SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: September 30, 1997
SAVOIR TECHNOLOGY GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-11560 94-2414428
- ---------------------------- ------------ ----------------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification Number)
254 East Hacienda, Campbell, CA 95008
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(408) 379-0177
-------------------------------
(Registrant's telephone number,
including area code)
<PAGE>
Item 7. Financial Statements and Exhibits.
---------------------------------
(a) Financial statements of business acquired.
Consolidated financial statements of Star Management Services,
Inc., a Delaware corporation ("Star") and its subsidiaries,
pertaining to the registrant's acquisition of all of the
outstanding common stock of Star are submitted herewith as
shown in Item 7(c) following.
(b) Pro Forma Financial Information.
Pro forma financial statements for Savoir Technology Group,
Inc., showing the pro forma effects of the acquisition of Star,
are submitted herewith as shown in Item 7(c) following.
(c) Exhibits.
99.1 Financial Statements of Star Management Services, Inc.
and Subsidiaries:
a. Report of Independent Public Accountants dated
November 26, 1997
b. Consolidated Balance Sheets as of September 30, 1997
and October 31, 1996
c. Consolidated Statements of Income for the Eleven
Months ended September 30, 1997 and the Years Ended
October 31, 1996 and 1995
d. Consolidated Statements of Stockholders' Equity for
the Eleven Months ended September 30, 1997 and the
Years Ended October 31, 1996 and 1995
e. Consolidated Statements of Cash Flows for the Eleven
Months ended September 30, 1997 and the Years Ended
October 31, 1996 and 1995
f. Notes to Consolidated Financial Statements for the
Eleven Months ended September 30, 1997 and the Years
Ended October 31, 1996 and 1995
99.2 Pro Forma Financial Statements of Savoir Technology
Group, Inc.:
a. Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 1996
(Unaudited)
b. Notes to Pro Forma Condensed Consolidated Statement
of Operations for the Year Ended December 31, 1996
(Unaudited)
-2-
<PAGE>
c. Pro Forma Condensed Consolidated Statement of
Operations for the Nine Months Ended September 30,
1997 (Unaudited)
d. Notes to Pro Forma Condensed Consolidated Statement
of Operations for the Nine Months Ended September
30, 1997 (Unaudited)
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: December 12, 1997
SAVOIR TECHNOLOGY GROUP, INC.
By /s/ James W. Dorst
-------------------------------------
James W. Dorst
Chief Financial Officer
-4-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No. Description
------- -----------
99.1 Financial Statements of Star Management Services, Inc. and
Subsidiaries:
a. Report of Independent Public Accountants dated
November 26, 1997
b. Consolidated Balance Sheets as of September 30, 1997 and
October 31, 1996
c. Consolidated Statements of Income for the Eleven Months
ended September 30, 1997 and the Years Ended October 31,
1996 and 1995
d. Consolidated Statements of Stockholders' Equity for the
Eleven Months ended September 30, 1997 and the Years
Ended October 31, 1996 and 1995
e. Consolidated Statements of Cash Flows for the Eleven
Months ended September 30, 1997 and the Years Ended
October 31, 1996 and 1995
f. Notes to Consolidated Financial Statements for the Eleven
Months ended September 30, 1997 and the Years Ended
October 31, 1996 and 1995
99.2 Pro Forma Financial Statements of Savoir Technology
Group, Inc.:
a. Pro Forma Condensed Consolidated Statement of Operations
for the Year Ended December 31, 1996 (Unaudited)
b. Notes to Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 1996
(Unaudited)
c. Pro Forma Condensed Consolidated Statement of Operations
for the Nine Months Ended September 30, 1997 (Unaudited)
d. Notes to Pro Forma Condensed Consolidated Statement of
Operations for the Nine Months Ended September 30, 1997
(Unaudited)
-5-
EXHIBIT 99.1
------------
STAR MANAGEMENT SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997, AND
OCTOBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
-1-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Star Management Services, Inc.:
We have audited the accompanying consolidated balance sheets of Star Management
Services, Inc. (a Delaware corporation), and subsidiaries as of September 30,
1997 (prior to the sale of 100 percent of its common stock to Savoir Technology
Group, Inc., as described in Note 11), and October 31, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
eleven months ended September 30, 1997, and the years ended October 31, 1996 and
1995. These financial statements are the responsibility of Star Management
Services, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Star Management Services, Inc.,
and subsidiaries as of September 30, 1997 (prior to the sale of 100 percent of
its common stock to Savoir Technology Group, Inc., as described in Note 11), and
October 31, 1996, and the results of their operations and their cash flows for
the eleven months ended September 30, 1997, and the years ended October 31, 1996
and 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
November 26, 1997
-2-
<PAGE>
<TABLE>
STAR MANAGEMENT SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997, AND OCTOBER 31, 1996
(In Thousands, Except Share Amounts)
<CAPTION>
ASSETS 1997 1996
------ ----------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 6,911 $ 6,425
Trade accounts receivable............................................................ 27,517 9,216
Other receivables.................................................................... 1,419 1,084
Inventories.......................................................................... 3,839 3,735
Prepaid expenses and other........................................................... 477 1,533
----------- ----------
Total current assets............................................................. 40,163 21,993
Other.................................................................................. 43 14
Property and equipment, net............................................................ 1,180 990
Net assets of discontinued operations (Note 3)......................................... -- 2,184
----------- ----------
Total assets..................................................................... $ 41,386 $ 25,181
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Line of credit....................................................................... $ 3,000 $ --
Accounts payable..................................................................... 29,683 14,466
Accrued expenses..................................................................... 1,019 1,085
Payable to Sirius Computer Solutions, Ltd., net...................................... 1,442 --
Other................................................................................ 939 456
----------- ----------
Total current liabilities........................................................ 36,083 16,007
----------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, no par value; 3,000 shares authorized; 2,675 and 3,000 shares
issued and outstanding at September 30, 1997, and October 31, 1996,
respectively..................................................................... -- --
Paid-in capital...................................................................... 3,958 4,439
Retained earnings.................................................................... 1,345 4,735
----------- ----------
Total stockholders' equity....................................................... 5,303 9,174
----------- ----------
Total liabilities and stockholders' equity....................................... $ 41,386 $ 25,181
=========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-3-
<PAGE>
<TABLE>
STAR MANAGEMENT SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share and Per Share Amounts)
<CAPTION>
Eleven Months
Ended Year Ended
September 30, October 31,
----------------- -----------------------------------
1997 1996 1995
----------------- ----------------- ----------------
<S> <C> <C> <C>
Sales and other revenue...................................... $ 86,505 $ 76,495 $ 55,148
Cost of sales................................................ 75,755 65,226 45,067
---------------- ---------------- ----------------
Gross profit................................................. 10,750 11,269 10,081
---------------- ---------------- ----------------
Operating expenses:
Selling, general and administrative........................ 8,341 5,662 4,493
Executive bonuses.......................................... 1,325 2,712 3,826
---------------- ---------------- ----------------
Total operating expenses............................... 9,666 8,374 8,319
---------------- ---------------- ----------------
Income from operations....................................... 1,084 2,895 1,762
Interest income (expense), net............................... 99 (81) --
---------------- ---------------- ----------------
Income from continuing operations before income taxes........ 1,183 2,814 1,762
---------------- ---------------- ----------------
Income tax expense........................................... (381) (963) (514)
---------------- ---------------- ----------------
Income from continuing operations............................ 802 1,851 1,248
Discontinued operations (Note 3): Income from discontinued
operations, net of income taxes of $276, $22 and $79 in
1997, 1996 and 1995, respectively.......................... 582 43 191
---------------- ---------------- ----------------
Net income................................................... $ 1,384 $ 1,894 $ 1,439
================ ================ ================
Net income per common share:
Continuing operations...................................... $ 267 $ 617 $ 416
Discontinued operations.................................... 194 14 64
---------------- ---------------- ----------------
Net income per common share............................ $ 461 $ 631 $ 480
================ ================ ================
Weighted average common shares outstanding................... 2,999 3,000 3,000
================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-4-
<PAGE>
<TABLE>
STAR MANAGEMENT SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997, AND
THE YEARS ENDED OCTOBER 31, 1996 AND 1995
(In Thousands, Except Share Amounts)
<CAPTION>
Common Stock
------------------------------ Paid-In Retained
Shares Amount Capital Earnings Total
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance as of October 31, 1994.......... 3,000 $ -- $ 4,439 $ 1,402 $ 5,841
Net income.............................. -- -- -- 1,439 1,439
-------------- -------------- -------------- -------------- --------------
Balance as of October 31, 1995.......... 3,000 -- 4,439 2,841 7,280
Net income.............................. -- -- -- 1,894 1,894
-------------- -------------- -------------- -------------- --------------
Balance as of October 31, 1996.......... 3,000 -- 4,439 4,735 9,174
Split-off of end-user business,
including income tax effect of $255... (325) -- (481) (4,774) (5,255)
Net income.............................. -- -- -- 1,384 1,384
-------------- -------------- -------------- -------------- --------------
Balance as of September 30, 1997........ 2,675 $ -- $ 3,958 $ 1,345 $ 5,303
============== ============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-5-
<PAGE>
<TABLE>
STAR MANAGEMENT SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Eleven Months
Ended Year Ended
September 30, October 31,
----------------- -----------------------------------
1997 1996 1995
----------------- ----------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 1,384 $ 1,894 $ 1,439
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 924 750 445
Deferred income tax (benefit).......................... (122) (142) 225
Inventory adjustment................................... 155 252 228
Write-off of property and equipment.................... 104 -- --
(Increase) decrease in assets:
Receivables............................................ (12,547) (10,675) (5,274)
Inventories............................................ (259) (616) (373)
Prepaid expenses and other............................. 725 (998) (491)
Increase (decrease) in liabilities:
Accounts payable....................................... 8,052 16,483 596
Accrued expenses....................................... 757 782 479
Other.................................................. (35) 358 (540)
---------------- ---------------- ----------------
Net cash provided by (used in) operating
activities...................................... (862) 8,088 (3,266)
---------------- ---------------- ----------------
Cash flows from investing activities:
Proceeds from investments in leases........................ 1,478 2,207 1,896
Purchases of property and equipment........................ (1,885) (3,038) (3,108)
Proceeds from lease termination penalties.................. -- 24 15
Proceeds from notes receivable............................. 135 132 10
---------------- ---------------- ----------------
Net cash used in investing activities............... (272) (675) (1,187)
---------------- ---------------- ----------------
Cash flows from financing activities:
Borrowings (repayments) under line-of-credit
agreements, net.................................. 3,000 (1,562) 1,562
Proceeds from nonrecourse lease obligations................ 372 2,037 1,490
Payments on nonrecourse lease obligations.................. (1,752) (2,019) (1,648)
Proceeds from officer notes payable........................ -- 3,000 --
Payments on officer notes payable.......................... -- (3,000) --
---------------- ---------------- ----------------
Net cash provided by (used in) financing
activities...................................... 1,620 (1,544) 1,404
---------------- ---------------- ----------------
Increase (decrease) in cash and cash equivalents........... 486 5,869 (3,049)
Cash and cash equivalents, beginning of period............. 6,425 556 3,605
---------------- ---------------- ----------------
Cash and cash equivalents, end of period................... $ 6,911 $ 6,425 $ 556
================ ================ ================
-6-
<PAGE>
<CAPTION>
Eleven Months
Ended Year Ended
September 30, October 31,
----------------- -----------------------------------
1997 1996 1995
----------------- ----------------- ----------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for interest................... $ 310 $ 526 $ 323
================ ================ ================
Cash paid during the period for income taxes............... $ 811 $ 783 $ 543
================ ================ ================
Noncash investing and financing activities-
Note received from sale of land........................ $ -- $ -- $ 140
================ ================ ================
Investments in direct financing leases................. $ 519 $ 1,262 $ 2,308
================ ================ ================
Receivable in connection with split-off................ $ 152 $ -- $ --
================ ================ ================
Liabilities incurred in connection with split-off...... $ 2,001 $ -- $ --
================ ================ ================
Split-off of end-user business......................... $ 5,255 $ -- $ --
================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-7-
<PAGE>
STAR MANAGEMENT SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, AND OCTOBER 31, 1996 AND 1995
(In Thousands, Except Share Amounts)
1. ORGANIZATION AND OPERATIONS:
---------------------------
Star Management Services, Inc. (Star), was incorporated in 1992 under the laws
of the State of Delaware. Star's principal subsidiary, Business Partner
Solutions, Inc., formerly Star Data Systems, Inc. (a Texas corporation), was
incorporated in 1980. Star and its wholly owned subsidiaries (collectively, the
Company) primarily distribute new and used midrange computer systems, peripheral
equipment and software products to wholesalers, dealers and other resellers in
both the national and international markets. The Company also provides internet
services to its customers.
The Company's primary vendor is International Business Machines (IBM). The
Company is authorized to market its vendors' products under various contractual
agreements, which typically have two-year terms. Each agreement requires the
Company, among other things, to meet certain minimum sales volumes in order to
qualify as a marketer, to obtain certain discounts and to renew the agreement.
Management of the Company anticipates exceeding these minimum sales volumes.
Warranties for all products are provided by their vendors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Principles of Consolidation and Basis of Presentation
- -----------------------------------------------------
The accompanying consolidated financial statements include the accounts of Star
and its wholly owned subsidiaries, Sirius Investments, Inc., Business Partner
Solutions, Inc., Star Data International, Inc., and INET Systems, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform to
current year presentation.
The consolidated financial statements as of and for the eleven months ended
September 30, 1997, are presented after the split-off of the Company's End-User
Business (as defined in Note 3) on September 30, 1997, and prior to the sale of
100 percent of the Company's remaining common stock to Savoir Technology Group,
Inc. (Savoir), on September 30, 1997, as described in Note 11. The split-off has
been accounted for as a discontinued operation in accordance with Accounting
Principles Board (APB) Opinion No. 30. Thus, the accompanying consolidated
financial statements and notes thereto have been restated for all periods
presented.
The End-User Business is comprised of several of the Company's divisions.
Historically, all sales and other revenue, cost of sales and operating expenses
were accounted for on each division's income statement and were directly
attributable to the divisions' operations.
-8-
<PAGE>
Certain common costs were charged directly to the respective divisions on a
nonarbitrary basis that fairly apportioned the costs in relation to the benefits
received and were immaterial for all years presented. Executive bonuses were
based on consolidated results of operations and, as such, were charged to each
division based on its contribution to consolidated pretax income. Historically,
certain assets, liabilities and income taxes were accounted for on a
consolidated or subsidiary basis with no allocation to individual divisions. For
purposes of determining net assets of discontinued operations as of October 31,
1996, and income from discontinued operations for 1997, 1996 and 1995, balances
were allocated to the End-User Business based on its operations, unless
otherwise described below.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents were historically recorded
on the balance sheets of the Company's subsidiaries rather than its divisions.
Consequently, there is no reasonable means by which to allocate cash and cash
equivalents to the End-User Business. Total consolidated cash was $6,425 at
October 31, 1996, none of which is reflected in net assets of discontinued
operations.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES. The majority of accounts payable and
accrued expenses was allocated based on management's specific identification of
items directly attributable to the operations of the End-User Business. The
immaterial remainder related to common services was allocated based on business
volumes.
INCOME TAXES. The Company's divisions are not separate taxable entities. Income
tax expense and income tax payable were allocated to continuing operations and
discontinued operations on a pro rata basis using the respective pretax income
as a percentage of consolidated pretax income. As such, the balances may not be
reflective of such income tax expense and income tax payable on a stand-alone
basis. The entire deferred federal income tax liability was allocated to net
assets of discontinued operations since it is primarily comprised of temporary
differences related to the End-User Business's net investment in leases, which
are reported as operating leases for federal income tax purposes.
Immediately prior to the split-off on September 30, 1997, the assets and
liabilities of the End-User Business were allocated in accordance with the terms
of the respective agreements as further described in Note 3.
Fiscal Year Change
- ------------------
The Company's fiscal year-end will change from October 31 to December 31 to
conform with Savoir's fiscal year, effective the calendar year beginning January
1, 1998. In anticipation of this change, the Company's 1997 fiscal year ended on
September 30, 1997. A three-month fiscal transition period from October 1, 1997,
through December 31, 1997, will precede the start of the new calendar year
cycle. All general references to years in the accompanying consolidated
financial statements and notes thereto relate to the fiscal periods ended
September 30, 1997, and October 31, 1996 and 1995, unless otherwise noted.
-9-
<PAGE>
Estimates in the Financial Statements
- -------------------------------------
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
- -------------------
Sales are recognized at the time of product shipment. Rentals from operating
leases are included in lease income as earned over the term of the lease.
Net Income Per Common Share
- ---------------------------
Net income per common share is computed by dividing net income by the
weighted-average number of common shares outstanding during the applicable
period.
Cash and Cash Equivalents
- -------------------------
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents.
Concentrations of Credit Risk
- -----------------------------
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of trade accounts receivable. Receivables are
secured by the equipment sold. Credit risk with respect to trade receivables is
minimized because of the diversification of the Company's large customer base
and its geographical dispersion. No single customer accounted for more than 10
percent of the Company's sales in 1997, 1996 and 1995.
Inventories
- -----------
Inventories consisting primarily of purchased product held for resale are stated
at the lower of cost or market. Cost is determined using the specific cost
method. The Company's inventories include high technology computer systems that
may be subject to rapid technological obsolescence. The Company attempts to
minimize inventories on hand and considers technological obsolescence when
estimating required reserves. It is reasonably possible that such estimates
could change in the near term.
Property and Equipment
- ----------------------
Property and equipment are presented at cost less accumulated depreciation and
amortization. Expenditures for major additions are capitalized. Expenditures for
repairs and maintenance are charged to expense as incurred. Depreciation and
amortization are provided
-10-
<PAGE>
for in amounts sufficient to expense the cost of depreciable assets over their
estimated useful lives, which range from three to seven years. Straight-line and
accelerated methods are utilized. Leasehold improvements are amortized over the
shorter of their useful lives or the lease term.
Federal Income Taxes
- --------------------
The Company files a consolidated federal income tax return excluding Star Data
International, Inc., which is required by statute to file separately. Deferred
taxes are provided on the liability method whereby deferred tax assets and
liabilities are recognized for temporary differences between the reported
amounts and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment. See Note 7.
Fair Value of Financial Instruments
- -----------------------------------
The estimated fair values of the Company's financial instruments have been
determined by the Company using appropriate valuation methodologies and
approximate their recorded book values. The carrying values of the Company's
cash and cash equivalents, receivables, accounts payable, debt and all other
financial instruments approximate their fair values.
Long-Lived Assets
- -----------------
Effective for the Company's fiscal year beginning November 1, 1996, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires an assessment of the recoverability of the Company's
investment in long-lived assets to be held and used in operations whenever
events or circumstances indicate that their carrying amounts may not be
recoverable. Such assessment requires that the future cash flows associated with
the long-lived assets be estimated over their remaining useful lives and an
impairment loss be recognized when the future cash flows are less than the
carrying value of such assets. As of September 30, 1997, management of the
Company has determined that no impairment loss is required.
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income and its components in a full set of
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997, and requires reclassification of earlier financial statements
for comparative purposes. Management of the Company is evaluating the
requirements of SFAS No. 130 and the effects on the Company's financial
reporting and disclosures.
-11-
<PAGE>
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments in annual and interim financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 supersedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. In the initial year of application, comparative information for earlier
periods is to be presented. Management of the Company is evaluating the
requirements of SFAS No. 131 and the effects, if any, on the Company's financial
reporting and disclosures.
3. DISCONTINUED OPERATIONS:
-----------------------
On September 30, 1997, the Company completed the split-off of its business of
selling, leasing and servicing computers, computer-related equipment and
software products to end-users in the United States who acquire such products
for their own use and not for resale (the End-User Business). To effectuate the
split-off, two new companies were formed - Sirius Computer Solutions, Ltd.
(Sirius, Ltd.), and Sirius Management, LLC (Sirius, LLC). The Company
contributed certain assets and liabilities of its End-User Business to Sirius,
Ltd., in exchange for a 99 percent limited partnership interest in Sirius, Ltd.,
and a 100 percent ownership interest in Sirius, LLC (collectively, the
Interests). The Interests were then transferred to the stockholders of Star in
exchange for 325 shares of Star stock having a fair value of $5,750, the
independently appraised value of the End-User Business. The transaction was
structured similar to a taxable "split-off" for federal income tax purposes and,
thus, is referred to as such in the accompanying financial statements and notes.
Because the transaction was a pro rata exchange, the split-off was accounted for
at historical cost of $5,000 in accordance with APB Opinion No. 29. Thus, the
Company reduced stockholders' equity by $5,000, of which $481 was charged to
paid-in capital, and the remainder was charged to retained earnings. For federal
income tax purposes, the transaction was valued at fair value of $5,750. Federal
income tax expense of $255 related to the capital gain recognized by the Company
was charged to retained earnings in accordance with SFAS No. 109.
The assets and liabilities related to the End-User Business which were excluded
from the transfer to Sirius, Ltd., consist primarily of certain trade
receivables, accounts payable, outstanding borrowings under the line of credit
with IBM Credit Corporation and other liabilities. Excluded trade receivables
were approximately $11,473 at September 30, 1997, and represented the total
amount of excluded payables and other liabilities assumed by the Company.
Accordingly, such amounts are included in the accompanying financial statements.
The Company agreed to transfer cash to Sirius, Ltd., in an amount necessary to
provide the End-User Business with a net asset balance of $5,000 at the
split-off date. The subsequent cash transfer of $1,594 is reflected as a payable
to Sirius, Ltd., which is presented net of a $152 receivable from Sirius, Ltd.,
in the accompanying consolidated financial statements at September 30, 1997.
-12-
<PAGE>
The condensed components of net assets of discontinued operations at October 31,
1996, were as follows:
Current assets.............................................. $ 11,168
Property and equipment, net................................. 1,169
Net investment in leases, less current portion.............. 1,656
Other....................................................... 17
-----------
Total assets.......................................... 14,010
-----------
Accounts payable and accrued expenses....................... 7,979
Nonrecourse leased equipment obligations.................... 3,439
Other....................................................... 408
-----------
Total liabilities..................................... 11,826
-----------
Net assets of discontinued operations................. $ 2,184
===========
Revenue of discontinued operations was $66,750, $44,122 and $30,498 in 1997,
1996 and 1995, respectively.
4. PROPERTY AND EQUIPMENT:
----------------------
<TABLE>
Property and equipment consist of the following:
<CAPTION>
September 30, October 31,
1997 1996
------------ ------------
<S> <C> <C>
Office furniture and equipment.................................. $ 1,487 $ 1,593
Software........................................................ 150 154
Leasehold improvements.......................................... 195 377
Tools, testing and other equipment.............................. 15 17
Equipment leased to others under operating leases............... 403 -
---------- ------------
Total costs................................................... 2,250 2,141
Less--Accumulated depreciation and amortization.................. (1,070) (1,151)
---------- -------------
Net property and equipment.................................... $ 1,180 $ 990
========== =-===========
</TABLE>
5. LINE OF CREDIT AND ACCOUNTS PAYABLE:
-----------------------------------
The Company has an Inventory and Working Capital Financing Agreement (the Credit
Line) with IBM Credit Corporation (ICC), an affiliate of IBM, whereby purchases
from IBM are directly charged to the Credit Line and are paid by the Company
based on payment terms outlined in the agreement. Borrowings under the Credit
Line are based on eligible accounts receivable and inventory, as defined, and
are limited to $25,000, temporarily increased to
-13-
<PAGE>
$37,500. As of September 30, 1997, and October 31, 1996, the Company had
outstanding borrowings under this agreement of $25,572 and $15,775,
respectively. Product advances and working capital advances, as defined, bear
interest at prime plus 1.75 percent and prime plus 2 percent, respectively. As
of September 30, 1997, the amount of unused credit, subject to the terms of the
agreement, was $2,587. The weighted-average interest rates on the Company's
borrowings were 10.28 percent and 10.25 percent as of September 30, 1997, and
October 31, 1996, respectively.
The amounts outstanding under the Credit Line represent unpaid invoices and
accrued purchase liabilities and, as such, are presented as accounts payable in
the accompanying consolidated financial statements, except for $3,000 which
represents a working capital advance and, as such, is presented as line of
credit. Credit Line amounts are secured by the Company's assets not otherwise
pledged as collateral under other debt agreements and are guaranteed by the
Company. The Credit Line requires the Company to comply with certain covenants,
including maintaining certain financial ratios and net worth requirements. The
Company obtained waivers of all noncompliance with its financial ratios as of
September 30, 1997. As a result of the sale of 100 percent of the Company's
common stock, the Credit Line terminated on September 30, 1997, and the
Company's outstanding borrowings were consolidated with Savoir's Inventory and
Working Capital Financing Agreement with ICC, as described in Note 11.
As of October 31, 1996, the Company had $5,000 available for borrowing under a
$5,000 revolving line-of-credit agreement with a bank. The Company paid an
annual commitment fee of 1/8 of 1 percent on the unused portion. The line
matured on March 31, 1997.
Accounts payable include amounts related to equipment received but not yet
invoiced of approximately $22,584 and $9,566 as of September 30, 1997, and
October 31, 1996, respectively.
6. GEOGRAPHIC INFORMATION:
----------------------
Information by geographic location is shown below. The Company's foreign
operations relate to its subsidiary, Star Data International, Inc. (a Virgin
Islands corporation), and its international brokerage division.
-14-
<PAGE>
<TABLE>
<CAPTION>
Eleven Months
Ended Year Ended
September 30, October 31,
----------------- -----------------------------------
1997 1996 1995
----------------- ----------------- ----------------
<S> <C> <C> <C>
Sales:
Domestic................................................... $ 78,130 $ 64,733 $ 42,690
Foreign.................................................... 8,375 11,762 12,458
---------------- ---------------- ----------------
Total.................................................. $ 86,505 $ 76,495 $ 55,148
================ ================ ================
Income from continuing operations, before income taxes:
Domestic................................................... $ 869 $ 2,175 $ 1,117
Foreign.................................................... 314 639 645
---------------- ---------------- ----------------
Total.................................................. $ 1,183 $ 2,814 $ 1,762
================ ================ ================
</TABLE>
7. INCOME TAXES
------------
<TABLE>
Income tax expense consists of the following:
<CAPTION>
Eleven Months
Ended Year Ended
September 30, October 31,
----------------- -----------------------------------
1997 1996 1995
----------------- ----------------- ----------------
<S> <C> <C> <C>
Federal:
Current.................................................... $ 408 $ 1,029 $ 319
Deferred................................................... (71) (139) 195
State........................................................ 44 73 -
---------------- ---------------- ----------------
Income tax expense..................................... $ 381 $ 963 $ 514
================ ================ ================
</TABLE>
<TABLE>
Income tax expense differs from the amount computed by applying the statutory
federal income tax rate of 34 percent to income from continuing operations
before income tax expense due to the following:
<CAPTION>
Eleven Months
Ended Year Ended
September 30, October 31,
----------------- -----------------------------------
1997 1996 1995
----------------- ----------------- ----------------
<S> <C> <C> <C>
Income tax expense computed at statutory rate................ $ 402 $ 957 $ 599
Increases (decreases) in taxes resulting from:
Nondeductible expenses..................................... 20 23 13
Foreign sales corporation tax rate difference.............. (49) (63) (90)
State income taxes, net of federal benefit................. 28 48 -
Other...................................................... (20) (2) (8)
---------------- ---------------- ----------------
Income tax expense..................................... $ 381 $ 963 $ 514
================ ================ ================
</TABLE>
-15-
<PAGE>
<TABLE>
Net deferred tax asset at September 30, 1997, consists of the following
temporary differences:
<S> <C>
Deferred tax assets:
Inventory adjustment.................................... $ 7
Accrued vacation........................................ 18
--------
25
Deferred tax liability:
Fixed assets............................................ (1)
--------
Net deferred tax asset.............................. $ 24
========
</TABLE>
8. OPERATING LEASES:
----------------
The Company conducts its operations in leased facilities under various operating
leases. Total rent expense was $279, $252 and $261 for 1997, 1996 and 1995,
respectively. Future minimum rental payments required under the noncancelable
operating leases existing at September 30, 1997, are $224 for the 13 months
ending October 31, 1998, and $12 for the year ending October 31, 1999.
9. RELATED-PARTY TRANSACTIONS:
--------------------------
From time to time, certain officers of the Company have loaned amounts to the
Company. The highest amount of loans from officers during 1996 was $1,500. There
were no amounts outstanding at October 31, 1996. No such loans were received in
1997.
10. EMPLOYEE SAVINGS PLAN:
---------------------
The Company has a 401(k) savings plan to reward employees for service to the
Company. The plan provides for employee contributions to be discretionarily
matched by the Company on an annual basis. All employees are eligible to
participate in the plan after one full year of employment. Full vesting of the
Company's contribution occurs after five years of employment. The Company serves
as administrator of the plan. Total Company contributions to the plan were $94,
$60 and $37 for 1997, 1996 and 1995, respectively.
11. SUBSEQUENT EVENTS:
-----------------
On September 30, 1997, the Company's stockholders sold 100 percent of the
Company's issued and outstanding common stock to Savoir Technology Group, Inc.,
formerly Western Micro Technology, Inc. (Savoir), in exchange for 460,000 shares
of Savoir's common stock and an aggregate cash amount of $42,150, which is
subject to certain adjustments, as defined in the Stock Purchase Agreement dated
June 4, 1997, as amended. Two additional cash payments of $3,675 each are to be
received on the first and second anniversaries of the closing. The stockholders
will also receive up to $5,000 in earn-out payments based on the
-16-
<PAGE>
achievement of certain performance goals. Consequently, the Company became a
wholly owned subsidiary of Savoir.
On September 30, 1997, Savoir entered into a note purchase agreement (the Note
Agreement) with Robert Fleming, Inc., and Canpartners Investments IV, LLC
(together, the Purchasers), and Canpartners Investments IV, LLC, as agent for
the Purchasers. Pursuant to the Note Agreement, Savoir sold $15,700 of secured
notes to the Purchasers. The notes, which are subordinated to Savoir's primary
lender, ICC, bear interest at 13.5 percent, include an original issue discount,
fully earned upon funding, of $700 and are due September 30, 2000. Savoir used
the proceeds to acquire the Company. Savoir's obligations under the Note
Agreement are guaranteed by Savoir's subsidiaries, including the Company, and
are secured by substantially all of their assets.
On September 30, 1997, Savoir executed an amendment to its Inventory and Working
Capital Financing Agreement with ICC to reflect its acquisition of the Company.
Pursuant to the amendment, Savoir's credit line was increased to $75,000, and
Savoir obtained an additional loan of $10,000 to acquire the Company. Savoir's
obligations to ICC are guaranteed by Savoir's subsidiaries, including the
Company, and are secured by substantially all of their assets.
In November 1997, Savoir signed a definitive agreement to acquire MCBA Systems,
Inc. (MCBA). Management anticipates that MCBA will become a division of the
Company. The consideration to be paid for MCBA is 900,000 shares of Savoir
common stock, issued at closing, with an additional earn-out based upon future
performance. The acquisition is subject to a number of conditions including the
approval by the shareholders of Savoir, the consent of certain of Savoir's
lenders and standard regulatory approvals.
-17-
EXHIBIT 99.2
SAVOIR TECHNOLOGY GROUP, INC.
PRO FORMA FINANCIAL STATEMENTS
The accompanying pro forma condensed consolidated statements of
operations have been derived from the historical financial statements of Savoir
Technology Group, Inc. (formerly Western Micro Technology, Inc.) (the Company)
and the systems distribution business of Star Management Services, Inc. (SMS)
and adjust such information to give effect to the acquisition of the systems
distribution business of SMS.
The pro forma condensed consolidated statements of operations for the
year ended December 31, 1996 and the nine months ended September 30, 1997 assume
that the acquisition of SMS occurred on January 1, 1996.
The pro forma information is not necessarily indicative of the results
which would actually have occurred had the transactions been in effect on the
dates and for the periods indicated or which may result in the future. This pro
forma information should be read in conjunction with the notes thereto and the
historical financial information.
-1-
<PAGE>
<TABLE>
SAVOIR TECHNOLOGY GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(in thousands, except per share data)
(unaudited)
<CAPTION>
Historical
------------------------------------
Pro Forma Pro Forma
Savoir SMS Adjustments Combined
--------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net sales................................ $ 131,697 $ 76,495 $ -- $ 208,192
Cost of goods sold....................... 114,389 65,226 -- 179,615
--------------- ----------------- --------------
Gross profit............................. 17,308 11,269 -- 28,577
Selling, general and administrative
expenses............................. 14,123 8,374 2,624 (1) 21,809
(3,312) (2)
--------------- ---------------- ----------------
Operating income......................... 3,185 2,895 688 6,768
Interest expense......................... 978 81 4,995 (3) 6,054
Other (income) expense................... (407) -- -- (407)
--------------- ----------------- ---------------- --------------
Income before income taxes............... 2,614 2,814 (4,307) 1,121
Provision for income taxes............... 276 963 (791) (4) 448
--------------- ----------------- ---------------- --------------
Net income............................... $ 2,338 $ 1,851 $ (3,516) $ 673
=============== ================= ================ ==============
Net income per share..................... $ 0.50 $ 0.13
=============== ==============
Number of shares used in per share
calculation.......................... 4,663 -- 460 (5) 5,123
=============== ================= ================ ==============
</TABLE>
-2-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
Note A - Acquisition:
On September 30, 1997, Savoir Technology Group, Inc. (formerly Western
Micro Technology, Inc.) (the Company) acquired all of the capital stock of Star
Management Services, Inc. (SMS) for an aggregate of $42,149,535 in cash and
460,000 shares of the Company's common stock. Additional cash payments of
$3,675,000 are to be paid on the first and second anniversaries of the closing.
In addition, the selling stockholders can earn up to an additional $5,000,000 in
cash payments based upon attainment of certain performance goals. SMS is a
holding company for a family of companies including Star Data Systems, Inc. dba
Sirius Computer Solutions (Sirius), a value-added distributor for high
technology mid-range solutions in the IBM AS/400 and RS/6000 systems market.
Sirius also sells systems directly to end-user customers as an industry
remarketer. Prior to the closing of the SMS acquisition, SMS completed a
split-off of the Sirius end-user business as a separate unaffiliated company.
Upon acquiring SMS, the distribution arm was renamed Business Partner Solutions
(BPS). BPS became a wholly owned subsidiary of the company.
Note B - Pro Forma Periods and Entities:
For the purposes of the pro forma combined data, SMS's financial data
for its fiscal year ended October 31, 1996 and its nine months ended July 31,
1997 have been combined with the Company's financial data for the fiscal year
ended December 31, 1996 and the nine months ended September 30, 1997. The pro
forma amounts do not include pro forma adjustments for sales that would have
occurred between the distribution business of SMS and the end-user business if
the split-off of the end-user business had occurred at the beginning of each
period presented. Including these sales amounts, pro forma combined net sales
would have been approximately $219,000,000 and $247,000,000 for the nine months
ended September 30, 1997 and year ended December 31, 1996, respectively, pro
forma combined net income would have been $867,000 and $ 1,700,000, respectively
and pro forma combined net income per share would have been $0.15 and $0.33,
respectively.
Note C - Pro Forma Adjustments:
(1) Represents amortization of goodwill and other intangibles associated
with the SMS acquisition over a 20 year amortization period.
(2) Represents reduction in SMS's executive compensation, management
bonuses and other costs to reflect the SMS acquisition.
(3) Represents increase in interest expense as a result of the placement of
$15,700,000 of subordinated debt and a $10,000,000 senior secured note
to finance the SMS acquisi-
-3-
<PAGE>
tion, and $7,350,000 in notes issued to the selling SMS stockholders as
part of the SMS transaction.
(4) Represents tax adjustment to reflect 40% overall income tax rate
applicable to pro forma results.
(5) Represents issuance of restricted common stock as consideration in SMS
acquisition.
-4-
<PAGE>
<TABLE>
SAVOIR TECHNOLOGY GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Historical
------------------------------------
Pro Forma Pro Forma
Savoir SMS Adjustments Combined
--------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net sales................................ $ 121,975 $ 69,904 $ -- $ 191,879
Cost of goods sold....................... 102,571 61,078 -- 163,649
--------------- ----------------- --------------
Gross profit............................. 19,404 8,826 -- 28,230
Selling, general and administrative
expenses................................. 16,205 6,230 1,968 (1) 23,413
(990) (2)
---------------- ----------------- ----------------
Operating income......................... 3,199 2,596 (978) 4,817
Interest expense......................... 1,532 -- 2,923 (3) 4,455
Other (income) expense................... (362) -- -- (362)
--------------- ----------------- ---------------- --------------
Income before income taxes............... 2,029 2,596 (3,901) 724
Provision for income taxes............... 312 -- (22) (4) 290
--------------- ----------------- ---------------- --------------
Net income............................... $ 1,717 $ 2,596 $ (3,879) $ 434
=============== ================= ================ ==============
Net income per share..................... $ 0.33 $ 0.08
=============== ==============
Number of shares used in per share
calculation.............................. 5,212 -- 460 (5) 5,672
=============== ================= ================ ==============
</TABLE>
-5-
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(1) Represents amortization of goodwill and other intangibles associated
with the SMS acquisition over a 20 year amortization period.
(2) Represents reduction in SMS's executive compensation, management
bonuses and other costs to reflect the SMS acquisition.
(3) Represents increase in interest expense as a result of the placement of
$15,700,000 of subordinated debt and a $10,000,000 senior secured note
to finance the SMS acquisition, and $7,350,000 in notes issued to the
selling SMS stockholders as part of the SMS transaction.
(4) Represents tax adjustment to reflect 40% overall income tax rate
applicable to pro forma results.
(5) Represents issuance of restricted common stock as consideration in SMS
acquisition.
-6-
