<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, 1999.
Or
[ ] 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)
645 Hembree Parkway, Suite J, Roswell, Georgia 30076
---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 442-6060
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.
<TABLE>
<CAPTION>
Class Outstanding at November 12, 1999
----- --------------------------------
<S> <C>
Class A Common Stock, $.001 par value 3,169,165 shares
Class B Common Stock, $.001 par value 3,159,166 shares
</TABLE>
<PAGE> 2
TEKGRAF, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> ` <C>
-----
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998....... 1
Consolidated Statements of Operations for the three and nine months ended
September 30, 1999 and 1998 ..................................................... 3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 .................................................... 4
Notes to Consolidated Financial Statements ...................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk .........................14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .................................................. 14
SIGNATURES ............................................................................................ 14
INDEX OF EXHIBITS ..................................................................................... 15
</TABLE>
<PAGE> 3
19
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Tekgraf, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,410,724 $ 1,702,848
Accounts receivable, less allowance for doubtful
accounts of $805,000 and $520,000 at September 30, 1999
and December 31, 1998,
respectively 17,737,961 16,626,730
Inventories, net 12,267,775 7,718,337
Prepaid expenses and other assets 671,299 872,945
Deferred income taxes 844,648 298,273
----------- -----------
Total current assets 33,932,407 27,219,133
Property and equipment, net 1,920,491 824,664
Goodwill, net 2,361,415 9,009,941
Other assets 88,468 101,863
----------- -----------
Total assets $38,302,781 $37,155,601
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 4
Tekgraf, Inc.
Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt $ 2,503,640 $ 719,898
Accounts payable 14,966,152 12,868,281
Accrued expenses 2,683,918 1,502,859
Income taxes payable 306,871
Contract obligation and deferred income 3,000,549
------------ ------------
Total current liabilities 23,154,259 15,397,909
Deferred income taxes 95,986 95,986
------------ ------------
Total liabilities 23,250,245 15,493,895
------------ ------------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock, $.001 par value,
31,666,667 shares authorized; 3,169,165 shares issued and outstanding at
September 30, 1999 and December 31, 1998 3,169 3,169
Class B Common Stock, $.001 par value,
3,333,333 shares authorized; 3,159,166 shares
issued and outstanding at September 30, 1999 and December 31, 1998 3,159 3,159
Preferred Stock, $.001 par value, 5,000,000 shares authorized; no shares issued
at September 30, 1999 and December 31, 1998
Due from acquisition stockholders (17,686) (608,288)
Additional paid-in capital 22,556,865 22,556,865
Retained earnings (deficit) (7,492,971) (293,199)
------------ ------------
Total stockholders' equity 15,052,536 21,661,706
------------ ------------
Total liabilities and stockholders' equity $ 38,302,781 $ 37,155,601
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 5
Tekgraf, Inc.
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 28,362,793 $ 26,323,407 $ 81,626,826 $ 70,699,918
Cost of goods sold 23,903,236 22,347,868 68,712,665 59,645,434
------------ ------------ ------------ ------------
Gross profit 4,459,557 3,975,539 12,914,161 11,054,484
Operating expenses:
Selling, general and administrative 4,302,251 4,180,684 12,558,017 10,435,545
Depreciation 110,780 55,516 240,576 155,244
Amortization and impairment of goodwill 6,355,031 160,620 6,678,453 443,619
Restructuring charges and other expenses 847,061 847,061
------------ ------------ ------------ ------------
Income (loss) from operations (7,155,566) (421,281) (7,409,946) 20,076
Other (income)/expenses, net 6,814 (82,056) (34,585) (354,942)
Interest expense 55,305 13,439 88,411 23,795
------------ ------------ ------------ ------------
Income (loss) before income taxes (7,217,685) (352,664) (7,463,772) 351,223
Provision (benefit) for income taxes (302,000) (85,000) (264,000) 315,000
------------ ------------ ------------ ------------
Net income (loss) $ (6,915,685) $ (267,664) $ (7,199,772) $ 36,223
============ ============ ============ ============
Basic and diluted weighted
average shares outstanding 6,161,664 6,161,664 6,161,664 5,797,727
============ ============ ============ ============
Basic and diluted net income (loss) per share $ (1.12) $ (0.04) $ (1.17) $ 0.01
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 6
Tekgraf, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(7,199,772) $ 36,223
----------- -----------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Provision for doubtful accounts receivable 280,845 281,210
Provision/writedown of inventory 252,996 157,425
Depreciation 240,576 155,244
Amortization and impairment of goodwill 6,678,453 443,619
Gain on sale of Prisym (32,000)
Deferred taxes (204,250) (214,009)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (1,609,876) (1,484,070)
Inventories (1,804,131) (1,000,900)
Prepaid expenses and other assets 83,323 (630,740)
Accounts payable and accrued expenses 2,388,732 (1,893,071)
Deferred income and contract obligation 494,914
Income taxes (306,871) (101,297)
----------- -----------
Total adjustments 6,462,711 (4,286,589)
----------- -----------
Net cash used in operating activities (737,061) (4,250,366)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,238,375) (394,241)
Proceeds from sale of Prisym 979,239
Cash paid for acquisitions, including overdrafts
acquired from acquisitions and acquisition costs (538,931) (1,798,166)
----------- -----------
Net cash used in investing activities (798,067) (2,192,407)
----------- -----------
Cash flows from financing activities:
Net proceeds from credit facility 1,783,742 7,152
Repayment of debt (18,207)
Repayment of advance to stockholders
and related entities (246,956)
Payment to stockholder for excess net asset value (249,518)
Payments received from stockholders for deficient
net asset values 459,262 177,742
Repayment of acquired companies' loans (1,984,322)
Proceeds from acquired companies' line of credit facilities 246,359
Payment of stock issuance cost (56,630)
----------- -----------
Net cash provided by (used in) financing activities 2,243,004 (2,124,380)
----------- -----------
Increase (decrease) in cash and cash equivalents 707,876 (8,567,153)
Cash and cash equivalents, beginning of period 1,702,848 8,600,339
----------- -----------
Cash and cash equivalents, end of period $ 2,410,724 $ 33,186
=========== ===========
Supplemental non-cash investing and financing activities:
Fair value of stock issued $ 2,030,362
Cash paid in connection with acquisitions $ 400,000 1,415,000
Other acquisition costs 138,931 212,000
Fair value of liabilities assumed 3,817,604 6,923,314
Fair value of assets acquired (4,356,535) (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. Except for the
December 31, 1998 consolidated balance sheet, the financial statements presented
herein are unaudited but reflect 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 financial statements should be read in
conjunction with the financial statements and notes thereto and the report of
independent accountants included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998. 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 the
three and nine months ended September 30, 1999 are not necessarily indicative of
the results to be expected for the full year. Certain prior year amounts have
been reclassified to conform to the 1999 presentation.
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 any of the periods presented. At September 30, 1999, the
basic and diluted weighted average shares exclude the escrow shares and were
determined as follows:
<TABLE>
<S> <C>
Shares outstanding from beginning of period 6,328,331
Weighted average escrow shares (166,667)
----------
Basic and diluted weighted average shares 6,161,664
==========
</TABLE>
3. Acquisitions
Effective April 1, 1999, the Company completed the acquisition of the U.S. and
Canadian service businesses and the worldwide parts business of Calcomp
Technology, Inc. (the "Services Acquisition") for $400,000 in cash and the
assumption of certain liabilities. The assets acquired and liabilities assumed
were consummated through the formation of a wholly owned subsidiary, Calgraph
Technology Services, Inc. These businesses provide the field maintenance and
repair of the Calcomp printers and other products in the U.S. and Canada and is
the source for Calcomp printer parts and components to successors of Calcomp's
service divisions outside the U.S. and Canada. The acquisition was accounted for
as a purchase and the acquired assets and assumed liabilities have been included
in the accompanying financial statements as of September 30, 1999 based upon
preliminary estimates. Evaluations of fair
5
<PAGE> 8
values of the assets acquired and the liabilities assumed are in process and the
final purchase price allocation could differ from these estimates and
assumptions.
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.
On March 25, 1999, effective February 28, 1999, the Company sold its ownership
interest in Prisym Technologies, Inc. of Georgia ("Prisym" or the "1999
Disposition"), its 60% owned subsidiary, to the other shareholder of Prisym.
The purchase prices for the 1998 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.
The following unaudited pro forma summary combines the consolidated results of
the Company as if the 1998 Acquisitions, the Services Acquisition and the 1999
Disposition had occurred as of January 1, 1998. The pro forma summary 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. The
pro forma summary does not purport to represent what the Company's results of
operations would have actually been if the 1998 Acquisitions and the Services
Acquisition had occurred as of January 1, 1998 or to project the Company's
results of operations for any future period. Note that the 1998 Acquisitions
previously operated as closely held businesses. Additionally, the Services
Acquisition previously operated as part of a significantly larger corporation,
therefore the overhead has been estimated based upon the actual expenses
incurred since the date of acquisition as the historical statements did not
include actual expenses incurred for the specific assets acquired and
liabilities assumed. The unaudited proforma data below also includes the
impairment of goodwill and restructuring charges and other expenses (as
described in Note 4) recorded in the third quarter of 1999.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Statement of Operations Data: (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 28,362,793 $ 27,854,060 $ 83,126,795 $85,740,306
Gross profit 4,459,557 4,323,905 13,484,427 13,845,081
Income (loss) from operations (7,155,566) (465,304) (7,387,895) 66,722
Income (loss) before taxes (7,217,685) (378,036) (7,431,221) 513,199
Net income (loss) (6,915,685) (293,036) (7,179,590) 49,225
Basic and diluted income (loss) per share (1.12) (0.05) (1.17) 0.01
Weighted average shares outstanding 6,161,664 6,161,664 6,161,664 6,161,664
</TABLE>
6
<PAGE> 9
4. Impairment of Goodwill and Restructuring Charges and Other Expenses
Management of the Company, since each of the respective acquisitions, has
continually reviewed the impairment and potential recoverability of the
goodwill, as events and changes in circumstances have warranted, to determine
whether or not any of the goodwill associated with the acquisitions has been
impaired. In the third quarter of 1999, in light of several factors including
the continued change in the manner in which acquired assets are being utilized
and the history and forecasted amounts of the related acquisitions, the Company
has reviewed and completed an analysis and determined that $6,193,318 of the
unamortized goodwill is impaired and therefore not recoverable, resulting in a
writedown in the third quarter statement of operations.
In connection with the acquisitions, many functions formerly performed in
regional offices have been in transition and have been consolidated and
centralized, resulting in certain office or warehouse locations no longer being
necessary to the Company's business operations. Accordingly, $230,000 has been
charged to operations in the third quarter related to these leased premises no
longer in use. Additionally, associated with the related centralization and
consolidation and as part of management's overall strategic plan, certain costs
have been incurred related to these acquisitions, including employee severance,
and these costs, amounting to $617,061, have been combined with the above
described amount and are reflected as Restructuring Charges and Other Expenses
in the third quarter statement of operations.
5. Income Taxes
The Company's effective tax rate was 4.2% and 24.1% for the three months ended
September 30, 1999 and 1998, respectively. The difference between the Company's
effective and statutory tax rates for 1999 and 1998 was primarily due to the
amortization of non-deductible goodwill and state taxes, net of the federal
benefit.
6. Segment Information
The Company's operations were previously classified into two business units:
graphics and technology. With the acquisition of the U.S. and Canadian service
businesses and the worldwide parts business of Calcomp Technology, Inc., the
Company has an additional services business unit. These business units are
revenue producing components of the Company about which separate financial
information is produced internally and operating decisions are made. The
following segment information is for the three and nine months ended September
30, 1999, respectively:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1999
---- ----
<S> <C> <C>
Net sales:
Graphics $ 24,655,777 $ 71,912,607
Technology 1,947,440 6,410,958
Services 1,759,576 3,303,261
------------ ------------
Total net sales $ 28,362,793 $ 81,626,826
============ ============
Operating income (loss):
Graphics (1) $ (6,370,914) $ (5,608,937)
Technology 65,993 147,471
Services 48,871 (152,301)
Corporate (2) (899,516) (1,796,179)
------------ ------------
Total operating income (loss) $ (7,155,566) $ (7,409,946)
============ ============
<CAPTION>
September 30, 1999
------------------
Identifiable assets:
Graphics $ 21,820,304
Technology 1,367,134
Services 3,974,568
Corporate 11,140,775
------------
Total identifiable assets $ 38,302,781
============
</TABLE>
7
<PAGE> 10
Corporate operating income (loss) includes overhead and special charges
related to the consolidated Company.
(1) The operating income (loss) includes the impairment of goodwill of
$6,193,318 and restructuring charges and other expenses of $330,000.
(2) The operating income (loss) includes restructuring charges and other
expenses of $517,061.
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 Section 21E of 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 obtain
financing in the future; (ii) trends affecting the Company's financial condition
or results of operations, including those related to Year 2000 issues; (iii) the
Company's growth strategy and operating strategy; (iv) the Company's anticipated
capital needs and capital expenditures; (v) projected outcomes and any effects
on the Company of any litigation or investigations concerning the Company; and
(vi) the potential impact of changes to, additions of or losses of distribution
agreements with manufacturers. When used in this report, the words "expects,"
"intends," "believes," "anticipates," "estimates," "may," "could," "should,"
"would," "will," "plans," "continue," and other similar expressions and
variations thereof are intended to identify forward-looking statements.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance, that such statements involve risks and
uncertainties, 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 the
integration of past acquisitions, competition and pricing pressures, dependence
on acquiring and maintaining distribution arrangements with manufacturers,
dependence on certain suppliers and economic conditions.
OVERVIEW
The Company is engaged in the distribution, manufacture, configuration, and
servicing of computers and computer peripherals, hardware and software. The
Company commenced operations in February 1993 as Crescent Computers, Inc., for
the purpose of engaging in the manufacture of custom or "made-to order" premium
servers and network workstations under the brand name "Crescent Computer," now
marketed as "Tekgraf Systems." In December 1994, the Company acquired a
controlling interest in Prisym
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<PAGE> 11
Technologies, Inc. of Georgia ("Prisym"), an authorized reseller of equipment
manufactured by Digital Equipment Corporation.
In June 1997, the Company completed the acquisition of all of the outstanding
capital stock of five regional distributors of computer graphics products: G&R
Marketing, Inc., Microsouth, Inc., tekgraf, inc., Computer Graphics Distributing
Company, and Tekgraf Northwest, Inc. (formerly Intelligent Products Marketing,
Incorporated), which includes IG Distribution, Inc. (collectively, the "1997
Acquisitions") in exchange for an aggregate of 2,192,000 shares of Class B
Common Stock (taking into account subsequent stock splits and reverse stock
splits of the Company). In acquiring these companies, with offices outside
Chicago, Atlanta, Houston, Washington D.C. and San Francisco, the Company
increased both its geographic presence and business scope. Subsequent to the
1997 Acquisitions, the Company reincorporated under the laws of the State of
Delaware by merging into a wholly owned Delaware subsidiary and changed its name
to Tekgraf, Inc. In connection therewith, the Company reorganized its operations
into two divisions: the Graphics Division, a wholesale distribution network of
high-end computer graphics products; and the Technology Division, which is
engaged in the manufacture, sale and support of the Tekgraf System and the
distribution of related components.
On November 10, 1997, the Company completed the initial public offering of its
securities (the "Offering"). In the Offering, the Company offered 2,100,000
units at a price of $6.00 per unit, with each unit consisting of one share of
Class A Common Stock and one redeemable warrant. Each warrant entitles the
holder to purchase one share of Class A Common Stock at an exercise price of
$8.40, subject to adjustment.
In April and May 1998, the Company completed the acquisition of all of the
outstanding capital stock of three more distributors of computer graphics
products: Computer Graphics Technology, Inc., located in Greenville, South
Carolina; Martec, Inc., located outside Los Angeles; and New England Computer
Graphics, Inc., with offices outside both Boston and Toronto (collectively, the
"1998 Acquisitions").
On July 31, 1998, the Company reincorporated from Delaware to Georgia by merging
into a wholly-owned subsidiary that had been incorporated in Georgia for the
purpose of carrying out the reincorporation. Contemporaneously with the merger,
the subsidiary changed its name to Tekgraf, Inc. On March 25, 1999, effective
February 28,1999, the Company sold its controlling interest in Prisym.
Effective April 1, 1999, the Company completed the acquisition of certain assets
of Calcomp Technology, Inc. (the "Services Acquisition"). The acquired assets
consist of those assets used in Calcomp's U.S. and Canadian service businesses
and its worldwide parts business. The Company paid $400,000 in cash and assumed
certain liabilities of Calcomp as consideration for the acquired assets. The U.S
and Canadian service businesses primarily involve the field maintenance and
repair of Calcomp printers and plotter products in the U.S. and Canada. The
worldwide parts business involves the supply of Calcomp printer parts and
components to successors of Calcomp's service divisions outside the U.S. and
Canada.
RESULTS OF OPERATIONS
Net sales. Net sales increased $2.0 million, or 7.7%, to $28.4 million for the
three months ended September 30, 1999 compared to $26.3 million for the quarter
ended September 30, 1998. Of the increase, $2.0 million was due to increased
market penetration and internal growth in the Graphics Division and $1.8 million
was attributable to the Services Acquisition that occurred on April 1, 1999.
These increases were offset by a decrease in Technology Division revenues of
$1.8 million, with the decrease attributable to the sale of Prisym, which was
effective February 28, 1999. Accordingly, there were no revenues from Prisym in
the third quarter of 1999 as compared to $1.5 million in 1998. Net sales
increased $10.9 million, or 15.5%, to $81.6 million for the nine months ended
September 30, 1999 compared to $70.7 million for the nine months ended September
30, 1998, primarily due to the 1998 Acquisitions that occurred in April and May
of 1998 that were included for the entire nine months of
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<PAGE> 12
1999, the Services Acquisition and increased market penetration and internal
growth of the Graphics Division offset by a decrease in Technology Division
revenues of approximately $4.8 million, primarily as a result of the sale of
Prisym.
Gross Profit. Gross profit increased $484,000, or 12.2%, to $4.5 million for the
three months ended September 30, 1999 compared to $4.0 million for the 1998
quarter. Gross margin as a percentage of sales increased to 15.7% for the third
quarter of 1999 compared to 15.1% for the same period in 1998. The slight
increase in the gross margin percentage was primarily due to the relatively
consistent sales volume associated with the channels business, slightly higher
sales volume associated with the Point-of-Purchase digital signage business and
the addition of a higher gross margin percentage associated with the Services
Acquisition. The gross margin percentages for the nine months ended September
30, 1999 and 1998 also remained relatively consistent at 15.8% and 15.6%,
respectively.
SG&A Expenses. SG&A expenses increased $122,000, or 2.9%, to $4.3 million for
the three months ended September 30, 1999 compared to $4.2 million for the three
months ended September 30, 1998. Of the increase, $590,000 was attributable to
the Services Acquisition, offset by a decrease of $218,000 from having sold
Prisym during the first quarter of 1999, with the remainder of the decrease due
to efficiencies recognized during the 1999 quarter and certain severance costs
recognized in the 1998 quarter. SG&A expenses for the nine months ended
September 30, 1999 as compared to the same period in 1998 increased $2.1
million, primarily due to the net change described above for the quarter and
approximately $600,000 from the 1998 Acquisitions not being included in the
first quarter and for a portion of the second quarter of 1998 and increased
commissions on increased sales and costs associated with internal growth of the
Company.
Impairment of Goodwill and Restructuring Charges and Other Expenses. Management
of the Company, since each of the respective acquisitions, has continually
reviewed the impairment and potential recoverability of the goodwill, as events
and changes in circumstances have warranted, to determine whether or not any of
the related goodwill associated with the acquisitions has been impaired. In the
third quarter of 1999, in light of several additional factors including the
continued change in the manner in which acquired assets are being utilized and
the history and forecasted amounts of the related acquisitions, the Company has
again reviewed and has completed an analysis and determined that $6,193,318 of
the unamortized goodwill is impaired and therefore not recoverable, resulting in
a writedown in the third quarter statement of operations. Also, in connection
with the acquisitions, many functions formerly performed in regional offices
have been in transition and have been consolidated and centralized resulting in
certain office or warehouse locations no longer being necessary to the Company's
operations. Accordingly, $230,000 has been charged to operations in the third
quarter of operations related to these leased premises no longer in use.
Additionally, associated with the related centralization and consolidation and
as part of management's overall strategic plan, certain costs have been incurred
related to these acquisitions, including employee severance, and these costs,
amounting to $617,061, have been combined with the above described amount and
are reflected as Restructuring Charges and Other Expenses in the third quarter
statement of operations.
Income (loss) from Operations. The operating loss, excluding the goodwill
impairment and the restructuring charges and other expenses, decreased $306,000
to a loss of $(115,000) for the third quarter of 1999 compared to an operating
loss of $(421,000) for the comparable 1998 quarter. Operating income, excluding
the goodwill impairment and the restructuring charges and other expenses,
decreased to a loss of $(370,000) for the nine months ended September 30, 1999
as compared to income of $20,000 for the nine months ended September 30, 1998,
primarily due to the reasons described in the preceding paragraphs.
Additionally, income from operations, excluding the goodwill impairment, was
reduced by $162,000 and $161,000 for the quarters ended September 30, 1999 and
1998, respectively, and $485,000 and $444,000 for the nine months ended
September 30, 1999 and 1998, respectively, related to the amortization of
goodwill.
10
<PAGE> 13
Provision for Income Taxes. The Company's effective tax rate was 4.2% and 24.1%
for the three months ended September 30, 1999 and 1998, respectively. The
effective tax rate for the nine months ended September 30, 1999 and 1998 was
3.5% and 89.7%, respectively. The difference between the Company's effective and
statutory rates for 1999 and 1998 was primarily due to the amortization of
non-deductible goodwill and state taxes, net of the federal benefit.
Pro Forma Combined Financial Information
The 1998 Acquisitions described previously have a significant impact on the
comparisons of operating results for 1999 and 1998, due to the fact that the
operating results of the 1998 Acquisitions were not included for the first
quarter of 1998 and a portion of the second quarter of 1998. The comparisons are
also affected by the Services Acquisition, for which the results of operations
have only been included from the acquisition date, April 1, 1999. Therefore, in
addition to the historical comparisons for the three and nine months ended
September 30, 1999 and 1998, the Company has included the unaudited pro forma
statements of operations for the three and nine months ended September 30, 1999
and 1998 as if the 1998 Acquisitions and the Services Acquisition had occurred
on January 1, 1998.
The 1999 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 1998
Acquisitions and the Services Acquisition actually been combined for the periods
presented. Note that the 1998 Acquisitions previously operated as closely held
businesses. Additionally, the Services Acquisition previously operated as part
of a significantly larger corporation, therefore the overhead has been estimated
as the historical statements did not include actual expenses incurred for the
specific assets acquired and liabilities assumed. The pro forma statements of
operations data is not intended to be indicative of future operations, but
rather for a better understanding of the Company on a comparative basis. A
discussion and analysis of the pro forma results, given the above
qualifications, is not considered meaningful and is therefore not presented. The
unaudited proforma data below also includes the impairment of goodwill and
restructuring charges and other expenses (as described in Note 4) recorded in
the third quarter of 1999.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Statements of Operations Data: (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 28,362,793 $ 27,854,060 $ 83,126,795 $85,740,306
Cost of goods sold 23,903,236 23,530,155 69,642,368 71,895,225
Gross profit 4,459,557 4,323,905 13,484,427 13,845,081
Operating expenses:
Selling, general and administrative 4,302,251 4,533,535 13,099,232 13,116,163
Depreciation and amortization 272,493 255,674 732,711 662,196
Impairment of goodwill 6,193,318 6,193,318
Restructuring charges and other expenses 847,061 847,061
Income (loss) from operations (7,155,566) (465,304) (7,387,895) 66,722
Income (loss) before taxes (7,217,685) (378,036) (7,431,221) 513,199
Provision (benefit) for income taxes (302,000) (85,000) (251,631) 463,974
Net income (loss) (6,915,685) (293,036) (7,179,590) 49,225
Basic and diluted income (loss) per share $ (1.12) $ (0.05) $ (1.17) $ 0.01
Weighted average shares outstanding 6,161,664 6,161,664 6,161,664 6,161,664
</TABLE>
11
<PAGE> 14
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 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.
During the first quarter of 1999, the Company made purchase price adjustments
for the 1998 Acquisitions for net asset values that were less than originally
estimated by the stockholders of the acquired companies. During March of 1999,
these stockholders paid the Company approximately $459,000 pursuant to these
adjustments, and they still owe the Company approximately $18,000.
Since inception, the Company has financed its operations through a combination
of cash flows from operations, bank borrowings, equity capital, and, following
completion of the Company's initial public offering in November 1997, the net
proceeds from that 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 and related complementary businesses. Any such acquisitions may
require additional capital, although there can be no assurance that any
additional acquisitions will be completed.
In July 1998, the Company entered into a Loan and Security Agreement (the
"Agreement") with a bank that provides for an outstanding line of credit in the
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
receivable, inventory and equipment as collateral. During the nine months ended
September 30, 1999, the Company borrowed and repaid approximately $4.5 million
and $2.7 million, respectively, under this credit facility.
The Company has limited unused sources of capital. As of September 30, 1999 and
1998, the Company had net working capital of approximately $10.8 million and
$11.8 million, respectively. Management has undertaken steps to address the
Company's ongoing cash requirements including concentrating the Company's market
focus, identifying additional operational and administrative efficiencies, and
actively managing working capital. The Company believes that its available funds
together with its current and anticipated credit facilities will be adequate to
satisfy its current and planned operations, including restructuring accruals,
for at least the next 12 months.
For the nine months ended September 30, 1999, the Company used approximately
$737,000 in cash from operating activities. The cash used in operations resulted
primarily from the increase in acccounts receivable of $1.6 million and the
increase in inventories of $1.8 million offset by the increase in accounts
payable and accrued expenses of $2.4 million, including approximately $800,000
in restructuring charges. The change in accounts receivable was attributable to
the timing of collections. Additionally, these changes were due to the Company
stocking for anticipated sales and an increase in the accounts payable
associated with the increase in inventory. The Company's cash flows from
operations has been and
12
<PAGE> 15
continues to be affected primarily by the timing of the collection of accounts
receivable, its inventory levels and the timing of its payments of outstanding
invoices.
For the nine months ended September 30, 1999, the Company used cash in investing
activities of approximately $798,000 primarily due to the sale of Prisym, with
proceeds of $979,000, offset by the purchase of property and equipment of $1.2
million, which consisted of capital improvements related to the Services
Acquisition and additional purchases related to the new MIS system, offset by
the cash paid for the Services Acquisition of $400,000, including acquisition
costs of $139,000.
Cash provided by financing activities for the nine months ended September 30,
1999, was attributable to payments received from stockholders for deficient net
asset values, as discussed previously, and net proceeds of $1.8 million in debt
received under the Company's credit facility.
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, with these
increases attributable to growth in sales during the second quarter and stocking
for anticipated sales in the near term.
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,
resulted from 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 under an
acquired entity's existing line of credit and the receipt of $178,000 from
stockholders for deficient net asset values. The acquired entity's outstanding
line of credit was paid in full in July of 1998 and the facility was terminated.
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,
thereby causing potential system failures or miscalculations, which could result
in disruptions of normal business operations.
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. Management of the Company believes its internal software systems are
Year 2000 compliant, as a result of the management information systems project
completed during 1999. The costs of the Company's efforts to address the Year
2000 problem were not material to the Company's financial position or any year's
results of operations.
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 adversely and materially affect the Company's
results of operations, liquidity and financial condition. The Company believes
that, with the completion of the management information systems project, the
possibility of significant interruptions of normal operations should be reduced,
although the Company can provide no assurance to that effect. In
13
<PAGE> 16
the event that any of the Company's outside vendors or customers do not
successfully and timely achieve Year 2000 compliance, and the Company is unable
to replace them with alternate suppliers or new customers, the Company's
business or operations could be materially and adversely affected.
Transfer to the Nasdaq SmallCap Market
On November 10, 1999, the Nasdaq Stock Market ("Nasdaq") notified the Company of
its determination to transfer the listing of the Company's Class A Common Stock
from the Nasdaq National Market to the Nasdaq SmallCap Market effective the
opening of business November 15, 1999. Listing on the Nasdaq SmallCap Market is
contingent upon the successful completion of an application, which the Company
is currently preparing, and a Nasdaq review process. The Nasdaq has already
determined that if the Company's bid price failed to close at or above $1.00 per
share during the course of its review of the application, the Company would be
placed under a 90-day exception to the bid price requirement. If the Company
fails to comply with the terms of this exception, the Class A Common Stock will
be delisted from the Nasdaq. The Company believes that it will be able to comply
with the Nasdaq SmallCap Market listing requirements and the Company is
considering what steps can be taken to enable it to be reconsidered for listing
on the Nasdaq National Market. No assurances can be made that the Company will
be successful in maintaining its listing on the Nasdaq. If delisted from the
Nasdaq, the delisting could have an adverse and material effect on the Company's
stock price, the ability of the Company's shareholders to sell their shares, and
on the Company's ability to obtain additional debt and/or equity financing.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed as part of this Report.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
11.1 Statements of Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports Filed on Form 8-K
None
14
<PAGE> 17
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: November 12, 1999
By: /s/ William M. Rychel
------------------------------------------
Name: William M. Rychel
Title: Interim Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 By: /s/ W. Jeffrey Camp
-------------------------------------------
Name: W. Jeffrey Camp
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
<PAGE> 18
INDEX OF EXHIBITS
The following exhibits are filed as part of this Report.
Exhibit
Number Description
- ------- -----------
11.1 Statements of Computation of Earnings Per Share.
27.1 Financial Data Schedule. (for SEC use only)
16
<PAGE> 1
EXHIBIT 11.1
Tekgraf, Inc.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30:
Net loss $(6,915,685) $ (267,664)
Basic and diluted weighted average shares
outstanding 6,161,664 6,161,664
Net loss per share $ (1.12) $ (0.04)
FOR THE NINE MONTHS ENDED SEPTEMBER 30:
Net income (loss) $(7,199,772) $ 36,223
Basic and diluted weighted average shares
outstanding 6,161,664 5,797,727
Net income (loss) per share $ (1.17) $ 0.01
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TEKGRAF INCORPORATED, FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,410,724
<SECURITIES> 0
<RECEIVABLES> 18,542,465
<ALLOWANCES> (804,504)
<INVENTORY> 12,267,775
<CURRENT-ASSETS> 33,932,407
<PP&E> 2,499,673
<DEPRECIATION> (579,182)
<TOTAL-ASSETS> 38,302,781
<CURRENT-LIABILITIES> 23,154,259
<BONDS> 0
0
0
<COMMON> 6,328
<OTHER-SE> 15,046,208
<TOTAL-LIABILITY-AND-EQUITY> 38,302,781
<SALES> 81,626,826
<TOTAL-REVENUES> 81,626,826
<CGS> 68,712,665
<TOTAL-COSTS> 20,324,107
<OTHER-EXPENSES> (34,585)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,411
<INCOME-PRETAX> (7,463,772)
<INCOME-TAX> (264,000)
<INCOME-CONTINUING> (7,199,772)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,199,772)
<EPS-BASIC> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
