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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Class A Common Stock, $.001 par value
and
Warrants to purchase Class A Common Stock, $8.40 exercise price
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: [X] No [ ]:
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Class A Common Stock held by
non-affiliates of the registrant was $11,879,610 at March 21, 2000.
The number of shares of Class A Common Stock outstanding as of March 21,
2000 was 6,328,331.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy statement for the 2000 Annual
Meeting of Stockholders of Tekgraf, Inc. are incorporated by reference into Part
III of this Report.
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TEKGRAF, INC.
TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Business..........................................................................................3
2. Properties.......................................................................................17
3. Legal Proceedings................................................................................18
4. Submission of Matters to a Vote of Security Holders..............................................18
PART II
5. Market for the Company's Common Equity and Related
Stockholder Matters..................................................................19
6. Selected Financial Data..........................................................................21
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition...................................................22
7A. Quantitative and Qualitative Disclosures About
Market Risks.........................................................................31
8. Financial Statements and Supplementary Data......................................................31
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................................31
PART III
10. Directors and Executive Officers of the Company.................................................31
11. Executive Compensation..........................................................................31
12. Security Ownership of Certain Beneficial Owners and
Management...........................................................................32
13. Certain Relationships and Related Transactions..................................................32
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.............................................................................32
Signatures....................................................................................36
Index of Exhibits............................................................................E-1
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PART I
ITEM 1. BUSINESS.
OVERVIEW/HISTORY
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.
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 Systems". In December 1994, the Company
acquired a controlling interest in Prisym Technologies, Inc. of Georgia
("Prisym"), an authorized reseller of equipment manufactured by Digital
Equipment Corporation (a "DEC Reseller"). On March 25, 1999, the Company sold
its controlling interest in Prisym with an effective date of February 28, 1999.
In June 1997, the Company completed the acquisition of all of the outstanding
capital stock of five regional distributors of computer graphics products: G&R
Marketing, Inc. ("G&R"), Microsouth, Inc. ("Microsouth"), tekgraf, inc.
("tekgraf"), Computer Graphics Distributing Company ("CGD"), and Tekgraf
Northwest, Inc. (formerly Intelligent Products Marketing, Incorporated)
("Tekgraf Northwest"), which included IG Distribution, Inc. (collectively, the
"1997 Acquisitions") in exchange for an aggregate of 2,192,000 shares (giving
effect to the Company's 400-for-1 stock split and recapitalization in June 1997
and its .83333325-for-one stock split in October 1997) of Class B Common Stock
of the Company. In acquiring these companies, with offices outside Chicago,
Atlanta, Houston, Washington D.C. and San Francisco, the Company increased both
its geographic presence and business scope. Subsequent to the 1997
Acquisitions, the Company reincorporated under the laws of the State of
Delaware by merging into a wholly owned Delaware subsidiary 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 Tekgraf Technology
Systems Division, which is engaged in the manufacture, sale and support of the
Tekgraf System, and the distribution of related components.
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On November 10, 1997, the Company completed the initial public offering of its
securities (the "Offering"). In the Offering, the Company offered 2,100,000
units (the "Units") at a price of $6.00 per Unit, with each Unit consisting of
one share of Class A Common Stock and one redeemable warrant (a "Warrant").
Each Warrant entitles the holder to purchase one share of Class A Common Stock
at an exercise price of $8.40, which is subject to adjustment.
In 1998, the Company completed the acquisition of all of the outstanding
capital stock of three more distributors of computer graphics products:
Computer Graphics Technology, Inc. ("CGT"), located in Greenville, South
Carolina; Martec, Inc. ("Martec"), located outside Los Angeles; and New England
Computer Graphics, Inc. ("NECG"), with offices outside both Boston and Toronto
(collectively, the "1998 Acquisitions").
On April 1, 1998, the Company acquired CGT, a South Carolina corporation, by
merging CGT into a wholly owned Georgia subsidiary of the Company. The Company
paid $500,000 in cash and issued an aggregate of 330,000 unregistered shares of
the Company's Class A Common Stock to the holders of all of the outstanding
shares of stock of CGT as consideration in this acquisition.
On May 1, 1998, the Company acquired Martec, a California corporation, by
merging Martec into a wholly owned Georgia subsidiary of the Company. The
Company paid $500,000 in cash and issued an aggregate of 300,000 unregistered
shares of the Company's Class A Common Stock to the holder of all of the
outstanding shares of stock of Martec as consideration in this acquisition.
On May 8, 1998, the Company acquired NECG, a Massachusetts corporation, by
merging NECG into a wholly owned Georgia subsidiary of the Company. The Company
paid $415,000 in cash and issued an aggregate of 264,998 unregistered shares of
the Company's Class A Common Stock to the holders of all of the outstanding
shares of stock of NECG as consideration in this acquisition.
The purchase prices for the 1998 Acquisitions of CGT, Martec and NECG are
subject to adjustment based on certain net asset value and profitability
guarantees. Accordingly, a total of $325,000 of the cash consideration and
192,251 of the unregistered shares of Class A Common Stock issued in
consideration in the 1998 Acquisitions were placed in escrow to secure these
guarantees. In addition to these escrowed amounts, 192,250 of the shares issued
as consideration was placed in escrow to secure the various representations,
warranties and other indemnifiable provisions of the respective agreements. The
1998 Acquisitions are regional distributors and marketers of computer graphics
hardware and software. These acquisitions were recorded under the purchase
method of accounting.
On July 31, 1998, the Company reincorporated from Delaware to Georgia by
merging into Tekgraf Reincorporation Subsidiary, Inc., a wholly owned
subsidiary of the Company that had been incorporated in Georgia as a shell
corporation for the purpose of carrying out the reincorporation.
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Contemporaneously with the merger, Tekgraf Reincorporation Subsidiary changed
its name to Tekgraf, Inc. On March 25, 1999, the Company sold its controlling
interest in Prisym with an effective date of February 28, 1999.
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" or "CalGraph") for $400,000 in
cash and the assumption of certain liabilities. The assets acquired and
liabilities assumed were consummated through the formation of a wholly owned
subsidiary, CalGraph Technology Services, Inc. CalGraph provides field
maintenance and repair of the Calcomp printers and other products in the U.S.
and Canada and is the worldwide source for Calcomp printer parts and components
to successors of Calcomp's service divisions outside the U.S. and Canada.
STRATEGY
The Company anticipates that it will be able to expand its operations through
internal growth of each of its operating divisions. The Company's overall
business strategy is to be a value-added solutions provider for advanced
computer graphics technologies. The Company provides turnkey Digital Point of
Purchase Signage (POP) systems in various vertical niche markets. The Company
intends to develop Original Equipment Manufacturers (OEM) relationships with
manufacturers that need sales, marketing, technical support, and maintenance
capability in the North American market.
Management is engaged in an on-going examination and revision of the Company's
Internet strategy, and has taken steps to ensure that the Company will be able
to provide its customers and suppliers with internet-based informational and
transactional capabilities.
The Company intends to pursue strategic acquisitions of complementary
businesses that support the business strategy and adds value to our customers
and shareholders. The Company intends to focus its acquisition activities on
profitable companies that support vertical market solutions within niche
markets in which it has developed expertise and specialized knowledge and where
sales, marketing and operational synergies are available through the business
combination. There can be no assurance that the Company's acquisition program
will be successful, that the acquisition of other companies will be completed
or that, if completed, any companies acquired will be profitable or will
contribute revenues to the Company.
THE COMPANY'S DIVISIONS AND PRODUCTS
The Company consists of three operating segments: the Graphics Division, the
Tekgraf Technology Systems Division and CalGraph Technology Services, Inc., a
wholly owned subsidiary of Tekgraf, Inc. "See Note 14 of Notes to Consolidated
Financial Statements for segment financial information".
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THE GRAPHICS DIVISION
GENERAL
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.
With the addition of the 1998 Acquisitions, the Graphics Division is in a
position to provide computer graphics manufacturers with a nationwide
distribution channel and the value-added benefit of local technical sales and
support personnel. With the addition of the CalGraph Technology Services, Inc.
acquisition in 1999, the Company is in a position to develop OEM Relationships
with manufacturers that need a nationwide sales, marketing, technical and field
maintenance organization. See "Customers, Sales and Marketing."
A core motivation for the 1998 and 1997 Acquisitions was the pre-existing
relationships among such companies and their principals. The desire to provide
manufacturers with national sales and marketing programs fostered close
cooperation among these regional wholesale distributor firms, ultimately
leading to the formation of two trade associations, the David Group and the
Vision Group. The purpose of these prior associations was to facilitate joint
marketing and promotion, product line acquisitions, the sharing of technical
resources and sales strategies, and the transfer of excess inventory. All of
the companies that make up the Graphics Division are current or former members
of one or both of such trade associations.
During the years ended December 31, 1999 and 1998, the revenues of the Graphics
Division accounted for 87.4% and 85.3%, respectively, of the Company's total
revenues. The operating profit (loss) of the Graphics Division for these same
periods accounted for (96.3%) and 95.3%, respectively, of the Company's
operating profit (loss). The identifiable assets of the Graphics Division
accounted for 59.4% and 58.1% of the Company's total identifiable assets as of
December 31, 1999 and 1998, respectively.
PRODUCTS AND MARKETS
The Graphics Division sells and supports products in the Digital Point of
Purchase Signage (POP), large format display graphics, digital pre-press,
presentation graphics, color desktop publishing, digital imaging, electronic
drawing management, computer-aided design and other emerging computer graphics
technologies markets.
The Company provides value-added sales, marketing, fulfillment, and logistics
support and field maintenance capability for more than 30 manufacturers of a
broad array of complex computer graphics hardware and software, including
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Agfa Division of Bayer Corporation, Barco Graphics, Electronics For Imaging
(EFI), Encad, Inc., Epson America, Inc., Hewlett Packard, Hunt Graphics (Seal),
Mitsubishi Electronics America, Inc., Scitex America Corporation, Tektronix,
Inc., 3M and Vidar Systems Corporation. Among the products the Graphics
Division distributes and sells are production-grade color scanners, digital
cameras, color laser printers, color-calibrated monitors, color management
software and accessories, raster image processors (RIPs), wide-format ink jet
printers, wide-format digital scanners, pre-press software, digital film image
setters, color proofers, mass storage devices and the consumable products used
in many of such products.
The Company's agreements with manufacturers are generally non-exclusive,
provide for wholesale distribution to dealers and resellers in specified
geographic territories and are terminable by either party without cause on 30
or 60 days notice.
The Graphics Division intends to continue to operate in the following four
vertical markets:
- Digital Point of Purchase Signage (POP)
- Display Graphics
- Digital Pre-Press
- Electronic Drawing Management Systems (EDMS)
DIGITAL POINT OF PURCHASE SIGNAGE (POP). For many years, retailers have
utilized POP, sometimes referred to as Point of Sale (POS) signage, to promote
products and services to consumers. Typically, that signage has been produced
using manual methods (chalkboards, markers, etc.) by in-store personnel, or
printed at a central corporate location using standard lithography printing
methods and distributed to retail stores.
Recent advances in software and hardware have created a new market for
customized POP signage using display graphics printers, software and media.
This technology allows a retailer to quickly and easily create, print and
display retail signs that are more responsive to their needs.
During 1998, as part of the Company's key strategic objectives, the Company was
engaged by a major beverage manufacturer to design, implement, and support a
customized POP sign-making system which allows the beverage manufacturer to
quickly make POP signs without the use of highly trained, dedicated personnel.
The Company provides product research and development, training, installation,
and technical support for the beverage manufacturers' distributor customers,
and provides outsource fulfillment of inks and media used in the sign-making
process.
Through its internal Strategic Solutions Group, the Company has expanded the
digital point of purchase signage business by introducing a national initiative
designed to engage up to 40 resellers in 2000. In partnership with some
strategic Value Added Reseller ("VAR") customers and suppliers, the Company
will attempt to expand its customer base in the POP market to include a wide
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range of retailers including supermarkets, department stores, drug chains, and
large manufacturers of consumer products who rely heavily upon the retail
marketplace.
DISPLAY GRAPHICS. A rapidly growing segment of the computer graphics output
market is display graphics. Display graphics, or large format graphics,
describes a process that allows computer-generated or captured images to be
printed in sizes up to 60 inches wide.
Historically, these images could only be printed on color electrostatic
printers costing over $120,000. However, over the last several years,
significant advances in ink-jet technology, software, specialty inks and media
have placed the cost of entry for display graphics systems starting at under
$10,000, and market acceptance has been rapid. End-users of this technology
include a wide range of industries and markets, such as:
- Trade-show graphics - production of booth and arcade displays
- Point of Sale graphics - floor displays
- Sign Shops - traditional signage, fleet graphics
- Print-for-Pay (e.g., Kinkos, Sir Speedy)
- Package Design - package prototyping
- Graphic Arts - imposition proofing
Products sold to this market include large-format ink-jet printers (Encad,
Hewlett Packard), raster image processing software (Amiable Technologies, EFI,
Onyx Graphics), lamination systems (Seal Products, a division of Hunt
Manufacturing) and a wide range of inks, papers and other specialty media.
DIGITAL PRE-PRESS. Over the last several years, there has been a dramatic shift
in the process printing industry from manual, analog production of printed
materials to the use of computers. Historically, the production of a printed
brochure, magazine or catalog involved numerous manual steps using photographic
materials to produce the final press-ready copy.
With rapid advances in software and hardware, much of today's printed materials
are produced digitally. The print production process now allows a printed piece
to go from concept to imaged printing plate in a fully digital environment.
Copy writing, proofing, and revisions all take place on a desktop computer,
increasing the speed and efficiency of the pre-press process, and streamlining
personnel requirements in the process. The Company believes this market is in a
period of rapid transition regarding the manner in which electronics products
are delivered to the traditional printing customer. When digital pre-press
systems sold for $200,000 per seat (user), most manufacturers used a captive
direct sales force to sell to the end-user. Today, the typical seat sells for
$20,000, forcing manufacturers to utilize a reseller channel to deliver their
products.
The Graphics Division sells input, proofing, networking, color management
software and output devices, which are integral parts of a digital pre-press
system. These products are typically sold through two classes of resellers:
graphic arts dealers, who have traditionally sold film, chemicals, printing
plates
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and other analog pre-press supplies, and graphics VARs, who have specialized in
pre-press workflow technologies and the automation of the pre-press process.
ELECTRONIC DRAWING MANAGEMENT SYSTEMS (EDMS). The use of computer-aided design
("CAD") systems in the engineering and architectural community has created
workflow problem for those firms that have embraced CAD - what to do with the
archive of manually drafted drawings that had accumulated over the years prior
to the implementation of CAD systems.
EDMS allow these customers to capture (i.e., scan) paper drawings and store
them digitally. When needed, they can be retrieved, annotated, printed or
converted to CAD format for further revision. Since most of these functions can
be performed using existing CAD workstations or PCs, the cost of converting to
EDMS is relatively low, and the demand for such systems is growing
dramatically.
The Graphics Division sells all of the components necessary for the
installation of an EDMS system, including large format scanners, archiving and
manipulation software, optical storage systems and output devices.
CUSTOMERS, SALES AND MARKETING
The Graphics Division's customers are principally VARs and systems integrators
("SIs") as well as, for certain products, retailers, mass merchandisers and
direct marketers. VARs typically focus on sales to users in specific vertical
markets where the selling organization has unique knowledge and expertise
concerning the prospective customer's application. These customers purchase
products from the Company and resell them as an integrated solution bundled
with installation services and post-sales support. SIs typically purchase
products from the Company for further integration into a much larger solution
comprised of components from many sources. These solutions typically are very
large in scale and may involve an integration contract between the SI and the
end-user customer. The Graphics Division utilizes the retail, mass merchant and
direct marketing sales channels when product demand is firmly established and a
lower cost mechanism of delivery to the end user is warranted.
Currently, the Graphics Division has 24 outside and 18 inside sales
representatives and 12 technical support representatives. The Company believes
that this constitutes the highest concentration of sales and technical support
professionals in the United States devoted to the sales, marketing and support
of high-end computer graphics products.
The Company's sales representatives receive commissions based on gross profit
on completed sales. During each of the years ended December 31, 1999, 1998 and
1997, compensation paid to outside independent sales representatives amounted
to less than 5% of the Company's sales commissions.
The Graphics Division has and maintains training and demonstration facilities
equipped with manufacturers' hardware and applications software. These
resources are made available to prospects and customers for product
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evaluations, product training, demonstrations, benchmark testing and in-house
and in-the-field seminars. In addition, the Graphics Division's sales force and
technical sales representatives are trained and able to demonstrate the
technology it distributes and the applications of such technology. Inside and
outside technical sales representatives are also trained and understand their
manufacturers' products, the competitors' products, related applications,
software and the relevant end-user markets.
The Company believes the services offered by the Graphics Division are unique
in providing face-to-face sales, marketing and distribution of mid to high-end
computer graphics products sold through vertical reseller channels. Typically,
products carried by the Graphics Division are relatively complex, requiring
technical sales training, product demonstrations, product training, pre-sale
and post-sale technical support and immediate product availability. Selling and
supporting products in these markets require knowledge of many distinct types
of hardware and software as well as communications protocols, networking
architecture, file formats, compression techniques and other systems
integration issues. Manufacturers of products with such a level of complexity
often need to leverage their own limited resources by selling and distributing
through reseller organizations. Similarly, reseller organizations are often
severely limited in the technical sales and marketing resources they can devote
to the sale of specific products. Accordingly, each regional location of the
Graphics Division augments both the manufacturer's and the reseller's staff,
capitalizing on its ongoing relationships with the local resellers and end user
community. Resellers are trained and assisted by Graphics Division staff in all
aspects of sales, marketing, distribution and installation of its products.
With the consolidation and centralization of the operations of the 1999, 1998,
and 1997 Acquisitions, the Company has established a national distribution
network capable of providing nationwide sales, marketing, distribution, and
technical and field service support. In addition to the economies of scale, the
Company believes that it will be much more cost-effective for certain
manufacturers of computer graphics technology and peripheral equipment to
utilize the Company as a marketer and service provider of its products than to
maintain their own extensive internal sales and service force.
CALGRAPH TECHNOLOGY SERVICES, INC.
GENERAL
CalGraph Technology Services, Inc., a wholly owned subsidiary of Tekgraf, Inc.,
is a provider of on-site installation support, service and warranty repair, a
hot-line technical support services and preventive maintenance services in
North America. The business includes the maintenance and repair of the CalComp
line of wide-format printer products in the U.S. and Canada and the supply of
CalComp printer parts and components to successors of CalComp's service
divisions outside the U.S. and Canada. CalGraph has a solid and experienced
base upon which to expand into a world-class third-party services provider.
CalGraph has formed relationships with other OEM graphics products
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manufacturers to provide maintenance and repair service operations in the U.S.
and Canada. Those OEM manufacturers include Canon and Epson, America.
The U.S. and Canadian service operations include 75 field service technicians
and 15 support personnel in the Company's Technical Support Call Center and
field dispatch operations in Fullerton, California. Also located in Fullerton
are the Company's component repair and refurbishment facilities and parts
warehousing.
PRODUCTS AND MARKETS
The addition of the CalGraph business unit allows the Company the opportunity
to form business relationships with OEM manufacturers and handle the entire
process of bringing a product to market in North America. Tekgraf can establish
the sales channel, provide marketing, technical support, installation, and
post-sales repairs as well as preventive maintenance.
The market for graphic systems continues to expand and customers typically want
to deal with a single vendor that can sell, install, support and service the
product after installation. In addition, as the Digital Point of Purchase
Signage Market continues to grow, the CalGraph business is an integral part of
the total solution. The Company has the ability to offer the customer a turnkey
solution, which includes hardware, software, installation, support and field
repairs.
CalGraph has installed a state of the art call dispatch and customer service
system that allows customers to open and track the status of each service call
via the Internet. This system also allows a manufacturer to open a service call
remotely on our system through internet-based links.
CUSTOMERS
CalGraph's customers are both OEM manufacturers and end users. Canon U.S.A. and
Epson America, Inc. currently utilize CalGraph to provide new product warranty
service and repairs for the wide-format ink-jet products that are sold in the
U.S. and Canada. The Company is actively engaged in the process of negotiating
additional contracts with other OEM manufacturers in the ink-jet, digital
pre-press and drawing management markets.
CalGraph also provides after-market preventive maintenance, field service and
depot repair services. The majority of customers currently own equipment
manufactured by CalComp, Inc. In 1999, no customer represented more than 5% of
the revenues of CalGraph Technology Services, Inc.
SALES AND MARKETING
CalGraph's sales and marketing activities are targeted at both classes of
customers described above. OEM sales activity is generated through industry
referrals, tradeshows and referrals from the Graphics Division.
Sales of after-warranty service contracts are pursued through telemarketing
activities, direct mail advertising and OEM referrals.
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THE TEKGRAF TECHNOLOGY SYSTEMS DIVISION
GENERAL
The operations of the Tekgraf Technology Systems Division currently consist of
the manufacture of the Tekgraf System. The Company custom designs, assembles
and sells custom or "made-to-order" premium servers or workstations and related
technology to VARs, vertical solution providers, corporations, universities and
government entities. See "Customers, Sales and Marketing." The Company also
provides services to its customers, including system architecture design,
hardware consulting and customer support.
PRODUCTS AND MARKETS
The Tekgraf System is an Intel-based workstation that is assembled in a number
of different configurations using standard component parts. Although many of
the Tekgraf Systems are based on standard configurations, customization enables
the Company to customize and accommodate customer computer needs with respect
to storage capacity, speed, price, applications, size, configuration and a
range of other considerations that can be accommodated in whole or in part by
the selection of appropriate components. The Company provides customers with
continuing technical support and assistance in the maintenance and operations
of Company purchased products. The Company also works with SIs on network
configuration and performs research and implementation of upcoming products,
such as Linux.
Tekgraf Systems are currently being used to operate non-sterile heart
catheterization diagnostic equipment, as voice mail/auto-attendant controllers,
in informational kiosks and in other process-control applications. The Company
also sells servers and redundant array of independent disks (RAID) storage
systems to VARs and other companies seeking to create Internet web sites,
internal networks, graphics and CAD workstations and application servers.
During the years ended December 31, 1999 and 1998, the revenues of the Tekgraf
Technology Systems Division accounted for 7.7% and 14.7%, respectively, of the
Company's total revenues. The operating profit of the Technology Division for
these same periods accounted for 0.3% and 4.7%, respectively, of the Company's
operating profit. The identifiable assets of the Technology Division accounted
for 3.2% and 5.6% of the Company's identifiable assets as of December 31, 1999
and 1998, respectively.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist of the assembly of Tekgraf
Systems at its facility in Norcross, Georgia and the testing of the electronic
and mechanical components incorporated into its products.
The Company has elected to assemble its products using principally the highest
quality off-the-shelf electronic component parts available from multiple
sources.
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The Company believes that this practice helps to ensure better quality control
and pricing by allowing the Company to select the best manufactured and best
performing components available on the market, rather than a proprietary
product that may fall behind the latest technology in terms of either such
characteristic, and to purchase such components from marketplace sources that
offer the best prices at the time the particular components are needed for
production, as opposed to having prices dictated by the limited sources able to
provide a proprietary component. The Company obtains component parts on a
purchase order basis and does not have long-term contracts with any suppliers.
To date, the Company has not experienced significant interruptions in the
supply of such component parts, and believes that numerous qualified suppliers
are available. The Company believes that the inability of any of its current
suppliers, except as specified below, to provide component parts to the Company
would not adversely affect the Company's operations and that alternative
sources could be readily established.
The Company currently obtains its motherboards (a primary component of the
workstation) from two sources. Certain of the Company's file server products
incorporate a motherboard, which is currently purchased from a sole supplier.
Historically, the Company has been able to obtain adequate supplies of this
component and does not anticipate any related sourcing problems; the inability
in the future to obtain sufficient numbers of such components or to develop
alternative sources could result in delays in product introductions or
shipments. Such delays could have an adverse effect on the Company's results of
operations. The Company plans to attempt development of additional alternative
sources to limit any adverse impact on the Company's results of operations.
The Company has established a comprehensive testing and qualification program
to ensure that all subassemblies meet the Company's specifications and
standards before final assembly and testing. The Tekgraf Technology Systems
Division also actively participates in reviews sponsored by trade magazines,
regularly finishing among the top performers. The Company's quality control
program includes diagnostic tests, assembly, burn-in, final configuration and
final quality assurance tests and the employment of process controls at its
manufacturing facility. The Company has also implemented quality control
policies and procedures that are reviewed and accepted by the Company's major
customers. The Company believes that these procedures help ensure a
high-quality product.
The Company's manufacturing facility totals approximately 4,000 square feet.
The Company believes that additional manufacturing facilities, if necessary,
are available. The Company is currently operating at approximately 50% of
capacity at this facility. See "Item 2 - Properties."
CUSTOMERS, SALES AND MARKETING
Customers for the Tekgraf System include OEMs, other vertical market computer
resellers, computer dealers, universities, government entities and
corporations. The Tekgraf Technology Systems Division does not market to
individual end-users, focusing instead on establishing relationships with
entities which will
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constitute repeat sales and have internal computer support personnel capable of
handling local issues prior to involvement of Company personnel.
The Company currently distributes Tekgraf Technology Systems Division products
principally through the efforts of its internal direct sales force. Because the
Tekgraf Technology Systems Division typically sells large amounts of equipment
to a small number of customers, a large portion of the Tekgraf Technology
Systems Division's sales may be derived from a limited number of customers.
CUSTOMER SERVICE AND SUPPORT
The Company believes that customer service and support is a significant
competitive factor in the network systems market in which it sells the Tekgraf
System and will become more important as local area networks ("LANs") become
more complex and as more enterprises implement business-critical applications
on their networks. The Company supports its customers by providing rapid
problem resolutions both during and after the installation process. The Company
maintains a technical support organization that assists customers in
trouble-shooting problems and providing replacement parts. The Company provides
a toll-free telephone number to help diagnose and correct customer system
interruptions as they occur at customer sites and support staff is available
during normal business hours.
The Company warrants all of its Tekgraf Systems servers and workstations
against defects in materials and workmanship for two years. During the warranty
period, the Company will repair or replace any Tekgraf System or component
thereof, which the Company identifies as defective. The Company, in certain
circumstances, will send replacement parts to the customer site prior to the
return of defective components in order to minimize down time. The Company has
contracted with a bonded, national service provider to furnish on-site service
of Tekgraf Systems to customers that choose that option.
The Company's product warranties do not differ materially from those generally
available in the industry. In most instances, the Company receives warranties
on products from vendors that are at least equivalent to those it provides to
its customers. To date, the Company has not experienced any material claims
under its warranties.
GRAPHICS DIVISION, TEKGRAF TECHNOLOGY SYSTEM
DIVISION AND CALGRAPH TECHNOLOGY SERVICES, INC.
BACKLOG
The Company does not have significant backlog due to the fact that: (i) the
Graphics Division generally ships orders received the same or next day and (ii)
the Tekgraf Technology System Division is able to manufacture and deliver
products generally within a few days of order receipt and long-term contracts
to supply products have not been entered into with customers (the Company
manufactures and sells products on the basis of individual purchase orders as
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and when received). CalGraph Technology Service, Inc. provides service
typically under a service contract that is invoiced in advance of the service
period. As of December 31, 1999, deferred service revenue representing billing
of service contracts in advance of providing the service was $2.3 million.
Excluding deferred service revenue, the backlog at the beginning of a quarter
may not represent a significant percentage of the products to be sold in that
quarter. Quarterly revenues and operating results depend on the volume and
timing of orders received during the quarter. Therefore, management of the
Company does not consider order backlog a significant indicator of the
Company's future revenues.
COMPETITION
The Company's Graphics Division competes primarily with OEM equipment
manufacturers that either utilize an in-house sales force to market their
products to resellers and end-users or utilize the services of large, national
fulfillment distributors. The Company believes its primary competition will
come from national fulfillment distributors whose specialty is order
fulfillment. The Company believes that the primary factors differentiating it
from such competitors are its ability to provide technical sales training,
product demonstrations and evaluation units, product training, pre-sale and
post-sale technical support and a nationwide field maintenance organization to
repair the product.
The Tekgraf Technology System Division manufactures the Tekgraf System which is
constructed using standardized parts that are available to others in the
market. The business of manufacturing and selling computers and computer
peripheral equipment is intensely competitive and rapidly changing. The Company
believes that the principal competitive factors in this industry include
relative price and performance, product availability, technical expertise,
financial stability, service, support and reputation. The competitors of the
Tekgraf Technology Systems Division include established computer product
manufacturers, some of which supply products to the Company, computer
resellers, distributors and service providers. Most of the companies in which
Tekgraf Technology System Division competes have substantially greater capital
resources, research and development staffs, marketing and distribution programs
and facilities, and many of them have substantially greater experience in the
production and marketing of products. As a result, these competitors may be
able to devote greater resources than the Company to the sales and service of
their computer products. As the computer market in which the Company competes
has matured, product price competition has intensified and is likely to
continue to intensify, which may make it too costly for the Company to continue
the "made to order" method of doing business. One of the results of this
competition may be to lower sales prices and decrease profit margins.
Additionally, there is no assurance that the Tekgraf System will continue to
achieve sufficient market acceptance to assure the Company's future success and
long-range profitability in the face of competition with such significantly
larger and better-capitalized companies.
Technological competition from other and longer established computer hardware
manufacturers and software developers is significant and expected to increase.
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The Company expects that hardware manufacturers and software developers will
continue to enter the market to provide and package integrated solutions to the
same customer base served by Tekgraf Technology Systems Division. All such
market participants will compete intensely to maintain or improve their market
shares and revenues.
CalGraph Technology Services, Inc. competes primarily with third-party service
providers and manufacturers' own service organizations. The Company typically
maintains agreements with manufacturers to provide the service for the product.
The Company's primary focus is to provide post sales technical support and
maintenance with manufacturers that do not have a service organization.
INTELLECTUAL PROPERTY
The Company has no patents and its success will depend, in part, on its ability
to preserve its trade secrets and proprietary know-how and to operate without
infringing upon the proprietary rights of third parties.
The Company seeks to protect trade secrets and proprietary know-how, in part,
by confidentiality agreements with employees, consultants, advisors and others.
There can be no assurance that such employees, consultants, advisors or others
will maintain the confidentiality of such trade secrets or proprietary
information, or that the trade secrets or proprietary know-how of the Company
will not otherwise become known or be independently developed by competitors in
such a manner that the Company will have no practical recourse.
PRODUCT RESEARCH AND MARKET DEVELOPMENT
The market for the Company's products is characterized by rapid technological
change and evolving industry standards, and it is highly competitive with
respect to timely product innovations. The introduction of products embodying
new technology and the emergence of new industry standards can render existing
products obsolete and unmarketable. The Company believes that its future
success will depend upon its ability to develop, manufacture and market new
products and enhancements to existing products on a cost-effective and timely
basis.
If the Company is unable for technological or other reasons to develop products
in a timely manner in response to changes in the industry, or if products or
product enhancements that the Company develops do not achieve market
acceptance, the Company's business will be materially and adversely affected.
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EMPLOYEES
The Company had a total of 261 full-time employees as of December 31, 1999. The
breakout of employees by segment is: (i) 115 full-time and two part-time
employees in the Graphics Division, (ii) 89 full-time and one part-time
employee at CalGraph Technology Services, Inc. and (iii) 17 full-time employees
and one part-time employee in the Tekgraf Technology Systems Division.
The Company's employees are not represented by a labor union and the Company
believes that relations with employees are satisfactory.
ITEM 2. PROPERTIES.
FACILITIES AND ADMINISTRATIVE FUNCTIONS
The table below sets forth certain information with respect to leased
properties, which represent Graphics Division locations unless otherwise noted:
Lease Terms:
APPROXIMATE SQUARE EXPIRATION ANNUAL
LOCATION FOOTAGE DATE RENTAL (1)
- -------- ------- ---- ----------
980 Corporate Woods Parkway
Vernon Hills, Illinois 14,935 9/30/02 $ 163,837
720 Corporate Woods Parkway
Vernon Hills, Illinois 25,382 9/30/02 $ 127,861
645 Hembree Parkway
Roswell, Georgia (4) 10,447 4/30/02 $ 55,961
444 North Frederick Avenue
Gaithersburg, Maryland 3,160 7/31/02 $ 60,937
7020 Koll Center Parkway
Pleasanton, California (2)(4) 7,892 12/08/01 $ 96,888
6721 Port West
Houston, Texas 5,495 2/28/02 $ 39,840
1110 West Butler Road
Greenville, South Carolina 9,000 9/30/00 $ 54,054
370 Amapola Avenue
Torrance, California (3) 9,594 9/30/01 $ 77,724
2 Park Drive
Westford, Massachusetts 3,500 12/31/00 $ 37,524
7502 Connelley Drive
Hanover, Maryland 1,500 1/31/03 $ 19,500
7490 Pacific Circle
Mississauga, Ontario 3,000 7/31/00 $ 16,296
(CalGraph Technology Services)
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APPROXIMATE SQUARE EXPIRATION ANNUAL
LOCATION FOOTAGE DATE RENTAL (1)
- -------- ------- ---- ----------
577 Burning Tree Drive
Fullerton, California 30,000 6/01/04 $ 196,194
2979 Pacific Drive
Norcross, Georgia 7,560 1/31/01 $ 39,129
(Tekgraf Technology Systems Division)
915 Broadway
New York, New York 2,000 3/31/01 $ 38,792
- ---------------------------------------
(1) Certain of these leases provide for moderate annual rental increases.
(2) A portion of these premises is being subleased to a company affiliated
with certain stockholders of the Company for an annual rental of
approximately $39,000.
(3) As of October 1999, the Company no longer operates out of this
location. The space has been partially sublet as of December 1999.
(4) This property serves as one of the Company's three existing warehouse
locations.
The Company, in the past, has maintained eight regional warehouses for the
Graphics Division. As part of the Company's consolidation and centralization
efforts, the Company has reduced the number of warehouses to three, located in
Vernon Hills, Illinois, San Francisco, and Atlanta. The Graphics Division
locations detailed above represent primarily sales offices and demonstration
facilities.
The Company is also in the process of centralizing certain administrative,
accounting and operational functions from the existing locations to its Vernon
Hills, Illinois location.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in certain claims arising in the normal course of
business. In the opinion of management of the Company, although the outcomes of
the claims are uncertain, in the aggregate, they are not likely to have a
material adverse effect on the Company.
Prior to the January 21, 2000 special meeting of shareholders related to the
reclassification of Class B Common Stock, shareholders who owned of record
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. As required by Georgia law, after the meeting and after the
reclassification was approved, the Company delivered a written dissenters'
notice to the dissenting shareholders describing where and by when demands for
payment for their shares should be made. The Company has not yet received a
demand from these shareholders, and therefore the Company cannot assess the
impact, if any, the exercise of these rights may have on the Company's financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held a Special Meeting of Shareholders on January 21, 2000.
Shareholders were asked to vote on a proposal to reclassify all issued and
outstanding Class B Common Stock into Class A Common Stock on a one-for-one
basis, and to amend Tekgraf's Articles of Incorporation to eliminate the
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authority in the Articles of Incorporation to issue Class B Common Stock in the
future and to make certain related technical amendments. The votes for the
proposal are as follows:
FOR AGAINST ABSTAIN
-------------------------------------------
Class A Shareholders 2,602,015 14,715 585,302
Class B Shareholders 8,612,745 0 7,018,750
Class A & Class B
Shareholders 11,214,760 14,715 7,604,052
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
PRICE RANGE OF CLASS A COMMON STOCK AND REDEEMABLE WARRANTS
The Company's Class A Common Stock and Warrants are quoted on the NASDAQ
SmallCap Market under the symbols "TKGF" and "TKGFW", respectively. Each
Warrant entitles the holder thereof to purchase one share of Class A Common
Stock of the Company at an exercise price of $8.40 at any time until 5:00 p.m.,
New York City time, on November 10, 2002. Beginning on November 10, 1998, the
Warrants are redeemable by the Company, on 30 days' written notice, at a price
of $0.05 per Warrant, if the "closing price" of the Company's Class A Common
Stock for any 30 consecutive trading days ending within 15 days of the notice
of redemption averages in excess of $11.75 per share. The "closing price" shall
mean the closing bid price if listed in the over-the-counter market on Nasdaq
or otherwise or the closing sale price if listed on the Nasdaq National Market
or a national securities exchange. The Company has agreed not to redeem the
Warrants unless a prospectus covering the shares of Class A Common Stock
underlying the Warrants is in effect throughout the date fixed for redemption.
All Warrants must be redeemed if any are redeemed.
The following table sets forth, for the periods indicated, the high and low
closing prices per share of the Class A Common Stock and Redeemable Warrants as
reported by the NASDAQ.
1999 HIGH LOW
- ---- ------ ------
1st Quarter
Class A Common Stock $ 2.32 $ 1.13
Redeemable Warrants .34 .13
2nd Quarter
Class A Common Stock 1.88 1.25
Redeemable Warrants .28 .09
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HIGH LOW
------ ------
3rd Quarter
Class A Common Stock 1.94 1.06
Redeemable Warrants .28 .13
4th Quarter
Class A Common Stock 2.19 .91
Redeemable Warrants .34 .03
1998 HIGH LOW
- ---- ------ ------
1st Quarter
Class A Common Stock $ 4.31 $ 2.00
Redeemable Warrants .75 .19
2nd Quarter
Class A Common Stock 3.88 3.00
Redeemable Warrants .59 .25
3rd Quarter
Class A Common Stock 3.13 1.75
Redeemable Warrants .41 .22
4th Quarter
Class A Common Stock 3.00 1.13
Redeemable Warrants .31 .13
CLASS B 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, as described in Item 4 previously. 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 .83333325-for-one reverse stock
split effected in October 1997) of Class B Common Stock as the consideration
used in the 1997 Acquisitions on June 2, 1997. At that time, 1,141,333 shares
(again, giving effect to the stock split and reverse stock split) were already
held by the shareholders of the Company. Accordingly, the Company had 3,333,333
shares of Class B Common Stock outstanding. During 1999 and 1998 respectively,
32,867 and 174,167 shares of Class B Common Stock were converted to Class A
Common Stock on a one-for-one basis. Consequently, there were 3,126,299
outstanding shares of Class B Common Stock at December 31, 1999.
HOLDERS
As of March 24, 2000, there were approximately 46 holders of record of the
Class A Common Stock and 23 holders of record of the Warrants.
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DIVIDENDS
The Company has applied and intends to continue to apply any retained and
current earnings toward the development of its business and to finance the
growth of the Company. Consequently, the Company currently does not anticipate
paying cash dividends on Common Stock in the foreseeable future. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL AND OPERATING DATA
The financial information presented below represents selected historical data
for the Company. The following selected financial and operating data presented
by the Company should be read in conjunction with the historical consolidated
financial statements of the Company and the related notes thereto and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." Note that effective June 2, 1997, the Company acquired all of the
outstanding common stock of G&R, Microsouth, tekgraf, CGD, and Tekgraf
Northwest. In April and May 1998, the Company acquired all of the outstanding
common stock of CGT, Martec and NECG. Note also that on April 1, 1999, the
Company acquired the U.S. and Canadian service businesses and worldwide parts
businesses of Calcomp Technology, Inc. These acquisitions were accounted for as
purchases and accordingly, are only included in the historical consolidated
financial statements from the acquisition date forward.
YEARS ENDED
DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999(1)(2) 1998 (3) 1997 (4) 1996 1995
Statement of Operations Data:
Net Sales $ 111,024 $99,047 $ 48,733 $ 13,415 $ 12,277
Cost of goods sold 93,152 83,621 41,250 10,952 10,368
--------- ------- -------- -------- --------
Gross profit 17,872 15,426 7,483 2,463 1,909
Operating expenses:
Selling, general and
Administrative 17,098 14,326 7,294 2,245 1,761
Depreciation and amortization 7,081 833 390 17 28
Restructuring charges and
other expenses 847 -- -- -- --
--------- ------- -------- -------- --------
Operating income (loss) (7,154) 267 (201) 201 120
Other income 85 348 68 15 --
Interest expense 157 37 301 160 126
--------- ------- -------- -------- --------
Income (loss) before taxes (7,226) 578 (434) 56 (6)
Provision (benefit) for income taxes (108) 487 (41) 13 (2)
--------- ------- -------- -------- --------
Net income (loss) $ (7,118) $ 91 $ (393) $ 43 $ (4)
========= ======= ======== ======== ========
Net income (loss) per share $ (1.16) $ .02 $ (.15) $ .04 $ --
========= ======= ======== ======== ========
Earnings (loss) before interest,
Taxes, depreciation, amortization
(EBITDA**) and restructuring charges $ 859 $ 1,448 $ 257 $ 233 $ 148
Earnings (loss) per share before
Interest, taxes, depreciation,
Amortization (EBITDA**) and
Restructuring charges $ .13 $ .25 $ .10 $ .21 $ .14
**EBITDA is a non-GAAP measurement and is presented for additional analysis
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YEARS ENDED
DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------------------------------------------------
1999(1) 1998 (3) 1997 (4) 1996 1995
-----------------------------------------------------------------------------
Balance Sheet Data:
Working capital $ 9,289 $11,821 $ 13,066 $ (104) $ (51)
Total assets 37,340 37,156 29,952 3,007 2,264
Due to stockholders/related entities -- -- 517 2,211 1,616
Long-term obligations -- -- 13 -- --
Stockholders' equity (deficit) 13,371 21,662 20,055 10 (33)
=======================================================================================================================
(1) On April 1, 1999, the Company completed the acquisition of the U.S. and
Canadian service businesses and worldwide parts business of Calcomp
Technology, Inc. and their operations are included in the statement of
operations and balance sheet data from this date forward. See "Item 1.
Business - Overview/History".
(2) The statement of operations data for 1999 includes $6,193,000 in
impairment of goodwill charges, $230,000 in charges related to leased
premises no longer in use and $617,000 in centralization and consolidation
expenses.
(3) In April and May 1998, the Company acquired three computer graphics
companies and their operations are included in the Statement of Operations
and Balance Sheet data from this date forward. See "Item 1.
Business - Overview/History".
(4) On June 2, 1997, the Company acquired five computer graphics companies and
their operations are included in the Statement of Operations and Balance
Sheet data from this date forward. See "Item 1. Business -
Overview/History".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The following discussion should be read in conjunction with the information
contained in the Consolidated Financial Statements, including the related notes.
OVERVIEW
The Company 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.
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and Canada and supplies parts for the Calcomp printer products and other third
party manufacturers on a worldwide basis.
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 Technology Systems
Division and the distribution of related components.
On November 10, 1997, the Company completed the initial public offering of its
securities. In the Offering, the Company issued 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, with an
effective date of February 28,1999. the Company sold its controlling interest in
Prisym Corporation, an authorized reseller of equipment for Digital Equipment
Corporation (DEC). The Company had acquired its interest in Prisym in 1994.
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
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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.
RESULTS OF OPERATIONS
Net sales reflect the sale of the Company's products, net of allowances for
returns and other adjustments. Both Graphics and Tekgraf Technology Systems
sales are generated from the sale of products primarily in the U.S. CalGraph
Technology Services are generated from the maintenance and repair of Calcomp
printers and plotter products in the U.S. and Canada and the sale of printer and
plotter parts on an international basis. One customer accounted for 14% and 8%
of sales in 1999 and 1998, respectively. No individual customer accounted for
more than 5% of sales during 1997.
Cost of goods sold consists primarily of product costs (costs of acquisition or
manufacture) and freight charges. Cost of goods sold also includes direct
expenses, such as labor and inventory, obtaining FCC certification of products
where required, the cost of shipping, and overhead allocated to direct expenses
incurred in manufacturing products sold by the Company. The direct costs
associated with providing services performed by the Company for its customers
are also included in the cost of goods sold.
Sales and gross profits depend in part on the volume and mix of components and
finished goods contained in the Company's inventory from time to time.
Manufactured product sales have a higher gross profit margin with a relatively
lower volume of sales per customer, while component sales have a comparably
lower gross profit margin with a relatively higher volume of sales per customer.
A large portion of the Company's operating expenses is relatively fixed. Since
the Company does not obtain long-term purchase orders or commitments from its
customers, it must anticipate the future volume of orders based upon historical
purchasing practices of its customers. Cancellations, reductions or delays in
orders by a customer or group of customers could have a material adverse effect
on the Company's business, financial condition and results of operations.
Selling, general and administrative ("SG&A") expenses include costs related to
the Company's sales force, which is comprised of both direct employees of the
Company and independent sales representatives. Included in SG&A expenses are
direct labor costs for in-house sales representatives and commissions paid to
both in-house and independent sales personnel. Also reflected as SG&A expenses
are certain management, supervisory and staff salaries and employee benefits,
data processing, training, warehouse costs, rent and office supply costs. Costs
associated with marketing and advertising of the Company's products are also
included in SG&A expenses, along with expenses relating to corporate and
administrative functions that serve to support the existing products and service
business of the Company as well as to provide the infrastructure for future
growth.
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Interest expense includes costs and expenses associated with working capital
indebtedness, as evidenced by outstanding balances on the Company's current and
prior credit facilities, and working capital advances previously made by certain
stockholders (which have been repaid).
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998.
NET SALES. Total net sales increased $12.0 million, or 12.1%, to $111.0 million
for the year ended December 31, 1999 compared to $99.0 million for the year
ended December 31, 1998. Graphics net sales increased $12.6 million or 14.9% to
$97.0 million for the year ended December 31, 1999 compared to $84.4 million for
the year ended December 31, 1998. This increase was due to an increase in
Point-of-Purchase (POP) sales of $8.8 million and an increase in channel
distribution sales of $3.8 million. The Tekgraf Technology Systems sales
decreased $6.1 million or 41.6% from $14.6 million for the year ended December
31, 1998 to $8.5 million for the year ended December 31, 1999. The decrease was
due to the sale of the Prisym business effective February 1999. Services net
sales of $5.4 million for the year ended December 31, 1999 was due to the
acquisition of the CalGraph business effective April 1999.
GROSS PROFIT. Gross profit for 1999 increased $2.4 million, or 15.6%, to $17.9
million compared to $15.4 million for 1998. Gross profit as a percentage of
sales increased to 16.1% for 1999 compared to 15.6% for 1998. The increase in
the gross margin percentage was primarily due to higher profit margin sales for
the POP business as well as the higher profit margin for the CalGraph service
business acquired in April 1999. The gross profit as a percentage of sales for
the graphics distribution business remained constant for the year ended December
1999 compared to the year ended December 1998.
SG&A EXPENSES. SG&A expenses increased $2.8 million, or 19.3%, to $17.1 million
for 1999 compared to $14.3 million for 1998. SG&A expenses as a percentage of
sales were 15.4% and 14.5% for 1999 and 1998, respectively. Of the increase,
$1.9 million was attributable to the Services Acquisition, which was offset by a
decrease of $1.0 million in SG&A expenses for the sale of the Prisym business
during the first quarter of 1999. The remainder of the increase is due to
increased SG&A expenses associated with increased sales and support costs
associated with the growth of the Company.
DEPRECIATION, AMORTIZATION, 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 goodwill, as events
and changes in circumstances have warranted, to determine whether or not any of
the related goodwill associated with the acquisitions has been impaired. In
1999, in light of several additional 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
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in a writedown in the third quarter statement of operations. Also, 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
operations. Accordingly, $230,000 has been charged to operations in 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 have been incurred related to these acquisitions,
including employee severance. These costs, amounting to $617,061, have been
combined with the above described amount and are reflected as Restructuring
Charges and Other Expenses in the 1999 statement of operations.
EARNINGS (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)
AND RESTRUCTURING CHARGES, decreased $589,000 to $859,000 for the 1999 year
compared to $1,448,000 for 1998.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company's effective tax rate was a
benefit (1.5)% for the year ended December 31, 1999 as compared to 84.2% for the
year ended December 31, 1998. The difference between the Company's effective and
statutory tax rates was primarily due to the amortization of non-deductible
goodwill and to state taxes, net of the federal benefit.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997.
NET SALES. Net sales increased $50.3 million, or 103.2%, to $99.0 million for
the year ended December 31, 1998 compared to $48.7 million for the year ended
December 31, 1997. Of the increase, including internal growth since dates of
acquisition, $18.5 million was attributable to the acquisitions that occurred in
April and May 1998 and $32.4 million of the increase in 1998 was due to the 1997
acquisitions being included in the results of operations for the entire year of
1998. These increases were offset by a decrease of approximately $600,000 in net
sales in the Technology Division.
GROSS PROFIT. Gross profit for 1998 increased $7.9 million, or 106.1%, to $15.4
million compared to $7.5 million for 1997. Gross profit as a percentage of sales
increased to 15.6% for 1998 compared to 15.4% for 1997. While gross margins
continue to remain under pressure, the Company has maintained its gross margin
percentages primarily as a result of differing product mixes and by providing
increased value-added services.
SG&A EXPENSES. SG&A expenses increased $7.0 million, or 96.4%, to $14.3 million
for 1998 compared to $7.3 million for 1997. SG&A expenses as a percentage of
sales were 14.5% and 15.0% for 1998 and 1997, respectively. The increase in SG&A
expenses is primarily attributable to the acquisitions that occurred in June
1997 and April and May of 1998. The 1998 acquisitions accounted for $2.4 million
of the increase. Costs associated with the internal growth of the Company,
including increased commissions on increased sales,
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and the additional infrastructure and duplicative costs associated with
combining the companies accounted for the remainder of the increase in SG&A
expenses.
OPERATING INCOME. Operating income (loss) increased $468,000, to $267,000 for
the 1998 year compared to $(201,000) for the 1997 year. In addition to the costs
described above, operating income was reduced by the amortization of goodwill of
$610,000 for the year ended December 31, 1998. For 1997, the operating loss was
increased by goodwill amortization of $265,000.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company's effective tax rate was 84.2%
for the year ended December 31, 1998 as compared to (9.4)% for the year ended
December 31, 1997. The difference between the Company's effective and statutory
tax rates was primarily due to the amortization of non-deductible goodwill and
to state taxes, net of the federal benefit.
PRO FORMA COMBINED FINANCIAL INFORMATION
The 1998 Acquisitions described previously have 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 that occurred on April 1, 1999 and the
sale of Prisym, effective February 28, 1999, for which the results of operations
have only been included from the acquisition and disposal dates, respectively.
Therefore, in addition to the historical comparisons for the years ended
December 31, 1999 and 1998, the Company has included the unaudited pro forma
statements of operations for the years ended December 31, 1999 and 1998, as if
the 1998 Acquisitions, Services Acquisition and the sale of Prisym had occurred
on 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 that the 1998 Acquisitions previously operated as closely held
businesses. Additionally, the Services Acquisition previously operated as part
of a significantly larger corporation, therefore the overhead has been estimated
as the historical statements did not include actual expenses incurred for the
specific assets acquired and liabilities assumed. The pro forma statements 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. The
unaudited pro forma data below also includes the impairment of goodwill and
restructuring charges and other expenses recorded in the year ended December 31,
1999.
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PROFORMA COMBINED YEARS ENDED
(IN THOUSANDS) DECEMBER 31,
-----------------------------
1999 1998
-----------------------------
(unaudited) (unaudited)
Statement of Operations Data:
Net Sales $ 112,524 $ 114,143
Cost of goods sold
94,082 95,986
--------- ---------
Gross profit 18,442 18,157
Operating expenses:
Selling, general and
Administrative 17,641 17,272
Depreciation and amortization 894 941
Impairment of goodwill 6,193
Restructuring charges and
other expenses 847 --
--------- ---------
Operating income (loss) (7,133) (56)
Other income 85 425
Interest expense 157 82
--------- ---------
Income (loss) before taxes (7,205) 287
Provision (benefit) for income taxes (95) 427
--------- ---------
Net loss $ (7,110) $ (140)
========= =========
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 underwriting discounts and related
expenses, were approximately $10.4 million. Additionally, certain stockholders
of the Company contributed an aggregate of $870,000 to the capital of the
Company. A portion of the proceeds from the initial public offering was used to
repay bank debt of $2 million, debt to a related entity of $2 million and debt
to a stockholder of $125,000. In conjunction with the repayment of the bank
debt, the Company terminated the line of credit facilities with the related
banks.
During 1998, the Company issued 894,998 unregistered shares of Class A Common
Stock and paid cash of $1,415,000 as consideration for the acquisitions of three
computer graphics distributing companies. Additionally, the Company paid $1.6
million consisting of debt repayment less the proceeds from stockholders from
deficient net asset values and credit facilities.
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 1999, these
stockholders paid the Company approximately $464,000 pursuant to these
adjustments, and a stockholder still owes the Company approximately $13,000.
Since inception, the Company has financed its operations through a combination
of cash flows from operations, bank borrowings, equity capital and the net
proceeds from the Company's initial public offering in November 1997. 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
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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 year ended
December 31, 1999, the Company borrowed and repaid approximately $6.3 million
and $2.7 million, respectively, under this credit facility.
As of December 31, 1999 and 1998 the Company had net working capital of
approximately $9.3 million and $11.8 million, respectively. The Company believes
that its available funds together with its current and anticipated credit
facilities will be adequate to satisfy its current and planned operations,
including restructuring accruals, for at least the next 12 months.
For the year ended December 31, 1999, the Company used approximately $1.3
million in cash from operating activities. The cash used in operations resulted
primarily from the increase in accounts receivable of $1.1 million and the
increase in inventory of $2.3 million offset by the increase in accounts payable
and accrued expenses of $1.4 million, including approximately $575,000 in
restructuring charges. The change in accounts receivable was attributable to the
timing of sales for the fourth quarter 1999. Additionally, the increase in
inventory was due to the Company taking advantage of year end vendor purchase
discounts, which also accounts for the increase in the accounts payable balance
at December 31, 1999.
For the year ended December 31, 1999, the Company used cash in investing
activities of approximately $958,000 primarily due to the purchase of property
and equipment of $1.4 million, which consisted of capital improvements related
to the Services Acquisition and additional purchases related to the new MIS
system and the cash paid for the Services Acquisition of $400,000 and related
acquisition costs of $139,000. These investments have been partially offset by
the sale of Prisym with proceeds of $979,000.
Cash provided by financing activities for the year ended December 31, 1999, was
attributable to payments of $464,000 received from stockholders for deficient
net asset values, as discussed previously, and net proceeds of $3.5 million in
debt received under the Company's credit facility, offset by a $1.8 million loan
to stockholder. The stockholder loan is due in December 2000 and is secured by
1.2 million shares of Common Stock.
For the year ended December 31, 1998, the Company used approximately $3.1
million in cash from operating activities. The cash used in operations resulted
primarily from the increases in accounts receivable and inventory. These changes
were attributable to growth in sales, strong December sales and stocking for
anticipated sales in the near term.
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For the year ended December 31, 1998, the Company used cash in investing
activities of approximately $1.8 million for acquisitions, including overdrafts
acquired, and $541,000 for the purchase of property and equipment, which was
primarily purchases related to the new MIS system.
Cash used in financing activities for the year ended December 31, 1998 was
attributable to the repayment of advances from stockholders and related
entities, loaned to the Company prior to the initial public offering, of
$247,000, and the repayment of the acquired entities' existing lines of credit
of $2.0 million. These amounts were partially offset by net proceeds of $707,000
received under the Company's credit facility and $246,000 received under an
acquired entity's existing line of credit. The acquired entity's outstanding
line of credit was paid in full in July 1998 and the facility was terminated.
NASDAQ UPDATE
TRANSFER TO THE NASDAQ SMALLCAP MARKET
On November 10, 1999, the Nasdaq Stock Market ("Nasdaq") notified the Company of
its determination to transfer the listing of the Company's Class A Common Stock
from the Nasdaq National Market to the Nasdaq SmallCap Market effective the
opening of business November 15, 1999. The Company has complied with the Nasdaq
SmallCap Market listing requirements and has received approval for the SmallCap
Market listing. The Company is considering what steps can be taken to enable it
to be reconsidered for listing on the Nasdaq National Market. No assurances can
be made that the Company will be successful in maintaining its listing on the
Nasdaq. If delisted from the Nasdaq, the delisting could have an adverse and
material effect on the Company's stock price, the ability of the Company's
shareholders to sell their shares, and the Company's ability to obtain
additional debt and/or equity financing.
IMPACT OF INFLATION
Management believes that inflation has not had a material impact on the
Company's business, its net sales and revenues or its income (loss) from
continuing operations.
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.
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31
Investors are cautioned that such forward-looking statements are not guarantees
of future performance and involve risks and uncertainties, and that actual
results may differ materially from those that are anticipated in the
forward-looking statements as a result of the impact of competition and
competitive pricing, business conditions and growth in the industry, general and
economic conditions, and other risks. Investors should review the more detailed
description of these and other possible risks contained in the Company's
securities filings and in the "Risk Factors" section of the prospectus included
in the Registration Statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements beginning on page F-1. Consolidated
condensed quarterly financial information on the Company is included in Note 16
of Notes to the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
For the three year period ended December 31, 1999, there has been no
disagreement between Tekgraf, Inc. and its independent accountants on any matter
of accounting principles or practices or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information relating to the Company's directors, nominees for election as
directors and executive officers under the headings "Election of Directors",
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for the 2000 Annual
Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the headings "Executive Compensation", Director
Compensation" and "Employment and Severance Agreements" in the Company's
definitive proxy statement for the 2000 Annual Meeting of Shareholders is
incorporated herein by reference to such proxy statement.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Ownership of Tekgraf Common Stock" in the
Company's definitive proxy statement for the 2000 Annual Meeting of Shareholders
is incorporated herein by reference to such proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 2000 Annual
Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Consolidated Financial Statements.
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedule for the Years Ended
December 31, 1999, 1998 and 1997.
Report of Independent Accountants on Schedule II - Valuation and
Qualifying Accounts on page F-18.
Schedule II - Valuation and Qualifying Accounts on page F-19.
All other financial statement schedules are omitted because the information is
not required, or is otherwise included in the Consolidated Financial Statements
or the notes thereto included in this Annual Report on Form 10-K.
Consolidated condensed quarterly financial information on the Company is
included in Note 16 of Notes to the Consolidated Financial Statements.
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(a) (3) Exhibits.
The following exhibits are filed with or incorporated by reference into this
Annual Report on Form 10-K. Unless indicated otherwise, the exhibit number
corresponds to the exhibit number incorporated by reference.
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Plan of Merger between Crescent Computers, Inc. and Tekgraf, Inc.,
dated June 20, 1997 (Filed as Exhibit 2.1 to the Company's Registration
Statement on Form S-1, No. 333-33449, and incorporated herein by
reference (the "Registration Statement")).
3.1 Articles of Incorporation dated July 16, 1998 (Filed as Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q filed on August 14, 1998
and incorporated herein by reference (the "1998 Second Quarter Form
10-Q")).
3.2 Certificate of Merger, containing amendment to Articles of
Incorporation of Tekgraf Reincorporation Subsidiary, Inc. (Filed as
Exhibit 3.2 to the 1998 Second Quarter Form 10-Q and incorporated
herein by reference).
3.3 Bylaws (Filed as Exhibit 3.3 to the 1998 Second Quarter Form 10-Q and
incorporated herein by reference).
10.1* 1997 Stock Plan of the Company (Filed as Exhibit 10.1 to the
Registration Statement and incorporated herein by reference).
10.2* Employment Agreement dated June 2, 1997 between Crescent Computers,
Inc. and Phillip C. Aginsky (Filed as Exhibit 10.2 to the Registration
Statement and incorporated herein by reference).
10.3* Employment Agreement dated June 2, 1997 between Crescent Computers,
Inc. and Dan I. Bailey (Filed as Exhibit 10.3 to the Registration
Statement and incorporated herein by reference).
10.4* Employment Agreement dated June 2, 1997 between Crescent Computers,
Inc. and William M. Rychel (Filed as Exhibit 10.4 to the Registration
Statement and incorporated herein by reference).
10.5* Form of Employment Agreement between Crescent Computers, Inc. and
Regional Sales Directors (Filed as Exhibit 10.5 to the Registration
Statement and incorporated herein by reference).
10.6* Employment Agreement dated February 26, 1998, between Tekgraf, Inc. and
W. Jeffrey Camp. (Filed as Exhibit 10.6 to the Company's Annual Report
on Form 10-K, filed March 31, 1998, and incorporated herein by
reference (the "1998 Form 10-K")).
10.7 Stock Purchase Agreement dated May 1, 1997, by and among Crescent
Computers, Inc. and its shareholders and Microsouth, Inc. and its
shareholders, as amended (Filed as Exhibit 10.6 to the Registration
Statement and incorporated herein by reference).
10.8 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and tekgraf, Inc. and its
shareholders, as amended (Filed as Exhibit 10.7 to the Registration
Statement and incorporated herein by reference).
10.9 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and G&R Marketing, Inc. and its
shareholders, as amended (Filed as Exhibit 10.8 to the Registration
Statement and incorporated herein by reference).
10.10 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and Computer Graphics Distributing
Company and its shareholders, as amended (Filed as Exhibit 10.9 to the
Registration Statement and incorporated herein be reference).
10.11 Stock Purchase Agreement dated May 1, 1997 by and among Crescent
Computers, Inc. and its shareholders and Intelligent Products
Marketing, Inc. and its shareholders and IG Distributing, Inc. and its
shareholders, as amended (Filed as Exhibit 10.10 to the Registration
Statement and incorporated herein by reference).
10.12 Escrow Agreement dated August 1997 (Filed as Exhibit 10.11 to the
Registration Statement and incorporated herein by reference).
10.13 Indemnification Agreement dated 1997 (Filed as Exhibit 10.12 to the
Registration Statement and incorporated herein by reference).
10.14 [Intentionally omitted].
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10.15 Lease Agreement dated September 4, 1993 between Crescent Computers,
Inc. and TCW Realty Fund II (Filed as Exhibit 10.14 to the Registration
Statement and incorporated herein by reference).
10.16 Leases for property located at 7020 Koll Center Parkway by and between
Patrician Associates, Inc., Koll Bernal Avenue Associates and
Intelligent Products Marketing, Inc., as amended (Filed as Exhibit
10.15 to the Registration Statement and incorporated herein by
reference).
10.17 Industrial Space Lease dated November 13, 1991 between G&R Technologies
and American National Bank and Trust Company of Chicago (Filed as
Exhibit 10.16 to the Registration Statement and incorporated herein by
reference).
10.18 Commercial Lease Agreement dated March 29, 1991 between Computer
Graphics Distributing Company and Girard Associates II Limited
Partnership (Filed as Exhibit 10.17 to the Registration Statement and
incorporated herein by reference).
10.19 Lease Agreement dated May 1, 1992 between Microsouth, Inc. and ASC
North Fulton Associates Joint Venture (Filed as Exhibit 10.18 to the
Registration Statement and incorporated herein by reference).
10.20 Lease Agreement dated March 1998 between Tekgraf, Inc. a Texas
corporation and Connecticut General Life Insurance Company, (Filed as
Exhibit 10.19 to the Registration Statement and incorporated herein by
reference), as amended (amendment filed as Exhibit 10.20(a) to the 1998
Form 10-K and incorporated herein by reference).
10.21 Lease Agreement, dated March 1, 1998, by and between Computer Graphics
Technology and Southridge Equities. (Filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K, filed April 16, 1998, and
incorporated herein by reference.
10.22 Standard Industrial/Commercial Multi-Tenant Lease, dated May 9, 1995,
between Sanwa Bank California, as Lessor, and Martec, Inc., as Lessee.
(Filed as Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q
filed on May 15, 1998 and incorporated herein by reference (the "1998
First Quarter Form 10-Q")).
10.23 Commercial Lease, dated January 1, 1997, between Woodland Park Realty
Trust No. 2, as Lessor, and New England Computer Graphics, as Lessee.
(Filed as Exhibit 10.23 to the 1998 First Quarter Form 10-Q and
incorporated herein by reference).
10.24 Industrial Lease Agreement, dated July 25, 1997, between 2725312 Canada
Inc., as Landlord, and New England Computer Graphics, Inc., as Tenant
(filed as Exhibit 10.24 to the 1998 First Quarter Form 10-Q and
incorporated herein by reference).
10.26 Agreement and Plan of Merger by and among Tekgraf, Inc., a Delaware
corporation, Tekgraf Sub I, Inc., a Georgia corporation, and Computer
Graphics Technology, Inc., a South Carolina corporation, and its
Shareholders, dated March 23, 1998. (Filed as Exhibit 10.22 to the 1998
Form 10-K and incorporated herein by reference).
10.27 Escrow Agreement, dated April 1, 1998, by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub I, Inc., a Georgia corporation, Scott
C. Barker, Robert Shumaker, and Thomas Mills (as the "Company
Shareholders"), Scott C. Barker (as the "Shareholder Representative"),
and First Union National Bank (as the "Escrow Agent"). (Filed as
Exhibit 2.2 to the Company's current report on Form 8-K, filed April
16, 1998, and incorporated herein by reference).
10.28 Pledge, Security and Escrow Agreement, dated April 1, 1998, by and
among Tekgraf, Inc., a Delaware corporation, Tekgraf Sub I, Inc., a
Georgia corporation, Scott C. Barker, Robert Shumaker, and Thomas Mills
(as the "Company Shareholders"), Scott C. Barker (as the
"Indemnification Representative"), and First Union National Bank (as
the "Escrow Agent"). (Filed as Exhibit 2.3 to the Company's current
report on Form 8-K, filed April 16, 1998, and incorporated herein by
reference).
10.29 Agreement and Plan of Merger, dated March 25, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation and Martec, Inc., a California corporation, and its
shareholder. (Filed as Exhibit 10.23 to the 1998 Form 10-K and
incorporated herein by reference).
10.30 Escrow Agreement, dated May 1, 1998, by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub II, Inc., a Georgia corporation, Mark
Lewis (as the "Company Shareholder"), Mark Lewis (as the "Shareholder
Representative"), and First Union National Bank (as the" Escrow
Agent"). (Filed as Exhibit 10.30 to the 1998 First Quarter Form 10-Q
and incorporated herein by reference).
10.31 Pledge, Security and Escrow Agreement, dated May 1, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub II, Inc., a Georgia
corporation, Mark Lewis (as the "Company Shareholder"), Mark Lewis (as
the "Indemnification Representative"), and First Union National Bank
(as the "Escrow Agent"). (Filed as Exhibit 10.31 to the 1998 First
Quarter Form 10-Q and incorporated herein by reference).
10.32 Agreement and Plan of Merger, dated March 25, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub III, Inc., a
Georgia corporation, and New England Computer Graphics, Inc., a
34
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Massachusetts corporation, and its shareholders. (Filed as Exhibit
10.24 to the 1998 Form 10-K and incorporated herein by reference.)
10.33 First Amendment to Agreement and Plan of Merger, dated March 30, 1998,
by and among Tekgraf, Inc., Tekgraf Sub III, Inc., New England Computer
Graphics, Inc. and its Shareholders. (Filed as Exhibit 10.25 to the
1998 Form 10-K and incorporated herein by reference.)
10.34 Escrow Agreement, dated May 8, 1998, by and among Tekgraf, Inc., a
Delaware corporation, Tekgraf Sub III, Inc., a Georgia corporation,
Robert Shumaker, Thomas Gust, A. Lowell Nerenberg, Scott Barker, David
Boston, William Rychel and Thomas Mills (as the "Company
Shareholders"), David Boston (as the "Shareholder Representative"), and
First Union National Bank (as the" Escrow Agent"). (Filed as Exhibit
10.34 to the 1998 First Quarter Form 10-Q and incorporated herein by
reference).
10.35 Pledge, Security and Escrow Agreement, dated May 8, 1998, by and among
Tekgraf, Inc., a Delaware corporation, Tekgraf Sub III, Inc., a Georgia
corporation, Robert Shumaker, Thomas Gust, A. Lowell Nerenberg, Scott
Barker, David Boston, William Rychel and Thomas Mills (as the "Company
Shareholders"), David Boston (as the "Indemnification Representative"),
and First Union National Bank (as the "Escrow Agent"). (Filed as
Exhibit 10.35 to the 1998 First Quarter Form 10-Q and incorporated
herein by reference).
10.36 Loan and Security Agreement between Tekgraf, Inc., as Borrower, and all
Subsidiaries of Borrower (except Prisym), as Subsidiary Guarantors and
Wachovia Bank, National Association, as Lender (Filed as Exhibit 10.36
to the 1998 Second Quarter Form 10-Q and incorporated herein by
reference).
10.37 Agreement and Plan of Merger, dated July 30,1998, by and among Tekgraf,
Inc. and Tekgraf Reincorporation Subsidiary, Inc. (Filed as Exhibit
10.37 to the 1998 Second Quarter Form 10-Q and incorporated herein by
reference).
10.38* Severance Agreement and General Release by and among Tekgraf, Inc. and
Phillip Aginsky, dated October 23, 1998 (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K, filed November 13, 1998, and
incorporated herein by reference).
10.39 Stock Purchase Agreement and Termination Agreement by and among
Tekgraf, Inc., William E. Streib, and Prisym Technologies, Inc. of
Georgia, dated March 25, 1999. Filed as Exhibit 10.39 to the Company's
Annual Report on Form 10-K, filed March 31, 1999 and incorporated
herein by reference.
10.40 Purchase and sale agreement dated April 1, 1999 by and between Tekgraf,
Inc., CalGraph Technology Services, and Calcomp Technology (filed on
1999 Form 8-K dated April 16, 1999).
10.41 Loan agreement between William Rychel and Tekgraf, Inc. dated December
1, 1999 (filed as Exhibit 8 to Schedule 13-D dated December 3, 1999).
11.1 Statements of Computation of Earnings Per Share
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule (for SEC use only)
- ------------------------------------------------------------------------------
* Indicates compensatory plan or arrangement.
(b) Report Filed on Form 8-K
No reports were filed on Form 8-K for the fourth quarter ended December 31,
1999.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED THIS 27th DAY OF MARCH,
2000.
Tekgraf, Inc.
(Registrant) By: /s/ William M. Rychel
-------------------------------
William M. Rychel
Principal Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE Title Date
--------- ----- ----
/s/ William M. Rychel Chief Executive Officer, March 27, 2000
- ----------------------------------- President and Director (principle
William M. Rychel executive officer)
/s/ Thomas M. Mason Chief Financial Officer March 27, 2000
- ----------------------------------- (principal financial and accounting
Thomas M. Mason officer)
/s/ Albert E. Sisto Director March 27, 2000
- -----------------------------------
Albert E. Sisto
/s/ Frank X. Dalton, Jr. Director March 27, 2000
- -----------------------------------
Frank X. Dalton, Jr.
36
37
TEKGRAF, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF TEKGRAF, INC.
Report of Independent Accountants.............................................................................. F-2
Consolidated Balance Sheets.....................................................................................F-3
Consolidated Statements of Operations...........................................................................F-4
Consolidated Statements of Changes in Stockholders' Equity......................................................F-5
Consolidated Statements of Cash Flows...........................................................................F-6
Notes to Consolidated Financial Statements......................................................................F-7
37
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Tekgraf, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Tekgraf, Inc. at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 3, 2000
38
39
TEKGRAF, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
1999 1998
-------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,704,454 $ 1,702,848
------------ ------------
Accounts receivable, less allowance for doubtful accounts of $782,000
and $520,000 at December 31, 1999 and 1998, respectively 17,094,518 16,626,730
Inventories, net 12,899,522 7,718,337
Prepaid expenses and other assets 313,159 872,945
Income taxes receivable 146,525
Deferred income taxes 800,264 298,273
------------ ------------
Total current assets 32,958,442 27,219,133
------------ ------------
Property and equipment, net 1,964,975 824,664
Goodwill, net 2,314,808 9,009,941
Other assets 101,443 101,863
------------ ------------
Total assets $ 37,339,668 $ 37,155,601
============ ============
LIABILITIES
Current liabilities:
Current debt $ 4,263,527 $ 719,898
Accounts payable 14,506,807 12,868,281
Accrued expenses 2,145,096 1,502,859
Income taxes payable 306,871
Contract obligation and deferred income 2,754,082
------------ ------------
Total current liabilities 23,669,512 15,397,909
------------ ------------
Deferred income taxes 298,934 95,986
------------ ------------
Total liabilities 23,968,446 15,493,895
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Class A Common Stock $.001 par value, 31,666,667 shares authorized;
3,202,032 and 3,169,165 shares issued and outstanding at
December 31, 1999 and 1998, respectively 3,202 3,169
Class B Common Stock, $.001 par value, 3,333,333 shares authorized;
3,126,299 and 3,159,166 shares issued and outstanding at
December 31, 1999 and 1998, respectively 3,126 3,159
Preferred Stock, $.001 par value, 5,000,000 shares authorized; no shares
issued and outstanding at December 31, 1999 and 1998
Due from stockholders (1,780,441) (608,288)
Additional paid-in capital 22,556,865 22,556,865
Accumulated deficit (7,411,530) (293,199)
------------ ------------
Total stockholders' equity 13,371,222 21,661,706
------------ ------------
Total liabilities and stockholders' equity $ 37,339,668 $ 37,155,601
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
39
40
TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
Net sales $ 111,024,410 $99,046,966 $ 48,732,391
Cost of goods sold 93,152,153 83,621,310 41,249,611
------------- ----------- ------------
Gross profit 17,872,257 15,425,656 7,482,780
Operating expenses:
Selling, general and administrative 17,098,106 14,326,088 7,294,267
Depreciation 355,591 223,082 124,453
Amortization and impairment of goodwill 6,725,060 609,783 265,263
Restructuring charges and other expenses 847,061
------------- ----------- ------------
Income (loss) from operations (7,153,561) 266,703 (201,203)
Other income 84,617 348,442 68,333
Interest expense 157,387 36,978 301,453
------------- ----------- ------------
Income (loss) before provision (benefit)
for income taxes (7,226,331) 578,167 (434,323)
Provision (benefit) for income taxes (108,000) 487,000 (40,986)
------------- ----------- ------------
Net income (loss) $ (7,118,331) $ 91,167 $ (393,337)
============= =========== ============
Basic and diluted weighted average shares outstanding 6,161,664 5,889,459 2,581,441
============= =========== ============
Basic and diluted net income (loss) per share $ (1.16) $ .02 $ (.15)
============= =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
40
41
TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NUMBER CLASS A NUMBER CLASS B DUE ADDITIONAL RETAINED
OF SHARES COMMON OF SHARES COMMON FROM STOCK- PAID-IN EARNINGS
(ACCUMULATED
CLASS A STOCK CLASS B STOCK HOLDERS CAPITAL DEFICIT) TOTAL
---------------------------------------------------------------------------------------------------
Balances, January 1, 1997 1,141,333 $1,141 $8,971 $ 10,112
Issuance of stock for
acquisitions 2,192,000 2,19 $ 9,170,866 9,173,058
Due from acquisition
stockholders $ (149,863) 149,863 --
Contribution from
pre-acquisition Stockholders
870,000 870,000
Common stock issued 2,100,000 $2,100 10,393,299 10,395,399
Net loss (393,337) (393,337)
--------- ------ --------- ------- ------------ ----------- ------------ ----------
Balances, December 31, 1997 2,100,000 2,100 3,333,333 3,333 (149,863) 20,584,028 (384,366) 20,055,232
Issuance of stock for
acquisitions 894,998 895 1,972,837 1,973,732
Due from acquisition
stockholders, net (458,425) (458,425)
Conversion of Class B Common
Stock to Class A Common
Stock 174,167 174 (174,167) (174) --
Net income 91,167 91,167
--------- ------ --------- ------- ------------ ----------- ------------ ----------
Balances, December 31, 1998 3,169,165 3,169 3,159,166 3,159 (608,288) 22,556,865 (293,199) 21,661,706
Due from acquisition
stockholders, net 594,936 594,936
Loan to stockholder (1,767,089) (1,767,089)
Conversion of Class B Common
Stock to Class A Common
Stock 32,867 33 (32,867) (33) --
Net loss (7,118,331) (7,118,331)
--------- ------ --------- ------- ------------ ----------- ------------ ------------
Balances, December 31, 1999 3,202,032 $3,202 3,126,299 $ 3,126 $ (1,780,441) $22,556,865 $ (7,411,530) $ 13,371,222
========= ====== ========= ======= ============ =========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
41
42
TEKGRAF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $(7,118,331) $ 91,167 $ (393,337)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Provision for doubtful accounts receivable 385,874 457,210 149,170
Provision/write-down of inventory 327,996 169,425 237,275
Depreciation 355,591 223,082 124,454
Amortization and impairment of goodwill 6,725,060 609,783 265,263
Gain on sale of Prisym (32,000)
Deferred taxes (187,009) (132,666) (111,372)
Changes in net assets and liabilities, net of
acquisitions:
Accounts receivable (1,071,462) (3,394,547) (956,268)
Inventories (2,280,787) (911,968) (501,897)
Prepaid expenses and other assets 428,488 (381,865) 114,455
Accounts payable and accrued expenses 1,390,565 18,295 2,591,941
Deferred income and contract obligation 248,447
Income taxes (453,396) 123,208 66,000
----------- ----------- -----------
Total adjustments 5,837,367 (3,220,043) 1,979,021
----------- ----------- -----------
Net cash provided by (used in) operating activities (1,280,964) (3,128,876) 1,585,684
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,397,874) (540,760) (59,082)
Proceeds from sale of Prisym 979,239
Cash acquired from acquisitions, net of acquisition costs of
$88,677 371,585
Cash paid for acquisitions, including overdrafts acquired
from acquisitions and acquisition costs (538,931) (1,798,166)
----------- ----------- -----------
Net cash provided by (used in) investing activities (957,566) (2,338,926) 312,503
----------- ----------- -----------
Cash flows from financing activities:
Advance from stockholders and related entities 37,862
Repayment of advances from stockholders and
related entities (246,956) (2,039,000)
Repayment of stockholder notes payable (125,000)
Repayments on lines of credit, net (2,018,036)
Proceeds, net, from credit facility 3,543,629 707,152
Repayment of debt (23,516)
Payment to stockholders for excess net asset values (249,518) (1,050,000)
Payments from stockholders for deficient net asset values 463,596 177,742
Repayment of acquired companies' loans (1,984,322)
Proceeds from acquired companies' line of credit facilities 246,359
Capital contribution from stockholders 870,000
Payment of stock issuance costs (56,630) (923,701)
Loan to stockholder (1,767,089)
Proceeds from issuance of common stock, net of underwriting
discounts 11,317,000
-----------
-----------
Net cash provided by (used in) financing activities 2,240,136 (1,429,689) 6,069,125
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 1,606 (6,897,491) 7,967,312
Cash and cash equivalents, beginning of year 1,702,848 8,600,339 633,027
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,704,454 $ 1,702,848 $ 8,600,339
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 135,764 $ 24,217 $ 301,453
=========== =========== ===========
Cash paid during the year for income taxes $ 527,233 $ 594,278 $ 4,386
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
42
43
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION, AND NATURE OF OPERATIONS
ORGANIZATION
The consolidated financial statements of Tekgraf, Inc. (the "Company") as of
December 31, 1999, include the accounts of five computer graphics
distributing companies acquired on June 2, 1997 (the "1997 Acquisitions"),
three computer graphics distributing companies acquired in April and May
1998 (the "1998 Acquisitions"), CalGraph Technology Services, Inc., a
service and worldwide parts business acquired on April 1, 1999 (the
"Services Acquisition"), and the Tekgraf Technology Systems Division
(previously named Crescent Computers, Inc.). These acquisitions were
recorded under the purchase method of accounting, and accordingly their
results of operations are included in the consolidated statements of
operations since their date of acquisition. All significant intercompany
balances, transactions, and profits have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
BASIS OF PRESENTATION
The consolidated financial statements are prepared on the basis of generally
accepted accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at December 31, 1999 and 1998, and reported amounts of
revenues and expenses for each of the three years in the period ended
December 31, 1999. Significant estimates include primarily those made for
the allowance for doubtful accounts, reserves for obsolete and slow-moving
inventory and the economic life of goodwill. Actual results could differ
from those estimates made by management.
NATURE OF OPERATIONS
The computer graphics wholesale distributors acquired during 1998 and 1997
are located throughout the United States and distribute and market a broad
array of complex computer graphics hardware and software. Products are sold
primarily to value added resellers and vertical solutions providers.
The services business provides on-site installation support, service and
warranty repair, and preventive maintenance services in North America. The
business includes the maintenance and repair of the CalComp, Epson and Canon
wide-format 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.
44
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is also a manufacturer, integrator and distributor of premium
workstations, and internet/intranet servers. Products are sold either
directly or through distributors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inherent in the accompanying consolidated financial statements are certain
risks and uncertainties. These risks and uncertainties include, but are not
limited to the impact of competitive products, competition, available
sources of supply and various technology related risks.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market (determined
principally by the first-in, first-out method, which approximates average
cost). The Company maintains a reserve for its estimate of excess, obsolete
and damaged goods. In most instances, the Company receives warranties on its
products from its vendors which are at least equivalent to those it provides
to its customers.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over their estimated useful lives,
which generally range from 3 to 7 years. Amounts expended for maintenance
and repairs are charged to expense as incurred. Upon disposition, both the
related cost and accumulated depreciation accounts are relieved and the
related gain or loss is credited or charged to operations.
GOODWILL
Goodwill is amortized over its estimated economic life or period of future
benefit. The Company is currently amortizing goodwill, on a straight-line
basis over 15 years. This estimated life is a composite of many factors that
are subject to change because of the nature of the Company's operations.
This is particularly true because goodwill reflects value attributable to
the going concern nature of acquired businesses, the stability of their
operations, market presence and reputation. Accordingly, at each reporting
period, the Company evaluates the continued appropriateness of this life and
recoverability of the carrying value of the goodwill based upon current and
future levels of income and undiscounted cash flows as well as the latest
available economic factors
2
45
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and circumstances. Impairment of value, if any, is recognized in the period
in which it is determined. 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 related goodwill associated with the
acquisitions has been impaired. During 1999, in light of several additional
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 in the 1999
statement of operations. Management of the Company does not believe that
there are facts or circumstances to indicate any additional impairment of
goodwill at December 31, 1999.
REVENUE
Sales are recognized upon the shipment of products to the customer or
distributor. Service sales represent amounts earned by providing equipment
maintenance services. Where such services are provided under annual
agreements, revenues are recognized on a pro rata basis over the periods of
the agreements. Other service revenues are recognized when the services are
performed.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides
an allowance for potential credit losses against the portion of accounts
receivable which is estimated to be uncollectible. Such losses have
historically been within management's expectations.
INCOME TAXES
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with SFAS No. 109, "Accounting for Income Taxes"
("SFAS 109"). Under SFAS 109, deferred tax liabilities and assets are
determined based on temporary differences between the bases of certain
assets and liabilities for income tax and financial reporting purposes. The
deferred tax assets and liabilities are classified according to the
financial statement classification of the assets and liabilities generating
the differences. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
3
46
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include its debt obligations. Management
believes that these instruments bear interest at rates which approximate
prevailing market rates for instruments with similar characteristics and,
accordingly, that the carrying values for these instruments are reasonable
estimates of fair value.
3. ACQUISITIONS
Effective April 1, 1999, the Company completed the acquisition of the U.S.
and Canadian service businesses and the worldwide parts business of Calcomp
Technology, Inc. for $400,000 in cash and the assumption of certain
liabilities. The assets acquired and liabilities assumed were consummated
through the formation of a wholly owned subsidiary, CalGraph Technology
Services, Inc. These businesses provide the field maintenance and repair of
the Calcomp printers and other products in the U.S. and Canada and is the
source for Calcomp printer parts and components to successors of Calcomp's
service divisions outside the U.S. and Canada. The acquisition was accounted
for as a purchase and the acquired assets and assumed liabilities have been
included in the accompanying financial statements as of December 31, 1999.
Cash paid in connection with acquisitions $ 400,000
Other acquisition costs 138,931
Fair value of liabilities assumed 3,339,208
Fair value of assets acquired (3,878,139)
-----------
$ --
In April and May of 1998, the Company completed the acquisition of three
regional computer graphics distributor companies. The acquisition agreements
provided, in exchange for 100% of the outstanding common stock of the three
companies, for the issuance of an aggregate of 894,998 shares of
unregistered Class A Common Stock and payment of $1,415,000 in cash. The
purchase prices for the 1998 Acquisitions are subject to adjustment based on
certain net asset value and profitability guarantees. Accordingly, a total
of $325,000 of the cash consideration and 192,251 of the unregistered shares
of Class A Common Stock issued in consideration in the 1998 Acquisitions
were placed in escrow to secure these guarantees. In addition to these
escrowed amounts, 192,250 of the shares issued as consideration was placed
in escrow to secure the various representations, warranties and other
indemnifiable provisions of the respective agreements.
On June 2, 1997, the Company completed the acquisition of 100% of the
outstanding common stock of five regional computer graphics distributors in
exchange for the issuance of 2,192,000 shares of Class B Common Stock.
4
47
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each stockholder deposited 40% of his shares in escrow to cover potential
claims for indemnification under the stock purchase agreements for
liabilities resulting from the breach of any representation, warranty,
covenant or agreement contained in the agreements.
The 1998 and 1997 Acquisitions were recorded under the purchase method of
accounting. The purchase prices have been allocated to assets acquired and
liabilities assumed based on the fair market value of the Company's common
stock. The fair value of assets acquired and liabilities assumed, after
giving effect to the excess and deficit net asset value, is as follows:
1998 1997
Acquisitions Acquisitions
Cash paid in connection with acquisitions $ 1,415,000
Fair value of stock issued and other acquisition costs 2,242,362 $ 9,574,214
Fair value of liabilities assumed 6,711,314 9,411,676
Fair value of assets acquired (7,494,398) (11,993,284)
----------- ------------
Goodwill $ 2,874,278 $ 6,992,606
=========== ============
The following unaudited pro forma summary combines the consolidated results of
the Company, the 1998 Acquisitions and the Services Acquisition as if the
acquisitions had occurred as of January 1, 1998. Additionally, the pro forma
data does not include the operating results of Prisym, which was sold effective
February 28, 1999. The unaudited pro forma summary includes the impairment of
goodwill charge of $6,193,000 and restructuring charges and other expenses of
$847,000 recorded in the year ended December 31, 1999. The weighted average
shares outstanding exclude 166,667 of escrow shares. The pro forma summary below
does not purport to represent what the Company's results of operations would
actually have been if such transactions in fact had occurred as of January 1,
1998, or to project the Company's results of operations for any future period.
FOR THE YEAR ENDED
DECEMBER 31,
1999 1998
-------------------------------------
(unaudited) (unaudited)
Net sales $112,524,379 $114,143,168
Gross profit 18,442,523 18,156,821
Income (loss) from operations (7,133,010) (56,682)
Income (loss) before taxes (7,205,780) 287,052
Pro forma net income (loss) (7,110,149) (139,939)
Basic and diluted income (loss) per share (1.15) (0.02)
Weighted average shares outstanding 6,161,664 6,161,664
5
48
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories, net of reserves, at December 31, 1999 and 1998 consist of the
following:
1999 1998
------------------------------------
Component materials $ 369,944 $ 333,333
Service Parts 2,442,418 0
Finished goods 10,087,160 7,385,004
----------- ------------
Inventories, net $12,899,522 $ 7,718,337
=========== ============
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net of accumulated depreciation, at December 31,
1999 and 1998, consists of the following:
1999 1998
Furniture and fixtures $ 565,041 $ 280,131
Computer equipment 1,972,321 834,285
Automobiles 121,810 101,796
----------- ------------
2,659,172 1,216,212
Less: accumulated depreciation (694,197) (391,548)
----------- ------------
Property and equipment, net $ 1,964,975 $ 824,664
=========== ============
6. 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 has been 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
6
49
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
above described amount and are reflected as Restructuring Charges and
Other Expenses in the 1999 statement of operations.
Goodwill, net of accumulated amortization, at December 31, 1999 and 1998
consists of the following:
1999 1998
------------------------------------
Goodwill $ 3,703,492 $ 9,866,884
Accumulated amortization (1,388,684) (856,943)
------------ ------------
Goodwill, net $ 2,314,808 $ 9,009,941
=========== ============
7. CURRENT DEBT
In July 1998, the Company entered into a Loan and Security Agreement (the
"Agreement"), which expires on June 30, 2001, with a bank that provides for
an outstanding principal amount of $7.5 million. Outstanding advances under
the Agreement bear interest at the LIBOR Index Rate plus a rate, varying
from 2.00% to 2.75%, that corresponds to a range of the Company's debt to
net worth ratio from 1:1 to 2:1. Pursuant to the terms of the Agreement, the
Company has pledged accounts receivables, inventory and equipment as
collateral. During the years ended December 31, 1999 and 1998, the Company
borrowed $6.3 million and $3.3 million, respectively, and repaid
approximately $2.7 million and $2.6 million, respectively, under this credit
facility. As of December 31, 1999 and 1998, the Company had an outstanding
balance of $4,263,527 and $707,152 under the credit facility.
In accordance with the Agreement, the Company is required to maintain
certain financial covenants, which specifically include a modified current
ratio, a debt to equity ratio and a fixed charge coverage ratio. At December
31, 1999, the Company obtained a waiver from the bank for non-compliance
with the fixed charge ratio.
7
50
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1999, 1998 and 1997 is as follows:
1999 FEDERAL STATE TOTAL
Current $ 66,521 $ 12,488 $ 79,009
Deferred (172,049) (14,960) (187,009)
----------- ----------- -----------
$ (105,528) $ (2,472) $ (108,000)
=========== =========== ===========
1998
Current $ 521,978 $ 97,688 $ 619,666
Deferred (122,053) (10,613) (132,666)
----------- ----------- -----------
$ 399,925 $ 87,075 $ 487,000
=========== =========== ===========
1997
Current $ 59,261 $ 11,125 $ 70,386
Deferred (108,031) (3,341) (111,372)
----------- ----------- -----------
$ (48,770) $ 7,784 $ (40,986)
=========== =========== ===========
A reconciliation of federal statutory and effective income tax rates is as
follows:
1999 1998 1997
Statutory U.S. federal income tax rate (34.0)% 34.0% (34.0)%
Effect of:
State income taxes, net of federal benefit (0.5) 5.7 2.4
Nondeductible goodwill amortization 31.6 35.9 20.8
Nondeductible meals and entertainment 0.2 1.5 3.9
Nondeductible foreign loss 1.1
Other, net 0.1 7.1 (2.5)
------ ------ -----
Effective income tax rate (1.5)% 84.2% (9.4)%
====== ====== =====
An analysis of the deferred income tax assets and liabilities at December
31, 1999 and 1998 is as follows:
1999 1998
Current deferred income tax assets:
Accounts receivable $ 268,696 $ 197,600
Inventory 284,482 98,800
Warranty 70,300
Restructuring accruals 144,620
263A Capitalization 84,998
Other 17,468 47,946
----------- ------------
Total current deferred income tax assets 870,564 344,346
Current deferred income tax liabilities:
Inventory (70,300)
Section 475 adjustment (46,073)
----------- ------------
Current deferred income tax asset, net $ 800,264 $ 298,273
=========== ============
Noncurrent deferred income tax assets:
Other $ 14,054 $ 46,033
Noncurrent deferred income tax liabilities, net
Section 475 adjustment (108,767) (138,219)
Other (204,221) (3,800)
----------- ------------
Total noncurrent deferred income
tax liabilities (312,988) (142,019)
----------- ------------
Noncurrent deferred income tax liability, net $ (298,934) $ (95,986)
=========== ============
8
51
TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management believes that realization of the deferred tax assets is more
likely than not due to taxable income available in carryback periods.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases office space under various operating leases expiring
through 2004. At December 31, 1999, minimum rentals due under these leases
were as follows:
2000 $ 920,337
2001 715,257
2002 389,711
2003 217,153
2004 91,695
-----------
$ 2,334,153
===========
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $887,000, $714,000 and $323,000 respectively.
LITIGATION
The Company is involved from time to time in litigation on matters which are
routine to the conduct of its business. Although the outcome of any
litigation cannot be predicted with certainty, the Company does not believe
that any outstanding litigation will have a material adverse effect on the
Company's consolidated financial position, results of operations, or cash
flows.
EMPLOYMENT AGREEMENTS
Certain stockholders of the Company have entered into employment agreements
which provide for a set base salary, participation in future incentive bonus
plans, stock option plans, certain other benefits, and a covenant not to
compete following termination of such person's employment.
10. CAPITAL STRUCTURE
On November 11, 1997, in connection with the initial public offering of the
Company's securities, 2,100,000 units were issued. Each unit consisted of
one share of Class A Common Stock and one Redeemable Warrant. The Class A
Common Stock and Redeemable Warrant were transferable separately immediately
upon issuance.
CLASS A COMMON STOCK
On June 2, 1997, the Company authorized 31,666,667 shares of Class A Common
Stock, $.001 par value. Holders of Class A Common Stock have the
9
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TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
right to cast one vote for each share held of record on all matters
submitted to a vote of holders of Class A Common Stock.
REDEEMABLE WARRANTS
Each Redeemable Warrant entitles the registered holder to purchase one
share of Class A Common Stock at an exercise price of $8.40 at any time
until the fifth anniversary of the date of issue. Beginning on the first
anniversary of the date of issue, the Redeemable Warrants are redeemable by
the Company on 30 days written notice and at a redemption price of $.05 per
Redeemable Warrant if the closing price of the Class A Common Stock for any
30 consecutive trading days ending within 15 days of the notice of
redemption averages in excess of $11.75 per share. All Redeemable Warrants
must be redeemed if any are redeemed. The Company has reserved from its
authorized but unissued shares a sufficient number of shares of Class A
Common Stock for issuance upon the exercise of the Redeemable Warrants. The
Redeemable Warrants do not contain any voting or other rights of a
stockholder of the Company.
CLASS B COMMON STOCK
On January 21, 2000 the Company eliminated its dual class of stock and all
outstanding shares of Class B Common Stock were converted into Class A
Common Stock on a one-for-one basis. On May 1, 1997 the Company increased
the outstanding shares from 100 to 3,424 by declaring a 34.24-for-1 stock
split of the Company's common stock (par value of $1.00). On June 2, 1997,
the Company declared a 400-for-1 stock split of the Company's common stock
pursuant to which all of the Company's outstanding common stock was
exchanged for 4,000,000 shares of Class B Common Stock with a par value of
$.001. During October 1997, the Company effected a .83333325-for-1 reverse
stock split pursuant to which the outstanding shares of Class B Common
Stock were exchanged for 3,333,333 shares of Class B Common Stock. Each
share of Class B Common Stock was entitled to five votes on all matters on
which stockholders may vote, including the election of directors. Each
share of Class B Common Stock was automatically converted into one share of
Class A Common Stock upon (i) its sale, gift of transfer, except in the
case of a transfer to a trust for which the original holder acts as sole
trustee or to any other holder of Class B Common Stock, (ii) the death of
the original holder thereof, including in the case of the original holder
having transferred the Class B Common Stock to a trust for which the
original holder served as trustee during his or her lifetime, or (iii) the
conversion of an aggregate of 75% of the authorized shares of Class B
Common Stock.
ESCROW SHARES
In connection with the Company's initial public offering of its securities,
the holders of the Company's Class B Common Stock agreed to place an
10
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TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
aggregate of 166,667 shares into escrow. These shares may be voted, but are
not transferable or assignable. These shares will be released if, and only
if, certain predetermined thresholds of pre-tax income or market value of
the Company's Class A Common Stock are exceeded. In the event any shares
are released from escrow to the holders who are employees or directors of
the Company, compensation expense equal to the fair value of the escrow
shares will be recognized in the consolidated statement of operations.
PREFERRED STOCK
On June 2, 1997, the Company authorized 5,000,000 shares of preferred
stock. The Board of Directors will have the authority to issue the
preferred stock in one or more series and to fix the number of shares and
the relative rights, conversion rights, voting rights and terms of
redemption and liquidation preferences, without further vote or action by
the stockholders.
11. STOCK OPTION PLAN
During August 1997, the Company's Board of Directors and stockholders
approved the 1997 Stock Option Plan (the "Plan") covering 300,000 shares of
the Company's Class A Common Stock which may be granted to employees,
officers, directors, and consultants or advisers to the Company. In May
1999, the Board of Directors approved a Plan amendment to increase the
number of shares of Class A Common Stock reserved for issuance there under
from 300,000 to 600,000. Options granted under the Plan may be either (i)
options intended to qualify as incentive stock options under Section 422 of
the Internal Revenue Code or (ii) non-qualified stock options. Incentive
options granted under the Plan are exercisable for a period of up to ten
years from the date of grant at an exercise price which is not less than
the fair market value of the stock on the date of grant, except that the
term of an incentive option granted under the Plan to a stockholder owning
more than 10% of the outstanding voting power may not exceed five years and
its exercise price may not be less than 110% of the fair market value of
the stock on the date of grant. In addition, to the extent that the
aggregate fair market value, as of the date of grant, of the stock for
which incentive options become exercisable for the first time by an
optionee during the calendar year exceeds $100,000, the portion of such
option which is in excess of the $100,000 limitation will be treated as a
non-qualified option. The Company's Board of Directors administers the
Plan, which expires in August 2007. The Company has 342,500 stock options
available for future grant at December 31, 1999.
11
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TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock options as of December 31, 1999, 1998 and 1997 and
activity during the period ending those dates as follows:
1999 1998 1997
------------------------ ------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------ ------------------------- -----------------------
Options at beginning of
period 262,500 3.00 0 -- 0 --
Granted 40,000 1.50 262,500 3.00 0 --
Exercised 0 -- 0 -- 0 --
Forfeited (27,000) 3.00 0 -- 0 --
------------------------ ------------------------- -----------------------
Outstanding at the end of
period 275,000 2.78 262,500 3.00 0 --
Options exercisable at end
Of period 97,625 2.74 15,000 3.00 0 --
Weighted average fair value of options granted during the period
1999 1998 1997
--------------------- ------------------------- ---------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Fair Average Fair Average Fair
Exercise Market Exercise Market Exercise Market
Price Value Price Value Price Value
-------- -------- --------- -------- --------- --------
Option granted during the year
Option price > fair market value -- -- 3.00 3.00 -- --
Option price = fair market value 1.50 1.50 -- -- -- --
Option price < fair market value -- -- -- -- -- --
The Company applies APB Opinion No. 25 ("APB 25") and related
Interpretations in accounting for the Plan. The Financial Accounting
Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") changing the methods for recognition of cost on
plans similar to those of the Company. Adoption of the accounting
provisions of FAS 123 is optional; however, pro forma disclosures as if the
Company adopted the cost recognition requirements under FAS 123 are
required.
The weighted average fair value of stock options granted during 1999 and
1998 was $0.89 and $0.91 respectively. Had compensation cost for the Plan
been determined on a fair value basis in accordance with the provisions of
FAS 123, the Company's net income (loss) for the three years ended December
31, 1999, 1998 and 1997, would have been as follows:
1999 1998 1997
------------ ------- ----------
Net income (loss) - as reported $(7,118,331) $91,167 $(393,337)
Net income (loss) - pro forma $(7,173,659) $43,469 $(393,337)
Earnings per share - pro forma $ (1.18) .01 (.15)
12
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TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amount of the proforma charge has been determined using the
Black-Scholes model, as permitted by FAS 123. For purposes of the
calculation, management used an interest rate of 5.6% based on the U.S.
Treasury Strip (zero-coupon) bonds, a projected volatility rate of 74.1%, a
dividend yield of 0% and an expected life of 4 years for the July 28, 1999
grants, respectively.
12. NET INCOME (LOSS) PER COMMON SHARE
Potential common stock is in the form of stock options and warrants that do
not have an effect on the 1999,1998 and 1997 diluted net income (loss) per
common share calculations. The following table presents information
necessary to calculate basic and diluted EPS for the years ended December
31, 1999, 1998 and 1997:
1999 1998 1997
----------- ------- ---------
Weighted average shares outstanding 6,328,331 6,056,126 2,702,166
Escrow shares (166,667) (166,667) (120,725)
----------- ------- ---------
6,161,664 5,889,459 2,581,441
=========== ======= =========
13. RELATED PARTY TRANSACTIONS
In December 1999, the Company loaned the chief executive officer and
president $1,775,000 to purchase the shares of Class A Common Stock and
Class B Common Stock. The loan is for a term of one year, with interest
payable annually at a rate that is .25% above the rate paid from time to
time by Tekgraf under its current bank loan agreement, and with all
principal and interest due at maturity. As collateral for payment of the
loan, the chief executive officer agreed to pledge 121,167 shares of Class A
Common Stock and 685,816 shares of the Class B Common Stock which he
recently purchased with the proceeds of the loan, and 99,875 shares of
previously owned Class A Common Stock, and 284,942 shares of previously
owned Class B Common Stock. The loan is prepayable at any time without
penalty.
During the year ended December 31, 1997, the Company recognized interest
expense on advances from a stockholder of approximately $177,000. The
advances from the stockholder bore interest at 8%.
14. 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. One customer accounted for 14% and 8% of sales in 1999
and 1998, respectively. The following segment information is for the years
ended December 31, 1999, 1998, and 1997:
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TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999 1998 1997
------------ ------------ ------------
Net sales:
Graphics $ 97,043,647 $ 84,437,910 $ 33,511,680
Technology 8,532,530 14,609,056 15,220,711
Services 5,448,233
------------ ------------ ------------
Total net sales $111,024,410 $ 99,046,966 $ 48,732,391
============ ============ ============
Operating income (loss):
Graphics(1) $ (5,108,080) $ 1,836,948 $ 449,446
Technology 14,899 90,502 (225,862)
Services 180,415
Corporate(2) (2,240,795) (1,660,747) (424,787)
------------ ------------ ------------
Total operating income (loss) $ (7,153,561) $ 266,703 $ (201,203)
============ ============ ============
Identifiable assets:
Graphics $ 22,175,994 $ 21,602,409 $ 17,668,748
Technology 1,201,205 2,075,272 2,096,920
Services 3,507,625
Corporate 10,454,844 13,477,920 10,186,680
------------ ------------ ------------
Total identifiable assets $ 37,339,668 $ 37,155,601 $ 29,952,348
============ ============ ============
Corporate operating income (loss) includes overhead and special charges
related to the consolidated Company.
(1) The operating income (loss) for 1999 includes the impairment of goodwill
charge of $6,193,318 and restructuring charges and other expenses of
$330,000.
(2) The operating income (loss) for 1999 includes restructuring charges and
other expenses of $517,061.
15. SUBSEQUENT EVENTS
On January 21, 2000 the Company eliminated its dual class of stock and all
outstanding shares of Class B Common Stock were converted into Class A
Common Stock on a one-for-one basis.
14
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TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. CONSOLIDATED CONDENSED QUARTERLY INFORMATION (UNAUDITED)
Selected unaudited financial information for each of the four quarters in
the years ended December 31, 1999 and 1998 are as follows:
WEIGHTED
NET INCOME AVERAGE SHARES
NET (LOSS) OUTSTANDING
NET GROSS INCOME PER SHARE BASIC AND
1999 SALES PROFIT (LOSS) BASIC AND DILUTED DILUTED
------------ ------------ ------------ ----------------- ---------------
First $ 24,335,778 $ 3,885,204 $ (175,211) $ (0.03) 6,161,664
Second 28,928,255 4,569,400 (108,876) (0.02) 6,161,664
Third 28,362,793 4,459,557 (6,915,685)(1) (1.12) 6,161,664
Fourth 29,397,584 4,958,096 81,441 0.01 6,161,664
------------ ------------ ------------
Total $111,024,410 $ 17,872,257 $ (7,118,331) $ (1.16) 6,161,664
============ ============ ============
1998
First $ 16,871,281 $ 2,830,125 $ 94,225 $ 0.02 5,266,666
Second 27,505,230 4,248,820 209,662 0.04 5,955,016
Third 26,323,407 3,975,539 (267,664) (0.04) 6,161,664
Fourth 28,347,048 4,371,172 54,944 0.01 6,161,664
------------ ------------ ------------
Total $ 99,046,966 $ 15,425,656 $ 91,167 $ 0.02 5,889,459
============ ============ ============
(1) The net loss in the third quarter of 1999 includes $6,193,000 in impairment
of goodwill charges, $230,000 in charges related to leased premises no
longer in use and $617,000 in centralization and consolidation expenses.
Basic net income (loss) per share was the same as diluted net income (loss)
per share in each period presented above.
15
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TEKGRAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Tekgraf, Inc.
Our audits of the consolidated financial statements of Tekgraf, Inc. referred
to in our report dated March 3, 2000 appearing in this Form 10-K also included
an audit of the financial statement schedule listed in Item 14(a). In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 3, 2000
16
59
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND AND AT END
DESCRIPTION OF YEAR EXPENSES RECLASSIFICATIONS OF YEAR
----------- ------- -------- ----------------- -------
1999
Allowance for doubtful accounts $520,000 $ 385,874 $(123,874) $782,000
Inventory reserves $260,000 $ 327,996 $ (94,306) $493,690
1998
Allowance for doubtful accounts $205,000 $ 457,210 $(142,210) $520,000
Inventory reserves $205,000 $ 169,425 $(114,425) $260,000
1997
Allowance for doubtful accounts $140,000 $ 149,170 $ (84,170) $205,000
Inventory reserves $ 0 $ 237,275 $ (32,275) $205,000
17
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TEKGRAF, INC.
INDEX OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.39 Stock Purchase Agreement and Termination Agreement by and among Tekgraf, Inc., William E. Streib,
and Prisym Technologies, Inc. of Georgia, dated March 25, 1999.
10.40 Purchase and sale agreement dated April 1, 1999 by and between Tekgraf, Inc., CalGraph Technology
Services, and Calcomp Technology (filed on 1999 Form 8-K dated April
16, 1999).
10.41 Loan agreement between William Rychell and Tekgraf, Inc. dated December 1, 1999 (filed as Exhibit 8 of
Schedule 13-D dated December 3, 1999).
11.1 Statements of Computation of Earnings Per Share
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule (for SEC use only)
18