<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 March 31, 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: 6000 Lake Forrest Drive, Suite 110, Atlanta, Georgia 30328
--------------------------------------------------------------------------
(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 May 14, 1999
----- ---------------------------
Class A Common Stock, $.001 par value 3,169,165 shares
Class B Common Stock, $.001 par value 3,159,166 shares
<PAGE> 2
TEKGRAF, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998............ 1
Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998 ....................................................... 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 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 ....................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 11
Item 6. Exhibits and Reports on Form 8-K ................................................. 12
SIGNATURES ........................................................................................... 13
INDEX OF EXHIBITS .................................................................................... 14
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Tekgraf, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,425,018 $ 1,702,848
Accounts receivable, less allowance for doubtful accounts 14,565,746 16,626,730
of $620,000 and $520,000 at March 31, 1999
and December 31, 1998, respectively
Inventories, net 8,440,001 7,718,337
Prepaid expenses and other assets 723,949 872,945
Deferred income taxes 358,373 298,273
----------- -----------
Total current assets 27,513,087 27,219,133
----------- -----------
Property and equipment, net 912,251 824,664
Goodwill, net 8,875,720 9,009,941
Other assets 83,245 101,863
----------- -----------
Total assets $37,384,303 $37,155,601
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE> 4
Tekgraf, Inc.
Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt $ 719,898
Accounts payable $13,869,518 12,868,281
Accrued expenses 1,281,174 1,502,859
Income taxes payable 60,528 306,871
----------- -----------
Total current liabilities 15,211,220 15,397,909
----------- -----------
Deferred income taxes 95,986 95,986
----------- -----------
Total liabilities 15,307,206 15,493,895
----------- -----------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock, $.001 par value, 3,169 3,169
31,666,667 shares authorized; 3,169,165 shares
issued and outstanding at March 31, 1999 and
December 31, 1998
Class B Common Stock, $.001 par value, 3,333,333 3,159 3,159
shares authorized; 3,159,166 shares issued and
outstanding at March 31, 1999 and December 31, 1998
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; no shares issued at March 31, 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) (468,410) (293,199)
----------- -----------
Total stockholders' equity 22,077,097 21,661,706
----------- -----------
Total liabilities and stockholders' equity $37,384,303 $37,155,601
=========== ===========
</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
Ended March 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Net sales $24,335,778 $16,871,281
Cost of goods sold 20,450,574 14,041,156
----------- -----------
Gross profit 3,885,204 2,830,125
Operating expenses:
Selling, general and administrative 3,826,107 2,537,819
Depreciation 52,554 45,676
Amortization 161,711 120,603
----------- -----------
Income (loss) from operations (155,168) 126,027
Other (income)/expenses, net 4,367 (118,006)
Interest expense 24,876 3,808
----------- -----------
Income (loss) before income taxes (184,411) 240,225
Provision (benefit) for income taxes (9,200) 146,000
----------- -----------
Net income (loss) $ (175,211) $ 94,225
=========== ===========
Basic and diluted weighted
average shares outstanding 6,161,664 5,266,666
=========== ===========
Basic and diluted net income (loss) per share $ (0.03) $ .02
=========== ===========
</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>
Three Months Ended
March 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (175,211) $ 94,225
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Provision for doubtful accounts receivable 100,000 16,000
Provision/writedown of inventory 58,155 91,000
Depreciation 52,554 45,676
Amortization 161,711 120,603
Gain on sale of Prisym (32,000)
Deferred taxes (60,100) (22,060)
Changes in assets and liabilities:
Accounts receivable 853,428 (111,426)
Inventories (783,734) (2,167,406)
Prepaid expenses and other assets 34,696 1,586
Accounts payable and accrued expenses 1,195,186 (1,834,637)
Income taxes (246,343) (173,263)
----------- -----------
Total adjustments 1,333,553 (4,033,927)
----------- -----------
Net cash provided by (used in) operating activities 1,158,342 (3,939,702)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (162,112) (102,179)
Proceeds from sale of Prisym 979,239
----------- -----------
Net cash provided by (used in) investing activities 817,127 (102,179)
----------- -----------
Cash flows from financing activities:
Repayment of debt (712,561) (7,883)
Repayment of advance from
Stockholders and related entities (246,956)
Payments received from stockholders for deficient
net asset values 459,262
----------- -----------
Net cash used in financing activities (253,299) (254,839)
----------- -----------
Increase (decrease) in cash and cash equivalents 1,722,170 (4,296,720)
Cash and cash equivalents, beginning of period 1,702,848 8,600,339
----------- -----------
Cash and cash equivalents, end of period $ 3,425,018 $ 4,303,619
=========== ===========
</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 months ended March 31, 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 stock
equivalents during either of the periods presented. At March 31, 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. 1998 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
5
<PAGE> 8
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 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. Note also that the entities acquired previously
operated as closely held businesses. The pro forma summary does not purport to
represent what the Company's results of operations would have actually been if
the 1998 Acquisitions had occurred as of January 1, 1998 or to project the
Company's results of operations for any future period.
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31, 1998
--------------
(Unaudited)
<S> <C>
Statement of Operations Data:
Net sales $23,518,676
Gross profit 3,789,881
Operating loss (63,331)
Income before taxes 85,290
Net loss (8,007)
Basic and diluted loss per share (0.00)
Weighted average shares outstanding 6,161,664
</TABLE>
4. Income Taxes
The Company's effective tax rate was (5.0)% and 60.8% for the three months
ended March 31, 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.
5. Sale of Prisym
On March 25, 1999, effective as of February 28, 1999, the Company sold its
ownership interest in Prisym Technologies, Inc. of Georgia ("Prisym"), its 60%
owned subsidiary, to the other shareholder of Prisym, for a gain of
approximately $32,000. The gain has been included in other income in the
consolidated statement of operations for the three months ended March 31, 1999.
The Company no longer has any interest in Prisym.
6. Subsequent Event
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. for $400,000 in cash and the assumption of certain liabilities.
These businesses provide the maintenance and repair of the Calcomp line of
printers and other products in the U.S. and Canada and the supplies of Calcomp
printer parts and components to successors of Calcomp's service divisions
outside the U.S. and Canada. The acquisition will be accounted for under the
purchase method of accounting.
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 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 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 System." In December 1994, the Company acquired a
controlling interest in Prisym 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.
7
<PAGE> 10
In 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, the
Company sold its controlling interest in Prisym.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998.
Net sales. Net sales increased $7.4 million, or 44.2%, to $24.3 million for the
quarter ended March 31, 1999 compared to $16.9 million for the quarter ended
March 31, 1998. Of the increase, $4.2 million was attributable to the
acquisitions that occurred in April and May of 1998. Of the remainder, $4.6
million of the increase was due to increased market penetration and internal
growth in the Graphics Division. This increase was offset by a decrease in
Technology Division revenues of $1.4 million, with approximately $950,000 of the
decrease attributable to the sale of Prisym, effective February 28, 1999, and
Prisym's decreased revenues prior to that date.
Gross Profit. Gross profit increased $1.1 million, or 37.3%, to $3.9 million for
the three months ended March 31, 1999 compared to $2.8 million for the 1998
quarter. Gross margin as a percentage decreased to 16.0% for the first quarter
of 1999 compared to 16.8% for the same period in 1998. While gross margins
continue to remain under pressure, the Company has maintained its margin
percentages primarily as a result of differing product mixes and by providing
increased value-added and outsource services. The margin percentages for the
first quarter of 1999 compared favorably with the margin percentages for the
last three quarters of 1998, which ranged from 15.1% to 15.5%.
SG&A Expenses. SG&A expenses increased $1.3 million, or 50.8%, to $3.8 million
for the three months ended March 31, 1999 compared to $2.5 million for 1998. The
1998 acquisitions accounted for $530,000 or 41.1% of the increase, and costs
associated with the internal growth of the Company, including increased
commissions on increased sales and the additional infrastructure and duplicative
costs associated with combining the companies, accounted for the remainder of
the increase in SG&A expenses.
Income (loss) from Operations. Operating income decreased $281,000 to a loss of
$(155,000) for the first quarter of 1999 compared to income of $126,000 for the
1998 quarter. In addition to the costs described above, income from operations
was reduced by $162,000 and $121,000 in 1999 and 1998, respectively, related to
the amortization of goodwill.
Provision for Income Taxes. The Company's effective tax rate was (5.0)% and
60.8% for the three months ended March 31, 1999 and 1998, 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 had 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 are included only for the period
January 1, 1999 through March 31, 1999. Therefore, in addition to the
historical
8
<PAGE> 11
comparisons of the quarter ended March 31, 1999 and 1998, the Company has
included the pro forma statement of operations for the quarter ended March
31, 1998 as if the 1998 Acquisitions had occurred as of January 1, 1998.
The 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. The
pro forma statement 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. All amounts are presented in thousands.
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------
1999 1998
---- ----
Statement of Operations Data: (Pro Forma
(Historical) Combined)
------------ ----------
(Unaudited)
<S> <C> <C>
Net sales $24,335,778 $23,518,676
Cost of goods sold 20,450,574 19,728,795
Gross profit 3,885,204 3,789,881
Operating expenses:
Selling, general and administrative 3,826,107 3,675,138
Depreciation and amortization 214,265 178,074
Operating loss (155,168) (63,331)
Income (loss) before taxes (184,411) 85,290
Provision (benefit) for income taxes (9,200) 93,297
Net loss/Pro forma net loss (175,211) (8,007)
</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 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.
9
<PAGE> 12
Since inception, the Company has financed its operations through a combination
of cash flow 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 quarter ended
March 31, 1999, the Company borrowed and repaid approximately $1 million and
$1.7 million, respectively, under this 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 three months ended March 31, 1999, the Company generated approximately
$1.2 million in cash from operating activities. The cash provided from
operations resulted primarily from the decrease in accounts receivable, more
than offset by the increases in inventory and accounts payable. These changes
were attributable to the collection of accounts receivable from the strong sales
that occurred at the end of the prior quarter, along with the reduction in
accounts receivable from the sale of Prisym. Additionally, these changes were
due to the Company stocking for anticipated sales in the near term and a
slowdown in the payment of its accounts payable. The Company's cash flow from
operations has been and continues to be affected primarily by the timing of
collection of accounts receivable, its inventory levels and the timing of its
payments of outstanding invoices. The Company's working capital was $12.3
million and $11.8 million at March 31, 1999 and December 31, 1998, respectively.
For the three months ended March 31, 1999, the Company generated cash from
investing activities of approximately $817,000 primarily due to the sale of
Prisym, with proceeds of $979,000, offset by the purchase of property and
equipment, which was primarily additional purchases related to the new MIS
system.
Cash used in financing activities for the three months ended March 31, 1999 was
attributable to the net repayment of $713,000 in debt owed under the Company's
credit facility. There was no balance outstanding at March 31, 1999. This use
of cash was offset by payments received from stockholders for deficient net
asset values, as discussed previously.
For the three months ended March 31, 1998, cash used in operations was
approximately $4.0 million, primarily resulting from a decrease in accounts
payable arising from the buildup of invoices prior to the initial public
offering, for which payments were made in the first quarter of 1998, following
the initial public offering in November of 1997. Additionally, there were
increased purchases of inventories due to increased sales and sales demand. The
increase in inventories was primarily attributable to the purchase of computer
equipment subject to firm purchase orders and then shipped to customers.
The cash used in financing activities for the three months ended March 31,
1998, represents primarily the repayment of advances from stockholders and
related entities, loaned to the Company prior to the initial public offering,
of $247,000.
Subsequent Events
Effective April 1, 1999, the Company completed the acquisition of certain
assets of Calcomp Technology, Inc. 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
10
<PAGE> 13
involve the maintenance and repair of the Calcomp line of printer 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. The acquisition will be accounted for under the
purchase method of accounting.
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 substantially completed during the first quarter of 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 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 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, in the aggregate, they are not likely to have a
material adverse effect on the Company.
11
<PAGE> 14
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> <C>
2.1 Purchase and Sale Agreement, dated April 1,
1999, by and between Tekgraf, Inc.,
CalGraph Technology Services, Inc., and
Calcomp Technology, Inc. (filed as Exhibit
2.1 to the Company's Current Report on Form
8-K on April 16, 1999 and incorporated
herein by reference).
10.1 Stock Purchase Agreement and Termination
Agreement by and among Tekgraf, Inc.,
William E. Streib, and Prisym Technologies,
Inc. of Georgia, dated March 25, 1999
(Filed as Exhibit 10.39 to the Company's
Annual Report on Form 10-K, filed March 31,
1999, and incorporated herein by
reference).
11.1 Statements of Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports Filed on Form 8-K
On April 16, 1999, the Company filed a Current Report on Form 8-K,
pursuant to Item 2 of Form 8-K, regarding the Company's acquisition of
certain assets and the assumption of certain liabilities of Calcomp
Technology, Inc., which acquisition was completed on April 1, 1999.
12
<PAGE> 15
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: May 14, 1999
By: /s/ William M. Rychel
------------------------------------------
Name: William M. Rychel
Title: Interim Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999
By: /s/ W. Jeffrey Camp
------------------------------------------
Name: W. Jeffrey Camp
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)
13
<PAGE> 16
INDEX OF EXHIBITS
The following exhibits are filed as part of this Report.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C> <C>
2.1 Purchase and Sale Agreement, dated April 1, 1999, by and
between Tekgraf, Inc., CalGraph Technology Services, Inc.,
and Calcomp Technology, Inc. (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K on April 16, 1999 and
incorporated herein by reference).
10.1 Stock Purchase Agreement and Termination Agreement by and
among Tekgraf, Inc., William E. Streib, and Prisym
Technologies, Inc. of Georgia, dated March 25, 1999 (Filed as
Exhibit 10.39 to the Company's Annual Report on Form 10-K,
filed March 31, 1999, and incorporated herein by reference).
11.1 Statements of Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
14
<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 March 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Net income (loss) $ (175,211) $ 94,225
Basic and diluted weighted average shares outstanding 6,161,664 5,266,666
Net income (loss) per share $ (0.03) $ 0.02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TEKGRAF FOR THE 3 MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,425,018
<SECURITIES> 0
<RECEIVABLES> 15,185,746
<ALLOWANCES> 620,000
<INVENTORY> 8,440,001
<CURRENT-ASSETS> 27,513,087
<PP&E> 1,303,410
<DEPRECIATION> (391,159)
<TOTAL-ASSETS> 37,384,303
<CURRENT-LIABILITIES> 15,211,220
<BONDS> 0
0
0
<COMMON> 6,328
<OTHER-SE> 22,070,769
<TOTAL-LIABILITY-AND-EQUITY> 37,384,303
<SALES> 24,335,778
<TOTAL-REVENUES> 24,335,778
<CGS> 20,450,574
<TOTAL-COSTS> 4,040,372
<OTHER-EXPENSES> (4,367)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,876
<INCOME-PRETAX> (184,411)
<INCOME-TAX> (9,200)
<INCOME-CONTINUING> (175,211)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (175,211)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
