<PAGE>
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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)
980 Corporate Woods Parkway, Vernon Hills, Illinois 60061
(Address of Principal Executive Offices, including Zip Code)
(847) 913-5888
(Registrant's telephone number, including area code)
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: |_|
The number of shares outstanding of the Registrant's common stock, par
value $.001, as of November 10, 2000, the latest practicable date, was 6,328,331
shares.
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TEKGRAF, INC.
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 ................................................. 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 2000 and 1999 ................. 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 .......................... 5
Notes to Consolidated Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........ 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 16
Item 6. Exhibits and Reports on Form 8-K .................................. 16
Signatures ................................................................ 17
Index of Exhibits ......................................................... 18
2
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PART I - FINANCIAL INFORMATION
TEKGRAF, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,027 $ 1,704
Accounts receivable, less allowance for doubtful accounts of $806,000
and $782,000 at September 30, 2000 and December 31, 1999, respectively 14,589 17,095
Inventories, net 8,914 12,900
Prepaid expenses and other assets 346 313
Income taxes receivable 95 147
Deferred income taxes 1,516 800
-------- --------
Total current assets 26,487 32,959
-------- --------
Property and equipment, net 2,343 1,965
Goodwill, net 2,175 2,315
Other assets 60 101
-------- --------
Total assets $ 31,065 $ 37,340
======== ========
LIABILITIES
Current liabilities:
Current debt $ 6,531 $ 4,264
Accounts payable 8,944 14,507
Accrued expenses 1,496 2,145
Contract obligation and deferred income 1,771 2,754
-------- --------
Total current liabilities 18,742 23,670
-------- --------
Deferred income taxes 250 299
-------- --------
Total liabilities 18,992 23,969
-------- --------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A Common Stock $.001 par value, 31,666,667 shares authorized; 6,328,331
and 3,202,032 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively 6 3
Class B Common Stock $.001 par value, 3,333,333 shares authorized at December 31, 1999;
No shares outstanding at September 30, 2000 and 3,126,299 outstanding at December 31, 1999 0 3
Preferred Stock, $.001 par value, 5,000,000 shares authorized; no shares
issued and outstanding at September 30, 2000 and December 31, 1999 0 0
Due from stockholders (1,775) (1,780)
Additional paid-in capital 22,657 22,557
Accumulated deficit (8,815) (7,412)
-------- --------
Total stockholders' equity 12,073 13,371
-------- --------
Total liabilities and stockholders' equity $ 31,065 $ 37,340
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands)
<TABLE>
<CAPTION>
Three months ended Three months ended Nine months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 1999 * 2000 1999 *
------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 21,312 $ 26,416 $ 66,544 $ 75,216
Cost of goods sold 18,534 22,448 56,694 63,567
----------- ----------- ----------- -----------
Gross profit 2,778 3,968 9,850 11,649
Operating expenses:
Selling, general and administrative 3,515 3,789 11,132 11,221
Depreciation 132 111 359 241
Amortization and impairment of goodwill 45 6,355 140 6,678
Restructuring charges and other expenses 0 847 0 847
----------- ----------- ----------- -----------
Loss from operations (914) (7,134) (1,781) (7,338)
Other (income)/expense (1) 7 26 (34)
Interest expense, net 54 55 173 88
----------- ----------- ----------- -----------
Loss before benefit for income taxes (967) (7,196) (1,980) (7,392)
Benefit for income taxes (341) (294) (663) (237)
----------- ----------- ----------- -----------
Loss from continuing operations (626) (6,902) (1,317) (7,155)
Loss from discontinued operations
(net of tax benefit) (45) (14) (86) (45)
----------- ----------- ----------- -----------
Net loss $ (671) $ (6,916) $ (1,403) $ (7,200)
=========== =========== =========== ===========
Basic and diluted weighted average shares
outstanding 6,161,664 6,161,664 6,161,664 6,161,664
=========== =========== =========== ===========
Loss applicable to common shares:
Continuing operations $ (0.10) $ (1.12) $ (0.21) $ (1.16)
Discontinued operations $ (0.01) $ (0.00) $ (0.02) $ (0.01)
----------- ----------- ----------- -----------
Net loss $ (0.11) $ (1.12) $ (0.23) $ (1.17)
=========== =========== =========== ===========
</TABLE>
*As reclassified for discontinued operations.
The accompanying notes are an integral part of these consolidated financial
statements.
4
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TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
(unaudited) (unaudited)
---------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,403) $(7,200)
Adjustments to reconcile net loss to
Net cash provided by (used in) operating activities:
Provision for doubtful accounts receivable 302 281
Provision /write-down of inventory 225 253
Depreciation 359 241
Amortization and impairment of goodwill 140 6,678
Gain on sale of Prisym 0 (32)
Deferred taxes (716) (204)
Non-cash compensation for services 100 0
Changes in net assets and liabilities, net of acquisitions:
Accounts receivable 2,204 (1,610)
Inventories 3,761 (1,804)
Prepaid expenses and other assets 60 83
Accounts payable and accrued expenses (6,212) 2,389
Deferred income and contract obligation (983) 495
Income taxes (49) (307)
------- -------
Total adjustments (809) 6,463
------- -------
Cash used in operating activities (2,212) (737)
------- -------
Cash flows from investing activities:
Purchase of property and equipment (737) (1,238)
Proceeds from sale of Prisym 0 440
------- -------
Cash used in investing activities (737) (798)
------- -------
Cash flows from financing activities:
Proceeds from debt 2,267 1,784
Loan to stockholder (8) 0
Payments from stockholders 13 459
------- -------
Cash provided by financing activities 2,272 2,243
------- -------
(Decrease)/Increase in cash and cash equivalents (677) 708
Cash and cash equivalents, beginning of year 1,704 1,703
------- -------
Cash and cash equivalents, end of period $ 1,027 $ 2,411
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. In the opinion of
management, all adjustments considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results that may
be expected for the full year ending December 31, 2000. For further
information, refer to the consolidated financial statements and the
footnotes included in the Form 10-K for the year ended December 31, 1999.
2. INVENTORIES
Inventories, net of reserves, at September 30, 2000 and 1999 consist of
the following:
September 30, December 31,
2000 1999
($ in thousands) ($ in thousands)
------------------------------------
(unaudited)
Component materials $ 685 $ 370
Service parts 1,917 2,442
Finished goods 6,312 10,088
------ -------
Inventories, net $8,914 $12,900
====== =======
3. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share are computed by dividing net
loss by the weighted average number of common shares and common share
equivalents outstanding during the period. There were no common share
equivalents that were dilutive during any of the periods presented. At
September 30, 2000, the basic and diluted weighted average shares exclude
the escrow shares and were determined as follows:
Shares outstanding from beginning of period 6,328,331
Weighted average escrow shares (166,667)
---------
Basic and diluted weighted average shares 6,161,664
=========
4. 1999 ACQUISITIONS AND DIVESTITURES
Effective April 1, 1999, the Company completed the acquisition of certain
assets of Calcomp Technology, Inc. (the "Services Acquisition"). The
acquired assets consist of those assets used in Calcomp's U.S. and
Canadian service businesses and its worldwide parts business. The Company
paid $400,000 in cash and assumed certain liabilities of Calcomp as
consideration for the acquired assets. The U.S and Canadian service
businesses primarily involve the field maintenance and repair of Calcomp
printers and plotter products in the U.S.
6
<PAGE>
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.
On March 25, 1999, the Company sold its ownership interest in Prisym
Technologies, Inc. of Georgia ("Prisym") with an effective date of
February 28, 1999. The Company sold its 60% ownership to the other
shareholders of Prisym, for a gain of approximately $32,000. The gain has
been included in other income in the consolidated statement of operations
for the nine months ended September 30, 1999. The Company no longer has
any interest in Prisym.
The following unaudited pro forma summary combines the consolidated
results of the Company as if the Calcomp acquisition and the Prisym
divestiture had occurred as of January 1, 1999. 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 actually have been if the
Calcomp acquisition and the Prisym divestiture had occurred as of January
1, 1999 or to project the Company's results of operations of operations
for any future period.
Nine Months Ended
(in thousands) September 30, September 30,
------------------------------
2000 1999
------------------------------
Actual Proforma
------------------------------
Statement of Operations Data: (unaudited) (unaudited)
Net sales $ 72,514 $ 83,127
Cost of goods sold 61,728 69,282
-------- --------
Gross profit 10,786 13,845
Operating expenses:
Selling, general and
Administrative 12,207 13,544
Depreciation 359 241
Amortization and impairment of goodwill 140 6,678
Restructuring charges and other expenses 0 847
-------- --------
Operating loss (1,920) (7,465)
Other expense/(income) 26 (54)
Interest expense 173 33
-------- --------
Loss before taxes (2,119) (7,444)
Benefit for income taxes (716) (264)
-------- --------
Net loss $ (1,403) $ (7,180)
======== ========
5. INCOME TAXES
The Company's effective tax rate was (35.5%) and (4.2%) for the three
months ended September 30, 2000 and 1999, respectively. The Company's
effective tax rate was (33.8%) and (3.5%) for the nine months ended
September 30, 2000 and 1999, respectively. The difference between the
Company's effective and statutory tax rates for 2000 and 1999 was
primarily due to the amortization of non-deductible goodwill and state
taxes, net of the federal benefit.
6. CLASS B COMMON STOCK CONVERSION TO CLASS A COMMON STOCK
All Class B Common Stock was converted to Class A Common Stock pursuant to
a vote of the securities holders at a special meeting of shareholders held
on January 21, 2000. Prior to
7
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the conversion, there was no active trading market for the Class B Common
Stock; however, each share of Class B Common Stock could be converted into
one share of Class A Common Stock. Each share of Class B Common Stock
entitled the holder to five votes per share, while the Class A Common
Stock entitled the holder to one vote per share. During 1999 and 1998,
32,867 and 174,167 shares of Class B Common Stock were converted to Class
A Common Stock on a one-for-one basis, respectively.
7. DISSENTER'S RIGHTS FOR CLASS B COMMON STOCK
Prior to the January 21, 2000 special meeting of shareholders related to
the reclassification of Class B Common Stock, stockholders of record who
owned 1,191,333 shares of Class B Common Stock, notified the Company of
their intent to exercise dissenters' rights if the actions contemplated by
the special meeting were approved. The Company received demands from these
stockholders. Pursuant to Georgia law, the Company responded to these
demands by offering the dissenting stockholders $1.73 per share (plus
accrued interest), representing the Company's estimate of the fair value
as of the relevant date, after taking into account relevant premiums and
discounts. The dissenting stockholders rejected the Company's offer and
have asserted that $4.50 per share was the fair value as of the relevant
date.
As the dissenting stockholders and the Company could not reach agreement
as to the fair value of the shares as of the relevant date, on May 26,
2000, the Company filed a petition in the Superior Court of Fulton County,
Georgia for a determination of fair value of the shares pursuant to the
Georgia statutes (the "Dissenter's Lawsuit"). The dissenters have
responded to the petition. As the case is still in the discovery phase,
although the Company has reached a partial settlement as discussed in Note
11. At this time the Company cannot predict the outcome of the remaining
settlement of the Dissenter's Lawsuit.
For a description of a partial settlement of the Dissenter's Lawsuit, see
Note 11 below.
8. IMPAIRMENT OF GOODWILL AND RESTRUCTURING CHARGES AND OTHER EXPENSES
Management of the Company, since each of the respective acquisitions, has
continually reviewed the recoverability of the goodwill, as events and
changes in circumstances have warranted, to determine whether or not any
of the goodwill associated with the acquisitions has been impaired. During
1999, in light of several factors including the continued change in the
manner in which acquired assets are being utilized and the history and
forecasted revenues and earnings of the related acquisitions, the Company
reviewed and completed an analysis and determined that $6,193,318 of the
unamortized goodwill is impaired and therefore not recoverable, resulting
in a writedown of goodwill in the 1999 statement of operations.
In connection with the acquisitions, many functions formerly performed in
regional offices have been in transition and have been consolidated and
centralized, resulting in certain office or warehouse locations no longer
being necessary to the Company's business operations. Accordingly,
$230,000 was charged to operations during 1999 related to these leased
premises no longer in use. Additionally, associated with the related
centralization and consolidation and as part of management's overall
strategic plan, certain costs amounting to $617,061 have been incurred,
including employee severance. These costs have been combined with the
above described amount and are reflected as Restructuring Charges and
Other Expenses in the third quarter of 1999 statement of operations.
8
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The following table provides a rollforward of the liabilities incurred in
connection with the 1999 business restructuring.
($ in thousands)
Nine months
ended
December 31, September 30, September 30,
1999 2000 2000
Type of Cost Balance Activity Balance
--------------------------------------------------------------------------------
Employee Separations $334 $(334) $ 0
Facility Closings 184 (164) 20
Other 60 (60) 0
---------------------------------------------
Total $578 $(558) $20
==== ===== ===
For the nine months ended September 30, 2000, restructuring reserve
balances were reduced by $558,000. Employee separations of $334,000 and
facility closings of $164,000 were charged against the restructuring
reserve for the nine months ended September 30, 2000. After the above
charges, management evaluated the restructuring reserve balance and
released $39,000 from employee separations, $108,000 from facility
closings and $60,000 from other restructuring reserves based on
anticipated restructuring needs. The restructuring reserve balance is
$20,000 as of September 30, 2000.
9. SEGMENT DISCLOSURES
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. For the Graphics Division net sales, no customers
accounted for more than 10% of the sales for the three months ended
September 30, 2000 and one customer accounted for 12% of sales for the
three months ended September 30, 1999. No customers accounted for more
than 10% of net sales for either the Technology Systems Division or
Services Division for the three months ended September 30, 2000 and 1999.
International sales for all three divisions were insignificant for the
three months ended September 30, 2000 and September 30, 1999. For the
Graphics Division net sales, no customers accounted for more than 10% of
the sales for the nine months ended September 30, 2000 and one customer
accounted for 22% of sales for the nine months ended September 30, 1999.
No customers accounted for more than 10% of net sales for either the
Technology Systems Division or Services Division for the nine months ended
September 30, 2000 and 1999. International sales for all three divisions
were insignificant for the nine months ended September 30, 2000 and
September 30, 1999. The following segment information is for the three
months and nine months ended September 30, 2000 and 1999:
9
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<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
-------------------------------------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales: ($ in thousands) ($ in thousands) ($ in thousands) ($ in thousands)
Graphics $ 19,230 $ 24,656 $ 59,717 $ 71,913
Services 2,082 1,760 6,827 3,303
-------- -------- -------- --------
Total net sales $ 21,312 $ 26,416 $ 66,544 $ 75,216
======== ======== ======== ========
Operating loss:
Graphics $ (704) $ (6,908) $ (1,975) $ (6,912)
Services 78 6 660 (243)
-------- -------- -------- --------
Net loss from
continuing operations $ (626) $ (6,902) $ (1,317) $ (7,155)
Identifiable assets:
Graphics $ 25,893 $ 32,961 $ 25,893 $ 32,961
Technology Systems 1,133 1,367 1,133 1,367
Services 4,039 3,975 4,039 3,975
-------- -------- -------- --------
Total identifiable assets $ 31,065 $ 38,303 $ 31,065 $ 38,303
======== ======== ======== ========
</TABLE>
10. RECLASSIFICATIONS
Certain amounts in the September 30, 1999 financial statements have been
reclassified to conform to the September 30, 2000 presentation.
11. DISCONTINUED OPERATIONS - TEKGRAF TECHNOLOGY SERVICES DIVISION
As of October 31, 2000, the Company sold the assets of its Tekgraf Systems
division to Micro Environments, LLC, a limited liability company, controlled by
Anita, Ltd., one of the dissenting shareholders in the Dissenter's Lawsuit. As
consideration for the assets of the Tekgraf Systems division, Anita, Ltd.
transferred to the Company 293,334 shares (subject to adjustment) of Class A
Common Stock in partial settlement of the Dissenter's Lawsuit. The number of
shares transferred is subject to adjustment based on the net book value of the
Tekgraf Systems division on October 31, 2000. Tekgraf Systems is an integrator
of desktop PC's and servers. The division produced $6.0 million in revenue and
had an pre-tax operating loss of $(139,000) for the nine months ended September
30, 2000.
The Company's 1999 consolidated financial statements have been reclassified to
report separately the results of operations for the Tekgraf Technology Services
Division. The operating results (in thousands) for the three months ended and
nine months ended September 30, 2000 of the discontinued Tekgraf Technology
Services Division consist of:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
---------------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
($ in thousands) ($ in thousands) ($ in thousands) ($ in thousands)
Net sales: $ 1,767 $ 1,947 $ 5,970 $ 6,411
======= ======= ======= =======
Loss from operations before income
taxes (73) (22) (139) (72)
Benefit from income taxes 28 8 53 27
------- ------- ------- -------
Loss from discontinued operations $ (45) $ (14) $ (86) $ (45)
======= ======= ======= =======
</TABLE>
10
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12. THIRD PARTY STOCK OPTIONS
The Company has agreements with two service providers whereby the Company
granted options to purchase up to 52,000 shares of the Company's common stock at
a weighted average exercise price of $1.51 per share. The options vest at the
date of grant and have expiration dates from three years from the grant date. On
the date of grant, these options had an estimated fair value aggregating $36,348
using the Black-Scholes option model. The Company's operations for the three
months and nine months ended September 30, 2000 include non-cash charges of
$36,348 relating to the options.
13. THIRD PARTY STOCK WARRANTS
On August 31, 2000, the Company entered into a twelve month agreement with
one service provider whereby the Company granted 100,000 warrants. Each party
has the right to terminate the Agreement with a 30 day written notice. The
vesting period of the warrants is: 50,000 warrants at a $1.50 exercise price,
vest immediately upon signing, 25,000 warrants at $2.50 exercise price, vest in
3 months after signing, and 25,000 warrants at a $3.50 exercise price, vest in 6
months from signing. The warrant expiration date is August 31, 2003. On the date
of grant, these options had an estimated fair value aggregating $58,400 using
the Black-Scholes option model. The Company's operations for the three months
and nine months ended September 30, 2000 include non-cash charges of $28,100
relating to the warrants.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Overview
The Company is a value-added solutions provider for advanced computer graphics
technologies with sales and technical support throughout North America. The
Graphics Division specializes in the wholesale distribution of computer graphics
technologies. In addition, the Graphics Division offers turnkey systems to
retail and manufacturing customers who wish to produce high-resolution, full
color posters, banners and other custom signage. The system includes a wide
format inkjet printer, sign-making software, consumables, technical and field
maintenance support. The Tekgraf Technology Systems Division is engaged in the
manufacture, sale, distribution and support of the Tekgraf Systems line of
special purpose Intel-based NT workstations and servers. CalGraph Technology
Services, Inc., a wholly owned subsidiary of Tekgraf, Inc., provides maintenance
and technical support services in the U.S. and Canada and supplies parts for the
Calcomp printer products and other third party manufacturers on a worldwide
basis.
Effective April 1, 1999, the Company completed the acquisition of certain assets
of Calcomp Technology, Inc. (the "Services Acquisition"). The acquired assets
consist of those assets used in Calcomp's U.S. and Canadian service businesses
and its worldwide parts business. The Company paid $400,000 in cash and assumed
certain liabilities of Calcomp as consideration for the acquired assets. The U.S
and Canadian service businesses primarily involve the field maintenance and
repair of Calcomp printers and plotter products in the U.S. and Canada. The
worldwide parts business involves the supply of Calcomp printer parts and
components to successors of Calcomp's service divisions outside the U.S. and
Canada.
Effective October 31, 2000, the Company completed the sale of its Tekgraf
Technology Services Division. The Company received as payment shares of Tekgraf
Class A Common Stock which were surrendered in January 2000 by a group of
shareholders who dissented to the conversion of
11
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Tekgraf Class B Common Stock to Class A Common Stock which was approved at a
special meeting of the Tekgraf shareholders on January 21, 2000. The dissenters
surrendered 293,334 shares of Class A Common Stock (subject to adjustment) in
exchange for the division. The consolidated financial statements for the three
months and nine months ended September 30, 2000 and 1999, respectively have been
reclassified to report separately the results of operations of the Tekgraf
Technology Services Division in discontinued operations.
Three Months Ended September 30, 2000 Compared With Three Months Ended September
30, 1999.
Continuing Operations:
Net Sales. Total net sales from continuing operations decreased $5.1 million, or
19.3%, to $21.3 million for the three months ended September 30, 2000, compared
to $26.4 million for the three months ending September 30, 1999. Of the $5.1
million decline, $3.5 million is backlog relating to new product introductions
from certain vendors. The Company expects the backlog orders to be shipped
during the fourth quarter of 2000. The remaining decline is attributable to a
direct sales initiative implemented by certain vendors. The Company expects the
new product introductions will help offset the revenue decline from certain
vendors who have implemented a direct sales initiative. The Graphics Division
net sales decreased $5.5 million, or 22.3%, to $19.2 million for the three
months ended September 30, 2000 compared to $24.7 million for the three months
ended September 30, 1999. The CalGraph Services Division sales increased $0.3
million or 18.2% to $2.1 million for the three months ended September 30, 2000
as compared to $1.8 million for the three months ended September 30, 1999. The
increase relates to new third party service contacts during the three months
ended September 30, 2000.
Gross Profit. Gross profit from continuing operations decreased $1.2 million or
30.0% for the three months ended September 30, 2000, to $2.8 million as compared
to $4.0 million for the three months ended September 30, 1999. Gross profit as a
percentage of sales decreased 2.0% to 13.0% for the three months ended September
30, 2000, as compared to 15.0% for the three months ended September 30, 1999.
The decline in gross profit is due to change of product sales mix in the
graphics business as well as a decrease in higher margin systems sales for the
three months ended September 30, 2000 compared to three months ended September
30, 1999.
SG&A Expenses. SG&A expenses from continuing operations decreased $0.3 million
or 7.9% to $3.5 million for the three months ended September 30, 2000 compared
to $3.8 million for the three months ended September 30, 1999. SG&A expenses as
a percentage of sales were 16.5% and 14.3% for the three months ended September
30, 2000 and 1999, respectively. SG&A expenses for the period ending September
30, 2000 include non-cash compensation expense of $100,000 related to stock
options and warrants issued for services to non-employees as well as legal fees
of approximately $100,000 relating to the dissenter's rights claims. See
footnote 7 regarding dissenter's rights claims for class B common stock.
Depreciation Expense. Depreciation expense from continuing operations increased
$21,000, or 18.9%, to $132,000 for the three months ended June 30, 2000, as
compared to $111,000 for the three months ended September 30, 1999.
Amortization and impairment of Goodwill. Amortization expense from continuing
operations decreased $6.3 million to $45,000 for the three months ended
September 30, 2000, compared to $6.4 million for the three months ended
September 30, 1999. During 1999, the management of the Company reviewed and
completed an analysis that $6,193,318 of the unamortized goodwill relating to
the acquisitions from 1997 and 1998 is impaired and therefore not recoverable,
which resulted in a third quarter 1999 writedown in the statement of operations.
12
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Income Taxes. The Company's effective tax rate for continuing operations was a
benefit of 35% for the three months ended September 30, 2000 compared to a
benefit of 4% for the three months ended September 30, 1999. The decrease in tax
benefit for the three months ended September 30, 1999 was primarily due to
non-tax deductible write-off of goodwill.
Net Loss. The Company had a net loss from continuing operations of $0.6 million
for the three months ended September 30, 2000, as compared to a net loss of $6.9
million for the three months ended September 30, 1999, primarily due to the
goodwill impairment.
Discontinued Operations:
The Company had a net after tax loss from discontinued operations of $45,000 for
the three months ended September 30, 2000 relating to the Tekgraf Technology
Systems Division.
Nine Months Ended September 30, 2000 Compared With Nine Months Ended September
30, 1999.
Continuing Operations:
Net Sales. Total net sales from continuing operations decreased $8.7 million, or
11.6%, to $66.5 million for the nine months ended September 30, 2000, compared
to $75.2 million for the nine months ending September 30, 1999. The Graphics
Division net sales decreased $12.2 million, or 17.0%, to $59.7 million for the
nine months ended September 30, 2000 compared to $71.9 million for the nine
months ended September 30, 1999. The decrease was due to a large number of
Point-of-Purchase (POP) system shipments during the nine months ended September
30, 1999, as well as a direct sales initiative implemented by a few key vendors
during the second quarter of 2000. The CalGraph Services Division net sales
increased $3.5 million for the nine months ended September 30, 2000. The
CalGraph Services Division was acquired in April 1999.
Gross Profit. Gross profit from continuing operations for the nine months ended
September 30, 2000 decreased $1.7 million, or 14.7%, to $9.9 million as compared
to $11.6 million for the nine months ended September 30, 1999. Gross profit as a
percentage of sales decreased 0.7% to 14.8% for the nine months ended September
30, 2000 compared to 15.5% for the nine months ended September 30, 1999. The
decline in gross profit is due to change of product sales mix in the graphics
business as well as lower higher margin systems sales for the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999.
SG&A Expenses. SG&A expenses from continuing operations decreased $0.1 million
to $11.1 million for the nine months ended September 30, 2000 compared to $11.2
million for the nine months ended September 30, 1999. SG&A expenses as a
percentage of sales were 16.7% and 14.9% for the nine months ended September 30,
2000 and 1999, respectively. SG&A expenses are up $0.8 million or 1.0% of sales
due to the Services Acquisition, offset by a decrease of $0.1 million for the
sale of the Prisym business during the first quarter of 1999. SG&A expenses for
the period ending September 30, 2000 include non-cash compensation expense of
$100,000 for services to non-employees as well as legal fees of approximately
$200,000 relating to the dissenter's rights claims. See footnote 7 regarding
dissenter's rights claims for class B common stock.
Depreciation Expense. Depreciation expense for continuing operations increased
$118,000, or 49%, to $359,000 for the nine months ended September 30, 2000, as
compared to $241,000 for the nine months ended September 30, 1999. The increase
is due to new software and computer equipment that was purchased in the third
quarter 1999 for the CalGraph business.
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Amortization and impairment of Goodwill. Amortization expense for continuing
operations decreased $6.6 million to $140,000 for the nine months ended
September 30, 2000, compared to $6.7 million for the nine months ended September
30, 1999. During 1999, the management of the Company reviewed and completed an
analysis and determined that $6,193,318 of the unamortized goodwill relating to
the acquisitions from 1997 and 1998 was impaired and therefore not recoverable,
which resulted in a third quarter 1999 writedown in the statement of operations.
Income Taxes. The Company's effective tax rate for continuing operations was a
benefit of 33% for the nine months ended September 30, 2000 compared to a
benefit of 3.2% for the nine months ended September 30, 1999. The tax benefit
increase of 29.8% for the nine months ended September 30, 2000 as compared to
the nine months ended September 30, 1999 is primarily due to the non-tax
deductible write-off of the amortization and impairment of goodwill during the
third quarter 1999.
Net Loss. The Company had a net loss for continuing operations of $1.3 million
for the nine months ended September 30, 2000, as compared to a net loss of $7.2
million for the nine months ended September 30, 1999.
Discontinued Operations:
The Company had a net after tax loss from discontinued operations of $86,000 for
the nine months ended September 30, 2000 relating to the Tekgraf Technology
Systems Division.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2000, the Company had $1.0 million in cash with working capital
of $7.8 million, compared to $1.7 million in cash and a working capital of $9.3
million as of December 31, 1999.
The Company used $2.2 million of cash from operations for the nine months ended
September 30, 2000 compared to cash used of $0.7 million from operations for the
nine months ended September 30, 1999. During the nine months ended September 30,
2000, accounts receivable decreased by $2.2 million, inventory decreased by $3.8
million, which was offset by a decrease in accounts payable of $6.2 million. The
decrease in accounts payable was due to lower inventory purchases during the
nine months ended September 30, 2000 as well as accelerated payments made for
inventory purchases to take advantage of vendor purchase discounts.
For the nine months ended September 30, 2000 and September 30, 1999, the Company
used $0.7 million and $1.2 million of cash, respectively, in investing
activities due to the purchase of property and equipment, mainly computer
equipment and software for development of the Company's new web-based order
fulfillment software. For the nine months ended September 30, 1999, the Company
received net proceeds of $0.4 million related to the sale of the Prisym
business.
For the nine months ended September 30, 2000, cash generated from financing
activities was $2.3 million. The Company had borrowings of $5.5 million and
repayments of $3.3 million with the outstanding bank loan.
In June 2000, the Company amended and restated a bank loan and security
agreement the "Agreement") with a bank that provides for a line of credit in the
amount of $12.5 million. Outstanding advances under the Agreement bear interest
at the LIBOR Index Rate plus a rate,
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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.
The outstanding loan balance as of September 30, 2000 was $6.5 million and $4.3
million as of December 31, 1999. 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. The Company was below the fixed charge coverage ratio and has obtained a
waiver from the bank for the nine months ended September 30, 2000.
Based upon its current operating plan, the Company believes its existing capital
resources, including the proceeds from the Bank Loan, should enable it to
maintain its current and planned operations for at least the next twelve months.
In December 1999, the SEC issued Staff Accounting Bulletin Number ("SAB No.")
101, "Revenue Recognition in Financial Statements," which provides additional
guidance in applying generally accepted accounting principles for revenue
recognition. Adoption of SAS 101 is required in the fourth quarter of fiscal
year 2000. The Company is not anticipating the implementation of SAB 101 to have
a material impact on the financial statements.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("Statement 133"). Statement 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The effective date of this statement was
delayed in June 1999 through the issuance of Statement of Financial Accounting
Standards No. 137 ("Statement 137"). The effective date has been extended to
fiscal years beginning after June 15, 2000. The Company is not anticipating the
implementation of SAB 133 to have a material impact on the financial statements.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
Credit risks with respect to trade
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receivables are limited due to the diversity of customers comprising the
Company's customer base. The Company purchases credit insurance for all
significant open accounts and the Company performs ongoing credit evaluations
and charges uncollectible amounts to operations when they are determined to be
uncollectible.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 7 of Notes to Consolidated Financial Statements, which Note is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed as part of this Report.
Exhibit
Number Description
------- -------------------------------------------------
10.1 Asset purchase agreement dated October 31, 2000, between
Anita Ltd, Micro Environments, LLC and Tekgraf, Inc. and
related documents.
11.1 Statement of Computation of Earnings Per Share.
27.1 Financial Data Schedule.(For SEC use only)
(b) Reports Filed on Form 8-K
None
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT ON FORM 10-Q TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED THIS 9th DAY OF NOVEMBER, 2000.
TEKGRAF, INC.
SIGNATURE Title
By: /s/ William M. Rychel Chief Executive Officer,
---------------------------- President and Director (principal
William M. Rychel executive officer)
By: /s/ Thomas M. Mason Chief Financial Officer
---------------------------- (principal financial and accounting
Thomas M. Mason Officer and duly authorized officer
Of the Registrant)
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INDEX OF EXHIBITS
Exhibit
Number Description
------- ------------------------------------------
10.1 Asset purchase agreement dated October 31, 2000, between
Anita Ltd, Micro Environments, LLC and Tekgraf, Inc. and
related documents.
11.1 Statement of Computation of Earnings Per Share.
27.1 Financial Data Schedule.(For SEC use only)
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