UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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. 0-11560
-------
WESTERN MICRO TECHNOLOGY, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2414428
------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
254 E. Hacienda Avenue, Campbell, CA
----------------------------------------
(Address of principal executive offices)
95008
----------
(Zip Code)
(408) 379-0177
-------------------------------
(Registrant's telephone number,
including area code)
N/A
-----
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 1, 1997
----- -----------------------------
Common Shares, without par value 4,825,776
1 of 18
<PAGE>
WESTERN MICRO TECHNOLOGY, INC. AND SUBSIDIARY
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 1997 and 1996 3
Consolidated Balance Sheets at June 30, 1997 and December 31, 1996 4
Consolidated Statements of Cash Flows for the Six Months Ended June
30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II - OTHER INFORMATION
Other Information 16
Signatures 17
Index to Exhibits 18
When used in this Report, the words "estimate," "project," "intend" and
"expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially. For a discussion of certain such
risks, see "Factors That May Affect Future Results" on page . Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release updates or revisions to these statements.
2 of 20
<PAGE>
<TABLE>
WESTERN MICRO TECHNOLOGY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales $39,886 $32,365 $75,836 $59,981
Cost of goods sold 33,293 28,459 63,274 52,495
------- ------- ------- -------
Gross profit 6,593 3,906 12,562 7,486
------- ------- ------- -------
Gross profit as % of sales 16.53% 12.07% 16.56% 12.48%
Selling, general and
administrative expenses 5,709 3,269 10,603 6,260
------- ------- ------- -------
Operating income 884 637 1,959 1,226
Interest expense 496 197 928 434
Other income 140 106 231 159
------- ------- ------- -------
Income before income taxes 528 546 1,262 951
Provision for income taxes 121 60 312 94
------- ------- ------- -------
Net income $ 407 $ 486 $ 950 $ 857
======= ======= ======= =======
Net income per common share $ 0.08 $ 0.11 $ 0.19 $ 0.19
======= ======= ======= =======
Number of shares used in per
share calculation 5,240 4,529 5,106 4,485
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
3 of 18
<PAGE>
<TABLE>
WESTERN MICRO TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
--------- --------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 182 $ 384
Trade accounts receivable, net of allowance for
doubtful accounts of $302 at June 30, 1997 and
$411 at December 31, 1996 34,391 25,943
Inventories 19,542 26,142
Other current assets 3,576 2,254
-------- --------
Total current assets 57,691 54,723
Property and equipment, net 3,690 3,276
Goodwill, net of accumulated amortization 7,645 4,937
Other assets 381 340
-------- --------
$ 69,407 $ 63,276
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 23,367 $ 11,277
Current portion of capital lease obligations 135 58
Accounts payable 23,863 33,956
Accrued expenses 2,329 1,984
-------- --------
Total current liabilities 49,694 47,275
Capital lease obligations, less current portion 478 53
Other 184 234
Commitments and contingencies
Shareholders' Equity:
Preferred Stock, no par value, 10,000,000 shares
authorized; none issued and outstanding
Common Stock, no par value, 10,000,000 shares
authorized; issued and outstanding: 4,812,095 at
June 30, 1997 and 4,488,131 at December 31, 1996 20,346 17,959
Accumulated deficit (1,295) (2,245)
-------- --------
Total shareholders' equity 19,051 15,714
-------- --------
$ 69,407 $ 63,276
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
4 of 18
<PAGE>
<TABLE>
WESTERN MICRO TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<CAPTION>
For the Six Months Ended
June 30,
----------------------
1997 1996
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 950 $ 857
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 749 445
Gain on sale of equipment (22)
Provision for doubtful accounts receivable 310
Changes in assets and liabilities:
Accounts receivable (8,364) (5,265)
Inventories 6,600 888
Other current assets (1,263) 698
Other assets (351) 7
Accounts payable (10,310) 2,847
Accrued expenses and other 278 (127)
-------- --------
Net cash (used in) provided by operating activities (11,401) 328
-------- --------
Cash flows from investing activities:
Acquisition of business, net of cash acquired 573 (662)
Proceeds from sale of equipment 22
Investment in QIV (100)
Acquisition of property and equipment (803) (1,331)
-------- --------
Net cash used in investing activities (330) (1,971)
-------- --------
Cash flows from financing activities:
Net proceeds from short-term borrowings 10,890 1,049
Payments on lease obligations (105) (91)
Proceeds from exercise of stock options 67 218
Proceeds from employee stock purchase plan 120
Proceeds from equipment loan 557
-------- --------
Net cash provided by financing activities 11,529 1,176
Net decrease in cash (202) (467)
Cash -- beginning of period 384 546
-------- --------
Cash -- end of period $ 182 $ 79
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
5 of 18
<PAGE>
WESTERN MICRO TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
Note 1: The unaudited consolidated financial statements, which include
the accounts of Western Micro Technology, Inc. and its subsidiary
(the "Company"), have been prepared in accordance with the
instructions to Form 10-Q and do not include all information and
footnotes necessary to comply with generally accepted accounting
principles. In the opinion of management, all normal recurring
adjustments considered necessary for a fair presentation have been
included. The consolidated statements of operations for the six
months ended June 30, 1997 are not necessarily indicative of the
results to be expected for a full year or for any other period. It
is suggested that these financial statements be read in conjunction
with the financial statements and the notes thereto included in the
Company's latest audited financial statements for the year ended
December 31, 1996.
Note 2: In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share," which specifies the computation,
presentation and disclosure requirements for earnings per share.
SFAS 128 supersedes Accounting Principles Board Opinion No. 15 and
is effective for financial statements issued for periods ending
after December 15, 1997. SFAS 128 requires restatement of all
prior-period earnings per share data presented after the effective
date. SFAS 128 will not have a material impact on the Company's
financial position, results of operations or cash flows.
Note 3: In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
REPORTING COMPREHENSIVE INCOME. This statement establishes
requirements for disclosure of comprehensive income and becomes
effective for the Company for fiscal years beginning after December
15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all
changes in stockholders' equity except those resulting from
investments or contributions by stockholders. The Company is
evaluating alternative formats for presenting this information, but
does not expect this pronouncement to materially impact the
Company's results of operations.
Note 4: In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (SFAS 131),
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. This statement establishes standards for disclosure
about operating segments in annual financial statements and
selected information in interim financial reports. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. This statement
supersedes Statement of Financial Accounting Standards No. 14,
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. The new
standard becomes effective for fiscal years beginning after
December 15, 1997, and requires that comparative information from
earlier years be restated to conform to the requirements of this
standard. The Company is evaluating the requirements of SFAS 131
and the effects, if any, on the Company's current reporting and
disclosures.
Note 5: The Company has available a $35,000,000 line of credit with a
financial institution that bears interest at the financial
institution's prime lending rate (8.50% as of June 30, 1997) plus
1.875%. Borrowings under the line of credit are based on eligible
accounts receivable and inventory, as defined, and are
collateralized by substantially all assets of the Company. The
facility is renewable annually and contains restrictive covenants
which include the maintenance of minimum revenue, profit and
tangible net worth ratios, as defined. The Company was not in
compliance with the tangible net worth covenant at June 30, 1997.
The financial institution granted a waiver as of June 30, 1997 for
the specific violation. Borrowings under this line of credit were
approximately $22,500,000 at June 30,
6 of 18
<PAGE>
1997. Based on eligible assets, as of June 30, 1997, the Company
had borrowings available of approximately $3,900,000.
Note 6: The December 31, 1996 balance sheet was derived from audited
financial statements, but does not include all disclosures required
by generally accepted accounting principles.
Note 7: Revenue Recognition and Accounts Receivable: the Company records
revenue, net of allowances for estimated returns, at the time of
product shipment. To reduce credit risk, the Company performs
ongoing credit evaluations and has credit insurance.
Note 8: Inventories, consisting primarily of purchased product held for
resale, are stated at the lower of cost (first-in, first-out) or
net realizable value.
Note 9: Supplemental Cash Flow Information: Cash paid for interest in
the six-month periods ended June 30, 1997 and 1996 was $852,000 and
$412,000, respectively.
Note 10: On March 17, 1997, the Company acquired all of the common stock
of Target Solutions, Inc. ("TSI"), a privately held company, for
approximately $2,200,000, paid in common stock of the Company.
Additional consideration can be earned by TSI by meeting certain
defined gross profit targets through fiscal year 2000. The
acquisition has been accounted for as a purchase with the result
that TSI operations are included in the Company's financial
statements from the date of purchase. In connection with the
acquisition, the Company recorded approximately $2,600,000 of
goodwill and other intangible assets. The fair value of assets
acquired from TSI were approximately $1,141,000 and liabilities
assumed were approximately $1,484,000. For the year ended December
31, 1996, TSI had unaudited revenues of approximately $15,000,000
with net income of approximately $200,000.
Note 11: On June 3, 1997, the Company entered into a Mentor-Protege
Agreement with Q.I.V. Systems, Inc. ("QIV"), a Texas-based reseller
of mid-range systems and a participant in the Minority Small
Business and Capital Ownership Development Program under the Small
Business Act. In connection therewith, on June 4, 1997 the Company
acquired QIV common stock equal to a 9.99% equity interest in QIV
for a purchase price of $500,000 ($100,000 of the purchase price
was paid in June of 1997 and the balance was paid in July of 1997).
In addition, the Company and QIV entered into an Industry
Remarketer Affiliate ("IRA") Agreement pursuant to which QIV was
appointed an IRA to sell to end users certain IBM systems it
acquires exclusively from the Company and to sell to end users
other computer products and services acquired from the Company.
Note 12: On June 4, 1997, the Company signed a definitive agreement (the
"Star Agreement") to acquire all of the capital stock of Star
Management Services in exchange for an aggregate of $43.4 million
in cash and 555,556 shares of the Company's Common Stock. The $43.4
million cash consideration is to be paid in three installments,
with $37.0 million to be paid at closing and two subsequent
payments of $3.3 and $3.1 million to be made on the first and
second anniversaries of the closing, respectively. The Star
Agreement also contains an earn-out provision which allows the
selling stockholders to earn up to an additional $5 million in cash
based upon attainment of certain net sales targets. It is currently
contemplated that the Star Agreement will be accounted for as a
purchase. The transaction, subject to financing, is expected to
close at the end of August 1997. Star Management Services is a
holding company for a family of companies including Star Data
Systems, Inc. dba Sirius Computer Solutions ("Sirius"), a
distributor of IBM mid-range systems. Sirius also sells IBM systems
to end-user customers. The Star Agreement contemplates that the
end-user business will be spun off from Star Management Services
prior to the closing, and therefore will not be acquired by the
Company. For the year ended October 31, 1996, the distribution
segment of Sirius had revenues of approximately $76,495,000 and
income from operations of approximately $5,500,000.
Note 13: Net income per share is computed using the weighted average
number of common and common equivalent shares (when dilutive)
outstanding during each period.
7 of 18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT EVENTS
On March 17, 1997, the Company acquired all of the common stock of
Target Solutions, Inc. ("TSI"), a privately held company, for approximately
$2,200,000, paid in common stock of the Company. Additional consideration can be
earned by TSI by meeting certain defined gross profit targets through fiscal
year 2000. The acquisition has been accounted for as a purchase with the result
that TSI operations are included in the Company's financial statements from the
date of purchase. In connection with the acquisition, the Company recorded
approximately $2,600,000 of goodwill and other intangible assets. The fair value
of assets acquired from TSI were approximately $1,141,000 and liabilities
assumed were approximately $1,484,000. For the year ended December 31, 1996, TSI
had unaudited revenues of approximately $15,000,000 with net income of
approximately $200,000.
On June 3, 1997, the Company entered into a Mentor-Protege Agreement
with Q.I.V. Systems, Inc. ("QIV"), a Texas-based reseller of mid-range systems
and a participant in the Minority Small Business and Capital Ownership
Development Program under the Small Business Act. In connection therewith, on
June 4, 1997 the Company acquired QIV common stock equal to a 9.99% equity
interest in QIV for a purchase price of $500,000 ($100,000 of the purchase price
was paid in June of 1997 and the balance was paid in July of 1997). In addition,
the Company and QIV entered into an Industry Remarketer Affiliate ("IRA")
Agreement pursuant to which QIV was appointed an IRA to sell to end users
certain IBM systems it acquires exclusively from the Company and to sell to end
users other computer products and services acquired from the Company.
On June 4, 1997, the Company signed a definitive agreement (the "Star
Agreement") to acquire all of the capital stock of Star Management Services in
exchange for an aggregate of $43.4 million in cash and 555,556 shares of the
Company's Common Stock. The $43.4 million cash consideration is to be paid in
three installments, with $37.0 million to be paid at closing and two subsequent
payments of $3.3 and $3.1 million to be made on the first and second
anniversaries of the closing, respectively. The Star Agreement also contains an
earn-out provision which allows the selling stockholders to earn up to an
additional $5 million in cash based upon attainment of certain net sales
targets. It is currently contemplated that the Star Agreement will be accounted
for as a purchase. The transaction, subject to financing, is expected to close
at the end of August 1997. Star Management Services is a holding company for a
family of companies including Star Data Systems, Inc. dba Sirius Computer
Solutions ("Sirius"), a distributor of IBM mid-range systems. Sirius also sells
IBM systems to end-user customers. The Star Agreement contemplates that the
end-user business will be spun off from Star Management Services prior to the
closing, and therefore will not be acquired by the Company. For the year ended
October 31, 1996, the distribution segment of Sirius had revenues of
approximately $76,495,000 and income from operations of approximately
$5,500,000.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net sales for the three months ended June 30, 1997 of $39,886,000
were 23% higher than the net sales of $32,365,000 for the corresponding period
in 1996. Sales increased due to the expansion of the Company's mid-range
computer systems distribution business and acquisitions. Gross profit as a
percentage of sales for the three months ended June 30, 1997 was 16.53% compared
to 12.07% for the comparable quarterly period one year ago. The increase in the
gross profit percentage in 1997 is a result of a shift in the relative mix of
higher profit products being sold and additional value-added and consulting
services revenue resulting from additional sales derived from the recent
acquisitions of Star Technologies, Inc., International Data Products LLC and
Target Solutions, Inc.
Selling, general and administrative expense increased 75% in the
three months ended June 30, 1997 from the same period a year ago due to
acquisitions, necessary personnel increases as a result of higher systems sales,
higher depreciation costs incurred as a result of additions to the Company's
infrastructure, higher amortization expense as a result of increased goodwill
related to acquisitions and higher lease expense as a result of the
8 of 18
<PAGE>
Company opening a new sales and integration center in Irvine, California and a
new distribution and integration center in Fremont, California.
Interest expense increased 152% in the three months ended June 30,
1997 versus the same period in 1996 due to an overall increase in line-of-credit
borrowings. The increased borrowings were necessary in order to fund
acquisitions, infrastructure additions, expanded operations and overall Company
growth.
The Company's effective tax rate is 23% versus the statutory rate of
34% due primarily to the utilization of net operating loss carryforwards.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net sales for the six months ended June 30, 1997 of $75,836,000 were
26% higher than the net sales of $59,981,000 for the corresponding period in
1996. Sales increased due to the expansion of the Company's mid-range computer
systems distribution business and acquisitions. Gross profit as a percentage of
sales for the six months ended June 30, 1997 was 16.56% compared to 12.48% for
the comparable quarterly period one year ago. The increase in the gross profit
percentage in 1997 is a result of a shift in the relative mix of higher profit
products being sold and additional value-added and consulting services revenue
resulting from additional sales derived from the recent acquisitions of Star
Technologies, Inc., International Data Products LLC and Target Solutions, Inc.
Selling, general and administrative expense increased 69% in the six
months ended June 30, 1997 from the same period a year ago due to increased
labor costs, acquisitions, necessary personnel increases as a result of higher
systems sales, higher depreciation costs incurred as a result of additions to
the Company's infrastructure and higher amortization expense as a result of
increased goodwill related to acquisitions.
Interest expense increased 114% in the six months ended June 30,
1997 versus the same period in 1996 due to an overall increase in line-of-credit
borrowings. The increased borrowings were necessary in order to fund
acquisitions, infrastructure additions, expanded operations and overall Company
growth.
The Company's effective tax rate is 25% versus the statutory rate of
34% due primarily to the utilization of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the six months ended
June 30, 1997 totaled $11,401,000 compared to the net cash provided by operating
activities of $328,000 for the six months ended June 30, 1996.
The increase in the accounts receivable of $8,364,000 was primarily
due to a significant number of sales occurring during the last two weeks of the
quarter. This was partially offset by a decrease in inventory of $6,600,000 as a
result of increased emphasis on inventory management. A decrease in accounts
payable of $10,310,000 as a result of the payment of year end purchases
accounted for the remainder of the net cash used in operating activities.
Net cash used in investing activities totaled $330,000 for the six
months ended June 30, 1997 compared to $1,971,000 for the six months ended June
30, 1996. The investing activities for 1997 consisted of the TSI purchase, the
QIV investment and continuing leasehold and computer hardware and software
investments made at the Company's headquarters and sales office sites.
The Company has available a $35,000,000 line of credit with a
financial institution that bears interest at the financial institution's prime
lending rate (8.50% as of June 30, 1997) plus 1.875%. Borrowings under the line
of credit are based on eligible accounts receivable and inventory, as defined,
and are collateralized by substantially all assets of the Company. The facility
is renewable annually and contains restrictive covenants which include the
maintenance of minimum revenue, profit and tangible net worth ratios, as
defined. The Company was not in compliance with the tangible net worth covenant
at June 30, 1997. The financial institution granted a waiver as
9 of 18
<PAGE>
of June 30, 1997 for the specific violation. Borrowings under this line of
credit were approximately $22,500,000 at June 30, 1997. Based on eligible
assets, as of June 30, 1997, the Company had borrowings available of
approximately $3,900,000.
The Company has required substantial working capital to finance
accounts receivable, inventories and capital expenditures and has financed its
working capital requirements, capital expenditures and acquisitions primarily
through bank borrowings and cash generated from operations. The Company believes
that its existing cash and available bank borrowings are sufficient to fund the
Company's operations through the end of 1997. The Company is actively
considering other alternatives for raising additional cash including public
equity, private equity, or appropriate alternative debt financing. There can be
no assurance that the Company will be able to obtain additional financing on
acceptable terms or at sufficient levels.
FACTORS THAT MAY AFFECT FUTURE RESULTS
UNCERTAINTY OF COMPLETING STAR ACQUISITION; BREAK-UP FEE. The Company
and Star Management Services, Inc. and its stockholders have entered into a
stock purchase agreement (the "Star Agreement") whereby the Company will acquire
Star (the "Star Acquisition"), with the expectation that the Star Acquisition
will be completed in August 1997. The respective obligations of the Company and
Star Management Services to consummate the Star Acquisition, however, are
subject to the satisfaction of various conditions set forth in the Star
Agreement, including, among other things: (i) the Company obtaining an aggregate
of at least $25 million of additional loan or other debt financing pursuant to
loan terms that do not require repayment of principal during the first two years
of the loan (the "Loan Financing"); (ii) the Company obtaining the consent of
IBM Credit Corporation ("ICC") to the Loan Financing or the refinancing by the
Company of its existing indebtedness to ICC; (iii) completion of the spin-off by
Sirius Computers of the Sirius End-user Business; (iv) receipt of all applicable
regulatory approvals; (v) the absence of any order prohibiting consummation of
the Star Acquisition; (vi) the representations and warranties of the Company and
Star Management Services set forth in the Star Agreement remaining true and
correct in all material respects as of the closing of the Star Acquisition;
(vii) the Company and Star Management Services having performed in all material
respects each of their respective obligations required to be performed at or
prior to the closing of the Star Acquisition; and (viii) the satisfaction or
waiver of certain additional conditions. The Company believes that unless it
raises a minimum of $15 million in private equity or debt, it will be unable to
consummate the Star Acquisition. Further, although the Company has engaged a
placement agent to arrange for placement of additional loan or debt financing, a
contemplated over advance facility, and subordinated debt with qualified lenders
in order to meet the requirements for the Loan Financing, there can be no
assurance that the Company will be able to obtain the Loan Financing on
commercially reasonable terms or at all. In addition, there can be no assurance
that the Company and Star Management Services will be able to satisfy in a
timely manner any of the other conditions precedent to closing the Star
Acquisition.
The Star Agreement may be terminated at any time by mutual agreement
of the parties. The Star Agreement may also be terminated by either party if (i)
there is a material breach of the Star Agreement by the other party which has
not been cured or waived prior to the closing date thereunder, or (ii) the Star
Acquisition has not been consummated on or before August 31, 1997 through no
fault of either party. In the event that the Star Agreement is terminated for
any reason or if the parties fail to satisfy or waive all of the conditions set
forth therein, the Star Acquisition will not be completed and the Company will
not obtain the growth in revenues, operating leverage and cross-selling
opportunities anticipated to result from the Company's business combination with
Star. In addition, the failure of the Company to acquire Star will substantially
increase the Company's need to pursue other acquisitions as a means of achieving
growth and preserving its ability to compete effectively in the marketplace, may
jeopardize the Company's ability to maintain most favorable volume discount
status with IBM, and may otherwise materially adversely affect the Company's
business, financial condition and results of operations. See "Industry
Consolidation; Ability to Maintain Most Favorable Volume Discount Status,"
"Uncertainty of Future Acquisitions and Expansion" and "Substantial Competition"
below.
In the event that the Star Agreement is terminated by any party as a
result of the breach of or failure to satisfy a condition to closing under the
Star Agreement, the party which has committed such breach or failed to satisfy
its conditions to closing will be required to pay the other party a break-up fee
of $1,000,000 (in the case
10 of 18
<PAGE>
of a breach or failure by the Company; provided, however, that the break-up fee
will be $500,000 if the Company is unable to close because the stockholders of
Star would not waive the condition with respect to the Company's obtaining
financing pursuant to terms that do not require repayment of principal during
the first 24 months after closing) or $500,000 (in the case of a breach or
failure by Star). Among other things, the Company's inability to obtain the Loan
Financing in a timely manner would result, subject to certain exceptions, in the
Company's obligation to pay such a break-up fee.
The Star Agreement provided that the Star Acquisition was to close
on or before July 31, 1997. However, due to the Company's desire to obtain
optimal financing for the Star Acquisition, the Company requested that the
stockholders of Star agree to an amendment of the Star Agreement, to provide
that the Star Acquisition shall close on or before August 31, 1997. This
amendment was granted by letter of July 22, 1997 and, among other conditions,
required the Company to pay $500,000 in additional consideration for this 30-day
extension ($250,000 of which payment may be credited against any break-up fee
due from the Company if the transaction fails to close).
INTEGRATION RISKS RELATING TO STAR ACQUISITION. The Company's
ability to achieve the anticipated benefits of the Star Acquisition will depend
in part upon whether the integration of the businesses of the Company and Star
is accomplished in an efficient and effective manner, and there can be no
assurance that this will occur. The combination of the two businesses will
require, among other things, integration of the Company's and Star's respective
management and sales personnel, coordination of their sales and marketing
efforts, conversion of Star's computer system (including inventory, order entry
and financial reporting) to the Company's system, and integration of the
businesses' products and physical facilities. Among other things, following the
Star Acquisition, substantially all of the Company's sales and marketing
operations for IBM products will be relocated to Star's current facilities in
San Antonio, Texas and will thereafter be managed primarily by former Star
personnel. There can be no assurance that such coordination and integration will
be accomplished smoothly or successfully. The difficulties of such integration
may be increased by the necessity of coordinating geographically separated
organizations. The integration of certain operations following the Star
Acquisition will require the dedication of management resources which may
temporarily divert attention away from the day-to-day business of the combined
company. The inability of Management to integrate the operations of the two
businesses successfully could have a material adverse effect on the business and
the results of operations of the Company. In addition, as commonly occurs with
mergers and acquisitions of companies in the technology sector, during the
pre-acquisition and integration phases, aggressive competitors may undertake to
attract customers and to recruit key employees through various incentives. There
can be no assurance that the announcement of the Star Acquisition or the
consummation thereof will not materially adversely affect the selling and buying
patterns of manufacturers and present and potential customers of the Company and
Star Management Services.
INDUSTRY CONSOLIDATION; ABILITY TO MAINTAIN MOST FAVORABLE VOLUME
DISCOUNT STATUS. The systems distribution industry is currently experiencing a
consolidation of distributors, which has resulted in the mergers of certain of
the Company's major competitors. To the extent that any increased sales volumes
resulting from these mergers relate to the products of IBM, these mergers may
result in raising the sales volume threshold required to maintain most favorable
volume discount status with IBM. In furtherance of its business strategy, and in
order to maintain most favorable volume discount status with IBM, the Company
has recently completed several acquisitions and is actively engaged in an
ongoing search for additional acquisitions. Management believes completion of
the Star Acquisition is critical for the Company to achieve the increased sales
volumes necessary to protect the Company from any immediate threat to its
maintenance of most favorable volume discount status with IBM. Following
consummation of the Star Acquisition, the Company intends to continue to seek
additional acquisitions of service-oriented and other businesses that are
complementary to the Company's business in order to strengthen the Company's
business and market position. The Company is also assessing equity investments
in related businesses for similar purposes. However, there can be no assurance
that the Company will be successful in completing the Star Acquisition or any
other future acquisitions or in making any such equity investments. The failure
by the Company to complete successfully the Star Acquisition or other additional
acquisitions, or to otherwise increase its sales volume through internal growth,
could result in the Company's inability to maintain most favorable volume
discount status with IBM, which would, in turn, have a material adverse effect
on the Company's relationship with IBM, its business, financial condition and
results of operations.
11 of 18
<PAGE>
SUPPLIER CONCENTRATION. During the year ended December 31, 1996 and
the six months ended June 30, 1997, approximately 50% of the Company's net sales
was generated from the sale of products purchased from IBM. On a pro forma basis
giving effect to the Star Acquisition, approximately 70% of the Company's net
sales was generated from the sale of IBM products during these periods. The
Company's business, financial condition and results of operations are dependent
upon the Company's relationship with IBM and upon the market for IBM products.
Any disruption or change in the Company's relationship with IBM or in the manner
in which IBM distributes its products, the failure of IBM to develop new
products which are accepted by the Company's customers or the failure by the
Company to maintain sufficient sales volumes of certain IBM products to maintain
most favorable volume discount status, would have a material adverse effect upon
the Company's business, financial condition and results of operations.
The balance of the Company's net sales is derived from products of a
relatively limited number of other suppliers, with approximately 25% derived
from systems products manufactured by Data General Corporation, NCR Corporation,
and Unisys Corporation. On a pro forma basis giving effect to the Star
Acquisition, approximately 15% of the Company's net sales would be derived from
systems products manufactured by these three companies. The loss of a major
supplier or the interruption of certain supplier relationships, the inability of
any of these suppliers to successfully develop, manufacture or sell new
products, and any decrease in the sales or market acceptance of these suppliers'
products, could materially and adversely affect the Company's business,
financial condition and results of operations.
UNCERTAINTY OF FUTURE ACQUISITIONS AND EXPANSION. Acquisitions have
played an important role in the implementation of the Company's business
strategy and the Company believes that additional acquisitions are important to
the Company's growth, development and continued ability to compete effectively
in the marketplace. Prior acquisitions and investments, and the Company's
current efforts to complete the Star Acquisition, have placed substantial
demands on the Company's management and financial resources. The integration of
the acquired companies' operations have on occasion been slower, more complex
and more costly than originally anticipated. There can be no assurance that the
combined companies will realize the full cost savings or revenue enhancements
the Company expects to realize as a result of the recent acquisitions (or the
Star Acquisition) and the consolidation of certain of the operations of the
acquired companies (or of Star) or that such savings or enhancements will be
realized at the points in time currently anticipated. Furthermore, there can be
no assurance that any cost savings which are realized will not be offset by
increases in other expenses or operating losses. The Company will encounter
similar uncertainties and risks with respect to any future acquisitions and
investments it may make.
The Company evaluates potential acquisitions and investments on an
ongoing basis. No assurance can be given as to the Company's ability to compete
successfully at favorable prices for available acquisition or investment
candidates or to complete future acquisitions and investments, or as to the
financial effect on the Company of any acquired businesses or equity
investments. Future acquisitions and investments by the Company may involve
significant cash expenditures and may result in increased indebtedness and
interest and amortization expense and/or decreased operating income, any of
which could have a material adverse effect on the Company's future operating
results. If businesses are acquired through the issuance of equity securities,
the percentage ownership of the stockholders of the Company will be reduced and
stockholders may experience additional dilution. Should the Company be unable to
implement successfully its acquisition and investment strategy, its business,
financial condition and results of operations could be materially and adversely
affected.
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL. Since the sale of
its semiconductor business in July 1995, the Company has experienced significant
growth in the number of its employees and in the scope of its operating and
financial systems, resulting in increased responsibilities for the Company's
management. In addition, consummation of the Star Acquisition is expected to
increase the Company's employee base by approximately 140 persons presently
employed by Star. To manage future growth effectively, the Company will need to
continue to improve its operational, financial and management information
systems, procedures and controls, and expand, train, motivate, retain and manage
its employee base. There can be no assurance that the Company will be able to
manage its growth effectively, and failure to do so (with or without giving
effect to the Star Acquisition) could have a material adverse effect on the
Company's business, financial condition and results of operations.
12 of 18
<PAGE>
The Company's future success depends in part on the continued
service of its key sales, marketing and executive personnel, and its ability to
identify and hire additional personnel. Following the Star Acquisition, sales of
the Company's IBM product line will be managed primarily by personnel presently
employed by Star Management Services, and the Company's future success with
respect to such sales will depend on the continued service and competent
performance of such personnel. Competition for qualified sales, marketing and
executive personnel is intense and there can be no assurance that the Company
can retain and recruit adequate personnel to operate its business. The loss of
key personnel, with or without giving effect to the Star Acquisition, could have
a material adverse effect on the Company's business and operating results. The
Company does not maintain key man insurance on any of its employees.
SUBSTANTIAL COMPETITION. The Company competes with national,
regional, and local distributors such as Dickens Data Systems, Inc., Gates/Arrow
Commercial Systems, a division of Arrow Electronics, Inc., Hamilton Hall-Mark
Computer Products, a subsidiary of Avnet, Inc., Star Management Services, Inc.
(prior to the Star Acquisition), SupportNet, Inc. and, in some limited
circumstances, competes with its own vendors. The Company has experienced and
expects to continue to experience increased competition from current and
potential competitors, many of which have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base, than the Company. Accordingly, such
competitors or future competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than the
Company. Competitors which are larger than the Company may be able to obtain
pricing and terms from vendors that are more favorable than the pricing and
terms accorded to the Company. As a result, the Company may be at a disadvantage
when competing with these larger companies.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING; POTENTIAL
FUTURE DILUTION. The Company's operations to date have required substantial
amounts of capital and as a result the Company maintains a line of credit
secured by substantially all of the Company's assets. In order to pursue the
Company's expansion, acquisition and investment strategy, the Company will need
to obtain additional financing. In particular, the Company will need to obtain
the Loan Financing and other financing arrangements in order to complete the
Star Acquisition. In addition, depending upon the final terms and conditions of
the Loan Financing, the Company may be required to refinance its credit facility
with ICC with one or more alternate lenders, and there can be no assurance the
Company will be able to complete such refinancing on commercially reasonable
terms or at all. Although the Company believes it has sufficient funds, or
alternate sources of funds, to carry on its business as presently conducted
through 1997, the Company will need to raise additional amounts through public
or private debt and/or equity financings (including the Star Acquisition and
other possible acquisitions and investments). There can be no assurance that
additional financing of any type will be available on acceptable terms, or at
all and failure to obtain such financing, if necessary, could adversely affect
the Company's business, financial condition and results of operations.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE REQUIREMENTS. The Company has,
and upon closing of the Star Acquisition will continue to have, substantial
indebtedness. As of June 30, 1997, on a pro forma basis after giving effect to
the closing of the Star Acquisition, the Company would have had total
indebtedness, including current maturities, of $96.7 million.
The Company's high level of debt and debt service requirements will
have several important effects on its future operations, including the
following: (i) the Company will have significant cash requirements to service
debt, reducing funds available for operations and future business opportunities
and increasing the Company's vulnerability to adverse general economic and
industry conditions and competition; (ii) the Company's leveraged position will
increase its vulnerability to competitive pressures; (iii) the financial
covenants and other restrictions contained in loan agreements relating to the
Company's indebtedness will require the Company to meet certain financial tests
and will restrict its ability to borrow additional funds, to dispose of assets
or to pay cash dividends on, or repurchase any preferred or common stock; and
(iv) funds available for working capital, capital expenditures, acquisitions and
general corporate purposes will be limited. Any default under the documents
governing indebtedness of the Company could have a significant adverse effect on
the market value of the Company's stock.
13 of 18
<PAGE>
In addition, certain of the Company's competitors currently operate on a less
leveraged basis and may have greater operating and financing flexibility than
the Company.
FLUCTUATIONS IN OPERATING RESULTS. The Company's past operating
results have been, and its future operating results (with or without giving
effect to the Star Acquisition) will be, subject to fluctuations from quarter to
quarter and on an annual basis due to a variety of factors, including, without
limitation, the cost and effect of acquisitions, the addition or loss of a key
supplier or customer, price competition, changes in the mix of products sold
through distribution channels and in the mix of products purchased by OEMs, and
changes in the supply and demand for mid-range computer systems, peripheral
equipment, software and related services. Operating results (with or without
giving effect to the Star Acquisition) could also be adversely affected by
general economic and other conditions affecting the timing of customer orders
and capital spending, a downturn in the market for computers, and order
cancelations or rescheduling. In addition, a substantial portion of the
Company's (and, to a lesser extent, Star's) sales are made in the last few days
of a quarter. Accordingly, the Company's quarterly results of operations are
difficult to predict and delays in the closings of sales near the end of a
quarter could cause quarterly revenues to fall substantially short of
anticipated levels and, to a greater degree, adversely affect profitability. The
Company's future operating results (with or without giving effect to the Star
Acquisition) are expected to fluctuate as a result of these and other factors,
which could have a material adverse effect on the Company's business, operating
results and financial condition.
SEASONALITY. While the Company's business is not generally affected
by seasonal trends, its business (with or without giving effect to the Star
Acquisition) is influenced by trends affecting its suppliers and customers. For
example, the Company's largest vendor, IBM, sells approximately 40% of its
products in the last calendar quarter, which in the future could have an effect
on the Company's revenues from quarter to quarter. Due to the Company's recent
significant growth through acquisitions, and IBM's recent prominence as a
supplier to the Company, the Company has not yet experienced any material
seasonal variations in its operating results, but such seasonal variations may
occur in the future, and could have a material adverse effect (with or without
giving effect to the Star Acquisition) on the Company's business, operating
results and financial condition.
RAPID TECHNOLOGICAL CHANGES, PRICE REDUCTIONS AND INVENTORY RISK.
The market for products sold by the Company and by Star is extremely competitive
and is characterized by declining selling prices over the life of a particular
product and rapid technological changes. Since the Company acquires inventory in
advance of product shipments, and because the markets for the Company's products
are volatile and subject to rapid technological and price changes, there is a
risk that the Company will forecast incorrectly and stock excessive or
insufficient inventory of particular products. Although the Company has stock
rotation rights and price protection with certain vendors permitting it to
return discontinued products, or to receive price protection (should the vendor
reduce the price of product that is already in the Company's inventory) in the
form of cash refunds or credits for the purchase of additional product, if the
Company is forced to sell its inventory for less than its targeted or
traditional margins it could have a material adverse effect upon the Company's
financial condition and results of operations. The markets in which the Company
and Star compete currently are subject to intense price competition and the
Company expects additional price and product competition as other companies
enter these markets and new products and technologies are introduced. Increased
competition may result in further price reductions, reduced gross margins and
loss of market share, any of which could materially and adversely affect (with
or without giving effect to the Star Acquisition) the Company's business,
financial condition and results of operations.
CREDIT FACILITY AGREEMENT LIMITATIONS. The Company's credit facility
agreement with ICC is structured to provide, among other things, favorable
financing for the purchase of IBM products, and provides a limited amount of
additional financing to carry the inventory of third-party products. The Company
presently has no other facility for financing the purchase of products from
third parties. While the ICC facility is adequate for the Company's present
purchases of products of third-party vendors, if the Company increases the
purchase of such products (as it anticipates doing following the Star
Acquisition), it may need to obtain additional inventory financing, in which
case it will need to obtain a modification, waiver or replacement of its credit
facility agreement with ICC (which is presently secured by all of the assets of
the Company, including all inventory purchased from third-party vendors).
Moreover, in connection with the efforts to obtain the Loan Financing, the
Company may
14 of 18
<PAGE>
be required to refinance the ICC credit facility with one or more alternate
lenders. There can be no assurance that such additional or replacement financing
will be available to the Company when needed or on acceptable terms, or that ICC
will consent to modifying the current credit facility agreement in order to
allow such alternate financing. In addition, in the event the ICC credit
facility is refinanced in connection with completing the Star Acquisition, there
can be no assurance that any replacement financing obtained by the Company will
be on terms as favorable to the Company as the ICC facility with respect to the
purchase and carrying of inventory and other matters.
The Company's credit facility agreement with ICC also currently
requires that the Company obtain the consent of ICC prior to incurring any
additional indebtedness. The Company's credit facility with ICC is not
sufficient to provide the necessary funding for the Star Acquisition or other
future acquisitions contemplated by the Company's business plan. Accordingly,
the Company will need to pursue alternate sources of debt and/or equity
financing in order to provide the funds required by its business plan, and will
need to obtain the consent of ICC to the incurrence of any additional
indebtedness. In particular, the Company will require the consent of ICC to the
incurrence of the Loan Financing (or the ICC credit facility will need to be
refinanced) in order to complete the Star Acquisition. While the Company has no
reason to believe that ICC will withhold its consent to the Loan Financing or
other financing arrangements, there can be no assurance that the Company will
obtain such consent. Failure to obtain such consent and/or to obtain an
alternate credit facility which will allow the Company to incur additional
indebtedness in an amount sufficient to achieve the goals set forth in the
Company's business plan could have a material adverse effect upon the Company's
business, financial condition and results of operations.
EXTENSION OF CREDIT TO CUSTOMERS WITHOUT REQUIRING COLLATERAL. The
Company sells products to a broad geographic and demographic base of customers,
extends trade credit, and generally does not require supporting collateral. To
reduce credit risk, the Company performs ongoing credit evaluations of its
customers, maintains an allowance for doubtful accounts and has credit
insurance. Both historically and on a pro forma basis, no single customer
accounted for more than 10% of the outstanding accounts receivable balance at
December 31, 1996 and June 30, 1997. Should the Company's customers increase the
rate at which they default on payments due to the Company, and should the
Company be unable to collect such amounts, it could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
15 of 18
<PAGE>
PART II. OTHER INFORMATION
Item 1 Legal proceedings.
-----------------
None.
Item 2 Changes in Securities.
---------------------
None.
Item 3 Defaults on Senior Securities.
-----------------------------
None.
Item 4 Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5 Other Information.
-----------------
None.
Item 6 Exhibits and Reports on Form 8-K.
--------------------------------
A. Exhibits
11.1 Computation of Net Income Per Share
27 Financial Data Schedule
B. Reports on Form 8-K.
A Current Report on Form 8-K, filed with the Securities and Exchange
Commission (the "Commission"), on April 1, 1997, related to the
Registrant's acquisition of Target Solutions, Inc.
A Current Report on Form 8-K, filed with the Commission on June 5,
1997, as amended on Form 8-K/A Amendment No. 1, filed with the
Commission on June 19, 1997 and as amended on Form 8-K/A Amendment
No. 2, filed with the Commission on July 16, 1997, related to the
acquisition of the mid-range computer systems distribution business
of Star Management Services, Inc.
16 of 18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Registrant:
WESTERN MICRO TECHNOLOGY, INC.
Dated: August 14, 1997 By /s/ P. Scott Munro
--------------------------------------
P. Scott Munro
Chief Executive Officer and President
Dated: August 14, 1997 By /s/ James W. Dorst
--------------------------------------
James W. Dorst
Chief Financial Officer
17 of 18
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
-------
11.1 Computation of Net Income Per Share
27 Financial Data Schedule
18 of 18
EXHIBIT 11.1
<TABLE>
WESTERN MICRO TECHNOLOGY, INC. AND SUBSIDIARY
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------- ---------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding for the period 4,805 4,205 4,673 4,193
Dilutive effect of common equivalent
shares under the treasury stock method 391 324 407 250
------ ------ ------ ------
Average shares used for computing
primary net income per share 5,196 4,529 5,080 4,443
Adjustment for dilutive effect of
employee stock options at ending
market price 44 26 42
Average shares used for computing fully
diluted net income per share 5,240 4,529 5,106 4,485
====== ====== ====== ======
Net income $ 407 $ 486 $ 950 $ 857
====== ====== ====== ======
Net income per common share:
Primary net income per share $ 0.08 $ 0.11 $ 0.19 $ 0.19
====== ====== ====== ======
Fully diluted net income per share $ 0.08 $ 0.11 $ 0.19 $ 0.19
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAR-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 182
<SECURITIES> 0
<RECEIVABLES> 34,693
<ALLOWANCES> 302
<INVENTORY> 19,542
<CURRENT-ASSETS> 57,691
<PP&E> 6,475
<DEPRECIATION> 82,785
<TOTAL-ASSETS> 69,407
<CURRENT-LIABILITIES> 49,694
<BONDS> 0
0
0
<COMMON> 20,346
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 69,407
<SALES> 39,886
<TOTAL-REVENUES> 39,886
<CGS> 33,293
<TOTAL-COSTS> 6,593
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 496
<INCOME-PRETAX> 528
<INCOME-TAX> 121
<INCOME-CONTINUING> 407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 407
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
