, the Company reincorporated from Delaware to Georgia by
merging into Tekgraf Reincorporation Subsidiary, Inc., a wholly owned
subsidiary of the Company that had been incorporated in Georgia as a shell
corporation for the purpose of carrying out the reincorporation.
Results of Operations
NET SALES. Net sales for the quarter ended September 30, 1998 increased 42% to
$26.3 million from $18.5 million for the prior year period. Net sales for the
nine months ended September 30, 1998 increased 128% to $70.7 million from $31.0
million for the same period in 1997. The growth in net sales for the quarter
and nine months ended September 30, 1998 as compared to the prior year was
primarily due to the acquisitions that were completed in June 1997 and April
and May of 1998. For the quarter ended
7
<PAGE> 10
September 30, 1998, the 1998 acquisitions contributed $6.2 million in net
sales. The remaining growth in net sales for the 1998 quarter, as compared to
the prior year, or $1.6 million, was due to internal growth and the
introduction of additional product lines.
GROSS PROFIT. Gross profit for the quarter ended September 30, 1998 increased
32% to $4.0 million from $3.0 million for the comparable prior year period.
Gross profit for the nine months ended September 30, 1998 increased 128% to
$11.1 million from $4.9 million for the same period in 1997. Gross profit as a
percentage of sales for the quarter and nine months ended September 30, 1998
was 15.1% and 15.6%, respectively, compared to 16.2% and 15.7% for the
comparable prior year periods. While gross margins continue to remain under
pressure, the Company has maintained it current gross margin percentages
primarily as a result of differing product mixes and by providing increased
value added services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses for the quarter ended September 30, 1998
increased 75% to $4.2 million from $2.4 million for the comparable prior year
period. SG&A expenses for the nine months ended September 30, 1998 increased
173% to $10.4 million from $3.8 million for the same period in 1997. SG&A
expenses as a percentage of sales were 15.8% and 14.7% for the three and nine
months ended September 30, 1998, respectively, compared to 12.9% and 12.3% for
the same periods in 1997. The increase in SG&A expenses is primarily
attributable to the acquisitions that occurred in June 1997 and April and May
of 1998. Additionally, the third quarter of 1998 was the first quarter that the
SG&A expenses of the 1998 acquisitions were included for the entire quarter and
certain severance costs were also included in the third quarter of 1998. The
1998 acquisitions accounted for $828,000 and $1.5 million of the increase in
SGA expenses for the quarter and nine months ended September 30, 1998,
respectively. Costs associated with the internal growth of the Company,
including commissions on increased sales, costs of operating as a public
company, and additional infrastructure costs accounted for the remainder of the
increase in SG&A expenses.
OPERATING INCOME (LOSS). Operating income (loss) for the quarter ended
September 30, 1998 decreased to ($402,000) from $474,000 for the comparable
prior year period. Operating income for the nine months ended September 30,
1998 was $71,000 as compared to $837,000 for the same period in 1997. In
addition to the costs described above, income from operations was reduced by
the amortization of goodwill of $161,000 and $444,000 for the quarter and nine
months ended September 30, 1998, respectively.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 25.5% and
78.3% for the quarter and nine months ended September 30, 1998 compared to
50.5% and 48.0% for the comparable prior year periods. The difference between
the Company's effective and statutory tax rates was primarily due to the
amortization of non-deductible goodwill and to state taxes net of the federal
benefit.
Pro Forma Combined Financial Information
The 1997 and 1998 Acquisitions described previously have had a significant
impact on the comparisons of operating results for 1997 and 1998, due to the
fact that the operating results for the 1997 Acquisitions are included only
from June 2 through September 30 for the nine month period ended September 30,
1997 and the operating results for the 1998 acquisitions are only included from
the closing dates of their respective acquisitions, in April and May 1998,
forward. Therefore, in addition to the historical comparisons of the three and
nine month periods ended September 30, 1997 and September 30, 1998, the Company
has included herein the unaudited pro forma data for the three and nine month
periods ended September 30, 1997 and 1998 as if the acquisitions had occurred
as of January 1, 1997, giving effect for the 1997 acquisitions to certain
adjustments, including the elimination of revenue and expenses related to
affiliated entities of the 1997 acquisitions which were not acquired by the
Company, adjustments in compensation levels that have been contractually agreed
to, elimination of amortization of negative goodwill, elimination of the pro
rata interest expense incurred on capital to be contributed by the
pre-combination stockholders of the Company, related income tax effects,
elimination of transactions between the 1997 acquisition companies, and
amortization of the intangible assets.
The 1997 and 1998 unaudited pro forma data below also gives no effect to any
efficiencies or additional costs that might have occurred, if any, had the
companies actually been combined for the entire period presented. Note also
that the entities acquired previously operated as closely held businesses.
Additionally, the 1997 unaudited pro forma data does not take into account the
additional interest that might have been earned or interest expense that might
have been saved from the proceeds of the Offering. The unaudited pro forma data
is not intended to be indicative of future results of operations. A discussion
and analysis of the pro forma results, given the above qualifications, is not
considered meaningful and is therefore not presented. All amounts are presented
in thousands.
8
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<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ -----------------------
1997 1998 1997 1998
Unaudited Unaudited
--------- ---------
Statement of Income Data: (Pro forma (Actual) (Pro forma (Pro forma)
Combined) Combined) Combined)
<S> <C> <C> <C> <C>
Net sales $24,068 $ 26,323 $69,362 $ 80,464
Gross profit 3,797 3,976 11,796 12,510
Income (loss) from operations 588 (402) 2,412 (102)
Income (loss) before taxes 531 (334) 2,266 291
Net income (loss) 179 (268) 1,226 (75)
</TABLE>
Liquidity and Capital Resources
In November 1997, the Company consummated an initial public offering of
2,100,000 units consisting of 2,100,000 shares of Class A Common Stock and
2,100,000 redeemable warrants at a combined price of $6 per unit. The net
proceeds of the sale, after deducting underwriter discounts, etc., were
approximately $10.4 million. Additionally, certain stockholders of the Company
contributed an aggregate of $870,000 to the capital of the Company. A portion
of the proceeds from the initial public offering was used to repay bank debt of
$2 million, debt to a related entity of $2 million and debt to a stockholder of
$125,000. In conjunction with the repayment of the bank debt, the Company
terminated the line of credit facilities with the related banks.
During April and May of 1998, the Company issued 894,998 unregistered shares of
Class A common stock and paid cash of $1,415,000 as consideration for the
acquisitions of three computer graphics distributing companies. Additionally,
the Company paid $1.6 million in debt, primarily bank debt, and terminated the
existing lines of credit of the acquired entities. The one remaining loan
facility was terminated in July 1998, as discussed below.
The Company made purchase price adjustments, for the 1997 Acquisitions, during
the second quarter of 1998 for excess net asset values contributed or for net
asset values that were less than originally estimated to the stockholders of
the acquisition companies. The total amount received by the Company during the
second quarter was $109,000. Additionally, a $90,000 note payable to
stockholder was offset against amounts owed to the Company for a deficient net
asset value. The remaining amounts of $250,000 and $68,000 were paid and
received, respectively, in the third quarter.
Since inception, the Company has financed its operations through a combination
of cash flow from operations, bank borrowings and equity capital and
subsequently, the net proceeds from the Company's initial public offering. The
Company's capital requirements have arisen primarily in connection with
acquisitions, growth in revenue and the purchase of fixed assets. A key element
of the Company's strategy is to continue to evaluate opportunities to expand
through acquisitions of companies engaged in the distribution and/or marketing
of computers and/or computer hardware, software and peripherals.
In July 1998, the Company entered into a Loan and Security Agreement (the
"Agreement") with a bank that provides for an outstanding principal amount of
$7.5 million. Outstanding advances under the Agreement bear interest at the
LIBOR Index Rate plus a rate, varying from 2.00% to 2.75%, that corresponds to
a range of the Company's debt to net worth ratio from 1:1 to 2:1. Pursuant to
the terms of the Agreement, the Company has pledged accounts receivables,
inventory and equipment as collateral. During the quarter ended September 30,
1998, the Company borrowed and repaid approximately $1,250,000 under this
credit facility. No amounts are currently outstanding on the credit facility.
The Company believes that its available funds, together with the cash flow
expected to be generated from operations and current and anticipated credit
facilities, will be adequate to satisfy its current and planned operations for
at least the next 12 months.
For the nine months ended September 30, 1998, the Company used approximately
$4.3 million in operating activities. The cash used in operations resulted
primarily from the increases in accounts receivable and inventory and the
decrease in accounts payable. These changes were attributable to growth in
sales and stocking for anticipated sales in the near term and the decrease in
accounts payable is primarily attributable to the growth of the payables prior
to the IPO that were paid shortly after the beginning of the year. Excluding
the amounts acquired in the 1998 Acquisitions, the accounts receivable,
inventory, and accounts payable levels, when combined, have remained relatively
consistent with the levels at March 31, 1998.
For the nine months ended September 30, 1998, the Company used cash in
investing activities of $1.8 million for acquisitions, including overdrafts
acquired, and $394,000 for the purchase of property and equipment, which were
primarily additional purchases related to the new MIS system.
Cash used in financing activities for the nine months ended September 30, 1998
was attributable to the repayment of advances from stockholders and related
entities, loaned to the Company prior to the initial public offering, of
$247,000, and the repayment of the acquired entities' existing lines of credit
of $2.0 million. These amounts were partially offset by proceeds received of
$246,000
9
<PAGE> 12
under an acquired entity's existing line of credit. The acquired entity's
outstanding line of credit was paid in full in July and the facility was
terminated. The remaining significant activity in financing activities is
discussed in the preceding paragraphs.
Potential Delisting from the Nasdaq National Market
By letter dated September 29, 1998, the Nasdaq Stock Market notified the Company
that, based on a review of the price data for the Company's Class A Common Stock
for the preceding 30-day trading period, the Company did not meet the $5,000,000
minimum market value of public float requirement. If the Company is unable to
meet this requirement for a ten consecutive trading day period by December 29,
1998, Nasdaq has indicated that it will delist the Company's Class A Common
Stock from trading on the Nasdaq National Market at the opening of business on
December 31, 1998. Nasdaq also indicated that it may delist the Company during
this 90-day period if it fails to maintain compliance with any other listing
requirements. Any delisting instituted by Nasdaq would likely have an adverse
and material effect on the price of the Company's common stock and on the
ability of the Company's shareholders to sell their shares. Such delisting
could also adversely affect the Company's ability to obtain additional debt
and/or equity financing and may result in a reduction in the amount and quality
of security analysts' and the news media's coverage of the Company. The Company
is considering various alternatives to address this situation, including
seeking Nasdaq verification that the Company has been brought back into
compliance (if applicable) and the possibility of appealing any Nasdaq decision
to delist the Company's Class A Common Stock. There can be no assurance,
however, that any action taken by the Company will be successful to maintain
its listing on the Nasdaq National Market.
Year 2000
The "Year 2000" problem relates to computers, software, and other equipment in
which time and date-sensitive programs were written using two digits, rather
than four, to define calendar year data. As a result, date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
The Company has adopted a plan to facilitate a smooth transition of the
systems, products, and vendors upon which the Company relies into the
twenty-first century. The internal software systems currently in use by the
Company are not all Year 2000 compliant.
Management of the Company believes its internal software systems will be made
Year 2000 compliant in a timely manner, as a result of the management
information systems project begun in 1998. The project is scheduled to be
completed during the first quarter of 1999. The estimated costs of the
Company's efforts to address the Year 2000 problem are not expected to be
material to the Company's financial position or any year's results of
operations, although there can be no assurance to this effect.
The Company's primary exposure emanates from the ability of its technology
suppliers to implement the necessary changes for Year 2000 compliance.
Management believes that the Company's exposure is minimal as the majority of
our software products sold to customers are warranted and supported at the end
user level by our suppliers. While there is no guarantee, the suppliers claim
that, where applicable, the software products are Year 2000 compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. The Company believes
that, with the completion of the management information project, the
possibility of significant interruptions of normal operations should be
reduced. In the event that any of the Company's outside vendors do not
successfully and timely achieve Year 2000 compliance, and the Company is unable
to replace them with new customers or alternate suppliers, the Company's
business or operations could be adversely affected.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in certain claims arising in the normal course of
business. In the opinion of management of the Company, although the outcomes of
the claims are uncertain, they are not likely to have, in the aggregate, an
adverse material effect on the Company.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
There were no matters submitted to a vote of security holders during the
quarter ended September 30, 1998.
Item 5. Other Information.
Not applicable.
10
<PAGE> 13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Plan of Merger between Crescent Computers, Inc. and Tekgraf,
Inc., dated June 20, 1997 (Filed as Exhibit 2.1 to the
Company's Registration Statement on Form S-1, No. 333-33449
and incorporated herein by reference (the "Registration
Statement")).
3.1 Articles of Incorporation dated July 16, 1998(Filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
filed on August 14, 1998 and incorporated herein by reference
(the "Second Quarter Form 10-Q")).
3.2 Certificate of Merger, containing amendment to Articles of
Incorporation of Tekgraf Reincorporation Subsidiary, Inc.
(Filed as Exhibit 3.2 to the Second Quarter Form 10-Q and
incorporated herein by reference).
3.3 Bylaws (Filed as Exhibit 3.3 to the Second Quarter Form 10-Q
and incorporated herein by reference).
10.1 1997 Stock Plan of the Company (Filed as Exhibit 10.1 to the
Registration Statement and incorporated herein by reference).
10.2 Employment Agreement dated June 2, 1997 between Crescent
Computers, Inc. and Phillip C. Aginsky (Filed as Exhibit 10.2
to the Registration Statement and incorporated herein by
reference).
10.3 Employment Agreement dated June 2, 1997 between Crescent
Computers, Inc. and Dan I. Bailey (Filed as Exhibit 10.3 to
the Registration Statement and incorporated herein by
reference).
10.4 Employment Agreement dated June 2, 1997 between Crescent
Computers, Inc. and William M. Rychel (Filed as Exhibit 10.4
to the Registration Statement and incorporated herein by
reference).
10.5 Form of Employment Agreement between Crescent Computers, Inc.
and Regional Sales Directors (Filed as Exhibit 10.5 to the
Registration Statement and incorporated herein by reference).
10.6 Employment Agreement dated February 26, 1998, between
Tekgraf, Inc. and W. Jeffrey Camp. (Filed as Exhibit 10.6 to
the Company's Annual Report on Form 10-K, filed March 31,
1998, and incorporated herein by reference (the "Form
10-K")).
10.7 Stock Purchase Agreement dated May 1, 1997, by and among
Crescent Computers, Inc. and its shareholders and Microsouth,
Inc. and its shareholders, as amended (Filed as Exhibit 10.6
to the Registration Statement and incorporated herein by
reference).
10.8 Stock Purchase Agreement dated May 1, 1997 by and among
Crescent Computers, Inc. and its shareholders and tekgraf,
Inc. and its shareholders, as amended (Filed as Exhibit 10.7
to the Registration Statement and incorporated herein by
reference).
10.9 Stock Purchase Agreement dated May 1, 1997 by and among
Crescent Computers, Inc. and its shareholders and G&R
Marketing, Inc. and its shareholders, as amended (Filed as
Exhibit 10.8 to the Registration Statement and incorporated
herein by reference).
10.10 Stock Purchase Agreement dated May 1, 1997 by and among
Crescent Computers, Inc. and its shareholders and Computer
Graphics Distributing Company and its shareholders, as
amended (Filed as Exhibit 10.9 to the Registration Statement
and incorporated herein be reference).
10.11 Stock Purchase Agreement dated May 1, 1997 by and among
Crescent Computers, Inc. and its shareholders and Intelligent
Products Marketing, Inc. and its shareholders and IG
Distributing, Inc. and its shareholders, as amended (Filed as
Exhibit 10.10 to the Registration Statement and incorporated
herein by reference).
10.12 Escrow Agreement dated August 1997 (Filed as Exhibit 10.11 to
the Registration Statement and incorporated herein by
reference).
10.13 Indemnification Agreement dated 1997 (Filed as Exhibit 10.12
to the Registration Statement and incorporated herein by
reference).
10.14 [Intentionally omitted].
10.15 Lease Agreement dated September 4, 1993 between Crescent
Computers, Inc. and TCW Realty Fund II (Filed as Exhibit
10.14 to the Registration Statement and incorporated herein
by reference).
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<PAGE> 14
10.16 Leases for property located at 7020 Koll Center Parkway by
and between Patrician Associates, Inc., Koll Bernal Avenue
Associates and Intelligent Products Marketing, Inc., as
amended (Filed as Exhibit 10.15 to the Registration Statement
and incorporated herein by reference).
10.17 Industrial Space Lease dated November 13, 1991 between G&R
Technologies and American National Bank and Trust Company of
Chicago (Filed as Exhibit 10.16 to the Registration Statement
and incorporated herein by reference).
10.18 Commercial Lease Agreement dated March 29, 1991 between
Computer Graphics Distributing Company and Girard Associates
II Limited Partnership (Filed as Exhibit 10.17 to the
Registration Statement and incorporated herein by reference).
10.19 Lease Agreement dated May 1, 1992 between Microsouth, Inc.
and ASC North Fulton Associates Joint Venture (Filed as
Exhibit 10.18 to the Registration Statement and incorporated
herein by reference).
10.20 Lease Agreement dated March 1998 between Tekgraf, Inc. a
Texas corporation and Connecticut General Life Insurance
Company, (Filed as Exhibit 10.19 to the Registration
Statement and incorporated herein by reference), as amended
(amendment filed as Exhibit 1020(a) to the Form 10-K and
incorporated herein by reference).
10.21 Lease Agreement, dated March 1, 1998, by and between Computer
Graphics Technology and Southridge Equities. (Filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K,
filed April 16, 1998, and incorporated herein by reference
(the "Form 8-K")).
10.22 Standard Industrial/Commercial Multi-Tenant Lease, dated May
9, 1995, between Sanwa Bank California, as Lessor, and
Martec, Inc., as Lessee. (Filed as Exhibit 10.22 to the
Company's Quarterly Report on Form 10-Q filed on May 15, 1998
and incorporated herein by reference (the "First Quarter Form
10-Q")).
10.23 Commercial Lease, dated January 1, 1997, between Woodland
Park Realty Trust No. 2, as Lessor, and New England Computer
Graphics, as Lessee. (Filed as Exhibit 10.23 to the First
Quarter Form 10-Q and herein incorporated by reference).
10.24 Industrial Lease Agreement, dated July 25, 1997, between
2725312 Canada Inc., as Landlord, and New England Computer
Graphics, Inc., as Tenant (filed as Exhibit 10.24 to the
First Quarter Form 10Q and incorporated herein by reference).
10.25 Voting Agreement dated as of August 7, 1997 between Tekgraf,
Inc. and A. Lowell Nerenberg and Edward H.L. Mason (Filed as
Exhibit 10.20 to the Registration Statement and incorporated
herein be reference).
10.26 Agreement and Plan of Merger by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub I, Inc., a Georgia
corporation, and Computer Graphics Technology, Inc., a South
Carolina corporation, and its Shareholders, dated March 23,
1998. (Filed as Exhibit 10.22 to the Form 10-K and
incorporated herein by reference). **
10.27 Escrow Agreement, dated April 1, 1998, by and among Tekgraf,
Inc., a Delaware corporation, Tekgraf Sub I, Inc., a Georgia
corporation, Scott C. Barker, Robert Shumaker, and Thomas
Mills (as the "Company Shareholders"), Scott C. Barker (as
the "Shareholder Representative"), and First Union National
Bank (as the "Escrow Agent"). (Filed as Exhibit 2.2 to the
Form 8-K and incorporated herein by reference).
10.28 Pledge, Security and Escrow Agreement, dated April 1, 1998,
by and among Tekgraf, Inc., a Delaware corporation, Tekgraf
Sub I, Inc., a Georgia corporation, Scott C. Barker, Robert
Shumaker, and Thomas Mills (as the "Company Shareholders"),
Scott C. Barker (as the "Indemnification Representative"),
and First Union National Bank (as the "Escrow Agent"). (Filed
as Exhibit 2.3 to the Form 8-K and incorporated herein by
reference).
10.29 Agreement and Plan of Merger, dated March 25, 1998, by and
among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub II,
Inc., a Georgia corporation and Martec, Inc., a California
corporation, and its shareholder. (Filed as Exhibit 10.23 to
the Form 10-K and incorporated herein by reference). **
10.30 Escrow Agreement, dated May 1, 1998, by and among Tekgraf,
Inc., a Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation, Mark Lewis (as the "Company Shareholder"), Mark
Lewis ( as the "Shareholder Representative"), and First Union
National Bank (as the" Escrow Agent"). (Filed as Exhibit
10.30 to the First Quarter Form 10-Q and incorporated herein
by reference).
10.31 Pledge, Security and Escrow Agreement, dated May 1, 1998, by
and among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub
II, Inc., a Georgia corporation, Mark Lewis (as the "Company
Shareholder"), Mark Lewis (as the "Indemnification
Representative"), and First Union National Bank (as the
"Escrow Agent"). (Filed as Exhibit 10.31 to the First Quarter
Form 10-Q and incorporated herein by reference).
12
<PAGE> 15
10.32 Agreement and Plan of Merger, dated March 25, 1998, by and
among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub III,
Inc., a Georgia corporation, and New England Computer
Graphics, Inc., a Massachusetts corporation, and its
shareholders. (Filed as Exhibit 10.24 to the Form 10-K and
incorporated herein by reference.)**
10.33 First Amendment to Agreement and Plan of Merger, dated March
30, 1998, by and among Tekgraf, Inc., Tekgraf Sub III, Inc.,
New England Computer Graphics, Inc. and its Shareholders.
(Filed as Exhibit 10.25 to the Annual Report on Form 10-K and
incorporated herein by reference.)
10.34 Escrow Agreement, dated May 8, 1998, by and among Tekgraf,
Inc., a Delaware corporation, Tekgraf Sub III, Inc., a
Georgia corporation, Robert Shumaker, Thomas Gust, A. Lowell
Nerenberg, Scott Barker, David Boston, William Rychel and
Thomas Mills (as the "Company Shareholders"), David Boston (
as the "Shareholder Representative"), and First Union
National Bank (as the" Escrow Agent"). (Filed as Exhibit
10.34 to the First Quarter Form 10-Q and incorporated herein
by reference).
10.35 Pledge, Security and Escrow Agreement, dated May 8, 1998, by
and among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub
III, Inc., a Georgia corporation, Robert Shumaker, Thomas
Gust, A. Lowell Nerenberg, Scott Barker, David Boston,
William Rychel and Thomas Mills (as the "Company
Shareholders"), David Boston (as the "Indemnification
Representative"), and First Union National Bank (as the
"Escrow Agent"). (Filed as Exhibit 10.35 to the First Quarter
Form 10Q and incorporated herein by reference).
10.36 Loan and Security Agreement between Tekgraf, Inc., as
Borrower , and all Subsidiaries of Borrower (except Prisym),
as Subsidiary Guarantors and Wachovia Bank, National
Association, as Lender (Filed as Exhibit 10.36 to the Second
Quarter Form 10-Q and incorporated herein by reference).
10.37 Agreement and Plan of Merger, dated July 30,1998, by and
among Tekgraf, Inc. and Tekgraf Reincorporation Subsidiary,
Inc. (Filed as Exhibit 10.37 to the Second Quarter Form 10-Q
and incorporated herein by reference).
11.1 Statements of Computation of Earnings Per Share
27.1 Financial Data Schedule (for SEC use only).
99.1 Press release dated May 13, 1998 (Filed as Exhibit 99.1 to
the First Quarter Form 10Q and incorporated herein by
reference).
99.2 Press release dated May 14, 1998 (Filed as Exhibit 99.2 to
the First Quarter Form 10Q and incorporated herein by
reference).
99.3 Press release dated May 15, 1998 (Filed as Exhibit 99.3 to
the First Quarter Form 10Q and incorporated herein by
reference).
99.4 Press release dated August 13, 1998 (Filed as Exhibit 99.4 to
the Second Quarter Form 10-Q and incorporated herein by
reference).
** The Company will furnish supplementally a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission
upon request, as provided in Item 601 (b) (2) of Regulation S-K.
(a) Report Filed on Form 8-K
On November 13, 1998, the Company filed a Current Report on Form 8-K, pursuant
to Item 5 thereof, concerning the resignation of Phillip C. Aginsky pursuant to
a Severance Agreement and General Release executed by Mr. Aginsky and the
Company, the appointment of William M. Rychel as interim Chief Executive
Officer of the Company, the resignations of certain other persons from the
Board and the appointment of certain persons to the Board, all in connection
with the Severance Agreement.
13
<PAGE> 16
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.
<TABLE>
<S> <C>
TEKGRAF, INC.
Date: November 13, 1998
By: /s/ William M. Rychel
--------------------------------------------------
William M. Rychel, Interim Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1998
By: /s/ W. Jeffrey Camp
--------------------------------------------------
W. Jeffrey Camp, Chief
Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
14
<PAGE> 17
TEKGRAF, INC.
Index of Exhibits
The following exhibits are filed as part of the Report.
<TABLE>
<CAPTION>
Exhibit
Number Description Page
<S> <C> <C>
2.1 Plan of Merger between Crescent Computers, Inc. and Tekgraf,
Inc., dated June 20, 1997 (Filed as Exhibit 2.1 to the
Company's Registration Statement on Form S-1, No. 333-33449
and incorporated herein by reference (the "Registration
Statement")).
3.1 Articles of Incorporation dated July 16, 1998 (Filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
filed on August 14, 1998 and incorporated herein by reference
(the "Second Quarter Form 10-Q")).
3.2 Certificate of Merger, containing amendment to Articles of
Incorporation of Tekgraf Reincorporation Subsidiary, Inc.
(Filed as Exhibit 3.2 to the Second Quarter Form 10-Q and
incorporated herein by reference).
3.3 Bylaws (Filed as Exhibit 3.3 to the Second Quarter Form 10-Q
and incorporated herein by reference).
10.1 1997 Stock Plan of the Company (Filed as Exhibit 10.1 to the
Registration Statement and incorporated herein by reference).
10.2 Employment Agreement dated June 2, 1997 between Crescent
Computers, Inc. and Phillip C. Aginsky (Filed as Exhibit 10.2
to the Registration Statement and incorporated herein by
reference).
10.3 Employment Agreement dated June 2, 1997 between Crescent
Computers, Inc. and Dan I. Bailey (Filed as Exhibit 10.3 to
the Registration Statement and incorporated herein by
reference).
10.4 Employment Agreement dated June 2, 1997 between Crescent
Computers, Inc. and William M. Rychel (Filed as Exhibit 10.4
to the Registration Statement and incorporated herein by
reference).
10.5 Form of Employment Agreement between Crescent Computers, Inc.
and Regional Sales Directors (Filed as Exhibit 10.5 to the
Registration Statement and incorporated herein by reference).
10.6 Employment Agreement dated February 26, 1998, between
Tekgraf, Inc. and W. Jeffrey Camp. (Filed as Exhibit 10.6 to
the Company's Annual Report on Form 10-K, filed March 31,
1998, and incorporated herein by reference (the "Form
10-K")).
10.7 Stock Purchase Agreement dated May 1, 1997, by and among
Crescent Computers, Inc. and its shareholders and Microsouth,
Inc. and its shareholders, as amended (Filed as Exhibit 10.6
to the Registration Statement and incorporated herein by
reference).
10.8 Stock Purchase Agreement dated May 1, 1997 by and among
Crescent Computers, Inc. and its shareholders and tekgraf,
Inc. and its shareholders, as amended (Filed as Exhibit 10.7
to the Registration Statement and incorporated herein by
reference).
10.9 Stock Purchase Agreement dated May 1, 1997 by and among
Crescent Computers, Inc. and its shareholders and G&R
Marketing, Inc. and its shareholders, as amended (Filed as
Exhibit 10.8 to the Registration Statement and incorporated
herein by reference).
10.10 Stock Purchase Agreement dated May 1, 1997 by and among
Crescent Computers, Inc. and its shareholders and Computer
Graphics Distributing Company and its shareholders, as
amended (Filed as Exhibit 10.9 to the Registration Statement
and incorporated herein be reference).
10.11 Stock Purchase Agreement dated May 1, 1997 by and among
Crescent Computers, Inc. and its shareholders and Intelligent
Products Marketing, Inc. and its shareholders and IG
Distributing, Inc. and its shareholders, as amended (Filed as
Exhibit 10.10 to the Registration Statement and incorporated
herein by reference).
10.12 Escrow Agreement dated August 1997 (Filed as Exhibit 10.11 to
the Registration Statement and incorporated herein by
reference).
</TABLE>
1
<PAGE> 18
<TABLE>
<S> <C>
10.13 Indemnification Agreement dated 1997 (Filed as Exhibit 10.12
to the Registration Statement and incorporated herein by
reference).
10.14 [Intentionally omitted].
10.15 Lease Agreement dated September 4, 1993 between Crescent
Computers, Inc. and TCW Realty Fund II (Filed as Exhibit
10.14 to the Registration Statement and incorporated herein
by reference).
10.16 Leases for property located at 7020 Koll Center Parkway by
and between Patrician Associates, Inc., Koll Bernal Avenue
Associates and Intelligent Products Marketing, Inc., as
amended (Filed as Exhibit 10.15 to the Registration Statement
and incorporated herein by reference).
10.17 Industrial Space Lease dated November 13, 1991 between G&R
Technologies and American National Bank and Trust Company of
Chicago (Filed as Exhibit 10.16 to the Registration Statement
and incorporated herein by reference).
10.18 Commercial Lease Agreement dated March 29, 1991 between
Computer Graphics Distributing Company and Girard Associates
II Limited Partnership (Filed as Exhibit 10.17 to the
Registration Statement and incorporated herein by reference).
10.19 Lease Agreement dated May 1, 1992 between Microsouth, Inc.
and ASC North Fulton Associates Joint Venture (Filed as
Exhibit 10.18 to the Registration Statement and incorporated
herein by reference).
10.20 Lease Agreement dated March 1998 between Tekgraf, Inc. a
Texas corporation and Connecticut General Life Insurance
Company, (Filed as Exhibit 10.19 to the Registration
Statement and incorporated herein by reference), as amended
(amendment filed as Exhibit 1020(a) to the Form 10-K and
incorporated herein by reference).
10.21 Lease Agreement, dated March 1, 1998, by and between Computer
Graphics Technology and Southridge Equities. (Filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K,
filed April 16, 1998, and incorporated herein by reference
(the "Form 8-K")).
10.22 Standard Industrial/Commercial Multi-Tenant Lease, dated May
9, 1995, between Sanwa Bank California, as Lessor, and
Martec, Inc., as Lessee. (Filed as Exhibit 10.22 to the
Company's Quarterly Report on Form 10-Q filed on May 15, 1998
and incorporated herein by reference (the "First Quarter Form
10-Q")).
10.23 Commercial Lease, dated January 1, 1997, between Woodland
Park Realty Trust No. 2, as Lessor, and New England Computer
Graphics, as Lessee. (Filed as Exhibit 10.23 to the First
Quarter Form 10-Q and incorporated herein by reference).
10.24 Industrial Lease Agreement, dated July 25, 1997, between
2725312 Canada Inc., as Landlord, and New England Computer
Graphics, Inc., as Tenant. (Filed as Exhibit 10.24 to the
First Quarter Form 10-Q and incorporated herein by
reference).
10.25 Voting Agreement dated as of August 7, 1997 between Tekgraf,
Inc. and A. Lowell Nerenberg and Edward H.L. Mason (Filed as
Exhibit 10.20 to the Registration Statement and incorporated
herein be reference).
10.26 Agreement and Plan of Merger by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub I, Inc., a Georgia
corporation, and Computer Graphics Technology, Inc., a South
Carolina corporation, and its Shareholders, dated March 23,
1998. (Filed as Exhibit 10.22 to the Form 10-K and
incorporated herein by reference). **
10.27 Escrow Agreement, dated April 1, 1998, by and among Tekgraf,
Inc., a Delaware corporation, Tekgraf Sub I, Inc., a Georgia
corporation, Scott C. Barker, Robert Shumaker, and Thomas
Mills (as the "Company Shareholders"), Scott C. Barker (as
the "Shareholder Representative"), and First Union National
Bank (as the "Escrow Agent"). (Filed as Exhibit 2.2 to the
Form 8-K and incorporated herein by reference).
10.28 Pledge, Security and Escrow Agreement, dated April 1, 1998,
by and among Tekgraf, Inc., a Delaware corporation, Tekgraf
Sub I, Inc., a Georgia corporation, Scott C. Barker, Robert
Shumaker, and Thomas Mills (as the "Company Shareholders"),
Scott C. Barker (as the "Indemnification Representative"),
and First Union National Bank (as the "Escrow Agent"). (Filed
as Exhibit 2.3 to the Form 8-K and incorporated herein by
reference).
10.29 Agreement and Plan of Merger, dated March 25, 1998, by and
among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub II,
Inc., a Georgia corporation and Martec, Inc., a California
corporation, and its shareholder. (Filed as Exhibit 10.23 to
the Form 10-K and incorporated herein by reference). **
10.30 Escrow Agreement, dated May 1, 1998, by and among Tekgraf,
Inc., a Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation, Mark Lewis (as the "Company Shareholder"), Mark
Lewis ( as the "Shareholder
</TABLE>
2
<PAGE> 19
<TABLE>
<S> <C>
Representative"), and First Union National Bank (as the"
Escrow Agent"). ( Filed as Exhibit 10.30 to the Form 10-Q and
incorporated herein by reference).
10.31 Pledge, Security and Escrow Agreement, dated May 1, 1998, by
and among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub
II, Inc., a Georgia corporation, Mark Lewis (as the "Company
Shareholder"), Mark Lewis (as the "Indemnification
Representative"), and First Union National Bank (as the
"Escrow Agent"). (Filed as Exhibit 10.31 to the First Quarter
Form 10-Q and incorporated herein by reference).
10.32 Agreement and Plan of Merger, dated March 25, 1998, by and
among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub III,
Inc., a Georgia corporation, and New England Computer
Graphics, Inc., a Massachusetts corporation, and its
shareholders. (Filed as Exhibit 10.24 to the Form 10-K and
incorporated herein by reference.)**
10.33 First Amendment to Agreement and Plan of Merger, dated March
30, 1998, by and among Tekgraf, Inc., Tekgraf Sub III, Inc.,
New England Computer Graphics, Inc. and its Shareholders.
(Filed as Exhibit 10.25 to the Annual Report on Form 10-K and
incorporated herein by reference.)
10.34 Escrow Agreement, dated May 8, 1998, by and among Tekgraf,
Inc., a Delaware corporation, Tekgraf Sub III, Inc., a
Georgia corporation, Robert Shumaker, Thomas Gust, A. Lowell
Nerenberg, Scott Barker, David Boston, William Rychel and
Thomas Mills (as the "Company Shareholders"), David Boston (
as the "Shareholder Representative"), and First Union
National Bank (as the" Escrow Agent"). (Filed as Exhibit
10.34 to the First Quarter Form 10-Q and incorporated herein
by reference).
10.35 Pledge, Security and Escrow Agreement, dated May 8, 1998, by
and among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub
III, Inc., a Georgia corporation, Robert Shumaker, Thomas
Gust, A. Lowell Nerenberg, Scott Barker, David Boston,
William Rychel and Thomas Mills (as the "Company
Shareholders"), David Boston (as the "Indemnification
Representative"), and First Union National Bank (as the
"Escrow Agent"). (Filed as Exhibit 10.35 to the First Quarter
Form 10-Q and incorporated herein by reference).
10.36 Loan and Security Agreement between Tekgraf, Inc., as
Borrower, and all Subsidiaries of Borrower (except Prisym),
as Subsidiary Guarantors and Wachovia Bank, National
Association, as Lender (Filed as Exhibit 10.36 to the Second
Quarter Form 10-Q and incorporated herein by reference).
10.37 Agreement and Plan of Merger, dated July 30, 1998, by and
among Tekgraf, Inc. and Tekgraf Reincorporation Subsidiary,
Inc. (Filed as Exhibit 10.37 to the Second Quarter Form 10-Q
and incorporated herein by reference).
11.1 Statements of Computation of Earnings Per Share.
27.1 Financial Data Schedule (for SEC use only).
99.1 Press release dated May 13, 1998 (Filed as Exhibit 99.1 to
the First Quarter Form 10-Q and incorporated herein by
reference).
99.2 Press release dated May 14, 1998 (Filed as Exhibit 99.2 to
the First Quarter Form 10-Q and incorporated herein by
reference).
99.3 Press release dated May 15, 1998 (Filed as Exhibit 99.3 to
the First Quarter Form 10-Q and incorporated herein by
reference).
99.4 Press Release dated August 13, 1998 (Filed as Exhibit 99.4 to
the Second Quarter Form 10-Q and incorporated herein by
reference).
</TABLE>
3
<PAGE> 1
EXHIBIT 11.1
Tekgraf, Inc.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1997 1998
---- ----
<S> <C> <C>
Net income (loss) $ 192 $ (268)
Weighted average number of common shares
Common shares 3,167 6,162
Net income (loss) per share $ 0.06 $ (0.04)
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 1998
---- ----
<S> <C> <C>
Net income $ 330 $ 36
Weighted average number of common shares
Common shares 2,010 5,798
Net income per share $ 0.16 $ 0.01
</TABLE>
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TEKGRAF, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 33,186
<SECURITIES> 0
<RECEIVABLES> 15,458,342
<ALLOWANCES> 450,000
<INVENTORY> 8,062,990
<CURRENT-ASSETS> 24,547,743
<PP&E> 1,080,905
<DEPRECIATION> 334,770
<TOTAL-ASSETS> 34,362,722
<CURRENT-LIABILITIES> 12,527,323
<BONDS> 0
0
0
<COMMON> 6,328
<OTHER-SE> 21,816,283
<TOTAL-LIABILITY-AND-EQUITY> 34,362,722
<SALES> 70,699,918
<TOTAL-REVENUES> 70,699,918
<CGS> 59,645,434
<TOTAL-COSTS> 59,645,434
<OTHER-EXPENSES> 354,942
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,795
<INCOME-PRETAX> 402,108
<INCOME-TAX> 315,000
<INCOME-CONTINUING> 87,108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,223
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
