<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from _______ to ________.
Commission File No. 0-23221
------------------------
TEKGRAF, INC.
-------------
(Exact Name of Registrant as Specified in its Charter)
Georgia 58-2033795
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
645 Hembree Parkway, Suite J, Roswell, Georgia 30076
---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 442-6060
Former Address: N/A
-------------------
(Former name, former address and former fiscal year,
if changed since last report):
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes: [X] No: [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practical date.
<TABLE>
<CAPTION>
Class Outstanding at August 9, 1999
----- -----------------------------
<S> <C>
Class A Common Stock, $.001 par value 3,169,165 shares
Class B Common Stock, $.001 par value 3,159,166 shares
</TABLE>
<PAGE> 2
TEKGRAF, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998............ 1
Consolidated Statements of Operations for the three and six months ended
June 30, 1999 and 1998 ......................................................... 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 ......................................................... 4
Notes to Consolidated Financial Statements ...................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 13
Item 4. Submission of Matters to a Vote of Securities Holders.............................. 13
Item 6. Exhibits and Reports on Form 8-K .................................................. 13
SIGNATURES ............................................................................................. 14
INDEX OF EXHIBITS ...................................................................................... 15
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Tekgraf, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 194,198 $ 1,702,848
Accounts receivable, less allowance for doubtful accounts
of $788,000 and $520,000 at June 30, 1999 and
December 31, 1998, respectively 17,889,613 16,626,730
Inventories, net 14,553,929 7,718,337
Prepaid expenses and other assets 499,737 872,945
Deferred income taxes 743,213 298,273
------------ ------------
Total current assets 33,880,690 27,219,133
Property and equipment, net 1,607,624 824,664
Goodwill, net 8,716,444 9,009,941
Other assets 79,943 101,863
------------ ------------
Total assets $ 44,284,701 $ 37,155,601
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE> 4
Tekgraf, Inc.
Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt $ 2,003,640 $ 719,898
Accounts payable 15,127,203 12,868,281
Accrued expenses 2,211,122 1,502,859
Income taxes payable 7,029 306,871
Contract obligation and deferred income 2,871,500
------------ ------------
Total current liabilities 22,220,494 15,397,909
Deferred income taxes 95,986 95,986
------------ ------------
Total liabilities 22,316,480 15,493,895
------------ ------------
Commitments and contingencies
Stockholders' equity:
Class A Common Stock, $.001 par value,
31,666,667 shares authorized; 3,169,165 shares
issued and outstanding at June 30, 1999 and
December 31, 1998 3,169 3,169
Class B Common Stock, $.001 par value, 3,333,333
shares authorized; 3,159,166 shares issued and
outstanding at June 30, 1999 and December 31, 1998 3,159 3,159
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; no shares issued at June 30, 1999 and
December 31, 1998
Due from acquisition stockholders (17,686) (608,288)
Additional paid-in capital 22,556,865 22,556,865
Retained earnings (deficit) (577,286) (293,199)
------------ ------------
Total stockholders' equity 21,968,221 21,661,706
------------ ------------
Total liabilities and stockholders' equity $ 44,284,701 $ 37,155,601
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 5
Tekgraf, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 28,928,255 $ 27,505,230 $ 53,264,033 $ 44,376,511
Cost of goods sold
24,358,855 23,256,410 44,809,429 37,297,566
------------ ------------ ------------ ------------
Gross profit 4,569,400 4,248,820 8,454,604 7,078,945
Operating expenses:
Selling, general and administrative 4,429,659 3,717,042 8,255,766 6,254,861
Depreciation 77,242 54,052 129,796 99,728
Amortization 161,711 162,396 323,422 282,999
------------ ------------ ------------ ------------
Income (loss) from operations (99,212) 315,330 (254,380) 441,357
Other (income)/expenses, net (45,766) (154,880) (41,399) (272,886)
Interest expense 8,230 6,548 33,106 10,356
------------ ------------ ------------ ------------
Income (loss) before income taxes (61,676) 463,662 (246,087) 703,887
Provision for income taxes 47,200 254,000 38,000 400,000
------------ ------------ ------------ ------------
Net income (loss) $ (108,876) $ 209,662 $ (284,087) $ 303,887
============ ============ ============ ============
Basic and diluted weighted
average shares outstanding 6,161,664 5,955,016 6,161,664 5,612,743
============ ============ ============ ============
Basic and diluted net income (loss) per share $ (0.02) $ 0.04 $ (0.05) $ 0.05
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 6
Tekgraf, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (284,087) $ 303,887
------------ ------------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Provision for doubtful accounts receivable 250,000 175,000
Provision/writedown of inventory 77,996 147,300
Depreciation 129,796 99,728
Amortization 323,422 282,999
Gain on sale of Prisym (32,000)
Deferred taxes (102,815) (116,413)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (1,730,682) (2,523,107)
Inventories (3,915,285) (1,880,690)
Prepaid expenses and other assets 263,410 (96,479)
Accounts payable and accrued expenses 2,076,987 (53,121)
Deferred income and contract obligation 365,865
Income taxes (299,842) (96,535)
------------ ------------
Total adjustments (2,593,148) (4,061,318)
------------ ------------
Net cash used in operating activities (2,877,235) (3,757,431)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (814,727) (226,598)
Proceeds from sale of Prisym 979,239
Cash paid for acquisitions, including overdrafts
acquired from acquisitions and acquisition costs (538,931) (1,798,166)
------------ ------------
Net cash used in investing activities (374,419) (2,024,764)
------------ ------------
Cash flows from financing activities:
Proceeds from debt, net 1,283,742
Repayment of advance to stockholders
and related entities (246,956)
Payments received from stockholders for deficient
net asset values 459,262 109,367
Repayment of acquired companies' loans (1,558,122)
Proceeds from acquired companies' line of credit facilities 233,362
Payment of stock issuance cost (50,568)
------------ ------------
Net cash provided by (used in) financing activities 1,743,004 (1,512,917)
------------ ------------
Decrease in cash and cash equivalents (1,508,650) (7,295,112)
Cash and cash equivalents, beginning of period 1,702,848 8,600,339
------------ ------------
Cash and cash equivalents, end of period $ 194,198 $ 1,305,227
============ ============
Supplemental non-cash investing and financing activities:
Fair value of stock issued $ 2,030,362
Cash paid in connection with acquisitions $ 400,000 1,415,000
Other acquisition costs 138,931 212,000
Fair value of liabilities assumed 3,817,604 6,923,314
Fair value of assets acquired (4,356,535) (7,758,314)
------------ ------------
Goodwill $ $ 2,822,362
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE> 7
Tekgraf, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accounting and reporting policies of Tekgraf, Inc. ("Tekgraf" or the
"Company") conform to generally accepted accounting principles. Except for the
December 31, 1998 consolidated balance sheet, the financial statements
presented herein are unaudited but reflect all adjustments which, in the
opinion of management, are necessary for the fair presentation of the
consolidated financial position, results of operations and cash flows for the
interim periods presented. All adjustments reflected in the interim financial
statements are of a normal recurring nature. Such financial statements should
be read in conjunction with the financial statements and notes thereto and the
report of independent accountants included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998. The year end balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. The results
of operations for the three and six months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the full year. Certain
prior year amounts have been reclassified to conform to the 1999 presentation.
2. Net Income (Loss) Per Common Share
Basic and diluted net income (loss) per common share are computed by dividing
net income (loss) by the weighted average number of common shares and common
share equivalents outstanding during the period. There were no common stock
equivalents during either of the periods presented. At June 30, 1999, the basic
and diluted weighted average shares exclude the escrow shares and were
determined as follows:
<TABLE>
<S> <C>
Shares outstanding from beginning of period 6,328,331
Weighted average escrow shares (166,667)
-----------
Basic and diluted weighted average shares 6,161,664
===========
</TABLE>
3. Acquisitions
Effective April 1, 1999, the Company completed the acquisition of the U.S. and
Canadian service businesses and the worldwide parts business of Calcomp
Technology, Inc. (the "Services Acquisition") for $400,000 in cash and the
assumption of certain liabilities. The assets acquired and liabilities assumed
were completed through the formation of a wholly owned subsidiary, Calgraph
Technology Services, Inc. These businesses provide the maintenance and repair
of the Calcomp line of printers and other products in the U.S. and Canada and
the supplies of Calcomp printer parts and components to successors of Calcomp's
service divisions outside the U.S. and Canada. The acquisition was accounted
for under the purchase method of accounting.
On May 8, 1998, the Company acquired New England Computer Graphics, Inc., a
Massachusetts corporation ("NECG"), by merging NECG into a wholly owned
subsidiary of the Company. The Company paid $415,000 in cash and issued an
aggregate of 264,998 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of NECG as
consideration in this acquisition.
On May 1, 1998, the Company acquired Martec, Inc., a California corporation
("Martec"), by merging Martec into a wholly owned subsidiary of the Company.
The Company paid $500,000 in cash and issued an aggregate of 300,000
unregistered shares of the Company's Class A Common Stock to the holder of all
of the outstanding shares of stock of Martec as consideration in this
acquisition.
5
<PAGE> 8
On April 1, 1998, the Company acquired Computer Graphics Technology, Inc., a
South Carolina corporation ("CGT"), by merging CGT into a wholly owned
subsidiary of the Company. The Company paid $500,000 in cash and issued an
aggregate of 330,000 unregistered shares of the Company's Class A Common Stock
to the holders of all of the outstanding shares of stock of CGT as
consideration in this acquisition.
The purchase prices for the 1998 acquisitions (collectively, "the 1998
Acquisitions") described above are subject to adjustment based on certain net
asset value and profitability guarantees. In order to secure these guarantees,
a total of $325,000 of the cash consideration and 192,251 of the unregistered
shares of the Class A Common Stock issued in the 1998 Acquisitions were placed
in escrow. In addition to these escrowed amounts, a total of 192,250 shares of
the Class A Common Stock was placed in escrow to secure the various
representations, warranties and other provisions of the respective agreements.
The acquisitions were recorded under the purchase method of accounting and
accordingly, the results of operations of the acquired entities have been
included in the Company's statements of operations from the respective
acquisition dates. The acquired entities are regional distributors and
marketers of computer graphics hardware and software.
The following unaudited pro forma summary combines the consolidated results of
the Company as if the 1998 Acquisitions and the Services Acquisition had
occurred as of January 1, 1998. The pro forma summary gives no effect to any
efficiencies or additional costs that might have occurred, if any, had the
companies actually been combined for the entire period presented. The pro forma
summary does not purport to represent what the Company's results of operations
would have actually been if the 1998 Acquisitions and the Services Acquisition
had occurred as of January 1, 1998 or to project the Company's results of
operations for any future period. Note also that the 1998 Acquisitions
previously operated as closely held businesses. Additionally, the Services
Acquisition previously operated as part of a significantly larger corporation
and therefore, the overhead actually incurred has been estimated based upon the
actual expenses incurred since the date of acquisition as the historical
statements did not include actual expenses incurred for the specific assets
acquired and liabilities assumed.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Statement of Operations Data: (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 28,928,255 $ 32,628,289 $ 55,740,033 $ 61,317,381
Gross profit 4,569,400 5,214,117 9,145,604 10,114,962
Income (loss) from operations (99,212) 412,892 (221,829) 564,461
Income (loss) before taxes (61,676) 570,130 (213,536) 888,753
Net income (loss) (108,876) 277,652 (263,905) 356,510
Basic and diluted income (loss) per share (0.02) 0.05 (0.04) 0.06
Weighted average shares outstanding 6,161,664 6,161,664 6,161,664 6,161,664
</TABLE>
4. Income Taxes
The Company's effective tax rate was 76.5% and 54.8% for the three months ended
June 30, 1999 and 1998, respectively. The difference between the Company's
effective and statutory tax rates for 1999 and 1998 was primarily due to the
amortization of non-deductible goodwill and state taxes, net of the federal
benefit.
6
<PAGE> 9
5. Segment Information
The Company's operations were previously classified into two business units:
graphics and technology. With the acquisition of the U.S. and Canadian service
businesses and the worldwide parts business of Calcomp Technology, Inc., the
Company has an additional services business unit. These business units are
revenue producing components of the Company about which separate financial
information is produced internally and operating decisions are made. The
following segment information is for the three and six months ended June 30,
1999, respectively:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, 1999 Ended June 30, 1999
------------------- -------------------
<S> <C> <C>
Net sales:
Graphics $ 25,573,390 $ 47,256,830
Technology 1,811,180 4,463,518
Services 1,543,685 1,543,685
------------ ------------
Total net sales $ 28,928,255 $ 53,264,033
============ ============
Operating income (loss):
Graphics $ 477,303 $ 761,977
Technology 53,549 81,478
Services (201,172) (201,172)
Corporate (428,892) (896,663)
------------ ------------
Total operating loss $ (99,212) $ (254,380)
============ ============
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
Identifiable assets:
Graphics $ 28,287,275
Technology 1,141,318
Services 4,034,672
Corporate 10,821,436
-------------
Total identifiable assets $ 44,284,701
=============
</TABLE>
Corporate operating income (loss) includes overhead and special
charges related to the consolidated Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). These forward-looking statements appear in a
number of places in this report and include all statements that are not
historical fact and that relate to the intent, belief or current expectations
of the Company, its directors or its officers with respect to, among other
things: (i) the Company's financing plans, including the Company's ability to
obtain financing in the future; (ii) trends affecting the Company's financial
condition or results of operations, including those related to Year 2000
issues; (iii) the Company's growth strategy and operating strategy; (iv) the
Company's anticipated capital needs and capital expenditures; (v) projected
outcomes and any effects on the Company of any litigation or investigations
concerning the Company; and (vi) the potential impact of changes to, additions
of or losses of distribution agreements with manufacturers. When used in this
report, the words "expects," "intends," "believes," "anticipates," "estimates,"
"may," "could," "should," "would," "will," "plans," "continue," and other
similar expressions and variations thereof are intended to identify
7
<PAGE> 10
forward-looking statements. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance, that such
statements involve risks and uncertainties, and that actual results,
performance or developments could differ materially from those implied by such
forward-looking statements as a result of known and unknown risks and other
factors, including those described from time to time in the Company's filings
with the Securities and Exchange Commission under the heading "Risk Factors"
and elsewhere, which should be read in conjunction with this document. Among
such factors are risks relating to acquisitions, competition and pricing
pressures, dependence on acquiring and maintaining distribution arrangements
with manufacturers, dependence on certain suppliers and economic conditions.
OVERVIEW
The Company is engaged in the distribution, manufacture, configuration, and
servicing of computers and computer peripherals, hardware and software. The
Company commenced operations in February 1993 as Crescent Computers, Inc., for
the purpose of engaging in the manufacture of custom or "made-to order" premium
servers and network workstations under the brand name "Crescent Computer," now
marketed as "Tekgraf System." In December 1994, the Company acquired a
controlling interest in Prisym Technologies, Inc. of Georgia ("Prisym"), an
authorized reseller of equipment manufactured by Digital Equipment Corporation.
In June 1997, the Company completed the acquisition of all of the outstanding
capital stock of five regional distributors of computer graphics products: G&R
Marketing, Inc., Microsouth, Inc., tekgraf, inc., Computer Graphics
Distributing Company, and Tekgraf Northwest, Inc. (formerly Intelligent
Products Marketing, Incorporated), which includes IG Distribution, Inc.
(collectively, the "1997 Acquisitions") in exchange for an aggregate of
2,192,000 shares of Class B Common Stock (taking into account subsequent stock
splits and reverse stock splits of the Company). In acquiring these companies,
with offices outside Chicago, Atlanta, Houston, Washington D.C. and San
Francisco, the Company increased both its geographic presence and business
scope. Subsequent to the 1997 Acquisitions, the Company reincorporated under
the laws of the State of Delaware by merging into a wholly owned Delaware
subsidiary and changed its name to Tekgraf, Inc. In connection therewith, the
Company reorganized its operations into two divisions: the Graphics Division, a
wholesale distribution network of high-end computer graphics products; and the
Technology Division, which is engaged in the manufacture, sale and support of
the Tekgraf System and the distribution of related components.
On November 10, 1997, the Company completed the initial public offering of its
securities (the "Offering"). In the Offering, the Company offered 2,100,000
units at a price of $6.00 per unit, with each unit consisting of one share of
Class A Common Stock and one redeemable warrant. Each warrant entitles the
holder to purchase one share of Class A Common Stock at an exercise price of
$8.40, subject to adjustment.
In April and May 1998, the Company completed the acquisition of all of the
outstanding capital stock of three more distributors of computer graphics
products: Computer Graphics Technology, Inc., located in Greenville, South
Carolina; Martec, Inc., located outside Los Angeles; and New England Computer
Graphics, Inc., with offices outside both Boston and Toronto (collectively, the
"1998 Acquisitions").
On July 31, 1998, the Company reincorporated from Delaware to Georgia by merging
into a wholly-owned subsidiary that had been incorporated in Georgia for the
purpose of carrying out the reincorporation. Contemporaneously with the merger,
the subsidiary changed its name to Tekgraf, Inc. On March 25, 1999, effective
February 28, 1998, the Company sold its controlling interest in Prisym.
Effective April 1, 1999, the Company completed the acquisition of certain
assets of Calcomp Technology, Inc. (the "Services Acquisition"). The acquired
assets consist of those assets used in Calcomp's U.S. and Canadian service
businesses and its worldwide parts business. The Company paid $400,000 in cash
and assumed certain liabilities of Calcomp as consideration for the acquired
assets. The U.S. and Canadian service businesses primarily involve the
maintenance and repair of the Calcomp line of printer products in the U.S. and
Canada. The worldwide parts business involves the supply of Calcomp printer
parts and components to successors of Calcomp's service divisions outside the
U.S. and Canada.
8
<PAGE> 11
RESULTS OF OPERATIONS
Net sales. Net sales increased $1.4 million, or 5.2%, to $28.9 million for the
three months ended June 30, 1999 compared to $27.5 million for the quarter
ended June 30, 1998. Of the increase, $1.5 million was due to increased market
penetration and internal growth in the Graphics Division and $1.5 million was
attributable to the Services Acquisition that occurred on April 1, 1999. These
increases were offset by a decrease in Technology Division revenues of $1.6
million, with approximately $1.5 million of the decrease attributable to the
sale of Prisym, which was effective February 28, 1999. Accordingly, there were
no revenues from Prisym in the second quarter of 1999 as compared to $1.5
million in 1998. Net sales increased $8.9 million, or 20.0%, to $53.3 million
for the six months ended June 30, 1999 compared to $44.4 million for the six
months ended June 30, 1998, primarily due to the 1998 Acquisitions that
occurred in April and May of 1998 that were included for the entire six months
of 1999, the Services Acquisition and increased market penetration and internal
growth of the Graphics Division offset by a decrease in Technology Division
revenues of approximately $3.0 million, primarily as a result of the sale of
Prisym.
Gross Profit. Gross profit increased $321,000, or 7.6%, to $4.6 million for the
three months ended June 30, 1999 compared to $4.2 million for the 1998 quarter.
Gross margin as a percentage of sales increased to 15.8% for the second quarter
of 1999 compared to 15.4% for the same period in 1998. The slight increase in
the gross margin percentage was primarily due to the relatively consistent
sales volume associated with the channels business, slightly higher sales
volume associated with the POP business and the addition of a higher gross
margin percentage associated with the Services Acquisition. The gross margin
percentages for the six months ended June 30, 1999 and 1998 also remained
relatively consistent at 15.9% and 16.0%, respectively.
SG&A Expenses. SG&A expenses increased $713,000, or 19.2%, to $4.4 million for
the three months ended June 30, 1999 compared to $3.7 million for the three
months ended June 30, 1998. Of the increase, $586,000 was attributable to the
Services Acquisition, offset by a decrease of $277,000 from having sold Prisym
during the first quarter of 1999, with the remainder of the increase in the
Graphics Division. SG&A expenses for the six months ended June 30, 1999 as
compared to the same period in 1998 increased $2.0 million, primarily due to
the net change described above for the quarter and approximately $600,000 from
the 1998 Acquisitions not being included in the first quarter and for a portion
of the second quarter of 1998 and increased commissions on increased sales and
costs associated with internal growth of the Company.
Income (loss) from Operations. Operating income decreased $414,000 to a loss of
$(99,000) for the second quarter of 1999 compared to operating income of
$315,000 for the comparable 1998 quarter. Operating income decreased to a loss
of $(254,000) for the six months ended June 30, 1999 as compared to income of
$441,000 for the six months ended June 30, 1998, primarily due to the reasons
described in the preceding paragraphs. In addition to the costs described
above, income from operations was reduced by $162,000 in each of the quarters
ended June 30, 1999 and 1998, respectively, and $323,000 and $283,000 in the
six months ended June 30, 1999 and 1998, respectively, related to the
amortization of goodwill.
Provision for Income Taxes. The Company's effective tax rate was 76.5% and
54.8% for the three months ended June 30, 1999 and 1998, respectively. The
effective tax rate for the six months ended June 30, 1999 and 1998 was 15.4%
and 56.8%, respectively. The difference between the Company's effective and
statutory rates for 1999 and 1998 was primarily due to the amortization of
non-deductible goodwill and state taxes net of the federal benefit.
9
<PAGE> 12
Pro Forma Combined Financial Information
The 1998 Acquisitions described previously have had a significant impact on the
comparisons of operating results for 1999 and 1998, due to the fact that the
operating results of the 1998 Acquisitions were not included for the first
quarter of 1998 and a portion of the second quarter of 1998. The comparisons
are also affected by the Services Acquisition, for which the results of
operations have only been included from the acquisition date, April 1, 1999.
Therefore, in addition to the historical comparisons for the three and six
months ended June 30, 1999 and 1998, the Company has included the pro forma
statement of operations for the three and six months ended June 30, 1999 and
1998 as if the 1998 Acquisitions and the Services Acquisition had occurred as
of January 1, 1998.
The 1999 and 1998 unaudited pro forma data below also gives no effect to any
efficiencies or additional costs that might have occurred, if any, had the 1998
Acquisitions and the Services Acquisition actually been combined for the
periods presented. Note also that the 1998 Acquisitions previously operated as
closely held businesses. Additionally, the Services Acquisition previously
operated as part of a significantly larger corporation and therefore, the
overhead actually incurred has been estimated as the historical statements did
not include actual expenses incurred for the specific assets acquired and
liabilities assumed. 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.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Statement of Operations Data: (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 28,928,255 $ 32,628,289 $ 55,740,033 $ 61,317,381
Cost of goods sold 24,358,855 27,414,172 46,594,429 51,202,419
Gross profit 4,569,400 5,214,117 9,145,604 10,114,962
Operating expenses:
Selling, general and administrative 4,429,659 4,575,777 8,905,215 9,137,979
Depreciation and amortization 238,953 225,448 462,218 412,522
Income (loss) from operations (99,212) 412,892 (221,829) 564,461
Income (loss) before taxes (61,676) 570,130 (213,536) 888,753
Provision for income taxes 47,200 292,478 50,369 532,243
Net income (loss) (108,876) 277,652 (263,905) 356,510
Basic and diluted income (loss) per share (0.02) 0.05 (0.04) 0.06
Weighted average shares outstanding 6,161,664 6,161,664 6,161,664 6,161,664
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In November 1997, the Company consummated an initial public offering of
2,100,000 units consisting of 2,100,000 shares of Class A Common Stock and
2,100,000 redeemable warrants at a combined price of $6 per unit. The net
proceeds of the sale, after deducting underwriter discounts, etc., were
approximately $10.4 million. Additionally, certain stockholders of the Company
contributed an aggregate of $870,000 to the capital of the Company. A portion
of the proceeds from the initial public offering was used to repay bank debt of
$2 million, debt to a related entity of $2 million and debt to a stockholder of
$125,000. In conjunction with the repayment of the bank debt, the Company
terminated the line of credit facilities with the related banks.
10
<PAGE> 13
During 1998, the Company issued 894,998 unregistered shares of Class A Common
Stock and paid cash of $1,415,000 as consideration for the acquisitions of
three computer graphics distributing companies. Additionally, the Company paid
$1.6 million in debt, primarily bank debt, and terminated the existing lines of
credit of the acquired entities.
During the first quarter of 1999, the Company made purchase price adjustments
for the 1998 Acquisitions for net asset values that were less than originally
estimated by the stockholders of the acquired companies. During March of 1999,
these stockholders paid the Company approximately $459,000 pursuant to these
adjustments, and they still owe the Company approximately $18,000.
Since inception, the Company has financed its operations through a combination
of cash flow from operations, bank borrowings, equity capital, and, following
completion of the Company's initial public offering in November 1997, the net
proceeds from that offering. The Company's capital requirements have arisen
primarily in connection with acquisitions, growth in revenue and the purchase
of fixed assets. A key element of the Company's strategy is to continue to
evaluate opportunities to expand through acquisitions of companies engaged in
the distribution and/or marketing of computers and/or computer hardware,
software and peripherals and related complementary businesses. Any such
acquisitions may require additional capital, although there can be no assurance
that any additional acquisitions will be completed.
In July 1998, the Company entered into a Loan and Security Agreement (the
"Agreement") with a bank that provides for an outstanding line of credit in the
amount of $7.5 million. Outstanding advances under the Agreement bear interest
at the LIBOR Index Rate plus a rate, varying from 2.00% to 2.75%, that
corresponds to a range of the Company's debt to net worth ratio from 1:1 to
2:1. Pursuant to the terms of the Agreement, the Company has pledged accounts
receivable, inventory and equipment as collateral. During the six months ended
June 30, 1999, the Company borrowed and repaid approximately $3.0 million and
$1.7 million, respectively, under this credit facility. The Company believes
that its available funds, together with the cash flow expected to be generated
from operations and current and anticipated credit facilities, will be adequate
to satisfy its current and planned operations for at least the next 12 months.
For the six months ended June 30, 1999, the Company used approximately $2.9
million in cash from operating activities. The cash used in operations resulted
primarily from the increase in acccounts receivable of $1.7 million and the
increase in inventories of $3.9 million offset by the increase in accounts
payable of $2.1 million. The change in accounts receivable was attributable to
the timing of collections. Additionally, these changes were due to the Company
stocking for anticipated sales and an increase in the accounts payable
associated with the increase in inventory. The Company's cash flows from
operations has been and continues to be affected primarily by the timing of the
collection of accounts receivable, its inventory levels and the timing of its
payments of outstanding invoices. The Company's working capital was $11.7
million and $11.8 million at June 30, 1999 and December 31, 1998, respectively.
For the six months ended June 30, 1999, the Company used cash in investing
activities of approximately $375,000 primarily due to the sale of Prisym, with
proceeds of $979,000, offset by the purchase of property and equipment of
815,000, which consisted of capital improvements related to the Services
Acquisition and additional purchases related to the new MIS system, offset by
the cash paid for the Services Acquisition of $400,000, including acquisition
costs of $139,000.
Cash provided by financing activities for the six months ended June 30, 1999
was attributable to payments received from stockholders for deficient net asset
values, as discussed previously, and net proceeds of $1.3 million in debt
received under the Company's credit facility.
For the six months ended June 30, 1998, the Company used approximately $3.8
million in operating activities. The cash used in operations resulted primarily
from the increases in accounts receivable and inventory, with these increases
attributable to growth in sales during the second quarter and stocking for
anticipated sales in the near term.
11
<PAGE> 14
For the six months ended June 30, 1998, the Company used cash in investing
activities of $1.8 million for acquisitions, including overdrafts acquired, and
$227,000 for the purchase of property and equipment, which were primarily
additional purchases related to the new MIS system.
Cash used in financing activities for the six months ended June 30, 1998
resulted from the repayment of advances from stockholders and related entities,
loaned to the Company prior to the initial public offering, of $247,000, and
the repayment of the acquired entities' existing lines of credit of $1.6
million. These amounts were partially offset by proceeds received of $233,000
under an acquired entity's existing line of credit and the receipt of $109,000
from stockholders for deficient net asset values. The acquired entity's
outstanding line of credit was paid in full in July of 1998 and the facility
was terminated.
YEAR 2000
The "Year 2000" problem relates to computers, software, and other equipment in
which time and date-sensitive programs were written using two digits, rather
than four, to define calendar year data. As a result, date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000,
thereby causing potential system failures or miscalculations, which could
result in disruptions of normal business operations.
The Company has adopted a plan to facilitate a smooth transition of the
systems, products, and vendors upon which the Company relies into the
twenty-first century. Management of the Company believes its internal software
systems are Year 2000 compliant, as a result of the management information
systems project completed during 1999. The costs of the Company's efforts to
address the Year 2000 problem were not material to the Company's financial
position or any year's results of operations.
The Company's primary exposure emanates from the ability of its technology
suppliers to implement the necessary changes for Year 2000 compliance.
Management believes that the Company's exposure is minimal as the majority of
our software products sold to customers are warranted and supported at the end
user level by our suppliers. While there is no guarantee, the suppliers claim
that, where applicable, the software products are Year 2000 compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could adversely and materially affect the Company's
results of operations, liquidity and financial condition. The Company believes
that, with the completion of the management information systems project, the
possibility of significant interruptions of normal operations should be
reduced, although the Company can provide no assurance to that effect. In the
event that any of the Company's outside vendors or customers do not
successfully and timely achieve Year 2000 compliance, and the Company is unable
to replace them with alternate suppliers or new customers, the Company's
business or operations could be adversely affected.
Potential Delisting from the Nasdaq National Market
By letter dated June 10, 1999, the Nasdaq Stock Market notified the Company
that, based on a review of the price data for the Company's Class A Common
Stock for the preceding 30-day trading period, the Company did not meet the
$5,000,000 minimum market value of public float requirement. If the Company is
unable to meet this requirement for a minimum ten consecutive trading day
period by September 10, 1999, Nasdaq has indicated that it will delist the
Company's Class A Common Stock from trading on the Nasdaq National Market at
the opening of business on September 14, 1999. Nasdaq also indicated that it
may delist the Company during this 90-day period if it fails to maintain
compliance with any other listing requirements. Any delisting instituted by
Nasdaq would likely have an adverse and material effect on the price of the
Company's common stock and on the ability of the Company's shareholders to sell
their shares. Such delisting could also adversely affect the Company's ability
to obtain additional debt and/or equity financing and may result in a reduction
in the amount and quality of security analysts' and the news media's coverage
of the Company. The Company is considering various alternatives to address this
situation, including
12
<PAGE> 15
compliance (if applicable) and the possibility of appealing any Nasdaq decision
to delist the Company's Class A Common Stock. There can be no assurance,
however, that any action taken by the Company will be successful to maintain
its listing on the Nasdaq National Market.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in certain claims arising in the normal course of
business. In the opinion of management of the Company, although the outcomes of
the claims are uncertain, in the aggregate, they are not likely to have a
material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Securities Holders
The Company's 1999 Annual Meeting of Stockholders was held on May 26, 1999. The
following votes for each proposal were as follows:
The following directors were elected for terms expiring at the 2000 Annual
Meeting:
<TABLE>
<CAPTION>
For Against Abstain
PROPOSAL 1--Election of Directors
<S> <C> <C> <C>
William M. Rychel 12,722,571 28,517 6,031,665
W. Jeffrey Camp 12,722,571 28,517 6,031,665
Albert E. Sisto 12,722,571 28,517 6,031,665
Frank X. Dalton, Jr. 12,722,571 28,517 6,031,665
</TABLE>
Ratification of appointment of PricewaterhouseCoopers LLP as independent public
accountants:
<TABLE>
<S> <C> <C> <C>
PROPOSAL 2 12,722,571 1,400 6,044,315
</TABLE>
Approval of amendment to the Company's 1997 Stock Option Plan to increase the
number of shares of Class A Common Stock reserved for issuance from 300,000 to
600,000:
<TABLE>
<S> <C> <C> <C>
PROPOSAL 3 10,909,405 144,317 6,044,665
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed as part of this Report.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
11.1 Statements of Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports Filed on Form 8-K
On April 16, 1999, the Company filed a Current Report on Form 8-K,
pursuant to Item 2 of Form 8-K, regarding the Company's acquisition of
certain assets and the assumption of certain liabilities of Calcomp
Technology, Inc., which acquisition was completed on April 1, 1999.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEKGRAF, INC.
Date: August 13, 1999
By: /s/ William M. Rychel
-----------------------------------------
Name: William M. Rychel
Title: Interim Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999
By: /s/ W. Jeffrey Camp
-----------------------------------------
Name: W. Jeffrey Camp
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)
14
<PAGE> 17
INDEX OF EXHIBITS
The following exhibits are filed as part of this Report.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
11.1 Statements of Computation of Earnings Per Share.
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
15
<PAGE> 1
EXHIBIT 11.1
Tekgraf, Inc.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30:
Net income (loss) $ (108,876) $ 209,662
Basic and diluted weighted average shares
outstanding 6,161,664 5,955,016
Net income (loss) per share $ (0.02) $ 0.04
FOR THE SIX MONTHS ENDED JUNE 30:
Net income (loss) $ (284,087) $ 303,887
Basic and diluted weighted average shares
outstanding 6,161,664 5,612,743
Net income (loss) per share $ (0.05) $ 0.05
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TEKGRAF INC. FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 194,198
<SECURITIES> 0
<RECEIVABLES> 18,677,180
<ALLOWANCES> 787,567
<INVENTORY> 14,553,929
<CURRENT-ASSETS> 33,880,690
<PP&E> 2,076,025
<DEPRECIATION> (468,401)
<TOTAL-ASSETS> 44,284,701
<CURRENT-LIABILITIES> 22,220,494
<BONDS> 0
0
0
<COMMON> 6,328
<OTHER-SE> 21,961,893
<TOTAL-LIABILITY-AND-EQUITY> 44,284,701
<SALES> 53,264,033
<TOTAL-REVENUES> 53,264,033
<CGS> 44,809,429
<TOTAL-COSTS> 8,708,984
<OTHER-EXPENSES> 41,339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,106
<INCOME-PRETAX> (246,087)
<INCOME-TAX> 38,000
<INCOME-CONTINUING> (284,087)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (284,087)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
