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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 JUNE 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
$.001, as of August 10, 2000, the latest practicable date, was 6,328,331 shares.
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TEKGRAF, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999.............3
Consolidated Statements of Operations for the three months and six months ended
June 30, 2000 and 1999............................................................4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999............................................................5
Notes to Consolidated Financial Statements........................................6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations........................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................13
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................14
Item 4. Submissions of Matters to a Vote of Security Holders.............................14
Item 6. Exhibits and Reports on Form 8-K.................................................14
Signatures................................................................................15
Index of Exhibits.........................................................................16
</TABLE>
2
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PART I - FINANCIAL INFORMATION
TEKGRAF, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------------------
2000 1999
-------------------------------
(UNAUDITED)
-------------------------------
($ IN THOUSANDS)($ IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,174 $1,704
Accounts receivable, less allowance for doubtful accounts of $919,300
and $782,000 at June 30, 2000 and December 31, 1999, respectively 15,817 17,095
Inventories, net 9,687 12,900
Prepaid expenses and other assets 72 313
Income taxes receivable 108 147
Deferred income taxes 1,147 800
-------------- ----------------
Total current assets 28,005 32,959
-------------- ----------------
Property and equipment, net 2,130 1,965
Goodwill, net 2,222 2,315
Other assets 76 101
-------------- ----------------
Total assets $ 32,433 $ 37,340
============== ================
LIABILITIES
Current liabilities:
Current debt $ 4,058 $ 4,264
Accounts payable 11,758 14,507
Accrued expenses 1,550 2,145
Contract obligation and deferred income 2,123 2,754
-------------- ----------------
Total current liabilities 19,489 23,670
-------------- ----------------
Deferred income taxes 299 299
-------------- ----------------
Total liabilities 19,788 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
June 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 June 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 June 30, 2000 and December 31, 1999 0 0
Due from stockholders (1,775) (1,780)
Additional paid-in capital 22,557 22,557
Accumulated deficit (8,143) (7,412)
-------------- ----------------
Total stockholders' equity 12,645 13,371
-------------- ----------------
Total liabilities and stockholders' equity $ 32,433 $ 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
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
--------------------------------------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
--------------------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
($ IN THOUSANDS) ($ IN THOUSANDS) ($ IN THOUSANDS) ($ IN THOUSANDS)
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales $ 25,948 $ 28,928 $ 49,652 $ 53,264
Cost of goods sold 22,340 24,740 41,904 45,191
---------- ---------- ---------- ----------
Gross profit 3,608 4,188 7,748 8,073
Operating expenses:
Selling, general and administrative 4,245 4,049 8,323 7,874
Depreciation 131 77 262 130
Amortization of goodwill 47 162 95 323
---------- ---------- ---------- ----------
Loss from operations (815) (100) (932) (254)
Other expense/(income) 30 (46) 27 (41)
Interest expense, net 34 8 119 33
---------- ---------- ---------- ----------
Loss before benefit for
income taxes (879) (62) (1,078) (246)
(Benefit)/Provision for income taxes (294) 47 (347) 38
---------- ---------- ---------- ----------
Net loss $ (585) $ (109) $ (731) $ (284)
========== ========== ========== ==========
Basic and diluted weighted average
shares outstanding 6,161,664 6,161,664 6,161,664 6,161,664
========== ========== ========== ==========
Basic and diluted net loss per share $ (0.09) $ (0.02) $ (0.12) $ (0.05)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
---------------------------------------
JUNE 30, 2000 JUNE 30, 1999
---------------------------------------
(UNAUDITED) (UNAUDITED)
---------------------------------------
<S> <C> <C>
Cash flows from operating activities: ($ IN THOUSANDS) ($ IN THOUSANDS)
Net loss $ (731) $ (284)
Adjustments to reconcile net loss to
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Provision for doubtful accounts receivable 120 250
Provision /write-down of inventory 150 78
Depreciation 262 130
Amortization of goodwill 95 323
Gain on sale of Prisym 0 (32)
Deferred taxes (347) (103)
Changes in net assets and liabilities, net of
acquisitions:
Accounts receivable 1,158 (1,731)
Inventories 3,063 (3,915)
Prepaid expenses and other assets 303 264
Accounts payable and accrued expenses (3,344) 2,077
Deferred income and contract obligation (631) 366
Income taxes 0 (300)
------- -------
Total adjustments 829 (2,593)
------- -------
Cash provided by (used in) operating activities 98 (2,877)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (427) (815)
Proceeds from sale of Prisym 0 440
------- -------
Cash provided by (used in) investing activities (427) (375)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds/(Repayment) of debt (206) 1,284
Loan to stockholder (8) 0
Payments from stockholders for deficient net asset values 13 459
------- -------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (201) 1,743
------- -------
Decrease in cash and cash equivalents (530) (1,509)
Cash and cash equivalents, beginning of year 1,704 1,703
------- -------
Cash and cash equivalents, end of period $ 1,174 $ 194
======= =======
</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 six months ended June 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 June 30, 2000 and 1999 consist of the
following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------------------------
2000 1999
--------------------------------
($ in thousands) ($ in thousands)
--------------------------------
(unaudited) (unaudited)
<S> <C> <C>
Component materials $ 494 $ 370
Service parts 1,981 2,442
Finished goods 7,212 10,088
------- --------
Inventories, net $ 9,687 $ 12,900
======= ========
</TABLE>
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 during any of the periods presented. At June 30, 2000, 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>
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. 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.
6
<PAGE>
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 six months
ended June 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. Note: The June 30, 2000 data represents
actual results. 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.
<TABLE>
<CAPTION>
PROFORMA COMBINED SIX MONTHS ENDED
(IN THOUSANDS) JUNE 30, JUNE 30,
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
Statement of Operations Data: (unaudited) (unaudited)
Net sales $ 49,652 $ 54,764
Cost of goods sold 41,904 45,741
-------- --------
Gross profit 7,748 9,023
Operating expenses:
Selling, general and
Administrative 8,323 8,798
Depreciation 262 137
Amortization of goodwill 95 323
-------- --------
Operating loss (932) (235)
Other expense/(income) 27 (54)
Interest expense 119 33
-------- --------
Loss before taxes (1,078) (214)
(Benefit) provision for income taxes (347) 50
-------- --------
Net loss $ (731) $ (264)
======== ========
</TABLE>
5. INCOME TAXES
The Company's effective tax rate was (33.4)% and 76% for the three months
ended June 30, 2000 and 1999, respectively. The Company's effective tax rate
was (32.2)% and 15% for the six months ended June 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 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. The
Company issued 2,192,000 shares (giving effect to the Company's 400-for-1
stock split in June 1997 and its 0.83333325-for-one reverse stock split
effected in October 1997) of Class B Common Stock as the consideration in
five acquisitions completed in June 1997. At that time,
7
<PAGE>
1,141,333 shares (again, giving effect to the stock split and reverse
stock split) were already held by the stockholders of the Company.
Accordingly, the Company had 3,333,333 shares of Class B Common Stock
outstanding. 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.
The Company has filed a court action for determination of the fair value of
the stock and accrued interest. Currently, the case is in the discovery
stage, and consequently the Company cannot predict the outcome of this
matter. The Company has secured a $12.5 million credit line from the bank,
subject to certain contingencies. Management believes that the funds from
this credit line will be adequate to fund the repurchase of the dissenters'
shares.
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 $617,061 have been incurred, including employee
severance. These costs have been combined with the above described amount
and are reflected as Restructuring Charges and Other Expenses in the third
quarter of 1999 statement of operations.
8
<PAGE>
The following table provides a rollforward of the liabilities incurred in
connection with the 1999 business restructuring.
<TABLE>
<CAPTION>
($ in thousands)
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1999 JUNE 30, 2000 2000
TYPE OF COST BALANCE ACTIVITY BALANCE
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee Separations $334 $(248) $86
Facility Closings 184 (153) 31
Other 60 (60) 0
----------------------------------------------------------
Total $578 $(461) $117
==== ====== ====
</TABLE>
For the six months ended June 30, 2000, restructuring reserve balances were
reduced by $461,000. Employee separations of $209,000 and facility closings
of $45,000 were charged against the restructuring reserve for the six months
ended June 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 $117,000 as of June 30, 2000.
9. SEGMENT DISCLOSURES
The Company's operations were previously classified into two business units:
graphics and technology. With the acquisition of the U.S. and Canadian
service businesses and the worldwide parts business of Calcomp Technology,
Inc., the Company has an additional services business unit. These business
units are revenue producing components of the Company about which separate
financial information is produced internally and operating decisions are
made. For the Graphics Division net sales, no customers accounted for more
than 10% of the sales for the three months ended June 30, 2000 and one
customer accounted for 13% of sales for the three months ended June 30,
1999. No customers accounted for more than 10% of net sales for both the
Technology and Services Division for the three months ended June 30, 2000
and 1999. International sales for all three divisions were insignificant for
the three months ended June 30, 2000 and June 30, 1999. For the Graphics
Division net sales, no customers accounted for more than 10% of the sales
for the six months ended June 30, 2000 and one customer accounted for 23% of
sales for the six months ended June 30, 1999. No customers accounted for
more than 10% of net sales for both the Technology and Services Division for
the six months ended June 30, 2000 and 1999. International sales for all
three divisions were insignificant for the six months ended June 30, 2000
and June 30, 1999. The following segment information is for the three months
and six months ended June 30, 2000 and 1999:
9
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
-------------------------------------------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales: ($ IN THOUSANDS) ($ IN THOUSANDS) ($ IN THOUSANDS) ($ IN THOUSANDS)
Graphics $ 21,225 $ 25,574 $ 40,706 $ 47,259
Technology Systems 2,397 1,811 4,202 4,462
Services 2,326 1,543 4,744 1,543
-------- -------- -------- --------
Total net sales $ 25,948 $ 28,928 $ 49,652 $ 53,264
======== ======== ======== ========
Operating income (loss):
Graphics $ (762) $ 152 $ (1,248) $ 15
Technology Systems (15) (12) (66) (50)
Services 192 (249) 583 (249)
-------- -------- -------- --------
Total operating loss $ (585) $ (109) $ (731) $ (284)
======== ======== ======== ========
Identifiable assets:
Graphics $ 27,771 $ 35,827 $ 27,771 $ 35,827
Technology Systems 1,174 3,096 1,174 3,096
Services 3,488 5,362 3,488 5,362
-------- -------- -------- --------
Total identifiable assets $ 32,433 $ 44,285 $ 32,433 $ 44,285
======== ======== ======== ========
</TABLE>
10. RECLASSIFICATIONS
Certain amounts in the June 30, 1999 financial statements have been
reclassified to conform to the June 30, 2000 presentation.
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.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999.
10
<PAGE>
NET SALES. Total net sales decreased $3.0 million, or 10.3%, to $25.9 million
for the three months ended June 30, 2000, compared to $28.9 million for the
three months ending June 30, 1999. The Graphics Division net sales decreased
$4.3 million, or 17.0%, to $21.2 million for the three months ended June 30,
2000 compared to $25.6 million for the three months ended June 30, 1999. The
decrease was due to the timing of the roll-out of the reseller Digital
Point-of-Purchase (POP) program as well as a direct sales initiative implemented
by a key vendor. The Tekgraf Technology Systems sales increased $0.6 million, or
32.3%, to $2.4 million for the three months ended June 30, 2000, compared to
$1.8 million for the three months ended June 30, 2000. The CalGraph Services
Division sales increased $0.8 million or 50.7% to $2.3 million for the three
months ended June 30, 2000 as compared to $1.5 million for the three months
ended June 30, 1999. The increase relates to new third party service contacts
during the three months ended June 30, 2000. The CalGraph Services Division was
acquired in April 1999.
GROSS PROFIT. Gross profit decreased $0.6 million or 13.8% for the three months
ended June 30, 2000, to $3.6 million as compared to $4.2 million for the three
months ended June 30, 1999. Gross profit as a percentage to sales decreased 0.6%
to 13.9% for the three months ended June 30, 2000, as compared to 14.5% for the
three months ended June 30, 1999. The decline in gross profit is due to change
of product sales in the graphics business as well as lower systems sales for the
three months ended June 30, 2000 compared to three months ended June 30, 1999.
SG&A EXPENSES. SG&A expenses increased $0.2 million or 4.8% to $4.2 million for
the three months ended June 30, 2000 compared to $4.0 million for the three
months ended June 30, 1999. SG&A expenses as a percentage of sales were 16.4%
and 14.0% for` the three months ended June 30, 2000 and 1999, respectively. SG&A
expenses for the period ending June 30, 2000 include legal fees of approximately
$100,000 relating to the dissenter's rights and restructuring reserve reversals
of $207,000. See footnote 7 regarding dissenter's rights for class B common
stock.
DEPRECIATION EXPENSE. Depreciation expense increased $54,000, or 70.1%, to
$131,000 for the three months ended June 30, 2000, as compared to $77,000 for
the three months ended June 30, 1999. The increase is due to new software and
computer equipment that was purchased in the third quarter 1999 for the CalGraph
business.
AMORTIZATION EXPENSE. Amortization expense decreased $115,000, or 71.0%, to
$47,000 for the three months ended June 30, 2000, compared to $162,000 for the
three months ended June 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.
INCOME TAXES. The Company's effective tax rate was a benefit of 33% for the
three months ended June 30, 2000 compared to a provision of 76% for the three
months ended June 30, 1999.
NET LOSS. The Company had a net loss of $0.6 million for the three months ended
June 30, 2000, as compared to a net loss of $0.1 million for the three months
ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999.
NET SALES. Total net sales decreased $3.6 million, or 6.8%, to $49.7 million for
the six months ended June 30, 2000, compared to $53.3 million for the six months
ending June 30, 1999. The Graphics Division net sales decreased $6.6 million, or
13.9%, to $40.7 million for the six months ended June 30, 2000 compared to $47.3
million for the six months ended June 30, 1999. The decrease was due to the
timing of the roll-out of the reseller Digital Point-of-Purchase (POP) program
as well as a direct sales initiative implemented by a few key vendors during the
second
11
<PAGE>
quarter of 2000. The Tekgraf Technology Systems sales decreased $0.3 million,
or 5.8%, to $4.2 million for the six months ended June 30, 2000, compared to
$4.5 million for the six months ended June 30, 1999. The decrease was due to
the sale of the Prisym business effective February 1999. Excluding the Prisym
divestiture, net sales for the Tekgraf Technology Systems business increased
20.5% for the six months ended June 30, 2000 as compared to the six months
ended June 30, 1999. The CalGraph Services Division net sales increased $3.2
million for the six months ended June 30, 2000. The CalGraph Services
Division was acquired in April 1999.
GROSS PROFIT. Gross profit for the six months ended June 30, 2000 decreased $0.3
million, or 4.0%, to $7.7 million as compared to $8.1 million for the six months
ended June 30, 1999. Gross profit as a percentage to sales increased 0.4% to
15.6% for the six months ended June 30, 2000 compared to 15.2% for the six
months ended June 30, 1999. The decline in gross profit is due to change of
product sales in the graphics business as well as lower systems sales for the
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
SG&A EXPENSES. SG&A expenses increased $0.4 million to $8.3 million for the six
months ended June 30, 2000 compared to $7.9 million for the six months ended
June 30, 2000. SG&A expenses as a percentage of sales were 16.7% and 14.8% for
the six months ended June 30, 2000 and 1999, respectively. Of the increase, $0.8
million was attributable 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 June 30, 2000 include legal fees of
approximately $100,000 relating to the dissenter's rights and restructuring
reserve reversals of $207,000. See footnote 7 regarding dissenter's rights for
class B common stock.
DEPRECIATION EXPENSE. Depreciation expense increased $132,000, or 101%, to
$262,000 for the six months ended June 30, 2000, as compared to $130,000 for the
six months ended June 30, 1999. The increase is due to new software and computer
equipment that was purchased in the third quarter 1999 for the CalGraph
business.
AMORTIZATION EXPENSE. Amortization expense decreased $228,000, or 71.0%, to
$95,000 for the six months ended June 30, 2000, compared to $323,000 for the six
months ended June 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.
INCOME TAXES. The Company's effective tax rate was a benefit of 32% for the six
months ended June 30, 2000 compared to a provision of 5% for the three months
ended June 30, 1999.
NET LOSS. The Company had a net loss of $0.7 million for the six months ended
June 30, 2000, as compared to a net loss of $0.3 million for the six months
ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2000, the Company had $1.2 million in cash with a working capital
surplus of $8.5 million, compared to $1.7 million in cash and a working capital
of $9.3 million for the six months ended June 30, 1999.
The Company generated $0.1 million of cash from operations for the six months
ended June 30, 2000 compared to cash used of $2.9 million from operations for
the six months ended June 30, 1999. During the six months ended June 30, 2000,
inventory decreased by $3.1 million, which was offset by a decrease in accounts
payable of $3.3 million. The decrease in accounts payable was due to lower
inventory purchases during the six months ended June 30, 2000 as well as
payments made for inventory purchased in December 1999 to take advantage of
year-end purchase discounts.
12
<PAGE>
For the six months ended June 30, 2000 and June 30, 1999, the Company used $0.4
million and $0.8 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 six months ended June 30, 1999, the Company received net proceeds of $0.4
million related to the sale of the Prisym business.
For the six months ended June 30, 2000, cash used for financing activities was
$0.2 million. The Company had borrowings of $3.5 million and repayments of $3.7
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 an outstanding 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, 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 June 30, 2000 was $4.1 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 six
months ended June 30, 2000.
Based upon its current operating plan, the Company believes its existing capital
resources, including the proceeds from the Loan, should enable it to maintain
its current and planned operations.
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. The Company is not expecting the implementation of SAB 101 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.
13
<PAGE>
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 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.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 7 of Notes to Consolidated Financial Statements
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 2000 Annual Meeting of Stockholders was held on May 25,
2000. The following votes for each proposal were as follows:
The following directors were elected for terms expiring at the 2001
Annual Meeting:
Proposal 1 - Election of Directors
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
William M. Rychel 4,532,296 0 0
Steven J. Carnevale 4,532,296 0 0
Frank X. Dalton 4,532,296 0 0
Albert E. Sisto 4,532,296 0 0
Proposal 2 - Approval of Amendment to 1997 Stock Option Plan
Proposal 2 2,835,470 124,753 31,800
</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>
3.1 Restated Articles of Incorporation dated January 21, 2000.
10.36 Amended and Restated Loan and Security Agreement dated June 9, 2000
between Tekgraf, Inc., as Borrower, and all Subsidiaries of Borrower,
as Subsidiary Guarantors, and Wachovia Bank, National Association, as
Lender.
11.1 Statement of Computation of Earnings Per Share.
27.1 Financial Data Schedule.(For SEC use only)
</TABLE>
(b) Reports Filed on Form 8-K
None
15
<PAGE>
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 THIS 11th DAY OF AUGUST, 2000.
SIGNATURE TITLE
/s/ William M. Rychel Chief Executive Officer,
------------------------------------ President and Director (principal
William M. Rychel executive officer)
/s/ Thomas M. Mason Chief Financial Officer
------------------------------------ (principal financial and accounting
Thomas M. Mason officer)
16
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------------ -------------------------------------------------
<S> <C>
3.1 Restated Articles of Incorporation dated January 21,
2000.
10.36 Amended and Restated Loan and Security Agreement dated
June 9, 2000 between Tekgraf, Inc., as Borrower, and
all Subsidiaries of Borrower, as Subsidiary
Guarantors, and Wachovia Bank, National Association,
as Lender.
11.1 Statement of Computation of Earnings Per Share.
27.1 Financial Data Schedule.(For SEC use only)
</TABLE>
17
