<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SAVOIR TECHNOLOGY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-2414428
(STATE OR OTHER JURISDICTION OF IN-
CORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
254 EAST HACIENDA AVENUE
CAMPBELL, CALIFORNIA 95008
(408) 379-0177
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
P. SCOTT MUNRO
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER, PRESIDENT AND SECRETARY
SAVOIR TECHNOLOGY GROUP, INC.
254 EAST HACIENDA AVENUE
CAMPBELL, CALIFORNIA 95008
(408) 379-0177
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
COPIES TO:
<TABLE>
<S> <C>
JORGE DEL CALVO, ESQ. G. WILLIAM SPEER, ESQ.
KATHARINE A. MARTIN, ESQ. MARK A. LOEFFLER, ESQ.
DAVINA K. KAILE, ESQ. POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
PILLSBURY MADISON & SUTRO LLP 191 PEACHTREE STREET, NE
2550 HANOVER STREET ATLANTA, GEORGIA 30303
PALO ALTO, CALIFORNIA 94304 (404) 572-6600
(650) 233-4500
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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- -----------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par 4,025,000
value................. shares $11.53 $46,408,250 $13,692
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- -----------------------------------------------------------------------------------
</TABLE>
(1) Includes 525,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee based
on the average of the high and low prices of the Common Stock as reported
by The Nasdaq National Market on March 11, 1998 pursuant to Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 13, 1998
[SAVOIR LOGO APPEARS HERE]
3,500,000 SHARES
COMMON STOCK
-----------
All of the shares of Common Stock offered hereby are being offered by Savoir
Technology Group, Inc. (the "Company"). The Common Stock is quoted on The
Nasdaq National Market under the symbol "SVTG." On March 11, 1998, the closing
sale price of the Common Stock as reported on The Nasdaq National Market was
$11.50 per share. See "Price Range of Common Stock."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.................... $ $ $
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Total(3)..................... $ $ $
</TABLE>
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(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting estimated expenses of $450,000 payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 525,000 additional shares of Common Stock solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
-----------
The Common Stock is offered severally by the Underwriters named herein,
subject to prior sale, when, as, and if received and accepted by them, subject
to their right to reject orders, in whole or in part, and to certain other
conditions. It is expected that delivery of the certificates representing the
Common Stock will be made against payment therefor at the offices of The
Robinson-Humphrey Company, LLC, Atlanta, Georgia, on or about , 1998.
THE ROBINSON-HUMPHREY COMPANY
JEFFERIES & COMPANY, INC.
CLEARY GULL REILAND & MCDEVITT INC.
, 1998
<PAGE>
[INSIDE FRONT COVER OF PROSPECTUS]
[SAVIOR LOGO APPEARS HERE]
NATIONAL PRESENCE
[Map of the United States depicting locations of the Company's Corporate
Headquarters, Business Partner Solutions, Inc. Corporate Headquarters,
warehouse, distribution and integration centers, sales offices and sales,
marketing and technical support offices appears here.]
Legend
symbol - Corporate Headquarters
symbol - Business Partner Solutions, Inc. Corporate Headquarters
symbol - Warehouse, Distribution and Integration Centers
symbol - Sales Offices
symbol - Sales, Marketing and Technical Support Offices
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus, including
the information under "Risk Factors." Except as otherwise noted, all
information in this Prospectus assumes no exercise of the Underwriters' over-
allotment option.
THE COMPANY
Savoir Technology Group, Inc. (the "Company") is a value-added wholesale
distributor of commercial mid-range servers, peripheral equipment (including
wireless networking equipment, storage products, printers and terminals) and
software. Through its Mid-Range Systems Division, the Company primarily
distributes commercial mid-range servers and related products to value-added
resellers ("VARs") who generally incorporate commercial applications software
and sell integrated computer systems to end user customers. Through its
Computer and Peripherals Group ("CPG"), the Company integrates and configures
personal computers, workstations and departmental servers for original
equipment manufacturers ("OEMs"). The Company has a national presence served
through four warehouse, distribution and integration centers in the United
States.
The Company distributes commercial mid-range servers manufactured by
International Business Machines Corporation ("IBM"), Unisys Corporation
("Unisys"), NCR Corporation ("NCR") and Data General Corporation ("Data
General"). The Company believes that it is one of the top three distributors of
IBM's AS/400 and RS/6000 commercial mid-range servers. The Company was recently
named IBM's Distributor of the Year for the second half of 1997 and was
designated as one of IBM's Premier Business Partners, a distinction awarded
only to the top 2% of IBM's partners and affiliates. In addition to the
products it offers, the Company also provides a variety of value-added
services, including integration, technical support, logistical and inventory
management, marketing and financing, credit and leasing services.
The commercial mid-range server market encompasses servers typically priced
between $25,000 and $1.5 million with processing power sufficient to run entire
small- to medium-sized businesses and departments or divisions of large
businesses. According to Dataquest, the mid-range server market grew 12.8% to
$26.0 billion in 1996 from $23.1 billion in 1995, and is expected to grow at a
10.9% compound annual rate to $43.7 billion in 2001. Many computer
manufacturers faced with the rising cost of maintaining a direct sales force to
serve a large and diverse group of VARs and end user customers are relying more
upon wholesale distributors for an increasing percentage of their sales to
small- and medium-sized businesses. For example, IBM, a leading participant in
the commercial mid-range server market with an estimated 19% market share,
announced in early 1996 its intention to increase its sales through qualified
wholesale distributors by over 100%. In addition, certain manufacturers are
outsourcing to wholesale distributors certain support functions such as
integration, configuration, logistical and inventory management, technical
support and marketing. At the same time, the Company believes that shortened
product life cycles, the accelerated introduction of new products and
applications, the complex technical nature of the commercial mid-range server
market, limited direct purchasing power with manufacturers and manufacturers'
preference in dealing with a smaller number of well-capitalized wholesale
distributors have caused VARs to rely increasingly on these distributors for
inventory management, financing, technical support and other related functions.
The Company believes that the role of the value-added wholesale distributor
will become increasingly important as the VAR market for these products
continues to become fragmented.
Since December 1994, the Company has completed seven acquisitions and expects
to consummate the acquisition of Huntsville, Alabama-based MCBA Systems, Inc.
("MCBA") by March 31, 1998. Through acquisitions and internal growth, the
Company has expanded its products and services, increased its geographic market
coverage, strengthened its management and technical personnel and increased its
operating leverage. As a result, the Company's net sales increased from $106.5
million in 1995 to $237.9 million in 1997, representing compound annual growth
of 49.5%, while its operating income improved from a loss (excluding
restructuring charges) of $648,000 in 1995 to income of $6.8 million in 1997.
3
<PAGE>
The Company's objective is to improve upon its position as a leading value-
added wholesale distributor of commercial mid-range servers and to capitalize
on the continuing shift of sales by manufacturers of commercial mid-range
servers to the wholesale distribution channel. The following are the key
elements of the Company's business strategy: (i) strengthen and expand vendor
relationships; (ii) focus on mid-range commercial VARs and independent software
vendors ("ISVs"); (iii) pursue and effectively integrate strategic
acquisitions; (iv) increase sales of higher-margin, value-added services; and
(v) expand geographic market coverage.
PENDING ACQUISITION
On November 22, 1997, the Company entered into an Agreement and Plan of
Reorganization, with MCBA and its stockholders (the "MCBA Agreement"), whereby
MCBA will become a wholly owned subsidiary of the Company upon consummation of
the proposed acquisition (the "MCBA Acquisition"). All outstanding shares of
MCBA common stock (and all securities convertible into any capital stock of
MCBA) will be converted into an aggregate of 900,000 shares of the Company's
Common Stock on a pro rata basis. In addition, the MCBA Agreement contains an
earnout provision which allows the stockholders of MCBA to earn up to an
additional 1,500,000 shares of the Company's Common Stock based upon the
attainment of certain performance goals in calendar 1998 and 1999.
MCBA is a value-added wholesale distributor and reseller of IBM commercial
mid-range servers, including the AS/400 and RS/6000, and software. MCBA is also
one of four authorized distributors of IBM's S/390 mainframe systems. In
addition to the products it offers, MCBA provides network configuration and
technical support services to its customers. MCBA's revenue for the year ended
December 31, 1997 was $26.9 million. The proposed MCBA Acquisition, which is
expected to be consummated by March 31, 1998, is subject to various customary
closing conditions. There can be no assurance that the Company and MCBA will be
able to satisfy in a timely manner any or all of the conditions precedent to
closing the proposed MCBA Acquisition. In addition, the MCBA Agreement may be
terminated for various reasons or no reason, including, but not limited to,
termination by either party at will if the MCBA Acquisition has not been
consummated by March 31, 1998. The closing of the MCBA Acquisition is not
subject to the completion of this offering.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by the Company........... 3,500,000 shares
Common Stock to be Outstanding after the Of-
fering....................................... 8,989,258 shares(1)
Use of Proceeds............................... For repayment of a credit
advance, payments to certain
individuals in connection with
a prior acquisition, repayment
of subordinated debt,
repayment of indebtedness
under a credit facility,
general corporate purposes and
possible future acquisitions.
See "Use of Proceeds."
Nasdaq National Market Symbol................. SVTG
</TABLE>
- --------
(1) Based on 5,489,258 shares of Common Stock outstanding at March 11, 1998.
Does not include: (i) 1,564,135 shares of Common Stock subject to options
outstanding pursuant to the Company's Amended and Restated 1994 Stock
Option Plan (the "1994 Stock Option Plan") at a weighted average exercise
price of $8.27 per share; (ii) 1,733,375 shares of Common Stock issuable
upon exercise of outstanding warrants at a weighted average exercise price
of $9.06 per share; and (iii) 2,303,048 shares of Common Stock reserved for
issuance upon conversion of 2,242,500 outstanding shares of Series A
Preferred Stock, $0.01 par value (the "Series A Preferred Stock") at a
conversion ratio of 1.027 shares of Common Stock for every one share of
Series A Preferred Stock. Also excludes: (i) 406,760 shares of Common Stock
reserved for issuance pursuant to the 1994 Stock Option Plan; (ii) 110,601
shares of Common Stock reserved for issuance pursuant to the Company's 1995
Employee Stock Purchase Plan; (iii) up to 200,000 shares of Common Stock
issuable pursuant to certain earnout provisions granted by the Company in
connection with prior acquisitions; and (iv) 10 shares of Series B
Preferred Stock $0.01 par value (the "Series B Preferred Stock") which are
not convertible into shares of Common Stock. See "Capitalization,"
"Management--Stock Option Plan," "Description of Capital Stock--Common
Stock Warrants" and "--Preferred Stock" and Note 6 of Notes to Consolidated
Financial Statements.
RISK FACTORS
Purchasers of Common Stock in this offering should carefully consider the
risk factors set forth under the caption "Risk Factors" and the other
information included in this Prospectus prior to making an investment
decision. See "Risk Factors."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.......................................... $106,462 $131,697 $237,884
Gross profit....................................... 13,046 17,308 32,795
Selling, general and administrative expenses....... 13,694 13,716 25,969
Restructuring costs................................ 3,600 -- --
Operating income (loss)............................ (4,248) 3,592 6,826
Income (loss) before income taxes.................. (5,098) 2,614 3,645
Net income (loss).................................. (5,098) 2,338 3,310
Diluted net income (loss) per share(1)............. $ (1.36) $ 0.52 $ 0.55
Number of shares (diluted) used in per share
calculation....................................... 3,756 4,513 5,976
OTHER DATA:
EBITDA(2).......................................... $ (3,721) $ 4,575 $ 9,496
Depreciation and amortization...................... 527 983 2,670
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------
ACTUAL AS ADJUSTED(3)
----------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 6,454 $ 20,415
Total assets........................................ 186,888 186,226
Short-term debt..................................... 15,579 3,068
Long-term debt, less current portion................ 22,330 416
Stockholders' equity................................ 47,080 82,293
</TABLE>
- --------
(1) See Note 7 of Notes to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share.
(2) EBITDA represents earnings from operations before interest income and
expense (including amortization of deferred financing costs), income taxes,
depreciation, amortization of goodwill and non-cash stock option
compensation expenses. EBITDA is presented because it is a widely accepted
financial indicator of a leveraged company's ability to service and/or
incur indebtedness and because management believes that EBITDA is a
relevant measure of the Company's ability to generate cash without regard
to the Company's capital structure or working capital needs. EBITDA as
presented may not be comparable to similarly titled measures used by other
companies, depending upon the non-cash charges included. When evaluating
EBITDA, investors should consider that EBITDA: (i) should not be considered
in isolation but together with other factors which may influence operating
and investing activities, such as changes in operating assets and
liabilities and purchases of property and equipment; (ii) is not a measure
of performance calculated in accordance with generally accepted accounting
principles; (iii) should not be construed as an alternative or substitute
for income from operations, net income or cash flows from operating
activities in analyzing the Company's operating performance, financial
condition or cash flows; and (iv) should not be used as an indicator of the
Company's operating performance or as a measure of its liquidity.
(3) Adjusted to reflect the sale of 3,500,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $11.50 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
The purchase of the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the information set forth elsewhere in this
Prospectus, the following risk factors should be considered carefully in
evaluating the Company and its business before purchasing shares of Common
Stock offered hereby. This Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 21E of the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), regarding future events and the
Company's plans and expectations that involve risks and uncertainties. When
used in this Prospectus, the words "estimate," "project," "intend," "expect"
and "anticipate" and similar expressions are intended to identify such
forward-looking statements. Such statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual
results to differ materially from those projected. Factors that may cause or
contribute to such differences include, but are not limited to, those
discussed below under "Risk Factors," as well as those discussed elsewhere in
this Prospectus and in the documents incorporated herein by reference. In
light of the important factors that can materially affect results, including
those set forth in this paragraph and below, the inclusion of forward-looking
information herein should not be regarded as a representation by the Company
or any other person that the objectives or plans for the Company will be
achieved. The reader is therefore cautioned not to place undue reliance on the
forward-looking statements contained herein, which speak only as of the date
hereof.
DEPENDENCE UPON IBM AND VENDOR CONCENTRATION
The Company's business, financial condition and results of operations are
highly dependent upon the Company's relationship with IBM and upon the
continued market acceptance of IBM commercial mid-range servers. During the
years ended December 31, 1995, 1996 and 1997, approximately 30%, 50% and 65%,
respectively, of the Company's net sales were generated from the sale of IBM
products, and the Company expects the percentage to increase in 1998. The
Company's non-exclusive agreement with IBM may be unilaterally modified by IBM
upon 30 days' written notice, is subject to a 90-day renewal notice, provides
no franchise rights and may not be assigned by the Company. The continued
consolidation of wholesale distributors of commercial mid-range servers may
also result in IBM raising the sales volume threshold required to maintain
most favorable volume discount status. 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 and potential equity
investments for similar purposes. However, there can be no assurance that the
Company will be successful in completing any future acquisitions or in making
any such equity investments. The failure by the Company to complete other
acquisitions or make equity investments, 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 and on
the Company's business, financial condition and results of operations. Any
disruption, change or termination 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, the
failure by the Company to maintain certain operational and administrative
capabilities, the failure by the Company to maintain sufficient sales volumes
of certain IBM products to maintain most favorable volume discount status or
the addition of other wholesale distributors by IBM 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 the sale of products
from a limited number of other vendors. During the years ended December 31,
1995, 1996 and 1997, approximately 22%, 28% and 19%, respectively, of the
Company's net sales were derived from the sale of products manufactured by
Data General, NCR and Unisys, collectively. To become an authorized
distributor for these vendors, the Company typically enters into a non-
exclusive agreement that is cancelable by either party upon 30 to 120 days'
prior written notice. Any disruption, change or termination in the Company's
relationship with any such vendor or in the manner in which any such vendor
distributes its products, the failure of any such vendor to develop new
products which
7
<PAGE>
are accepted by the Company's customers, the failure by the Company to
maintain certain operational and administrative capabilities, the failure by
the Company to maintain sufficient sales volumes of certain vendors' products
to maintain most favorable volume discount status or the addition of other
wholesale distributors by any such vendor would have a material adverse effect
upon the Company's business, financial condition and results of operations.
As is typical in its industry, the Company receives volume discounts and
market development funds from most of its vendors. These volume discounts
directly affect the Company's gross profits. In addition, market development
funds are typically used by the Company to offset a portion of its sales and
marketing expenses. Any change in the availability of these discounts or
market development funds or the failure of the Company to obtain vendor
financing on satisfactory terms and conditions would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Products and Vendors."
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly net sales and operating results may vary
significantly as a result of a variety of factors, including, but not limited
to, changes in the supply and demand for commercial mid-range servers,
peripheral equipment, software and related services, the cost, timing and
integration of acquisitions, the addition or loss of a key vendor or customer,
the introduction of new technologies, changes in manufacturers' prices, price
protection policies or stock rotation privileges, changes in market
development funds, changes in the level of operating expenses, product supply
shortages, disruption of warehousing or shipping channels, inventory
adjustments, increases in the amount of accounts receivable written off, price
competition and changes in the mix of products sold through distribution
channels and in the mix of products purchased by OEMs. Operating results 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 commercial mid-range servers and order cancelations or rescheduling. In
addition, historically a substantial portion of the Company's net sales has
been made in the last few days of a quarter. Accordingly, the Company's
quarterly operating results are difficult to predict and delays in the closing
of sales near the end of a quarter could cause quarterly net sales to fall
substantially short of anticipated levels and, to a greater degree, adversely
affect profitability. Thus, the Company believes that period-to-period
comparisons of the Company's operating results are not necessarily meaningful
and should not be relied upon as an indication of future performance. The
Company's future operating results are expected to fluctuate as a result of
these and other factors, which could have a material adverse effect on the
Company's business, financial condition and results of operations and on the
price of the Common Stock. It is possible that in future periods the Company's
operating results may be below the expectations of securities analysts and
investors. In such event, the market price of the Common Stock would likely be
materially and adversely affected. See "--Possible Volatility of Stock Price,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations."
In connection with the repayment of subordinated debt with a portion of the
net proceeds from this offering, the Company will incur a prepayment penalty
and related charges of approximately $1.7 million, net of tax. It is
anticipated that this one-time, non-recurring charge will adversely impact the
Company's net income after extraordinary items for the quarter ended June 30,
1998. See "Use of Proceeds."
SUBSTANTIAL COMPETITION
The markets in which the Company operates are highly competitive.
Competition is based primarily on product availability, price, credit
availability, speed of delivery, ability to tailor specific solutions to
customer needs, breadth and depth of product lines and services, technical
expertise and pre- and post-sale service and support. Increased competition
may result in further price reductions, reduced gross profit margins and loss
of market share, any of which could materially and adversely affect the
Company's business, financial condition and results of operations.
8
<PAGE>
Through the Mid-Range Systems Division, the Company competes with national,
regional and local distributors, including, but not limited to, Gates/Arrow
Commercial Systems, a division of Arrow Electronics, Inc., Hamilton Hall-Mark
Computer Products, a subsidiary of Avnet, Inc., and Pioneer Standard
Electronics, Inc. (which recently announced its intention to acquire Dickens
Data Systems, Inc.), and, in some limited circumstances, its own vendors. In
the distribution of storage products, the Company competes with national,
regional and local distributors. Through CPG, the Company competes with
contract manufacturers, systems integrators and certain assemblers of computer
products. 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 to devote greater resources to the development,
promotion and sale of their products than the Company. Competitors which are
larger than the Company may be able to obtain more favorable pricing and terms
from vendors than the Company. As a result, the Company may be at a
disadvantage when competing with these larger companies. If the Company fails
to compete effectively, the Company's business, financial condition and
results of operations would be materially and adversely affected. See
"Business--Competition."
RELIANCE ON SIRIUS COMPUTER SOLUTIONS, LTD.
During the year ended December 31, 1997 and the quarter ended December 31,
1997, sales to Sirius Computer Solutions, Ltd. ("Sirius") accounted for
approximately 11% and 23%, respectively, of the Company's net sales. The
Company's sales to Sirius are made under the Industry Remarketer Affiliate
Agreement between the Company and Sirius dated as of September 30, 1997 (the
"Sirius Agreement"), pursuant to which the Company appointed Sirius as one of
its industry remarketer affiliates of IBM products. The Sirius Agreement
provides that Sirius may not enter into any similar arrangement with any third
party for the purpose of selling IBM products to its end user customers and
also provides a favorable pricing structure to Sirius. The Sirius Agreement
expires on September 30, 2000, but may be terminated earlier under certain
conditions, not including termination at will. Any disruption, change or
termination of the Company's relationship with Sirius or a reduction in
purchases from the Company by Sirius could have a material adverse effect upon
the Company's business, financial condition and results of operations. See
"Business--Customers."
INTEGRATION RISKS RELATING TO ACQUISITIONS
Since December 1994, the Company has completed seven acquisitions, and on
November 22, 1997, the Company entered into the MCBA Agreement which
contemplates that MCBA will become a wholly owned subsidiary of the Company
upon consummation of the proposed MCBA Acquisition. The MCBA Acquisition is
expected to be consummated by March 31, 1998. The respective obligations of
the Company and MCBA to consummate the MCBA Acquisition, however, are subject
to the satisfaction of various customary conditions set forth in the MCBA
Agreement. There can be no assurance that the Company and MCBA will be able to
satisfy in a timely manner any or all of the conditions precedent to closing
the MCBA Acquisition. In addition, the MCBA Agreement may be terminated for
various reasons or no reason, including, but not limited to, termination by
either party at will if the MCBA Acquisition has not been consummated by March
31, 1998.
The combination of the Company's business and acquired businesses requires,
among other things, integration of the respective management teams and sales
and other personnel, coordination of sales and marketing efforts, conversion
of computer systems (including inventory control, order entry and financial
reporting) and integration of the businesses' products and physical
facilities. The difficulties of such integration may be increased by the
necessity of coordinating geographically separate organizations. The
integration of certain operations will require the dedication of management
resources which may temporarily divert attention away from the day-to-day
business of the combined company. There can be no assurance that such
coordination and integration will be accomplished smoothly or successfully.
The inability of management to integrate the operations of acquired businesses
successfully could have a material adverse effect on the Company's business,
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financial condition and results of operations. In addition, during the
integration phase, aggressive competitors may undertake to attract customers
and to recruit key employees through various incentives. There can be no
assurance that acquisitions will not materially and adversely affect the
selling patterns of vendors and the buying patterns of present and potential
customers of the Company and that such effect will not materially and
adversely affect the Company's business, financial condition and results of
operations.
The Company's ability to achieve the anticipated benefits of the proposed
MCBA Acquisition, the acquisition of Star Management Services, Inc. ("SMS")
completed on September 30, 1997 (the "SMS Acquisition") or any other
acquisition depends in part upon whether the integration of the business of
the Company and any acquired business is accomplished in an efficient and
effective manner, and there can be no assurance that this will occur. The SMS
Acquisition and other prior acquisitions and investments have placed, and will
continue to place, substantial demands on the Company's management team and
financial resources. The integration of the operations of SMS and the other
acquired companies has on occasion been slower, more complex and more costly
than originally anticipated. The Company will encounter similar uncertainties
and risks with respect to any future acquisitions and investments, including
the proposed MCBA Acquisition. Although the Company expects to realize cost
savings and sales enhancements as a result of the recent and proposed
acquisitions, there can be no assurance that such savings or enhancements will
be realized in full or when anticipated, or that any such cost savings will
not be offset by increases in other expenses or operating losses. See "--
Uncertainty of Future Acquisitions and Expansion."
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 its growth, development and continued ability to
compete effectively in the marketplace. The Company evaluates potential
acquisitions and strategic investments on an ongoing basis. No assurance can
be given as to the Company's ability to compete successfully 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, interest and amortization expense or decreased operating income,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, future growth will
require additional financing to fund the working capital requirements of the
Company's business and to finance future acquisitions and strategic equity
investments, if any. There can be no assurance that the Company will be able
to raise financing on satisfactory terms and conditions, if at all. See "--
Future Capital Needs; Uncertainty of Additional Financing." 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. See "--Integration Risks Relating to Acquisitions" and "--Future
Dilution Due to Acquisitions."
MANAGEMENT OF GROWTH
Since 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, the SMS Acquisition, which was completed in September 1997,
increased the Company's employee base by approximately 140 persons to 373
employees as of February 28, 1998. 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 successful in managing any future expansion or
identifying, attracting and retaining key personnel, and failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "--Dependence on Key Personnel" and
"Management."
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DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in part on the continued service of its
key management, sales and marketing personnel and its ability to identify and
hire additional personnel. Competition for qualified management, sales and
marketing personnel is intense and there can be no assurance that the Company
can retain and recruit adequate personnel to operate its business. The success
of the Company is largely dependent on the skills, experience and efforts of
its key personnel, particularly P. Scott Munro, Chairman of the Board, Chief
Executive Officer, President and Secretary, and Carlton Joseph Mertens II,
Chief Executive Officer and President of the Company's subsidiary, Business
Partner Solutions, Inc., both of whom have entered into employment agreements
with the Company. The loss of either of these individuals or other key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company maintains life
insurance on Messrs. Munro and Mertens in the amounts of $7.9 million and
$10.0 million, respectively. The Company is contractually obligated to apply
any proceeds from these policies in the following order: (i) to repay the
credit advance from IBMCC (as defined herein) and (ii) to repay any amounts
outstanding under the Company's Subordinated Notes (as defined herein). See
"Management."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company's operations to date have required substantial amounts of
working capital to finance accounts receivable and product inventories.
Although the Company believes it has sufficient funds, or alternate sources of
funds, to carry on its business as presently conducted through 1998, the
Company will need to raise additional amounts through public or private debt
or equity financings in order to achieve the growth contemplated by the
Company's business plan. 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 could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "--Limitations
Upon Incurrence of Additional Indebtedness" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DEPENDENCE ON AVAILABILITY OF CREDIT AND IBMCC CREDIT FACILITY
In order to obtain necessary working capital, the Company relies primarily
on a line of credit that is collateralized by substantially all of the
Company's assets. As a result, the amount of credit available to the Company
may be adversely affected by numerous factors beyond the Company's control,
such as delays in collection or deterioration in the quality of the Company's
accounts receivable, economic trends in the technology industry, interest rate
fluctuations and the lending policies of the Company's creditors. Any decrease
or material limitation on the amount of capital available to the Company under
its line of credit or other financing arrangements will limit the ability of
the Company to fill existing sales orders or expand its sales levels and,
therefore, would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, any significant
increases in interest rates will increase the cost of financing to the Company
and could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is dependent on the
availability of accounts receivable financing on reasonable terms and at
levels that are high relative to its equity base in order to maintain and
increase its sales. There can be no assurance that such financing will
continue to be available to the Company in the future or available under terms
acceptable to the Company. The inability of the Company to have continuous
access to such financing at reasonable costs would materially and adversely
impact the Company's business, financial condition, results of operations and
cash flows.
The Company has primarily funded its working capital requirements through a
$75.0 million Inventory and Working Capital Agreement (the "IBMCC Credit
Facility") with IBM Credit Corporation ("IBMCC"), which credit line was
temporarily increased to $85.0 million through January 31, 1998. At December
31, 1997, the outstanding principal balance under the IBMCC Credit Facility
was approximately $71.7 million, of which $65.1 million represented product
purchases and $6.6 million represented interest-bearing cash advances. In
addition, the Company has an outstanding credit advance under the IBMCC Credit
Facility in the amount of $10.0 million
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(the "IBMCC Credit Advance"). Borrowings under the IBMCC Credit Facility are
collateralized by substantially all assets of the Company, including accounts
receivable, inventories and equipment. The IBMCC Credit Facility provides that
the outstanding interest-bearing cash advance balance (excluding the IBMCC
Credit Advance) is subject to an annual interest rate of prime plus 1.875%
(10.375% at February 28, 1998) and expires on September 30, 1999. IBMCC may
terminate the IBMCC Credit Facility at any time upon the occurrence of, and
subsequent failure to cure, an "Event of Default" (as such term is defined in
the IBMCC Credit Facility and the Note Purchase Agreement (as defined
herein)). In the event of such termination, the outstanding borrowings under
the IBMCC Credit Facility become immediately due and payable in their
entirety. The termination of the IBMCC Credit Facility and the subsequent
inability of the Company to secure a replacement credit facility on terms and
conditions similar to those contained in the IBMCC Credit Facility would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
LIMITATIONS UPON INCURRENCE OF ADDITIONAL INDEBTEDNESS
The terms of the IBMCC Credit Facility and the Note Purchase Agreement dated
September 30, 1997 with Robert Fleming, Inc. and Canpartners Investments IV,
LLC, as purchasers (together, the "Purchasers"), and Canpartners Investments
IV, LLC, as agent for the Purchasers (the "Note Purchase Agreement"), require
that the Company obtain the consent of IBMCC and the Purchasers of the
Company's subordinated notes issued pursuant to the Note Purchase Agreement
(the "Subordinated Notes") prior to incurring certain additional indebtedness,
including any additional senior or subordinated debt. The Company may incur
additional indebtedness without such consent through capital leases and
general business commitments insofar as the terms thereof are commercially
reasonable and consistent with prior business practices. The IBMCC Credit
Facility and the Company's anticipated cash flows may not provide sufficient
funding to achieve the growth contemplated by the Company's business plan.
Accordingly, the Company may need to obtain the consent of IBMCC and the
Purchasers of the Subordinated Notes prior to incurring any additional
indebtedness. While the Company has no reason to believe that such consents
will be withheld, there can be no assurance that the Company will obtain such
consents. Failure to obtain such consents or to obtain an alternate credit
facility or to refinance the Subordinated Notes in order to allow the Company
to incur additional indebtedness in an amount sufficient to achieve the growth
contemplated by the Company's business plan could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
RAPID TECHNOLOGICAL CHANGE, PRICE REDUCTIONS AND INVENTORY RISK
The markets for products sold by the Company are extremely competitive and
are characterized by declining selling prices over the life of a particular
product and rapid technological change. 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. The Company's business, like
that of other wholesale distributors, is subject to the risk that the value of
its inventory will be adversely affected by price reductions by manufacturers
or by technological changes affecting the usefulness or desirability of its
product inventory. It is the policy of many manufacturers of technology
products to protect wholesale distributors such as the Company from the loss
in value of inventory due to technological change or reductions in the
manufacturers' prices. Under the terms of most of the Company's agreements,
vendors will generally credit the Company for inventory losses resulting from
the vendor's price reductions if the Company complies with certain conditions.
In addition, generally under such agreements, the Company has the right to
return for credit or exchange for other products a portion of its slow moving
or obsolete inventory items within designated periods of time. There can be no
assurance that, in every instance, the Company will be able to comply with all
necessary conditions or manage successfully such price protection or stock
rotation opportunities, if available. Also, a manufacturer which elects to
terminate a distribution agreement generally will repurchase its products
carried in a wholesale distributor's inventory. These industry practices are
sometimes not included in written agreements
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and do not protect the Company in all cases from declines in inventory value,
excess inventory or product obsolescence. There can be no assurance that
manufacturers will continue such practices or that the Company will be able to
manage successfully its existing and future inventories. Historically, the
Company has not experienced losses due to obsolete inventory in excess of
established inventory reserves. Significant declines in inventory value in
excess of established inventory reserves or dramatic changes in prevailing
technology could have a material adverse effect on the Company's business,
financial condition and results of operations.
Certain major systems vendors, including IBM, have developed and will
continue to implement programs which allow the Company to assemble systems
from components provided by the vendors. While the Company has developed the
ability to integrate and configure computer products, the process of
assembling large volumes of systems from components will require new business
practices by the Company. It is also uncertain how the vendors will apply
policies related to price protection, stock rotation and other protections
against the decline in inventory value of such system components. There can be
no assurance that the Company will be successful in the integration and
configuration of computer products or that certain vendors will apply the same
price protection and stock rotation policies to the Company's component
inventories. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Products and Vendors."
LOW PROFIT MARGINS
As a result of price competition, the Company has low gross profit and
operating income margins. These low margins magnify the impact on operating
results of variations in net sales and operating costs. The Company has
partially offset the effects of its low gross profit margins by increasing net
sales, availing itself of large volume purchase discount opportunities and
reducing selling, general and administrative expenses as a percentage of net
sales. However, there can be no assurance that the Company will maintain or
increase net sales, continue to avail itself of large volume purchase discount
opportunities or further reduce selling, general and administrative expenses
as a percentage of net sales in the future. Future gross profit margins may be
materially and adversely affected by changes in product mix, vendor pricing
actions and competitive and economic pressures. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
PRODUCT SUPPLY SHORTAGES
The Company is dependent upon the supply of products available from its
vendors. From time to time, the industry has experienced product shortages due
to vendors' difficulty in projecting demand for certain products distributed
by the Company. When such product shortages occur, the Company typically
receives an allocation of product from the vendor. There can be no assurance
that vendors will be able to maintain an adequate supply of products to
fulfill all of the Company's orders on a timely basis. Failure to obtain
adequate product supplies, if such supplies are available to competitors,
would have a material adverse effect on 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 and offers unsecured credit terms to its customers. To reduce credit
risk, the Company performs ongoing credit evaluations of its customers,
maintains an allowance for doubtful accounts and has credit insurance. Sirius
accounted for more than 10% of the Company's outstanding accounts receivable
at December 31, 1997. No other single customer accounted for more than 5% of
the Company's outstanding accounts receivable balance at December 31, 1997.
Historically, the Company has not experienced losses from write-offs in excess
of established reserves. 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 on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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SEASONALITY
The computer distribution industry experiences seasonal trends and, within
each quarter, generally tends to sell a substantial amount of its products in
the last few days of the quarter. The Company's largest vendor, IBM, sells
approximately 35-40% of its products in the last calendar quarter, and such
continuing pattern could have an effect on the Company's quarterly net sales.
Historically, a substantial portion of the Company's net sales has been made
in the last few days of a quarter. Due to the Company's recent significant
growth through acquisitions and the Company's increased dependence on the sale
of IBM products, variations experienced by IBM and the Company may be
magnified in the future and could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Fluctuations in Operating Results" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Quarterly Results of
Operations."
EXPANDING SERVICE CAPABILITIES
The Company is expanding the nature and scope of its value-added services.
There can be no assurance that new value-added services will be integrated
successfully with the Company's commercial mid-range server and related
products distribution business. If the Company is unable to effectively
provide value-added services, it may be unable to compete effectively for the
business of certain customers which require the provision of such services as
a condition to purchasing products from the Company. In addition, the Company
will be subject to risks, commonly associated with a value-added services
business, including dependence on reputation, fluctuations in workload and
dependence on the ability to identify, recruit and retain qualified technical
personnel. The expansion of the Company's value-added services is expected to
require a significant capital investment, including an increase in the number
of technical employees. There can be no assurance that one or more of such
factors will not have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Business
Strategy" and "--Value-Added Services."
DEPENDENCE ON THIRD-PARTY SHIPPERS
The Company presently ships a majority of its products from its warehouses
via Federal Express Corporation ("FedEx"), but also ships via United Parcel
Service of America, Inc. ("UPS") and other common carriers. In addition,
certain products that the Company sells are drop shipped to its customers via
these carriers. Changes in shipping terms or the inability of FedEx, UPS or
any other third-party shipper to perform effectively (whether as a result of
mechanical failure, casualty loss, labor stoppage, other disruption or any
other reason) could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company can maintain favorable shipping terms or replace such shipping
services on a timely or cost-effective basis. See "Business--Operations and
Infrastructure."
PLANNED INTERNATIONAL EXPANSION
Although the Company to date has not generated significant net sales from
international operations, one of the elements of its business strategy is to
expand internationally. The Company was recently authorized to distribute
IBM's AS/400 products in Canada. There can be no assurance that the Company
will be able to expand successfully its international business. Certain risks
inherent in doing business on an international level include, but are not
limited to, management of remote operations, unexpected changes in regulatory
requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, longer payment
cycles, problems in collecting accounts receivable, political instability,
fluctuations in currency exchange rates and potentially adverse tax
consequences, any of which could adversely impact the success of the Company's
international operations. There can be no assurance that one or more of such
factors will not have a material adverse effect on the Company's future
international operations and, consequently, on the Company's business,
financial condition and results of operations. See "Business--Business
Strategy."
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RISK ASSOCIATED WITH POTENTIAL "YEAR 2000" PROBLEMS OF THIRD PARTIES
It is possible that the currently installed computer systems, software
products or other business systems of the Company's vendors or customers,
working either alone or in conjunction with other software or systems, will
not accept input of, store, manipulate and output data in the year 2000 or
thereafter without error or interruption (commonly known as the "Year 2000
problem"). The Company believes that its business systems, including its
computer systems, are not subject to the Year 2000 problem; however, the
Company has begun to query its vendors and customers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly processing date information as the Year 2000 approaches. However,
there can be no assurance that the Company will identify all such Year 2000
problems in the computer systems of its vendors or customers in advance of
their occurrence or that they will be able to successfully rectify any
problems that are discovered. The expenses of the Company's efforts to
identify and address such problems, or the expenses or liabilities to which
the Company may become subject as a result of such problems, are not expected
to have a material adverse effect on the Company's business, financial
condition or results of operations. The purchasing patterns of existing and
potential customers, however, may be affected by Year 2000 problems, which
could cause fluctuations in the Company's sales volumes and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
NO CASH DIVIDENDS ON COMMON STOCK
The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently anticipates that it will retain all available
funds for use in the operation of its business, including possible
acquisitions, and does not intend to pay any cash dividends in the foreseeable
future. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other factors, future
earnings, operations, capital requirements, acquisitions and strategic
investment opportunities, the general financial condition of the Company and
general business conditions. Further, the Company's ability to pay cash
dividends is currently restricted by the IBMCC Credit Facility and the Note
Purchase Agreement. The terms of future credit facilities or other agreements
may also contain similar restrictions. In addition, the Company's Certificate
of Designation with respect to the Series A Preferred Stock prohibits the
payment of dividends on the Common Stock unless and until dividends are paid
on the Series A Preferred Stock in accordance with its terms. See "Dividend
Policy."
FUTURE DILUTION DUE TO ACQUISITIONS
In connection with certain acquisitions completed by the Company, the
Company expects to issue up to approximately 200,000 additional shares of
Common Stock pursuant to certain earnout provisions based on the attainment of
certain performance goals. The Company anticipates issuing additional shares
of Common Stock or other equity or convertible debt securities to effect
future acquisitions, including the proposed MCBA Acquisition, or for other
corporate purposes. Pursuant to the MCBA Agreement, the stockholders of MCBA
could earn up to 1,500,000 additional shares of Common Stock based upon the
attainment of certain performance goals in calendar 1998 and 1999. Upon such
issuances, the percentage ownership of the stockholders of the Company will be
reduced and stockholders may experience additional dilution.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been and is likely to continue to
be highly volatile and may be significantly affected by factors such as actual
or anticipated fluctuations in the Company's quarterly operating results,
announcements of technological innovations, industry conditions and trends,
changes in or failure by the Company to meet the expectations of securities
analysts and investors, general market conditions and other factors. It is
possible that in some future quarter, the Company's operating results may be
below the expectations of securities analysts and investors. In such event,
the price of the Common Stock would likely decline, perhaps substantially. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market prices of
the stocks of technology companies. These broad market fluctuations may
adversely affect the market price of the Common Stock. In the past, following
periods of volatility in the market price of a particular company's
securities, securities class action litigation has often
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been brought. There can be no assurance that such litigation will not occur in
the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect upon the Company's business,
financial condition and results of operations. See "Price Range of Common
Stock."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") and Amended and Restated
Bylaws (the "Bylaws") may have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. Such provisions could limit the price that
certain investors may be willing to pay in the future for shares of the Common
Stock. The Company has issued 2,242,500 shares of Series A Preferred Stock and
10 shares of Series B Preferred Stock, and has the authority to issue up to an
additional 7,757,490 shares of preferred stock and to determine the price,
rights, preferences, qualifications, limitations and restrictions, including
voting rights, of such additional preferred stock without any further vote or
action by the stockholders, subject to the terms of the outstanding shares of
Series A Preferred Stock and Series B Preferred Stock. The issuance of
additional preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, would have
the effect of delaying or preventing a third party from acquiring a majority
of the outstanding voting stock of the Company. Further, Section 203 of the
General Corporation Law of Delaware (the "DGCL") prohibits the Company from
engaging in certain business combinations with interested stockholders. These
provisions may have the effect of delaying or preventing a change in control
of the Company without action by the stockholders, and therefore could
adversely affect the market price of the Common Stock. See "Description of
Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 8,989,258 shares of
Common Stock outstanding (9,514,258 shares if the Underwriters' over-allotment
option is exercised in full), substantially all of which will be freely
tradable without restriction or further registration under the Securities Act
other than by "affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act.
The holders of an aggregate of approximately 4,482,542 shares of Common
Stock, which shares include Common Stock issuable upon conversion of the
Series A Preferred Stock and upon the exercise of outstanding warrants, are
entitled under certain circumstances to cause the Company to register the sale
of such shares of Common Stock under the Securities Act. The Company currently
has a registration statement on Form S-3 in effect with respect to all such
shares. Such shares are freely tradable during the effectiveness of such
registration unless subject to other restrictions.
The Company's directors and executive officers who collectively hold an
aggregate of 816,433 shares of Common Stock have agreed pursuant to certain
agreements that they will not sell any shares of Common Stock owned by them
without the prior written consent of The Robinson-Humphrey Company, LLC for a
period of 180 days after the date of this Prospectus. In addition, certain
holders of approximately 1,426,000 shares of Common Stock, 1,132,012 shares of
Series A Preferred Stock convertible into 1,162,576 shares of Common Stock,
and 1,066,006 warrants representing rights to acquire up to 1,066,006 shares
of Common Stock have agreed that they will not sell any shares of Common
Stock, or other securities of the Company, for 45 days from the date of this
Prospectus without the prior written consent of The Robinson-Humphrey Company,
LLC.
Sales of a substantial number of shares of the Common Stock in the public
market following this offering, or the perception that such sales might occur,
after the applicable restrictions thereon lapse could have a material adverse
effect on the market price of the Common Stock and could impair the Company's
ability to raise additional equity capital. See "Management--Recent Option
Grants" and "--Stock Option Plan," "Description of Capital Stock--Registration
Rights," "Shares Eligible for Future Sale" and "Underwriting."
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THE COMPANY
Beginning in December 1994 and accelerating following the divestiture of its
electronic components distribution business in July 1995, the Company has
pursued an aggressive acquisition strategy to expand its mid-range server
distribution business and strengthen its relationships with IBM and other
vendors. In addition, the Company's CPG and reseller businesses have grown
primarily as a result of strategic acquisitions. Pursuant to this strategy,
the Company has completed the following seven acquisitions:
. First Computer Corporation (December 1994)--a Burr Ridge, Illinois-based
wholesale distributor of commercial mid-range servers primarily
manufactured by NCR.
. International Parts, Inc. (November 1995)--a San Antonio, Texas-based
wholesale distributor of commercial mid-range servers primarily
manufactured by IBM and NCR.
. R&D Hardware Systems Company of Colorado ("R&D") (January 1996)--a
Colorado Springs, Colorado-based wholesale distributor of commercial mid-
range servers primarily manufactured by IBM, Unisys and Data General. In
connection with this acquisition, the Company established a relationship
with NxTrend, Inc. ("NxTrend") (an affiliate of the former owner of R&D),
a VAR specializing in the sale of mid-range products bundled with its
proprietary distribution applications software.
. Star Technologies, Inc. (November 1996)--an Irvine, California-based
systems integrator of PCs, workstations and departmental servers.
. International Data Products, LLC (November 1996)--an Irvine, California-
based reseller primarily of IBM RS/6000 commercial mid-range servers to
end-user customers.
. Target Solutions, Inc. (March 1997)--an Irvine, California-based reseller
of IBM commercial mid-range servers to end user customers.
. Star Management Services, Inc. ("SMS") (September 1997)--a San Antonio,
Texas-based wholesale distributor of IBM commercial mid-range servers,
principally AS/400 products. In connection with the SMS Acquisition, the
Company established a relationship with Sirius (an affiliate of the
former owners of SMS), a VAR specializing in selling IBM products
typically bundled with J.D. Edwards & Company ("J.D. Edwards")
application software. Subsequent to the acquisition, SMS was renamed
Business Partner Solutions, Inc. and presently operates as a subsidiary
of the Company.
The Company was incorporated in California in 1975 as Silicon Valley
Services, Inc. and was renamed Western Micro Technology, Inc. in April 1977.
In August 1997, the Company was reincorporated in Delaware. The Company
changed its name to Savoir Technology Group, Inc. in November 1997. The
Company's principal executive offices are located at 254 East Hacienda Avenue,
Campbell, California 95008. Its telephone number is (408) 379-0177.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $11.50 per share are estimated to be approximately $37.4 million ($43.1
million if the Underwriters' over-allotment option is exercised in full),
after deducting the estimated underwriting discount and offering expenses
payable by the Company. The Company intends to use the net proceeds from this
offering as follows: (i) $10.0 million for the repayment of the IBMCC Credit
Advance; (ii) $6.7 million for payments to two individuals, one of whom is an
executive officer and director of the Company, in connection with the SMS
Acquisition; (iii) $16.8 million for the repayment of the Subordinated Notes
and associated prepayment penalty and related charges; and (iv) $3.9 million
for repayment of indebtedness under the IBMCC Credit Facility. At February 28,
1998, the Company's indebtedness with respect to the IBMCC Credit Advance was
approximately $10.0 million, payable in four installments on the last day of
March 1998, September 1998, March 1999 and September 1999, with interest on
the unpaid balance thereof at the annual rate of prime plus 2% (10.5% at
February 28, 1998). At February 28, 1998, the amount to be paid to the two
individuals in connection with the SMS Acquisition was approximately $7.4
million. Such amount has been discounted from $7.4 million to $6.7 million on
the Company's balance sheet using its effective borrowing rate of 10.375%. At
February 28, 1998, the balance due on the Subordinated Notes was approximately
$15.7 million payable on September 30, 2000, with interest on the unpaid
balance thereof at the annual rate of 13.5% and is subject to certain
prepayment penalties. At February 28, 1998, the Company's interest-bearing
cash advances under the IBMCC Credit Facility (excluding the IBMCC Credit
Advance described above) was approximately $9.3 million, with interest on the
unpaid balance thereof at the annual rate of prime plus 1.875% (10.375% at
February 28, 1998).
Any additional net proceeds from this offering are expected to be used for
general corporate purposes, including working capital and possible future
acquisitions. However, except with respect to its discussions with certain
entities, none of which would constitute a significant subsidiary if acquired,
the Company has no specific agreements or commitments in this regard. The
Company's management will retain broad discretion as to the allocation of the
net proceeds of this offering remaining after the allocations set forth above.
18
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on The Nasdaq National Market under the symbol
"SVTG." Prior to November 24, 1997, the Common Stock was quoted on The Nasdaq
National Market under the symbol "WSTM." The following table sets forth, for
the periods indicated, high and low sales prices for the Common Stock as
reported by The Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
First Quarter................................................. $ 7.07 $4.38
Second Quarter................................................ 11.38 6.25
Third Quarter................................................. 9.13 5.88
Fourth Quarter................................................ 12.38 8.00
YEAR ENDED DECEMBER 31, 1997
First Quarter................................................. $14.50 $9.50
Second Quarter................................................ 13.50 8.63
Third Quarter................................................. 12.75 8.00
Fourth Quarter................................................ 11.63 9.00
YEAR ENDING DECEMBER 31, 1998
First Quarter (through March 11, 1998)........................ $12.75 $9.63
</TABLE>
On March 11, 1998, the closing sale price for the Common Stock on The Nasdaq
National Market was $11.50 per share. As of March 11, 1998, there were
approximately 300 stockholders of record and approximately 1,800 beneficial
stockholders of the Common Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently anticipates that it will retain all available
funds for use in the operation of its business, including possible
acquisitions, and does not intend to pay any cash dividends in the foreseeable
future. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other factors, future
earnings, operations, capital requirements, acquisitions and strategic equity
investment opportunities, the general financial condition of the Company and
general business conditions. Further, the Company's ability to pay cash
dividends is currently restricted by the IBMCC Credit Facility and the Note
Purchase Agreement. The terms of future credit facilities or other agreements
may also contain similar restrictions. In addition, the Company's Certificate
of Designation with respect to the Series A Preferred Stock prohibits the
payment of dividends on the Common Stock unless and until dividends are paid
on the Series A Preferred Stock in accordance with its terms. See "Risk
Factors--No Cash Dividends on Common Stock."
19
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of December 31, 1997, and as adjusted to reflect the receipt and
application of the net proceeds from the sale of the 3,500,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $11.50 per share. The information set forth below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt...................................... $ 15,579 $ 3,068
=========== ===========
Long-term debt, less current portion................. $ 22,330 $ 416
Stockholders' equity:
Preferred Stock, $0.01 par value: 10,000,000 shares
authorized; 2,242,500 shares of Series A issued
and outstanding; 10 shares of Series B issued and
outstanding....................................... 18,132 18,132
Common Stock, $0.01 par value: 25,000,000 shares
authorized; 5,357,678 shares issued and
outstanding; 8,857,678 shares issued and
outstanding, as adjusted(1)....................... 27,983 65,368
Retained earnings.................................. 965 (1,207)
----------- -----------
Total stockholders' equity....................... 47,080 82,293
----------- -----------
Total capitalization........................... $ 69,410 $ 82,709
=========== ===========
</TABLE>
- --------
(1) Based on 5,357,678 shares of Common Stock outstanding at December 31,
1997. Does not include: (i) 1,436,010 shares of Common Stock subject to
options outstanding pursuant to the 1994 Stock Option Plan at a weighted
average exercise price of $7.93 per share; (ii) 1,733,375 shares of Common
Stock issuable upon exercise of outstanding warrants at a weighted average
exercise price of $8.88 per share; and (iii) 2,242,500 shares of Common
Stock reserved for issuance upon conversion of the outstanding shares of
Series A Preferred Stock. Also excludes: (i) 169,260 shares of Common
Stock reserved for issuance pursuant to the 1994 Stock Option Plan; (ii)
124,759 shares of Common Stock reserved for issuance pursuant to the
Company's 1995 Employee Stock Purchase Plan; (iii) up to 241,000 shares of
Common Stock issuable pursuant to certain earnout provisions granted by
the Company in connection with prior acquisitions; and (iv) 10 shares of
Series B Preferred Stock which are not convertible into shares of Common
Stock. See "Capitalization," "Management--Stock Option Plan," "Description
of Capital Stock--Common Stock Warrants" and "--Preferred Stock" and Note
6 of Notes to Consolidated Financial Statements.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to the
Company's consolidated statements of operations for each of the three years in
the period ended December 31, 1997 and the consolidated balance sheets at
December 31, 1996 and 1997 are derived from consolidated financial statements
of the Company that have been audited by Coopers & Lybrand L.L.P., independent
accountants, which appear elsewhere in this Prospectus. The consolidated
statements of operations for the two years ended December 31, 1994 and the
consolidated balance sheets at December 31, 1993, 1994 and 1995 are derived
from consolidated financial statements audited by Coopers & Lybrand L.L.P.
which are not included in this Prospectus. The data set forth below should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993(1) 1994(1) 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales..................... $96,843 $119,285 $106,462 $131,697 $237,884
Cost of goods sold............ 79,802 102,662 93,416 114,389 205,089
------- -------- -------- -------- --------
Gross profit.................. 17,041 16,623 13,046 17,308 32,795
Selling, general and
administrative expenses...... 16,373 16,958 13,694 13,716 25,969
Restructuring costs........... 1,510 -- 3,600 -- --
------- -------- -------- -------- --------
Operating income (loss) --
continuing operations....... (842) (335) (4,248) 3,592 6,826
Interest expense.............. 535 884 850 978 3,181
------- -------- -------- -------- --------
Income (loss) before income
taxes--continuing operations. (1,377) (1,219) (5,098) 2,614 3,645
Income tax expense (benefit).. (286) (217) -- 276 335
------- -------- -------- -------- --------
Income (loss) from continuing
operations................... (1,091) (1,002) (5,098) 2,338 3,310
Discontinued operations, net
of tax....................... 524 387 -- -- --
------- -------- -------- -------- --------
Net income (loss)............. $ (567) $ (615) $ (5,098) $ 2,338 $ 3,310
======= ======== ======== ======== ========
Net income (loss) per
share:(2)
--Basic...................... $ (0.16) $ (0.17) $ (1.36) $ 0.55 $ 0.57
--Diluted.................... (0.16) (0.17) (1.36) 0.52 0.55
Number of shares used in per
share calculations:(2)
--Basic...................... 3,474 3,669 3,756 4,255 4,902
--Diluted.................... 3,474 3,669 3,756 4,513 5,976
Other Data:
EBITDA(3)..................... $ 24 $ 222 $ (3,721) $ 4,575 $ 9,496
Depreciation and amortization. 866 557 527 983 2,670
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $12,021 $ 12,334 $ 7,312 $ 7,448 $ 6,454
Total assets.................. 34,975 37,898 35,899 63,276 186,888
Short-term debt............... 6,131 9,261 7,126 11,335 15,579
Long-term debt, less current
portion...................... 52 65 117 53 22,330
Stockholders' equity.......... 13,976 14,424 11,004 15,714 47,080
</TABLE>
- --------
(1) Amounts for 1993 and 1994 have been restated to reflect the 1994
discontinuation of the testing division and the 1994 acquisition of First
Computer Corporation accounted for as a pooling of interests.
(2) See Note 7 of Notes to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share.
(3) EBITDA represents earnings from continuing operations before interest
income and expense (including amortization of deferred financing costs),
income taxes, depreciation, amortization of goodwill and non-cash stock
option compensation expenses. EBITDA is presented because it is a widely
accepted financial indicator of a leveraged company's ability to service
and/or incur indebtedness and because management believes that EBITDA is a
relevant measure of the Company's ability to generate cash without regard
to the Company's capital structure or working capital needs. EBITDA as
presented may not be comparable to similarly titled measures used by other
companies, depending upon the non-cash charges included. When evaluating
EBITDA, investors should consider that EBITDA: (i) should not be
considered in isolation but together with other factors which may
influence operating and investing activities, such as changes in operating
assets and liabilities and purchases of property and equipment; (ii) is
not a measure of performance calculated in accordance with generally
accepted accounting principles; (iii) should not be construed as an
alternative or substitute for income from operations, net income or cash
flows from operating activities in analyzing the Company's operating
performance, financial condition or cash flows; and (iv) should not be
used as an indicator of the Company's operating performance or as a
measure of its liquidity.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. Except
for historical information contained herein, the following discussion contains
forward-looking statements that involve risks and uncertainties. Such forward-
looking statements include, but are not limited to, statements regarding
future events and the Company's plans and expectations. The Company's actual
results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed previously in "Risk Factors," as well as those discussed
elsewhere in this Prospectus or incorporated herein by reference.
OVERVIEW
Recognizing the consolidation trend in the commercial mid-range systems
distribution industry, the Company commenced its acquisition strategy in
December 1994 with the acquisition of First Computer Corporation. Since then,
the Company has focused upon expanding its commercial mid-range server
distribution business through internal growth and strategic acquisitions. On
July 26, 1995, the Company sold its electronic components distribution assets
to Reptron Electronics Inc. The transaction, valued at approximately $12.5
million, consisted of a $9.2 million payment in cash and the assumption of
$3.3 million in accounts payable. Since December 1995, the Company has
completed an additional six acquisitions, which have expanded the Company's
products and services, increased its geographic market coverage, strengthened
its management and technical personnel and increased its operating leverage.
The following table summarizes the Company's acquisition history:
<TABLE>
<CAPTION>
ESTIMATED EARNOUT
INITIAL CONSIDERATION ACTUAL EARNOUT PAID POTENTIAL CONSIDERATION(1)
------------------------ ----------------------- --------------------------------
ACQUISITION TRANSACTION SHARES OF SHARES OF SHARES OF
TARGET DATE CASH COMMON STOCK CASH COMMON STOCK CASH COMMON STOCK
----------------------- ----------- ----------- ------------ -------- ------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Star Management
Services, Inc.
("SMS")(2)............. 9/30/97 $49,500,000 460,000 -- -- $ 5,000,000 --
Target Solutions, Inc.
("TSI")(3)............. 3/17/97 -- 220,273 -- -- -- --
International Data
Products, LLC
("IDP")(4)............. 11/29/96 265,000 -- -- -- -- 140,000
Star Technologies, Inc.
("STI")(5)............. 11/7/96 -- 113,263 -- 48,721 -- 60,000
R&D Hardware Systems
Company of Colorado
("R&D")(6)............. 1/2/96 1,000,000 125,000 -- 78,587 -- --
International Parts,
Inc. ("IPI")(7)........ 11/18/95 -- 300,000 -- 42,516 -- --
First Computer
Corporation ("FCC")(8). 12/1/94 34 328,943 -- -- -- --
</TABLE>
- --------
(1) Estimated by the Company as of March 11, 1998.
(2) The $49.5 million cash consideration is to be paid in three installments,
with $42.2 million paid at closing and two subsequent payments of $3.7
million to be made on the first and second anniversaries of the closing,
respectively. For the eleven months ended September 30, 1997, SMS had
audited revenue of $86.5 million and operating income of $1.1 million.
(3) For the year ended December 31, 1996, TSI had unaudited revenue of $16.0
million and net income of approximately $200,000. The TSI agreement
provides for a total earnout potential consideration of $10,000,000 in
cash and stock. See Note 11 of Notes to Consolidated Financial Statements.
(4) Excludes assumed liabilities of $424,000. For the year ended December 31,
1995, IDP had unaudited revenue of $4.6 million and net income of
approximately $2,000. The IDP agreement provides for a total earnout
potential consideration of 140,000 shares of Common Stock. See Note 11 of
Notes to Consolidated Financial Statements.
(5) For the year ended June 30, 1996, STI had unaudited revenue of $7.5
million and net income of approximately $40,000.
(6) For the year ended December 31, 1995, R&D had unaudited revenue of $9.6
million and net income of approximately $446,000.
(7) For the year ended December 31, 1994, IPI had unaudited revenue of $15.2
million and net income of approximately $90,000.
(8) For the year ended December 31, 1993, FCC had unaudited revenue of $6.1
million and net income of approximately $23,000.
22
<PAGE>
INCOME TAXES
Due to the utilization of net operating loss carryforwards generated in 1995
and years prior, the Company's effective tax rate was 10.6% and 9.2% in 1996
and 1997, respectively, as compared to a normal combined effective tax rate of
approximately 40% for federal and state income taxes. As of December 31, 1997,
the Company has utilized substantially all of its available federal net
operating loss carryforward amounts. Due to the utilization of these
carryforwards and the significant amount of non-tax deductible amortization
expense related to goodwill incurred in certain acquisitions, the Company
expects its effective tax rate to approximate 50% in 1998.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain income and
expense items as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0%
Cost of goods sold........................ 87.7 86.9 86.2
---------- ---------- ----------
Gross profit............................ 12.3 13.1 13.8
Selling, general and administrative
expenses................................. 12.4 9.7 9.8
Depreciation and amortization expense..... 0.5 0.7 1.1
Restructuring costs....................... 3.4 0.0 0.0
---------- ---------- ----------
Total operating expenses.............. 16.3 10.4 10.9
---------- ---------- ----------
Operating income (loss)............... (4.0) 2.7 2.9
Interest expense.......................... 0.8 0.7 1.4
---------- ---------- ----------
Income (loss) before income taxes......... (4.8) 2.0 1.5
Income tax expense........................ 0.0 0.2 0.1
---------- ---------- ----------
Net income (loss)......................... (4.8)% 1.8% 1.4%
========== ========== ==========
</TABLE>
COMPARISONS OF YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Net Sales. Net sales consists of sales of commercial mid-range servers,
integrated personal computers, workstations, peripheral equipment, storage
products, software and remarketed installation and technical support services,
net of sales discounts and returns. Net sales increased by 80.6% to $237.9
million in 1997 from $131.7 million in 1996, and by 23.7% in 1996 from $106.5
million in 1995. Net sales in 1995 included $28.2 million in net sales from
the Company's former electronic components distribution business, which was
sold in July 1995. Excluding the net sales of the electronic components
distribution business, net sales in 1996 increased 68.2% from $78.3 million in
1995. The growth in net sales resulted primarily from additions to the
Company's sales force, increased marketing efforts, increased integration and
storage product sales in CPG and the acquisitions of IPI, R&D, STI, IDP, TSI
and SMS.
Gross Profit. Cost of sales is comprised of purchase costs, net of early
payment and volume discounts and product freight. Gross profit as a percentage
of net sales is affected by several factors including the mix of high margin
and low margin products and services and the proportion of large orders on
which the Company extends volume discounts to customers. Gross profit
increased by 89.5% to $32.8 million in 1997 from $17.3 million in 1996, and by
32.7% in 1996 from $13.0 million in 1995. Gross profit in 1995 includes $4.1
million in gross profit from the former electronic components distribution
business. Excluding the gross profit of the electronic components distribution
business, gross profit increased 94.4% in 1996 from $8.9 million in 1995.
Gross profit as a percentage of net sales was 13.8% in 1997, 13.1% in 1996 and
12.3% in 1995 (11.4% excluding the electronic components distribution
business). The increase in gross profit as a percentage of net sales in 1996
23
<PAGE>
and 1997 was a result of a greater mix of higher margin products and services,
including integration and technical support services, as well as increased
volume discounts provided by certain vendors.
Operating Expenses. Operating expenses include: salaries and commissions
paid to sales representatives; compensation paid to marketing, product
management, technical and administrative personnel; depreciation of
infrastructure costs, including the Company's information system and leasehold
improvements; amortization of intangibles resulting from goodwill recorded
from acquisitions; facility lease expenses; telephone and data line expenses
and provision for bad debt losses. Fluctuations in operating expenses as a
percentage of net sales can result from planned expenditures by the Company
for additional sales, marketing, technical support and administrative
personnel, efficiencies gained through higher sales volumes and resulting
economies of scale and the timing of acquisitions.
Selling, general and administrative expenses (excluding depreciation and
amortization expense) increased by 83.5% to $23.3 million in 1997 from $12.7
million in 1996, and decreased 3.3% in 1996 from $13.2 million in 1995.
Selling, general and administrative expenses as a percentage of net sales were
9.8% in 1997, 9.7% in 1996 and 12.4% in 1995. In 1997, selling, general and
administrative expenses as a percentage of net sales were essentially the same
as in 1996, despite rapid net sales growth and the addition of personnel and
infrastructure costs from acquisitions. The Company expects to achieve
additional economies of scale in selling, general and administrative expenses
in 1998 as the Company continues to integrate the acquisition of SMS which was
completed on September 30, 1997. Selling, general and administrative expenses
as a percentage of net sales decreased in 1996 from 1995 primarily due to
elimination of the personnel and infrastructure relating to the electronic
components distribution business.
Depreciation and amortization expense increased by 171.6% to $2.7 million in
1997 from $1.0 million in 1996, and by 86.5% in 1996 from $500,000 in 1995.
Depreciation and amortization expense as a percentage of net sales was 1.1% in
1997, 0.7% in 1996 and 0.5% in 1995. In 1997, depreciation and amortization
expense as a percentage of net sales increased over 1996 due to higher
amortization expense as a result of increased goodwill related to acquisitions
and higher depreciation costs incurred as a result of leasehold improvements
and computer equipment additions. In 1996, depreciation and amortization
expense as a percentage of net sales increased over 1995 primarily due to
higher amortization expense as a result of increased goodwill related to
acquisitions.
Restructuring costs incurred by the Company in 1995 related to the
divestiture of the Company's former electronic components distribution
business. The $3.6 million charge taken in 1995, 3.4% of net sales, consisted
of $1.4 million for write-offs of goodwill, $1.2 million for severance and
other related exit charges and $1.0 million for component inventory reserves.
Operating Income (Loss). Operating income increased by 90.0% to $6.8 million
in 1997 from $3.6 million in 1996. In 1995, the Company had an operating loss
of $4.2 million. The increase in operating income in 1996 and 1997 resulted
from higher net sales and increased gross profit as a percentage of net sales,
operating expense control and economies of scale. Operating income (loss) as a
percentage of net sales was 2.9% in 1997, 2.7% in 1996 and (4.0%) in 1995.
Interest Expense. Interest expense increased by 225.3% to $3.2 million in
1997 from $1.0 million in 1996, and by 15.1% in 1996 from $850,000 in 1995.
The increase in interest expense in 1996 and 1997 resulted from increased
borrowings in order to fund acquisitions, principally the acquisition of SMS
on September 30, 1997, infrastructure additions, expanded operations and
overall growth.
Income Taxes. Income tax expense was $335,000, $276,000 and $0 in 1997, 1996
and 1995, respectively, reflecting effective tax rates of 9.2%, 10.6% and 0%,
respectively. The Company's effective tax rate differed from statutory rates
due to the utilization of net operating loss carryforwards from losses
generated in 1995 and prior.
24
<PAGE>
Net Income (Loss). Net income increased by 41.6% to $3.3 million in 1997
from $2.3 million in 1996. The Company incurred a net loss of $5.1 million in
1995. Net income (loss) as a percentage of net sales was 1.4% in 1997, 1.8% in
1996 and (4.8%) in 1995.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial data
and such data expressed as a percentage of net sales for the quarters of 1996
and 1997. In the opinion of management, this information has been presented on
the same basis as the audited consolidated financial statements appearing
elsewhere in this Prospectus, and all necessary adjustments (consisting only
of normal recurring adjustments) have been included in the amounts stated
below to present fairly the unaudited quarterly results when read in
conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. The operating results for any quarter
are not necessarily indicative of the results to be expected for any future
period.
<TABLE>
<CAPTION>
1996 1997
---------------------------------- -----------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $27,617 $32,364 $33,940 $37,776 $35,950 $39,886 $46,139 $115,909
Cost of goods sold...... 24,037 28,458 29,443 32,451 29,981 33,293 39,297 102,518
------- ------- ------- ------- ------- ------- ------- --------
Gross profit........... 3,580 3,906 4,497 5,325 5,969 6,593 6,842 13,391
------- ------- ------- ------- ------- ------- ------- --------
Selling, general and
administrative
expenses............... 2,727 2,929 3,297 3,780 4,410 5,213 4,967 8,709
Depreciation and
amortization........... 211 234 254 284 393 356 504 1,417
------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses.............. 2,938 3,163 3,551 4,064 4,803 5,569 5,471 10,126
------- ------- ------- ------- ------- ------- ------- --------
Operating income....... 642 743 946 1,261 1,166 1,024 1,371 3,265
Interest expense........ 237 197 242 302 432 496 604 1,649
------- ------- ------- ------- ------- ------- ------- --------
Income before income
taxes................. 405 546 704 959 734 528 767 1,616
Income tax expense...... 34 60 61 121 191 121 -- 23
------- ------- ------- ------- ------- ------- ------- --------
Net income............. $ 371 $ 486 $ 643 $ 838 $ 543 $ 407 $ 767 $ 1,593
======= ======= ======= ======= ======= ======= ======= ========
Diluted net income per
share................. $ 0.09 $ 0.11 $ 0.14 $ 0.18 $ 0.11 $ 0.08 $ 0.15 $ 0.19
======= ======= ======= ======= ======= ======= ======= ========
Number of shares
(diluted) used in per
share calculation..... 4,326 4,529 4,476 4,708 4,977 5,196 5,144 8,194
======= ======= ======= ======= ======= ======= ======= ========
<CAPTION>
AS A PERCENTAGE OF NET SALES
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 87.0 87.9 86.8 85.9 83.4 83.5 85.2 88.5
------- ------- ------- ------- ------- ------- ------- --------
Gross profit........... 13.0 12.1 13.2 14.1 16.6 16.5 14.8 11.5
------- ------- ------- ------- ------- ------- ------- --------
Selling, general and
administrative
expenses............... 9.9 9.1 9.7 10.0 12.3 13.1 10.8 7.5
Depreciation and
amortization........... 0.8 0.7 0.8 0.8 1.1 0.9 1.0 1.2
------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses.............. 10.7 9.8 10.5 10.8 13.4 14.0 11.8 8.7
------- ------- ------- ------- ------- ------- ------- --------
Operating income....... 2.3 2.3 2.7 3.3 3.2 2.5 3.0 2.8
Interest expense........ 0.9 0.6 0.6 0.8 1.2 1.2 1.3 1.4
------- ------- ------- ------- ------- ------- ------- --------
Income before income
taxes................. 1.4 1.7 2.1 2.5 2.0 1.3 1.7 1.4
Income tax expense...... 0.1 0.2 0.2 0.3 0.5 0.3 -- --
------- ------- ------- ------- ------- ------- ------- --------
Net income............. 1.3% 1.5% 1.9% 2.2% 1.5% 1.0% 1.7% 1.4%
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
The Company's quarterly net sales and operating results may vary
significantly as a result of a variety of factors, including, but not limited
to, changes in the supply and demand for commercial mid-range servers,
peripheral equipment, software and related services, the cost, timing and
integration of acquisitions, the addition or loss of a key vendor or customer,
the introduction of new technologies, changes in manufacturers' prices, price
protection policies or stock rotation privileges, changes in market
development funds, changes in the level of operating expenses, product supply
shortages, disruption of warehousing or shipping channels, inventory
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<PAGE>
adjustments, increases in the amount of accounts receivable written off, price
competition, changes in the mix of products sold through distribution channels
and in the mix of products purchased by OEMs. Operating results 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
commercial mid-range servers, and order cancelations or rescheduling. In
addition, the computer distribution industry experiences both seasonal trends
and, within each quarter, tends to sell a substantial amount of its products
at the end of the quarter. For example, the Company's largest vendor, IBM,
sells approximately 35-40% of its products in the last calendar quarter.
Historically, a substantial portion of the Company's net sales has been 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 closing of
sales near the end of a quarter could cause quarterly net sales to fall
substantially short of anticipated levels and, to a greater degree, adversely
affect profitability. Thus, the Company believes that period-to-period
comparisons of the Company's operating results are not necessarily meaningful
and should not be relied upon as an indication of future performance. The
Company's future operating results are expected to continue to fluctuate as a
result of these and other factors, which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Risk Factors--Fluctuations in Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company has required substantial capital to finance accounts receivable,
inventories, capital expenditures and acquisitions, and has financed these
requirements primarily through borrowings under credit facilities, cash
generated from operations and recently, the issuance and sale of Series A
Preferred Stock and Subordinated Notes.
In September 1997, the Company negotiated with IBMCC to increase the IBMCC
Credit Facility line from $35.0 million to $75.0 million. The line was
subsequently increased on a temporary basis to $85.0 million through January
31, 1998. Product purchases from IBM and cash advances from IBMCC are directly
charged to the credit line and are paid by the Company based on payment terms
outlined in the IBMCC Credit Facility. Borrowings under the IBMCC Credit
Facility are based on eligible accounts receivable and inventory, as defined.
The IBMCC Credit Facility is renewable in September 1999 and contains
restrictive covenants which include the maintenance of minimum current,
tangible net worth and times interest earned ratios, as defined. As of
December 31, 1996 and 1997, the Company had outstanding borrowings under the
IBMCC Credit Facility of $27.2 million and $71.7 million, respectively. Of the
total outstanding borrowings, $11.2 million and $6.6 million represented cash
advances at December 31, 1996 and 1997, respectively. Cash advances bear
interest at the prime rate plus 1.875% (10.375% at December 31, 1997). Based
on eligible assets, as of December 31, 1997, the Company had additional
borrowings available under the IBMCC Credit Facility of approximately $12.5
million.
On September 30, 1997, the Company entered into the Note Purchase Agreement,
pursuant to which the Company sold $15.7 million of Subordinated Notes to the
Purchasers, granted to the Purchasers warrants (the "Warrants") to purchase an
aggregate of 400,000 shares of the Common Stock and granted to the Purchasers
10 shares of Series B Preferred Stock. The Subordinated Notes, which are
subordinated to the Company's primary lender, IBMCC, bear interest at 13.5%
annually, include an original issue discount, fully earned upon funding, of
$700,000, and are due September 30, 2000. The Company may prepay the
Subordinated Notes at 107% of the principal balance subsequent to September
30, 1997, 106% subsequent to September 30, 1998 and 105% subsequent to
September 30, 1999. On or after March 31, 2000, the Purchasers may request
redemption of up to 50% of the Subordinated Notes issued at 100% of the
principal amount. The Warrants issued pursuant to the Note Purchase Agreement
have an exercise price of $7.50 per share and expire on September 30, 2004. On
each anniversary, the Warrant price may be reset to 87.5% of the price, as
defined, of the Common Stock if the market price of the Common Stock is less
than $7.50. The Note Purchase Agreement required the Company to register the
Common Stock underlying the Warrants on a registration statement on Form S-3.
The Series B Preferred Stock issued to the Purchasers allows the holders of
the Series B Preferred Stock to elect one member to the Company's Board of
Directors if there is a default or event of default, as defined, in the Note
Purchase Agreement. The Note Purchase Agreement contains restrictive covenants
which include minimum fixed charge
26
<PAGE>
coverage ratio, minimum income, minimum consolidated net worth and maximum
capital expenditures. The Company used the proceeds from the issuance of the
Subordinated Notes to consummate the SMS Acquisition.
On September 30, 1997, the Company executed an amendment to its IBMCC Credit
Facility, pursuant to which the Company obtained the IBMCC Credit Advance to
consummate the SMS Acquisition. The IBMCC Credit Advance bears interest at the
rate of prime plus 2% (10.5% at December 31, 1997) and is due in four
installments through September 30, 1999. As part of the amendment, the Company
granted IBMCC warrants to purchase 100,000 shares of the Common Stock. The
warrants issued to IBMCC are the same, in all respects, to the Warrants issued
to the Purchasers.
Operating activities for 1997 provided cash in the amount of $5.9 million.
For this period, cash was provided primarily as a result of net income of $3.3
million, depreciation and amortization of $2.7 million, and a $32.3 million
increase in accounts payable, partially offset by a $23.3 million increase in
accounts receivable and a $7.5 million increase in inventories. Favorable
accounts payable terms with IBMCC and increased leasing of product purchases
by customers through IBMCC and third party leasing vendors, which decreased
the average days to collect customer receivables, resulted in the generation
of cash in 1997. For 1996, net cash in the amount of $1.0 million was used in
operating activities, primarily as a result of higher levels of accounts
receivable and inventories, increased sales volume and acquisitions, partially
offset by an increase in accounts payable.
Investing activities for 1997 used cash in the amount of $37.7 million. For
this period, cash was used for the acquisitions of SMS and TSI, the equity
investment in Q.I.V. Systems, Inc. and continuing leasehold and computer
hardware and software investments made at the headquarters, sales office and
warehouse and integration center sites. For 1996, net cash in the amount of
$2.8 million was used in investing activities, primarily for the acquisitions
of R&D, IDP and STI and infrastructure additions.
Cash provided by financing activities for 1997 was $34.4 million, consisting
primarily of borrowings under the Note Purchase Agreement and the IBMCC Credit
Advance totaling $23.1 million and the issuance of Series A Preferred Stock
totaling $19.1 million, partially offset by the Company's reduction in short-
term borrowings by $8.4 million. For 1996, cash provided by financing
activities was $3.7 million, resulting primarily from an increase in short-
term borrowings to fund working capital requirements.
The Company believes it has sufficient funds, or alternate sources of funds,
to carry on its business as presently conducted through 1998. See "Risk
Factors--Future Capital Needs; Uncertainty of Additional Financing."
YEAR 2000 COMPLIANCE
The Company believes that its business systems, including its computer
systems, are not subject to the Year 2000 problem; however, the Company has
begun to query its vendors and customers as to their progress in identifying
and addressing problems that their computer systems may face in correctly
processing date information as the Year 2000 approaches. See "Risk Factors--
Risks Associated With Potential "Year 2000" Problems of Third Parties."
BACKLOG
Although the Company receives purchase orders for products to be delivered
to customers over a specified time period, there can be no assurance that such
orders will result in sales, as most orders are subject to revision or
cancellation without penalty. Consequently, the Company does not believe that
backlog is a meaningful indicator of sales for future periods.
27
<PAGE>
BUSINESS
GENERAL
The Company is a value-added wholesale distributor of commercial mid-range
servers, peripheral equipment (including wireless networking equipment,
storage products, printers and terminals) and software. The Company believes
that it is one of the top three distributors of IBM's AS/400 and RS/6000
commercial mid-range servers. The Company was recently named IBM's Distributor
of the Year for the second half of 1997 and was designated as one of IBM's
Premier Business Partners, a distinction awarded only to the top 2% of IBM's
partners and affiliates. The Company also distributes commercial mid-range
servers, peripheral equipment and software manufactured by Unisys, NCR, Data
General and Telxon Corporation ("Telxon"). The Company primarily distributes
commercial mid-range servers and related products to VARs who generally
incorporate commercial applications software and sell integrated computer
systems to end user customers. The Company also integrates and configures
personal computers, workstations and departmental servers for OEMs, and
provides and remarkets installation and technical support services. Through
seven acquisitions and internal growth, the Company has expanded its products
and services, increased its geographic market coverage, strengthened its
management and technical personnel and increased its operating leverage. As a
result, the Company's net sales increased from $106.5 million in 1995 to
$237.9 million in 1997, representing compound annual growth of 49.5%, while
its operating income improved from a loss (excluding restructuring charges) of
$648,000 in 1995 to income of $6.8 million in 1997.
INDUSTRY OVERVIEW
The commercial mid-range server market encompasses servers typically priced
between $25,000 and $1.5 million with processing power sufficient to run
entire small- to medium-sized businesses and departments or divisions of large
businesses. According to Dataquest, the mid-range server market grew 12.8% to
$26.0 billion in 1996 from $23.1 billion in 1995, and is expected to grow at a
10.9% compound annual rate to $43.7 billion in 2001. Growth in the commercial
mid-range server market is being driven by the proliferation of client-server
networked environments, local area networks ("LANs"), wide area networks
("WANs"), increased processing power, the evolution of sophisticated
applications software, growth in Intranet and Internet environments, the
decline in prices for mid-range servers and the scaling of the NT operating
system into mid-range systems. Within the commercial mid-range server market,
IBM is a leading participant with its offering of AS/400 and RS/6000
commercial mid-range servers. In 1996, according to a study by Dataquest, IBM
and Hewlett-Packard Corporation ("Hewlett-Packard") were the leading
manufacturers of mid-range servers, with each holding an estimated 19% market
share.
The distribution channels for commercial mid-range servers generally consist
of manufacturers, wholesale distributors, resellers and end users. In recent
years, these distribution channels have evolved through three stages: (i)
direct sales by manufacturers to end user customers; (ii) single-tier
distribution in which manufacturers sell to resellers who, in turn, sell
directly to end user customers; and (iii) two-tier or wholesale distribution
in which manufacturers sell to value-added wholesale distributors who sell
only to resellers who, in turn, sell directly to end user customers.
The Company believes that the middle market customer niche in which it
competes is one of the fastest growing segments of the commercial mid-range
server market. Many computer manufacturers faced with the rising cost of
maintaining a direct sales force to serve a large and diverse group of VARs
and end user customers are relying more upon wholesale distributors for an
increasing percentage of their sales to small- and medium-sized businesses.
For example, in early 1996, IBM announced its intention to increase its sales
through qualified wholesale distributors by over 100%. In addition, to enhance
profitability and concentrate resources on product design, marketing and other
core aspects of their businesses, certain manufacturers are outsourcing to
wholesale distributors certain support functions, such as integration,
configuration, logistical and inventory management, technical support and
marketing. At the same time, the Company believes that shortened product life
cycles, the accelerated introduction of new products and applications, the
complex technical nature of the commercial mid-range server market, limited
direct purchasing power with manufacturers and manufacturers' preference in
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<PAGE>
dealing with a smaller number of well-capitalized wholesale distributors have
caused VARs to rely increasingly on these distributors for inventory
management, financing, technical support and other related functions. The
Company believes that the role of the value-added wholesale distributor will
become increasingly important as the VAR market for these products continues
to become more fragmented.
In addition, increasingly the final assembly of certain products is
performed by wholesale distributors. In order to compete more effectively and
lower their costs, certain major computer systems manufacturers that rely on
the wholesale distribution model have announced their intention to reduce
their own inventories and the inventories of their distributors and resellers
by implementing or expanding a build-to-order manufacturing process. These
major manufacturers have also begun to develop programs whereby final assembly
will be performed at the distribution level ("channel assembly") as compared
to the build-to-forecast methodology they presently employ. The Company has
participated in IBM's channel assembly program for RS/6000 mid-range servers
since January 1997.
As commercial mid-range market opportunities have increased, the mid-range
distribution industry has experienced significant consolidation as economies
of scale and access to financial resources have become more critical. Smaller
wholesale distributors are seeking to partner with larger wholesale
distributors or are being driven out of the market as manufacturers, led by
IBM and Hewlett-Packard, strive to market their products through a smaller
number of large wholesale distributors such as the Company. Examples of such
consolidation of distributors of IBM mid-range servers over the past year
include the acquisition of ProAmerica by Dickens Data Systems, Inc., the
acquisition of SupportNet by Gates/Arrow Commercial Systems, a division of
Arrow Electronics, Inc., the SMS Acquisition and the pending acquisition of
Dickens Data Systems, Inc. by Pioneer Standard Electronics, Inc. Large
wholesale distributors, such as the Company, that have been able to utilize
economies of scale to lower costs and pass on the savings to their customers
in the form of reduced prices or increased technical support, have continued
to expand market share. Furthermore, the need for wholesale distributors to
increase operating leverage and purchasing power, the desire of VARs to
satisfy their mid-range system requirements with fewer vendors who provide
higher levels of value-added services and the lack of sufficient capital
available to these VARs have accelerated the consolidation of small- and
medium-sized distributors. The Company believes that this consolidation trend
will continue through the year 2000.
BUSINESS STRATEGY
The Company's objective is to improve upon its position as a leading value-
added wholesale distributor of commercial mid-range servers and to capitalize
on the continuing shift of sales by manufacturers of commercial mid-range
servers to the wholesale distribution channel. The following are the key
elements of the Company's business strategy:
. Strengthen and Expand Vendor Relationships. The Company believes that
much of its success comes from its strong relationships with a relatively
small number of vendors. The Company intends to continue to enhance its
vendor relationships by aggressively pursuing co-marketing efforts,
actively participating in advisory councils and customer groups and
maintaining strong relationships with key vendor executives. The Company
was recently named IBM's Distributor of the Year for the second half of
1997 and was designated as one of IBM's Premier Business Partners, a
distinction awarded only to the top 2% of IBM's partners and affiliates. In
addition, the Company continually reviews its vendor mix and identifies new
vendors that the Company believes are well positioned for long-term growth.
The Company believes that significant opportunities exist in the emerging
NT market and intends to expand its distribution business by offering
additional platforms which utilize this network operating system.
. Focus on Mid-Range Commercial Value-Added Resellers and Independent
Software Vendors. The Company intends to continue to focus on distributing
products to VARs which sell systems to small- and medium-sized end user
customers, and also to focus on ISVs, which sell systems bundled with
software to small- and medium-sized end user customers. Many manufacturers
faced with declining product prices and the rising cost of selling direct
to a large and diverse group of end user customers are relying on wholesale
29
<PAGE>
distributors for an increasing percentage of their sales to small- and
medium-sized businesses. At the same time, resellers are increasing their
reliance on wholesale distributors for service and support functions. The
Company believes that its focus on selling to VARs and ISVs should enable
it to capitalize on the continued growth in the small- and medium-sized end
user market, resulting in additional sales for the Company.
. Pursue and Effectively Integrate Strategic Acquisitions. The Company
intends to capitalize on the continuing consolidation of the commercial
mid-range server distribution channel by identifying and pursuing
additional acquisition opportunities. Since December 1994, the Company has
completed seven acquisitions and expects to consummate the MCBA Acquisition
by March 31, 1998. The Company believes that future acquisitions should
enable it to continue to increase its product and service offerings,
enhance its presence in major domestic markets, strengthen its management
and technical personnel and improve its operating leverage.
. Increase Sales of Higher-Margin, Value-Added Services. The Company
intends to increase the quantity and quality of value-added services it
offers by acquiring and integrating companies that have a significant
service component to their business. The Company believes that, as the
trend toward outsourcing continues, it has the opportunity to capitalize on
the higher margins of the value-added services segment of its business. The
Company intends to strengthen its offering of configuration, installation
and maintenance services, thus allowing its customers to focus on their
core competencies, limit their investment in working capital and improve
product quality. The Company also intends to focus on expanding the value-
added assembly portion of its business.
. Expand Geographic Market Coverage. The Company intends to take
advantage of its vendor relationships and distribution expertise to expand
into North American markets it does not currently serve. Pursuant to this
strategy, the Company has entered into an agreement with IBM to distribute
IBM's AS/400 products in Canada. The Company believes that the
international mid-range server distribution market is currently several
years behind the domestic distribution model and will evolve in a manner
similar to the U.S. mid-range server distribution market. The Company
believes that it can capitalize on the consolidation of the international
mid-range server distribution markets and on mid-range server
manufacturers' increasing reliance on wholesale distributors in
international markets.
PRODUCTS AND VENDORS
The Company's net sales are derived primarily from the activities of two
business divisions, the Mid-Range Systems Division and the Computer and
Peripherals Group.
. Mid-Range Systems Division. The distribution of commercial mid-range
servers in 1997 accounted for approximately 75% of the Company's net sales.
The principal goal of the Company's commercial mid-range systems
distribution business is to provide customers with rapid, accurate delivery
of products as well as to provide quality configuration and technical
support. Products distributed by the Company include mid-range servers
which run on Unix, OS/400 and NT operating systems, peripheral equipment
(including wireless networking equipment, storage products, printers and
terminals) and software. In addition to selling new equipment, the Company
also distributes refurbished IBM AS/400 equipment. Within the Mid-Range
Systems Division, the Company represents five major manufacturers: IBM;
Data General; NCR; Unisys; and Telxon. During the years ended December 31,
1995, 1996 and 1997, approximately 30%, 50% and 65%, respectively, of the
Company's net sales were generated from the sale of IBM products. The
Company's mid-range IBM product line includes the AS/400 and RS/6000
families of mid-range servers. The Company believes that it is one of the
top three distributors of IBM commercial mid-range servers. Recently, the
Company was named IBM's Distributor of the Year for the second half of
1997, as one of IBM's Premier Business Partners and as one of several
distributors to qualify for IBM's Authorized Assembly Program ("AAP"). The
AAP certification allows the Company to utilize its integration facilities
to assemble custom RS/6000 configurations, allowing for shorter delivery
times to customers and a reduction in required inventory levels of pre-
configured systems.
30
<PAGE>
. Computer and Peripherals Group. The Company offers OEMs and its
departmental server customers a single source for their hardware, software
and service needs through CPG. CPG accounted for approximately 25% of the
Company's net sales in 1997. Through CPG, the Company offers its customers
a wide variety of value-added systems integration services up to, and
including, the actual installation at the end user site (e.g., "turnkey"
systems assembly of departmental servers, workstations, hardware and
software "bundling" and light manufacturing). CPG's more advanced products
include fault tolerant software, serial port expansion devices and disk
striping and mirroring solutions for the SCO/UNIX operating environments.
Products assembled and manufactured by the Company include special purpose
PC-based subcomponents of larger systems, private-label departmental and
small enterprise servers and related peripherals. CPG sources components
manufactured by DIGI International, Inc., IBM, Sony Electronics, Inc., The
Santa Cruz Operation, Inc. ("SCO"), Toshiba America Electronic Components,
Inc. and Wyse Technologies, Inc., among others. Through CPG, the Company
also specializes in building systems pursuant to long-term contracts for
companies seeking fully compatible configurations that remain consistent
over time.
VALUE-ADDED SERVICES
In addition to the products it offers, the Company also provides a variety
of value-added services, including the following:
. Integration Services. The Company performs light manufacturing or
technical integration services, ranging from simple hardware and software
integration, burn-in and testing to building customized systems to the
customer's specifications.
. Technical Support Services. The Company currently offers its customers
pre-sale technical assistance, configuration review and verification,
consulting services, network design, implementation and installation
services and site planning, telephone support and help desk, patch/bug
isolation and identification, certification requirements and preparation
and system administration assistance. The Company also remarkets certain
vendor maintenance and consulting services and reseller training programs.
. Logistical and Inventory Management Services. The Company offers
ordering and purchasing services, including order acknowledgment, order
management, contract purchasing and end-of-life buy programs. The Company
also offers inventory services such as expedited delivery, kitting and
bill-of-material services, warehousing and storage services, bonded
inventory programs, consignment programs and customer on-site operations.
The Company offers various delivery options and services, including drop
shipments, blind shipments, custom packaging, consolidated shipping
services, special handling services, personnel services and exporting
assistance. Additionally, in the near future, the Company expects to
implement an automated system by which customers can access status
information on product orders that are being drop shipped directly to such
customers by the vendor.
. Marketing Services. The Company makes current and updated information
on its products and services available to its customers through its fax
broadcast service and its web site. The Company also customizes and
provides Internet web sites for certain of its customers. In addition, the
Company offers ready to execute demand generation campaigns, assistance
with such campaigns, assistance with organizing advertising campaigns and
joint marketing funds.
. Financing, Credit and Leasing Services. The Company offers its
customers various financing and credit options, including open account
terms, electronic funds transfer, standby letters of credit, security
interest/UCC filings, personal guarantees, end user lock box services and
bid bonds. The Company also offers end user financing programs through
third parties, including leasing programs, joint purchase orders, payment
agreements and inventory financing programs.
31
<PAGE>
CUSTOMERS
The Company's customers currently include approximately 800 active accounts.
Except for Sirius, which accounted for approximately 11% of the Company's net
sales in 1997, no single customer accounted for more than 5% of the Company's
net sales in 1997. The Company segments its significant customers into the
following three broad categories:
. Value-Added Resellers. VARs typically install their own or other
vendors' software, configure completed systems and integrate their service
offerings with hardware which can be supplied by the Company. For example,
Sirius purchases IBM mid-range servers from the Company and typically
bundles these servers with software provided by J.D. Edwards. Sirius is
therefore generally able to provide its end user customers with a complete
turnkey computer systems package. In addition, NxTrend purchases IBM, Data
General and Unisys mid-range servers from the Company and bundles its
proprietary distribution applications software with these mid-range
products for sale to its end user customers.
. OEMs. These manufacturers, served by the Company through CPG, integrate
or have the Company integrate the Company's products with their own prior
to distribution to their end user customer. An example of one of the
Company's OEM customers is Melita International, Inc. ("Melita"), a
provider of customer contact and telephone call management systems. Melita
utilizes the Company to configure its proprietary software on a
preconfigured system which can be shipped directly to Melita's customer. In
addition, customers such as Tektronix, Inc. and Wang Laboratories, Inc.
have found it more efficient to outsource certain specialized products to
the Company as opposed to creating an internal infrastructure for
themselves.
. Systems Integrators. Systems integrators focus on delivering non-
industry specific solutions to the end user customer. Such solutions may
include electronic commerce, networking, Intranet/Internet configurations,
as well as application-specific solutions. For example, Q.I.V. Systems,
Inc. designs and installs network systems solutions in a variety of
application environments that incorporate commercial mid-range servers
purchased from the Company.
SALES AND MARKETING
In general, the Company focuses on selling and marketing high-quality
commercial mid-range servers and integrated computer system products from a
relatively small number of vendors. The Company's sales, sales support and
product management organizations are generally organized by vendor into
autonomous business units that sell and support only products offered by that
particular vendor. The Company believes that its customers require ongoing
support from technically trained sales professionals who are dedicated to a
particular vendor, and, in certain instances, to a particular product line,
and who can provide technical support on the increasingly complex mid-range
servers and systems offered by the Company's vendors.
The Company sells and supports IBM mid-range products through its Business
Partner Solutions, Inc. subsidiary and Data General, NCR and Unisys mid-range
products through its Western Micro Technology division. Sales professionals
require the technical expertise to work with customers and the Company's mid-
range product purchasing specialists to provide the computer system solutions
that their customers and, ultimately the end user, require. The Company's
sales professionals participate in vendor-sponsored training and certification
programs. Within the mid-range distribution business units, the Company
maintains a salesperson to technical support person ratio of approximately 4
to 1. The Company utilizes directed telemarketing programs, maintains a
database of current and potential customers, participates in cooperative
advertising with vendors, participates in trade shows and advisory councils
and utilizes print media as part of its sales and marketing efforts.
Within CPG, the Company sells primarily to OEMs. Technical expertise within
CPG's sales force is critical during the relatively long sales cycles required
to develop new commercial products. Once the products are developed, the
ongoing forecasting, manufacture, delivery and installation of these systems
must be carefully managed and reviewed. Within CPG, the Company maintains a
salesperson to technical support person ratio of
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approximately 2 to 1. In general, due to the complex nature of the products
offered by CPG, new customers are primarily solicited using targeted print
advertising and customer referrals.
As of December 31, 1997, the Company had approximately 90 direct sales
personnel. The Company has a national presence served by its sales offices in
Campbell and Irvine, California, Colorado Springs, Colorado, Chicago,
Illinois, Boston, Massachusetts and San Antonio, Texas. The Company's sales
offices are supported by centralized marketing departments located in Chicago
and San Antonio. The Company generally compensates its sales personnel based
on attainment of specified gross profit margins, return on assets and
inventory turns.
OPERATIONS AND INFRASTRUCTURE
Information Systems
The Company's corporate information system is a scalable, centralized
processing system capable of supporting numerous operational functions,
including purchasing, receiving, order processing, shipping, inventory
management, sales analysis and accounting. The Company's customers and sales
representatives rely on the information system for on-line, real-time
information on product pricing, inventory availability and order status. The
fully integrated modular system provides customers and sales representatives
on-line access to the status of IBM's backlog of shipments the Company expects
to receive, thereby significantly reducing back office telephone investigation
time. After product pricing and availability have been determined, the
integrated order entry system automatically places an order for shipment or
allocates the inventory to the assembly operations, if so required. The system
then instructs warehouse personnel to pull products for shipment and informs
them as to the location of the inventory. In order to optimize the use of
warehouse space, the Company uses a random access system whereby inventory is
stored in the first available location within the warehouse. The Company
believes that its business systems, including its computer systems, are not
subject to the Year 2000 problem. The Company anticipates that in the second
quarter of 1998, it will undertake conversion of the information systems at
its San Antonio, Texas locations to its corporate information system in
Campbell, California.
Inventory Control
For both the Mid-Range Systems Division and CPG, the Company's computer
systems automatically determine price and availability of inventory and can
allocate inventory to bills of material. The Company currently has two
discrete inventory control systems. The first is maintained in San Antonio,
Texas and manages the Company's IBM AS/400 and Telxon product inventories. The
second is located in Campbell, California and tracks all IBM RS/6000, Data
General, NCR, Unisys and CPG inventories at the Company's locations throughout
the United States. Under both systems, inventories are overseen by a dedicated
group of product specialists, assigned by product line, whose responsibility
it is to appropriately manage inventory levels and turnover. A significant
portion of these specialists' compensation is paid based upon the attainment
of certain prescribed inventory management benchmarks. The Company anticipates
that the San Antonio inventory system will be converted into the corporate
inventory control system in Campbell, California in the second quarter of
1998.
Warehouse and Integration Facilities; Shipping
The Company maintains inventory stocking locations in Irvine and Fremont,
California, Chicago, Illinois and San Antonio, Texas. In addition, the Company
has a major integration facility in Fremont, California, adjacent to its
warehouse, with other integration facilities in Irvine, Chicago and San
Antonio. The Company's Fremont integration facility is ISO 9002 certified and
the Company intends to seek ISO 9002 certification for its Irvine facility.
The Company presently ships products from its warehouses via FedEx, UPS and
other common carriers. In addition, certain products that the Company
distributes are drop-shipped to the Company's customers by its vendors. See
"Risk Factors--Dependence on Third Party Shippers."
33
<PAGE>
Financial Services
The Company provides a number of flexible leasing and financing alternatives
to its customers, including a variety of leasing options, inventory flooring
options and end user lock-box arrangements. The Company also maintains credit
insurance to enable it to more effectively manage the risk of extending credit
to its customers. See "Risk Factors--Extension of Credit to Customers Without
Requiring Collateral."
COMPETITION
The markets in which the Company operates are highly competitive.
Competition is based primarily on product availability, price, credit
availability, speed of delivery, ability to tailor specific solutions to
customer needs, breadth and depth of product lines and services, technical
expertise and pre- and post-sale service and support. Increased competition
may result in further price reductions, reduced gross profit margins and loss
of market share, any of which could materially and adversely affect the
Company's business, financial condition and results of operations.
Through the Mid-Range Systems Division, the Company competes with national,
regional and local distributors, including, but not limited to, Gates/Arrow
Commercial Systems, a division of Arrow Electronics, Inc., Hamilton Hall-Mark
Computer Products, a subsidiary of Avnet, Inc., and Pioneer Standard
Electronics, Inc. (which recently announced its intention to acquire Dickens
Data Systems, Inc.), and, in some limited circumstances, its own vendors. In
the distribution of storage products, the Company competes with national,
regional and local distributors. Through CPG, the Company competes with
contract manufacturers, systems integrators and certain assemblers of computer
products. 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 to devote greater resources to the development,
promotion and sale of their products than the Company. Competitors which are
larger than the Company may be able to obtain more favorable pricing and terms
from vendors than the Company. As a result, the Company may be at a
disadvantage when competing with these larger companies. If the Company fails
to compete effectively, the Company's business, financial condition and
results of operations would be materially and adversely affected. See "Risk
Factors--Substantial Competition."
EMPLOYEES
As of February 28, 1998, the Company had approximately 373 full-time
employees. The Company is not a party to any collective bargaining agreement
and considers its employee relations to be good.
34
<PAGE>
PROPERTIES AND FACILITIES
The Company leases all facilities used in its business. The following table
summarizes the principal properties occupied by the Company:
<TABLE>
<CAPTION>
APPROXIMATE LEASE
SQUARE EXPIRATION
LOCATION PRINCIPAL USE FOOTAGE DATE
-------- ------------- ----------- ----------
<C> <S> <C> <C>
Campbell, California....................... Corporate Headquarters 36,000 2000
and Sales Office
San Antonio, Texas(1)...................... Business Partner 27,000 1998
Solutions, Inc.
Corporate Headquarters
and Sales, Marketing and
Technical Support Office
Fremont, California........................ Warehouse, Distribution 66,500 2003
and Integration Center
Irvine, California......................... Warehouse, Distribution 41,000 2004
and Integration Center
and Sales Office
San Antonio, Texas(1)...................... Warehouse, Distribution 30,000 1998
and Integration Center
Burr Ridge, Illinois (a suburb of Chicago). Warehouse, Distribution, 16,900 2003
Integration Center and
Sales, Marketing and
Technical Support Office
Framingham, Massachusetts (a suburb of 11,200 2000
Boston)................................... Sales Office
Colorado Springs, Colorado................. Sales Office 2,500 1999
</TABLE>
- --------
(1) It is currently anticipated that the operations housed in these locations
will be moved by July 1998 to a single new 87,000 square foot facility in
San Antonio, Texas, which has been leased by the Company through 2008.
The Company believes its facilities are suitable for their uses and are
generally adequate to support the Company's current level of operations. The
Company believes that lease extensions or replacement space may be obtained
for all of its leased facilities upon the expiration of the current lease
terms, in most cases at rates not materially higher than those currently in
effect.
LITIGATION
The Company is not presently a party to any litigation that is material to
the Company. The Company is involved in various other investigations and
claims arising in the normal conduct of its business, none of which, in the
opinion of the Company, will have a material adverse effect on the Company's
business, financial condition and results of operations or its ability to
conduct business.
TRADEMARKS AND SERVICE MARKS
Savoir Technology Group(TM), Business Partner Solutions(TM) and WM
(Stylized)(R) are trademarks of the Company. The Company does not believe that
its operations are dependent upon any of its trademarks or trade names. The
Company also sells products and provides services under various trademarks,
service marks and trade names to which reference is made in this Prospectus
and which are the property of owners other than the Company. Such owners have
reserved all rights with respect to their respective trademarks, service marks
and trade names.
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of February 28, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
P. Scott Munro........... 41 Chairman of the Board, Chief Executive Officer,
President, Secretary and Director
James W. Dorst........... 43 Chief Financial Officer
Robert O'Reilly.......... 45 Senior Vice President
Carlton Joseph Mertens 32 Chief Executive Officer and President of the
II...................... Company's subsidiary, Business Partner Solutions,
Inc., and Director
Angelo Guadagno(1)(2).... 55 Director
James J. Heffernan(3).... 55 Director
K. William Sickler(1)(2). 48 Director
J. Larry Smart(1)(3)..... 49 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Stock Option Committee.
(3) Member of the Audit Committee.
P. SCOTT MUNRO has served as Chief Executive Officer, President and
Secretary of the Company since July 1995. Mr. Munro has also served as
Chairman of the Board since January 1998 and served as a Director of the
Company from July 1995. From January 1993 to July 1995, Mr. Munro was
President, Computer Systems Division of the Company, and from July 1990 to
January 1993, he served as Senior Vice President, Computer Systems Division of
the Company. Prior to 1990, Mr. Munro served as a General Manager for both
Future Electronics, Inc., a distributor of electronic components, and Arrow
Electronics, Inc., a distributor of computer products.
JAMES W. DORST has served as Chief Financial Officer of the Company since
May 1995. From May 1994 to February 1995, Mr. Dorst was Chief Financial
Officer of Accolade, Inc., an entertainment software developer. From March
1986 to April 1993, he was Chief Financial Officer of Drypers Corporation, a
manufacturer of consumer disposable products. Prior to 1986, he was employed
by the public accounting firm of Coopers & Lybrand L.L.P.
ROBERT O'REILLY has served as Senior Vice President of the Company since
September 1997 and prior to that time served as Vice President of Human
Resources from February 1996 and Director of Human Resources from September
1995. Prior to joining the Company, Mr. O'Reilly was a Director of Human
Resources, with special emphasis on recruitment, training and development,
during his 10-year career with Future Electronics, Inc., a distributor of
electronic components.
CARLTON JOSEPH MERTENS II has served as a Director of the Company and as
Chief Executive Officer and President of the Company's subsidiary, Business
Partners Solutions, Inc., since September 1997. From 1984 to September 1997,
Mr. Mertens was an active member of SMS' management team, and served as
Executive Vice President of SMS from 1991 to September 1997 prior to its
acquisition by the Company.
ANGELO GUADAGNO has served as a Director of the Company since August 1997.
From 1989 to 1997, he was the Vice President of Worldwide Channel Sales of
Data General, a manufacturer of servers, storage systems and related software.
During his tenure at Data General he also served as: Vice President of U.S.
Sales from 1994 to 1996; Vice President, American Sales and Services from 1990
to 1994; and Vice President of North American Sales Division from 1989 to
1990.
36
<PAGE>
JAMES J. HEFFERNAN has served as a Director of the Company since October
1995. Since January 1996, he has been Chief Financial Officer and a director
of USWeb Corporation, an Internet consulting firm. From March 1995 to January
1996, he was Chief Financial Officer of Interlink Computer Sciences, a
software company. Prior to such time, Mr. Heffernan was Chairman of the Board
and Chief Financial Officer of Panoramic, Inc., a software company. From June
1994 to June 1995, Mr. Heffernan was a director of International Microcomputer
Software, Inc., a software company.
K. WILLIAM SICKLER has served as a Director of the Company since July 1993.
Mr. Sickler has served as Chief Executive Officer and President of Gadzoox
Networks, Inc., a provider of gigabit fibre channel networking products since
April 1996. From July 1995 to April 1996, he was Executive Director of
Software Business Development for Seagate Technology, a software developer and
manufacturer of disk drives, with responsibility for analysis of potential
software company acquisitions. From December 1992 to July 1995, Mr. Sickler
was President and Chief Executive Officer of Network Computing, Inc., a
provider of network management software for local area networks.
J. LARRY SMART has served as a Director of the Company since October 1995.
From October 1995 to January 1998, he also served as Chairman of the Board of
the Company. Since March 1997, Mr. Smart has served as President and Chief
Executive Officer of Visioneer, Inc., a developer of personal desktop
management hardware and software imaging products, and served as Chairman of
the Board of Directors of that company from February 1997 until assuming the
position of President and Chief Executive Officer. From July 1995 until March
1997, he was Chairman of the Board, President and Chief Executive Officer of
StreamLogic Corporation, a data storage company. From March 1994 to February
1995, Mr. Smart was President and Chief Executive Officer of Maxtor
Corporation, a data storage company. From July 1991 to February 1995, Mr.
Smart was President and Chief Executive Officer of Southwall Technologies,
Inc., a materials sciences company.
The Company currently has authorized six (6) members of the Board of
Directors. All directors are elected to hold office until the next annual
meeting of stockholders of the Company and until their successors have been
duly elected and qualified. Officers are elected at the first meeting of the
Board of Directors following the stockholders' meeting at which the directors
are elected and serve at the discretion of the Board of Directors. There are
no family relationships among any of the directors or executive officers of
the Company.
37
<PAGE>
EXECUTIVE COMPENSATION
The following table provides certain summary information for the years ended
December 31, 1995, 1996 and 1997 concerning compensation paid to the Company's
Chief Executive Officer and to the Company's two other named executive
officers whose compensation exceeded $100,000 in 1997 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
------------------ ------ --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
P. Scott Munro.......... 1997 302,485 119,398 -- 150,000 --
Chairman of the Board, 1996 221,286 122,564 -- 125,000 --
Chief Executive 1995 173,660 152,530 -- 60,000 --
Officer, President and
Secretary
James W. Dorst.......... 1997 192,333 51,872 -- 30,000 --
Chief Financial Officer 1996 150,000 47,867 -- 20,000 --
1995 100,000 30,640 20,833(1) 50,000 --
Robert O'Reilly(2)...... 1997 142,517 36,578 -- 30,000 --
Senior Vice President
</TABLE>
- --------
(1) Mr. Dorst served as a consultant to the Company from February 1995 until
he was hired by the Company in May 1995. During his consultancy with the
Company, he was paid $20,833.
(2) Mr. O'Reilly became an executive officer of the Company during 1997.
38
<PAGE>
RECENT OPTION GRANTS
The following table sets forth certain information regarding options granted
during the fiscal year ended December 31, 1997 to the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM($)(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SHARE) DATE 5% 10%
- ---- ---------- -------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
P. Scott Munro.......... 75,000(3) 13.2% 11.375 5/16/07 536,526 1,359,662
75,000(4) 13.2% 11.375 5/16/07 536,526 1,359,662
James W. Dorst.......... 15,000(3) 2.6% 11.375 5/16/07 107,305 271,932
15,000(4) 2.6% 11.375 5/16/07 107,305 271,932
Robert O'Reilly......... 15,000(3) 2.6% 11.375 5/16/07 107,305 271,932
15,000(4) 2.6% 11.375 5/16/07 107,305 271,932
</TABLE>
- --------
(1) Based on options to purchase an aggregate of 567,000 shares of Common
Stock granted during fiscal 1997.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of five percent (5%) and
ten percent (10%) compounded annually from the date the respective options
were granted to their expiration date and are not presented to forecast
possible future appreciation, if any, in the price of the Common Stock.
The gains shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise of the
options or the sale of the underlying shares of Common Stock. The actual
gains, if any, on the stock option exercises will depend on the future
performance of the Common Stock, the optionee's continued employment
through applicable vesting periods and the date on which the options are
exercised.
(3) These options have a 10-year term and vest at the rate of twenty-five
percent (25%) per year over a four-year period. These options have
accelerated vesting upon a change of control of the Company.
(4) These options have a 10-year term and vest based on the price of the
Common Stock expressed as a 30-day consecutive average, with one hundred
percent (100%) vesting after five years in any event. These options have
accelerated vesting upon a change of control of the Company.
The following table shows the number of shares of Common Stock represented
by outstanding stock options held by each of the Named Executive Officers as
of December 31, 1997.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- -------------------------- -------------------------
<S> <C> <C>
P. Scott Munro............. 134,218 / 302,500 718,549 / 828,438
James W. Dorst............. 30,000 / 70,000 210,000 / 233,750
Robert O'Reilly............ 11,250 / 63,750 32,344 / 97,031
</TABLE>
- --------
(1) Based on a per share price of $10.375, the closing price of the Common
Stock as reported by The Nasdaq National Market on December 31, 1997, the
last trading day of the fiscal year.
COMPENSATION OF DIRECTORS
The Company's outside directors (i.e., those who are not employees of the
Company) receive an annual retainer of $20,000, plus $750 for each board
meeting attended. The Company pays for directors' liability insurance and has
entered into indemnification agreements with each of its directors. At the
1994 Annual Meeting of Stockholders, the stockholders approved the adoption of
the 1994 Stock Option Plan, which has on several occasions thereafter been
amended. The 1994 Stock Option Plan, as amended, provides for the grant of an
option of 15,000 shares of the Common Stock to certain directors who are not
employees following their initial election
39
<PAGE>
or appointment and an option for 4,000 shares of Common Stock at every regular
annual meeting thereafter at which they are elected. The exercise price of the
options is the fair market value of the Common Stock on the date of each
respective grant and the options vest over a four-year period. In April 1997,
the Board of Directors made discretionary grants of nonstatutory stock options
to each of the outside directors to purchase 6,250 shares of Common Stock at
an exercise price of $11.00 per share.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with P. Scott Munro
dated January 1, 1996. Pursuant to the terms of the agreement, as amended, Mr.
Munro receives a base salary of $325,000 per year and is eligible to receive a
bonus of up to $200,000 per year, subject to achievement of certain
performance goals. If Mr. Munro is terminated without cause, he will be
entitled to receive his base salary for twelve (12) months following his
termination. If Mr. Munro's responsibilities are reduced within twelve (12)
months following a change in control and such reduction in responsibilities is
not for cause, any resignation of employment by Mr. Munro as a consequence of
such reduction in responsibilities will be treated as a termination of
employment without cause.
The Company has also entered into employment agreements with other
management personnel as follows: (i) an employment agreement with James W.
Dorst dated June 12, 1995, pursuant to which Mr. Dorst receives a base salary
of $200,000 per year and is eligible to receive a bonus of up to $60,000 per
year, subject to achievement of certain performance goals; and (ii) an
employment agreement with Robert O'Reilly dated January 22, 1998, pursuant to
which Mr. O'Reilly receives a base salary of $150,000 per year and is eligible
to receive a bonus of up to $50,000 per year and a one-time bonus of $12,500,
subject to achievement of certain performance goals. In addition to the
foregoing, pursuant to each of their agreements with the Company, if Mr. Dorst
or Mr. O'Reilly is terminated for cause, such person will be entitled to
receive his base salary and bonus through the date of his termination. If Mr.
Dorst or Mr. O'Reilly is terminated without cause, such person will be
entitled to receive his base salary for a period following his termination,
twelve (12) months for Mr. Dorst and six (6) months for Mr. O'Reilly. If Mr.
Dorst's or Mr. O'Reilly's responsibilities are reduced twelve (12) months
following a change in control and such reduction in responsibilities is not
for cause, any resignation of employment as a consequence of such reduction in
responsibilities will be treated as a termination of employment without cause.
The Company has entered into an employment agreement with Carlton Joseph
Mertens II dated September 30, 1997, pursuant to which Mr. Mertens receives a
base salary of $270,000 per year and is eligible to receive a bonus of up to
$130,000 per year, subject to achievement of certain performance goals. If Mr.
Mertens is terminated for cause, he will be entitled to receive his base
salary and bonus due through the date of his termination. If Mr. Mertens is
terminated without cause or if Mr. Mertens terminates his employment with the
Company for certain specified reasons, he will be entitled to receive his base
salary for nine (9) months following his termination; such reasons include
assignment or alteration by the Company of Mr. Mertens' duties,
responsibilities or obligations materially inconsistent with his position with
the Company after notice of Mr. Mertens' objections thereto, failure of the
Company to provide to Mr. Mertens the salary or bonuses described above,
relocation of the Company's Business Partner Solutions, Inc.'s principal
offices outside of San Antonio, Texas, any requirement by the Company for Mr.
Mertens to relocate anywhere other than San Antonio, Texas and instructions by
the Company given to Mr. Mertens to violate any applicable law after notice of
Mr. Mertens' objections. In addition, the Company has entered into a
noncompetition agreement with Mr. Mertens dated September 30, 1997 (the
"Mertens Non-Compete"). The Mertens Non-Compete was made in connection with
the sale by Mr. Mertens of all of his shares of SMS to the Company. Under the
Mertens Non-Compete, Mr. Mertens agreed that, with respect to certain
geographic areas, including all of the states of the United States of America
(but excluding certain California counties), Canada, Mexico and Puerto Rico,
he would not sell computer hardware, software or services to value-added
resellers, resellers or systems integrators or approach, contact or solicit
any employee of the Company (or any affiliate of the Company) to leave the
employ of the Company (or any of its affiliates) except through general
employment advertising. The Mertens Non-Compete
40
<PAGE>
expires on the earlier of September 30, 1999 or the date on which final
payment of any salary due to Mr. Mertens is made. The Mertens Non-Compete may
terminate earlier upon the Company's failure to pay timely accrued interest on
certain promissory notes held by Mr. Mertens.
STOCK OPTION PLAN
The 1994 Stock Option Plan provides for awards in the form of restricted
shares, stock units, options (including incentive stock options ("ISOs") and
nonstatutory stock options ("NSOs")) or stock appreciation rights ("SARs").
Employees, consultants and advisors of the Company are eligible for the grant
of restricted shares, stock units, SARs and NSOs. Only employees are eligible
for the grant of ISOs. The outside directors of the Company receive automatic
NSO grants as described above and may elect to receive any director fees in
NSOs, stock units or a combination thereof. A total of 2,121,802 shares of
Common Stock have been reserved for issuance under the 1994 Stock Option Plan.
As of March 10, 1998, 1,564,135 awards had been granted under the 1994 Stock
Option Plan to 78 persons. Such options have exercise prices ranging from
$2.00 to $12.75 per share and a weighted average exercise price of $8.27 per
share.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Certificate of Incorporation that
limit the liability of its directors for monetary damages for breach of their
fiduciary duty as directors, except for liability that cannot be eliminated
under the DGCL. The DGCL provides that directors of a company will not be
personally liable for monetary damages for breach of their fiduciary duty as
directors, except for liability: (i) for any breach of their duty of loyalty
to the Company or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) for unlawful payment of dividend or unlawful stock repurchase or
redemption, as provided in Section 174 of the DGCL; or (iv) for any
transaction from which the director derived an improper personal benefit.
The Certificate of Incorporation and Bylaws also provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by
the DGCL. The Company has entered into separate indemnification agreements
with its directors and officers that could require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified. The Company believes that the limitation of liability
provision in its Certificate of Incorporation and Bylaws and the
indemnification agreements will facilitate the Company's ability to continue
to attract and retain qualified individuals to serve as directors and officers
of the Company.
41
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as to the beneficial ownership of
the Common Stock as of March 11, 1998, and as adjusted to reflect the sale of
the shares offered hereby, by: (i) each person known to the Company to
beneficially own more than five percent (5%) of the Common Stock; (ii) each of
the Company's directors; (iii) each of the Named Executive Officers; and (iv)
all executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED (2)
DIRECTORS, OFFICERS AND --------------------------
CERTAIN BENEFICIAL NUMBER OF SHARES BEFORE AFTER
OWNERS BENEFICIALLY OWNED(1) OFFERING OFFERING
- ----------------------- --------------------- ----------- -----------
<S> <C> <C> <C> <C>
ROI Capital Management,
Inc. ("ROI") and
affiliates(3)
One Bush Street, Suite
1150
San Francisco, CA
94104.................. 590,825 10.3% 6.4%
Canpartners Investments
IV, LLC ("CanIV")
and affiliates(4)
9665 Wilshire
Boulevard, Suite 200
Beverly Hills, CA
90212.................. 517,616 8.6 5.4
Strome Susskind
Investment Management,
L.P. ("SSIM") and
affiliates(5)
100 Wilshire Avenue
Santa Monica, CA 90491. 590,967 9.7 6.2
Carlton Joseph Mertens
II(6).................. 460,000 8.4 5.1
Hemisphere Trading
Co.(7)
5796 Shelby Oaks Drive,
Suite 12
Memphis, TN 38134...... 414,000 7.5 4.6
Robert Fleming Inc.(8).. 436,685 7.4 4.6
P. Scott Munro(9)....... 154,844 2.7 1.7
James W. Dorst(10)...... 47,469 * *
Angelo Guadagno......... 0 * *
James J. Heffernan(11).. 7,188 * *
Robert O'Reilly(12)..... 17,609 * *
K. William Sickler(13).. 22,688 * *
J. Larry Smart(14)...... 21,188 * *
All executive officers
and directors as a
group (8 persons)(15).. 816,433 14.2 8.8
</TABLE>
- --------
* Less than one percent (1%).
(1) Unless otherwise indicated, the beneficial owner has sole voting and
dispositive power over the shares reported in the table. Information with
respect to beneficial ownership is based upon information obtained from
the stockholders and from the Company's transfer agent. To the Company's
knowledge, unless otherwise indicated, the persons and entities named in
the table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission (the "Commission") and
includes voting and investment power with respect to securities. Shares of
Common Stock issuable upon exercise of stock options exercisable within 60
days of February 28, 1998, upon conversion of Series A Preferred Stock or
upon exercise of warrants that are currently exercisable or exercisable
within 60 days of February 28, 1998 are deemed to be outstanding and to be
beneficially owned by the person presently entitled to exercise the right
of conversion or exercise for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. Each
share of Series A Preferred Stock is convertible at any time into shares
of the Common Stock at a current ratio of 1.027 shares of Common Stock for
each share of Series A Preferred Stock.
(2) Based on 5,489,258 shares of Common Stock outstanding as of March 11,
1998.
42
<PAGE>
(3) Includes 323,600 shares of Common Stock, 175,000 shares of Series A
Preferred Stock and warrants to purchase 87,500 shares of Common Stock.
Common Stock ownership information is based on Amendment Number 1 to
Schedule 13D dated January 26, 1996 filed jointly by ROI, ROI Partners,
L.P. ("PTRS"), ROI & Lane, L.P. ("R&L"), Mark T. Boyer and Mitchell J.
Soboleski reporting beneficial ownership as follows:
<TABLE>
<CAPTION>
SHARED
SHARES VOTING AND
BENEFICIALLY DISPOSITIVE
OWNED POWER
------------ -----------
<S> <C> <C>
ROI............................................... 323,600 323,600
PTRS.............................................. 201,000 201,000
R&L............................................... 24,000 24,000
Mr. Boyer......................................... 201,000 201,000
Mr. Soboleski..................................... 201,000 201,000
</TABLE>
Messrs. Boyer and Soboleski are the sole stockholders and President and
Secretary, respectively, of ROI. Messrs. Boyer and Soboleski and ROI are the
general partners of PTRS, which is an investment limited partnership. ROI is
the managing general partner of R&L, which is an investment partnership. In
addition, the shares of Series A Preferred Stock and warrants are held as
follows: (i) 60,000 shares of Series A Preferred Stock and warrants to
purchase 30,000 shares of Common Stock are held by ROI Offshore Fund Ltd;
(ii) 100,000 shares of Series A Preferred Stock and warrants to purchase
50,000 shares of Common Stock are held by PTRS; and (iii) 15,000 shares of
Series A Preferred Stock and warrants to purchase 7,500 shares of Common
Stock are held by Microcap Partners, L.P. The Series A Preferred Stock and
warrants are not registered pursuant to Section 12 of the Exchange Act;
therefore, ownership of such securities does not require reporting pursuant
to Regulation 13D of the Exchange Act. The Company has no information about
the shared voting and dispositive power of such securities.
(4) Includes 208,000 shares of Series A Preferred Stock and warrants to
purchase 304,000 shares of Common Stock. Common Stock ownership
information is based on a Schedule 13D dated September 30, 1997 filed
jointly by CanIV, Canyon Capital Management, L.P. ("CCM"), Canpartners
Incorporated ("Canpartners"), Mitchell R. Julis, Joshua S. Friedman and R.
Christian B. Evensen, each of whom beneficially owns 512,000 shares and
shares voting and dispositive power over all such shares. Messrs. Julis,
Friedman and Evensen are the sole stockholders of Canpartners. Messrs.
Julis, Friedman and Evensen and Canpartners are the members of CanIV,
which is an investment limited partnership formed to hold securities
through participation agreements for accounts managed by CCM. Canpartners
is the managing general partner of CanIV. CCM is a registered investment
advisor controlled by Canpartners. In addition, 208,000 shares of Series A
Preferred Stock and warrants to purchase 304,000 shares of Common Stock
are held by CanIV. The Series A Preferred Stock and warrants are not
registered pursuant to Section 12 of the Exchange Act; therefore,
ownership of such securities does not require reporting pursuant to
Regulation 13D of the Exchange Act. The Company has no information about
the shared voting and dispositive power of such securities.
(5) Includes 387,012 shares of Series A Preferred Stock and warrants to
purchase 193,506 shares of Common Stock. The shares of Series A Preferred
Stock and warrants are held as follows: (i) 126,852 shares of Series A
Preferred Stock and warrants to purchase 63,426 shares of Common Stock are
held by Strome Offshore Limited; (ii) 125,098 shares of Series A Preferred
Stock and warrants to purchase 62,549 of Common Stock are held by Strome
Susskind Hedgecap Fund, LP; (iii) 103,788 shares of Series A Preferred
Stock and warrants to purchase 51,894 shares of Common Stock are held by
Strome Partners L.P.; and (iv) 31,274 shares of Series A Preferred Stock
and warrants to purchase 15,637 shares of Common Stock are held by Strome
Hedgecap Limited. The Series A Preferred Stock and warrants are not
registered pursuant to Section 12 of the Exchange Act; therefore,
ownership of such securities does not require reporting pursuant to
Regulation 13D of the Exchange Act. The Company has no information about
the shared voting and dispositive power of such securities.
(6) Based on a Schedule 13D dated September 30, 1997 filed by Mr. Mertens.
(7) Based on a Schedule 13G dated October 3, 1997 filed by Hemisphere Trading
Co.
(8) Includes 155,000 shares of Series A Preferred Stock and warrants to
purchase 277,500 shares of Common Stock. The shares of Series A Preferred
Stock and warrants are held as follows: (i) 155,000 shares of Series A
Preferred Stock and warrants to purchase 277,500 shares of Common Stock
are held by Robert Fleming Inc.
(9) Includes 144,218 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
(10) Includes 30,000 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
(11) Includes 7,188 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
(12) Includes 16,250 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
(13) Includes 17,188 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
(14) Includes 7,188 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
(15) Includes 275,158 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
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DESCRIPTION OF CAPITAL STOCK
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 25,000,000 shares of Common Stock, par value $0.01 per
share (the "Common Stock"), and 10,000,000 shares of Preferred Stock, par
value $0.01 per share (the "Preferred Stock"), of which 2,242,500 shares are
designated Series A Preferred Stock and 10 shares are designated Series B
Preferred Stock. As of March 11, 1998, there were outstanding 5,489,258 shares
of Common Stock, 2,242,500 shares of Series A Preferred Stock and 10 shares of
Series B Preferred Stock.
The following summary does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Certificate of
Incorporation, including the Certificate of Designation for the Series A
Preferred Stock and the Series B Preferred Stock, where such rights are set
forth in full, and the provisions of applicable law.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preference of any then
outstanding Preferred Stock. Holders of Common Stock have no preemptive rights
and no right to convert their Common Stock into any other securities. There
are no redemption or sinking fund provisions applicable to the Common Stock.
All outstanding shares of Common Stock are fully paid and nonassessable.
COMMON STOCK WARRANTS
Each Warrant entitles the holder to purchase one share of Common Stock at an
exercise price of $7.50 per share and expires on September 30, 2004. On each
anniversary, the exercise price may be reset to 87.5% of the price of the
Common Stock if the market price of the Common Stock is less than $7.50. Each
warrant issued in connection with the private placement of the Series A
Preferred Stock (the "Series A Warrants") entitles the holder to purchase one
share of Common Stock at an exercise price of $9.6875 per share and expires on
September 18, 2002.
The exercise prices of the Warrants and the Series A Warrants are subject to
adjustment upon certain events, including stock splits, stock dividends,
distributions and reclassifications. Fractional shares of Common Stock will
not be issued upon exercise of either the Warrants or the Series A Warrants,
and cash will be paid in lieu thereof.
PREFERRED STOCK
Under the Certificate of Incorporation, the Company has the authority to
issue 10,000,000 shares of Preferred Stock, in one or more series, without
stockholder approval, with such designations, powers and preferences, and
qualifications or limitations or restrictions thereon, as shall be determined
by the Board of Directors. The preferences, powers, rights and restrictions of
different series of Preferred Stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, purchase funds and other matters. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Stock or affect adversely the
rights and powers, including voting rights, of the holders of Common Stock and
may have the effect of delaying, deferring or preventing a change in control
of the Company. As of the date of this Prospectus, there were 2,242,500 shares
of Series A Preferred Stock and 10 shares of Series B Preferred Stock
outstanding. The
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Company has no present plans to issue any additional shares of Preferred
Stock. See "Risk Factors--Anti-takeover Effect of Certain Charter and Bylaw
Provisions and Delaware Law."
Series A Preferred Stock
Holders of the Series A Preferred Stock are entitled to receive, out of
funds of the Company legally available therefor, cumulative dividends at a
rate per annum equal to 8% of the Liquidation Preference (as hereinafter
defined), subject to appropriate adjustments in the event of any stock
dividend, stock split, combination or other similar recapitalization affecting
such shares and subject further to any Special Dividend Rate Increases (as
hereinafter defined) (as so adjusted, the "Dividend Rate"), payable in equal
quarterly installments on January 15, April 15, July 15 and October 15 of each
year. The liquidation preference applicable to each share is equal to the
purchase price plus accrued and unpaid dividends to the date of final
distribution (the "Liquidation Preference"), payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Company, before any distribution to holders of Common Stock of the Company.
The Series A Preferred Stock is convertible, in whole or in part, at the
option of the holder at any time into shares of the Common Stock. The
conversion ratio is currently 1.027 shares of Common Stock for each share of
Series A Preferred Stock. The Series A Preferred Stock is redeemable, in whole
or in part, at the option of the Company, under certain circumstances on or
after September 30, 1998 or at any time on or after September 30, 2001. The
Series A Preferred Stock is not subject to any sinking fund or other
obligation of the Company to redeem or retire the Series A Preferred Stock
except as described below. Any Series A Preferred Stock converted, redeemed or
otherwise acquired by the Company will, upon cancellation of such shares, have
the status of authorized but unissued Preferred Stock subject to reissuance by
the Board of Directors as Preferred Stock of any one or more other series.
Series B Preferred Stock
Holders of the Series B Preferred Stock are not entitled to receive
dividends. The liquidation preference of each share of Series B Preferred
Stock is equal to $1.00, subject to appropriate adjustments in the event of
any stock dividend, stock split, combination or other similar recapitalization
affecting such shares, and is payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company before any
distribution to holders of Common Stock and holders of securities ranking
junior to the Series B Preferred Stock. The holders of Series B Preferred
Stock do not have voting rights unless there occurs a default by the Company
under the Note Purchase Agreement. The Series B Preferred Stock is not
convertible. The Series B Preferred Stock is redeemable, in whole or in part,
at the option of the Company, under certain circumstances. Any Series B
Preferred Stock converted, redeemed or otherwise acquired by the Company will,
upon cancellation of such shares, have the status of authorized but unissued
Preferred Stock subject to reissuance by the Board of Directors as Preferred
Stock of any one or more other series.
RIGHT OF FIRST REFUSAL -- PREEMPTIVE RIGHTS
The Company granted to the Purchasers of the Subordinated Notes and to IBMCC
rights of first refusal on all debt and private equity financings, except bank
financings. In addition, the Purchasers of the Subordinated Notes have the
right to maintain the same fully diluted ownership in the event of issuances
of additional shares of Common Stock, convertible securities or other Common
Stock equivalents, which right has been waived by all such Purchasers in
connection with this offering.
REGISTRATION RIGHTS
Pursuant to various agreements between the Company and certain parties, the
Company has granted such parties certain rights with respect to the
registration of shares of the Company under the Securities Act. If the Company
proposes to register any of its securities under the Securities Act for its
own account, such parties are entitled to notice of the registration and are
entitled to include, at the Company's expense, such shares therein, provided,
among other conditions, that the underwriters have the right to limit the
number of such shares included in the registration. In addition, such parties
may require the Company, on not more than one occasion during any
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12-month period, to file a registration statement under the Securities Act
with respect to their shares of the Company's stock, and the Company is
required to use its best efforts to effect the registration, subject to
certain conditions and limitations. All such registrations will be at the
Company's expense. Further, such parties may require the Company, at its
expense, to register their shares on a registration statement on Form S-3 for
so long as such form is available to the Company, subject to certain
conditions and limitations. The Company currently has a registration statement
on Form S-3 in effect with respect to all such shares. See "Shares Eligible
for Future Sale."
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF
INCORPORATION, BY-LAWS AND DELAWARE LAW
General
Certain provisions of the DGCL, the Certificate of Incorporation and Bylaws
could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party to acquire, control of the Company.
Such provisions could limit the price that certain investors might be willing
to pay in the future for shares of the Common Stock. These provisions of the
DGCL, the Certificate of Incorporation and Bylaws may also have the effect of
discouraging or preventing certain types of transactions involving an actual
or threatened change of control of the Company (including unsolicited takeover
attempts), even though such a transaction may offer the Company's stockholders
the opportunity to sell their stock at a price above the prevailing market
price. The Certificate of Incorporation allows the Company to issue Preferred
Stock with rights senior to those of the Common Stock and other rights that
could adversely affect the interests of holders of Common Stock, decrease the
amount of earnings or assets available for distribution to the holders of
Common Stock or adversely affect the rights and powers, including voting
rights, of the holders of Common Stock. In certain circumstances, such
issuance could have the effect of decreasing the market price of the Common
Stock, as well as having the anti-takeover effect discussed above. See "Risk
Factors--Anti-Takeover Effect of Certain Charter and Bylaw Provisions and
Delaware Law."
Delaware Takeover Statute
The Company is subject to Section 203 of the DGCL ("Section 203"), which
prohibits a Delaware corporation from engaging in a "business combination"
with certain persons ("Interested Stockholders") for three years following the
date any such person becomes an Interested Stockholder. Interested
Stockholders generally include (i) persons who are the beneficial owners of
15% or more of the outstanding voting stock of the corporation and (ii)
persons who are affiliates or associates of the corporation and who hold 15%
or more of the corporation's outstanding voting stock at any time within three
years before the date on which such person's status as an Interested
Stockholder is determined. Subject to certain exceptions, a business
combination includes, among other things, (i) a merger or consolidation, (ii)
the sale, lease exchange, mortgage, pledge, transfer or other disposition of
assets having an aggregate market value equal to 10% or more of either the
aggregate market value of all assets of the corporation determined on a
consolidated basis or the aggregate market value of all the outstanding stock
of the corporation, (iii) any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the Interested
Stockholder, except pursuant to a transaction that effects a pro rata
distribution to all stockholders of the corporation, (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series, or securities convertible into the
stock of any class or series, of the corporation that is owned directly or
indirectly by the Interested Stockholder, or (v) any receipt by the Interested
Stockholder of the benefit (except proportionately as a stockholder) of any
loans, advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
Section 203 does not apply to a business combination if: (i) before a person
becomes an Interested Stockholder, the board of directors of the corporation
approves the transaction in which the Interested Stockholder became an
Interested Stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the Interested Stockholder
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction
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<PAGE>
commences; or (iii) at or subsequent to the time the business combination is
approved by the board of directors and authorized at a meeting, and not by
written consent, of the stockholders by the affirmative vote of the holders of
at least two-thirds of the outstanding voting stock of the corporation not
owned by the Interested Stockholder. The foregoing is a summary of Section 203
and is not intended to be a complete description thereof.
Certificate of Incorporation and Bylaws
The Certificate of Incorporation does not include a provision for cumulative
voting in the election of directors. Under cumulative voting, a minority
stockholder holding a sufficient number of shares may be able to ensure the
election of one or more directors. The absence of cumulative voting may have
the effect of limiting the ability of minority stockholders to effect changes
in the Board of Directors and, as a result, may have the effect of deterring a
hostile takeover or delaying or preventing changes in control or management of
the Company.
The Bylaws provide that the authorized number of directors may be changed by
an amendment to the Bylaws adopted by the Board of Directors or by the
stockholders. Vacancies in the Board of Directors may be filled either by
holders of a majority of the Company's voting stock or a majority of directors
in office, although less than a quorum. The Bylaws also require that special
meetings of the stockholders of the Company may be called only by the Board of
Directors, the Chief Executive Officer of the Company or by any person or
persons holding shares representing at least 50% of the outstanding capital
stock. The Bylaws also require advance written notice, which must be received
by the Secretary of the Company not less than 35 days prior to the meeting,
from a stockholder regarding a proposal or director nomination which such
stockholder desires to present at an annual or special meeting of
stockholders. See "Risk Factors--Anti-Takeover Effect of Certain Charter and
Bylaw Provisions and Delaware Law."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services LLC.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 8,989,258 shares of
Common Stock outstanding (9,514,258 shares if the Underwriters' over-allotment
option is exercised in full). Substantially all of such shares are freely
tradeable (other than by an "affiliate" of the Company as such term is defined
in the Securities Act) without restriction or registration under the
Securities Act. The remaining shares of Common Stock then outstanding will be
deemed "restricted securities" within the meaning of Rule 144 of the
Securities Act (the "Restricted Shares") and may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144, which is summarized below, or another available exemption from
registration.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or a holder of Restricted Shares who owns beneficially shares that
were not acquired from the Company or an affiliate of the Company within the
prior year, would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock (approximately 89,608 shares immediately after this
offering, assuming no exercise of the Underwriters' over-allotment option) or
the average weekly trading volume of the Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 are subject to certain requirements relating
to manner of sale, notice and availability of current public information about
the Company. However, a person (or persons whose shares are aggregated) who is
not deemed to have been an affiliate of the Company at any time during the 90
days immediately preceding the sale and who owns beneficially restricted
shares is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above; provided that at least two years have elapsed
since the later of the date the shares were acquired from the Company or from
an affiliate of the Company. The foregoing is a summary of Rule 144 and is not
intended to be a complete description thereof.
The holders of an aggregate of approximately 4,482,542 shares of Common
Stock, which shares include Common Stock issuable upon conversion of the
Series A Preferred Stock and upon the exercise of outstanding warrants, are
entitled under certain circumstances to cause the Company to register the sale
of such shares of Common Stock under the Securities Act. The Company currently
has a registration statement on Form S-3 in effect with respect to all such
shares. Such shares are freely tradeable during the effectiveness of such
registration unless subject to other restrictions.
The Company's directors and executive officers who collectively hold an
aggregate of 816,433 shares of Common Stock have agreed pursuant to certain
agreements that they will not sell any shares of Common Stock owned by them
without the prior written consent of The Robinson-Humphrey Company, LLC for a
period of 180 days after the date of this Prospectus. In addition, certain
holders of approximately 1,426,000 shares of Common Stock, 1,132,012 shares of
Series A Preferred Stock convertible into 1,162,576 shares of Common Stock,
and 1,066,006 warrants representing rights to acquire up to 1,066,006 shares
of Common Stock have agreed that they will not sell any shares of Common
Stock, or other securities of the Company, for 45 days from the date of this
Prospectus without the prior written consent of The Robinson-Humphrey Company,
LLC. See "Description of Capital Stock--Registration Rights" and
"Underwriting."
Sales of a substantial number of shares of the Common Stock in the public
market following this offering, or the perception that such sales might occur,
after the restrictions lapse could have a material adverse effect on the
market price of the Common Stock and could impair the Company's future ability
to raise additional equity capital. See "Risk Factors--Shares Eligible for
Future Sale."
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom The Robinson-Humphrey Company, LLC,
Jefferies & Company, Inc. and Cleary Gull Reiland & McDevitt Inc. are acting
as representatives (collectively, the "Representatives"), have severally
agreed to purchase from the Company, and the Company has agreed to sell to the
Underwriters, the number of shares of Common Stock set forth opposite their
respective names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
The Robinson-Humphrey Company, LLC...............................
Jefferies & Company, Inc.........................................
Cleary Gull Reiland & McDevitt Inc...............................
Total........................................................ 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all shares of Common
Stock offered hereby (other than the shares subject to the Underwriters' over-
allotment option) if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share in sales to certain
other dealers. After the shares of Common Stock are released for sale to the
public, the offering price and other selling terms may be changed.
The Underwriters have been granted an option, exercisable during the 30-day
period after the date of this Prospectus, to purchase up to an aggregate of
525,000 additional shares of Common Stock from the Company, all at the same
price per share that the Company will receive for the 3,500,000 shares that
the Underwriters have agreed to purchase. To the extent that the Underwriters
exercise such option, each of the Underwriters will have made a firm
commitment to purchase from the Company approximately the same percentage of
such additional shares that the number of shares of Common Stock to be
purchased by them shown in the above table represents as a percentage of the
3,500,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 3,500,000
shares are being sold.
Pursuant to the terms of lock-up agreements, the Company's directors and
executive officers who hold an aggregate of 816,433 shares of Common Stock
have agreed with the Representatives that, subject to certain limited
exceptions, they will not sell or otherwise dispose of shares of Common Stock,
or other securities of the Company, for a period of 180 days after the date of
this Prospectus without the prior written consent of The Robinson-Humphrey
Company, LLC. Pursuant to the terms of certain other lock-up agreements,
holders of approximately 1,426,000 shares of Common Stock, 1,132,012 shares of
Series A Preferred Stock convertible into 1,162,576 shares of Common Stock,
and 1,066,006 warrants representing rights to acquire up to 1,066,006 shares
of Common Stock have agreed with the Representatives that, subject to certain
limited exceptions, they will not sell or otherwise dispose of shares of
Common Stock, or other securities of the Company, for a period of 45 days
after the date of this Prospectus without the prior written consent of The
Robinson-Humphrey Company, LLC.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
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In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on The Nasdaq National Market may engage in passive market-
making transactions in the Common Stock on The Nasdaq National Market in
accordance with Rule 103 of Regulation M during the one business day prior to
the pricing of the offering before the commencement of offers or sales of the
Common Stock. The passive market-making transactions must comply with
applicable volume and price limitations and be identified as such. In general,
a passive market maker must display its bid at a price not in excess of the
highest independent bid for the security; however, if all independent bids are
lowered below the passive market maker's bid, such bid must then be lowered
when certain purchase limits are exceeded.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters to bid for and purchase
shares of Common Stock. As an exception to these rules, the Representatives
are permitted to engage in certain transactions that stabilize the price of
the Common Stock. Such transactions may consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Common Stock. If
the Underwriters create a short position in the Common Stock in connection
with this offering (i.e., if they sell more shares of the Common Stock than
are set forth on the cover page of this Prospectus), the Representatives may
reduce the short position by purchasing the Common Stock in the open market.
The Representatives may elect to reduce any short position by exercising all
or part of the over-allotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of the Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of this offering. In general, purchases
of a security for the purpose of stabilization or to reduce a syndicate short
position could cause the price of the security to be higher than it might
otherwise be in the absence of such purchases. The imposition of a penalty bid
might have an effect on the price of a security to the extent that it were to
discourage resales of the security by the purchasers in this offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
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LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby are being passed upon for the Company by Pillsbury Madison &
Sutro LLP, Palo Alto, California. Certain legal matters in connection with the
offering will be passed upon for the Underwriters by Powell, Goldstein, Frazer
& Murphy LLP, Atlanta, Georgia.
EXPERTS
The consolidated balance sheets of Savoir Technology Group and subsidiaries
as of December 31, 1996 and 1997 and the consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997 included in this Prospectus have been
included in reliance on the reports of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at the following Regional Offices of the
Commission: 7 World Trade Center, Suite 1300, Floor, New York, New York 10048
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60611. Copies of such reports and other information may be obtained
from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition,
the Company files electronically with the Commission certain reports, proxy
statements and other information, and the Commission maintains a World Wide
Web site on the Internet (http://www.sec.gov) that contains such reports,
proxy statements and other information regarding the Company. Reports, proxy
and information statements and other information concerning the Company can
also be inspected at The Nasdaq National Market at 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-2 (including all amendments thereto, the "Registration Statement") under the
Securities Act and the rules and regulations promulgated thereunder, with
respect to the Common Stock offered hereby. This Prospectus, which constitutes
a part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto
on file with the Commission. For further information with respect to the
Company, the Common Stock offered hereby and such omitted information,
reference is hereby made to the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus regarding the
contents of any contract or other document are not necessarily complete, and,
with respect to each such contract or document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. A copy of the Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Regional Offices of the Commission at
7 World Trade Center, Suite 1300, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Chicago, Illinois 60611. Copies of
such material may also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the
fees prescribed by the Commission.
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<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed with the Commission (File No. 0-
11560) and are incorporated herein by reference: (i) Annual Report of the
Company on Form 10-K, as amended, for the fiscal year ended December 31, 1997;
and (ii) Current Report of the Company on Form 8-K dated March 9, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of this offering of Common Stock shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the foregoing documents incorporated herein by
reference, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference into such documents). Requests for such
documents should be submitted to Savoir Technology Group, Inc., 254 East
Hacienda Avenue, Campbell, California 95008, Attn: Secretary. In order to
ensure timely delivery of the documents, any request should be made at least
five business days prior to the date on which the final investment decision
must be made.
52
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Independent Accountants' Report......................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997.................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended De-
cember 31, 1995, 1996 and 1997......................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Savoir Technology Group, Inc.
Campbell, California
We have audited the accompanying consolidated balance sheets of Savoir
Technology Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial position of Savoir
Technology Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 30, 1998, except for
Note 14, as to which the
date is February 17, 1998
F-2
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash....................................................... $ 384 $ 2,919
Trade accounts receivable, net of allowance for doubtful
accounts of $319 in 1997 and $411 in 1996................. 25,943 76,664
Inventories................................................ 26,142 36,841
Other current assets....................................... 2,254 7,388
------- --------
Total current assets..................................... 54,723 123,812
Property and equipment, net.................................. 3,276 4,920
Excess of cost over acquired net assets and other
intangibles, net............................................ 4,937 57,537
Other assets................................................. 340 619
------- --------
Total assets........................................... $63,276 $186,888
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.............................................. $11,277 $ 7,063
Current portion of long-term debt.......................... 58 8,516
Accounts payable........................................... 33,956 96,143
Accrued expenses........................................... 1,984 5,636
------- --------
Total current liabilities................................ 47,275 117,358
Long-term debt, less current portion......................... 53 22,330
Other........................................................ 234 120
Commitments and contingencies (Notes 4, 9 and 11) -- --
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; issued and outstanding: 2,242,500 shares
Series A and 10 shares Series B at December 31, 1997;
liquidation preference of $21,444 at December 31, 1997 -- 18,132
Common stock, $0.01 par value; 25,000,000 shares
authorized; issued and outstanding: 5,357,678 shares in
1997 and 4,488,131 shares in 1996......................... 17,959 27,983
Retained earnings (deficit)................................ (2,245) 965
------- --------
Total stockholders' equity............................... 15,714 47,080
------- --------
Total liabilities and stockholders' equity............. $63,276 $186,888
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales.......................................... $106,462 $131,697 $237,884
Cost of goods sold................................. 93,416 114,389 205,089
-------- -------- --------
Gross profit..................................... 13,046 17,308 32,795
-------- -------- --------
Selling, general and administrative expenses....... 13,694 13,716 25,969
Restructuring costs................................ 3,600 -- --
-------- -------- --------
17,294 13,716 25,969
-------- -------- --------
Operating income (loss).......................... (4,248) 3,592 6,826
Interest expense................................... 850 978 3,181
-------- -------- --------
Income (loss) before income taxes................ (5,098) 2,614 3,645
Income tax expense................................. -- 276 335
-------- -------- --------
Net income (loss)................................ $ (5,098) $ 2,338 $ 3,310
======== ======== ========
Net income (loss) per share:
Basic............................................ $ (1.36) $ 0.55 $ 0.57
======== ======== ========
Diluted.......................................... $ (1.36) $ 0.52 $ 0.55
======== ======== ========
Number of shares used in per share calculations:
Basic............................................ 3,756 4,255 4,902
======== ======== ========
Diluted.......................................... 3,756 4,513 5,976
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK RETAINED
----------------- ----------------- EARNINGS
SHARES AMOUNT SHARES AMOUNT (DEFICIT) TOTAL
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1995................... -- $ -- 3,702,007 $13,909 $ 515 $14,424
Exercise of stock
options.............. -- -- 7,981 18 -- 18
Issuance of common
stock in business
combination.......... -- -- 300,000 1,660 -- 1,660
Net loss.............. -- -- -- -- (5,098) (5,098)
--------- ------- --------- ------- ------- -------
Balances, December 31,
1995................... -- -- 4,009,988 15,587 (4,583) 11,004
Exercise of stock
options.............. -- -- 92,157 331 -- 331
Issuance of common
stock in business
combinations......... -- -- 366,789 1,949 -- 1,949
Issuance under
employee stock
purchase plan........ -- -- 19,197 92 -- 92
Net income............ -- -- -- -- 2,338 2,338
--------- ------- --------- ------- ------- -------
Balances, December 31,
1996................... -- -- 4,488,131 17,959 (2,245) 15,714
Exercise of stock
options.............. -- -- 24,375 74 -- 74
Issuance of common
stock in business
combinations......... -- -- 809,898 6,825 -- 6,825
Issuance under
employee stock
purchase plan........ -- -- 31,044 256 -- 256
Issuance of preferred
stock and common
stock warrants, net
of offering costs.... 2,242,500 18,132 -- 1,000 -- 19,132
Dividend on preferred
stock................ -- -- 4,230 50 (100) (50)
Common stock warrants
issued in connection
with debt offerings.. -- -- -- 1,330 -- 1,330
Tax benefit from
exercise of stock
options.............. -- -- -- 489 -- 489
Net income............ -- -- -- -- 3,310 3,310
--------- ------- --------- ------- ------- -------
Balances, December 31,
1997................... 2,242,500 $18,132 5,357,678 $27,983 $ 965 $47,080
========= ======= ========= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $(5,098) $ 2,338 $ 3,310
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................. 527 983 2,670
Gain on sale of equipment...................... (68) (11) --
Provision for doubtful accounts receivable..... 291 120 472
Deferred taxes................................. -- -- (1,551)
Accretion on long-term debt obligations........ -- -- 344
Provision for restructuring costs.............. 3,600 -- --
Change in assets and liabilities:
Accounts receivable.......................... 421 (9,648) (23,282)
Inventories.................................. 2,035 (9,831) (7,505)
Other current assets......................... (110) (478) (1,564)
Other assets................................. (154) (484) --
Accounts payable............................. 4,001 15,591 32,312
Accrued expenses and other liabilities....... (1,726) 403 655
------- ------- --------
Net cash provided by (used in) operating
activities................................ 3,719 (1,017) 5,861
------- ------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired.. -- (640) (35,166)
Proceeds from sale of equipment.................. 192 22 --
Acquisition of other assets...................... -- -- (988)
Acquisitions of property and equipment........... (1,364) (2,200) (1,592)
------- ------- --------
Net cash used in investing activities...... (1,172) (2,818) (37,746)
------- ------- --------
Cash flows from financing activities:
Net proceeds (repayments) from short-term
borrowings...................................... (2,135) 3,434 (8,414)
Payments on long-term debt obligations........... (123) (184) (236)
Proceeds from exercise of stock options.......... 18 331 74
Proceeds from employee stock purchase plan....... -- 92 256
Proceeds from issuance of long-term debt, net of
issuance cost................................... -- -- 23,099
Proceeds from issuance of preferred stock and
warrants, net................................... -- -- 19,082
Proceeds from equipment loans.................... 101 -- 559
------- ------- --------
Net cash provided by (used in) financing
activities................................ (2,139) 3,673 34,420
------- ------- --------
Net increase (decrease) in cash.................... 408 (162) 2,535
Cash--beginning of period.......................... 138 546 384
------- ------- --------
Cash--end of period................................ $ 546 $ 384 $ 2,919
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations:
Savoir Technology Group, Inc. (the Company), formerly Western Micro
Technology, Inc., is a value-added distributor of commercial mid-range servers
(file servers and workstations), peripheral equipment and a full range of
storage products and software. The Company also integrates and configures
personal computers, work- stations and departmental servers, as well as
provides and remarkets installation and technical support services. Prior to
July 26, 1995, the Company's operations also included the distribution of
electronic components (see Note 12). The Company's primary sales office and
distribution center, from which it ships products to customers throughout the
United States, is located in Northern California. In addition to the Northern
California location, the Company has distribution centers in Texas,
Massachusetts, Southern California and Illinois and has sales offices
throughout the United States. The principal customers of the Company are
value-added-resellers, systems integrators and original equipment
manufacturers located in the United States.
Consolidated Financial Statement Presentation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, including Star Management Services, Inc.
(SMS) which the Company acquired in a purchase combination on September 30,
1997 (see Note 11). All significant intercompany accounts and transactions
have been eliminated.
Estimates:
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain Risks and Concentrations:
The Company maintains cash balances with four major financial institutions.
The Company sells its 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. One customer accounted for more than 10% of the
outstanding accounts receivable balance at December 31, 1997. No other
customer accounted for more than 10% of the outstanding accounts receivable
balance at December 31, 1996 and 1997.
Revenues are concentrated with a relatively limited number of customers and
the providers of certain systems are concentrated among a few manufacturers.
The loss of a major customer or the interruption of certain supplier
relationships could adversely affect operating results. During the years ended
December 31, 1995, 1996 and 1997, approximately 30%, 50% and 65%,
respectively, of the Company's revenue was generated from the sale of products
purchased from one of the Company's vendors, International Business Machines
Corporation (IBM).
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments including cash,
accounts receivable, notes payable, accounts payable and accrued expenses
approximate fair value due to their short maturity.
Revenue Recognition:
The Company records revenue, net of allowance for estimated returns, at the
time of product shipment.
F-7
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Inventories:
Inventories, consisting primarily of purchased product held for resale, are
stated at the lower of cost or net realizable value. Cost is determined using
average and specific cost methods. The Company's inventories include high
technology computer systems that may be specialized in nature and subject to
rapid technological obsolescence. The Company does, however, have certain
return privileges with many of its vendors. While the Company attempts to
minimize the required inventories on hand and considers technological
obsolescence when estimating required reserves to reduce recorded amounts to
market values, it is reasonably possible that such estimates could change in
the near term.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is recorded on a
straight-line basis over the estimated useful lives, typically two to ten
years. Leasehold improvements are amortized over the useful lives of the
improvements or lease term, whichever is shorter.
When assets are sold or retired, the cost and related accumulated
depreciation are removed from the accounts and the resulting gains or losses
are included in income.
Excess of Cost over Acquired Net Assets and Other Intangibles:
The excess cost over acquired net assets is being amortized on a straight-
line basis over 15 and 20 year periods. Other intangibles are being amortized
on a straight-line basis over their estimated useful lives which is typically
3 to 5 years. Amortization expense was $39,000, $292,000 and $1,400,000, in
1995, 1996 and 1997, respectively. The Company reviews the carrying value of
excess costs over acquired net assets and other intangibles for impairment
whenever events or changes in circumstances indicate the carrying amount may
not be recoverable. At December 31, 1997, the net unamortized balance of
goodwill is not considered to be impaired.
Income Taxes:
The Company accounts for its income taxes using the liability method under
which deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and
are measured using enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts expected to be realized.
Market Development Funds:
Primary vendors provide the Company with market development funds in an
amount that is generally based on purchases of the vendors' products and
services. These funds typically range from 1% to 3% of such purchases and are
required to be used to market and promote the vendors' products and services.
The Company records these funds when earned as a reduction to offset direct
costs of marketing, selling, general, and administrative expenses.
Stock-Based Compensation:
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
F-8
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Net Income (Loss) Per Share:
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share", effective December 31,
1997. SFAS 128 requires the presentation of basic and diluted earnings per
share (EPS). Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted EPS is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential
common shares consist of incremental shares issuable upon exercise of stock
options and conversion of preferred stock outstanding. All prior period
earnings per share amounts have been restated to comply with SFAS 128.
Reclassifications:
Certain amounts in the financial statements have been reclassified to
conform with the current year's presentation. These classifications did not
change previously reported total assets, liabilities, stockholders' equity or
net income (loss).
Recent Accounting Pronouncements:
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.
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.
2. LONG LIVED ASSETS:
Property and equipment consist of the following (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Computer and office equipment................................ $4,728 $8,286
Leasehold improvements....................................... 682 1,190
------ ------
5,410 9,476
Accumulated depreciation and amortization.................... (2,134) (4,556)
------ ------
$3,276 $4,920
====== ======
</TABLE>
F-9
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. LONG LIVED ASSETS, CONTINUED:
Excess of cost over acquired net assets and other intangibles (In
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ -------
<S> <C> <C>
Excess of cost over net assets acquired..................... $4,668 $55,528
Other intangibles........................................... 600 3,740
------ -------
5,268 59,268
Accumulated amortization.................................... (331) (1,731)
------ -------
$4,937 $57,537
====== =======
</TABLE>
3. BORROWING ARRANGEMENTS:
Notes Payable (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------- ------
<S> <C> <C>
Working capital line.......................................... $11,277 $6,645
Other......................................................... -- 418
------- ------
$11,277 $7,063
======= ======
</TABLE>
The Company has an inventory and working capital financing agreement (the
IBMCC Credit Facility) with IBM Credit Corporation (IBMCC), an affiliate of
IBM, whereby purchases from IBM and cash advances from IBMCC are directly
charged to the IBMCC Credit Facility and are paid by the Company based on
payment terms outlined in the agreement. Total borrowings under the IBMCC
Credit Facility are based on eligible accounts receivable and inventory, as
defined, and are limited to $75,000,000, temporarily increased to $85,000,000
through January 31, 1998. The IBMCC Credit Facility is renewable in September
1999 and contains restrictive covenants which include the maintenance of
minimum current ratio, tangible net worth and times interest earned ratios, as
defined and is collateralized by substantially all assets of the Company. As
of December 31, 1996 and 1997, the Company had outstanding borrowings under
this agreement of $27,286,000 and $71,661,000, respectively. Of the total
outstanding borrowings, $11,277,000 and $6,645,000 represented cash advances
at December 31, 1996 and 1997, respectively with the remainder included in
accounts payable which amounted to $16,009 and $65,016, respectively. Cash
advances bear interest at prime (8.50% as of December 31, 1997) plus 1.875%.
Based on eligible assets, as of December 31, 1997, the Company had borrowings
available of approximately $12,500,000. The weighted average interest rates
for the Company's cash advances during 1996 and 1997 were 9.2% and 10.23%,
respectively.
Long-Term Debt (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
---- -------
<S> <C> <C>
Subordinated notes payable................................... $-- $15,700
IBMCC loan................................................... -- 10,000
SMS seller notes............................................. -- 7,350
Other........................................................ 111 528
--- -------
111 33,578
Less discount................................................ -- (2,732)
--- -------
111 30,846
Less amount due within one year.............................. (58) (8,516)
--- -------
Long-term debt due after one year............................ $53 $22,330
=== =======
</TABLE>
F-10
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. BORROWING ARRANGEMENTS, CONTINUED:
Principal payments for long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................................. $ 8,787
1999................................................................. 8,803
2000................................................................. 15,834
2001................................................................. 131
2002................................................................. 23
-------
$33,578
=======
</TABLE>
On September 30, 1997, the Company entered into a note purchase agreement
(the "Note Purchase Agreement") with Robert Fleming, Inc. and Canpartners
Investments IV, LLC, as purchasers (together, the "Purchasers") and
Canpartners Investments IV, LLC, as agent for the Purchasers. Pursuant to the
Note Purchase Agreement, the Company sold $15,700,000 of secured notes to the
Purchasers, granted to the Purchasers warrants to purchase 400,000 shares of
the Company's Common Stock, and granted to the Purchasers ten shares of newly
authorized and issued Series B Preferred Stock. The notes, which are
subordinated to the Company's primary lender, IBMCC, bear interest at 13.5%
annually, include an original issue discount, fully earned upon funding, of
$700,000 and are due September 30, 2000. The Company may prepay the notes at
107% of the principal balance subsequent to September 30, 1997, 106%
subsequent to September 30, 1998 and 105% subsequent to September 30, 1999. On
or after March 31, 2000, the Purchasers may request redemption of up to 50% of
the notes issued at 100% of the principal amount. The warrants issued pursuant
to the Note Purchase Agreement have a purchase price of $7.50 and expire in
seven years. On each anniversary the warrant price may be reset to 87.5% of
the price, as defined, of the Company's Common Stock if the market price is
less than $7.50. The warrants issued in connection with the notes were
determined to have a fair market value of $1,064,000, which has been charged,
along with the original issue discount, to discount on notes payable. The
discount is being charged to interest expense on a straight-line basis over
the life of the notes. The Series B Preferred Stock issued to the purchasers
allows the holders of the Series B Preferred Stock to elect one member to the
Company Board of Directors if there is a default or event of default, as
defined, on the Note Purchase Agreement. The Note Purchase Agreement contains
restrictive covenants which include minimum fixed charge coverage ratio,
minimum income, minimum consolidated net worth and maximum capital
expenditures, as defined. The Company was not in compliance with the maximum
capital expenditure covenants at December 31, 1997 and received a waiver for
this specific violation. The Company used the proceeds from the notes to
consummate the SMS acquisition (see Note 11).
On September 30, 1997, the Company executed an amendment to the IBMCC Credit
Facility. Pursuant to the amendment of the IBMCC Credit Facility, the Company
obtained an additional loan of $10,000,000 to consummate the acquisition of
SMS. The loan bears interest at prime (8.5% as of September 30, 1997) plus 2%
and is due in four installments through September 30, 1999. As part of the
amendment, the Company granted IBMCC warrants to purchase 100,000 shares of
the Company's Common Stock. The warrants issued to IBMCC are the same, in all
respects, to the warrants issued to the Purchasers of the Note Agreement.
These warrants were determined to have a fair value of $266,000, which has
been charged against the face value of the loan. The discount is being charged
to interest expense over the life of the loan.
In connection with the acquisition of SMS (see Note 11), the Company is
obligated to pay the two selling stockholders of SMS cash payments totaling
$3,675,000 on the first and second anniversary of the acquisition, September
30, 1998 and 1999. The non-interest-bearing notes have been discounted using
the Company's effective borrowing rate of 10.375%. The total discount to the
face value of the notes was $1,047,000 and is being charged to interest
expense over the life of the notes.
F-11
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. OPERATING LEASE COMMITMENTS:
The Company leases its warehouse and office space under operating leases.
These leases expire through 2004 and provide for payment of insurance,
maintenance and property taxes. In addition, the Company leases certain
equipment under operating leases and rental arrangements extending for periods
of up to five years.
The total rent expense, net of sublease income, was $934,000, $722,000 and
$1,600,000 for 1995, 1996 and 1997, respectively.
Future minimum rental commitments for all noncancelable operating leases are
as follows (In thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
---------------------------------------------------------------------
<S> <C>
1998................................................................. $1,462
1999................................................................. 1,324
2000................................................................. 1,111
2001................................................................. 985
2002................................................................. 1,003
Thereafter........................................................... 542
------
$6,427
======
</TABLE>
5. INCOME TAXES:
The provision for (benefit from) income taxes consist of the following (In
thousands):
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -------
<S> <C> <C> <C>
1997:
Current........................................... $ 1,578 $ 308 $ 1,886
Deferred.......................................... (1,301) (250) (1,551)
------- ----- -------
$ 277 $ 58 $ 335
======= ===== =======
1996:
Current........................................... $ 223 $ 53 $ 276
Deferred.......................................... -- -- --
------- ----- -------
$ 223 $ 53 $ 276
======= ===== =======
1995:
Current........................................... -- -- --
Deferred.......................................... -- -- --
------- ----- -------
$ -- $ -- $ --
======= ===== =======
</TABLE>
F-12
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES, CONTINUED:
The Company's effective tax rate differs from the U.S. federal statutory tax
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Statutory tax (benefit) rate.................. (34)% 34 % 34 %
Goodwill and other nondeductible expenses..... 11 4 15
Benefit resulting from utilization of federal
NOL.......................................... -- (33) (17)
State taxes, net of federal benefit........... -- 6 8
Change in valuation reserve................... 23 -- (35)
Other......................................... -- -- 4
------- ------- -------
-- % 11 % 9 %
======= ======= =======
</TABLE>
The components of the net deferred tax asset are as follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- ------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserve................................. $ 93 $ 518
Accumulated depreciation.................................... 83 85
Uniform inventory capitalization............................ 248 221
Inventory reserve........................................... 314 285
Other nondeductible reserves................................ 124 289
Other....................................................... 111 73
Net operating losses........................................ 915 80
Valuation allowance......................................... (1,888) --
------- ------
$ -- $1,551
======= ======
</TABLE>
Realization of the net deferred tax assets as of December 31, 1997 is
dependent on generating sufficient taxable income to offset future deduction
of the related items. Although realization is not assured, management believes
it is more likely than not that all of the net deferred tax assets will be
realized.
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $1,600,000 available to offset future taxable income for state
tax purposes. The operating loss carryforwards expire from 1998 to 2002, if
not utilized.
6. STOCKHOLDERS' EQUITY:
Stockholders' Equity;
In August of 1997, the stockholders of the Company approved an amendment of
the Company's Articles of Incorporation to increase the number of authorized
shares of Common Stock from 10,000,000 to 25,000,000. The stockholders also
approved the change of the Company's state of incorporation from California to
Delaware.
Preferred Stock Private Placement:
On September 18, 1997, the Company completed the private placement of
1,121,250 units (the "Units"). Each Unit consists of two shares of the
Company's Series A Preferred Stock, par value $0.01 per share, for an
aggregate of 2,242,500 shares, at a purchase price of $9.5625 per share, and
one Common Stock purchase warrant (which expires in five years), par value
$0.01 per share, for an aggregate of 1,125,250 shares, at a purchase price of
$.125 per warrant and exercisable at a price of $9.6875 per share. The Series
A Preferred Stock has an eight percent (8%) cumulative dividend, payable in
cash or Company Common Stock at the election of the Company and a potential
special dividend should the price of the Company's Common Stock fall below
$9.5625 on each anniversary of the private placement. The special dividend may
not exceed $1.9125 per share
F-13
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY, CONTINUED:
each year. The Series A Preferred Stock is convertible at the option of the
Holders, at any time, into Common Stock of the Company. The conversion price
is $9.3125 and is subject to adjustment if the Company issues any stock or
securities at less than the conversion price. Subsequent to September 19,
1998, the Company may redeem the Preferred Stock provided that the Company's
Common Stock is trading at one hundred fifty percent (150%) of the conversion
price (as adjusted) and the daily trading volume of the Company's stock is in
excess of 125,000 shares, as defined. Subsequent to September 19, 2001, the
Company may redeem the Preferred Stock at the conversion price (as adjusted).
In connection with the transaction, the Company issued warrants for the
purchase of 112,125 shares of Common Stock to placement agents. The warrants
are exercisable at $9.6875 per share and expire in five years. Net proceeds
totaled approximately $19,100,000. The Company used the proceeds to pay down
its line of credit and for general working capital purposes.
Warrants:
At December 31, 1997, warrants were outstanding to purchase a total of
1,733,375 shares of Common Stock at exercise prices ranging from $7.50 to
$9.6875 per share. The warrants, which were issued in connection with various
debt and equity financings, expire between 2002 to 2004. At December 31, 1997,
the Company had reserved 1,733,375 shares of Common Stock for issuance upon
exercise of these warrants. During the years ended December 31, 1996 and 1997,
no warrants were exercised.
Stock Option Plan:
Under the terms of the 1987 and 1994 Stock Option Plans, the Company may
grant nonqualified or incentive stock options at prices not less than 85% and
100% of the market value at the grant date, respectively. To date, most
options have been granted at 100% of the market value as of the date of grant.
Generally, options vest and become exercisable in equal annual increments over
four years beginning one year after the date of grant and expire five years
after they become exercisable.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------
SHARES NUMBER PRICE TOTAL
AVAILABLE OF PER (IN
FOR GRANT SHARES SHARE THOUSANDS)
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Balances, January 1, 1995.......... 35,439 594,344 $2.00-$ 8.75 $ 3,238
Options granted................... (342,500) 342,500 $2.25-$ 5.63 1,151
Options exercised................. (7,981) $2.00-$ 2.50 (18)
Options terminated................ 324,375 (324,375) $2.25-$ 8.25 (1,869)
-------- --------- ------------ -------
Balances, December 31, 1995........ 17,314 604,488 $2.00-$ 8.75 2,502
Additional shares reserved........ 400,000
Options granted................... (441,000) 441,000 $5.00-$10.34 3,367
Options exercised................. (92,157) $2.00-$ 6.13 (331)
Options terminated................ 23,750 (23,750) $3.38-$ 8.25 (108)
-------- --------- ------------ -------
Balances, December 31, 1996........ 64 929,581 $2.00-$10.34 5,430
Additional shares reserved........ 700,000
Options granted................... (610,679) 610,679 $8.00-$12.75 6,506
Options exercised................. -- (24,375) $2.25-$ 7.00 (74)
Options terminated................ 79,875 (79,875) $2.13-$12.25 (629)
-------- --------- ------------ -------
Balances, December 31, 1997........ 169,260 1,436,010 $2.00-$12.75 $11,233
======== ========= ============ =======
</TABLE>
At December 31, 1997, there were 1,605,270 shares of common stock reserved
for issuance under the Company's stock option plans and outstanding options
for 360,581 shares of common stock were exercisable.
F-14
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY, CONTINUED:
Employee Stock Purchase Plan:
The Company implemented an Employee Stock Purchase Plan (the Plan) in
November 1995, under which 175,000 shares of common stock have been reserved
for issuance. The Plan is qualified under Section 423 of the Internal Revenue
Code. The Plan allows for the purchase of stock at 85% of the lower of the
closing stock price at the beginning or the end of each six-month purchase
period. As of December 31, 1997, 50,241 shares have been issued under this
Plan.
The following information concerning the Company's stock option and employee
stock purchase plans is provided in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation." The Company accounts for such plans in
accordance with APB No. 25 and related Interpretations.
The following table summarizes information with respect to stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS OUTSTANDING
-------------------------------- --------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING LIFE EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 (YEARS) PRICE AT 12/31/97 PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.00-$3.63............... 219,706 7.54 $ 2.74 122,206 $2.75
$5.00-$8.88............... 396,125 8.26 $ 6.08 179,750 $6.09
$9.00-$12.75.............. 820,179 9.71 $10.39 58,625 $9.13
--------- -------
$2.00-$12.75.............. 1,436,010 8.95 $ 7.93 360,581 $5.44
========= =======
</TABLE>
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1995, 1996 and 1997:
<TABLE>
<CAPTION>
GROUP A GROUP B
------------------------- -------------------------
1995 1996 1997 1995 1996 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Risk-free interest
rates.................. 7.68 5.17 6.30 7.64 5.25 6.39
Expected life........... 5 years 5 years 5 years 4 years 4 years 4 years
Volatility.............. 87.42% 87.42% 75.00% 87.42% 87.42% 75.00%
</TABLE>
The weighted average expected life was calculated based on the exercise
behavior of each group. Group A represents officers and directors who are a
smaller group holding a greater average number of options than other option
holders and who tend to exercise later in the vesting period. Group B are all
other option holders, virtually all of whom are employees. This group tends to
exercise earlier in the vesting period.
The weighted average fair value of those options granted in 1995, 1996 and
1997 was $3.34, $7.64 and $6.90, respectively.
The Company has also estimated the fair value for the purchase rights issued
under the Company's Employee Stock Purchase Plan under the Black-Scholes
valuation model using the following assumptions for 1997:
<TABLE>
<S> <C>
Risk-free interest rate............................................ 5.46
Expected life...................................................... 0.5 years
Volatility......................................................... 75.00%
</TABLE>
F-15
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY, CONTINUED:
The weighted average fair value of those purchase rights granted in 1996 was
$5.10.
The following pro forma income (loss) information has been prepared
following the provisions of SFAS No. 123 (amounts in thousands except per
share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Net income (loss)--pro forma......................... $(5,213) $1,750 $1,624
======= ====== ======
Basic net income (loss) per share--pro forma......... $ (1.39) $ 0.41 $ 0.33
======= ====== ======
Diluted net income (loss) per share--pro forma....... $ (1.39) $ 0.42 $ 0.35
======= ====== ======
</TABLE>
The above pro forma effects on income may not be representative of the
effects on net income for future years as option grants typically vest over
several years and additional options are generally granted each year.
7. EARNINGS PER SHARE:
In accordance with the disclosure requirements of SFAS 128, a reconciliation
of the numerator and denominator of basic and diluted EPS is provided as
follows (In thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Numerator--basic and diluted EPS
Net income (loss).................................. $(5,098) $2,338 $3,310
Less: preferred stock dividends.................... -- -- (484)
------- ------ ------
Income available to common stockholders--basic..... (5,098) 2,338 2,826
Plus: impact of assumed preferred stock conversion. -- -- 484
------- ------ ------
Income available to common holders plus assumed
conversions--diluted.............................. $(5,098) $2,338 $3,310
======= ====== ======
Denominator--basic EPS
Weighted average shares outstanding................ 3,756 4,255 4,902
------- ------ ------
Basic earnings per share........................... $ (1.36) $ 0.55 $ 0.57
======= ====== ======
Denominator--diluted EPS
Denominator--basic EPS............................. 3,756 4,255 4,902
Effect of dilutive securities:
Common stock options and warrants.................. -- 258 453
Convertible preferred stock........................ -- -- 621
------- ------ ------
3,756 4,513 5,976
======= ====== ======
Diluted earnings per share......................... $ (1.36) $ 0.52 $ 0.55
======= ====== ======
</TABLE>
F-16
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental Disclosures of Cash Flow Information (In thousands):
Cash paid for interest and income taxes was:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996 1997
---- ------ ------
<S> <C> <C> <C>
Interest.................................................. $895 $1,021 $2,700
Income taxes.............................................. $ -- $ 66 $ 706
</TABLE>
Supplemental Disclosures of Noncash Investing and Financing Activities (In
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Tax benefit from exercise of stock options............. $ -- $ -- $ 489
Capital lease obligations.............................. $ 79 $ -- $ --
Common stock issued in connection with acquisitions.... $1,660 $1,949 $6,825
Dividend on preferred stock............................ $ -- $ -- $ 50
Common stock warrants issued in connection with notes
payable issuance...................................... $ -- $ -- $1,330
Common stock warrants issued in connection with pre-
ferred stock.......................................... $ -- $ -- $1,000
</TABLE>
9. CONTINGENCIES:
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's financial position or results of operations.
10. SAVINGS AND RETIREMENT PLAN:
The Company maintains the "Western Micro Technology Savings and Retirement
Plan," qualified under section 401(a) of the Internal Revenue Code. The Plan
provides for tax deferred automatic salary deductions and alternative
investment options. Employees are eligible to participate after completion of
six months of employment. Participants may apply for loans from their
accounts.
The Plan permits Company contributions determined quarterly by the Board of
Directors. No contributions were made in the years ended December 31, 1995,
1996 or 1997.
11. ACQUISITIONS AND INVESTMENTS:
On September 30, 1997, the Company acquired all of the capital stock of SMS
for an aggregate of $42,150,000 in cash at closing and 460,000 shares of the
Company's common stock, valued at $3,887,000, and additional cash payments of
$3,675,000 to be paid on each of the first and second anniversaries of the
closing (see Note 3). In addition, the selling stockholders can earn up to an
additional $5,000,000 in cash payments based upon attainment of certain
performance goals. All the additional cash payments become immediately due
upon a change in control of the Company, as defined. The acquisition has been
accounted for as a purchase with the result that SMS operations are included
in the Company's financial statements from the date of purchase. In connection
with the acquisition, the Company recorded approximately $47,600,000 of
goodwill and other
F-17
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. ACQUISITIONS AND INVESTMENTS, CONTINUED:
intangible assets. The fair value of assets acquired from SMS was
approximately $41,400,000 and liabilities assumed were approximately
$36,100,000. 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 spin-off of the Sirius end-user business as a
separate unaffiliated company. Upon acquiring SMS, the distribution arm was
renamed Business Partner Solutions, Inc. ("BPS"). Upon completion of the SMS
acquisition, BPS became a wholly owned subsidiary of the Company. For the
eleven months ended September 30, 1997, the distribution business of Sirius
had revenues of approximately $86,500,000 and income from operations of
approximately $1,100,000. The following presents unaudited pro forma combined
net sales, net income and earnings per share of the Company and SMS (excluding
the Sirius end-user business) for the fiscal years ended December 31, 1996 and
1997. The pro forma information is presented for informational purposes only,
and is not necessarily indicative of the operating results that would have
occurred if the SMS acquisition had been consummated at the beginning of the
earliest period presented, nor is it indicative of future operating results.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Net sales................................ $208,000,000 $306,000,000
============ ============
Net income............................... $ 631,000 $ 899,000
============ ============
Net income per share--basic.............. $ 0.13 $ 0.17
============ ============
Net income per share--diluted............ $ 0.13 $ 0.14
============ ============
</TABLE>
For purposes of the pro forma combined data, SMS's financial data for its
fiscal year ended October 31, 1996 have been combined with the Company's
financial data for the fiscal year ended December 31, 1996. The above 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
spinoff of the end-user business had occurred at the beginning of such period
presented. Including these sales amounts, pro forma combined net sales would
have been approximately $247,000,000 and $336,000,000 for the year ended
December 31, 1996 and 1997, respectively.
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 (220,273 shares) of the Company. Additional
consideration, up to $10,000,000 in cash and stock, can be earned by TSI by
meeting certain defined gross profit targets through fiscal year 1998. An
additional 62,578 shares were issued by the Company on March 17, 1997, and
placed in escrow for the earn-out provision. No shares were earned in 1997. If
TSI does not meet the earn-out provision targets in 1998, the appropriate
amount of shares will be returned to the Company. 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 was 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 November 29, 1996, the Company acquired the net assets of International
Data Products, LLC ("IDP"), a privately held company, for $265,000 in cash and
assumed net liabilities of $424,000. The agreement between the Company and IDP
(the "Agreement") contains an earn out provision which allows IDP to earn up
to 140,000 shares of the Company's common stock based on the attainment of
gross profit targets for certain fiscal year
F-18
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. ACQUISITIONS AND INVESTMENTS, CONTINUED:
1997 and 1998 sales (as defined in the Agreement). In connection with the
acquisition, the Company recorded approximately $780,000 of goodwill and other
intangible assets. For the year ended December 31, 1995, IDP had unaudited
revenues of approximately $4,611,000 with net income of approximately $2,000.
On November 7, 1996, the Company acquired the net assets of Star
Technologies, Inc. ("Star"), a privately held company, for $950,000 paid in
common stock (113,263 shares) of the Company. The agreement between the
Company and Star (the "Agreement") contains an earnout provision which allows
Star to earn up to an additional $1,500,000 of the Company's common stock
based on the attainment of gross profit targets for certain fiscal year 1997
and 1998 sales (as defined in the Agreement). An additional 89,418 shares were
issued by the Company on November 7, 1996 and placed in escrow for the earnout
provision. As of December 31, 1997, 48,721 shares, at an average price of
$10.26, have been earned under this provision. If Star does not meet the
earnout provision targets, the appropriate amount of shares will be returned
to the Company. In connection with the acquisition, the Company recorded
approximately $400,000 of goodwill and other intangible assets. For the year
ended June 30, 1996, Star had revenues of approximately $7,500,000 with net
income of approximately $40,000.
On January 2, 1996, the Company acquired the assets of R&D Hardware Systems
Company of Colorado ("R&D"), a privately held company, for $1,000,000 and
125,000 shares of the Company's common stock. The agreement between the
Company and R&D (the "Agreement") contains an earnout provision which allows
R&D to earn up to an additional 125,000 shares of the Company's common stock
based on attainment of gross profit targets for certain fiscal year 1996 and
1997 sales (as defined in the Agreement) up to a cumulative value not to
exceed $855,000. As of December 31, 1997, the end of the earnout period,
78,587 shares, at an average price of $10.33, have been earned under this
provision. In connection with the acquisition, the Company recorded
approximately $1,400,000 of goodwill and other intangible assets. For the year
ended December 31, 1995, R&D had revenues of approximately $9,557,000 with net
income of approximately $446,000.
On November 18, 1995, the Company acquired all of the common stock of
International Parts, Inc. ("IPI"), a privately held company for 300,000 shares
of the Company's common stock. The agreement between the Company and IPI (the
"Agreement") contains an earnout provision which allows for IPI to earn up to
an additional 300,000 shares of the Company's common stock based on 30% of
gross profit dollars generated for certain fiscal year 1996 and 1997 sales (as
defined in the Agreement) in excess of $418,550 per quarter. As of December
31, 1997, the end of the earnout period, 42,516 shares, at an average price of
$9.76, have been earned under this provision.
12. SALE OF COMPONENTS BUSINESS AND RESTRUCTURING CHARGE:
On July 26, 1995, the Company sold its electronics components distribution
assets to Reptron Electronics Inc. ("Reptron"). The transaction, valued at
approximately $12,500,000, consisted of a $9,200,000 payment in cash and the
assumption of $3,300,000 in accounts payable. The sale, which was approved by
the Company's stockholders, included the Company's semiconductor component
inventory, certain receivables, furniture and equipment. In addition, Reptron
assumed certain building and equipment lease obligations. As a result of this
sale, the Company recorded a restructuring charge of $3,600,000. Of this
amount, $2,376,000 was for non-cash write-offs comprised of $1,353,000 in
goodwill and a $1,023,000 increase to long-term inventory related reserves.
Severance and other exit related charges related to the sale comprised the
remaining $1,224,000. In February 1996, approximately $211,000 was distributed
from the escrow to the Company and the balance was paid to Reptron. Concurrent
with the distribution of the escrow funds, Reptron returned approximately
$789,000 of designated assets, valued at historical cost, to the Company.
These designated assets were primarily comprised of semiconductor inventories.
As of December 31, 1997 the Company did not have any inventory related to the
Reptron transaction.
F-19
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. PENDING ACQUISITION:
On November 22, 1997, the Company signed a definitive agreement to acquire
MCBA Systems, Inc. (MCBA), a privately held company, for approximately 900,000
shares of the Company's common stock. Additional consideration of 1,500,000
shares can be earned by MCBA stockholders by meeting certain future
performance targets. The acquisition is subject to a number of conditions,
including the approval by the stockholders of the Company. The acquisition is
anticipated to close in March of 1998. MCBA distributes the same IBM mid-range
servers as the Company plus the IBM S/390 system. For the year ended December
31, 1997, MCBA had unaudited revenues of $26,900,000 with unaudited net income
of $26,000.
14. SUBSEQUENT EVENT:
On February 17, 1998, the Company completed a Registration Statement on Form
S-3 for the registration of 4,482,542 shares of common stock issuable in
connection with the conversion of Series A Preferred Stock and the exercise of
certain warrants and for restricted shares issued in the SMS transaction.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OF-
FERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. ANY INFORMATION OR REPRE-
SENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SE-
CURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
The Company............................................................... 17
Use of Proceeds........................................................... 18
Price Range of Common Stock............................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Selected Consolidated Financial Data...................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 28
Management................................................................ 36
Security Ownership of Certain Beneficial Owners and Management............ 42
Description of Capital Stock.............................................. 44
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 49
Legal Matters............................................................. 51
Experts................................................................... 51
Available Information..................................................... 51
Incorporation of Certain Documents by Reference........................... 52
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 SHARES
LOGO
COMMON STOCK
----------------
PROSPECTUS
----------------
THE ROBINSON-HUMPHREY COMPANY
JEFFERIES & COMPANY, INC.
CLEARY GULL REILAND & MCDEVITT INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Company in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions.
All amounts are estimated except the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
PAYABLE BY
REGISTRANT
----------
<S> <C>
SEC registration fee............................................ $ 13,692
National Association of Securities Dealers, Inc. filing fee..... 5,141
Nasdaq National Market listing fee.............................. 17,500
Blue Sky fees and expenses...................................... 5,000
Accounting fees and expenses.................................... 75,000
Legal fees and expenses......................................... 75,000
Printing and engraving expenses................................. 200,000
Registrar and Transfer Agent's fees............................. 5,000
Miscellaneous fees and expenses................................. 53,667
--------
Total $450,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") permits the
Company's Board of Directors to indemnify any person against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with any threatened,
pending or completed action, suit or proceeding in which such person is made a
party by reason of his being or having been a director, officer, employee or
agent of the Company, in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The DGCL provides that indemnification
pursuant to its provisions is not exclusive of other rights of indemnification
to which a person may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise.
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and the Amended and Restated Bylaws (the
"Bylaws") provide for indemnification of the Company's directors, officers,
employees and other agents to the maximum extent permitted by law.
As permitted by Sections 102 and 145 of the DGCL, the Certificate of
Incorporation eliminates a director's personal liability for monetary damages
to the Company and its stockholders arising from a breach or alleged breach of
such director's fiduciary duty, except for liability under Section 174 of the
DGCL or liability for any breach of the director's duty of loyalty to the
Company or its stockholders, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law or for any
transaction from which the director derived an improper personal benefit.
In addition, the Company has entered into separate indemnification
agreements with its directors and officers that will require the Company,
among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors or officers to the
fullest extent not prohibited by law. The directors and officers of the
Company have a policy of insurance under which they are insured, within limits
and subject to limitations, against certain expenses in connection with the
defense of actions, suits or proceedings, and certain liabilities which might
be imposed as a result of such actions, suits or proceedings, in which they
are parties by reason of their being or having been directors or officers.
II-1
<PAGE>
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Company, its directors and officers, and by the Company of
the Underwriters, for certain liabilities, including liabilities arising under
the Securities Act, and affords certain rights of contribution with respect
thereto.
ITEM 16. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Asset Purchase Agreement dated May 5, 1995 between the Company and
Reptron Electronics, Inc., filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the Commission on August 9,
1995 and incorporated herein by this reference.
2.2 Agreement and Plan of Reorganization dated November 18, 1995 between
the Company and International Parts, Inc., filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K filed with the Commission
on December 4, 1995 and incorporated herein by this reference.
2.3 Asset Purchase Agreement dated January 2, 1996 between the Company
and R&D Hardware Systems Company of Colorado, filed as Exhibit 2.1
to the Company's Current Report on Form 8-K filed with the
Commission on January 17, 1996, and incorporated herein by this
reference.
2.4* Asset Purchase Agreement dated November 7, 1996 by and among the
Company, Star Technologies, Inc. and the Stockholders of Star
Technologies, Inc., filed as Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by this reference.
2.5 Asset Purchase Agreement dated November 29, 1996 by and among the
Company, International Data Products, LLC, Oliver-Allen Corporation,
Inc., International Data Products and Financial, Ltd., Alan M.
Bynder and Michael R. Duhaime, filed as Exhibit 10.25 to the
Company's Amendment on Form 10-K/A to its Annual Report on Form 10-K
for the year ended December 31, 1996, filed with the Commission on
November 19, 1997 and incorporated herein by this reference.
2.6 Agreement and Plan of Reorganization dated March 17, 1997 by and
among the Company, WMT Acquisition Corp., Target Solutions, Inc. and
Lee Adams, filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K filed with the Commission on March 28, 1997 and
incorporated herein by this reference.
2.7*+ Stock Purchase Agreement dated June 4, 1997 by and among the
Company, Star Management Services, Inc., Harvey E. Najim and Carlton
Joseph Mertens II, filed as Exhibit 2.1 to the Company's Current
Report on Form 8-K filed with the Commission on July 16, 1997 and
incorporated herein by this reference.
2.8*+ Third Amendment to Stock Purchase Agreement dated September 30, 1997
by and among the Company, Star Management Services, Inc., Harvey E.
Najim and Carlton Joseph Mertens II, filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K, filed with the Commission on
October 10, 1997 and incorporated herein by this reference.
2.9 Purchase Agreement Assignment between the Company and the Agent
dated September 30, 1997, filed as Exhibit 10.5 to the Company's
Current Report on Form 8-K dated October 10, 1997 and incorporated
herein by this reference.
2.10 Certificate of Ownership and Merger dated as of November 21, 1997,
filed as Exhibit 2.1 to the Company's Current Report on Form 8-K
dated November 21, 1997 and incorporated herein by this reference.
2.11 Amendment and Plan of Reorganization dated November 22, 1997, by and
among Savoir Technology Group, Inc., MCBA Systems, Inc., Michael N.
Gunnells and John Harkins, filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the Commission on December 22,
1997 and incorporated herein by this reference.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
4.1 Speciman Common Stock Certificate.
4.2 Restated Certificate of Incorporation of Savoir Technology Group,
Inc., a Delaware corporation, filed as Exhibit 3(ii) to the
Company's Current Report on Form 8-K dated July 23, 1997, filed on
August 14, 1997 and incorporated herein by this reference.
4.3 Certificate of Designation, Preferences and Rights of the Company's
Series A Preferred Stock, filed as Exhibit 3.2 to the Company's
Current Report on Form 8-K dated October 10, 1997 and incorporated
herein by this reference.
4.4 Certificate of Designation, Preferences and Rights of the Company's
Series B Preferred Stock, filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated October 10, 1997 and incorporated
herein by this reference.
4.5 Registration and Put Rights Agreement among the Company and the
Purchasers dated September 30, 1997, filed as Exhibit 4.2 to the
Company's Current Report on Form 8-K dated October 10, 1997 and
incorporated herein by this reference.
4.6 Warrant Agreement of Western Micro Technology, Inc. between the
Company and the Purchasers dated September 30, 1997 filed as Exhibit
4.3 to the Company's Current Report on Form 8-K dated October 10,
1997 and incorporated herein by this reference.
4.7 Common Stock Purchase Warrant in favor of Robert Fleming Inc., filed
as Exhibit 4.4 to the Company's Current Report on Form 8-K dated
October 10, 1997 and incorporated herein by this reference.
4.8 Common Stock Purchase Warrant in favor of CanPartners Investments
IV, LLC filed as Exhibit 4.5 to the Company's Current Report on Form
8-K dated October 10, 1997 and incorporated herein by this
reference.
4.9 13.5% Second Priority Senior Secured Notes Due September 30, 2000 in
favor of Robert Fleming Inc., filed as Exhibit 4.6 to the Company's
Current Report on Form 8-K dated October 10, 1997, and incorporated
herein by this reference.
4.10 13.5% Second Priority Senior Secured Notes Due September 30, 2000 in
favor of CanPartners Investments IV, LLC, filed as Exhibit 4.7 to
the Company's Current Report on Form 8-K dated October 10, 1997 and
incorporated herein by this reference.
4.11 Promissory Note of Registrant in the amount of Ten Million Dollars
($10,000,000) in favor of ICC dated September 30, 1997, filed as
Exhibit 4.8 to the Company's Current Report on Form 8-K dated
October 10, 1997 and incorporated herein by this reference.
4.12 Warrant Agreement of Western Micro Technology, Inc. between the
Company and ICC dated September 30, 1997, filed as Exhibit 4.9 to
the Company's Current Report on Form 8-K dated October 10, 1997 and
incorporated herein by this reference.
4.13 Registration and Put Rights Amendment between the Company and ICC,
filed as Exhibit 4.10 to the Company's Current Report on Form 8-K
dated October 10, 1997 and incorporated herein by this reference.
4.14 Common Stock Purchase Warrant in favor of ICC, filed as Exhibit 4.11
to the Company's Current Report on Form 8-K dated October 10, 1997
and incorporated herein by this reference.
4.15 Amended and Restated Bylaws of Savoir Technology Group, Inc., a
Delaware corporation, filed as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by this reference.
5.1 Opinion of Pillsbury Madison & Sutro LLP.
10.1 Lease Agreement between MP Hacienda, Inc. and the Company dated July
15, 1995, filed as Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, and incorporated
herein by this reference.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.2 Master Lease Commitment dated September 25, 1989 and Supplements
8.01 and 8.02 thereto, filed as Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1990 and
incorporated herein by this reference.
10.3 Inventory and Working Capital Financing Agreement dated December 1,
1996 by and between IBM Credit Corporation and the Company, and
Amendment #1 thereto, filed as Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, filed with
the Commission on March 31, 1997, and incorporated herein by this
reference.
10.4 Amended and Restated 1994 Stock Option Plan of Western Micro
Technology, Inc. amended and restated as of May 18, 1997, filed as
Exhibit A to the Company's Definitive Proxy Statement as filed with
the Commission on June 27, 1997, and incorporated herein by this
reference.
10.5 Amendment #4 to the Inventory and Working Capital Financing
Agreement dated September 30, 1997, filed as Exhibit 10.6 to the
Company's Current Report on Form 8-K, filed with the Commission on
October 10, 1997 and incorporated herein by this reference.
10.6 Note Purchase Agreement dated September 30, 1997 among the Company,
the Guarantors and the Purchasers, filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the Commission on
October 10, 1997 and incorporated herein by this reference.
10.7 Guarantor Security and Pledge Agreement among the Company, the
Guarantors and the Agent dated September 30, 1997, filed as Exhibit
10.1 to the Company's Current Report on Form 8-K dated October 10,
1997 and incorporated herein by this reference.
10.8 SMS Subordination and Intercreditor Agreement among the Company, the
Selling Stockholders, the Guarantors and the Purchasers dated
September 30, 1997, filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K dated October 10, 1997 and incorporated herein by
this reference.
10.9 Issuer Security and Pledge Agreement between the Company and the
Agent dated September 30, 1997, filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated October 10, 1997 and
incorporated herein by this reference.
10.10 Contribution Agreement Assignment between the Company and the Agent
dated September 30, 1997, filed as Exhibit 10.4 to the Company's
Current Report on Form 8-K dated October 10, 1997 and incorporated
herein by this reference.
10.11 Assumption Agreement among the Company, Star Data Systems, Inc. and
ICC dated September 30, 1997, filed as Exhibit 10.7 to the Company's
Current Report on Form 8-K dated October 10, 1997 and incorporated
herein by this reference.
10.12 Collateralized Guaranty of Payment between the Company and ICC dated
September 30, 1997, filed as Exhibit 10.8 to the Company's Current
Report on Form 8-K dated October 10, 1997 and incorporated herein by
this reference.
10.13 IBM Credit Corporation Subordination and Intercreditor Agreement
among the Company, the Guarantors, the Purchasers and ICC dated
September 30, 1997, filed as Exhibit 10.9 to the Company's Current
Report on Form 8-K dated October 10, 1997 and incorporated herein by
this reference.
10.14+ Business Partner Agreement between the Company and International
Business Machines Corporation dated September 29, 1997, filed as
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
period ended December 31, 1997 and incorporated herein by this
reference.
10.15+ Employment Letter between the Company and Carlton Joseph Mertens II
dated September 30, 1997, filed as part of Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Commission on
July 16, 1997 and incorporated herein by this reference.
10.16 Employment Letter between the Company and P. Scott Munro dated
January 22, 1998, filed as Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the period ended December 31, 1997 and
incorporated herein by this reference.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.17 Employment Letter between the Company and James W. Dorst dated
January 22, 1998, filed as Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the period ended December 31, 1997 and
incorporated herein by this reference.
10.18 Employment Letter between the Company and Robert O'Reilly dated
January 22, 1998, filed as Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the period ended December 31, 1997 and
incorporated herein by this reference.
10.19 Lease Agreement dated February 2, 1998, by and between Green
Mountain Ventures I, Ltd., a Texas limited partnership and the
Company's Business Partner Solutions, Inc., a Texas corporation,
filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, and incorporated herein by
this reference.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1).
24.1 Power of Attorney (see Page II-7).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Schedules omitted from this exhibit will be furnished to the Commission
upon request.
+ Confidential Treatment was granted by the Commission with respect to certain
portions of this exhibit.
+ Confidential Treatment requested with respect to certain portions of this
exhibit pursuant to a request for confidential treatment filed with the
Commission on March 13, 1998. The portions of the exhibit for which
confidential treatment has been requested have been omitted from the
exhibit. The omitted information has been filed separately with the
Commission as part of the confidential treatment request.
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because they are not applicable or not required
or because the information is included elsewhere in the Consolidated Financial
Statements or the Notes thereto.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver,
or cause to be delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF CAMPBELL, STATE OF CALIFORNIA, ON THE 13TH DAY OF
MARCH, 1998.
SAVOIR TECHNOLOGY GROUP, INC.
/s/ P. Scott Munro
By __________________________________
P. Scott Munro
Chairman of the Board,
Chief Executive Officer,
President, and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints P. Scott Munro and James W. Dorst, and each of
them, his true and lawful attorneys-in-fact and agents, each with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments, including post-
effective amendments, to this registration statement, and any registration
statement relating to the offering covered by this registration statement and
filed pursuant to Rule 462(b) under the Securities Act of 1933 and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents or their
substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ P. Scott Munro Chairman of the Board, March 13, 1998
____________________________________ Chief Executive Officer,
P. Scott Munro President and Secretary
(Principal Executive
Officer)
/s/ James W. Dorst Chief Financial Officer March 13, 1998
____________________________________ (Principal Financial
James W. Dorst Officer)
/s/ Angelo Guadagno Director March 13, 1998
____________________________________
Angelo Guadagno
/s/ James J. Heffernan Director March 13, 1998
____________________________________
James J. Heffernan
/s/ Carlton Joseph Mertens II Director March 13, 1998
____________________________________
Carlton Joseph Mertens II
/s/ K. William Sickler Director March 13, 1998
____________________________________
K. William Sickler
/s/ J. Larry Smart Director March 13, 1998
____________________________________
J. Larry Smart
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
2.1 Asset Purchase Agreement dated May 5, 1995 between the Company
and Reptron Electronics, Inc., filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Commission
on August 9, 1995 and incorporated herein by this reference.
2.2 Agreement and Plan of Reorganization dated November 18, 1995
between the Company and International Parts, Inc., filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K filed
with the Commission on December 4, 1995 and incorporated herein
by this reference.
2.3 Asset Purchase Agreement dated January 2, 1996 between the
Company and R&D Hardware Systems Company of Colorado, filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K filed
with the Commission on January 17, 1996, and incorporated
herein by this reference.
2.4* Asset Purchase Agreement dated November 7, 1996 by and among
the Company, Star Technologies, Inc. and the Stockholders of
Star Technologies, Inc., filed as Exhibit 10.24 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by this reference.
2.5 Asset Purchase Agreement dated November 29, 1996 by and among
the Company, International Data Products, LLC, Oliver-Allen
Corporation, Inc., International Data Products and Financial,
Ltd., Alan M. Bynder and Michael R. Duhaime, filed as Exhibit
10.25 to the Company's Amendment on Form 10-K/A to its Annual
Report on Form 10-K for the year ended December 31, 1996, filed
with the Commission on November 19, 1997 and incorporated
herein by this reference.
2.6 Agreement and Plan of Reorganization dated March 17, 1997 by
and among the Company, WMT Acquisition Corp., Target Solutions,
Inc. and Lee Adams, filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the Commission on March
28, 1997 and incorporated herein by this reference.
2.7*+ Stock Purchase Agreement dated June 4, 1997 by and among the
Company, Star Management Services, Inc., Harvey E. Najim and
Carlton Joseph Mertens II, filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Commission
on July 16, 1997 and incorporated herein by this reference.
2.8*+ Third Amendment to Stock Purchase Agreement dated September 30,
1997 by and among the Company, Star Management Services, Inc.,
Harvey E. Najim and Carlton Joseph Mertens II, filed as Exhibit
2.1 to the Company's Current Report on Form 8-K, filed with the
Commission on October 10, 1997 and incorporated herein by this
reference.
2.9 Purchase Agreement Assignment between the Company and the Agent
dated September 30, 1997, filed as Exhibit 10.5 to the
Company's Current Report on Form 8-K dated October 10, 1997 and
incorporated herein by this reference.
2.10 Certificate of Ownership and Merger dated as of November 21,
1997, filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K dated November 21, 1997 and incorporated herein by
this reference.
2.11 Amendment and Plan of Reorganization dated November 22, 1997,
by and among Savoir Technology Group, Inc., MCBA Systems, Inc.,
Michael N. Gunnells and John Harkins, filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K filed with the
Commission on December 22, 1997 and incorporated herein by this
reference.
4.1 Specimen Common Stock Certificate.
4.2 Restated Certificate of Incorporation of Savoir Technology
Group, Inc., a Delaware corporation, filed as Exhibit 3(ii) to
the Company's Current Report on Form 8-K dated July 23, 1997,
filed on August 14, 1997 and incorporated herein by this
reference.
4.3 Certificate of Designation, Preferences and Rights of the
Company's Series A Preferred Stock, filed as Exhibit 3.2 to the
Company's Current Report on Form 8-K dated October 10, 1997 and
incorporated herein by this reference.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
4.4 Certificate of Designation, Preferences and Rights of the Company's
Series B Preferred Stock, filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated October 10, 1997 and incorporated
herein by this reference.
4.5 Registration and Put Rights Agreement among the Company and the
Purchasers dated September 30, 1997, filed as Exhibit 4.2 to the
Company's Current Report on Form 8-K dated October 10, 1997 and
incorporated herein by this reference.
4.6 Warrant Agreement of Western Micro Technology, Inc. between the
Company and the Purchasers dated September 30, 1997 filed as Exhibit
4.3 to the Company's Current Report on Form 8-K dated October 10, 1997
and incorporated herein by this reference.
4.7 Common Stock Purchase Warrant in favor of Robert Fleming Inc., filed
as Exhibit 4.4 to the Company's Current Report on Form 8-K dated
October 10, 1997 and incorporated herein by this reference.
4.8 Common Stock Purchase Warrant in favor of CanPartners Investments IV,
LLC filed as Exhibit 4.5 to the Company's Current Report on Form 8-K
dated October 10, 1997 and incorporated herein by this reference.
4.9 13.5% Second Priority Senior Secured Notes Due September 30, 2000 in
favor of Robert Fleming Inc., filed as Exhibit 4.6 to the Company's
Current Report on Form 8-K dated October 10, 1997, and incorporated
herein by this reference.
4.10 13.5% Second Priority Senior Secured Notes Due September 30, 2000 in
favor of CanPartners Investments IV, LLC, filed as Exhibit 4.7 to the
Company's Current Report on Form 8-K dated October 10, 1997 and
incorporated herein by this reference.
4.11 Promissory Note of Registrant in the amount of Ten Million Dollars
($10,000,000) in favor of ICC dated September 30, 1997, filed as
Exhibit 4.8 to the Company's Current Report on Form 8-K dated October
10, 1997 and incorporated herein by this reference.
4.12 Warrant Agreement of Western Micro Technology, Inc. between the
Company and ICC dated September 30, 1997, filed as Exhibit 4.9 to the
Company's Current Report on Form 8-K dated October 10, 1997 and
incorporated herein by this reference.
4.13 Registration and Put Rights Amendment between the Company and ICC,
filed as Exhibit 4.10 to the Company's Current Report on Form 8-K
dated October 10, 1997 and incorporated herein by this reference.
4.14 Common Stock Purchase Warrant in favor of ICC, filed as Exhibit 4.11
to the Company's Current Report on Form 8-K dated October 10, 1997 and
incorporated herein by this reference.
4.15 Amended and Restated Bylaws of Savoir Technology Group, Inc., a
Delaware corporation, filed as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by this reference.
5.1 Opinion of Pillsbury Madison & Sutro LLP.
10.1 Lease Agreement between MP Hacienda, Inc. and the Company dated July
15, 1995, filed as Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, and incorporated
herein by this reference.
10.2 Master Lease Commitment dated September 25, 1989 and Supplements 8.01
and 8.02 thereto, filed as Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1990 and incorporated
herein by this reference.
10.3 Inventory and Working Capital Financing Agreement dated December 1,
1996 by and between IBM Credit Corporation and the Company, and
Amendment #1 thereto, filed as Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, filed with
the Commission on March 31, 1997, and incorporated herein by this
reference.
10.4 Amended and Restated 1994 Stock Option Plan of Western Micro
Technology, Inc. amended and restated as of May 18, 1997, filed as
Exhibit A to the Company's Definitive Proxy Statement as filed with
the Commission on June 27, 1997, and incorporated herein by this
reference.
</TABLE>
2
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<TABLE>
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EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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10.5 Amendment #4 to the Inventory and Working Capital Financing Agreement
dated September 30, 1997, filed as Exhibit 10.6 to the Company's
Current Report on Form 8-K, filed with the Commission on October 10,
1997 and incorporated herein by this reference.
10.6 Note Purchase Agreement dated September 30, 1997 among the Company,
the Guarantors and the Purchasers, filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the Commission on
October 10, 1997 and incorporated herein by this reference.
10.7 Guarantor Security and Pledge Agreement among the Company, the
Guarantors and the Agent dated September 30, 1997, filed as Exhibit
10.1 to the Company's Current Report on Form 8-K dated October 10,
1997 and incorporated herein by this reference.
10.8 SMS Subordination and Intercreditor Agreement among the Company, the
Selling Stockholders, the Guarantors and the Purchasers dated
September 30, 1997, filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K dated October 10, 1997 and incorporated herein by
this reference.
10.9 Issuer Security and Pledge Agreement between the Company and the Agent
dated September 30, 1997, filed as Exhibit 10.3 to the Company's
Current Report on Form 8-K dated October 10, 1997 and incorporated
herein by this reference.
10.10 Contribution Agreement Assignment between the Company and the Agent
dated September 30, 1997, filed as Exhibit 10.4 to the Company's
Current Report on Form 8-K dated October 10, 1997 and incorporated
herein by this reference.
10.11 Assumption Agreement among the Company, Star Data Systems, Inc. and
ICC dated September 30, 1997, filed as Exhibit 10.7 to the Company's
Current Report on Form 8-K dated October 10, 1997 and incorporated
herein by this reference.
10.12 Collateralized Guaranty of Payment between the Company and ICC dated
September 30, 1997, filed as Exhibit 10.8 to the Company's Current
Report on Form 8-K dated October 10, 1997 and incorporated herein by
this reference.
10.13 IBM Credit Corporation Subordination and Intercreditor Agreement among
the Company, the Guarantors, the Purchasers and ICC dated September
30, 1997, filed as Exhibit 10.9 to the Company's Current Report on
Form 8-K dated October 10, 1997 and incorporated herein by this
reference.
10.14+ Business Partner Agreement between the Company and International
Business Machines Corporation dated September 29, 1997, filed as
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
period ended December 31, 1997 and incorporated herein by this
reference.
10.15+ Employment Letter between the Company and Carlton Joseph Mertens II
dated September 30, 1997, filed as part of Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Commission on July
16, 1997 and incorporated herein by this reference.
10.16 Employment Letter between the Company and P. Scott Munro dated January
22, 1998, filed as Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the period ended December 31, 1997 and incorporated
herein by this reference.
10.17 Employment Letter between the Company and James W. Dorst dated January
22, 1998, filed as Exhibit 10.17 to the Company's Annual Report on
Form 10-K for the period ended December 31, 1997 and incorporated
herein by this reference.
10.18 Employment Letter between the Company and Robert O'Reilly dated
January 22, 1998, filed as Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the period ended December 31, 1997 and
incorporated herein by this reference.
10.19 Lease Agreement dated February 2, 1998, by and between Green Mountain
Ventures I, Ltd., a Texas limited partnership and the Company's
Business Partner Solutions, Inc., a Texas corporation, filed as
Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, and incorporated herein by this reference.
</TABLE>
3
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EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1).
24.1 Power of Attorney (see Page II-7).
27.1 Financial Data Schedule.
</TABLE>
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* Schedules omitted from this exhibit will be furnished to the Commission upon
request.
+ Confidential Treatment was granted by the Commission with respect to certain
portions of this exhibit.
+ Confidential Treatment requested with respect to certain portions of this
exhibit pursuant to a request for confidential treatment filed with the
Commission on March 13, 1998. The portions of the exhibit for which
confidential treatment has been requested have been omitted from the
exhibit. The omitted information has been filed separately with the
Commission as part of the confidential treatment request.
4
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PGFM DRAFT OF MARCH 12, 1998
EXHIBIT 1.1
SAVOIR TECHNOLOGY GROUP, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_______________, 1998
THE ROBINSON-HUMPHREY COMPANY, LLC
JEFFERIES & COMPANY, INC.
CLEARY GULL REILAND & McDEVITT INC.
As representatives of the several
Underwriters named in Schedule I hereto,
c/o The Robinson-Humphrey Company, LLC
3333 Peachtree Road, N.E.
Atlanta, Georgia 30326
Dear Sirs:
Savoir Technology Group, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I (the "Underwriters") an aggregate of
3,500,000 shares of common stock, par value $.01 per share (the "Common Stock"),
of the Company (the "Firm Shares"), and, at the election of the Underwriters,
subject to the terms and conditions stated herein, the Company proposes, subject
to the terms and conditions stated herein, to sell to the Underwriters up to
525,000 additional shares of Common Stock (the "Optional Shares") (the Firm
Shares and the Optional Shares that the Underwriters elect to purchase pursuant
to Section 2 hereof are collectively called the "Shares"). In your capacity as
representatives of the several Underwriters, you are referred to herein as the
"Representatives."
1. (a) REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(i) A registration statement on Form S-2 (File No. 333-
_____) with respect to the Shares, including a prospectus subject to
completion, has been filed by the Company with the Securities and
Exchange Commission (the "Commission") under the Securities Act of
1933, as amended (the "Act"), and one or more amendments to such
registration statement may have been so filed. After the execution of
this Agreement, the Company will file with the Commission either (A)
if such registration statement, as it may have been amended, has
become effective under the Act and information has been omitted
therefrom in accordance
<PAGE>
with Rule 430A under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no
such amendment shall have been filed, in such registration statement)
with such changes or insertions as are required by Rule 430A or
permitted by Rule 424(b) under the Act and as have been provided to
and approved by the Representatives, or (B) if such registration
statement, as it may have been amended, has not become effective under
the Act, an amendment to such registration statement, including a form
of prospectus, a copy of which amendment has been provided to and
approved by the Representatives prior to the execution of this
Agreement. As used in this Agreement, the term "Registration
Statement" means such registration statement, as amended at the time
when it was or is declared effective, including all financial
statement schedules and exhibits thereto and including any information
omitted therefrom pursuant to Rule 430A under the Act and included in
the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion included in
such registration statement or any amendment or post-effective
amendment thereto (including the prospectus subject to completion, if
any, included in the Registration Statement at the time it was or is
declared effective); and the term "Prospectus" means the prospectus
first filed with the Commission pursuant to Rule 424(b) under the Act
or, if no prospectus is required to be so filed, such term means the
prospectus included in the Registration Statement. For purposes of the
following representations and warranties, to the extent reference is
made to the Prospectus and at the relevant time the Prospectus is not
yet in existence, such reference shall be deemed to be to the most
recent Preliminary Prospectus. Any reference herein to the
Registration Statement, the Preliminary Prospectus or the Prospectus
shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-2 which were filed
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As used herein, the term "Incorporated Documents" means the
documents which at the time are incorporated by reference in the
Registration Statement, Preliminary Prospectus or the Prospectus.
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued and no proceeding for that
purpose has been instituted or threatened by the Commission or the
securities authority of any state or other jurisdiction. If the
Registration Statement has become effective under the Act, no stop
order suspending the effectiveness of the Registration Statement or
any part thereof has been issued and no proceeding for that purpose
has been instituted or threatened or, to the best knowledge of the
Company, contemplated by the Commission or the securities authority of
any state or other jurisdiction.
(iii) When any Preliminary Prospectus was filed with the
Commission it (A) contained all statements required to be stated
therein in accordance with, and complied in all material respects with
the requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not include any untrue statement of
a material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
2
<PAGE>
under which they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared effective, and
at each Time of Delivery (as hereinafter defined), it (A) contained or
will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects
with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not or will not include any untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the
Prospectus or any amendment or supplement thereto is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or such
amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectus was or is declared
effective) and at each Time of Delivery, the Prospectus, as amended or
supplemented at any such time, (A) contained or will contain all
statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements
of, the Act and the rules and regulations of the Commission thereunder
and (B) did not or will not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. The Incorporated Documents at the time
they were filed with the Commission complied in all material respects
with the requirements of the Exchange Act and the rules and
regulations of the Commission under the Exchange Act, and, when read
together with the other information in the Prospectus, will not
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading. The foregoing provisions of this paragraph
(iii) do not apply to statements or omissions made in any Preliminary
Prospectus, the Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto in reliance upon and
in conformity with written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein.
(iv) The descriptions in the Registration Statement and
the Prospectus of statutes, legal and governmental proceedings or
contracts and other documents are accurate and fairly present the
information required to be shown; and there are no statutes or legal
or governmental proceedings required to be described in the
Registration Statement or the Prospectus that are not described as
required and there are no contracts or documents of a character that
are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described and filed as required.
(v) Each of the Company and its subsidiaries has been
duly incorporated, is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation and has
full power and authority (corporate and other) to own or lease its
properties and conduct its business as described in the Prospectus.
The Company has full power and authority (corporate and other) to
3
<PAGE>
enter into this Agreement and to perform its obligations hereunder.
Each of the Company and its subsidiaries is duly qualified to transact
business as a foreign corporation and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties,
or conducts any business, so as to require such qualification, except
where the failure to so qualify would not have a material adverse
effect on the financial position, results of operations or business of
the Company and its subsidiaries.
(vi) The Company's authorized, issued and outstanding
capital stock is as disclosed in the Prospectus. All of the issued
shares of capital stock of the Company have been duly authorized and
validly issued, are fully paid and nonassessable and conform to the
description of the Common Stock contained in the Prospectus. None of
the issued shares of capital stock of the Company or any of its
subsidiaries has been issued or is owned or held in violation of any
preemptive rights of shareholders, and no person or entity (including
any holder of outstanding shares of capital stock of the Company or
its subsidiaries) has any preemptive or other rights to subscribe for
any of the Shares.
(vii) All of the issued shares of capital stock of each of
the Company's subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable and are owned beneficially by
the Company free and clear of all liens, security interests, pledges,
charges, encumbrances, defects, shareholders' agreements, voting
trusts, equities or claims of any nature whatsoever. Except as
disclosed in the Prospectus, the Company does not own, directly or
indirectly, any capital stock or other equity securities of any other
corporation or any ownership interest in any partnership, joint
venture or other association.
(viii) Except as disclosed in the Prospectus, there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of
the Company or any such subsidiary, (B) warrants, rights or options to
subscribe for or purchase from the Company or any such subsidiary any
such capital stock or any such convertible or exchangeable securities
or obligations, or (C) obligations of the Company or any such
subsidiary to issue any shares of capital stock, any such convertible
or exchangeable securities or obligations, or any such warrants,
rights or options.
(ix) Since the date of the most recent audited financial
statements included in the Prospectus, neither the Company nor any of
its subsidiaries has sustained any material loss or interference with
its business from fire, explosion, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as disclosed in
or contemplated by the Prospectus.
(x) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (A) neither
the Company nor any of
4
<PAGE>
its subsidiaries has incurred any liabilities or obligations, direct
or contingent, or entered into any transactions, not in the ordinary
course of business, that are material to the Company and its
subsidiaries taken as a whole, (B) the Company has not purchased any
of its outstanding capital stock or declared, paid or otherwise made
any dividend or distribution of any kind on its capital stock, (C)
there has not been any change in the capital stock (except as a result
of shares issued upon exercise of stock options pursuant to existing
stock option plans of the Company), long-term debt or short-term debt
of the Company or any of its subsidiaries (other than borrowing in the
ordinary course under the Company's credit facility with IBM Credit
Corporation), and (D) there has not been any material adverse change,
or any development involving a prospective material adverse change, in
or affecting the financial position, results of operations or business
of the Company and its subsidiaries taken as a whole, in each case
other than as disclosed in or contemplated by the Prospectus.
(xi) The Shares to be issued and sold by the Company have
been duly authorized and, when issued and delivered against payment
therefor as provided herein, will be validly issued and fully paid and
nonassessable and will conform to the description of the Common Stock
contained in the Prospectus; and the certificates evidencing the
Shares will comply with all applicable requirements of Delaware law.
(xii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to the Registration Statement (unless any such right has been
effectively waived) or any securities being registered pursuant to any
other registration statement filed by the Company under the Act.
(xiii) All offers and sales of the Company's capital stock
prior to the date hereof were at all relevant times duly registered
under the Act or exempt from the registration requirements of the Act
by reason of Sections 3(a)(10), 3(b), 4(2) or 4(6) thereof and were
duly registered or the subject of an available exemption from the
registration requirements of the applicable state securities or blue
sky laws.
(xiv) Neither the Company nor any of its subsidiaries is,
or with the giving of notice or passage of time or both would be, in
violation of its Certificate of Incorporation or Bylaws or in default
under any indenture, mortgage, deed of trust, loan agreement, material
lease or other agreement or instrument to which the Company or any of
its subsidiaries is a party or to which any of their respective
properties or assets are subject.
(xv) The issue and sale of the Shares to be issued and
sold by the Company and the performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict
with, or (with or without the giving of notice or the passage of time
or both) result in a breach or violation of any
5
<PAGE>
of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, material lease or
other material agreement or instrument to which the Company or any of
its subsidiaries is a party or to which any of their respective
properties or assets is subject, nor will such action conflict with or
violate any provision of the Certificate of Incorporation or Bylaws of
the Company or any of its subsidiaries or any statute, rule or
regulation or any order, judgment or decree of any court or
governmental agency or body having jurisdiction over the Company or
any of its subsidiaries or any of their respective properties or
assets.
(xvi) The Company and its subsidiaries have good and
marketable title in fee simple to all real property, if any, and good
title to all personal property owned by them, in each case free and
clear of all liens, security interests, pledges, charges,
encumbrances, mortgages and defects, except such as are disclosed in
the Prospectus or such as do not materially and adversely affect the
value of such property and do not materially and adversely interfere
with the use made or proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings held
under lease by the Company or any of its subsidiaries are held under
valid, subsisting and enforceable leases, with such exceptions as are
disclosed in the Prospectus or are not material and do not adversely
interfere with the use made or proposed to be made of such property
and buildings by the Company or such subsidiary.
(xvii) No consent, approval, authorization, order or
declaration of or from, or registration, qualification or filing with,
any court or governmental agency or body is required for the sale of
the Shares or the consummation of the transactions contemplated by
this Agreement, except the registration of the Shares under the Act
(which, if the Registration Statement is not effective as of the time
of execution hereof, shall be obtained as provided in this Agreement)
and such as may be required under state securities or blue sky laws in
connection with the offer, sale and distribution of the Shares by the
Underwriters.
(xviii) Other than as disclosed in the Prospectus, there is
no litigation, arbitration, claim, proceeding (formal or informal) or
investigation pending or threatened (or any basis therefor) in which
the Company or any of its subsidiaries is a party or of which any of
their respective properties or assets are the subject which is
individually or in the aggregate reasonably likely to have a material
adverse effect on the financial position, results of operations or
business of the Company and its subsidiaries. Neither the Company nor
any of its subsidiaries is in violation of, or in default with respect
to, any statute, rule, regulation, order, judgment or decree, except
as described in the Prospectus or such as do not and will not
individually or in the aggregate have a material adverse effect on the
financial position, results of operations or business of the Company
and its subsidiaries, taken as a whole, and neither the Company nor
any of its subsidiaries is required to take any action in order to
avoid any such violation or default.
6
<PAGE>
(xix) Coopers & Lybrand L.L.P., who have certified certain
financial statements of the Company and its consolidated subsidiaries,
is and was during the periods covered by its report included in the
Registration Statement and the Prospectus, independent public
accountants as required by the Act, the Exchange Act, and the rules
and regulations of the Commission thereunder.
(xx) The consolidated financial statements and schedules
(including the related notes) of the Company and its consolidated
subsidiaries included in the Registration Statement, the Prospectus or
any Preliminary Prospectus were prepared in accordance with generally
accepted accounting principles consistently applied throughout the
periods involved and fairly present the financial position and results
of operations of the Company and its subsidiaries, on a consolidated
basis, at the dates and for the periods presented. The other
financial and statistical information and data included in the
Registration Statement, the Prospectus or any Preliminary Prospectus,
set forth under the captions "Prospectus Summary," "Selected Financial
Data," "Management's Discussion and Analysis of Financial Conditions
and Results of Operations," and "Business" are, in all material
respects, accurately presented and prepared on a basis consistent with
such financial statements and the books and records of the Company.
(xxi) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the valid and binding
agreement of the Company enforceable against the Company in accordance
with its terms, subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws relating
to or affecting the enforcement of creditors' rights generally and to
general equitable principles.
(xxii) Neither the Company nor any of its officers,
directors or affiliates has (A) taken, directly or indirectly, any
action designed to cause or result in, or that has constituted or
might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares or (B) since the filing of the
Registration Statement (1) sold, bid for, purchased or paid anyone any
compensation for soliciting purchases of, the Shares or (2) paid or
agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
(xxiii) The Company has obtained for the benefit of the
Company and the Underwriters from each of its directors, executive
officers and the persons whose names appear on Schedule II hereto a
written agreement to the effect that for a period of either (i) 180 or
(ii) 45 days (as set forth in Schedule II) from the date of the
Prospectus such director, officer or other person will not, without
the prior written consent of The Robinson-Humphrey Company, LLC,
offer, sell, agree to sell, pledge, grant any option to purchase or
otherwise dispose of (or announce any offer, sale, pledge, grant of an
option to purchase or other disposition), directly or indirectly, any
shares of Common Stock
7
<PAGE>
or securities convertible into, or exercisable or exchangeable for,
shares of Common Stock.
(xxiv) Neither the Company, any of its subsidiaries, nor
any director, officer, agent, employee or other person associated with
or acting on behalf of the Company or any such subsidiary has,
directly or indirectly: used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses
relating to political activity; made any unlawful payment to foreign
or domestic government officials or employees or to foreign or
domestic political parties or campaigns from corporate funds; violated
any provision of the Foreign Corrupt Practices Act of 1977, as
amended; or made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment.
(xxv) The operations of the Company and its subsidiaries
with respect to any real property currently leased or owned or by any
means controlled by the Company or any subsidiary (the "Real
Property") are in compliance in all material respects with all
federal, state, and local laws, ordinances, rules, and regulations
relating to occupational health and safety and the environment
(collectively, "Laws"), and the Company and its subsidiaries have all
licenses, permits and authorizations necessary to operate under all
Laws and are in compliance in all material respects with all terms and
conditions of such licenses, permits and authorizations; neither the
Company nor any subsidiary has authorized, conducted or has knowledge
of the generation, transportation, storage, use, treatment, disposal,
or release of any hazardous substance, hazardous waste, hazardous
material, hazardous constituent, toxic substance, pollutant,
contaminant, petroleum product, natural gas, liquefied gas or
synthetic gas defined or regulated under any environmental law on, in
or under any Real Property in violation of any Laws; and there is no
pending or threatened claim, litigation or any administrative agency
proceeding, nor has the Company or any subsidiary received any written
or oral notice from any governmental entity or third party, that: (A)
alleges a violation of any Laws by the Company or any subsidiary; (B)
alleges the Company or any subsidiary is a liable party under the
Comprehensive Environmental Response, Compensation, and Liability Act,
42 U.S.C. (S) 9601 et seq. or any state superfund law; (C) alleges
------
possible contamination of the environment by the Company or any
subsidiary; or (D) alleges possible contamination of the Real
Property.
(xxvi) The Company and its subsidiaries own or have the
right to use all patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, franchises,
trade secrets, proprietary or other confidential information and
intangible properties and assets (collectively, "Intangibles")
necessary to their respective businesses as presently conducted or
proposed to be conducted or as the Prospectus indicates the Company or
such subsidiary proposes to conduct; to the knowledge of the
Company, neither the Company nor any subsidiary has infringed or is
infringing, and neither the Company nor any subsidiary has received
notice of infringement with respect to,
8
<PAGE>
asserted Intangibles of others; and, to the best knowledge of the
Company, there is no infringement by others of Intangibles of the
Company or any of its subsidiaries.
(xxvii) The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against
such losses and risks and in such amounts as are prudent and customary
in the businesses in which they are engaged; and neither the Company
nor any such subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a comparable cost.
(xxviii) Each of the Company and its subsidiaries makes and
keeps accurate books and records reflecting its assets and maintains
internal accounting controls which provide reasonable assurance that
(A) transactions are executed in accordance with management's general
or specific authorization, (B) transactions are recorded as necessary
to permit preparation of the Company's consolidated financial
statements in accordance with generally accepted accounting principles
and to maintain accountability for the assets of the Company, (C)
access to the assets of the Company and each of its subsidiaries is
permitted only in accordance with management's general or specific
authorization, and (D) the recorded accountability for assets of the
Company and each of its subsidiaries is compared with existing assets
at reasonable intervals and appropriate action is taken with respect
to any differences.
(xxix) No subsidiary of the Company is currently
prohibited, directly or indirectly, from paying any dividends to the
Company, from making any other distributions on such subsidiary's
capital stock, from repaying to the Company any loans or advances to
such subsidiary or from transferring any of such subsidiary's property
or assets to the Company or any other subsidiary of the Company,
except as disclosed in the Prospectus.
(xxx) The Company and its subsidiaries have filed all
foreign, federal, state and local tax returns that are required to be
filed by them and have paid all taxes shown as due on such returns as
well as all other materal taxes, assessments and governmental charges
that are due and payable; and no deficiency with respect to any such
return has been assessed or proposed.
(xxxi) The Company is not, will not become as a result of
the transactions contemplated hereby, and does not intend to conduct
its business in a manner that would cause it to become, an "investment
company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940.
(xxxii) The Common Stock is registered pursuant to Section
12(g) of the Exchange Act and is qualified as a Nasdaq National Market
security. The Company has taken no action designated to terminate, or
likely to have the effect of
9
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terminating, the registration of the Common Stock under the Exchange
Act or qualification of the Common Stock on the Nasdaq National
Market, nor has the Company received any notification that the
Commission or the National Association of Securities Dealers, Inc.
(the "NASD") is contemplating terminating such registration or
qualification.
(xxxiii) No labor dispute with the employees of the Company or
any subsidiary exists or, to the knowledge of the Company, is imminent
or threatened, and the Company is not aware of any existing, imminent
or threatened labor disturbance by the employees of any of its
principal suppliers, manufacturers or contractors that, in either
case, could result in a material adverse effect on the financial
position, results of operations or business of the Company.
2. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions
herein set forth, (a) the Company agrees to sell to each of the Underwriters,
and each of the Underwriters agrees, severally and not jointly, to purchase
from the Company at a purchase price of $_________ per share, the number of
Firm Shares (to be adjusted by the Representatives so as to eliminate
fractional shares) determined by multiplying the aggregate number of Firm
Shares to be sold by the Company by a fraction, the numerator of which is the
aggregate number of Firm Shares to be purchased by such Underwriter as set
forth opposite the name of such Underwriter in Schedule I hereto, and the
denominator of which is the aggregate number of Firm Shares to be purchased by
the Underwriters from the Company hereunder and (b) in the event and to the
extent that the Underwriters shall exercise the election to purchase Optional
Shares as provided below, the Company agrees to issue and sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly,
to purchase from the Company, at the purchase price per share set forth in
clause (a) of this Section 2, that portion of the number of Optional Shares as
to which such election shall have been exercised (to be adjusted by the
Representatives so as to eliminate fractional shares) determined by multiplying
such number of Optional Shares by a fraction, the numerator of which is the
maximum number of Optional Shares that such Underwriter is entitled to purchase
as set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the maximum number of the Optional Shares that all of
the Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election in whole or in part from time to time up to 525,000 Optional
Shares, at the purchase price per share set forth in clause (a) in the
paragraph above for the sole purpose of covering over-allotments in the sale of
Firm Shares. Any such election to purchase Optional Shares may be exercised by
written notice from the Representatives to the Company, given from time to time
within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by the
Representatives but in no event earlier than the First Time of Delivery (as
hereinafter defined) or, unless the Representatives and the Company otherwise
agree in writing, earlier than two or later than ten business days after the
date of such notice. In the event the Representatives elect to purchase all or
a portion of the Optional Shares, the Company agrees to furnish or cause to be
furnished to the Representatives the certificates,
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letters and opinions, and to satisfy all conditions, set forth in Section 7
hereof at each Subsequent Time of Delivery (as hereinafter defined).
3. OFFERING BY THE UNDERWRITERS. Upon the authorization by the
Representatives of the release of the Shares, the several Underwriters propose
to offer the Shares for sale upon the terms and conditions disclosed in the
Prospectus.
4. DELIVERY OF SHARES; CLOSING. Certificates in definitive form for the
Shares to be purchased by each Underwriter hereunder, and in such denominations
and registered in such names as The Robinson-Humphrey Company, LLC may request
upon at least 48 hours' prior notice to the Company, shall be delivered by or
on behalf of the Company to the Representatives for the account of such
Underwriter, against payment by such Underwriter on its behalf of the purchase
price therefor by wire transfer or certified or official bank check or checks
drawn on an Atlanta, Georgia bank, payable to the order of the Company in same
day available funds. The closing of the sale and purchase of the Shares shall
be held at the offices of Pillsbury Madison & Sutro LLP, 2550 Hanover Street,
Palo Alto, California 94034, except that physical delivery of such
certificates shall be made at the office of The Depository Trust Company, 55
Water Street, New York, New York 10041. The time and date of such delivery and
payment shall be, with respect to the Firm Shares, at [10:00 a.m.], Eastern
Time, on the third full business day after this Agreement is executed, or, if
this Agreement is executed after 4:30 p.m. Eastern Time, on the fourth full
business day after this Agreement is executed, or at such other time and date
as the Representatives and the Company may agree upon in writing, and, with
respect to the Optional Shares, at 10:00 a.m., Eastern Time, on the date
specified by the Representatives in the written notice given by the
Representatives of the Underwriters' election to purchase all or part of such
Optional Shares, or at such other time and date as the Representatives and the
Company may agree upon in writing. Such time and date for delivery of the Firm
Shares is herein called the "First Time of Delivery," such time and date for
delivery of any Optional Shares, if not the First Time of Delivery, is herein
called a "Subsequent Time of Delivery," and each such time and date for
delivery is herein called a "Time of Delivery." The Company will make such
certificates available for checking and packaging at least 24 hours prior to
each Time of Delivery at the office of The Depository Trust Company, 55 Water
Street, New York, New York 10041 or at such other location in New York, New
York specified by the Representatives in writing at least 48 hours prior to
such Time of Delivery.
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with each
of the Underwriters:
(i) If the Registration Statement has been declared effective
prior to the execution and delivery of this Agreement, the Company
will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented
to by the Representatives, subparagraph (4)) of Rule 424(b) not later
than the earlier of (A) the second business day following the
execution and delivery of this Agreement or (B) the fifth business day
after the date on which the Registration Statement is declared
effective. The Company will advise the Representatives promptly of
any such filing pursuant to Rule 424(b). The Company will file
promptly all reports and any definitive proxy or information
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statement required to be filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15 of the Exchange Act
subsequent to the date of the Prospectus.
(ii) The Company will not file with the Commission the
Prospectus or the amendment referred to in the second sentence of
Section l(a)(i) hereof, any amendment or supplement to the Prospectus
or any amendment to the Registration Statement unless the
Representatives have received a reasonable period of time to review
any such proposed amendment or supplement and consented to the filing
thereof and will use its best efforts to cause any such amendment to
the Registration Statement to be declared effective as promptly as
possible. Upon the request of the Representatives or counsel for the
Underwriters, the Company will promptly prepare and file with the
Commission, in accordance with the rules and regulations of the
Commission, any amendments to the Registration Statement or amendments
or supplements to the Prospectus that may be necessary or advisable in
connection with the distribution of the Shares by the several
Underwriters and will use its reasonable efforts to cause any such
amendment to the Registration Statement to be declared effective as
promptly as possible. If required, the Company will file any amendment
or supplement to the Prospectus with the Commission in the manner and
within the time period required by Rule 424(b) under the Act. The
Company will advise the Representatives, promptly after receiving
notice thereof, of the time when the Registration Statement or any
amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed and
will provide evidence to the Representatives of each such filing or
effectiveness.
(iii) The Company will advise the Representatives promptly
after receiving notice or obtaining knowledge of (A) the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or any part thereof or any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or
any amendment or supplement thereto, (B) the suspension of the
qualification of the Shares for offer or sale in any jurisdiction or
of the initiation or threatening of any proceeding for any such
purpose, or (C) any request made by the Commission or any securities
authority of any other jurisdiction for amending the Registration
Statement, for amending or supplementing the Prospectus or for
additional information or (D) any threat by the Commission or any such
securities authority to initiate proceedings for issuance of such stop
order or other order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto. The Company will use its best efforts to prevent
the issuance of any such stop order or other order and, if any such
stop order or other order is issued, to obtain the withdrawal thereof
as promptly as possible.
(iv) If the delivery of a prospectus relating to the Shares
is required under the Act at any time prior to the expiration of nine
months after the date of the Prospectus and if at such time any events
have occurred as a result of
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which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if for
any reason it is necessary during such same period to amend or
supplement the Prospectus to comply with the Act or the rules and
regulations thereunder, the Company will promptly notify the
Representatives and upon the request of the Representatives (but at
the Company's expense) prepare and file with the Commission an
amendment or supplement to the Prospectus that corrects such statement
or omission or effects such compliance and will furnish without charge
to each Underwriter and to any dealer in securities as many copies of
such amended or supplemented Prospectus as the Representatives may
from time to time reasonably request. If the delivery of a prospectus
relating to the Shares is required under the Act at any time nine
months or more after the date of the Prospectus, upon the request of
the Representatives but at the expense of the Underwriters, the
Company will prepare and deliver to the Underwriters as many copies as
the Representatives may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act. Neither the
Representatives' consent to, nor the Underwriters' delivery of, any
such amendment or supplement shall constitute a waiver of any of the
conditions set forth in Section 7.
(v) The Company promptly from time to time will take such
action as the Representatives may reasonably request to qualify the
Shares for offering and sale under the securities or blue sky laws of
such jurisdictions as the Representatives may request and will
continue such qualifications in effect for as long as may be necessary
to complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction.
(vi) The Company will promptly provide the Representatives,
without charge, (A) three manually executed copies of the Registration
Statement as originally filed with the Commission and of each
amendment thereto, each accompanied by all exhibits thereto, (B) for
each other Underwriter a conformed copy of the Registration Statement
as originally filed and of each amendment thereto, without exhibits,
and (C) so long as a prospectus relating to the Shares is required to
be delivered under the Act, as many copies of each Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto as
the Representatives may reasonably request.
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(viii) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, the Company will not, without the prior written consent of
The Robinson-Humphrey Company, LLC, offer, sell, agree to sell,
pledge, grant any option to purchase or otherwise dispose of (or
announce any offer, sale, pledge, grant of an option to purchase or
other disposition), directly or indirectly, any shares of Common Stock
or securities convertible into, exercisable or exchangeable for,
shares of Common Stock, except as provided in Section 2 and except for
the issuance of Common Stock upon the exercise of stock options or
warrants outstanding on the date of this Agreement to the extent that
such stock options or warrants are disclosed in the Prospectus.
(ix) During a period of five years from the effective date
of the Registration Statement, the Company will furnish to the
Representatives and, upon request, to each of the other Underwriters,
without charge, (A) copies of all reports or other communications
(financial or other) furnished to shareholders, (B) as soon as they
are available, copies of any reports and financial statements
furnished to or filed with the Commission or any national securities
exchange, and (C) such additional information concerning the business
and financial condition of the Company and its subsidiaries, if any,
as the Representatives may reasonably request.
(x) Neither the Company nor any of its officers, directors
or affiliates will (A) take, directly or indirectly, prior to the
termination of the underwriting syndicate contemplated by this
Agreement, any action designed to cause or to result in, or that might
reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of any of the Shares, (B) sell, bid for, purchase
or pay anyone any compensation for soliciting purchases of, the Shares
or (C) pay or agree to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
(xi) The Company will apply the net proceeds from the
offering in the manner set forth under "Use of Proceeds" in the
Prospectus.
(xii) The Company will cause the Shares to continue to be
listed on the Nasdaq National Market.
(xiii) If at any time during the period beginning on the
date the Registration Statement becomes effective and ending on the
later of (A) the date 30 days after such effective date and (B) the
date that is the earlier of (1) the date on which the Company first
files with the Commission a Quarterly Report on Form 10-Q after such
effective date and (2) the date on which the Company first issues a
quarterly financial report to shareholders after such effective date,
any rumor, publication or event relating to or affecting the Company
shall occur as a result of which in the reasonable opinion of the
Representatives the market price of the
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Common Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates
an amendment of or supplement to the Prospectus), the Company will,
after written notice from the Representatives advising the Company to
the effect set forth above, forthwith prepare, consult with the
Representatives concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to the
Representatives, responding to or commenting on such rumor,
publication or event.
6. EXPENSES. The Company will pay all costs and expenses incident to
the performance of its obligations under this Agreement (in such proportion as
may be agreed upon among them), whether or not the transactions contemplated
hereby are consummated or this Agreement is terminated pursuant to Section 10
hereof, including, without limitation, all costs and expenses incident to: (i)
the fees, disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and, if applicable,
filing, of the Registration Statement (including all amendments thereto), any
Preliminary Prospectus, the Prospectus and any amendments and supplements
thereto, this Agreement and any blue sky memoranda; (ii) the delivery of copies
of the foregoing documents to the Underwriters; (iii) the filing fees of the
Commission and the NASD relating to the Shares; (iv) the preparation, issuance
and delivery to the Underwriters of any certificates evidencing the Shares,
including transfer agent's and registrar's fees; (v) the qualification of the
Shares for offering and sale under state securities and blue sky laws, including
filing fees and fees and disbursements of counsel for the Underwriters relating
thereto; (vi) any listing of the securities on the Nasdaq National Market and
(vii) any expenses for travel, lodging and meals incurred by the Company and any
of its officers, directors and employees in connection with any meetings with
prospective investors in the Shares. It is understood, however, that, except as
provided in this Section, Section 8 and Section 10 hereof, the Underwriters will
pay all of their own costs and expenses, including the fees of their counsel,
stock transfer taxes on resale of any of the Shares by them, and any advertising
expenses relating to the offer and sale of the Shares.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder to purchase and pay for the Shares to be delivered at
each Time of Delivery shall be subject, in their discretion, to the accuracy of
the representations and warranties of the Company contained herein as of the
date hereof and as of such Time of Delivery, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its covenants and agreements hereunder, and to the following
additional conditions precedent:
(a) If the Registration Statement as amended to date has not become
effective prior to the execution of this Agreement, such Registration
Statement shall have been declared effective not later than 11:00 am.,
Atlanta time, on the date of this Agreement or such later date and/or time
as shall have been consented to by the Representatives in writing. If
required, the Prospectus and any amendment or supplement thereto shall have
been filed with the Commission pursuant to Rule 424(b) within the
applicable time period prescribed for such filing and in accordance with
Section 5(a) of this Agreement; no stop order suspending the effectiveness
of the Registration Statement or any part thereof shall
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<PAGE>
have been issued and no proceedings for that purpose shall have been
instituted, threatened or, to the best knowledge of the Company and the
Representatives, contemplated by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to the reasonable satisfaction of the Representatives.
(b) Powell, Goldstein, Frazer & Murphy LLP, counsel for the
Underwriters, shall have furnished to the Representatives such opinion or
opinions, dated such Time of Delivery, with respect to the incorporation of
the Company, the validity of the Shares being delivered at such Time of
Delivery, the Registration Statement, the Prospectus, and other related
matters as the Representatives may reasonably request, and the Company
shall have furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(c) The Representatives shall have received an opinion, dated such Time
of Delivery, of Pillsbury Madison & Sutro LLP, counsel for the Company, in
form and substance satisfactory to the Representatives and counsel for the
Underwriters, to the effect that:
(i) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and to
enter into this Agreement and perform its obligations hereunder. The
Company is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of each other
jurisdiction in which it owns or leases property, or conducts any
business, so as to require such qualification, except where the
failure to so qualify would not have a material adverse effect on the
financial position, results of operations or business of the Company
and its subsidiaries.
(ii) Each of the subsidiaries of the Company has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has the
corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement and
the Prospectus. Each such subsidiary is duly qualified to transact
business as a foreign corporation and is in good standing under the
laws of each other jurisdiction in which it owns or leases property,
or conducts any business, so as to require such qualification, except
where the failure to so qualify would not have a material adverse
effect on the financial position, results of operations or business of
the Company and its subsidiaries.
(iii) The Company's authorized, issued and outstanding
capital stock is as disclosed in the Prospectus. All of the issued
shares of capital stock of the Company have been duly authorized and
validly issued, are fully paid and nonassessable and conform to the
description of the Common Stock contained in the Prospectus. None of
the issued shares of capital stock of the Company or any of its
subsidiaries has been issued or is owned or held in violation of any
preemptive
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rights of shareholders, and no person or entity (including any holder
of outstanding shares of capital stock of the Company or its
subsidiaries) has any preemptive or other rights to subscribe for any
of the Shares.
(iv) All of the issued shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued,
are fully paid and nonassessable, and are owned beneficially by the
Company free and clear of all liens, security interests, pledges,
charges, encumbrances, shareholders' agreements, voting trusts,
defects, equities or claims of any nature whatsoever. To such
counsel's knowledge, other than the subsidiaries listed on Exhibit 21
to the Registration Statement, the Company does not own, directly or
indirectly, any capital stock or other equity securities of any other
corporation or any ownership interest in any partnership, joint
venture or other association.
(v) Except as disclosed in the Prospectus, there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of
the Company or any such subsidiary, (B) warrants, rights or options to
subscribe for or purchase from the Company or any such subsidiary any
such capital stock or any such convertible or exchangeable securities
or obligations, or (C) obligations of the Company or any such
subsidiary to issue any shares of capital stock, any such convertible
or exchangeable securities or obligations, or any such warrants,
rights or options.
(vi) The Shares to be issued and sold by the Company have
been duly authorized and, when issued and delivered against payment
therefor as provided herein, will be validly issued and fully paid and
nonassessable and will conform to the description of the Common Stock
contained in the Prospectus; the certificates evidencing the Shares
comply with all applicable requirements of Delaware law; the Shares
have been listed on the Nasdaq National Market.
(vii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings known to such counsel between
the Company and any person granting such person the right to require
the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement (unless
any such right has been effectively waived) or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Act.
(viii) All offers and sales of the Company's capital stock
prior to the date hereof were at all relevant times duly registered
under the Act or exempt from the registration requirements of the Act
by reason of Sections 3(b), 4(2) or 4(6) thereof and were duly
registered or the subject of an available exemption from the
registration requirements of the applicable state securities or blue
sky laws.
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(ix) Neither the Company nor any of its subsidiaries is, or
with the giving of notice or passage of time or both, would be, in
violation of its Certificate of Incorporation or Bylaws or in default
under any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which the Company or any such
subsidiary is a party or to which any of their respective properties
or assets is subject.
(x) The issue and sale of the Shares being issued at such
Time of Delivery and the performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict
with, or (with or without the giving of notice or the passage of time
or both) result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
to which the Company or any such subsidiary is a party or to which any
of their respective properties or assets is subject nor will such
action conflict with or violate any provision of the Certificate of
Incorporation or Bylaws of the Company or any of its subsidiaries or
any statute, rule or regulation or any order, judgment or decree of
any court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their respective
properties or assets.
(xi) The Company and its subsidiaries have good and
marketable title in fee simple to all real property and good title to
all personal property owned by them, in each case, free and clear of
all liens, security interests, pledges, charges, encumbrances,
mortgages and defects except such as are disclosed in the Prospectus
or such as do not materially and adversely affect the value of such
property and do not interfere with the use made and proposed to be
made of such property by the Company and subsidiaries; and any real
property and buildings held under lease by the Company or any of its
subsidiaries are held by the Company or such subsidiary under valid,
subsisting and enforceable leases with such exceptions as are
disclosed in the Prospectus or are not material and do not interfere
with the use made and proposed to be made of such property and
buildings by the Company or such subsidiary.
(xii) No consent, approval, authorization, order or
declaration of or from, or registration, qualification or filing with,
any court or governmental agency or body is required for the issue and
sale of the Shares or the consummation of the transactions
contemplated by this Agreement, except the registration of the Shares
under the Act and such as may be required under state securities or
blue sky laws in connection with the offer, sale and distribution of
the Shares by the Underwriters.
(xiii) To such counsel's knowledge and other than as
disclosed in or contemplated by the Prospectus, there is no
litigation, arbitration, claim, proceeding (formal or informal) or
investigation pending or threatened in which the Company or
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any of its subsidiaries is a party or of which any of their respective
properties or assets is the subject which, if determined adversely to
the Company or any such subsidiary, would individually or in the
aggregate have a material adverse effect on the financial position,
results of operations or business of the Company and its subsidiaries;
and, to such counsel's knowledge, neither the Company nor any of its
subsidiaries is in violation of, or in default with respect to, any
statute, rule, regulation, order, judgment or decree, except as
described in the Prospectus, nor is the Company or any subsidiary
required to take any action in order to avoid any such violation or
default.
(xiv) This Agreement has been duly authorized, executed and
delivered by the Company.
(xv) The Registration Statement and the Prospectus and each
amendment or supplement thereto (other than the financial statements
and related schedules therein, as to which such counsel need express
no opinion), as of their respective effective or issue dates, complied
as to form in all material respects with the requirements of the Act
and the rules and regulations thereunder. Each of the Incorporated
Documents (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion), as of
their respective effective dates, complied as to form in all material
respects with the requirements of the Exchange Act and the rules and
regulations thereunder. The descriptions in the Registration
Statement and the Prospectus of statutes, legal and governmental
proceedings or contracts and other documents are accurate and fairly
present the information required to be shown; and such counsel do not
know of any statutes or legal or governmental proceedings required to
be described in the Registration Statement or Prospectus that are not
described as required or of any contracts or documents of a character
required to be described in the Registration Statement or Prospectus
or to be filed as exhibits to the Registration Statement which are not
described and filed as required.
(xvi) The Registration Statement is effective under the Act;
any required filing of the Prospectus pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b);
and no stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued and, to such counsel's
knowledge, no proceedings for that purpose have been instituted or
threatened or are contemplated by the Commission.
(xvii) The Company is not, and will not be as a result of the
consummation of the transactions contemplated by this Agreement, an
"investment company," or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940.
Such counsel shall also state that they have no reason to believe that the
Registration Statement, or any further amendment thereto made prior to such Time
of Delivery, on its effective date and as of such Time of Delivery, contained or
contains any untrue statement of a material fact or omitted or omits to state
any material fact required to be stated therein or necessary to make the
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statements therein not misleading, or that the Prospectus, or any amendment or
supplement thereto made prior to such Time of Delivery, as of its issue date and
as of such Time of Delivery, contained or contains any untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading (provided that such counsel need express no belief
regarding the financial statements and related schedules and other financial
data contained in the Registration Statement, any amendment thereto, or the
Prospectus, or any amendment or supplement thereto).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of responsible
officers of the Company and public officials and, as to matters involving the
application of laws of any jurisdiction other than the State of Delaware or the
United States, to the extent satisfactory in form and scope to counsel for the
Underwriters, upon the opinion of local counsel, provided that such counsel
states such counsel believes that the Underwriters are justified in relying upon
such opinion and copies of such opinion are delivered to the Representatives and
counsel for the Underwriters.
(d) The Representatives shall have received from Coopers & Lybrand
L.L.P. letters dated, respectively, the date hereof (or, if the
Registration Statement has been declared effective prior to the execution
and delivery of this Agreement, dated such effective date and the date of
this Agreement) and each Time of Delivery, in form and substance
satisfactory to the Representatives, to the effect set forth in Annex I
hereto. In the event that the letters referred to in this Section 7(d) set
forth any changes, decreases or increases in the items specified in
paragraph (iv) of Annex I, it shall be a further condition to the
obligations of the Underwriters that (i) such letters shall be accompanied
by a written explanation by the Company as to the significance thereof,
unless the Representatives deem such explanation unnecessary, and (ii) such
changes, decreases or increases do not, in the sole judgment of the
Representatives, make it impracticable or inadvisable to proceed with the
purchase, sale and delivery of the Shares being delivered at such Time of
Delivery as contemplated by the Registration Statement, as amended as of
the date of such letter.
(e) Since the date of the latest audited financial statements included
in the Prospectus, neither the Company nor any of its subsidiaries shall
have sustained (i) any loss or interference with their respective
businesses from fire, explosion, flood, hurricane or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as disclosed in or
contemplated by the Prospectus, or (ii) any change, or any development
involving a prospective change (including without limitation a change in
management or control of the Company), in or affecting the position
(financial or otherwise), results of operations, net worth or business
prospects of the Company and its subsidiaries, otherwise than as disclosed
in or contemplated by the Prospectus, the effect of which, in either such
case, is in the sole judgment of the Representatives so material and
adverse as to make it impracticable or inadvisable to proceed with the
purchase, sale and delivery of the Shares being delivered at such Time of
Delivery as contemplated by the Registration Statement, as amended as of
the date hereof.
20
<PAGE>
(f) Subsequent to the date hereof there shall not have occurred any of
the following: (i) any suspension or limitation in trading in securities
generally on the New York Stock Exchange, or any setting of minimum prices
for trading on such exchange, or in the Common Stock by the Commission or
the Nasdaq National Market; (ii) a moratorium on commercial banking
activities in New York declared by either federal or state authorities; or
(iii) any outbreak or escalation of hostilities involving the United
States, declaration by the United States of a national emergency or war or
any other national or international calamity or emergency if the effect of
any such event specified in this clause (iii) in the sole judgment of the
Representatives makes it impracticable or inadvisable to proceed with the
purchase, sale and delivery of the Shares being delivered at such Time of
Delivery as contemplated by the Registration Statement, as amended as of
the date hereof.
(g) The Company shall have furnished to the Representatives at such
Time of Delivery certificates of officers of the Company, satisfactory to
the Representatives and counsel to the Underwriters, as to the accuracy of
the representations and warranties of the Company herein at and as of such
Time of Delivery, as to the performance by the Company of all of its
obligations hereunder to be performed at or prior to such Time of Delivery,
and as to such other matters as the Representatives may reasonably request,
and the Company shall have furnished or caused to be furnished certificates
as to the matters set forth in subsections (a) and (e) of this Section 7,
and as to such other matters as the Representatives may reasonably request.
(h) The Shares shall be listed on the Nasdaq National Market.
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement made by the Company in Section
l(a) of this Agreement; (ii) any untrue statement or alleged untrue statement of
any material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or (B) any application or other document, or any amendment
or supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify the Shares under the securities or blue sky laws thereof or filed with
the Commission or any securities association or securities exchange (each an
"Application"); or (iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or any Application a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating, defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement or any amendment
21
<PAGE>
thereto, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto or any Application in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives expressly for use therein. The Company will not, without the
prior written consent of each Underwriter, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding (or related cause of action or portion thereof) in respect of which
indemnification may be sought hereunder (whether or not such Underwriter is a
party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of such Underwriter from
all liability arising out of such claim, action, suit or proceeding (or related
cause of action or portion thereof).
(b) Each Underwriter, severally but not jointly, agrees to indemnify and
hold harmless the Company against any losses, claims, damages or liabilities to
which the Company may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment thereto,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or any Application or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives expressly for use therein; and will reimburse the
Company for any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party);
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to assume the defense of such action on behalf of such indemnified
party and such indemnified party shall have the right to select separate counsel
to defend such action on behalf of such indemnified party. After such notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof and approval by such indemnified party of counsel
appointed to defend such action, the indemnifying party will not be liable to
such indemnified party under this Section 8 for
22
<PAGE>
any legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, which separate counsel shall be designated by the
Representatives in the case of indemnity arising under paragraph (a) of this
Section 8) or (ii) the indemnifying party has authorized the employment of
counsel for the indemnified party at the expense of the indemnifying party.
Nothing in this Section 8(c) shall preclude an indemnified party from
participating at its own expense in the defense of any such action so assumed by
the indemnifying party.
(d) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof in
such proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and the Underwriters on the other from the offering
of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities (or actions in
respect thereof) as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Subsection (d) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (d), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue
23
<PAGE>
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meanings of the Act.
9. DEFAULT OF UNDERWRITERS. (a) If any Underwriter defaults in its
obligation to purchase Shares at a Time of Delivery, the Representatives may in
their discretion arrange for the Representatives or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six (36) hours after such default by any Underwriter the Representatives
do not arrange for the purchase of such Shares, the Company shall be entitled
to a further period of thirty-six (36) hours within which to procure another
party or other parties satisfactory to the Representatives to purchase such
Shares on such terms. In the event that, within the respective prescribed
periods, the Representatives notify the Company that the Representatives have
so arranged for the purchase of such Shares, or the Company notifies the
Representatives that it has so arranged for the purchase of such Shares, the
Representatives or the Company shall have the right to postpone a Time of
Delivery for a period of not more than seven days in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
to file promptly any amendments to the Registration Statement or the Prospectus
that in the opinion of the Representatives may thereby be made necessary. The
cost of preparing, printing and filing any such amendments shall be paid for by
the Underwriters. The term "Underwriter" as used in this Agreement shall
include any person substituted under this Section with like effect as if such
person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by the Representatives and
the Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-eleventh of the aggregate
number of Shares to be purchased at such Time of Delivery, then the Company
shall have the right to require each non-defaulting Underwriter to purchase the
number of Shares which such Underwriter agreed to purchase hereunder at such
Time of Delivery and, in addition, to require each non-defaulting Underwriter
to purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made, but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
10. TERMINATION. (a) This Agreement may be terminated with respect to the
Firm Shares or any Optional Shares in the sole discretion of the
Representatives by notice to the
24
<PAGE>
Company given prior to the First Time of Delivery or any Subsequent Time of
Delivery, respectively, in the event that (i) any condition to the obligations
of the Underwriters set forth in Section 7 hereof has not been satisfied, or
(ii) the Company shall have failed, refused or been unable to deliver the
Shares or to perform all obligations and satisfy all conditions on their
respective parts to be performed or satisfied hereunder at or prior to such
Time of Delivery, in either case other than by reason of a default by any of
the Underwriters. If this Agreement is terminated pursuant to this Section
10(a), the Company will reimburse the Underwriters severally upon demand for
all out-of-pocket expenses (including counsel fees and disbursements) that
shall have been incurred by them in connection with the proposed purchase and
sale of the Shares. The Company shall not be liable to any of the Underwriters
for the loss of anticipated profits from the transactions covered by this
Agreement.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by the Representatives and
the Company as provided in Section 9(a), the aggregate number of such Shares
which remains unpurchased exceeds one-eleventh of the aggregate number of Shares
to be purchased at such Time of Delivery, or if the Company shall not exercise
the right described in Section 9(b) to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to a Subsequent Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company, except for the expenses to be borne by the Company
and the Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
11. SURVIVAL. The respective indemnities, agreements, representations,
warranties and other statements of the Company, its officers and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person referred to in
Section 8(d) or the Company or any officer or director or controlling person of
the Company referred to in Section 8(d), and shall survive delivery of and
payment for the Shares. The respective agreements, covenants, indemnities and
other statements set forth in Sections 6 and 8 hereof shall remain in full force
and effect, regardless of any termination or cancellation of this Agreement.
12. NOTICES. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be mailed, delivered or telegraphed and
confirmed in writing to the Representatives in care of The Robinson-Humphrey
Company, LLC, 3333 Peachtree Road, N.E., Atlanta, Georgia 30326, Attention:
Corporate Finance Department (with a copy to Powell, Goldstein, Frazer & Murphy
LLP, 191 Peachtree Street, Atlanta, Georgia 30303, Attention: Mark A. Loeffler,
Esq.); and if sent to the Company, shall be mailed, delivered or telegraphed and
confirmed in writing, to the Company at 254 E. Hacienda Avenue, Campbell,
California 95008, Attention: James Dorst, Chief Financial Officer (with a copy
to Pillsbury Madison & Sutro LLP, 2550 Hanover Street, Palo Alto, California
94034, Attention: Katharine A. Martin, Esq.).
13. REPRESENTATIVES. The Representatives will act for the several
Underwriters in
25
<PAGE>
connection with the transactions contemplated by this Agreement, and any action
under this Agreement taken by the Representatives jointly or by The Robinson-
Humphrey Company, LLC will be binding upon all the Underwriters.
14. BINDING EFFECT. This Agreement shall be binding upon, and inure
solely to the benefit of, the Underwriters and the Company and to the extent
provided in Sections 8 and 10 hereof, the officers and directors and controlling
persons referred to therein and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia without giving effect to any
provisions regarding conflicts of laws.
16. COUNTERPARTS. This Agreement may be executed by any one or more of
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one and
the same instrument.
[Remainder of Page Intentionally Left Blank]
26
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us one of the counterparts hereof, and upon the
acceptance hereof by The Robinson-Humphrey Company, LLC on behalf of each of the
Underwriters, this letter will constitute a binding agreement between the
Underwriters and the Company. It is understood that the acceptance by the
Representatives of this letter on behalf of each of the Underwriters is pursuant
to the authority set forth in the Master Agreement Among Underwriters, a copy of
which shall be submitted to the Company for examination, upon request, but
without warranty on the part of the Representatives as to the authority of the
signers thereof.
Very truly yours,
SAVOIR TECHNOLOGY GROUP, INC.
By:
---------------------------------------
P. Scott Munro
Chairman, Chief Executive Officer,
President and Secretary
The foregoing Agreement is hereby
confirmed and accepted as of the
date first written above at
Atlanta, Georgia.
THE ROBINSON-HUMPHREY COMPANY, LLC
JEFFERIES & COMPANY, INC.
CLEARY GULL REILAND
& MCDEVITT INC.
By: The Robinson-Humphrey Company, LLC
By:
---------------------------------------
(Authorized Representative)
On behalf of each of the Underwriters
27
<PAGE>
SCHEDULE I
NUMBER OF
OPTIONAL
TOTAL SHARES TO BE
NUMBER OF FIRM PURCHASED IF
SHARES TO BE MAXIMUM OPTION
Underwriter PURCHASED EXERCISED
- ----------- --------- ---------
The Robinson-Humphrey
Company, LLC ...................
Jefferies & Company, Inc. ........
Cleary Gull Reiland
& McDevitt Inc. ................
Total............................. _________ _______
3,500,000 525,000
========= =======
28
<PAGE>
SCHEDULE II
180 Day Lock-Up 45 Day Lock-Up
--------------- --------------
P. Scott Munro Neil T. Anderson
James W. Dorst Astoria Capital Partners L.P.
Carlton Joseph Mertens II Canpartners Investments IV, LLC
Scott Robertson Commonwealth Life Ins. Co.
Robert O'Reilly Fahnestock & Co. Inc.
Fred J. Cuen IBM Credit Corporation
Angelo Guadagno JMG Capital Partners L.P.
James J. Hefferman KA Investments LDC
K. William Sickler Kodiak Opportunity, L.P.
J. Larry Smart Kodiak Opportunity Offshore, Ltd.
Lagunitas Partners, L.P.
Moshe Levy
Microcap Partners Limited Partnership
Robert Fleming Inc.
ROI Offshore Fund Ltd.
ROI Partners, L.P.
Seneca Capital International Ltd.
Senaca Capital L.P.
Strome Hedgecap Limited
Strome Offshore Limited
Strome Partners, L.P.
Strome, Susskind Hedgecap Fund, L.P.
Triton Capital Investments Ltd.
29
<PAGE>
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, Coopers & Lybrand,
L.L.C. shall furnish letters to the Underwriters to the effect that:
(i) they are independent public accountants with respect to the
Company and its consolidated subsidiaries within the meaning the Act and
the applicable published rules and regulations thereunder;
(ii) in their opinion, the consolidated financial statements and
schedules audited by them and included in the Prospectus and the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations thereunder;
(iii) on the basis of limited procedures, not constituting an
audit in accordance with generally accepted auditing standards, consisting
of a reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company and its subsidiaries, inspection of the minute
books of the Company and its subsidiaries since the date of the latest
audited financial statements included in the Prospectus, inquiries of
officials of the Company and its subsidiaries responsible for financial
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) as of a specified date not more than 5 days prior to the
date of such letter, there were any changes in the capital stock
(other than the issuance of capital stock upon exercise of options
which were outstanding on the date of the latest balance sheet
included in the Prospectus) or any increase in inventories or the
long-term debt or short-term debt of the Company and its
subsidiaries, or any decreases in net current assets or net assets or
other items specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are
described in such letter; and
(B) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (B) there were any decreases in net sales or operating,
income or the total or per share amounts of net income or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with the
comparable period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in each
case for
30
<PAGE>
increases or decreases which the Prospectus discloses have occurred
or may occur which are described in such letter; and
(iv) in addition to the audit referred to in their report included
in the Prospectus and the limited procedures, inspection of minute books,
inquiries and other procedures referred to in paragraph (iii) above, they
have carried out certain specified procedures, not constituting an audit in
accordance with generally accepted auditing standards, with respect to
certain amounts, percentages and financial information specified by the
Representatives which are derived from the general accounting records of
the Company and its subsidiaries, included in the Registration Statement
and the Prospectus, or which appear in Part II of, or in exhibits and
schedules to, the Registration Statement specified by the Representatives,
and have compared certain of such amounts, percentages and financial
information with the accounting records of the Company and its subsidiaries
and have found them to be in agreement.
References to the Registration Statement and the Prospectus in this Annex I
shall include any amendment or supplement thereto at the date of such letter.
31
<PAGE>
EXHIBIT 4.1
NUMBER [Logo] SHARES
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 80533W 10 7
This Certifies That
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES, $0.01 PAR VALUE, OF THE COMMON
STOCK OF
SAVOIR TECHNOLOGY GROUP, INC.
Transferable only on the books of the Corporation by the holder hereof in
person, or by duly authorized Attorney upon surrender of this certificate
properly endorsed. This certificate is not valid until countersigned by the
Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ JAMES W. DORST [SEAL] /s/ P. SCOTT MUNRO
CHIEF FINANCIAL OFFICER AND PRESIDENT AND CHIEF EXECUTIVE
TREASURER OFFICER
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, LLC
TRANSFER AGENT AND REGISTRAR
By
AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM__ as tenants in common UNIF GIFT MIN ACT-- Custodian
------------------------------
TEN ENT__ as tenants by the entireties (Cust) (Minor)
IT TEN __ as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act___________________________
tenants in common (State)
UNIF TRF MIN ACT -- Custodian (until age)
------------------------------
(Cust)
under Uniform Transfers
------------------------------
(Minor)
to Minors Act_________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________________hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
_______________________________________
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated_________________________
X_____________________________________________
X_____________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
NOTICE: UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By_____________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTE
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
March 13, 1998
Savoir Technology Group, Inc.
254 E. Hacienda Avenue
Campbell, CA 95008
Re: Registration Statement on Form S-2
Ladies and Gentlemen:
We are acting as counsel for Savoir Technology Group, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "Securities Act"), of 4,025,000 shares
(including 525,000 shares subject to the underwriters' over-allotment option) of
Common Stock, par value $.01 per share (the "Common Stock"), of the Company. In
this regard we have participated in the preparation of a Registration Statement
on Form S-2 relating to such 4,025,000 shares of Common Stock. (Such
Registration Statement, as amended, and including any registration statement
related thereto and filed pursuant to Rule 462(b) under the Securities Act (a
"Rule 462(b) registration statement") is herein referred to as the "Registration
Statement.")
We are of the opinion that the shares of Common Stock to be offered and
sold by the Company (including any shares of Common Stock registered pursuant to
a Rule 462(b) registration statement) have been duly authorized and, when issued
and sold by the Company in the manner described in the Registration Statement
and in accordance with the resolutions adopted by the Board of Directors of the
Company, will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.
Very truly yours,
/s/ Pillsbury Madison & Sutro LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-2 (File
No. ) of our report dated January 30, 1998, except for the matters
discussed in Note 14 for which the date is February 17, 1998, on our audits of
the financial statements of Savoir Technology Group, Inc. We also consent to
the references to our firm under the captions "Experts" and "Selected
Consolidated Financial Data."
/s/ Coopers & Lybrand L.L.P
COOPERS & LYBRAND L.L.P.
San Jose, California
March 13, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,919
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<PP&E> 4,920
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0
18,132
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<OTHER-SE> 965
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<SALES> 237,884
<TOTAL-REVENUES> 237,884
<CGS> 205,089
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<EPS-PRIMARY> .57
<EPS-DILUTED> .55
</TABLE>
