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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ____________
Commission File No. 000-23221
TEKGRAF, INC.
(Exact name of Registrant as specified in its charter)
Georgia 58-2033795
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
6000 LAKE FORREST DRIVE, SUITE 110, ATLANTA, GEORGIA 30328
(Address of Principal Executive Offices, including Zip Code)
(404) 252-0201
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Class A Common Stock, $.001 par value
and
Warrants to purchase Class A Common Stock, $8.40 exercise price
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
The aggregate market value of the Class A Common Stock held by
non-affiliates of the registrant was $5,556,927 at March 26, 1999. There were
558,666 shares of the Class B Common Stock held by non-affiliates of the
registrant at March 26, 1999.
The number of shares of Class A and Class B Common Stock outstanding as
of March 26, 1999 was 3,169,165 and 3,159,166, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy statement for the 1999
Annual Meeting of Stockholders of Tekgraf, Inc. are incorporated by reference
into Part III of this Report. Various exhibits to the Registrant's Registration
Statement on Form S-1, File Number 333-33449, are incorporated by reference into
the Exhibits to this Annual Report on Form 10-K.
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TEKGRAF, INC.
TABLE OF CONTENTS
<TABLE>
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ITEM PAGE
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PART I
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1. Business........................................................................................ 3
2. Properties......................................................................................12
3. Legal Proceedings...............................................................................13
4. Submission of Matters to a Vote of Security Holders.............................................13
PART II
5. Market for the Company's Common Equity and Related
Stockholder Matters.................................................................13
6. Selected Financial Data.........................................................................15
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition..................................................16
7A. Quantitative and Qualitative Disclosures About
Market Risks........................................................................22
8. Financial Statements and Supplementary Data.....................................................22
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................................22
PART III
10. Directors and Executive Officers of the Company................................................22
11. Executive Compensation.........................................................................22
12. Security Ownership of Certain Beneficial Owners and
Management..........................................................................22
13. Certain Relationships and Related Transactions.................................................23
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K............................................................................23
Signatures...................................................................................26
Index of Exhibits...........................................................................E-1
</TABLE>
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This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements relate to future economic
performance, plans and objectives of management of Tekgraf, Inc. (the "Company")
for future operations and projections of revenues and other financial items that
are based on the beliefs of the Company's management, as well as assumptions
made by, and information currently available to, the Company's management. The
words "expect," "estimate," "anticipate," "believe" and similar expressions are
intended to identify forward-looking statements. Such statements involve risks,
uncertainties and assumptions, including industry and economic conditions,
competition and other factors discussed in this and the Company's other filings
with the Securities and Exchange Commission, including the "Risk Factors"
section of the prospectus included in the Company's Registration Statement on
Form S-1, Registration number 333-33449 (the "Registration Statement"). If one
or more of these risks or uncertainties materialize or underlying assumptions
prove incorrect, actual outcomes may vary materially from those indicated. See
"Part II, Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition - Disclosure Regarding Forward-Looking Statements."
PART I
ITEM 1. BUSINESS.
Overview/History
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
(a "DEC Reseller").
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. ("G&R"), Microsouth, Inc. ("Microsouth"), tekgraf, inc.
("tekgraf"), Computer Graphics Distributing Company ("CGD"), and Tekgraf
Northwest, Inc. (formerly Intelligent Products Marketing, Incorporated)("Tekgraf
Northwest"), which includes IG Distribution, Inc. (collectively, the "1997
Acquisitions") in exchange for an aggregate of 2,192,000 shares (giving effect
to the Company's 400-for-1 stock split and recapitalization in June 1997 and its
.83333325-for-one stock split in October 1997) of Class B Common Stock 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 (the "Merger") 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, the distribution of
related components, and DEC Reseller activities.
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 (the "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 (a "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 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. ("CGT"), located in Greenville, South Carolina;
Martec, Inc. ("Martec"), located outside Los Angeles; and New England
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Computer Graphics, Inc. ("NECG"), with offices outside both Boston and Toronto
(collectively, the "1998 Acquisitions"). See "The 1998 Acquisitions and the
Acquisition Strategy".
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. Contemporaneously with the merger,
Tekgraf Reincorporation Subsidiary changed its name to Tekgraf, Inc. On March
25, 1999, the Company sold its controlling interest in Prisym.
Strategy
The Company's overall business strategy is to become a nationally recognized,
vertically oriented full services outsource provider of computer products and
services. The Company intends to accomplish this goal through internal growth of
its operating divisions and acquisitions of complementary businesses.
Internal Growth. The Company anticipates that it will be able to expand its
operations through internal growth of each of its operating divisions. The
Company will also seek to increase the customer base of the Technology Division
by utilizing the consolidated marketing and distribution structure of the
Graphics Division achieved as a result of the 1998 and 1997 Acquisitions, by
increased marketing of the Tekgraf System and related computer servers to
selected markets, and through enhanced product and service offerings.
The 1998 Acquisitions and the Acquisition Strategy
As was mentioned above, the Company acquired three regional distributors and
marketers of computer graphics hardware and software in April and May of 1998.
On April 1, 1998, the Company acquired CGT, a South Carolina corporation, 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, a California corporation, 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 NECG, a Massachusetts corporation, 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 1998 Acquisitions of CGT, Martec and NECG 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, 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 Acquisitions are regional distributors and marketers of computer graphics
hardware and software. These acquisitions were recorded under the purchase
method of accounting.
The Company intends to continue to expand its operations through acquisitions of
complementary businesses and to continue to seek out strategically attractive
companies that will allow the Company to continue to grow and expand within the
niche markets in which it has developed expertise and specialized knowledge. The
Company intends to focus its acquisition activities on profitable companies that
can be integrated into the Company's existing divisional structure, increase
divisional revenues, expand the geographic and technical scope of the Company's
operations and offer a greater range of products and services to our existing
customers as well as to potential new customers. There can be no assurance that
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the Company's acquisition program will be successful, that the acquisition of
other companies will be completed or that, if completed, any companies acquired
will be profitable or will contribute revenues to the Company.
THE COMPANY'S DIVISIONS AND PRODUCTS
As was mentioned above, the Company consists of two operating divisions, the
Graphics Division and the Technology Division.
THE GRAPHICS DIVISION
General
The Graphics Division currently consists of eight regional subsidiaries which
specialize in the wholesale distribution of computer graphics technologies. The
Graphics Division sells and supports products in the digital prepress,
presentation graphics, color desktop publishing, large format display graphics,
digital imaging, electronic drawing management, computer-aided design and other
emerging computer graphics technologies markets. The Company provides
value-added sales, marketing, fulfillment, and logistics support for more than
30 manufacturers of a broad array of complex computer graphics hardware and
software. See "Products and Markets."
Central to the business model of the Graphics Division and a core motivation for
the 1998 and 1997 Acquisitions were the pre-existing relationships among such
companies and their principals. The desire to provide manufacturers with
national sales and marketing programs fostered close cooperation among these
regional wholesale distributor firms, ultimately leading to the formation of two
trade associations, the David Group and the Vision Group. The purpose of these
prior associations was to facilitate joint marketing and promotion, product line
acquisitions, the sharing of technical resources and sales strategies, and the
transfer of excess inventory. All of the companies that make up the Graphics
Division are current or former members of one or both of such trade
associations.
A primary goal of the Graphics Division is to continue to build on the
aforementioned historic intercompany cooperation and function as a single entity
with respect to sales, marketing, advertising, public relations, technical
support and technology evaluation. With the addition of the 1998 Acquisitions,
the Graphics Division is in a position to provide computer graphics
manufacturers with a nationwide distribution channel and the value-added benefit
of local technical sales and support personnel. See "Customers, Sales and
Marketing." The Company intends to acquire other graphics technology and service
companies. There can be no assurance, however, that the Company will
successfully complete any such acquisitions.
On February 25, 1999, the Company signed a letter of intent with Calcomp
Technology, Inc. ("Calcomp"), a leading provider of wide-format printers and
other products, to enter into negotiations for a definitive agreement whereby
the Company will acquire Calcomp's U.S. and Canadian service businesses and
worldwide parts business and will assume certain liabilities relating to those
businesses. The closing of the proposed transaction is subject to the receipt of
all necessary approvals.
During the years ended December 31, 1998 and 1997, the revenues of the Graphics
Division accounted for 85.3% and 78.4%, respectively, of the Company's total
revenues (1997 is on a pro forma combined basis). The operating profit of the
Graphics Division for these same periods accounted for 95.3 and 76.7%,
respectively, of the Company's operating profit (1997 is on a pro forma
consolidated basis). The identifiable assets of the Graphics Division accounted
for 58.1% and 59.0% of the Company's total identifiable assets as of December
31, 1998 and 1997, respectively.
Products and Markets
The Company's Graphics Division distributes and supports products of over 30
manufacturers, including Agfa Division of Bayer Corporation, Electronics For
Imaging (EFI), Encad, Inc., Epson America, Inc.,
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Hewlett Packard, Mitsubishi Electronics America, Inc., Scitex America
Corporation, Tektronix, Inc., 3M and Vidar Systems Corporation. Among the
products the Graphics Division distributes and sells are color scanners, color
digital film recorders, digital cameras, color laser printers, color-calibrated
monitors, audio-visual presentation systems, raster image processors (RIPs), ink
jet printers, plotters, pre-press software, image setters, color proofers, mass
storage devices and the consumable products used in many of such products.
Prices typically range from less than $100 to more than $100,000.
The Company's agreements with manufacturers are generally non-exclusive, provide
for wholesale distribution to dealers and resellers in specified geographic
territories and are terminable by either party without cause on 30 or 60 days
notice.
The Graphics Division intends to continue to operate in the following four
vertical markets:
- Digital Pre-Press
- Display Graphics
- Electronic Drawing Management Systems (EDMS)
- Point of Purchase Signage (POP)
Digital Pre-Press. Over the last several years, there has been a dramatic shift
in the process printing industry from manual, analog production of printed
materials to the use of computers. Historically, the production of a printed
brochure, magazine or catalog involved numerous manual steps using photographic
materials to produce the final press-ready copy.
With rapid advances in software and hardware, much of today's printed materials
are produced digitally. The print production process now allows a printed piece
to go from concept to imaged printing plate in a fully digital environment. Copy
writing, proofing and revisions all take place on a desktop computer, increasing
the speed and efficiency of the pre-press process, and streamlining personnel
requirements in the process. The Company believes this market is in a period of
rapid transition regarding the manner in which electronics products are
delivered to the traditional printing customer. When digital pre-press systems
sold for $200,000 per seat (user), most manufacturers used a captive direct
sales force to sell to the end-user. Today, the typical seat sells for under
$20,000, forcing manufacturers to utilize a reseller channel to deliver their
products.
The Graphics Division sells input, proofing, networking, color management
software and output devices, which are integral parts of a digital pre-press
system. These products are typically sold through two classes of resellers:
graphic arts dealers, who have traditionally sold film, chemicals, printing
plates and other analog pre-press supplies, and graphics value added resellers
("VARs"), who have specialized in pre-press workflow technologies and the
automation of the pre-press process.
Display Graphics. The most rapidly growing segment of the computer graphics
output market is display graphics. Display graphics, or large format graphics,
describes a process that allows computer-generated or captured images to be
printed in sizes up to 60 inches wide.
Historically, these images could only be printed on color electrostatic printers
costing over $120,000. However, over the last several years, significant
advances in ink-jet technology, software, specialty inks and media have placed
the cost of entry for display graphics systems starting at under $10,000, and
market acceptance has been rapid. End-users of this technology include a wide
range of industries and markets, such as:
- Trade-show graphics - production of booth and arcade displays
- Point of Sale graphics - floor displays
- Sign Shops - traditional signage, fleet graphics
- Print-for-Pay (e.g., Kinkos, Sir Speedy)
- Package Design - package prototyping
- Graphic Arts - imposition proofing
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Products sold to this market include large-format ink-jet printers (Encad),
faster image processing software (Amiable Technologies, EFI, Onyx Graphics,
PISA), lamination systems (Seal Products, a division of Hunt Manufacturing) and
a wide range of inks, papers and other specialty media.
Electronic Drawing Management Systems (EDMS). The use of computer-aided design
("CAD") systems in the engineering and architectural community has created a
workflow problem for those firms that have embraced CAD - what to do with the
archive of manually drafted drawings.
EDMS allow these customers to capture (i.e., scan) paper drawings and store them
digitally. When needed, they can be retrieved, annotated, printed or converted
to CAD format for further revision. Since most of these functions can be
performed using existing CAD workstations or PC's, the cost of converting to
EDMS is relatively low, and the demand for such systems is growing dramatically.
The Graphics Division sells all of the components necessary for the installation
of an EDMS system, including large format scanners, archiving and manipulation
software, optical storage systems and output devices.
Point of Purchase Signage (POP). For many years, retailers have utilized POP,
sometimes referred to as Point of Sale (POS) signage, to promote products and
services to consumers. Typically, that signage has been produced using manual
methods (chalkboards, markers, etc.) by in-store personnel, or printed at a
central corporate location using standard lithography printing methods and
distributed to retail stores.
Recent advances in software and hardware have created a new market for
customized POP signage using display graphics printers, software and media. This
technology allows a retailer to quickly and easily create, print and display
retail signs that are more responsive to their needs.
During 1998, as part of the Company's key strategic objectives, the Company was
engaged by a major beverage manufacturer to design, implement and support a
customized POP sign making system which allows the beverage manufacturer to
quickly make POP signs without the use of highly trained, dedicated personnel.
The Company provides product research and development, training, installation
and technical support for the beverage manufacturers' distributor customers, and
provides outsource fulfillment of inks and media used in the sign making
process.
Through its internal Strategic Solutions Group, the Company intends to continue
its initiative in the POP market in 1999. In partnership with some strategic VAR
customers and suppliers, the Company will attempt to expand its customer base in
the POP market to include a wide range of retailers including supermarkets,
department stores, drug chains and large manufacturers of consumer products who
rely heavily upon the retail marketplace.
Customers, Sales and Marketing
The Graphics Division's customers are principally VARs and systems integrators
("SIs"), as well as, for certain products, retailers, mass merchandisers and
direct marketers. VARs typically focus on sales to users in specific vertical
markets where the selling organization has unique knowledge and expertise
concerning the prospective customer's application. These customers purchase
products from the Company and resell them as an integrated solution bundled with
installation services and post-sales support. SIs typically purchase products
from the Company for further integration into a much larger solution comprised
of components from many sources. These solutions typically are very large in
scale and may involve an integration contract between the SI and the end-user
customer. The Graphics Division utilizes the retail, mass merchant and direct
marketing sales channels when product demand is firmly established and a lower
cost mechanism of delivery to the end user is warranted.
Currently, the Graphics Division has 23 outside and 21 inside sales
representatives and 10 technical support representatives. The Company believes
that this constitutes the highest concentration of sales and technical support
professionals in the United States devoted to the sales, marketing, and support
of high-end computer graphics products.
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The Company's sales representatives receive commissions based on gross profit on
completed sales. During each of the years ended December 31, 1998, 1997 and
1996, compensation paid to outside independent sales representatives amounted to
less than 5% of the Company's sales.
Each regional location of the Graphics Division has and maintains training and
demonstration facilities equipped with manufacturers' hardware and applications
software. These resources are made available to prospects and customers for
product evaluations, product training, demonstrations, benchmark testing and
in-house and in-the-field seminars. In addition, the Graphics Division's sales
force and technical sales representatives are trained and able to demonstrate
the technology it distributes and the applications of such technology. Inside
and outside technical sales representatives are also trained and understand
their manufacturers' products, the competitors' products, related applications,
software and the relevant end-user markets.
The Company believes the services offered by the Graphics Division are unique in
providing face-to-face sales, marketing, and distribution of mid to high-end
computer graphics products sold through vertical reseller channels. Typically,
products carried by the Graphics Division are relatively complex, requiring
technical sales training, product demonstrations, product training, pre-sale and
post-sale technical support and immediate product availability. Selling and
supporting products in these markets require knowledge of many distinct types of
hardware and software as well as communications protocols, networking
architecture, file formats, compression techniques, and other systems
integration issues. Manufacturers of products with such a level of complexity
often need to leverage their own limited resources by selling and distributing
through reseller organizations. Similarly, reseller organizations are often
severely limited in the technical sales and marketing resources they can devote
to the sale of specific products. Accordingly, each regional location of the
Graphics Division augments both the manufacturer's and the reseller's staff,
capitalizing on its ongoing relationships with the local resellers and end user
community. Resellers are trained and assisted by Graphics Division staff in all
aspects of sales, marketing, distribution and installation of its products.
With the consolidation and centralization of the operations of the 1997 and 1998
Acquisitions, the Company has established a national distribution network. In
addition to the economies of scale achieved, the Company believes that it will
be much more cost-effective for certain manufacturers of computer graphics
technology and peripheral equipment to utilize the Company as a distributor of
its products than to maintain their own extensive internal sales force.
THE TECHNOLOGY DIVISION
General
The operations of the Technology Division currently consist of the manufacture
of the Tekgraf System. The Company custom designs, assembles and sells custom or
"made-to-order" premium servers or workstations and related technology to VARs,
vertical solution providers, corporations, universities and government entities.
See "Customers, Sales and Marketing." The Company also provides services to its
customers, including system architecture design, hardware consulting and
customer support.
On March 25, 1999, the Company sold its ownership interest in Prisym, its
60%-owned subsidiary, to the other shareholder of Prisym. The Company no longer
has any interest in Prisym.
Products and Markets
The Tekgraf System is a PC that is assembled in a number of different
configurations using standard component parts. Although many of the Tekgraf
Systems are based on standard configurations, customization enables the Company
to accommodate customer computer needs with respect to storage capacity, speed,
price, applications, size, configuration and a range of other considerations
that can be accommodated in whole or in part by the selection of appropriate
components. The Company provides customers with continuing technical support and
assistance in the maintenance and operations of Company purchased products. The
Company also works with SIs on network configuration and performs research and
implementation of upcoming products, such as Linux.
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Tekgraf Systems are currently being used to operate non-sterile heart
catheterization diagnostic equipment, as voice mail/auto-attendant controllers,
in informational kiosks and in other process-control applications. The Company
also sells servers and RAID storage systems to VARs and other companies seeking
to create Internet web sites, internal networks, graphics and CAD workstations
and application servers.
Through Prisym, the Company provided DEC's Alpha-based workstations and servers,
mass storage systems, printers, components and computer peripherals and supplies
to the nationwide installed base of DEC customers. Prisym's customers included
governmental agencies and educational institutions. As noted previously, Prisym
was sold on March 25, 1999.
During the years ended December 31, 1998 and 1997, the revenues of the
Technology Division accounted for 14.7% and 21.6%, respectively, of the
Company's total revenues (1997 is on a pro forma combined basis). The operating
profit of the Technology Division for these same periods accounted for 4.7% and
23.3%, respectively, of the Company's operating profit (1997 is on a pro forma
consolidated basis). The identifiable assets of the Technology Division
accounted for 5.6% and 7.0% of the Company's identifiable assets as of December
31, 1998 and 1997, respectively.
Manufacturing and Suppliers
The Company's manufacturing operations consist of the assembly of Tekgraf
Systems at its facility in Norcross, Georgia and the testing of the electronic
and mechanical components incorporated into its products.
The Company has elected to assemble its products using principally the highest
quality off-the-shelf electronic component parts available from multiple
sources. The Company believes that this practice helps to ensure better quality
control and pricing by allowing the Company to select the best manufactured and
best performing components available on the market, rather than a proprietary
product that may fall behind the latest technology in terms of either such
characteristic, and to purchase such components from marketplace sources that
offer the best prices at the time the particular components are needed for
production, as opposed to having prices dictated by the limited sources able to
provide a proprietary component. The Company obtains component parts on a
purchase order basis and does not have long-term contracts with any suppliers.
To date, the Company has not experienced significant interruptions in the supply
of such component parts, and believes that numerous qualified suppliers are
available. The Company believes that the inability of any of its current
suppliers, except as specified below, to provide component parts to the Company
would not adversely affect the Company's operations and that alternative sources
could be readily established.
The Company currently obtains its motherboards (a primary component of the PC)
from two sources. Certain of the Company's file server products incorporate a
motherboard, which is currently purchased from a sole supplier. Historically,
the Company has been able to obtain adequate supplies of this component and does
not anticipate any related sourcing problems; the inability in the future to
obtain sufficient numbers of such components or to develop alternative sources
could result in delays in product introductions or shipments. Such delays could
have an adverse effect on the Company's results of operations. The Company plans
to attempt development of additional alternative sources to limit any adverse
impact on the Company's result of operations.
The Company has established a comprehensive testing and qualification program to
ensure that all subassemblies meet the Company's specifications and standards
before final assembly and testing. The Technology Division also actively
participates in reviews sponsored by trade magazines, regularly finishing among
the top performers. The Company's quality control program includes diagnostic
tests, assembly, burn-in, final configuration and final quality assurance tests
and the employment of process controls at its manufacturing facility. The
Company has also implemented quality control policies and procedures that are
reviewed and accepted by the Company's major customers. The Company believes
that these procedures help ensure a high-quality product.
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The Company's own manufacturing facility totals approximately 4,000 square feet.
The Company believes that additional manufacturing facilities, if necessary, are
available. The Company is currently operating at approximately 50% of capacity
at this facility. See "Item 2 - Properties."
Customers, Sales and Marketing
Customers for the Tekgraf System include OEMs, other vertical market computer
resellers, computer dealers, universities, government entities and corporations.
The Technology Division does not market to individual end-users, focusing
instead on establishing relationships with entities which will constitute repeat
sales and have internal computer support personnel capable of handling local
issues prior to involvement of Company personnel.
The Company currently distributes Technology Division products principally
through the efforts of its internal direct sales force. The Company is beginning
to offer Technology Division products through its Graphics Division sales force
and to expand its marketing efforts and seek to (i) expand the customer base for
the Tekgraf System, (ii) expand the geographic market serviced by the
Graphics Division and (iii) increase both the number of products distributed and
the number of manufacturers whose products are distributed by the Graphics
Division. Because the Technology Division typically sells large amounts of
equipment to a small number of customers, a large portion of the Technology
Division's sales may be derived from a limited number of customers.
Customer Service and Support
The Company believes that customer service and support is a significant
competitive factor in the network systems market in which it sells the Tekgraf
System and will become more important as local area networks ("LANs") become
more complex and as more enterprises implement business-critical applications on
their networks. The Company supports its customers by providing rapid problem
resolutions both during and after the installation process. The Company
maintains a technical support organization that assists customers in
trouble-shooting problems and providing replacement parts. The Company provides
a toll-free telephone number to help diagnose and correct customer system
interruptions as they occur at customer sites and support staff is available
during normal business hours.
The Company warrants all of its Tekgraf Systems servers and workstations against
defects in materials and workmanship for two years. During the warranty period,
the Company will repair or replace any Tekgraf System or component thereof,
which the Company identifies as defective. The Company, in certain
circumstances, will send replacement parts to the customer site prior to the
return of defective components in order to minimize down time. The Company has
contracted with a bonded, national service provider to furnish on-site service
of Tekgraf Systems to customers that choose that option.
The Company's product warranties do not differ materially from those generally
available in the industry. In most instances, the Company receives warranties on
products from vendors that are at least equivalent to those it provides to its
customers. To date, the Company has not experienced any material claims under
its warranties.
Graphics and Technology Divisions
Backlog
The Company does not have significant backlog due to (i) the fact that the
Graphics Division generally ships orders received the same or next day and (ii)
the Technology Division being able to manufacture and deliver products generally
within a few days of order receipt and long-term contracts to supply products
have not been entered into with customers (the Company manufactures and sells
products on the basis of individual purchase orders as and when received).
Accordingly, backlog at the beginning of a quarter may not represent a
significant percentage of the products anticipated to be sold in that quarter.
Quarterly revenues and operating results depend on the volume and timing of
orders received during the quarter. Therefore, management of the Company does
not consider order backlog a significant indicator of the Company's future
revenues.
10
<PAGE> 11
Competition
The business of manufacturing and selling computers and computer peripheral
equipment is intensely competitive and rapidly changing. The Company believes
that the principal competitive factors in this industry include relative price
and performance, product availability, technical expertise, financial stability,
service, support and reputation.
The Company's Graphics Division competes primarily with computer equipment
manufacturers that either utilize an in-house sales force to market their
products to resellers and end-users or utilize the services of large, national
fulfillment distributors. The Company believes its primary competition will come
from national fulfillment distributors whose specialty is order fulfillment. The
Company believes that the primary factors differentiating it from such
competitors are its ability to provide technical sales training, product
demonstrations, product training, pre-sale and post-sale technical support and
evaluation units.
The Technology Division's Tekgraf Systems are constructed with standardized
parts that are available to others in the market. The competitors of the
Company's Technology Division include established computer product
manufacturers, some of which supply products to the Company, computer resellers,
distributors and service providers. Most of the companies with which the
Technology Division competes have substantially greater capital resources,
research and development staffs, marketing and distribution programs and
facilities, and many of them have substantially greater experience in the
production and marketing of products. As a result, these competitors may be able
to devote greater resources than the Company to the sales and service of their
computer products. As the computer market in which the Company competes has
matured, product price competition has intensified and is likely to continue to
intensify, which may make it too costly for the Company to continue the "made to
order" method of doing business. One of the results of this competition may be
to lower sales prices and decrease profit margins.
Technological competition from other and longer established computer hardware
manufacturers and software developers is significant and expected to increase.
The Company expects that hardware manufacturers and software developers will
continue to enter the market to provide and package integrated information
distribution solutions to the same customer base served by the Company's
Technology Division. All such market participants will compete intensely to
maintain or improve their market shares and revenues.
In the development market for network servers and workstations, the Technology
Division experiences competition from hundreds of small companies and a number
of significant competitors, including such major industry participants as IBM,
Dell and Compaq Computers, Inc. Consequently, the Technology Division has gained
authorization and began the marketing of Compaq systems and notebooks in the
opportunities where they are mandated. Additionally, there is no assurance that
the Tekgraf System will continue to achieve sufficient market acceptance to
assure the Company's future success and long range profitability in the face of
competition with such significantly larger and better-capitalized companies.
Intellectual Property
The Company has no patents and its success will depend, in part, on its ability
to preserve its trade secrets and proprietary know-how, and to operate without
infringing upon the proprietary rights of third parties.
The Company seeks to protect trade secrets and proprietary know-how, in part, by
confidentiality agreements with employees, consultants, advisors, and others.
There can be no assurance that such employees, consultants, advisors, or others
will maintain the confidentiality of such trade secrets or proprietary
information, or that the trade secrets or proprietary know-how of the Company
will not otherwise become known or be independently developed by competitors in
such a manner that the Company will have no practical recourse.
Product Research and Market Development
The market for the Company's products is characterized by rapid technological
change and evolving industry standards, and it is highly competitive with
respect to timely product innovations. The introduction of products embodying
new technology and the emergence of new industry standards can
11
<PAGE> 12
render existing products obsolete and unmarketable. The Company believes that
its future success will depend upon its ability to develop, manufacture and
market new products and enhancements to existing products on a cost-effective
and timely basis.
If the Company is unable for technological or other reasons to develop products
in a timely manner in response to changes in the industry, or if products or
product enhancements that the Company develops do not achieve market acceptance,
the Company's business will be materially and adversely affected. The Company
has in the past experienced delays in introducing certain of its products and
enhancements, and there can be no assurance that it will not encounter technical
or other difficulties that could in the future delay the introduction of new
products or enhancements. Such delays in the past have generally resulted from
the Company's need to obtain a requisite component from a third-party vendor
whose own development process has been delayed (e.g., the RAID controller card
for the Company's server products).
Employees
As of December 31, 1998, the Company had 121 full-time and 8 part-time employees
in the Graphics Division and 23 full-time employees and one part-time employee
in the Technology Division.
The Company's employees are not represented by a labor union and the Company
believes that relations with employees are satisfactory.
ITEM 2. PROPERTIES.
Facilities and Administrative Functions
The table below sets forth certain information with respect to leased properties
of the Graphics Division:
Lease Terms:
<TABLE>
<CAPTION>
Approximate Square Expiration Annual
Location Footage Date Rental(1)
- -------- ------------------ ---------- ---------
<S> <C> <C> <C>
980 Corporate Woods Parkway(2)
Vernon Hills, Illinois 14,935 5/31/00 $162,841
555 Corporate Woods Parkway
Vernon Hills, Illinois 11,000 9/30/99 $ 69,288
645 Hembree Parkway
Roswell, Georgia 10,447 4/30/02 $ 53,107
620 East Diamond Avenue
Gaithersburg, Maryland 8,993 6/30/99 $ 98,829
7020 Koll Center Parkway
Pleasanton, California(3) 7,892 12/8/01 $ 96,888
6721 Port West
Houston, Texas 5,495 3/31/99 $ 54,000
1110 West Butler Road
Greenville, South Carolina 9,000 9/30/00 $ 54,054
370 Amapola Avenue
Torrance, California 9,594 9/30/01 $ 77,724
2 Park Drive
Westford, Massachusetts 3,500 12/31/00 $ 37,526
7490 Pacific Circle
Mississauga, Ontario 3,000 7/31/00 $ 16,296
</TABLE>
- ---------------------
(1) Certain of these leases provide for moderate annual rental increases.
12
<PAGE> 13
(2) A portion of these premises is being subleased to a current stockholder
of the Company for an annual rental of approximately $30,000.
(3) A portion of these premises is being subleased to a company affiliated
with certain stockholders of the Company for an annual rental of
approximately $39,000.
The Company, in the past, has maintained eight regional warehouses for the
Graphics Division. As part of the Company's consolidation and centralization
efforts, the Company plans to reduce the number of warehouses to three.
The Technology Division's manufacturing and warehousing facilities are located
in approximately 7,600 square feet in Norcross, Georgia pursuant to a lease
expiring October 31, 2001, which provides for an annual rental of $37,989.
Prisym leased approximately 2,850 square feet in Norcross, Georgia, expiring
March 31, 1999, for an annual rental of $24,000.
The Company's executive offices are located in approximately 2,000 square
feet in Atlanta, Georgia pursuant to a lease expiring February 1, 2000, which
provides for an annual rental of $34,452. The Company periodically reviews its
space and is currently exploring the possibility of relocating the Company's
headquarters to the Roswell, Georgia location in 1999 or early 2000.
The Company is also in the process of centralizing certain administrative,
accounting and operational functions from the existing eleven locations to its
Roswell, Georgia and Vernon Hills, Illinois locations. The Company's new MIS
system is intended to increase the Company's customer service and sales
capabilities by providing contact management, customized management reports,
facilitating order tracking and automating sales projections.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders by the Company during the
quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Price Range of Class A Common Stock and Redeemable Warrants
The Company's Class A Common Stock and Warrants are quoted on the NASDAQ
National Market under the symbols "TKGFA" and "TKGFW", respectively. The
Company's securities have been quoted on the NASDAQ National Market since
November 10, 1997, when the Company completed the Offering. Each Warrant
entitles the holder thereof to purchase one share of Class A Common Stock of the
Company at an exercise price of $8.40 at any time until 5:00 p.m., New York City
time, on November 10, 2002. Beginning on November 10, 1998, the Warrants are
redeemable by the Company, on 30 days' written notice, at a price of $0.05 per
Warrant, if the "closing price" of the Company's Class A Common Stock for any 30
consecutive trading days ending within 15 days of the notice of redemption
averages in excess of $11.75 per share. The "closing price" shall mean the
closing bid price if listed in the over-the-counter market on Nasdaq or
otherwise or the closing sale price if listed on the Nasdaq National Market or a
national securities exchange. The Company has agreed not to redeem the Warrants
unless a prospectus covering the shares of Class A Common Stock underlying the
Warrants is in effect throughout the date fixed for redemption. All Warrants
must be redeemed if any are redeemed.
13
<PAGE> 14
The following table sets forth, for the periods indicated, the high and low
closing prices per share of the Class A Common Stock and Redeemable Warrants as
reported by the NASDAQ National Market.
<TABLE>
<CAPTION>
1998 High Low
- ---- ---- ---
<S> <C> <C>
1st Quarter
Class A Common Stock $ 4.31 $ 2.00
Redeemable Warrants .75 .19
2nd Quarter
Class A Common Stock 3.88 3.00
Redeemable Warrants .59 .25
3rd Quarter
Class A Common Stock 3.13 1.75
Redeemable Warrants .41 .22
4th Quarter
Class A Common Stock 3.00 1.13
Redeemable Warrants .31 .13
</TABLE>
<TABLE>
<CAPTION>
For the period November 10, 1997 to
December 31, 1997
- -----------------
<S> <C> <C>
Class A Common Stock $ 5.56 $ 2.31
Redeemable Warrants 1.88 .56
</TABLE>
Class B Common Stock
There is no active trading market for the Class B Common Stock; however, each
share of Class B Common Stock can be converted into one share of Class A Common
Stock. Each share of Class B Common Stock entitles the holder to five votes per
share, while the Class A Common Stock entitles the holder to one vote per share.
The Company issued 2,192,000 shares (giving effect to the Company's 400-for-1
stock split in June 1997 and its .83333325-for-one reverse stock split effected
in October 1997) of Class B Common Stock as the consideration used in the 1997
Acquisitions on June 2, 1997. At that time, 1,141,333 shares (again, giving
effect to the stock split and reverse stock split) were already held by the
shareholders of the Company. Accordingly, the Company had 3,333,333 shares of
Class B Common Stock outstanding until December 14, 1998, at which time 174,167
shares of Class B Common Stock were converted to 174,167 shares of Class A
Common Stock . Consequently, there are now 3,159,166 outstanding shares of Class
B Common Stock.
Holders
As of March 26, 1999, the approximate number of holders of record of the Class A
and Class B Common stock were 41 and 19, respectively.
As of March 26, 1999, the approximate number of holders of record of the
Warrants was 22.
Dividends
The Company has applied and intends to continue to apply its retained and
current earnings toward the development of its business and to finance the
growth of the Company. Consequently, the Company currently does not anticipate
paying cash dividends on either its Class A Common Stock or Class B Common Stock
in the foreseeable future. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition--Liquidity and Capital Resources."
Recent Sales of Unregistered Securities
As was stated above, in April and May of 1998, the Company completed the
acquisitions of the outstanding capital stock of CGT, Martec and NECG in
exchange for the issuance of unregistered Class A
14
<PAGE> 15
common stock. On April 1, 1998, 330,000 shares were issued to the former
shareholders of CGT. On May 1, 1998, 300,000 shares were issued to the former
shareholder of Martec, and on May 8, 1998, 264,998 shares were issued to the
former shareholders of NECG. In addition to these 894,998 shares, the Company
paid $1,415,000 in cash to these former shareholders as consideration for their
stock in CGT, Martec and NECG. The shares were issued in reliance on Section
4(2) of the Securities Act of 1933, based on the following factors: the
transactions did not involve general solicitations, the persons to whom the
securities were issued were provided with financial and other information with
respect to the Company, the securities were issued to a limited number of
persons, and the Company received reasonable assurance that those persons were
acquiring the securities for investment purposes.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL AND OPERATING DATA
The financial information presented below represents selected historical data
for the Company. The following selected financial and operating data presented
by the Company should be read in conjunction with the historical consolidated
financial statements of the Company and the related notes thereto and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." Note that effective June 2, 1997, the Company acquired all of the
outstanding common stock of G&R, Microsouth, tekgraf, CGD, and Tekgraf
Northwest. Also note that in April and May 1998, the Company acquired all of
the outstanding common stock of CGT, MGD and NECG. These acquisitions were
accounted for as purchases and accordingly, are only included in the historical
consolidated financial statements from the acquisition date forward.
Historical
<TABLE>
<CAPTION>
Years Ended
December 31
(in Thousands)
---------------------------------------------------------------
1998(1) 1997(2) 1996 1995 1994
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $99,047 $ 48,733 $13,415 $ 12,277 $ 6,339
Cost of goods sold 83,621 41,250 10,952 10,368 5,228
------- -------- ------- -------- -------
Gross profit 15,426 7,483 2,463 1,909 1,111
Operating expenses:
Selling, general and
administrative 14,326 7,294 2,245 1,761 1,082
Depreciation and amortization 833 390 17 28 8
------- -------- ------- -------- -------
Operating income (loss) 267 (201) 201 120 21
Other income 348 68 15 -- --
Interest expense 37 301 160 126 40
------- -------- ------- -------- -------
Income (loss) before taxes 578 (434) 56 (6) (19)
Provision (benefit) for income taxes 487 (41) 13 (2) (4)
------- -------- ------- -------- -------
Net income (loss) $ 91 $ (393) $ 43 $ (4) $ (15)
======= ======== ======= ======== =======
Net income (loss) per share $ .02 $ (.15) $ .04 $ --
======= ======== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Years Ended
December 31
(in Thousands)
--------------------------------------------------------------
1998(1) 1997(2) 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $11,821 $13,066 $ (104) $ (51) $ (39)
Total assets 37,156 29,952 3,007 2,264 1,725
Due to stockholders/related entities 517 2,211 1,616 1,424
Long-term obligations 13
Stockholders' equity (deficit) 21,662 20,055 10 (33) (24)
</TABLE>
15
<PAGE> 16
- -------------------------
(1) In April and May 1998, the Company acquired three computer graphics
companies and their operations are included in the Statement of
Operations and Balance Sheet data from this date forward. See "Item 1.
Business - The 1998 Acquisitions and the Acquisition Strategy".
(2) On June 2, 1997, the Company acquired five computer graphics companies
and their operations are included in the Statement of Operations and
Balance Sheet data from this date forward. See "Item 1. Business -
Overview/History".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The following discussion should be read in conjunction with the information
contained in the Consolidated Financial Statements, including the related notes.
Overview
The Company was incorporated in Georgia in February 1993 and in December 1994,
completed the acquisition of a 60% interest in Prisym. On June 2, 1997, the
Company completed the acquisition of a 100% interest in each of the subsidiaries
as shown in the table below.
Acquisitions
<TABLE>
<CAPTION>
(in thousands)
Company Date 1996 Net
Name Acquired Net Sales Assets
- ------- -------- --------- ------
<S> <C> <C> <C>
Microsouth June 2, 1997 $10,326 $ 484
tekgraf June 2, 1997 4,063 255
Tekgraf Northwest June 2, 1997 9,104 407
G&R June 2, 1997 21,038 525
CGD June 2, 1997 11,003 639
------- ------
$55,534 $2,310
======= ======
</TABLE>
In connection with the acquisitions listed above, a total of 2,192,000 shares of
Class B Common Stock of the Company was issued. The acquisitions were accounted
for using the purchase method of accounting. Subsequent to the acquisitions, the
Company completed a merger pursuant to which it reincorporated in the State of
Delaware and effected a recapitalization pursuant to which each share of common
stock of the Georgia entity was exchanged for 400 shares of Class B Common Stock
of the Delaware entity.
In April and May 1998, the Company completed the acquisition of a 100% interest\
in each of the subsidiaries as shown in the table below.
<TABLE>
<CAPTION>
(in thousands)
Company Date 1997
Name Acquired Net Sales
- ---- ------------- ---------
<S> <C> <C>
CGT April 1, 1998 $11,451
MGD May 1, 1998 7,523
NECG May 8, 1998 5,619
-------
$24,593
=======
</TABLE>
In connection with the acquisitions listed above, a total of 894,998 shares of
unregistered Class A Common Stock was issued and $1,415,000 in cash was paid.
The acquisitions were accounted for 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.
The Company is a nationally recognized vertically oriented provider of computer
products and services with a national distribution network. Accordingly, to more
efficiently absorb the Company's overhead and add profitable lines of business,
a principal part of Tekgraf's strategy is to acquire other graphics technology
and service companies.
16
<PAGE> 17
Tekgraf has also entered into a letter of intent with CalComp Technology, Inc.,
a leading provider of wide-format printers and other products, to enter into
negotiations for a definitive agreement whereby the Company will acquire
CalComp's U.S. and Canadian service businesses and worldwide parts business and
will assume certain liabilities related to those businesses. See "Item 1.
Business--The Graphics Division-General."
Results of Operations
Net sales reflect the sale of the Company's products, net of allowances for
returns and other adjustments and include minimal revenues related to services
performed at the Company's premises. Sales are generated from the sale of
products in both the domestic and international markets. One customer accounted
for 8% of sales in 1998. No individual customer accounted for more than 5% of
sales during 1997 or 1996.
Cost of goods sold consists primarily of product costs (costs of acquisition or
manufacture) and freight charges. Cost of goods sold also includes direct
expenses, such as labor and inventory, obtaining FCC certification of products
where required, the cost of shipping, as well as overhead allocated to direct
expenses incurred in manufacturing products sold by the Company. The direct
costs associated with providing services performed by the Company for its
customers are also included in the cost of goods sold.
Sales and gross profits depend in part on the volume and mix of components and
finished goods contained in the Company's inventory from time to time.
Manufactured product sales have a higher gross profit margin with a relatively
lower volume of sales per customer, while component sales have a comparably
lower gross profit margin with a relatively higher volume of sales per customer.
A large portion of the Company's operating expenses is relatively fixed. Since
the Company does not obtain long-term purchase orders or commitments from its
customers, it must anticipate the future volume of orders based upon historical
purchasing practices of its customers. Cancellations, reductions or delays in
orders by a customer or group of customers could have a material adverse effect
on the Company's business, financial condition and results of operations.
Selling, general and administrative ("SG&A") expenses include costs related to
the Company's sales force, which are comprised of both direct employees of the
Company and independent sales representatives. Included in SG&A expenses are
direct labor costs for in-house sales representatives as well as commissions
paid to both in-house and independent sales personnel. Also reflected as SG&A
expenses are certain management, supervisory and staff salaries and employee
benefits, data processing, training, rent, and office supply costs. Costs
associated with marketing and advertising of the Company's products are also
included in SG&A expenses, along with expenses relating to corporate and
administrative functions that serve to support the existing products and service
business of the Company, as well as to provide the infrastructure for future
growth.
Interest expense includes costs and expenses associated with working capital
indebtedness, as evidenced by outstanding balances on the Company's current and
prior credit facilities, and working capital advances previously made by certain
stockholders (which have been repaid).
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997.
Net Sales. Net sales increased $50.3 million, or 103.2%, to $99.0 million for
the year ended December 31, 1998 ("1998") compared to $48.7 million for the year
ended December 31, 1997 ("1997"). Of the increase, including internal growth
since dates of acquisition, $18.5 million was attributable to the acquisitions
that occurred in April and May 1998 and $32.4 million of the increase in 1998
was due to the 1997 acquisitions being included in the results of operations for
the entire year of 1998. These increases were offset by a decrease of
approximately $600,000 in net sales in the Technology Division.
Gross Profit. Gross profit for 1998 increased $7.9 million, or 106.1%, to $15.4
million compared to $7.5 million for 1997. Gross profit as a percentage of sales
increased to 15.6% for 1998 compared to 15.4% for
17
<PAGE> 18
1997. While gross margins continue to remain under pressure, the Company has
maintained its gross margin percentages primarily as a result of differing
product mixes and by providing increased value-added services.
SG&A Expenses. SG&A expenses increased $7.0 million, or 96.4%, to $14.3 million
for 1998 compared to $7.3 million for 1997. SG&A expenses as a percentage of
sales were 14.5% and 15.0% for 1998 and 1997, respectively. The increase in SG&A
expenses is primarily attributable to the acquisitions that occurred in June
1997 and April and May of 1998. The 1998 acquisitions accounted for $2.4 million
of the increase. 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.
Operating Income. Operating income (loss) increased $468,000, to $267,000 for
the 1998 year compared to $(201,000) for the 1997 year. In addition to the costs
described above, operating income was reduced by the amortization of goodwill of
$610,000 for the year ended December 31, 1998. For 1997, the operating loss was
increased by goodwill amortization of $265,000.
Provision for Income Taxes. The Company's effective tax rate was 84.2% for the
year ended December 31, 1998 as compared to (9.4)% for the year ended December
31, 1997. 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.
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996.
Net Sales. Net sales increased $35.3 million, or 263.3%, to $48.7 million for
the year ended December 31, 1997 compared to $13.4 million for the year ended
December 31, 1996 ("1996"). Of the increase, $33 million was attributable to the
acquisitions that occurred on June 2, 1997. The remaining $2 million increase
was due to increased market penetration and internal growth.
Gross Profit. Gross profit increased $5.0 million, or 203.8%, to $7.5 million
for 1997 compared to $2.5 million for 1996. Gross margin decreased to 15.4% for
1997 compared to 18.4% for 1996. The decreases were primarily attributable to
the differing product mixes.
SG&A Expenses. SG&A expenses increased $5.0 million, or 224.9%, to $7.3 million
for 1997 compared to $2.2 million for 1996. The acquisitions accounted for $4.3
million of the increase and the remainder was primarily attributable to the
additional infrastructure costs associated with combining the companies and the
additional costs of operating as a public company.
Operating Income. Operating income (loss) decreased $402,000 to $(201,000) for
the 1997 year compared to $201,000 for the 1996 year. The acquisitions increased
operating income by $450,000 with the offsetting amounts due to a small
operating loss at the Technology Division and the increased infrastructure costs
discussed previously.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995.
Net Sales. Net sales increased $1.1 million, or 9.3%, to $13.4 million for the
year ended December 31, 1996 compared to $12.3 million for the year ended
December 31, 1995 ("1995"). The increase in net sales was primarily attributable
to strong sales in the OEM sector to both established and new OEM customers as a
result of a focus on systems sales and increased market penetration by Prisym
resulting from an expanded sales force.
Gross Profit. Gross profit increased $553,000, or 29.0%, to $2.5 million for
1996 compared to $1.9 million for 1995. Gross margin increased to 18.4% for 1996
compared to 15.6% for 1995, primarily as a result of the growth in system sales
to specialized OEMs.
SG&A Expenses. SG&A expenses increased $484,000, or 27.5%, to $2.2 million for
1996 compared to $1.8 million for 1995. This increase was primarily attributable
to increased infrastructure costs and higher
18
<PAGE> 19
commissions. SG&A expenses as a percentage of net sales increased to 16.7% for
1996 compared to 14.3% for 1995.
Operating Income. Operating income increased $81,000, or 68.0%, to $201,000 for
1996 compared to $120,000 for 1995.
PRO FORMA COMBINED FINANCIAL INFORMATION
The Company is currently in the process of consolidating and centralizing
certain general and administrative functions at its Roswell, Georgia and Vernon
Hills, Illinois locations, including accounting, operations, human resources and
public relations. Economies of scale and elimination of duplicate overhead and
administrative costs are expected to reduce future operating costs. Offsetting
certain of these anticipated benefits are certain increases in personnel costs
and expenses incurred and to be incurred in completing the development of the
Company's corporate infrastructure. The Company does not believe these costs can
be accurately quantified. Accordingly, neither the anticipated savings nor the
anticipated costs have been included in the pro forma combined financial
information that is provided below.
The 1998 and 1997 Acquisitions described previously have had a significant
impact on the comparisons of operating results for 1998 and 1997, due to the
fact that the operating results of the 1997 Acquisitions are only included from
June 2, 1997 forward 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 years ended December 31, 1998 and 1997, the Company has included the pro
forma statements of operations for these two years as if the 1998 and 1997
Acquisitions had occurred at the beginning of 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 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 1998 and 1997 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
pro forma data does not take into account the additional interest that might
have been earned or interest expense that that might have been saved from the
proceeds of the Offering. 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.
Pro Forma Combined
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------
1998 1997
---------------------
Statement of Operations Data:
<S> <C> <C>
Net sales $107,200 $95,196
Cost of goods sold 90,515 79,688
-------- -------
Gross profit 16,685 15,508
Operating expenses:
Selling, general and
Administrative 15,729 13,220
Depreciation and
amortization 847 682
-------- -------
Operating income 109 1,606
Other income 418 153
Interest expense 82 435
-------- -------
Income before taxes 445 1,324
Provision for income taxes 436 697
-------- -------
Pro forma net income $ 9 $ 627
======== =======
</TABLE>
19
<PAGE> 20
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.
The Company made purchase price adjustments, for the 1997 Acquisitions, during
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.
During 1998, the Company paid and received $250,000 and $177,000, respectively.
Additionally, a $90,000 note payable to stockholder was offset against amounts
owed to the Company for a deficient net asset value.
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 and related
complimentary businesses.
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 year ended December 31, 1998, the
Company borrowed and repaid approximately $3.3 million and $2.6 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.
Prior to the initial public offering, Alongal, a related entity, had made
advances to the Company for working capital purposes. At December 31, 1997 and
December 31, 1996, amounts owed to Alongal were $195,000 and $2,109,000,
respectively. Such advances bore interest at the annual rate of 8% and were
payable on demand. All amounts owed to Alongal have been repaid.
For the year ended December 31, 1998, the Company used approximately $3.1
million in operating activities. The cash used in operations resulted primarily
from the increases in accounts receivable and inventory. These changes were
attributable to growth in sales, strong December sales and stocking for
anticipated sales in the near term. However, 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 year ended December 31, 1998, the Company used cash in investing
activities of approximately $1.8 million for acquisitions, including overdrafts
acquired, and $541,000 for the purchase of property and equipment, which was
primarily additional purchases related to the new MIS system.
20
<PAGE> 21
Cash used in financing activities for the year ended December 31, 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 net proceeds of $707,000
received under the Company's credit facility and $246,000 received under an
acquired entity's existing line of credit. The acquired entity's outstanding
line of credit was paid in full in July 1998 and the facility was terminated.
The remaining significant activity in financing activities is discussed in the
preceding paragraphs.
During 1997, cash provided by operations was $1.6 million which was due
primarily to an increase in accounts payable arising from increased purchases of
inventories and, to a lesser extent, offset by an increase in accounts
receivable and inventories due to increased sales and sales demand. The increase
in accounts receivable and inventories is primarily attributable to the purchase
of computer equipment subject to firm purchase orders and then shipped to
customers. The Company's cash used in operations was $199,000 for the year ended
December 31, 1996. The Company's cash flow from operations has been and
continues to be affected primarily by the timing of collection of accounts
receivable, which has increased as net sales have increased. The Company's
working capital was $13.1 million and $(104,000) at December 31, 1997 and 1996,
respectively, with the significant increase in 1997 due to the offering
proceeds.
NASDAQ NATIONAL MARKET UPDATE
By letter dated December 30, 1998, the Nasdaq Stock Market notified the Company
that it had regained compliance with the market value of public float
requirement.
IMPACT OF INFLATION
Management believes that inflation has not had a material impact on the
Company's business, its net sales and revenues or its income from continuing
operations.
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 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.
21
<PAGE> 22
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements appear in a number of places
in this report and include all statements that are not historical facts. Some of
the forward-looking statements relate to the intent, belief or expectations of
the Company and its management regarding the Company's strategies and plans for
operations and growth. Other forward-looking statements relate to trends
affecting the Company's financial condition and results of operations, and the
Company's anticipated capital needs and expenditures.
Investors are cautioned that such forward-looking statements are not guarantees
of future performance and involve risks and uncertainties, and that actual
results may differ materially from those that are anticipated in the
forward-looking statements as a result of the impact of competition and
competitive pricing, business conditions and growth in the industry, general and
economic conditions, and other risks. Investors should review the more detailed
description of these and other possible risks contained in the Company's
securities filings and in the "Risk Factors" section of the prospectus included
in the Registration Statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements beginning on page F-1. Consolidated
condensed quarterly financial information on the Company is included in Note 16
of Notes to the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
For the three year period ended December 31, 1998, there has been no
disagreement between Tekgraf, Inc. and its accountants on any matter of
accounting principles or practices or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information relating to the Company's directors, nominees for election as
directors and executive officers under the headings "Election of Directors" and
"Executive Officers" in the Company's definitive proxy statement for the 1999
Annual Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 1999 Annual Meeting of Shareholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 1999
Annual Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
22
<PAGE> 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1999 Annual
Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Consolidated Financial Statements.
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a) (2) Consolidated Financial Statement Schedule for the Years Ended December
31, 1998 and 1997.
Report of Independent Accountants on Schedule II - Valuation and
Qualifying Accounts on page F-17.
Schedule II - Valuation and Qualifying Accounts on page F-18.
All other financial statement schedules are omitted because the information is
not required, or is otherwise included in the Consolidated Financial Statements
or the notes thereto included in this Annual Report on Form 10-K.
Condensed quarterly financial information on the Company is included in Note 16
of Notes to the Consolidated Financial Statements.
(a) (3) Exhibits.
The following exhibits are filed with or incorporated by reference into this
Annual Report on Form 10-K. Unless indicated otherwise, the exhibit number
corresponds to the exhibit number incorporated by reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <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).
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
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 "1998 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).
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
10.20(a) to the 1998 Form 10-K and incorporated herein by
reference).
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
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
10.21 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 1998 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 1998 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).
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 1998 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 1998 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).
</TABLE>
25
<PAGE> 26
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).
10.38 Severance Agreement and General Release by and among Tekgraf, Inc.
and Phillip Aginsky, dated October 23, 1998 (filed as Exhibit 10.1
to the Company's Current Report on Form 8-K on November 13, 1998
and incorporated herein by reference).
10.39 Stock Purchase Agreement and Termination Agreement by and among
Tekgraf, Inc., William E. Streib, and Prisym Technologies, Inc.
of Georgia, dated March 25, 1999.
11.1 Statements of Computation of Earnings Per Share
21.1 Subsidiaries
27.1 Financial Data Schedule (for SEC use only)
(b) Report Filed on Form 8-K
On November 10, 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 an additional director to the Board, all in connection with the
Severance Agreement.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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 THIS 31st DAY OF MARCH,
1999.
Tekgraf, Inc.
(Registrant) By:/s/ William M. Rychel
---------------------
William M. Rychel
Principal Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE Title Date
--------- ----- ----
<S> <C> <C>
/s/ William M. Rychel
- ----------------------------- Interim Chief Executive Officer, March 31, 1999
William M. Rychel President and Director
/s/ W. Jeffrey Camp
- ----------------------------- Chief Financial Officer March 31, 1999
W. Jeffrey Camp (duly authorized principal
financial and accounting
officer) and Director
/s/ Albert E. Sisto
- ----------------------------- Director March 31, 1999
Albert E. Sisto
/s/ Frank X. Dalton, Jr.
- ----------------------------- Director March 31, 1999
Frank X. Dalton, Jr.
</TABLE>
26
<PAGE> 27
Tekgraf, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements of Tekgraf, Inc.
<TABLE>
<S> <C>
Report of Independent Accountants ........................ F-2
Consolidated Balance Sheets .............................. F-3
Consolidated Statements of Operations .................... F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows .................... F-6
Notes to Consolidated Financial Statements ............... F-7
</TABLE>
F-1
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Tekgraf, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Tekgraf, Inc. at December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Atlanta, Georgia
February 25, 1999 (except as to Note 15,
for which the date is March 25, 1999)
F-2
<PAGE> 29
TEKGRAF, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,702,848 $ 8,600,339
Accounts receivable, less allowance for doubtful accounts of $520,000
and $205,000 at December 31, 1998 and 1997, respectively 16,626,730 9,217,843
Inventories, net 7,718,337 4,700,615
Prepaid expenses and other assets 872,945 368,770
Deferred income taxes 298,273 62,832
----------- -----------
Total current assets 27,219,133 22,950,399
----------- -----------
Property and equipment, net 824,664 344,703
Goodwill, net 9,009,941 6,555,773
Other assets 101,863 52,633
Deferred income taxes 48,840
----------- -----------
Total assets $37,155,601 $29,952,348
=========== ===========
LIABILITIES
Current liabilities:
Current debt $ 719,898 $ 23,474
Accounts payable 12,868,281 8,345,388
Accrued expenses 1,502,859 928,121
Income taxes payable 306,871 70,100
Due to acquisition stockholders 180,289
Notes payable, stockholders 90,000
Due to stockholders and related entities 246,956
----------- -----------
Total current liabilities 15,397,909 9,884,328
----------- -----------
Debt, less current maturities 12,788
Deferred income taxes 95,986
----------- -----------
Total liabilities 15,493,895 9,897,116
----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A Common Stock $.001 par value, 31,666,667 shares authorized;
3,169,165 and 2,100,000 shares issued and outstanding at
December 31, 1998 and 1997, respectively 3,169 2,100
Class B Common Stock, $.001 par value, 3,333,333 shares authorized;
3,159,166 and 3,333,333 shares issued and outstanding at
December 31, 1998 and 1997, respectively 3,159 3,333
Preferred Stock, $.001 par value, 5,000,000 shares authorized; no shares issued
and outstanding at December 31, 1998 and 1997
Due from acquisition stockholders (608,288) (149,863)
Additional paid-in capital 22,556,865 20,584,028
Retained earnings (deficit) (293,199) (384,366)
----------- -----------
Total stockholders' equity 21,661,706 20,055,232
----------- -----------
Total liabilities and stockholders' equity $37,155,601 $29,952,348
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 30
TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Net sales $99,046,966 $48,732,391 $13,414,131
Cost of goods sold 83,621,310 41,249,611 10,951,551
----------- ----------- -----------
Gross profit 15,425,656 7,482,780 2,462,580
Operating expenses:
Selling, general and administrative 14,326,088 7,294,267 2,244,924
Depreciation 223,082 124,453 16,999
Amortization 609,783 265,263
----------- ----------- -----------
Income (loss) from operations 266,703 (201,203) 200,657
Other income 348,442 68,333 14,916
Interest expense 36,978 301,453 159,500
----------- ----------- -----------
Income (loss) before provision (benefit)
for income taxes 578,167 (434,323) 56,073
Provision (benefit) for income taxes 487,000 (40,986) 13,000
----------- ----------- -----------
Net income (loss) $ 91,167 $ (393,337) $ 43,073
=========== =========== ===========
Basic and diluted weighted average shares outstanding 5,889,459 2,581,441 1,084,266
=========== =========== ===========
Basic and diluted net income (loss) per share $ .02 $ (.15) $ .04
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 31
TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER CLASS A NUMBER CLASS B DUE ADDITIONAL RETAINED
OF SHARES COMMON OF SHARES COMMON FROM STOCK- PAID-IN EARNINGS
CLASS A STOCK CLASS B STOCK HOLDERS CAPITAL (DEFICIT) TOTAL
--------- ------ --------- ------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,1996 1,141,333 $1,141 $ (34,102) $ (32,961)
Net Income 43,073 43,073
--------- ------ --------- ------ --------- ----------- ----------- -----------
Balances, December 31, 1996 1,141,333 1,141 8,971 10,112
Issuance of stock for
acquisitions 2,192,000 2,192 $ 9,170,866 9,173,058
Due from acquisition
stockholders $(149,863) 149,863 --
Contribution from
pre-acquisition
stockholders 870,000 870,000
Common stock issued 2,100,000 $2,100 10,393,299 10,395,399
Net loss (393,337) (393,337)
--------- ------ --------- ------ --------- ----------- ----------- -----------
Balances, December 31, 1997 2,100,000 2,100 3,333,333 3,333 (149,863) 20,584,028 (384,366) 20,055,232
Issuance of stock for
acquisitions 894,998 895 1,972,837 1,973,732
Due from acquisition
stockholders, net (458,425) (458,425)
Conversion of Class B Common
Stock to Class A Common --
Stock 174,167 174 (174,167) (174)
Net income 91,167 91,167
--------- ------ --------- ------ --------- ----------- ----------- -----------
Balances, December 31, 1998 3,169,165 $3,169 3,159,166 $3,159 $(608,288) $22,556,865 $ (293,199) $21,661,706
========= ====== ========= ====== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 32
TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 91,167 $ (393,337) $ 43,073
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 223,082 124,454 16,999
Provision/writedown of inventory 169,425 237,275
Amortization 609,783 265,263
Provision for doubtful accounts receivable 457,210 149,170 18,000
Deferred income taxes (132,666) (111,372) 8,900
Changes in net assets and liabilities, net of
the effects of the acquisitions:
Accounts receivable (3,394,547) (956,268) (256,507)
Inventories (911,968) (501,897) (86,745)
Other assets (381,865) 114,455 (45,897)
Accounts payable and accrued expenses 18,295 2,591,941 99,025
Income taxes payable 123,208 66,000 4,100
----------- ------------ ----------
Total adjustments (3,220,043) 1,979,021 (242,125)
----------- ------------ ----------
Net cash provided by (used in) operating
activities (3,128,876) 1,585,684 (199,052)
----------- ------------ ----------
Cash flows from investing activities:
Cash acquired from acquisitions, net of acquisition
costs of $88,677 371,585
Cash paid for acquisitions, including overdraft acquired (1,798,166)
Payments for purchase of property and equipment (540,760) (59,082) (69,042)
----------- ------------ ----------
Net cash provided by (used in) investing
activities (2,338,926) 312,503 (69,042)
----------- ------------ ----------
Cash flows from financing activities:
Advance from stockholders and related entities 37,862 1,115,957
Repayment of advances from stockholders and
related entities (246,956) (2,039,000) (520,657)
Repayment of stockholder notes payable (125,000)
Repayments on lines of credit, net (2,018,036)
Proceeds, net, from credit facility 707,152
Repayment of debt (23,516)
Payment to stockholders for excess net asset values (249,518) (1,050,000)
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
Capital contribution from stockholders 870,000
Payment of stock issuance costs (56,630) (923,701)
Proceeds from issuance of common stock, net of
underwriting discounts 11,317,000
----------- ------------ ----------
Net cash provided by (used in) financing
activities (1,429,689) 6,069,125 595,300
----------- ------------ ----------
Increase (decrease) in cash and cash equivalents (6,897,491) 7,967,312 327,206
Cash and cash equivalents, beginning of year 8,600,339 633,027 305,821
----------- ------------ ----------
Cash and cash equivalents, end of year $ 1,702,848 $ 8,600,339 $ 633,027
=========== ============ ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 24,217 $ 301,453 $ 159,500
============ ============ ==========
Cash paid during the year for income taxes $ 594,278 $ 4,386 $ --
============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 33
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION, AND NATURE OF OPERATIONS
ORGANIZATION
The consolidated financial statements of Tekgraf, Inc. (the "Company")
as of December 31, 1998 include the accounts of six computer graphics
distributing companies which were acquired on June 2, 1997 (the "1997
Acquisitions), three computer graphics distributing companies acquired
in April and May 1998 (the "1998 Acquisitions") and Prisym
Technologies, Inc. of Georgia ("Prisym"), a 60% owned subsidiary. The
1998 and 1997 acquisitions were recorded under the purchase method of
accounting, and accordingly their results of operations are included in
the consolidated statements of operations since their date of
acquisition. Minority interest, if any, represents the minority
stockholder's proportionate share of the equity in Prisym, and due to
immateriality, has not been presented as a separate line item in the
consolidated statements of operations. All significant intercompany
balances, transactions, and profits have been eliminated in
consolidation. Certain prior year amounts have been reclassified to
conform to the 1998 presentation.
BASIS OF PRESENTATION
The consolidated financial statements are prepared on the basis of
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at December 31, 1998 and
1997 and reported amounts of revenues and expenses for each of the
three years in the period ended December 31, 1998. Significant
estimates include primarily those made for the allowance for doubtful
accounts, reserves for obsolete and slow-moving inventory and the
economic life of goodwill. Actual results could differ from those
estimates made by management.
NATURE OF OPERATIONS
The computer graphics distributing companies acquired during 1998 and
1997 are located throughout the United States and distribute and market
a broad array of complex computer graphics hardware and software.
Products are sold primarily to value added resellers and vertical
solutions providers.
The Company is also a manufacturer, integrator and distributor of
premium personal computers, workstations, and internet/intranet
servers. Products are sold either directly or through distributors.
Prisym markets workstations, printers, mass storage, components and
peripherals of a major U.S. manufacturer.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inherent in the accompanying consolidated financial statements are
certain risks and uncertainties. These risks and uncertainties include,
but are not limited to the impact of competitive products,
competition, available sources of supply and various technologies
related risks.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (determined principally by
the first-in, first-out method, which approximates average cost) or
market. The Company maintains a reserve for its estimate of excess,
obsolete and damaged goods. In most instances, the Company receives
warranties on its products from its vendors which are at least
equivalent to those it provides to its customers.
F-7
<PAGE> 34
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives,
which generally range from 3 to 7 years. Amounts expended for
maintenance and repairs are charged to expense as incurred. Upon
disposition, both the related cost and accumulated depreciation
accounts are relieved and the related gain or loss is credited or
charged to operations.
GOODWILL
Goodwill is amortized over its estimated economic life or period of
future benefit. The Company is currently amortizing goodwill, on a
straight-line basis over 15 years. This estimated life is a composite
of many factors that are subject to change because of the nature of the
Company's operations. This is particularly true because goodwill
reflects value attributable to the going concern nature of acquired
businesses, the stability of their operations, market presence and
reputation. Accordingly, at each reporting period, the Company
evaluates the continued appropriateness of this life and recoverability
of the carrying value of the goodwill based upon current and future
levels of income and undiscounted cash flows as well as the latest
available economic factors and circumstances. Impairment of value, if
any, is recognized in the period in which it is determined. Management
of the Company does not believe that there are facts or circumstances
to indicate impairment of goodwill at December 31, 1998.
REVENUE
Sales are recognized upon the shipment of products to the customer or
distributor.
Concentration of credit risk with respect to trade accounts receivable
is generally diversified due to the number of entities comprising the
Company's customer base. The Company performs ongoing credit
evaluations and provides an allowance for potential credit losses
against the portion of accounts receivable which is estimated to be
uncollectible. Such losses have historically been within management's
expectations.
INCOME TAXES
The provision for income taxes and corresponding balance sheet accounts
are determined in accordance with SFAS No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under SFAS 109, deferred tax liabilities and
assets are determined based on temporary differences between the bases
of certain assets and liabilities for income tax and financial
reporting purposes. The deferred tax assets and liabilities are
classified according to the financial statement classification of the
assets and liabilities generating the differences. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include its debt obligations.
Management believes that these instruments bear interest at rates which
approximate prevailing market rates for instruments with similar
characteristics and, accordingly, that the carrying values for these
instruments are reasonable estimates of fair value.
3. ACQUISITIONS
In April and May of 1998, the Company completed the 1998 Acquisitions
of three regional computer graphics wholesale distributor companies.
The acquisition agreements provided, in exchange for 100% of the
outstanding common stock of the three companies, for the issuance of an
aggregate of 894,998 unregistered Class A common stock shares of the
Company and payment of $1,415,000 in cash, in
F-8
<PAGE> 35
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
connection with these acquisitions, subject to adjustment in the event
that warranted earnings levels and warranted net asset values are
either not met or exceeded.
The purchase prices for 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, 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.
On June 2, 1997, the Company completed the 1997 Acquisitions of 100% of
the outstanding common stock of five regional computer graphics
distributors in exchange for the issuance of 2,192,000 shares of Class
B Common Stock. Each stockholder deposited 40% of his shares in escrow
to cover potential claims for indemnification under the stock purchase
agreements for liabilities resulting from the breach of any
representation, warranty, covenant or agreement contained in the
Agreements.
The 1998 and 1997 Acquisitions were recorded under the purchase method
of accounting. The purchase prices have been allocated to assets
acquired and liabilities assumed based on the fair market value of the
Company's common stock. The fair value of assets acquired and
liabilities assumed, after giving effect to the excess and deficit net
asset value, is as follows:
<TABLE>
<CAPTION>
1998 1997
Acquisitions Acquisitions
<S> <C> <C>
Cash paid in connection with acquisitions $ 1,415,000
Fair value of stock issued and other
acquisition costs 2,242,362 $ 9,574,214
Fair value of liabilities assumed 6,711,314 9,411,676
Fair value of tangible and identifiable
assets acquired (7,494,398) (11,993,284)
----------- ------------
Goodwill $ 2,874,278 $ 6,992,606
=========== ============
</TABLE>
The following unaudited pro forma summary combines the consolidated
results of the Company and the 1998 Acquisitions and the 1997
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 the elimination of 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 the pro rata interest expense
incurred on capital to be contributed by the pre-acquisition
stockholders of the Company, related income tax effects, elimination of
transactions between the acquired entities, and amortization of
intangible assets. The year ended December 31, 1997 amounts include a
pro forma adjustment to eliminate the effect of certain 1997 inventory
purchase accounting adjustments. In addition, the earnings per share
amounts give effect to the acquisitions, subsequent recapitalization
and the weighted average shares outstanding exclude 166,667 of escrow
shares. The pro forma summary does not purport to represent what the
Company's results of operations would actually have been if such
transaction in fact had occurred as of January 1, 1997 or to project
the Company's results of operations for any future period.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
Net sales $107,200,090 $ 95,196,460
Gross profit 16,684,634 15,508,159
Income from operations 108,292 1,606,256
Income before taxes 445,143 1,324,459
Net income 8,692 626,985
Basic and diluted income per share -- .10
Weighted average shares outstanding 6,161,664 6,161,664
</TABLE>
F-9
<PAGE> 36
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVENTORIES
Inventories, net of reserves, at December 31, 1998 and 1997 consist of
the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Component materials $ 333,333 $ 661,770
Finished goods 7,385,004 4,038,845
---------- ----------
$7,718,337 $4,700,615
========== ==========
</TABLE>
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net of accumulated depreciation, at December
31, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Furniture and fixtures $ 280,131 $ 188,132
Computer equipment 834,285 262,204
Automobiles 101,796 81,586
---------- ---------
1,216,212 531,922
Less: accumulated depreciation (391,548) (187,219)
---------- ---------
$ 824,664 $ 344,703
========== =========
</TABLE>
6. GOODWILL
Goodwill, net of accumulated amortization, at December 31, 1998 and
1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Goodwill $9,866,884 $6,821,036
Accumulated amortization (856,943) (265,263)
---------- ----------
$9,009,941 $6,555,773
========== ==========
</TABLE>
7. CURRENT DEBT
In July 1998, the Company entered into a Loan and Security Agreement
(the "Agreement"), which expires on June 30, 2001, 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
year ended December 31, 1998, the Company borrowed and repaid
approximately $3.3 million and $2.6 million, respectively, under this
credit facility. As of December 31, 1998, the Company has an
outstanding balance of $707,152 under the credit facility.
In accordance with the Agreement, the Company is required to maintain
certain financial covenants, which specifically include a modified
current ratio, a debt to equity ratio and a fixed charge coverage
ratio.
F-10
<PAGE> 37
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES
The provision (benefit) for income taxes for the years ended December
31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 FEDERAL STATE TOTAL
<S> <C> <C> <C>
Current $ 521,978 $ 97,688 $ 619,666
Deferred (122,053) (10,613) (132,666)
--------- -------- ---------
$ 399,925 $ 87,075 $ 487,000
========= ======== =========
1997
Current $ 59,261 $ 11,125 $ 70,386
Deferred (108,031) (3,341) (111,372)
--------- -------- ---------
$ (48,770) $ 7,784 $ (40,986)
========= ======== =========
1996
Current $ 3,567 $ 533 $ 4,100
Deferred 7,654 1,246 8,900
--------- -------- ---------
$ 11,221 $ 1,779 $ 13,000
========= ======== =========
</TABLE>
A reconciliation of federal statutory and effective income tax rates is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Statutory U.S. federal income tax rate 34.0% (34.0)% 15.0%
Effect of:
State income taxes, net of federal benefit 5.7 2.4 5.0
Nondeductible goodwill amortization 35.9 20.8
Nondeductible meals and entertainment 1.5 3.9 1.5
Other, net 7.1 (2.5) 1.5
---- ---- ----
Effective income tax rate 84.2% (9.4)% 23.0%
==== ==== ====
</TABLE>
Benefits of approximately $15,000 in net operating loss carryforwards
were recognized in 1997.
An analysis of the deferred income tax assets and liabilities at
December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current deferred income tax assets:
Accounts receivable $ 197,600 $ 36,885
Inventory 98,800 25,947
Other 47,946
--------- ---------
Total current deferred income tax assets 344,346 62,832
Current deferred income tax liabilities:
Section 475 adjustment (46,073)
--------- ---------
Current deferred income tax asset, net $ 298,273 $ 62,832
========= =========
Noncurrent deferred income tax assets:
Other $ 46,033 $ 48,840
Noncurrent deferred income tax liabilities:
Section 475 adjustment (138,219)
Other (3,800)
--------- ---------
Total noncurrent deferred income tax liabilities (142,019) --
--------- ---------
Noncurrent deferred income tax asset (liability), net $ (95,986) $ 48,840
========= =========
</TABLE>
F-11
<PAGE> 38
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Management believes that realization of the deferred tax assets is more
likely than not due to taxable income available in carryback periods.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases office space under various operating leases expiring
through 2002. At December 31, 1998, minimum rentals due under these
leases were as follows:
<TABLE>
<S> <C>
1999 $ 687,873
2000 428,393
2001 246,221
2002 19,395
----------
$1,381,882
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $714,000, $323,000 and $60,000 respectively.
LITIGATION
The Company is involved from time to time in litigation on matters
which are routine to the conduct of its business. Although the outcome
of any litigation cannot be predicted with certainty, the Company does
not believe that any outstanding litigation will have a material
adverse effect on the Company's consolidated financial position,
results of operations, or cash flows.
EMPLOYMENT AGREEMENTS
Certain stockholders of the Company have entered into employment
agreements which provide for a set base salary, participation in future
incentive bonus plans, stock option plans, certain other benefits, and
a covenant not to compete following termination of such person's
employment.
10. CAPITAL STRUCTURE
On November 11, 1997, in connection with the initial public offering of
the Company's securities, 2,100,000 units were issued. Each unit
consisted of one share of Class A Common Stock and one Redeemable
Warrant. The Class A Common Stock and Redeemable Warrant were
transferable separately immediately upon issuance.
CLASS A COMMON STOCK
On June 2, 1997, the Company authorized 31,666,667 shares of Class A
Common Stock, $.001 par value. Holders of Class A Common Stock have the
right to cast one vote for each share held of record on all matters
submitted to a vote of holders of Class A Common Stock.
REDEEMABLE WARRANTS
Each Redeemable Warrant entitles the registered holder to purchase one
share of Class A Common Stock at an exercise price of $8.40 at any time
until the fifth anniversary of the date of issue. Beginning on the
first anniversary of the date of issue, the Redeemable Warrants are
redeemable by the Company on 30 days written notice and at a redemption
price of $.05 per Redeemable Warrant if the closing price of the Class
A Common Stock for any 30 consecutive trading days ending within 15
days of the notice of redemption averages in excess of $11.75 per
share. All Redeemable Warrants must be redeemed if any are redeemed.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Class A Common Stock for issuance upon
the exercise of the
F-12
<PAGE> 39
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Redeemable Warrants. The Redeemable Warrants do not contain any voting
or other rights of a stockholder of the Company.
CLASS B COMMON STOCK
On May 1, 1997 the Company increased the outstanding shares from 100 to
3,424 by declaring a 34.24-for-1 stock split of the Company's common
stock (par value of $1.00). On June 2, 1997, the Company declared a
400-for-1 stock split of the Company's common stock pursuant to which
all of the Company's outstanding common stock was exchanged for
4,000,000 shares of Class B Common Stock with a par value of $.001.
During October 1997, the Company effected a .83333325-for-1 reverse
stock split pursuant to which the outstanding shares of Class B Common
Stock were exchanged for 3,333,333 shares of Class B Common Stock. Each
share of Class B Common Stock is entitled to five votes on all matters
on which stockholders may vote, including the election of directors.
Each share of Class B Common Stock is automatically converted into one
share of Class A Common Stock upon (i) its sale, gift of transfer,
except in the case of a transfer to a trust for which the original
holder acts as sole trustee or to any other holder of Class B Common
Stock, (ii) the death of the original holder thereof, including in the
case of the original holder having transferred the Class B common Stock
to a trust for which the original holder served as trustee during his
or her lifetime, or (iii) the conversion of an aggregate of 75% of the
authorized shares of Class B Common Stock.
ESCROW SHARES
In connection with the Company's initial public offering of its
securities, the holders of the Company's Class B Common Stock agreed to
place an aggregate of 166,667 shares into escrow. These shares may be
voted, but are not transferable or assignable. These shares will be
released if, and only if, certain predetermined thresholds of pre-tax
income or market value of the Company's Class A Common stock are
exceeded. In the event any shares are released from escrow to the
holders who are employees or directors of the Company, compensation
expense equal to the fair value of the escrow shares will be recognized
in the consolidated statement of operations.
PREFERRED STOCK
On June 2, 1997, the Company authorized 5,000,000 shares of preferred
stock. The Board of Directors will have the authority to issue the
preferred stock in one or more series and to fix the number of shares
and the relative rights, conversion rights, voting rights and terms of
redemption and liquidation preferences, without further vote or action
by the stockholders.
11. STOCK OPTION PLAN
During August 1997, the Company's Board of Directors and stockholders
approved the 1997 Stock Option Plan (the "Plan") covering 300,000
shares of the Company's Class A Common Stock which may be granted to
employees, officers, directors, and consultants or advisers to the
Company. Options granted under the Plan may be either (i) options
intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code or (ii) non-qualified stock options. Incentive
options granted under the Plan are exercisable for a period of up to
ten years from the date of grant at an exercise price which is not less
than the fair market value of the stock on the date of grant, except
that the term of an incentive option granted under the Plan to a
stockholder owning more than 10% of the outstanding voting power may
not exceed five years and its exercise price may not be less than 110%
of the fair market value of the stock on the date of grant. In
addition, to the extent that the aggregate fair market value, as of the
date of grant, of the stock for which incentive options become
exercisable for the first time by an optionee during the calendar year
exceeds $100,000, the portion of such option which is in excess of the
$100,000 limitation will be treated as a non-qualified option. The
Plan, which expires in August 2007, is administered by the Company's
Board of Directors. The Company granted an employee 15,000 stock
options during November 1997. These options were terminated on March 1,
F-13
<PAGE> 40
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1998, pursuant to a right granted to the Company in the option
agreements. On March 1, 1998, the Company granted an officer options to
purchase 45,000 shares of the Company's Class A Common Stock, at an
exercise price of $3.00 per share. On December 16, 1998, the Company
granted various employees options to purchase 212,500 shares of the
Company's Class A Common Stock, at an exercise price of $3.00 per
share. No stock options were exercisable at December 31, 1997, and
15,000 stock options were exercisable at December 31, 1998.
The Company has 42,500 shares available for future grant at December
31, 1998.
The Company applies APB Opinion No. 25 ("APB 25") and related
Interpretations in accounting for the Plan. The Financial Accounting
Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") changing the methods for recognition of cost
on plans similar to those of the Company. Adoption of the accounting
provisions of FAS 123 is optional; however, pro forma disclosures as if
the Company adopted the cost recognition requirements under FAS 123 are
required.
The weighted average fair value of stock options granted during 1998
was $233,425. Had compensation cost for the Plan been determined on a
fair value basis in accordance with the provisions of FAS 123, the
Company's net income (loss) for the years ended December 31, 1998 and
1997, would have been as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net income (loss) - as reported $91,167 $(393,337)
Net income (loss) - proforma $43,469 $(393,337)
</TABLE>
The amount of the proforma charge has been determined using the
Black-Scholes model, as permitted by FAS 123. For purposes of the
calculation, management used a risk free rate of return, a projected
volatility rate of 92.4%, a dividend yield of 0% and an expected life
of 3.5 years and 4 years for the March 1, 1998 and December 16, 1998
grants, respectively.
12. NET INCOME (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standard Board issued
Statement No. 128 ("FAS 128"). This statement establishes standards for
computing and presenting earnings per share ("EPS"). Basic EPS excludes
dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity. FAS 128 requires restatement of all prior-period EPS data.
Potential common stock is in the form of stock options and warrants
which do not have an effect on the 1998 and 1997 diluted net income
(loss) per common share calculations. The following table presents
information necessary to calculate basic and diluted EPS for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Weighted average shares outstanding 6,056,126 2,702,166 1,141,333
Escrow shares (166,667) (120,725) (57,067)
---------- ---------- ----------
5,889,459 2,581,441 1,084,266
========== ========== ==========
</TABLE>
F-14
<PAGE> 41
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. RELATED PARTY TRANSACTIONS
Included in the due to stockholder and related entities at December 31,
1997 were advances from the Company's majority stockholder of $137,314
and advances from other stockholders of $109,642. During the years
ended December 31, 1997 and 1996, the Company recognized interest
expense on the advances from the majority stockholder of approximately
$177,000, and $160,000, respectively. The advances from the majority
stockholders bore interest at 8%. The advances from other stockholders
did not bear interest. All advances from stockholders were due on
demand.
14. SEGMENT INFORMATION
The Company's operations are classified into two business units:
graphics and technology. These business units are revenue producing
components of the Company about which separate financial information is
produced internally and operating decisions are made.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net sales:
Graphics $84,437,910 $33,511,680 $ --
Technology 14,609,056 15,220,711 13,414,131
----------- ----------- -----------
Total net sales $99,046,966 $48,732,391 $13,414,131
=========== =========== ===========
Operating income (loss):
Graphics $ 1,836,948 $ 449,446 $ --
Technology 90,502 (225,862) 200,657
Corporate (1,660,747) (424,787) --
----------- ----------- -----------
Total operating income (loss) $ 266,703 $ (201,203) $ 200,657
=========== =========== ===========
Identifiable assets:
Graphics $21,602,409 $17,668,748 $ --
Technology 2,075,272 2,096,920 3,007,109
Corporate 13,477,920 10,186,680 --
----------- ----------- -----------
Total identifiable assets $37,155,601 $29,952,348 $ 3,007,109
=========== =========== ===========
</TABLE>
Corporate operating income (loss) includes overhead and special charges
related to the consolidated Company.
15. SUBSEQUENT EVENTS
On February 25, 1999, the Company signed a letter of intent with
CalComp Technology, Inc. ("Calcomp"), a leading provider of wide-format
printers and other products, to enter into negotiations for a
definitive agreement whereby the Company will acquire Calcomp's U.S.
and Canadian service businesses and worldwide parts business and will
assume certain liabilities relating to those businesses. The closing of
the proposed transaction is subject to the receipt of all necessary
approvals.
On March 25, 1999, the Company sold its ownership interest in Prisym
Technologies, Inc. of Georgia, its 60%-owned subsidiary, to the other
shareholder of Prisym. The Company no longer has any interest in
Prisym.
F-15
<PAGE> 42
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. CONSOLIDATED CONDENSED QUARTERLY INFORMATION (UNAUDITED)
Selected unaudited financial information for each of the four quarters
in the years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
NET INCOME AVERAGE SHARES
NET (LOSS) OUTSTANDING
NET GROSS INCOME PER SHARE BASIC AND
1998 SALES PROFIT (LOSS) BASIC AND DILUTED DILUTED
<S> <C> <C> <C> <C> <C>
First $ 16,871,281 $ 2,830,125 $ 94,225 $ 0.02 5,266,666
Second 27,505,230 4,248,820 209,662 0.04 5,955,016
Third 26,323,407 3,975,539 (267,664) (0.04) 6,161,664
Fourth 28,347,048 4,371,172 54,944 0.01 6,161,664
------------ ----------- ----------
Total $ 99,046,966 $15,425,656 $ 91,167 $ 0.02 5,889,459
============ =========== ==========
1997
First $ 3,130,610 $ 611,138 $ 109,610 $ 0.10 1,084,266
Second 9,321,271 1,234,430 28,245 0.02 1,725,004
Third 18,536,085 3,009,566 191,966 0.06 3,166,666
Fourth 17,744,425 2,627,646 (723,158)(1) (0.17) 4,307,970
------------ ----------- ----------
Total $ 48,732,391 $ 7,482,780 $ (393,337) $(0.15) 2,581,441
============ =========== ==========
</TABLE>
(1) The net loss in the fourth quarter of 1997 was primarily attributable
to decreased sales and additional selling, general and administrative
expenses incurred in the fourth quarter, including costs associated
with operating as a public company.
Basic net income (loss) per share was the same as diluted net income
(loss) per share in each period presented above.
F-16
<PAGE> 43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Tekgraf, Inc.
Our audits of the consolidated financial statements of Tekgraf, Inc. referred to
in our report dated February 25, 1999 appearing in this Form 10-K also included
an audit of the financial statement schedule listed in the index in this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Atlanta, Georgia
February 25, 1999
F-17
<PAGE> 44
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND AND AT END
DESCRIPTION OF YEAR EXPENSES RECLASSIFICATIONS OF YEAR
<S> <C> <C> <C> <C>
1998
Allowance for doubtful accounts $ 205,000 $ 457,210 $(142,210) $ 520,000
========= ========= ========== =========
1997
Allowance for doubtful accounts $ 140,000 $ 149,170 $(84,170) $ 205,000
========= ========= ========= =========
</TABLE>
F-18
<PAGE> 45
Tekgraf, Inc.
Index of Exhibits
The following exhibits are filed with or incorporated by reference into this
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <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 "1998 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].
</TABLE>
E-1
<PAGE> 46
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
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 10.20(a) to the 1998
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 10.21 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 1998
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 1998 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 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
</TABLE>
E-2
<PAGE> 47
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
corporation, and its shareholders. (Filed as Exhibit 10.24 to the 1998
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
1998 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).
10.38 Severance Agreement and General Release by and among Tekgraf, Inc. and
Phillip Aginsky, dated October 23, 1998 (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K on November 13, 1998 and
incorporated herein by reference).
10.39 Stock Purchase Agreement and Termination Agreement by and among
Tekgraf, Inc., William E. Streib, and Prisym Technologies, Inc. of
Georgia, dated March 25, 1999.
11.1 Statements of Computation of Earnings Per Share.
21.1 Subsidiaries
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
E-3
<PAGE> 1
EXHIBIT 10.39
STOCK PURCHASE AGREEMENT AND TERMINATION AGREEMENT
This Stock Purchase and Termination Agreement (this "AGREEMENT") is
entered into as of the 25th day of March, 1999 by and among WILLIAM E. STREIB,
in his individual capacity ("PURCHASER"), Prisym Technologies, Inc. of Georgia,
a Georgia corporation (the "COMPANY"), and TEKGRAF, INC., a Georgia corporation
("SELLER").
RECITALS
A. Purchaser owns 40 shares and Seller owns 60 shares of the
$1.00 par value common stock ("COMMON STOCK") of the Company, which shares
represent 100% of the issued and outstanding shares of the Company;
B. Purchaser, Seller and the Company are parties to that certain
Shareholders Agreement made and entered into the 30th day of November, 1994
(the "SHAREHOLDERS AGREEMENT");
C. Purchaser desires to purchase from Seller, and Seller desires
to sell to Purchaser all 60 Shares of Common Stock of the Company owned by
Seller, in accordance with the terms and conditions contained herein.
D. Pursuant to the Shareholders Agreement, Seller agreed to
provide the Company with adequate working capital financing. The Company
desires to repay Seller for the financing it provided to the Company, and
Purchaser and the Company, on the one hand, and Seller, on the other, desire to
terminate the Shareholders Agreement and release each other from any further
obligations thereunder;
AGREEMENTS
Therefore, for good and valuable consideration, the receipt and
sufficiency of which arc hereby acknowledged, the parties agree as follows:
1. Purchase and Sale of Shares. On the terms and subject to the
conditions contained in this Agreement, Purchaser hereby agrees to purchase
from Seller, and Seller hereby agrees to sell to Purchaser, 60 shares (the
"SHARES") of the Common Stock of the Company, for the purchase price set forth
in Section 2 hereof.
2. Purchase Price. At the Closing (as defined in Section 4
below), Purchaser will pay to Seller a total purchase price for the Shares in
the amount of $32,000 (the "PURCHASE PRICE") by bank or cashier's check or via
wire transfer of immediately available funds to such bank and account as have
been designated by Seller to Purchaser in writing.
<PAGE> 2
3. Transfer of Shares. Contemporaneously with the Closing (as
defined in Section 4 below), Seller shall deliver to the Purchaser the stock
certificate representing the Shares, together with a duly executed stock
transfer power therefor, free and clear of any liens, claims, equities,
security interests, preemptive rights, judgments and other encumbrances of
every kind and nature whatsoever.
4. Time and Place of Closing. The transactions contemplated by
this Agreement will be consummated (the "CLOSING") at 2:00 p.m., at the offices
of Troutman Sanders LLP on March 25, 1999, and will be effective as of March 1,
1999 (the "Effective Date"). The date on which the Closing occurs is referred
to in this Agreement as the "CLOSING DATE".
5. Repayment. Contemporaneously with the Closing, the Company
will pay to Seller, by wire transfer of immediately available funds, the sum of
$947,239.07, which sum represents payment and satisfaction in full of all
amounts that are owed by the Company to the Seller under the Shareholders
Agreement or otherwise. Following such payment, the Seller, the Purchaser and
the Company shall have no further right or claim against one another for any
debts, claims, obligations or liabilities of any kind, all of which are hereby
forever discharged and released, other than any claims arising under this
Agreement.
6. No Further Distribution of Profits. The parties have agreed
that there shall be no further distribution of "Net Profits" (as defined in the
Shareholders Agreement) of the Company, and Seller waives all rights to any
such further distributions.
7. Payment of Taxes. Seller shall be responsible for the timely
filing of the appropriate federal and state tax returns of the Company and the
payment of federal and state income taxes owed by the Company for the fiscal
year ended December 31, 1998, and shall provide Purchaser with a copy of the
1998 federal and state tax returns so filed. Seller shall be entitled to
receive any refund arising out of such taxes and shall be responsible for the
payment of any deficiencies arising out of such taxes. The Company shall be
responsible for the filing of the appropriate federal and state tax returns and
the payment of all other taxes owed by the Company, including any payments for
estimated taxes during 1999.
8. Termination of Certain Agreements.
8.1. Contemporaneously with the Closing, Purchaser, Seller
and the Company hereby agree to terminate the Shareholders Agreement
effective as of the Effective Date and to release the parties thereto
from all further obligations thereunder.
8.2. Contemporaneously with the Closing, the Company and
Purchaser hereby agree to terminate that certain Employment Agreement
between the Company and Purchaser dated November 30, 1994 and to
release one another from any further obligations thereunder. Such
termination and release shall be effective as of the Effective Date.
2
<PAGE> 3
9. Removal of Seller's Representatives, Designees and
Appointees. Effective on or before the Closing Date, the Seller as a
shareholder of the Company hereby agrees to execute a written consent of the
shareholders of the Company adopting certain actions and resolutions in lieu of
meeting, whereby all of Seller's representatives, designees and appointees
serving as directors of the Company are removed from such positions with the
Company.
10. Representations and Warranties by Seller. Seller hereby
represents and warrants to Purchaser as follows:
10.1. Power and Authority. Seller has the corporate power
and authority to enter into this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Seller, and no other
corporate proceedings on the part of Seller are necessary to authorize
the execution, delivery and performance of this Agreement by Seller.
10.2. Binding Effect. This Agreement has been duly
executed and delivered by Seller and constitutes its legal, valid and
binding obligation, enforceable in accordance with its terms.
10.3. Title to Shares. The Shares are duly and validly
issued, fully paid and nonassessable and are owed beneficially and of
record by the Seller, free and clear of any and all liens, claims,
equities, security interests, preemptive rights, judgments and other
encumbrances of every kind and nature whatsoever.
10.4. Other Securities. Other than the Shares and the
shares of Common Stock owned by Purchaser, as of the Effective Date,
Seller has not authorized, and to Seller's best knowledge, there are
no issued and outstanding shares of any class of securities of the
Company or outstanding options, warrants, convertible securities,
subscriptions or other agreements or rights of any nature under which
the Company may be obligated to issue or transfer any shares of its
stock.
10.5. Consents and Approvals. Seller has obtained all
consents, authorizations and approvals to the transactions
contemplated by this Agreement that to its knowledge are required
pursuant to the terms of any material agreement or arrangement
relating to or binding upon the Seller or any of its affiliates or
subsidiaries.
11. Representations by Purchaser. Purchaser hereby represents and
warrants to Seller as follows:
11.1. Investment Intent. Purchaser hereby represents and
warrants to Seller that he is acquiring the Shares for his own account
for investment purposes only and not with a view to, or for resale in
connection with, any distribution of such Shares within the meaning of
the Georgia Securities Act of 1973, as amended, or the Securities Act
of 1933, as amended, and that he does not presently intend to resell,
assign or
3
<PAGE> 4
otherwise dispose of all or any part of the Shares and that Purchaser
will not sell, pledge, transfer or assign the Shares except in a
transaction which is exempt under the provisions of the federal
securities laws and applicable state securities laws. Purchaser
represents and warrants that he is a sophisticated investor who, as the
chief executive officer of the Company, has access to such information
as he deemed necessary or appropriate to formulate an informed purchase
decision.
11.2. Power and Authority. Purchaser has the power and
authority to enter into this Agreement, to perform his obligations
hereunder and to consummate the transactions contemplated hereby.
11.3. Consents and Approvals. The Purchaser has obtained
all consents, authorizations and approvals to the transactions
contemplated by this Agreement that are required pursuant to the terms
of any material agreement or arrangement relating to or binding upon
the Purchaser.
11.4. Present Intent not to Sell Shares to Certain
Persons. As of the date hereof, Purchaser does not intend to sell the
Shares, or any other shares of capital stock of the Company, to any of
the current holders of the Class B Common Stock of Seller, a list of
whom will be provided to the Purchaser by Seller upon request of
Purchaser, and to Purchaser's knowledge, no such persons are involved
in the transactions contemplated herein except in their capacities on
behalf of Seller.
12. Representation by the Company. The Company has the corporate
power and authority to enter into this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of the Company, and no other corporate proceedings on the part of
the Company are necessary to authorize the execution, delivery and performance
of this Agreement by the Company. The Company has obtained all consents,
authorizations and approvals to the transactions contemplated by this Agreement
that are to the Company's knowledge required pursuant to the terms of any
material agreement or arrangement relating to or binding upon the Company.
13. Publicity. Neither Seller nor Purchaser nor the Company shall
issue any press release, written public statement or announcement relating to
this Agreement or the transactions contemplated hereby without the written prior
approval, which shall not be unreasonably withheld, of all parties in each
instance, except to the extent such disclosure is required by law (in which case
such parties shall use all reasonable efforts to give the other parties prior
notice thereof).
14. Confidentiality. Purchaser and Seller agree that any
information or material regarding the transactions contemplated herein that is
obtained by Purchaser from Seller, its employees, agents, or representatives,
including its attorneys, subsidiaries, or affiliates, regarding Seller, its
subsidiaries or affiliates and that is obtained by Seller from Purchaser, its
4
<PAGE> 5
employees, agents or representatives, including its attorneys,
regarding Purchaser, will be used solely for the purposes of
evaluating and consummating the transactions contemplated herein.
Purchaser and Seller agree that they will keep such confidential
information confidential for a period of two years, and neither will
disclose any information regarding the transactions contemplated
herein received from the other or the Company, or any of their
respective employees, agents, or representatives, including attorneys
and accountants, to any third party, except as required by applicable
law or legal process, without the prior written consent of the other;
provided, however, that any such information may be disclosed to a
person's representatives when they need to know such information for
the purposes of preparing for and evaluating the proposed transaction
or for the purpose of financing the proposed transaction. Purchaser
and Seller agree that if the proposed transaction contemplated hereby
is not closed for any reason, each shall return to the other all
materials received from the other regarding the transactions
contemplated herein.
15. Conduct of Business Pending Closing. Purchaser hereby
covenants that from the date hereof until the Closing Date the Company will
carry on its business in the usual, regular and ordinary course consistent with
past practices.
15.1. Dividends. Between March 1, 1999 and the Closing
Date, Purchaser hereby covenants that he will not cause the Company to
make any dividend or other unusual distributions of any kind to the
shareholders of the Company unless in a manner prescribed by the
Shareholder Agreement and upon prior written notice to the Chief
Financial Officer of the Seller.
15.2. Access to the Business. Prior to the Closing Date,
Purchaser shall use reasonable efforts to cause the Company to permit
Seller and its representatives, agents, counsel and accountants, to
have full access at all reasonable times to the premises, business,
properties, assets, financial statements, contracts, books, records
and working papers of, and other relevant information pertaining to
the Company and to cause the Company's officers and employees to
furnish to Seller and its representatives, agents, counsel and
accountants, such financial and operating data and other information
with respect to the Company as Seller may reasonably request. Prior to
the Closing Date, Seller shall use reasonable efforts to cause the
Company to permit Purchaser and its representatives, agents, counsel
and accountants, to have full access at all reasonable times to the
premises, business, properties, assets, financial statements,
contracts, books, records and working papers of, and other relevant
information pertaining to the Company and to use reasonable efforts to
cause the Company's officers and employees to furnish to Purchaser and
its representatives, agents, counsel and accountants, such financial
and operating data and other information with respect to the Company
as Purchasers may reasonably request.
16. Nonsolicitation of Customers. The Company and Purchaser agree
that, during the six (6) month period commencing as of the Closing Date,
neither they nor any entity with which they are affiliated or which they
control will, without the prior written consent of Seller in each instance,
either directly or indirectly, alone or in conjunction with any other person or
entity, for or on behalf of the Company solicit, entice or induce any customer
of Seller or any
5
<PAGE> 6
of its subsidiaries or affiliates with whom or with which the Company had
direct contact. Seller agrees that, during the six (6) month period commencing
as of the Closing Date, neither it nor any entity with which it is affiliated
or which it controls will, without the prior written consent of the Company and
the Purchaser in each instance, either directly or indirectly, alone or in
conjunction with any other person or entity, for or on behalf of Seller or any
of its subsidiaries or affiliates solicit, entice or induce any customer of the
Company or any of its affiliates with whom or with which Seller had direct
contact.
17. Nonsolicitation or Personnel. The Company and Purchaser agree
that, during the six (6) month period commencing as of the Closing Date,
neither they nor any entity with which they are affiliated or which they
control will, without the prior written consent of Seller in each instance,
either directly or indirectly, alone or in conjunction with any other person or
other personnel, solicit any personnel of Seller or any of its subsidiaries or
affiliates to terminate, alter or lessen that party's affiliation as a
consultant, contractor or employee of Seller or any of its subsidiaries or
affiliates. Seller agrees that, during the six (6) month period commencing as
of the Closing Date, neither they nor any entity with which they are affiliated
or which they control will, without the prior written consent of the Company in
each instance, either directly or indirectly, alone or in conjunction with any
other person or other personnel of the Company, solicit any personnel to
terminate, alter or lessen that party's affiliation as a consultant, contractor
or employee of the Company.
18. Conditions to Obligations of Purchaser and the Company. All
of the obligations of Purchaser and the Company under this Agreement are
subject to the fulfillment prior to or at the Closing of each of the following
conditions, any of which may be waived by Seller in its sole discretion:
18.1. Representations and Warranties. All representations
and warranties of Seller contained in this Agreement shall be true and
correct in all material respects as of the date hereof, and such
representations and warranties shall be true and correct in all
material respects as of the Closing (as if made at and as of such
time).
18.2. Performance of Agreements. Seller shall have
performed and complied in all material respects with all agreements
and conditions required by this Agreement to be performed or complied
with by it prior to or at the Closing.
18.3. Approvals. Any and all governmental authorities,
bodies or agencies having jurisdiction over the transactions
contemplated by this Agreement shall have granted such consents,
authorizations and approvals as are necessary for the consummation
thereof, and all applicable waiting or similar periods required by law
shall have expired.
18.4. No Injunctions. No preliminary or permanent
injunction or other order by any federal, state or local court which
prevents the consummation of the transactions contemplated by this
Agreement shall have been issued and remain in effect, and no action
to obtain any such injunction or order shall have been filed and
remain pending.
6
<PAGE> 7
18.5. Financing. Purchaser shall have obtained the
financing necessary to consummate the transactions contemplated
hereby.
18.6. Material Adverse Change. There shall have been no
material adverse change in the business, operations, equity, earnings,
prospects or financial condition of the Company from October 31, 1998
until the Closing Date.
19. Conditions to Obligations of Seller. All of the obligations
of Seller under this Agreement are subject to the fulfillment prior to or at
the Closing of each of the following conditions, any of which may be waived by
Purchaser and the Company:
19.1. Representations and Warranties. All representations
and warranties of Purchaser and the Company contained in this
Agreement shall be true and correct in all material respects as of the
date hereof, and such representations and warranties shall be true and
correct in all material respects as of the Closing (as if made at and
as of such time).
19.2. Performance of Agreements. Purchaser and the Company
shall have fully performed and complied in all material respects with
all agreements and conditions required by this Agreement to be
performed or complied with by him prior to or at the Closing.
19.3. Approvals. Any and all governmental authorities,
bodies or agencies having jurisdiction over the transactions
contemplated by this Agreement shall have granted such consents,
authorizations and approvals as are necessary for the consummation
thereof, and all applicable waiting or similar periods required by law
shall have expired.
19.4. No Injunctions. No preliminary or permanent
injunction or other order by any federal, state or local court which
prevents the consummation of the transactions contemplated by this
Agreement shall have been issued and remain in effect, and no action
to obtain any such injunction or order shall have been filed and
remain pending.
19.5. Ordinary Course of Business. Purchaser shall have
operated the Company in the ordinary course consistent with past
practices since March 1, 1999.
19.6. Material Adverse Change. There shall have been no
material adverse change in the business, operations, equity, earnings,
prospects or financial condition of the Company from October 31, 1998
until the Closing Date.
20. Closing Deliveries.
20.1. Closing Deliveries by Purchaser and the Company.
Purchaser and the Company shall deliver or cause to be delivered at
the Closing all of the following:
(a) The Purchaser shall pay the Purchase Price
set forth in Section 2;
7
<PAGE> 8
(b) The Company shall satisfy its obligations
under Section 5 hereof, to repay amounts outstanding that are
owed to Seller.
(c) The Company shall satisfy its obligations
under Section 6 hereof to distribute to Purchaser and Seller
their respective interests in the Undistributed Profits of
the Company.
20.2. Closing Deliveries by the Seller. The Seller shall
deliver or cause to be delivered at Closing all of the following:
(a) The original stock certificate representing
all the Shares of Common Stock of the Company owed by the
Seller, duly endorsed by the Seller or with duly executed
stock powers attached.
(b) A duly certified copy of the written
consent of the board of directors of Seller evidencing the
approval of Seller's board of directors of this Agreement and
the sale contemplated hereby.
(c) All promissory notes or other evidences of
indebtedness of the Company to the Seller marked "satisfied"
or other evidence satisfactory to the Purchaser that all
debts owed to Seller by the Company have been satisfied.
21. Indemnification.
21.1. Definition of Damages. As used in this Agreement,
"Damages" shall mean all assessments, levies, losses, fines, penalties,
liabilities, damages, costs and expenses, including reasonable
attorneys' fees and expenses.
21.2. Purchaser's Indemnification Obligations. Purchaser
shall indemnify, save and keep harmless Seller, its subsidiaries and
affiliates against and from all Damages sustained or incurred by them
as a result of or arising out of or by virtue of:
(a) any inaccuracy in or breach of any
representation and warranty made by the Purchaser to Seller
herein or in any closing document delivered to Seller in
connection herewith; or
(b) the breach by Purchaser of or the failure of
the Purchaser to comply with, any of the covenants or
obligations to be performed by the Purchaser under this
Agreement.
21.3. Seller's Indemnification. Obligations. Seller shall
indemnify, save and keep harmless Purchaser and its successors and
permitted assigns (each a "PURCHASER INDEMNITEE"), against and from all
Damages sustained or incurred by any Purchaser Indemnitee as a result
of or arising out of or by virtue of:
8
<PAGE> 9
(a) any inaccuracy in or breach of any
representation and warranty made by Seller to the Purchaser
herein or in any closing document delivered to the Purchaser
in connection herewith; or
(b) any breach by Seller of, or failure by
Seller to comply with, any of the covenants or obligations
under this Agreement to be performed by Seller under this
Agreement.
21.4. Time Limitation On Certain Indemnification
Obligations. Claims for indemnification made under paragraphs 21.2 and
21.3 of this Agreement may be made during the period from the Closing
Date until the second anniversary of the Closing Date. Notwithstanding
the foregoing, any claim for indemnification shall survive such
termination date, if the party seeking indemnification, prior to such
termination date shall have advised the party from whom it seeks
indemnification in writing of the claim.
22. Commissions. Each party shall be responsible for any
commissions or finders' or originator's or transaction fees payable to any
person retained by it in connection with the proposed transaction, and the
parties will indemnify each other with respect thereto.
23. Cost and Expense. Each party will bear its own costs and
expenses in connection with the proposed transaction and the transactions
contemplated herein.
24. Miscellaneous.
24.1. Survival. All covenants, agreements, representations
and warranties made herein or pursuant to any certificate or
instrument delivered pursuant to this Agreement shall survive the
Closing.
24.2. Amendment. This Agreement may not be amended except
by an instrument in writing signed by Seller and Purchaser.
24.3. Notices. All notices required or permitted to be
given hereunder shall be in writing and may be delivered by hand, by
facsimile, by nationally recognized private courier, or by United
States mail. Notices delivered by mail shall be deemed given three (3)
business days after being deposited in the United States mail, postage
prepaid, registered or certified mail, return receipt requested.
Notices delivered by hand, by facsimile, or by nationally recognized
private courier shall be deemed given on the day of receipt (if such
day is a business day or, if such day is not a business day, the next
succeeding business day); provided, however, that a notice delivered
by facsimile shall only be effective if confirmation is received of
receipt of the facsimile at the number provided in this Section 24.3
or if such notice is also delivered by hand, or deposited in the
United States mail, postage prepaid, registered or certified mail
(return receipt requested), on or before two (2) business days
following transmission by facsimile. All notices shall be addressed as
follows:
9
<PAGE> 10
If to Seller:
Tekgraf, Inc.
6000 Lake Forrest Drive, Suite 110
Atlanta, GA 30328
Attn.: W. Jeffrey Camp
Facsimile: 404-459-8288
If to Purchaser:
William E. Streib
Prisym Technologies, Inc. of Georgia
3079 Crossing Park, Suite 250
Norcross, GA 30071
Facsimile: 770-417-5351
and/or to such other respective addresses and/or addressees as may be
designated by notice given in accordance with the provisions of this
Section 24.3.
24.4. Entire Agreement; Binding Effect. This Agreement and
the instruments to be delivered by the parties pursuant to the
provisions hereof constitute the entire agreement between the parties
and shall be binding upon and inure to the benefit of the parties
hereto and their respective legal representatives, successors and
permitted assigns.
24.5. Non-Waiver. The failure in any one or more instances
of a party to insist upon performance of any of the terms, covenants
or conditions of this Agreement, to exercise any right or privilege in
this Agreement conferred, or the waiver by such party of any breach of
any of the terms, covenants or conditions of this Agreement, shall not
be construed as a subsequent waiver of any such terms, covenants,
conditions, rights or privileges, but the same shall continue and
remain in full force and effect as if no such forbearance or waiver
had occurred. No waiver shall be effective unless it is in writing and
signed by an authorized representative of the waiving party.
24.6. Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed to be an
original, and all such counterparts shall constitute but one
instrument.
24.7. Severability. The invalidity of any provision of
this Agreement or portion of a provision shall not affect the validity
of any other provision of this Agreement or the remaining portion of
the applicable provision.
24.8. Applicable Law. This Agreement shall be governed and
controlled as to validity, enforcement, interpretation, construction,
effect and in all other respects by the internal laws of the State of
Georgia applicable to contracts made in that State.
10
<PAGE> 11
24.9. Benefits. Except as expressly provided herein,
nothing in this Agreement, express or implied, shall confer on any
Person other than the parties hereto, and their respective successors
and permitted assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, including third
party beneficiary rights.
24.10. Assignability. This Agreement shall not be
assignable by Seller, Purchaser or the Company without the prior
written consent of the other parties. Purchaser may assign his right
to purchase the Shares to any person or entity prior to Closing,
except for any of the persons listed in Section 11.4 hereof.
24.11. Headings. The headings contained in this Agreement
are for convenience of reference only and shall not affect the meaning
or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
"SELLER"
TEKGRAF, INC.
By: /s/ Jeff Camp
--------------------------------
Title: CFO
-----------------------------
"PURCHASER"
/s/ William E. Streib
-----------------------------------
William E. Streib
"COMPANY"
PRISYM TECHNOLOGIES, INC. OF GEORGIA
By: /s/ William E. Streib
--------------------------------
Title: President
-----------------------------
11
<PAGE> 1
EXHIBIT 11.1
Tekgraf, Inc.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Net income (loss) $ 91 $ (393)
Basic and diluted weighted average number of common shares
Common shares 5,889 2,581
Basic and diluted net income (loss) per share $ 0.02 $(0.15)
</TABLE>
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Registrant
G&R Marketing, Inc., an Illinois corporation
Microsouth, Inc., a Georgia corporation
tekgraf, inc., a Texas corporation
Computer Graphics Distributing Company, a Maryland corporation
Tekgraf Northwest, a California corporation
Computer Graphics Technology, Inc., a Georgia corporation
Martec, Inc., a Georgia corporation
New England Computer Graphics, Inc., a Georgia corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TEKGRAF, INC. FOR THE YEAR ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,702,848
<SECURITIES> 0
<RECEIVABLES> 17,146,730
<ALLOWANCES> 520,000
<INVENTORY> 7,718,337
<CURRENT-ASSETS> 27,219,133
<PP&E> 1,216,212
<DEPRECIATION> 391,548
<TOTAL-ASSETS> 37,155,601
<CURRENT-LIABILITIES> 15,397,909
<BONDS> 0
0
0
<COMMON> 6,328
<OTHER-SE> 21,655,378
<TOTAL-LIABILITY-AND-EQUITY> 37,155,601
<SALES> 99,046,966
<TOTAL-REVENUES> 99,046,966
<CGS> 83,621,310
<TOTAL-COSTS> 83,621,310
<OTHER-EXPENSES> 348,442
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,978
<INCOME-PRETAX> 578,167
<INCOME-TAX> 487,000
<INCOME-CONTINUING> 91,167
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,167
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
