UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-11560
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SAVOIR TECHNOLOGY GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2414428
------------ ---------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
254 E. HACIENDA AVENUE, CAMPBELL, CA
-----------------------------------------
(Address of principal executive offices)
95008
--------
(Zip Code)
(408) 379-0177
---------------
(Registrant's telephone number,
including area code)
N/A
-----
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 7, 1998
----- -----------------------------
Common Stock $0.01 par value 9,971,240
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<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1998 and 1997 3
Consolidated Balance Sheets at June 30, 1998 and December 31,
1997 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
Index to Exhibits 22
When used in this Report, the words "estimate," "project," "intend" and
"expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially. For a discussion of certain such
risks, see "Factors That May Affect Future Results" on page . Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release updates or revisions to these statements.
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<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
ENDED JUNE 30, ENDED JUNE 30,
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
--------------- ---------------- --------------- ---------------
Net sales $ 122,920 $ 39,886 $ 223,424 $ 75,836
Cost of goods sold 108,031 33,293 195,474 63,274
-------------- ---------------- -------------- ---------------
Gross profit 14,889 6,593 27,950 12,562
-------------- ---------------- -------------- ---------------
Gross profit as % of sales 12.11% 16.53% 12.51% 16.56%
Selling, general and administrative expenses 10,627 5,569 19,853 10,372
-------------- --------------- ------------- ---------------
Operating income 4,262 1,024 8,097 2,190
Interest expense 963 496 2,672 928
-------------- ---------------- -------------- ---------------
Income before income taxes and extraordinary item 3,299 528 5,425 1,262
Provision for income taxes 1,618 121 2,651 312
-------------- ---------------- -------------- ---------------
Income before extraordinary item 1,681 407 2,774 950
Extraordinary item, net of tax effect (2,338) -- (2,338) --
-------------- ---------------- -------------- ---------------
Net income (loss) $ (657) $ 407 $ 436 $ 950
============== ================ ============== ===============
Net income per share:
Basic income before extraordinary item $ 0.16 $ 0.08 $ 0.28 $ 0.20
Extraordinary item, net of tax effect (0.30) -- (0.34) --
-------------- ---------------- -------------- ---------------
Basic net income (loss) $ (0.14) $ 0.08 $ (0.06) $ 0.20
=============== ================ =============== ===============
Diluted income before extraordinary item $ 0.16 $ 0.08 $ 0.28 $ 0.19
Extraordinary item, net of tax effect (0.22) -- (0.24) --
-------------- ---------------- -------------- ---------------
Diluted net income (loss) $ (0.06) $ 0.08 $ 0.04 $ 0.19
============== ================ ============== ===============
Number of shares used in per share calculations:
Basic 7,986 4,805 6,884 4,673
============== ================ ============== ===============
Diluted 10,747 5,196 9,738 5,080
============== ================ ============== ===============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<PAGE>
<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
------------------- ----------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 7,002 $ 2,919
Trade accounts receivable, net of allowance for doubtful
accounts of $620 at June 30, 1998 and $319 at
December 31, 1997 78,459 76,664
Inventories 37,179 36,841
Other current assets 16,784 7,388
------------------- ----------------
Total current assets 139,424 123,812
Property and equipment, net 4,796 4,920
Excess of cost over acquired net assets and other
intangibles, net 69,817 57,537
Other assets 738 619
------------------- ----------------
$ 214,775 $ 186,888
=================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 17,863 $ 7,063
Current portion of long-term debt 1,036 8,516
Accounts payable 100,828 96,143
Accrued expenses 6,570 5,636
------------------- ----------------
Total current liabilities 126,297 117,358
Long-term debt, less current portion 1,153 22,330
Other 60 120
Commitments and contingencies -- --
Stockholders' Equity:
Preferred Stock, $0.01 par value, 10,000,000 shares
authorized; issued and outstanding: 2,024,900 shares Series
A at June 30, 1998 and 2,242,500 at December 31, 1997;
liquidation preference of $19,358 at June 30, 1998 and
$21,444 at December 31, 1997 20 22
Common Stock, $0.01 par value, 25,000,000 shares authorized;
issued and outstanding: 9,914,097 at June 30, 1998 and
5,357,678 at December 31, 1997 99 54
Additional paid-in capital 86,712 46,039
Retained earnings 434 965
------------------- ----------------
Total stockholders' equity 87,265 47,080
------------------- ----------------
$ 214,775 $ 186,888
=================== ================
The accompanying notes are an integral
part of these financial statements
</TABLE>
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<PAGE>
<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<CAPTION>
For the Six Months
ENDED JUNE 30,
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 436 $ 950
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,761 749
Accretion on long-term debt obligations 732 --
Provision for doubtful accounts receivable 267 310
Deferred taxes 75 --
Write-off of unamortized warrant discount 2,773 --
Changes in assets and liabilities:
Accounts receivable 1,840 (8,364)
Inventories (355) 6,600
Other current assets (9,471) (1,263)
Accounts payable 887 (10,310)
Accrued expenses and other 950 278
---------------- ----------------
Net cash provided by (used in) operating activities 895 (11,050)
---------------- ----------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (3,198) 473
Acquisition of other assets (786) (351)
Acquisition of property and equipment (636) (803)
---------------- ----------------
Net cash used in investing activities (4,620) (681)
---------------- ----------------
Cash flows from financing activities:
Proceeds from short-term borrowings 135,952 23,733
Payments on short-term borrowings (124,747) (12,843)
Payments on long-term debt obligations (32,516) (105)
Proceeds from issuance of common stock 28,683 --
Proceeds from exercise of stock options and warrants 311 67
Proceeds from employee stock purchase plan 125 120
Proceeds from equipment loan -- 557
---------------- ----------------
Net cash provided by financing activities 7,808 11,529
---------------- ----------------
Net increase (decrease) in cash 4,083 (202)
Cash--beginning of period 2,919 384
---------------- ----------------
Cash--end of period $ 7,002 $ 182
================ ================
The accompanying notes are an integral
part of these financial statements
</TABLE>
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<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
Note 1: The unaudited consolidated financial statements which include the
accounts of Savoir Technology Group, Inc. and its subsidiaries
(the Company) have been prepared in accordance with the
instructions to Form 10-Q and do not include all information and
footnotes necessary to comply with generally accepted accounting
principles. In the opinion of management, all normal recurring
adjustments considered necessary for a fair presentation have been
included. The consolidated statements of operations for the six
months ended June 30, 1998 are not necessarily indicative of the
results to be expected for a full year or for any other period.
The December 31, 1997 balance sheet was derived from audited
financial statements, but does not include all disclosures
required by generally accepted accounting principles. It is
suggested that these financial statements be read in conjunction
with the financial statements and the notes thereto included in
the Company's latest audited financial statements for the year
ended December 31, 1997.
Note 2: The Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income,"
effective January 1, 1998. This statement requires the disclosure
of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is
defined as net income plus revenues, expenses, gains and losses
that, under generally accepted accounting principles, are excluded
from net income. The components of comprehensive income which are
excluded from net income are not significant, individually or in
the aggregate, and therefore, no separate statement of
comprehensive income has been presented.
Note 3: 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 Informa-
tion." This statement establishes standards for disclosure about
operating segments in annual finan- cial 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 state- ment 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, with interim reporting disclosures required in the first
quarter immediately subsequent to the year in which SFAS 131 is
adopted, and requires that comparative information from earlier
years be restated to conform to the requirements of this standard.
The Company is evaluating the requirements of SFAS 131 and the
effects, if any, on the Company's current reporting and
disclosures.
Note 4: The Company has an inventory and working capital financing
agreement (the IBMCC Credit Facility) with IBM Credit Corporation
(IBMCC), an affiliate of International Business Machines
Corporation (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 in
the IBMCC Credit Facility, and are limited to $85,000,000. 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 ratio,
as defined in the IBMCC Credit Facility, and is collateralized by
substantially all assets of the Company. The Company was in
compliance with these covenants as of June 30, 1998. Cash advances
under the IBMCC Credit Facility were $17,848,000 at June 30, 1998.
Cash advances bear interest at prime (8.5% at June 30, 1998) plus
1.875%. Based on eligible assets, as of June 30, 1998, the Company
had borrowings available of approximately $8,016,000.
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Note 5: Revenue Recognition and Accounts Receivable: The Company records
revenue, net of allowances for estimated returns, at the time of
product shipment. To reduce credit risk, the Company performs
ongoing credit evaluations and has credit insurance.
Note 6: Inventories, consisting primarily of purchased product held for
resale, are stated at the lower of cost (average) or net
realizable value.
Note 7: Supplemental Cash Flow Information: Cash paid for interest in
the six-month periods ended June 30, 1998 and 1997 was $2,204,000
and $852,000, respectively. Cash paid for income taxes during the
six month periods ended June 30, 1998 and 1997 was $2,754,000 and
$101,000, respectively.
Note 8: 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>
For the Three Months For the Six Months
ENDED JUNE 30, ENDED JUNE 30,
------------------------- --------------------------
1998 1997 1998 1997
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Numerator--basic and diluted EPS
Net income before extraordinary item $ 1,681 $ 407 $ 2,774 $ 950
Less: preferred stock dividends (431) -- (868) --
----------- ------------ ----------- ------------
Income available to common stockholders,
before extraordinary item 1,250 407 1,906 950
Extraordinary item, net of tax effect (2,338) -- (2,338) --
----------- ------------ ----------- ------------
Net income (loss)--basic (1,088) 407 (432) 950
Plus: impact of assumed conversion 431 -- 868 --
----------- ------------ ----------- ------------
Net income (loss)--diluted $ (657) $ 407 $ 436 $ 950
=========== ============ =========== ============
Denominator--basic EPS
Weighted average shares outstanding 7,986 4,805 6,884 4,673
=========== ============ =========== ============
Basic EPS
Income before extraordinary item $ 0.16 $ 0.08 $ 0.28 $ 0.20
Extraordinary item, net of tax effect (0.30) -- (0.34) --
----------- ------------ ----------- ------------
Net income (loss) $ (0.14) $ 0.08 $ (0.06) $ 0.20
=========== ============ =========== ============
Denominator--diluted EPS
Denominator--basic EPS 7,986 4,805 6,884 4,673
Effect of dilutive securities:
Convertible Preferred Stock 2,077 -- 2,160 --
Common Stock options and warrants 684 391 694 407
----------- ------------ ----------- ------------
10,747 5,196 9,738 5,080
=========== ============ =========== ============
Diluted EPS
Income before extraordinary item $ 0.16 $ 0.08 $ 0.28 $ 0.19
Extraordinary item, net of tax effect (0.22) -- (0.24) --
----------- ------------ ----------- ------------
Net income (loss) $ (0.06) $ 0.08 $ 0.04 $ 0.19
=========== ============ =========== ============
</TABLE>
Options to purchase 443,500 and 246,000 shares of Common Stock
were outstanding at June 30, 1998 and 1997, respectively, but were
not included in the calculation of net income per share because
the options' exercise price was greater than the average market
price of the common shares.
Note 9: On April 29, 1998, the Company completed the public offering of
3,000,000 shares of its Common Stock at a price of $10.50 per
share. After deducting the underwriting discount and offering
expenses, the net proceeds to the Company were $28,683,000. The
Company used the proceeds of the offering to reduce its
outstanding debt obligations, exclusive of the outstanding cash
advances on the IBMCC Credit Facility.
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<PAGE>
Note 10: In connection with the repayment of its outstanding debt
obligations (see Note 9 above), the Company recorded an
extraordinary charge of $2,338,000, net of tax, resulting from a
prepayment penalty, the write-off of unamortized discounts
relating to certain warrants issued to debt holders and other
related expenses.
Note 11: On May 15, 1998, the Company purchased substantially all of the
UniDirect catalog and VarCity distribution business and related
electronic software distribution organization of UniDirect
Corporation (UDC) for $4,600,000, comprised of $2,900,000 in cash
and a $1,700,000 promissory note. The promissory note bears
interest at 8.25% and is payable over a two-year period. This
transaction has been accounted for as a purchase with the result
that UDC operations are included in the Company's financial
statements from the date of purchase. In connection with the
acquisition, the Company recorded approximately $4,900,000 of
goodwill and other intangible assets. During the year ended
December 31, 1997, the acquired businesses had unaudited revenues
of approximately $18,000,000.
UniDirect specializes in the sales and support of technically
advanced software products. VarCity is a nationwide distributor of
client/server and Internet software products to resellers.
Software solutions sold by both companies include products for
areas such as web and intranet development and related management
tools, UNIX and Windows NT applications and utilities,
client/server applications, advanced operating systems and
databases, and PC connectivity applications.
Note 12: On June 5, 1998, the Company acquired all of the outstanding
shares of MCBA Systems, Inc.'s (MCBA) common stock for $487,000 of
cancelled indebtedness and 852,854 shares of the Company's common
stock. In addition, the selling stockholders of MCBA can earn an
additional 1,500,000 shares of the Company's common stock based
upon attainment of certain performance goals in calendar 1998 and
1999. The acquisition has been accounted for as a purchase with
the result that MCBA operations are included in the Company's
financial statements from the date of purchase. In connection with
the acquisition, the Company recorded approximately $9,800,000 of
goodwill and other intangible assets. The fair values of assets
acquired from MCBA were approximately $4,045,000 and liabilities
assumed were approximately $3,945,000.
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 unaudited revenue for the year
ended December 31, 1997 was approximately $26,900,000.
Note 13: Certain amounts in the financial statements have been
reclassified to conform with the current period's presentation.
These reclassifications did not change previously reported total
assets, liabilities, stockholders' equity or net income (loss).
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RECENT EVENTS
On April 29, 1998, the Company completed the public offering of 3,000,000
shares of its Common Stock at a price of $10.50 per share. After deducting the
underwriting discount and offering expenses, the net proceeds to the Company
were $28,683,000. The Company used the proceeds of the offering to reduce its
outstanding debt obligations, exclusive of the outstanding cash advances on the
IBMCC Credit Facility.
On May 15, 1998, the Company purchased substantially all of the UniDirect
catalog and VarCity distribution business and related electronic software
distribution organization of UDC for $4,600,000, comprised of $2,900,000 in cash
and a $1,700,000 promissory note. The promissory note bears interest at 8.25%
and is payable over a two-year period. This transaction has been accounted for
as a purchase with the result that UDC operations are included in the Company's
financial statements from the date of purchase. In connection with the
acquisition, the Company recorded approximately $4,900,000 of goodwill and other
intangible assets. During the year ended December 31, 1997, the acquired
businesses had unaudited revenues of approximately $18,000,000.
UniDirect specializes in the sales and support of technically advanced
software products. VarCity is a nationwide distributor of client/server and
Internet software products to resellers. Software solutions sold by both
companies include products for areas such as web and intranet development and
related management tools, UNIX and Windows NT applications and utilities,
client/server applications, advanced operating systems and databases, and PC
connectivity applications.
On June 5, 1998, the Company acquired all of the outstanding shares of
MCBA common stock for $487,000 of cancelled indebtedness and 852,854 shares of
the Company's common stock. In addition, the selling stockholders of MCBA can
earn an additional 1,500,000 shares of the Company's common stock based upon
attainment of certain performance goals in calendar 1998 and 1999. The
acquisition has been accounted for as a purchase with the result that MCBA
operations are included in the Company's financial statements from the date of
purchase. In connection with the acquisition, the Company recorded approximately
$9,800,000 of goodwill and other intangible assets. The fair values of assets
acquired from MCBA were approximately $4,045,000 and liabilities assumed were
approximately $3,945,000.
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 unaudited
revenue for the year ended December 31, 1997 was approximately $26,900,000.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
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 for the three months ended June 30, 1998
of $122,920,000 were 208% higher than the net sales of $39,886,000 for the
corresponding period in 1997. Sales increased due to the continued expansion of
the Company's computer systems distribution business, particularly through the
acquisition of Star Management Services, Inc. (SMS) in the third quarter of
1997. The acquisition of MCBA in June of 1998, the opening of a sales office in
Canada in June of 1998 and increased software sales, primarily as a result of
the acquisition of UDC, also contributed to the rise in revenue. The
acquisitions of MCBA and UDC accounted for approximately $6.3 million of net
sales during the three months ended June 30, 1998. The recruitment of new
customers, hiring of additional sales representatives, and general market demand
for computer systems also contributed to the overall rise in revenue.
During the quarter ended June 30, 1998, sales to Sirius Computer
Solutions, Ltd. (Sirius) accounted for approximately 19% of the Company's net
sales. The Company's sales to Sirius are made under the Industry
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<PAGE>
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. As
a result, Sirius is expected to remain the Company's largest customer for the
duration of the Sirius Agreement and to account for approximately the same
percentage of the Company's net sales for the remainder of 1998 as it
represented in the second quarter of 1998. 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.
Cost of sales is comprised of purchase costs, net of early payment and
volume discounts and product freight and does not include any depreciation or
amortization expense. Gross profit increased 126% to $14,889,000 in the quarter
ended June 30, 1998 from $6,593,000 in the quarter ended June 30, 1997. As a
percentage of net sales, gross profit decreased to 12.1% for the three months
ended June 30, 1998 from 16.5% for the corresponding period in 1997. This
decrease is due to increased sales of lower gross profit computer systems,
primarily due to acquisitions. An increase in large order sales, on which the
Company extends volume discounts to customers also contributed to the decline in
the gross profit percentage.
Selling, general and administrative 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. Selling, general and administrative expenses
increased 91% to $10,627,000 in the three months ended June 30, 1998 from
$5,569,000 in the same period a year ago due to the acquisitions of SMS, MCBA
and UDC, necessary increase in personnel costs, higher depreciation costs
incurred as a result of additions to the Company's infrastructure, start-up
costs associated with opening an office in Canada and a higher amortization
expense as a result of increased goodwill related to acquisitions. As a
percentage of net sales, selling, general and administrative expenses were 8.6%
for the three months ended June 30, 1998, compared to 14.0% for the same period
in 1997. The decrease is a result of increased operating leverage due to the
higher sales volumes.
Interest expense increased 94% to $963,000 in the quarter ended June 30,
1998 versus $496,000 from the same period in 1997 due to additional borrowings
associated with the acquisition of SMS and UDC and an overall increase in
line-of-credit borrowings. The increased borrowings were necessary in order to
fund infrastructure additions, expanded operations and overall Company growth.
The Company's effective tax rate is 49% versus the statutory rate of 34%
due primarily to non-deductible goodwill and other intangibles.
In connection with the repayment of its outstanding debt obligations, the
Company recorded an extraordinary charge of $2,338,000, net of tax, resulting
from a prepayment penalty, the write-off of unamortized discounts relating to
certain warrants issued to debt holders and other related expenses.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net sales for the six months ended June 30, 1998 of $223,424,000 were
195% higher than the net sales of $75,836,000 for the corresponding period in
1997. Sales increased due to the expansion of the Company's computer systems
distribution business, particularly through the acquisition of SMS in the third
quarter of 1997. The acquisition of MCBA in June of 1998, the opening of a sales
office in Canada in June of 1998 and increased software sales, primarily as a
result of the acquisition of UDC, also contributed to the rise in revenue. The
acquisition of MCBA and UDC accounted for approximately $6.3 million of net
sales in the six months ended June 30, 1998. The recruitment of new customers,
hiring of additional sales representatives, increased integration orders
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<PAGE>
and higher storage product sales in the Company's Computer and Peripherals Group
(CPG) and general market demand for computer systems also contributed to the
overall rise in revenue.
During the six months ended June 30, 1998, sales to Sirius accounted for
approximately 20% of the Company's net sales.
Gross profit increased 122% to $27,950,000 in the six months ended June
30, 1998 from $12,562,000 in the six months ended June 30, 1997. As a percentage
of net sales, gross profit decreased to 12.5% for the six months ended June 30,
1998 from 16.6% for the corresponding period in 1997. This decrease is due to
increased sales of lower gross profit computers systems, primarily due to
acquisitions. An increase in large order sales, on which the Company extends
volume discounts to customers also contributed to the decline in the gross
profit percentage.
Selling, general and administrative expenses increased 91% to $19,853,000
in the six months ended June 30, 1998 from $10,372,000 in the same period a year
ago due to the acquisition of SMS, MCBA and UDC, necessary increase in personnel
costs, higher depreciation costs incurred as a result of additions to the
Company's infrastructure, start-up costs associated with opening an office in
Canada and a higher amortization expense as a result of increased goodwill
related to acquisitions. As a percentage of net sales, selling, general and
administrative expenses were 8.9% for the six months ended June 30, 1998,
compared to 13.7% for the same period in 1997. The decrease is a result of
increased operating leverage due to the higher sales volumes.
Interest expense increased 188% to $2,672,000 in the six months ended
June 30, 1998 versus $928,000 from the same period in 1997 due to additional
borrowings associated with the acquisition of SMS and an overall increase in
line-of-credit borrowings. The increased borrowings were necessary in order to
fund infrastructure additions, expanded operations and overall Company growth.
Interest expense for the six months ended June 30, 1998 also increased due to
the amortization of a discount on warrants issued in September 1997. The
warrants were originally determined to have a fair market value of $1,330,000,
which was recorded as discount on notes payable. During the first quarter of
1998, the warrants were revalued at $2,721,000. The Company recorded
approximately $330,000 in interest expense for the discount on the warrants
during the six months ended June 30, 1998. The Company will not incur an
additional expense resulting from the warrants as the unamortized value was
expensed as a result of the Company's public offering and subsequent payoff of
the debt underlying the warrants.
The Company's effective tax rate is 49% versus the statutory rate of 34%
due primarily to non-deductible goodwill and other intangibles.
In connection with the repayment of its outstanding debt obligations, the
Company recorded an extraordinary charge of $2,338,000, net of tax, resulting
from a prepayment penalty, the write-off of unamortized discounts relating to
certain warrants issued to debt holders and other related expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities during the six months ended
June 30, 1998 totaled $895,000 compared to the net cash used in operating
activities of $11,050,000 for the six months ended June 30, 1997. Net cash from
operating activities was reduced by an increase in other assets of $9,471,000
which was due to the payment of estimated income taxes and an increase in
rebates receivable. This was offset by the write-off of unamortized warrant
discounts totaling $2,773,000, depreciation and amortization of $2,761,000 and a
decrease in accounts receivable of $1,840,000, as a result of increased
collection efforts.
Net cash used in investing activities during the six months ended June
30, 1998 was $4,260,000 compared to net cash used in investing activities of
$681,000 during the six months ended June 30, 1997. Investing activities in 1998
consisted of the acquisition of MCBA and UDC and continuing leasehold and
computer hardware and software investments made at the Company's headquarters,
sales office and warehouse and integration center sites.
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Net cash provided by financing activities during the six months ended
June 30, 1998 was $7,808,000 compared to $11,529,000 provided during the six
months ended June 30, 1997. Financing activities in 1998 consisted of a public
offering of common stock and cash advances under the IBMCC Credit Facility. On
April 29, 1998, the Company completed the public offering of 3,000,000 shares of
its Common Stock at a price of $10.50 per share. After deducting the
underwriting discount and offering expenses, the net proceeds to the Company
were $28,683,000. The Company used the proceeds of the offering to reduce its
outstanding debt obligations, exclusive of the outstanding cash advances on the
IBMCC Credit Facility. The IBMCC Credit Facility cash proceeds were used for the
payment of debt obligations and to fund the growth of the Company.
Under the IBMCC Credit Facility, the Company's 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 in the IBMCC Credit Facility, and are
limited to $85,000,000. 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 ratio, as defined in
the IBMCC Credit Facility, and is collateralized by substantially all assets of
the Company. The Company was in compliance with these covenants at June 30,
1998. Cash advances under the IBMCC Credit Facility were $17,848,000 at June 30,
1998. Cash advances bear interest at prime (8.5% at June 30, 1998) plus 1.875%.
Based on eligible assets, as of June 30, 1998, the Company had borrowings
available of approximately $8,016,000.
The Company has required substantial working capital to finance accounts
receivable, inventories and capital expenditures and has financed its working
capital requirements, capital expenditures and acquisitions primarily through
bank borrowings, cash generated from operations and sales of Common Stock and
Preferred Stock Units. The Company believes that its existing cash and available
bank borrowings are sufficient to fund the Company's operations through the end
of 1998. The Company is actively considering other alternatives for raising
additional cash including public equity, private equity, or appropriate
alternative debt financing. There can be no assurance that the Company will be
able to obtain additional financing on acceptable terms or at sufficient levels.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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, 1996 and 1997,
approximately 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 through 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.
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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, 1996 and 1997, approximately 28% and 19%, respectively, of the Company's net
sales were derived from the sale of products manufactured by Data General
Corporation, NCR Corporation and Unisys Corporation, 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 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.
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 are 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.
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.
In the distribution of computer systems, 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 acquired 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.
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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.
RELIANCE ON SIRIUS COMPUTER SOLUTIONS, LTD. During the year ended
December 31, 1997, the quarter ended December 31, 1997 and the six months ended
June 30, 1998, sales to Sirius accounted for approximately 11%, 23% and 20%,
respectively, of the Company's net sales. The Company's sales to Sirius are made
under 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. As a result, Sirius is
expected to remain the Company's largest customer for the duration of the Sirius
Agreement and to account for approximately the same percentage of the Company's
net sales for the remainder of 1998 as it represented in the first six months of
1998. 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.
INTEGRATION RISKS RELATING TO ACQUISITIONS. Since December 1994, the
Company has completed nine acquisitions. 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,
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 benefits of the MCBA acquisition,
the acquisition of SMS completed on September 30, 1997 (the SMS Acquisition),
the UDC 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 MCBA acquisition, the SMS Acquisition, the UDC
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. Although the
Company expects to realize cost savings and sales enhancements as a result of
recent and potential future 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.
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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.
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. 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.
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.
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.
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
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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.
LIMITATIONS UPON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The terms of the
IBMCC Credit Facility require that the Company obtain the consent of IBMCC 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 prior to incurring any additional indebtedness. While the Company has
no reason to believe that such consent will be withheld, there can be no
assurance that the Company will obtain such consent. Failure to obtain such
consent or to obtain an alternate credit facility 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.
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 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
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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.
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.
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 and at June 30, 1998. No other single customer accounted for more than 5%
of the Company's outstanding accounts receivable balance at December 31, 1997 or
at June 30, 1998. 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.
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 are 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.
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.
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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.
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 and opened an
office in Canada during the three months ended June 30, 1998. 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.
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.
FUTURE DILUTION DUE TO ACQUISITIONS. In connection with certain
acquisitions completed by the Company, the Company expects to issue up to
approximately 1,700,000 additional shares of Common Stock pursuant to earnout
provisions based on the attainment of performance goals. The Company anticipates
issuing additional shares of Common Stock or other equity or convertible debt
securities to effect future acquisitions or for other corporate purposes. Upon
such issuances, the percentage ownership of the stockholders of the Company will
be reduced and stockholders may experience additional dilution.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
-18-
<PAGE>
PART II. OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS.
None.
Item 2: CHANGES IN SECURITIES.
None.
Item 3: DEFAULTS ON SENIOR SECURITIES.
None.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
SPECIAL MEETING OF STOCKHOLDERS
At the Special Meeting of Stockholders held on June 4, 1998, the
holders of shares representing 65.8% of the total votes eligible to be case,
approved and adopted the Agreement and Plan of Reorganization, dated as of
November 22, 1997, by and among the Company, MCBA, Michael N. Gunnells and
John Harkins (together, the "Selling Shareholders"), as amended by the First
and Second Amendments to Agreement and Plan of Reorganization, dated as of
March 27, 1998 and April 23, 1998, respectively, by and among the Company,
Acquisition Sub, MCBA, the Selling Shareholders, and the transactions
contemplated thereby, including the Merger and the issuance of shares of the
common stock, par value $0.01 per share, of the Company to the Selling
Shareholders, by the margins indicated as follows:
For: 5,069,547
Against: 60,629
Abstain: 0
Item 5: OTHER INFORMATION.
None.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K.
A. EXHIBITS
The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference (as stated therein) as part of this report on
Form 10-Q.
-19-
<PAGE>
B. REPORTS ON FORM 8-K.
The following reports on Form 8-K, or amendments to
previously filed reports on Form 8-K, were filed during the
quarter ended June 30, 1998.
<TABLE>
<CAPTION>
Date of
Filed Date Report Items Reported Financial Statements Filed
- ---------- ------- --------------------------------------------- -----------------------------
<S> <C> <C> <C>
06/19/98 6/5/98 Item 2 - Acquisition or Disposition of Assets.
------------------------------------
(Form 8-K)
Item 7 - Financial Statements and Exhibits.
---------------------------------
(a) Financial statements of busi- None.
ness acquired.
(b) Pro forma financial None.
information.
(c) Exhibits.
(i) 2.1 Agreement and Plan
of Reorganization.
</TABLE>
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Registrant:
SAVOIR TECHNOLOGY GROUP, INC.
Dated: August 13, 1998 By /S/ P. SCOTT MUNRO
------------------------------------
P. Scott Munro
Chief Executive Officer
Dated: August 13, 1998 By /S/ JAMES W. DORST
------------------------------------
James W. Dorst
Chief Financial Officer
Dated: August 13, 1998 By /S/ DENNIS J. POLK
------------------------------------
Dennis J. Polk
Chief Accounting Officer
-21-
<PAGE>
INDEX TO EXHIBITS
Exhibit
-------
2.1 Second Amendment to Agreement and Plan of Reorganization
dated April 23, 1998, by and among Savoir Technology Group,
Inc., STG Acquisition Corp., MCBA Systems, Inc., Michael N.
Gunnells and John Harkins, filed herewith.
3(i) 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.
3(ii) 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.
4.1 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.
4.2 Certification 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.
4.3 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.
4.4 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.
4.5 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.
4.6 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.
4.7 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.
4.8 13.5% Second Priority Senior Secured Notes Due September 30,
2000 in favor of Robert Fleming Inc., 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.
<PAGE>
4.9 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.
4.10 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.
4.11 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.
4.12 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.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule for the period ended
December 31, 1996.
27.3 Restated Financial Data Schedule for the period ended March
31, 1997.
27.4 Restated Financial Data Schedule for the period ended
September 30, 1997.
27.5 Restated Financial Data Schedule for the period ended
December 31, 1997.
EXHIBIT 2.1
SECOND AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
THIS SECOND AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (the
"Second Amendment"), dated as of April 23, 1998, is made and entered into by and
among SAVOIR TECHNOLOGY GROUP, INC, a Delaware Corporation ("Parent"), STG
ACQUISITION CORP., a Delaware corporation ("Sub"), MCBA SYSTEMS, INC., an
Alabama corporation ("MCBA"), MICHAEL N. GUNNELLS and JOHN HARKINS (together the
"Selling Shareholders").
RECITALS:
A. Parent, Sub, the Selling Shareholders and MCBA are parties to that
certain Agreement and Plan of Reorganization, dated as of November 22, 1997, as
amended by the First Amendment to Agreement and Plan of Reorganization dated as
of March 27, 1998 (the "Merger Agreement").
B. The Merger Agreement provides that if the Closing has not occurred
by May 15, 1998, the Merger Agreement may be terminated pursuant to Section
9.1(c) of the Merger Agreement and that Parent, MCBA and the Selling
Shareholders shall use their respective best efforts to cause the Closing Date
to be no later than May 15, 1998.
NOW, THEREFORE, in consideration of the foregoing recitals and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. Each of Parent, Sub, the Selling Shareholders and MCBA hereby agree
that by execution and delivery of this Second Amendment, all references to May
15, 1998 in Sections 2.13, 7.4 and 9.1(c) of the Merger Agreement are hereby
amended to refer to June 5, 1998.
2. This Second Amendment may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered will be an
original, but all such counterparts will together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
3. Other than as set forth herein, this Second Amendment does not
modify, change or delete any other term, provision, addendum, representation,
warranty, agreement or covenant (the "Provisions") relating to or contained in
the Merger Agreement, and all such Provisions remain in full force and effect.
-1-
<PAGE>
4. This Second Amendment shall be governed by, and construed in
accordance with, the laws of the State of California, regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof.
5. This Second Amendment and any of the provisions hereof may not be
amended, altered or added to in any manner except by a document in writing and
signed by each party hereto.
* * *
-2-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have executed this First
Amendment and caused the same to be duly delivered on its behalf as of the date
first written above.
SAVOIR TECHNOLOGY GROUP, INC.
By /s/ P. Scott Munro
------------------------------------
P. Scott Munro
President and CEO
STG ACQUISITION CORP.
By /s/ P. Scott Munro
------------------------------------
P. Scott Munro
President
MCBA SYSTEMS, INC.
By /s/ Michael N. Gunnells
------------------------------------
Michael N. Gunnells
President
SELLING SHAREHOLDERS
/s/ Michael N. Gunnells
--------------------------------------
Michael N. Gunnells
/s/ John Harkins
--------------------------------------
John Harkins
-3-
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