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 September 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ______________
Commission File No. 0-11560
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SAVOIR TECHNOLOGY GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2414428
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(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
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(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 November 1, 1999
----- -------------------------------
Common Stock $0.01 par value 13,101,530
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SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998 3
Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 24
PART II - OTHER INFORMATION 25
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Index to Exhibits 27
</TABLE>
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 15. 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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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 181,577 $ 149,809 $ 551,833 $ 373,233
Cost of goods sold 162,026 132,561 490,784 328,035
------------- ------------- ------------ -------------
Gross profit 19,551 17,248 61,049 45,198
------------- ------------- ------------ -------------
Gross profit as % of sales 10.77% 11.51% 11.06% 12.11%
Selling, general and administrative expenses 15,626 12,177 44,699 32,030
Restructuring charge 12,800 -- 12,800 --
------------- ------------- ------------ -------------
Operating income (loss) (8,875) 5,071 3,550 13,168
Interest expense 586 605 2,098 3,277
------------- ------------- ------------ -------------
Income (loss) before income taxes and
extraordinary item (9,461) 4,466 1,452 9,891
Provision (benefit) for income taxes (4,063) 2,179 1,267 4,830
------------- ------------- ------------ -------------
Income (loss) before extraordinary item (5,398) 2,287 185 5,061
Extraordinary item, net of tax effect -- -- -- (2,338)
------------- ------------- ------------ -------------
Net income (loss) $ (5,398) $ 2,287 $ 185 $ 2,723
============= ============= ============ =============
Net income (loss) per share:
Income before extraordinary item - basic $ (0.44) $ (0.20) $ (0.07) $ 0.00
Extraordinary item, net of tax effect -- -- -- (0.30)
------------- ------------- ------------ -------------
Net income (loss) - basic $ (0.44) $ (0.20) $ (0.07) $ (0.30)
============= ============= ============ =============
Income before extraordinary item - diluted $ (0.44) $ (0.20) $ (0.07) $ 0.00
Extraordinary item, net of tax effect -- -- -- (0.28)
------------- ------------- ------------ -------------
Net income (loss) - diluted $ (0.44) $ (0.20) $ (0.07) $ (0.28)
============= ============= ============ =============
Number of shares used in per share calculations:
Basic 12,993 9,599 12,248 7,876
============= ============= ============ =============
Diluted 12,993 9,599 12,248 8,442
============= ============= ============ =============
The accompanying notes are an integral
part of these consolidated financial statements
</TABLE>
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<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------------------ -------------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash............................................................ $ 7,170 $ 5,820
Trade accounts receivable, net of allowance for doubtful
accounts of $1,200 at September 30, 1999 and $1,100 at
December 31, 1998............................................... 115,781 156,953
Inventories.......................................................... 39,602 38,913
Other current assets................................................. 31,052 16,017
------------------ -------------------
Total current assets........................................ 193,605 217,703
Property and equipment, net.......................................... 7,475 5,526
Excess of cost over acquired net assets and other
intangibles, net................................................ 100,017 83,810
Other assets......................................................... 2,250 1,863
------------------ -------------------
$ 303,347 $ 308,902
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable................................................... $ 24,068 $ 21,240
Current portion of long-term debt............................... 2,969 1,020
Accounts payable................................................ 146,597 171,021
Accrued expenses and other current liabilities.................. 14,664 20,967
------------------ -------------------
Total current liabilities................................... 188,298 214,248
Long-term debt, less current portion................................. 4,454 1,087
Commitments and contingencies........................................ -- --
Stockholders' Equity:
Preferred Stock, $0.01 par value, 10,000,000 shares
authorized; issued and outstanding: Series A: 1,850,012
shares at September 30, 1999 and 1,986,500 shares at
December 31, 1998; Series B: 10 shares at September 30, 1999
and December 31, 1998; liquidation preference: $17,691 at
September 30, 1999 and $18,996 at December 31, 1998............. 19 20
Common Stock, $0.01 par value, 25,000,000 shares authorized;
issued and outstanding: 13,058,659 shares at September 30,
1999 and 10,698,010 shares at December 31, 1998................. 131 107
Additional paid-in capital...................................... 112,377 91,810
Shareholder note receivable..................................... (2,513) --
Retained earnings............................................... 581 1,630
------------------ -------------------
Total stockholders' equity.................................. 110,595 93,567
================== ===================
$ 303,347 $ 308,902
================== ===================
The accompanying notes are an integral
part of these consolidated financial statements
</TABLE>
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<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<CAPTION>
For the Nine Months
Ended September 30,
------------------------------------------
1999 1998
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 185 $ 2,723
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Write down of fixed assets and intangibles.................. 7,492 --
Depreciation and amortization............................... 6,775 4,387
Accretion on long-term debt obligations..................... -- 732
Provision for doubtful accounts receivable.................. 860 427
Gain on sale of fixed assets................................ 1 117
Deferred taxes.............................................. (364) 100
Write-off of unamortized warrant discount................... -- 2,773
Changes in assets and liabilities:
Accounts receivable......................................... 42,662 (26,490)
Inventories................................................. (768) (7,046)
Other current assets........................................ (13,940) (12,897)
Accounts payable............................................ (25,988) 33,951
Accrued expenses and other current liabilities.............. (6,411) 6,213
------------------ -------------------
Net cash provided by (used in) operating activities.... 10,504 4,990
------------------ -------------------
Cash flows from investing activities:
Proceeds from sale of fixed assets.............................. 11 6
Acquisition of businesses, net of cash acquired................. (7,477) (16,073)
Acquisition of other assets..................................... (887) (1,133)
Acquisition of property and equipment........................... (3,633) (1,232)
Proceeds from sale of an investment............................. 250 --
------------------ -------------------
Net cash used in investing activities....................... (11,736) (18,432)
------------------ -------------------
Cash flows from financing activities:
Proceeds from short-term borrowings............................. 374,412 202,993
Payments on short-term borrowings............................... (376,581) (200,984)
Proceeds from short-term loan................................... 5,000 15,000
Payments on debt obligations.................................... (1,136) (32,579)
Proceeds from issuance of common stock.......................... -- 28,683
Proceeds from issuance of preferred stock....................... -- (284)
Proceeds from exercise of stock options and warrants............ 304 311
Proceeds from employee stock purchase plan...................... 623 303
Payment of cash dividend on preferred stock..................... (40) --
------------------ -------------------
Net cash provided by financing activities................... 2,582 13,443
------------------ -------------------
Net increase in cash................................................. 1,350 1
Cash--beginning of period............................................. 5,820 2,919
================== ===================
Cash--end of period................................................... $ 7,170 $ 2,920
================== ===================
The accompanying notes are an integral
part of these consolidated financial statements
</TABLE>
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SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(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 nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for a full
year or for any other period. The December 31, 1998 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, 1998.
Note 2: The Company has adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131,
"DISCLOSURES AND SEGMENTS OF AN ENTERPRISE AND RELATED
Information" ("SFAS 131").
The Company has two operating segments: the Mid-Range Systems
Division ("MRS") and the Computer and Peripherals Group ("CPG").
Products distributed by MRS includes mid-range servers that run
on UNIX, OS/400 and NT operating systems, peripheral equipment
(including wireless networking equipment, storage products,
printers and terminals) and software. Through CPG, the Company
offers its customers value-added systems integration services up
to, and including, installation (e.g., "turnkey" systems assembly
of departmental servers, workstations, hardware and software
"bundling" and light manufacturing). The accounting policies of
the segments are the same. Although management measures the
profitability of its business through the results of these two
segments, the Company's segments have similar economic
characteristics and, as such, the results of operations have been
aggregated and separate disclosure is not presented.
Foreign sales for the nine months ended September 30, 1999 and
1998 were approximately $28,672,000 and $12,021,000,
respectively.
During the nine months ended September 30, 1999 and 1998,
approximately 75% of the Company's net sales were generated from
the sale of IBM products.
One customer accounted for approximately 16% and 18% of the
Company's net sales in the nine months ended September 30, 1999
and 1998, respectively, and no other single customer accounted
for more than 10% of the Company's net sales.
Note 3: 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 $125,000,000. The IBMCC Credit Facility expires on
August 31, 2000 and contains restrictive covenants which include
the maintenance of minimum current ratio, tangible net worth, net
profit after tax, EBITDA to fixed charges and times interest
earned ratio, as defined in the
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IBMCC Credit Facility, and is collateralized by substantially all
assets of the Company. The Company was not in compliance with the
current ratio, the net profit after tax ratio and tangible net
worth covenants at September 30, 1999. IBMCC granted a waiver as
of September 30, 1999 for these specific violations. As of
September 30, 1999 the Company had outstanding borrowings under
this agreement of $4,061,000. Cash advances bear interest at
prime (8.25% at September 30, 1999) plus 1.875%. Based on
eligible assets, as of September 30, 1999, the Company had
available borrowings of approximately $32,000,000.
Note 4: 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 5: Inventories, consisting primarily of purchased product held
for resale, are stated at the lower of cost (average) or net
realizable value.
Note 6: Supplemental Cash Flow Information: Cash paid for interest in
the nine month periods ended September 30, 1999 and 1998 was
$2,084,000 and $2,669,000, respectively. Cash paid for income
taxes during the nine-month periods ended September 30, 1999 and
1998 was $10,851,000 and $3,278,000, respectively.
Note 7: 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 Nine Months
Ended September 30, Ended September 30,
---------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Numerator--basic and diluted EPS
Income (loss) before extraordinary item $ (5,398) $ 2,287 $ 185 $ 5,061
Less: preferred stock dividends........ (300) (4,191) (1,030) (5,059)
--------------- --------------- ------------- --------------
Income available to common stockholders,
before extraordinary item......... (5,698) (1,904) (845) 2
Extraordinary item, net of tax effect.. -- -- -- (2,338)
--------------- --------------- ------------- --------------
Net income (loss)--basic................ (5,698) (1,904) (845) (2,336)
Plus: impact of assumed conversion..... -- -- -- --
--------------- --------------- ------------- --------------
Net income (loss)--diluted.............. $ (5,698) $ (1,904) $ (845) $ (2,336)
=============== =============== ============= ==============
Denominator--basic EPS
Weighted average shares outstanding.... 12,993 9,599 12,248 7,876
--------------- --------------- ------------- --------------
Basic EPS
Income before extraordinary item....... $ (0.44) $ (0.20) $ (0.07) $ 0.00
Extraordinary item, net of tax effect.. -- -- -- (0.30)
--------------- --------------- ------------- --------------
Basic earnings per share............... $ (0.44) $ (0.20) $ (0.07) $ (0.30)
=============== =============== ============= ==============
Denominator--diluted EPS
Denominator--basic EPS.................. 12,993 9,599 12,248 7,876
Effect of dilutive securities:
Convertible Preferred Stock............ -- -- -- --
Common Stock options and warrants...... -- -- -- 566
--------------- --------------- ------------- --------------
12,993 9,599 12,248 8,442
=============== =============== ============= ==============
Diluted EPS
Income (loss) before extraordinary item $ (0.44) $ (0.20) $ (0.07) $ 0.00
Extraordinary item, net of tax effect.. -- -- -- (0.28)
--------------- --------------- ------------- --------------
Net income (loss)...................... $ (0.44) $ (0.20) $ (0.07) $ (0.28)
=============== =============== ============= ==============
</TABLE>
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Note 8: On January 4, 1999, the Company acquired certain assets of
Infinite Solutions, Inc. ("Infinite") for $2,750,000 in cash and
88,560 shares of the Company's Common Stock (valued at $8.47 per
share). The acquisition has been accounted for as a purchase with
the result that Infinite's operations are included in the
Company's financial statements from the date of purchase. In
connection with the acquisition, the Company recorded
approximately $3,600,000 of goodwill and other intangible assets.
Infinite is an Atlanta, Georgia based specialty distributor and
integrator of computer systems and software. For the year ended
December 31, 1998, Infinite had unaudited revenues of
approximately $19,000,000.
Note 9: At a special shareholders' meeting held on April 6, 1999, the
Company's stockholders approved the amendment of certain
provisions of its Series A Preferred Stock. Included in the
adopted changes was the elimination of the special dividend
provision, which potentially occurred on an annual basis
dependent on the average stock price of the Company's Common
Stock falling below a predetermined amount. Also included in the
adopted changes was the lowering of the conversion price of the
Preferred Stock from $9.31 to $8.00 per share.
Note 10: On April 27, 1999, the Company completed the acquisition of
Enlaces, an IBM distributor headquartered in Monterrey, Mexico,
for approximately $5,200,000 in cash and 235,638 shares of the
Company's Common Stock (valued at $8.49 per share). The
acquisition has been accounted for as a purchase with the result
that Enlaces' operations are included in the Company's financial
statements from the date of purchase. The agreement between the
Company and Enlaces contains an earnout provision which allows
the former shareholders of Enlaces to earn up to an additional
$8,000,000, $5,000,000 of which is guaranteed. The guaranteed
earnout has been recorded as a liability by the Company.
Enlaces consists of a group of companies that sell IBM AS/400 and
RS/6000 mid-range products and services, and includes Enlaces
Computacionales and Enlaces y Asociados. It also includes
Instituto de Educacion Avanzada, which is an IBM authorized
training center and provides sales, technical support and
administrative services. For the year ended December 31, 1998,
Enlaces had translated unaudited revenues of approximately
$17,000,000.
Note 11: On April 23, 1999, the Company executed an amendment to its
credit facility with IBMCC, pursuant to which the Company
obtained an additional $5,000,000 to consummate the Enlaces
transaction (see Note 10 above). The loan bears interest at prime
(8.25% at September 30, 1999) plus 2.0% and is due in monthly
installments through September 2000.
Note 12: During the second quarter of 1999 the Company executed an
Executive Retention Agreement (the "Agreement") with its Chief
Executive Officer, P. Scott Munro ("Mr. Munro"). Included in the
agreement is a provision for a recourse loan ("loan") to Mr.
Munro for approximately $2,500,000 with a stated interest rate of
4.9%. Mr. Munro executed the loan provision on May 10, 1999 and
used the proceeds to exercise approximately 480,000 options under
the revised terms of the Company's Employee Stock Option Plan.
The loan is due and payable, including principal and interest, in
May 2002. If Mr. Munro remains employed with the Company, the
loan, and accrued interest, will be forgiven as follows: $800,000
on January 1, 2000 (the effective date of this $800,000 expense
to the Company for the loan forgiveness will be December 31,
1999) and the balance on May 9, 2002. The loan provision of the
Agreement also allows for Mr. Munro to borrow up to an additional
approximately $1,100,000 under the same terms and conditions
noted above. On September 10, 1999, Mr. Munro executed the
remaining portion of the loan agreement and borrowed the
additional approximately $1,100,000 available to him.
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Note 13: The consolidated statements of operations for 1999 include
pre-tax charges totaling $12,800,000 related to the restructuring
of corporate functions and the recognition of impaired assets. Of
this amount, $4,300,000 represents costs associated with the
consolidation of facilities and elimination of redundant
back-office functions. The costs associated with the
restructuring principally include lease termination costs
($2,000,000), leasehold and other asset disposals ($1,400,000)
and personnel (a total of 38 employees, primarily in
administration, finance and information technology) severance
costs ($900,000). The remaining $8,500,000 represents asset
impairment charges related to recorded goodwill and fixed assets.
These impairment costs principally include the write off of
goodwill ($7,000,000) related to unprofitable business activities
acquired in previous purchases (Target Solutions, Inc.,
International Data Products, LLC and UniDirect, Inc.), the
operations of which the Company has terminated as part of its
restructuring. The balance of the impairment charge relates to
the write-off of unproductive electronic commerce assets
($1,500,000).
As of September 30, 1999, the Company had approximately
$4,200,000 remaining in its restructuring and asset impairment
reserve, primarily consisting of lease termination costs
($1,900,000), leasehold and other assets ($1,300,000) and
severance ($700,000). With the exception of the lease
termination costs, the Company expects that all activities and
expenditures related to this restructuring will be completed
by March 31, 2000.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RECENT EVENTS
On January 4, 1999, we acquired certain assets of Infinite for
$2,750,000 in cash and 88,560 shares of our Common Stock (valued at $8.47 per
share). The acquisition has been accounted for as a purchase with the result
that Infinite's operations are included in our financial statements from the
date of purchase. In connection with the acquisition, we recorded approximately
$3,600,000 of goodwill and other intangible assets.
Infinite is an Atlanta, Georgia based specialty distributor and
integrator of computer systems and software. For the year ended December 31,
1998, Infinite had unaudited revenues of approximately $19,000,000.
At a special shareholders' meeting held on April 6, 1999, our
stockholders approved the amendment of certain provisions of our Series A
Preferred Stock. Included in the adopted changes was the elimination of the
special dividend provision, which potentially occurred on an annual basis
dependent on the average stock price of our Common Stock falling below a
predetermined amount. Also included in the adopted changes was the lowering of
the conversion price of the Preferred Stock from $9.31 to $8.00 per share.
On April 27, 1999, we completed the acquisition of Enlaces, an IBM
distributor headquartered in Monterrey, Mexico, for approximately $5,200,000 in
cash and 235,638 shares of our Common Stock (valued at $8.49 per share). The
acquisition has been accounted for as a purchase with the result that Enlaces'
operations are included in our financial statements from the date of purchase.
The agreement between Enlaces and us contains an earnout provision which allows
the former shareholders of Enlaces to earn up to an additional $8,000,000,
$5,000,000 of which is guaranteed.
Enlaces consists of a group of companies that sell IBM AS/400 and
RS/6000 mid-range products and services, and includes Enlaces Computacionales
and Enlaces y Asociados. It also includes Instituto de Educacion Avanzada,
which is an IBM authorized training center and provides sales, technical
support and administrative services. For the year ended December 31, 1998,
Enlaces had translated unaudited revenues of approximately $17,000,000.
On April 23, 1999, we executed an amendment to our credit facility with
IBMCC, pursuant to which we obtained an additional $5,000,000 to consummate the
Enlaces transaction. The loan bears interest at prime (8.25% at September 30,
1999) plus 2.0% and is due in monthly installments through September 2000.
On August 13, 1999, we announced a cost reduction program which
resulted in an approximately $12,800,000 charge in the quarter ended September
30, 1999. As part of the program, we will consolidate facilities, eliminate
back-office functions and reflect the impairment of certain tangible and
intangible assets related to unprofitable business operations. Once the plan is
complete, we will have the majority of our back-office operations headquartered
in San Antonio, Texas and will have consolidated the remaining operations of our
former headquarters in Campbell, California into our Fremont, California
facility. We expect to generate annual savings of approximately $3,000,000 from
this program.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales consist 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 September 30,
1999 of $181,577,000 were 21% higher than the net sales of $149,809,000 for the
corresponding period in 1998. Sales increased due to the continued expansion of
our computer systems distribution group, particularly through the acquisitions
of the distribution segment of REAL Applications, Ltd. ("REAL") in the third
quarter of 1998, Infinite in the first quarter of 1999 and Enlaces in the second
quarter of 1999. REAL, Infinite and Enlaces accounted for approximately
$29,970,000 of net sales for the quarter ended September 30, 1999. Sales also
increased due to the recruitment of new customers, hiring of additional sales
representatives and higher storage product sales. Despite the increase in
revenue during the three months ended September 30, 1999 compared to the three
months ended September 30, 1998, we did incur
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a slowdown in sales in September 1999 in our largest product line, the IBM
AS/400(TM). We attribute the slowdown to the Year 2000 issue and its effect on
purchasing patterns in end-user accounts. We have determined that larger
end-user accounts are reducing their purchases from our value-added reseller
customers as they focus on ensuring that their systems are Year 2000 compliant.
We expect historical buying patterns to return after the first quarter of 2000.
During the quarter ended September 30, 1999, sales to Sirius Computer
Solutions, Ltd. ("Sirius") accounted for approximately 19% of our net sales. Our
sales to Sirius are made under the Industry Remarketer Affiliate Agreement
between us and Sirius dated September 30, 1997 (the "Sirius Agreement"),
pursuant to which we appointed Sirius as one of our 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 our
largest customer for the duration of the Sirius Agreement and to account for
approximately the same percentage of our net sales for the remainder of 1999 as
it represented in the third quarter of 1999. The Sirius Agreement expires on
December 31, 2000, but may be terminated earlier under certain conditions, not
including termination at will. Any disruption, change or termination of our
relationship with Sirius or a reduction in purchases from us by Sirius could
have a material adverse effect upon our business, financial condition and
results of operations.
Cost of sales includes purchase costs, net of early payment and volume
discounts and product freight and does not include any depreciation or
amortization expense. Gross profit increased 13% to $19,551,000 in the quarter
ended September 30, 1999 from $17,248,000 in the quarter ended September 30,
1998. As a percentage of net sales, gross profit decreased to 10.8% for the
three months ended September 30, 1999 from 11.5% for the corresponding period in
1998. This decrease is a result of a shift in the relative mix of products being
sold, a higher proportion of large orders on which we extend volume discounts to
customers and the historically lower gross profit percentage of REAL.
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 our 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
(exclusive of our restructuring charge) increased 28% to $15,626,000 in the
three months ended September 30, 1999 from $12,177,000 in the same period a year
ago due to the purchases of REAL, Infinite and Enlaces, necessary increases in
personnel costs, higher depreciation costs incurred as a result of additions to
our infrastructure and higher amortization expense as a result of increased
goodwill related to acquisitions. This increase was partially offset by
eliminations in personnel, depreciation and amortization and facilities expenses
resulting from our restructuring in August. As a percentage of net sales,
selling, general and administrative expenses were 8.6% for the three months
ended September 30, 1999, compared to 8.1% for the same period in 1998. The
increase is primarily a result of the revenue shortfall experienced late in the
third quarter of 1999.
During the quarter ended September 30, 1999, we recorded a pre-tax
charge totaling $12,800,000 related to the restructuring of corporate functions
and the recognition of impaired assets. Of this amount, $4,300,000 represents
costs associated with the consolidation of facilities and elimination of
redundant back-office functions. The costs associated with the restructuring
principally include lease termination costs ($2,000,000), leasehold and
other asset disposals ($1,400,000) and personnel (a total of 38 employees,
primarily in administration, finance and information technology) severance costs
($900,000). The remaining $8,500,000 represents asset impairment charges related
to recorded goodwill and fixed assets. These impairment costs principally
include reserves for recorded goodwill related to unprofitable business
activities ($7,000,000) and unproductive electronic commerce assets
($1,500,000).
We decided to restructure our operations as a result of internal
reviews of all significant corporate functions. Upon completion of the review,
we determined, as a result of multiple acquisitions over the past three years,
there were functions, facilities and personnel that were duplicative and
unnecessary if properly consolidated.
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The impairment charges were a result of our ongoing evaluation of our
assets and the related useful lives and contribution to our company. The
goodwill portion of the charge relates to the performance of acquisitions of
Target Solutions, Inc., International Data Products, LLC and UniDirect, Inc. The
business lines associated with each of these acquisitions have had deteriorating
results over the past year, with a significant drop off in the second and third
quarters of 1999. The decline is attributable to the fact that these business
lines were not within the core distribution competency of our company. As a
result, we terminated these operations as part of our restructuring. The fixed
asset portion of the impairment charge relates to unsuccessful investments made
by our company in an electronic commerce attachment to our business process
system.
As of September 30, 1999, we had approximately $4,200,000 remaining in
our restructuring and asset impairment reserve, primarily consisting of lease
termination costs ($1,900,000), leasehold and other assets ($1,300,000) and
severance ($700,000).
Interest expense decreased 3% in the three months ended September 30,
1999 versus the same period in 1998. The decrease was a result of more
effective use of our working capital to fund operations and limiting the use of
our available line-of-credit. The decrease was partially offset by additional
interest expense, included as a result of the Enlaces transaction.
For the third quarter of 1999, we had a beneficial tax rate of 43%.
This rate differs from the federal statutory rate of 34%, due to the loss
incurred in the quarter as a result of the restructuring charge.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales for the nine months ended September 30, 1999 of $551,833,000
were 48% higher than net sales of $373,233,000 for the corresponding period in
1998. Sales increased due to the continued expansion of our computer systems
distribution group, particularly through the acquisitions of MCBA Systems, Inc.
("MCBA") in the second quarter of 1998, REAL in the third quarter of 1998,
Infinite in the first quarter of 1999 and Enlaces in the second quarter of
1999. MCBA, REAL, Infinite and Enlaces accounted for approximately $121,173,000
of net sales in the nine months ended September 30, 1999. Sales also increased
due to the opening of a sales office in Canada in the second quarter of 1998,
the recruitment of new customers, hiring of additional sales representatives,
increased integration orders and higher storage product sales.
During the nine months ended September 30, 1999, sales to Sirius
accounted for approximately 16% of our net sales.
Gross profit increased 35% to $61,049,000 in the nine months ended
September 30, 1999 from $45,198,000 in the nine months ended September 30, 1999.
As a percentage of net sales, gross profit decreased to 11.1% for the nine
months ended September 30, 1999 from 12.1% for the corresponding period in 1998.
This decrease is a result of a shift in the relative mix of products being sold,
a higher proportion of large orders on which we extend volume discounts to
customers and the historically lower gross profit percentages of MCBA and REAL.
Selling, general and administrative expenses (exclusive of our
restructuring charge) increased 40% to $44,699,000 in the nine months ended
September 30, 1999 from $32,030,000 in the same period a year ago due to the
acquisitions of MCBA, REAL, Infinite and Enlaces, necessary increases in
personnel costs, higher depreciation costs incurred as a result of additions to
our infrastructure, 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 8.1% for the nine months ended September 30, 1999, compared to
8.6% for the same period in 1998. The decrease is primarily a result of
increased operating leverage due to the higher sales volumes and continued
emphasis on expense control.
Interest expense decreased 36% in the nine months ended September 30,
1999 versus the same period in 1998. This was due to the payment of debt
associated with the purchase of SMS in the second quarter of 1998. In addition,
interest expense was higher in the nine months ended September 30, 1998 due to
the amortization of discount for 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
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warrants were revalued at $2,721,000. We recorded approximately $330,000 in
interest expense for the discount on the warrants during the six months ended
June 30, 1998. We will not incur an additional expense resulting from the
warrants as the unamortized value was expensed as a result of our public
offering and subsequent payoff of the debt underlying the warrants in the second
quarter of 1998.
Our effective tax rate is 87% versus the statutory rate of 34% due
primarily to non-deductible goodwill, other intangibles and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities during the nine months ended
September 30, 1999 totaled $10,504,000 compared to $4,990,000 for the nine
months ended September 30, 1998. Net cash provided by operating activities was
primarily attributable to reductions in accounts receivable, partially offset by
a decrease in accounts payable and an increase in other current assets. The
reductions in accounts receivable was a result of quarterly sales fluctuations
as well as increased emphasis on asset management.
Net cash used in investing activities during the nine months ended
September 30, 1999 was $11,736,000 compared to net cash used in investing
activities of $18,432,000 during the nine months ended September 30, 1998.
Investing activities in the nine months ended September 30, 1999 consisted of
the acquisitions of Infinite and Enlaces and continuing leasehold and computer
hardware and software investments made at our headquarters, sales office and
warehouse and integration center sites.
Net cash provided by financing activities during the nine months ended
September 30, 1999 was $2,582,000 compared to net cash provided by financing
activities of $13,443,000 provided during the nine months ended September 30,
1998. Financing activities in the nine months ended September 30, 1999 primarily
consisted of borrowings and repayments under the IBMCC Credit Facility. We had
net repayments during the first nine months of 1999 as a result of the above
noted increased emphasis on asset management.
Under the IBMCC Credit Facility, our purchases from IBM and cash
advances from IBMCC are directly charged to the IBMCC Credit Facility and are
paid by us 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
$125,000,000. The IBMCC Credit Facility expires on August 31, 2000 and contains
restrictive covenants which include the maintenance of minimum current ratio,
tangible net worth, net profit after tax, EBITDA to fixed charges and times
interest earned ratio, as defined in the IBMCC Credit Facility, and is
collateralized by substantially all our assets. We were not in compliance with
the current ratio, the net profit after tax ratio and tangible net worth
covenants at September 30, 1999. IBMCC granted a waiver as of September 30, 1999
for these specific violations. As of September 30, 1999 we had outstanding
borrowings under this agreement of $4,061,000. Cash advances bear interest at
prime (8.25% at September 30, 1999) plus 1.875%. Based on eligible assets, as of
September 30, 1999, we had available borrowings of approximately $32,000,000.
We have required substantial working capital to finance accounts
receivable, inventories and capital expenditures and have financed our working
capital requirements, capital expenditures and acquisitions primarily through
bank borrowings, cash generated from operations and sales of Common Stock and
Preferred Stock Units. We believe that our existing cash and available bank
borrowings are sufficient to fund our operations through the end of 1999. We are
actively considering other alternatives for raising additional cash including
public equity, private equity, or appropriate alternative debt financing. There
can be no assurance that we will be able to obtain additional financing on
acceptable terms or at sufficient levels.
YEAR 2000 COMPLIANCE ISSUES
GENERAL
We have completed a Year 2000 compliance audit and are essentially
complete with the remediation of our internal systems. We still have a limited
number of non mission-critical systems to upgrade. We expect to be done with
these systems by November 30, 1999. As part of our audit process, we developed
and implemented company-
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wide Year 2000 repair and upgrade to our computer systems and hardware. The
audit addressed a broad range of issues affecting us as a result of the
programming code in computer and computer related systems.
INTERNAL SYSTEMS
Our business software system includes an enterprise-wide solution which
was upgraded to the most recent version in fiscal 1998, which we believe to be
Year 2000 compliant. This system handles our most critical functions, including,
finance, inventory control, warehousing, shipping and receiving, logistics,
purchasing, sales and order taking. All of our offices are fully integrated into
our enterprise-wide business software system. The hardware upgrade for the
enterprise-wide solution was completed in April 1999. Since our most critical
functions are run on the enterprise-wide business software system, any Year 2000
problems at the hardware or software level could have a material adverse effect
on us. If the system failed to work on January 1, 2000, it could prevent us from
controlling our inventory, taking orders, buying inventory and billing our
customers.
We inventoried and analyzed our remaining centralized computer and
embedded systems, as well as our WAN data services, WAN hardware, networking
equipment, voice-mail equipment and access and alarm systems, to identify any
potential Year 2000 issues and we have taken appropriate corrective action based
on the results of such analysis.
THIRD PARTY SUPPLIERS AND VENDORS
We have contacted our critical suppliers, manufactures, distributors
and other vendors to determine if their operations and the projects and services
that they provide to us are Year 2000 compliant. Our largest supplier of product
is IBM, with approximately 75% of our revenue derived from sales of IBM
products. As a result, we devoted substantial effort in working with IBM to
address any potential Year 2000 problems. Absent written assurances of Year 2000
compliance by such third parties, we will assume that such third parties will
not be Year 2000 compliant and we will attempt to reduce our risks with respect
to the failure of such third parties to be Year 2000 compliant by developing
contingency plans. However, there can be no assurance that in all instances
contingency plans can be adopted or that they will adequately serve the needs of
our customers and other constituents.
PRODUCTS
Because we are a distributor of mid-range computers, software and
peripheral products, the Year 2000 issue is likely to have a substantial affect
on the products that we sell. While we have dealt directly with the
manufacturers of our products to determine whether such products are Year 2000
compliant, as a distributor, we will not make representations and warranties to
our customers regarding Year 2000 compliance of the products we sell. Rather, we
assign to our customers the manufacturer's warranties. However, if there are
Year 2000 compliance issues it could increase our risk of product returns,
increased inventory and/or reduced sales. While we believe that our largest line
of products, IBM AS/400 and RS/6000 mid-range servers, are Year 2000 compliant,
there can be no assurance that the other products we distribute do not contain
undetected errors or defects associated with Year 2000 that may result in
material costs to us. Should the IBM AS/400 or RS/6000 mid-range servers fail to
be Year 2000 compliant or should IBM be unable to supply product because of Year
2000 issues, the effect on our results of operations, liquidity and financial
condition would be severe.
YEAR 2000 COSTS
The total cost associated with the Year 2000 audit and required
modifications to become Year 2000 compliant was not material to our financial
position. The total cost of the Project was approximately $1,500,000. It is
possible that as we continue our audit and detect problems that are not
currently known to us, additional costs may be incurred, which could be
substantial.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, our normal business activities or operations.
Such failures could materially and adversely affect our results of operations,
liquidity and financial condition. Due to the inherent uncertainty in the Year
2000 problem, resulting in
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part from the uncertainty of the Year 2000 readiness of third-party suppliers
and customers, we are unable to determine at this time whether the consequences
of the Year 2000 failures will have a material impact on our results of
operations, liquidity or financial condition.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Risk Factors
WE ARE DEPENDENT UPON IBM AS OUR PRINCIPAL VENDOR
Our business, financial condition and results of operations are highly
dependent upon our relationship with International Business Machines Corporation
("IBM") and upon the continued market acceptance of IBM commercial mid-range
servers, storage products and other peripheral equipment. During the year ended
December 31, 1998 and the nine months ended September 30, 1999, approximately
80% and 75%, respectively, of our net sales were generated from the sale of IBM
products. Our agreement with IBM is non-exclusive and may be unilaterally
modified by IBM upon 30 days' written notice, renews automatically but may be
terminated by IBM upon written notice given not less than 90 days prior to the
renewal date (January 1, 2001), provides no franchise rights and may not be
assigned by us. 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. As part of
our business strategy, and in order to maintain most favorable volume discount
status with IBM, we have completed several acquisitions and we are actively
engaged in an ongoing search for additional acquisitions. We are also seeking to
make minority equity investments in potential large customers for similar
purposes. However, we cannot assure you that we will be successful in completing
any future acquisitions or in making any equity investments. If we are unable to
complete other acquisitions or make equity investments, or are otherwise unable
to increase our sales volume through internal growth, we could lose our most
favorable volume discount status with IBM, which would, in turn, have a material
adverse effect on our relationship with IBM and on our business, financial
condition and results of operations. The occurrence of any of the following
events could have a material adverse effect upon our business, financial
condition and results of operations:
o any disruption, change or termination in our relationship with IBM
or in the manner in which IBM distributes its products;
o the failure of IBM to develop new products which are accepted by
our customers;
o our failure to continue to achieve sufficient sales volumes of
certain IBM products or to maintain the required infrastructure,
in each case as required to maintain most favorable volume
discount status; and
o the addition of other wholesale distributors by IBM.
We receive market development funds and other incentives from IBM.
These market development and incentive funds directly affect our gross profit
and our sales and marketing expenses. Any change in the availability of these
market development and incentive funds would have a material adverse effect on
our business, financial condition and results of operations.
OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER
Our quarterly net sales and operating results may vary significantly as
a result of a variety of factors, including, but not limited to:
o changes in the supply and demand for commercial mid-range servers,
peripheral equipment, software and related services;
o the cost, timing and integration of acquisitions;
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o the addition or loss of a key vendor or customer;
o the introduction of new technologies;
o changes in manufacturers' prices, price protection policies or
stock rotation (return) privileges;
o changes in market development or other promotional funds;
o product supply shortages;
o disruption of warehousing or shipping channels;
o inventory adjustments;
o increases in the amount of accounts receivable written off;
o price competition; and
o changes in the mix of products sold through distribution channels
and in the mix of products purchased by OEMs.
Our operating results could also be adversely affected by:
o general economic and other conditions affecting the timing of
customer orders and capital spending;
o a downturn in the market for commercial mid-range servers; and
o order cancellations or rescheduling.
In addition, historically a substantial portion of our net sales has been made
in the last few days of a quarter. Our quarterly operating results are therefore
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, we believe that period-to-period comparisons of our operating results are
not necessarily meaningful and should not be relied upon as an indication of our
future performance. Our future operating results are expected to fluctuate as a
result of these and other factors, which could have a material adverse effect on
our business, financial condition and results of operations and on the price of
our common stock. It is possible that in future periods our operating results
may be below the expectations of securities analysts and investors. If this
happens, it is likely that the market price of our common stock would be
materially and adversely affected.
WE FACE SUBSTANTIAL COMPETITION
The markets in which we operate are highly competitive. Competition is
based primarily on:
o product availability;
o price;
o credit availability;
o speed of delivery;
o ability to tailor specific solutions to customer needs; and
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o breadth and depth of product lines and services, technical
expertise and pre-sale 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 our business, financial condition and results of operations.
Through our Mid-Range Systems Division, we compete with national,
regional and local distributors, including 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. In some
limited circumstances, we also compete with our own vendors. In the distribution
of storage products, we compete with national, regional and local distributors.
Through our Computers and Peripherals Group, we compete with contract
manufacturers, systems integrators and assemblers of computer products.
We have experienced, and expect 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
we do. Accordingly, present 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 we can. Competitors that are larger than Savoir may be able to
obtain more favorable pricing and terms from vendors than we can. As a result,
we may be at a disadvantage when competing with these larger companies. If we
fail to compete effectively, our business, financial condition and results of
operations would be materially and adversely affected.
SIRIUS COMPUTER SOLUTIONS, LTD. ACCOUNTS FOR 16% OF OUR NET SALES
During the year ended December 31, 1998 and the nine months ended
September 30, 1999, sales to Sirius Computer Solutions, Ltd. accounted for
approximately 18% and 16%, respectively, of our net sales. Our sales to Sirius
are made under the Industry Remarketer Affiliate Agreement between Savoir and
Sirius dated as of September 30, 1997, under which we appointed Sirius as one of
our industry remarketer affiliates for IBM products. This 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 our largest customer for the duration of this agreement and to account
for approximately the same percentage of our net sales for the remainder of 1999
as it represented in the first nine months of 1999. The agreement with Sirius
expires on December 31, 2000, but may be terminated earlier upon the happening
of specified events. This agreement may not be unilaterally terminated by either
Savoir or Sirius. Any disruption, change or termination of our relationship with
Sirius or a reduction in Sirius's purchases from us could have a material
adverse effect upon our business, financial condition and results of operations.
INTEGRATION OF ACQUIRED COMPANIES AND OUR BUSINESS MAY NOT BE
SUCCESSFUL
Since December 1994, we have completed thirteen acquisitions. The
combination of our business and acquired businesses requires, among other
things:
o integration of the respective management teams and sales and other
personnel;
o coordination of sales and marketing efforts;
o conversion of computer systems (including inventory control, order
entry and financial reporting); and
o 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
operations will require the dedication of management resources which may
temporarily divert attention away from the day-to-day business of the combined
company. We cannot assure you
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that the required coordination and integration will be accomplished smoothly or
successfully. Our inability to integrate successfully the operations of acquired
businesses could have a material adverse effect on our business, financial
condition and results of operations. In addition, during the integration phase,
aggressive competitors may attempt to attract our customers and recruit our key
employees. We cannot assure you that acquisitions will not materially and
adversely affect the selling patterns of vendors and the buying patterns of our
present and potential customers, and that any change in these patterns will not
materially and adversely affect our business, financial condition and results of
operations.
Our ability to achieve the anticipated benefits of our acquisitions
depends in part upon whether the integration of our business and any acquired
business is accomplished in an efficient and effective manner, and we cannot
assure you that this will occur. Our previous acquisitions and investments have
placed and will, together with future acquisitions, continue to place,
substantial demands on our management team and financial resources. The
integration of the operations of acquired companies has on occasion been slower,
more complex and more costly than we originally anticipated. We will encounter
similar uncertainties and risks in any future acquisitions and investments.
Although we expect to realize cost savings and sales enhancements as a result of
the recent and proposed acquisitions, we cannot assure you that these savings or
enhancements will be realized in full or when anticipated, or that any cost
savings will not be offset by increases in other expenses.
WE MAY NOT BE ABLE TO COMPLETE THE FUTURE ACQUISITIONS AND EXPANSION
THAT WE BELIEVE ARE IMPORTANT TO THE GROWTH OF OUR BUSINESS
Acquisitions have played an important role in the implementation of our
business strategy, and we believe that additional acquisitions are important to
our growth, development and continued ability to compete effectively in the
marketplace. We evaluate potential acquisitions and strategic investments on an
ongoing basis. We cannot assure you as to our ability to compete successfully
for available acquisition or investment candidates or to complete future
acquisitions and investments or as to the financial effect on us of any acquired
businesses or equity investments. Any future acquisitions and investments we
might make 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 our business, financial
condition and results of operations. In addition, future growth will require
additional financing to fund the working capital requirements of our business
and to finance future acquisitions and strategic equity investments, if any. We
cannot assure you that we will be able to raise financing on satisfactory terms
and conditions, if at all. Should we be unable to implement successfully our
acquisition and investment strategy, our business, financial condition and
results of operations could be materially and adversely affected.
WE MAY HAVE DIFFICULTY IN MANAGING OUR GROWTH
Since 1997, we have experienced significant growth in the number of our
employees and in the scope of our operating and financial systems, resulting in
increased responsibilities for our management. To manage future growth
effectively, we will need to continue to improve our operational, financial and
management information systems, procedures and controls and expand, train,
motivate, retain and manage our employee base. We cannot assure you that we 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 our business, financial condition and results of operations.
WE ARE DEPENDENT ON KEY PERSONNEL
Our future success depends in part on the continued service of our key
management, technical, sales and marketing personnel and our ability to identify
and hire additional personnel. Competition for qualified management, technical,
sales and marketing personnel is intense and we cannot assure you that we can
retain and recruit adequate personnel to operate our business. Our success is
largely dependent on the skills, experience and efforts of our key personnel,
particularly P. Scott Munro, Chairman of the Board, Chief Executive Officer and
Secretary, and Carlton Joseph Mertens, II, President and Chief Operating
Officer, each of whom has entered into an employment agreement with us. The loss
of either of these individuals or other key personnel could have a material
adverse effect on our business, financial condition and results of operations.
We maintain life insurance on Mr. Munro and Mr. Mertens in the amounts of $7.9
million and $10.0 million, respectively.
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WE HAVE SIGNIFICANT FUTURE CAPITAL NEEDS, AND THE AVAILABILITY OF
ADDITIONAL FINANCING IS UNCERTAIN
Our operations to date have required substantial amounts of working
capital to finance accounts receivable and product inventories. Although we
believe that we have sufficient funds, or alternate sources of funds, to carry
on our business as presently conducted through 1999, we will need to raise
additional amounts through public or private debt or equity financings in order
to achieve the growth contemplated by our business plan. We cannot assure you
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 our business, financial condition and results of operations.
WE ARE DEPENDENT UPON THE AVAILABILITY OF CREDIT AND OUR PRESENT CREDIT
FACILITY
In order to obtain necessary working capital, we rely primarily on a
line of credit that is collateralized by substantially all of our assets. The
amount of credit available to us may be adversely affected by numerous factors
beyond our control, such as:
o delays in collection or deterioration in the quality of our
accounts receivable;
o economic trends in the technology industry;
o the obsolescence of our inventory;
o interest rate fluctuations; and
o the lending policies of our creditors.
Any decrease or material limitation on the amount of capital available to us
under our line of credit or other financing arrangements will limit our ability
to fill existing sales orders or expand our sales levels and, therefore, would
have a material adverse effect on our business, financial condition and results
of operations. In addition, any significant increase in interest rates will
increase our cost of financing and could have a material adverse effect on our
business, financial condition and results of operations. We are dependent on the
availability of accounts receivable financing on reasonable terms and at levels
that are high relative to our equity base in order to maintain and increase our
sales. We cannot assure you that such financing will continue to be available to
us or available under terms acceptable to us. Our inability to have continuous
access to such financing at reasonable costs would materially and adversely
impact our business, financial condition, results of operations and cash flows.
We have primarily funded our working capital requirements through a
$125.0 million Inventory and Working Capital Agreement with IBM Credit
Corporation. Borrowings under this credit facility are collateralized by
substantially all of our assets, including accounts receivable, inventories and
equipment. This credit facility provides that the outstanding interest-bearing
cash advance balance is subject to interest at the annual rate of prime plus
1.875% (10.125% at September 30, 1999) and expires on August 31, 2000. IBM
Credit Corporation may terminate this credit facility at any time upon the
occurrence of, and subsequent failure to cure, an "Event of Default" (as that
term is defined in the documentation for the credit facility). In the event of
termination, the outstanding borrowings under the credit facility become
immediately due and payable. The termination of this credit facility and our
subsequent inability to secure a replacement credit facility on terms and
conditions no less favorable than those contained in our present credit facility
would have a material adverse effect on our business, financial condition and
results of operations. See also Note 3 to Notes to Consolidated Financial
Statements.
OUR PRESENT CREDIT FACILITY LIMITS OUR ABILITY TO INCUR ADDITIONAL
INDEBTEDNESS
The terms of our credit facility with IBM Credit Corporation require
that we obtain the consent of IBM Credit Corporation prior to incurring some
types of additional indebtedness, including any additional senior or
subordinated debt. We may incur additional indebtedness without IBM's consent
through capital leases and general business commitments if the terms are
commercially reasonable and consistent with our prior business practices. Our
present credit facility and our anticipated cash flows may not provide funding
sufficient to achieve the growth contemplated by our business plan. We may
therefore need to obtain the consent of IBM Credit Corporation to
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incur additional indebtedness. While we have no reason to believe that IBM will
not so consent, we cannot assure you that IBM Credit Corporation will give its
consent. Failure to obtain IBM's consent or to obtain an alternate credit
facility could have a material adverse effect on our business, financial
condition and results of operations.
OUR BUSINESS IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, PRICE REDUCTIONS
AND INVENTORY RISK
Since we acquire inventory in advance of product orders and shipments,
there is a risk that we will forecast incorrectly and stock excessive or
insufficient inventory of particular products. The markets for products that we
sell are extremely competitive and are characterized by declining selling prices
over the life of a particular product and rapid technological change. Therefore,
our business, like that of other wholesale distributors, is subject to the risk
that the value of our inventory will decline as a result of price reductions by
manufacturers or due to technological changes affecting the usefulness or
desirability of our product inventory. It is the policy of many manufacturers of
technology products to protect wholesale distributors such as Savoir from the
loss in value of inventory due to technological change or reductions in the
manufacturers' prices. Under the terms of most of our distribution agreements,
vendors will generally credit us for inventory losses resulting from the
vendor's price reductions if we comply with the conditions set forth in those
agreements. In addition, generally under such agreements, we have the right to
return for credit or exchange for other products a portion of our slow moving or
obsolete inventory items within designated periods of time. We cannot assure you
that, in every instance, we will be able to comply with all necessary conditions
or manage successfully our price protection or stock rotation opportunities, if
available. Also, a manufacturer that 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 us in all cases from declines in inventory
value, excess inventory or product obsolescence. We cannot assure you that
manufacturers will continue these protective practices or that we will be able
to manage successfully our existing and future inventories. Historically, we
have 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 our business, financial condition and
results of operations.
OUR BUSINESS HAS LOW PROFIT MARGINS
As a result of price competition, we have low gross profit and
operating income margins. These low margins magnify the impact on operating
results of variations in net sales and operating costs. We have partially offset
the effects of our low gross profit margins by increasing net sales, availing
ourself of large volume purchase discount opportunities and reducing selling,
general and administrative expenses as a percentage of net sales. However, we
cannot assure you that we will maintain or increase net sales, continue to avail
ourselves of large volume purchase discount opportunities or further reduce
selling, general and administrative expenses as a percentage of net sales.
Future gross profit margins may be materially and adversely affected by changes
in product mix, vendor pricing actions and competitive and economic pressures.
WE MAY EXPERIENCE PRODUCT SUPPLY SHORTAGES
We are dependent upon the supply of products available from our
vendors. From time to time, the industry has experienced shortages of some of
the products that we distribute due to vendors' difficulty in projecting demand.
When product shortages occur, we typically receive an allocation of product from
the vendor. We cannot assure you that our vendors will be able to maintain an
adequate supply of products to fulfill all of our orders on a timely basis. If
we fail to obtain adequate product supplies, or if product supplies are
available to competitors but not to us, it would have a material adverse effect
on our business, financial condition and results of operations.
WE EXTEND CREDIT TO CUSTOMERS WITHOUT REQUIRING COLLATERAL
We sell products to a broad geographic and demographic base of
customers and offer unsecured credit terms to our customers. Sirius accounted
for approximately 22% of our outstanding accounts receivable at September 30,
1999. No other single customer accounted for more than 10% of our outstanding
accounts receivable at September 30, 1999. To reduce our credit risk, we perform
ongoing credit evaluations of our customers, maintain an allowance for doubtful
accounts and have credit insurance. Historically, we have not experienced losses
from write-offs in excess of established reserves. Should our customers increase
the rate at which they default on
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payments due to us, and should we be unable to collect our accounts receivable
at a rate consistent with our present experience, it could have a material
adverse effect on our business, financial condition and results of operations.
OUR BUSINESS IS SEASONAL
The computer distribution industry experiences seasonal trends and,
within each quarter, a substantial amount of product is generally sold in the
last few days of the quarter. Our largest vendor, IBM, historically has sold up
to 35% of its products in the last calendar quarter, and the continuation of
this pattern could have an effect on our quarterly net sales. Historically, a
substantial portion of our net sales has been made in the last few days of a
quarter. Due to our recent significant growth through acquisitions and our
increased dependence on the sale of IBM products, sales variations may be
magnified in the future and could have a material adverse effect on our
business, financial condition and results of operations.
OUR ABILITY TO EXPAND OUR SERVICE CAPABILITIES IS UNCERTAIN
We are expanding the nature and scope of our value-added services. We
cannot assure you that new value-added services will be integrated successfully
with our commercial mid-range server and related products distribution business.
If we are unable to provide value-added services effectively, we may be unable
to compete for the business of customers that demand services as a condition to
purchasing products from us. In addition, we 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 our
value-added services is expected to require a significant capital investment,
including an increase in the number of technical employees. We cannot assure you
that difficulties encountered in connection with the expansion of our
value-added services will not have a material adverse effect on our business,
financial condition and results of operations.
WE ARE DEPENDENT ON THIRD-PARTY SHIPPERS
We presently ship a majority of our products from our warehouses via
Federal Express Corporation, but we also ship via United Parcel Service of
America, Inc. and other common carriers. In addition, we drop-ship products from
our vendors directly to our customers via these carriers. Changes in shipping
terms or the inability of Federal Express, United Parcel Service 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 our business, financial condition and
results of operations. We cannot assure you that we can maintain favorable
shipping terms or replace our present shipping services on a timely or
cost-effective basis.
OUR PLANNED INTERNATIONAL EXPANSION MAY NOT BE SUCCESSFUL
One of the elements of our business strategy is to expand
internationally. We are distributing IBM products in Canada and have recently
begun distribution in Mexico. We cannot assure you that we will be able to
expand our international business successfully. Risks inherent in doing business
on an international level include:
o management of remote operations;
o unexpected changes in regulatory requirements;
o export restrictions;
o tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o longer payment cycles;
o problems in collecting accounts receivable;
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o political instability;
o fluctuations in currency exchange rates; and
o potentially adverse tax consequences.
Any of these risks could adversely impact the success of our international
operations. We cannot assure you that difficulties encountered with one or more
of these factors will not have a material adverse effect on our future
international operations and, consequently, on our business, financial condition
and results of operations.
WE ARE SUBJECT TO YEAR 2000 UNCERTAINTIES
Many presently-installed computer systems and software products are
coded to accept only two-digit entries in the date code year field. This date
code field will need to distinguish 21st century dates from 20th century dates.
Systems that do not properly recognize date information could generate erroneous
data or cause a system to fail. We are in the process of completing our Year
2000 compliance audit and remediation plan. The Year 2000 issue creates risks
for us from problems in our own computer and embedded systems and from third
parties, such as vendors and customers, with whom we deal on financial and other
transactions. Failure of our and/or third parties' computer systems could have a
material adverse effect upon our ability to conduct our business.
We believe that our enterprise-wide business software system, which
handles our most critical functions, including finance, inventory control,
warehousing, shipping and receiving, logistics, purchasing, sales and order
taking, is not subject to the Year 2000 problem. If the system as a whole fails
to work on January 1, 2000 it could prevent us from controlling our inventory,
taking orders, buying inventory and billing our customers. We have inventoried
and analyzed our remaining centralized computer and embedded systems, as well as
our network data services, network hardware, networking equipment, voice-mail
equipment and access and alarm systems, to identify any potential Year 2000
issues, and we have taken appropriate corrective action based on the results of
such analysis.
As part of our Year 2000 audit, we contacted our critical suppliers,
manufacturers, distributors and other vendors to determine if their operations
and the products and services that they provide to us are Year 2000 compliant.
However, we cannot assure you that we will identify all Year 2000 problems in
the products or computer systems of our vendors in advance of their occurrence
or that our vendors will be able to successfully rectify any problems that are
discovered. Absent written assurances of Year 2000 compliance by these third
parties, we will assume non-compliance and will attempt to mitigate our risks
with respect to these third parties by developing contingency plans. However, we
cannot assure you that we can implement contingency plans in all instances or
that our contingency plans will adequately serve the needs of our customers and
other constituents.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Any failure could materially and adversely affect our business,
financial condition and results of operations. Due to the uncertainty inherent
in the Year 2000 problem, resulting in part from the unknown state of Year 2000
readiness of third-party suppliers and customers, we are presently unable to
determine whether we will be affected by any Year 2000 failures or whether any
failure we experience will have a material adverse effect on our business,
financial condition and results of operations.
WE HAVE NOT PAID AND DO NOT PRESENTLY INTEND TO PAY CASH DIVIDENDS ON
SAVOIR COMMON STOCK
We have never declared or paid a cash dividend on our common stock. We
currently anticipate that we will retain all available funds for use in the
operation of our business, including possible acquisitions, and we do not intend
to pay any cash dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of our Board of Directors and will depend
upon, among other factors:
o future earnings and cash flow;
o operations;
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o capital requirements;
o acquisitions and strategic investment opportunities;
o our general financial condition; and
o general business conditions.
Further, our ability to pay cash dividends is currently restricted by the terms
of our credit facility with IBM Credit Corporation. The terms of future credit
facilities or other agreements may also contain similar restrictions. In
addition, our Certificate of Designation with respect to the Series A Preferred
Stock prohibits the payment of dividends on our common stock unless and until
dividends are paid on the Series A Preferred Stock in accordance with its terms.
IF WE ISSUE STOCK IN CONNECTION WITH FUTURE ACQUISITIONS, IT MAY RESULT
IN DILUTION TO EXISTING STOCKHOLDERS
In connection with acquisitions that we have completed, we expect to
issue up to approximately 100,000 additional shares of our common stock based on
the attainment of performance goals by the acquired businesses. In addition, we
may issue additional shares of our common stock or other equity or convertible
debt securities to effect future acquisitions or for other corporate purposes.
Upon the issuance of additional capital stock, the percentage ownership of our
stockholders will be reduced and stockholders may experience additional
dilution.
OUR STOCK PRICE HAS BEEN VOLATILE HISTORICALLY
The market price of our common stock has been and is likely to continue
to be highly volatile and may be significantly affected by factors such as:
o actual or anticipated fluctuations in our quarterly operating
results;
o announcements of technological innovations;
o industry conditions and trends;
o changes in or our failure to meet the expectations of securities
analysts and investors; and
o general market conditions and other factors.
It is possible that in some future quarter, our operating results may be below
the expectations of securities analysts and investors. If this occurs, the price
of our 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 our 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 been brought. We cannot assure you that similar
litigation will not occur in the future with respect to us and our securities.
Any litigation relating to our securities could result in substantial costs and
a diversion of management's attention and resources, which could have a material
adverse effect upon our business, financial condition and results of operations.
PROVISIONS OF OUR CHARTER AND BYLAWS AND DELAWARE LAW MAY MAKE SAVOIR A
LESS ATTRACTIVE ACQUISITION CANDIDATE
Provisions of our Certificate of Incorporation and of our Bylaws may
make it more difficult for a third party to acquire, or may discourage a third
party from attempting to acquire, control of Savoir. These provisions could
limit the price that investors may be willing to pay for shares of our common
stock. We presently have 1,850,012 shares of Series A Preferred Stock
outstanding and 10 shares of Series B Preferred Stock outstanding and, without
any further vote or action by the stockholders, have the authority to issue up
to an additional 8,149,978
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shares of preferred stock and to determine the price, rights, preferences,
qualifications, limitations and restrictions, including voting rights, of this
additional preferred stock. The issuance of additional preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could delay or prevent a third party from acquiring a
majority of our outstanding voting stock. Further, Section 203 of the General
Corporation Law of Delaware prohibits us from engaging in various types of
business combinations with interested stockholders. These provisions may delay
or prevent a change in control of Savoir without action by the stockholders, and
therefore could adversely affect the market price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Other than as set forth below, the Company is not a party to any
material pending legal proceeding, nor is its property the subject of any
material pending legal proceeding, except ordinary routine legal proceedings
arising in the ordinary course of the Company's business and incidental to its
business, none of which are expected to have a material adverse impact upon the
Company's business, financial position or results of operations.
As reported in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, on June 18, 1999 a complaint was filed in the
Superior Court of Orange County, California by Lee Adams against Western Micro
Technology, Inc., WMT Acquisition Corp. and the Company. Mr. Adams' complaint
purports to allege causes of action for breach of contract, specific
performance, accounting, common count and false promise, arising out of an
Agreement and Plan of Reorganization, dated March 17, 1997, by and among Western
Micro Technology, Inc., WMT Acquisition Corp., Target Solutions, Inc. and Lee
Adams. In addition to equitable relief, the complaint seeks to recover general
damages and $10 million in punitive damages. The Company believes the complaint
is without merit and intends to defend itself vigorously against this complaint.
In addition, the Company has filed a cross-complaint for breach of contract in
which it is seeking compensatory damages in the amount of $1.5 million.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. EXHIBITS
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.
B. REPORTS ON FORM 8-K.
No reports on Form 8-K, or amendments to previously filed reports on
Form 8-K, were filed during the quarter ended September 30, 1999.
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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: November 15, 1999 B /S/ P. SCOTT MUNRO
----------------------------------
P. Scott Munro
Chief Executive Officer
Dated: November 15, 1999 By /S/ DENNIS J. POLK
------------------------------------
Dennis J. Polk
Senior Vice President, Corporate Finance
(Chief Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
-------
27.1 Financial Data Schedule.
-27-
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,170
<SECURITIES> 0
<RECEIVABLES> 116,981
<ALLOWANCES> 1,200
<INVENTORY> 39,602
<CURRENT-ASSETS> 193,605
<PP&E> 15,352
<DEPRECIATION> 7,877
<TOTAL-ASSETS> 303,347
<CURRENT-LIABILITIES> 188,298
<BONDS> 0
0
19
<COMMON> 131
<OTHER-SE> 109,864
<TOTAL-LIABILITY-AND-EQUITY> 303,347
<SALES> 181,577
<TOTAL-REVENUES> 181,577
<CGS> 162,026
<TOTAL-COSTS> 162,026
<OTHER-EXPENSES> 28,426
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 586
<INCOME-PRETAX> (9,461)
<INCOME-TAX> (4,063)
<INCOME-CONTINUING> (5,398)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,398)
<EPS-BASIC> (0.44)
<EPS-DILUTED> (0.44)
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