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 March 31, 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
---------
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 May 6, 1999
----- --------------------------
Common Stock $0.01 par value 12,180,755
-1-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998
Consolidated Balance Sheets at March 31, 1999 and December 31, 1998
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
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 12. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release updates or revisions to these statements.
-2-
<PAGE>
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
Ended March 31,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net sales $ 168,569 $ 100,504
Cost of goods sold 149,476 87,443
-------------- --------------
Gross profit 19,093 13,061
-------------- --------------
Selling, general and administrative expenses 13,627 9,226
-------------- --------------
Operating income 5,466 3,835
Interest expense 738 1,709
-------------- --------------
Income before income taxes 4,728 2,126
Provision for income taxes 2,317 1,033
-------------- --------------
Net income $ 2,411 $ 1,093
============== ==============
Net income per share:
Basic $ 0.18 $ 0.12
============== ==============
Diluted $ 0.17 $ 0.11
============== ==============
Number of shares used in per share calculations:
Basic 11,344 5,448
============== ==============
Diluted 14,141 6,167
============== ==============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
-3-
<PAGE>
<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 8,252 $ 5,820
Trade accounts receivable, net of allowance for doubtful
accounts of $905 at March 31, 1999 and $1,100 at
December 31, 1998 119,148 156,953
Inventories 40,463 38,913
Other current assets 19,007 16,017
-------------- --------------
Total current assets 186,870 217,703
Property and equipment, net 6,010 5,526
Excess of cost over acquired net assets and other
intangibles, net 96,896 83,810
Other assets 1,917 1,863
-------------- --------------
$ 291,693 $ 308,902
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 36,629 $ 21,240
Current portion of long-term debt 1,022 1,020
Accounts payable 131,583 171,021
Accrued expenses and other current liabilities 13,394 20,967
-------------- --------------
Total current liabilities 182,628 214,248
Long-term debt, less current portion 1,053 1,087
Commitments and contingencies -- --
Stockholders' Equity:
Preferred Stock, $0.01 par value, 10,000,000 shares authorized
issued and outstanding: 1,986,500 shares Series A at
March 31, 1999 and December 31, 1998 and 10 shares of
Series B at March 31, 1999 and December 31, 1998;
liquidation preference of $18,996 at March 31, 1999 and
December 31, 1998 20 20
Common Stock, $0.01 par value, 25,000,000 shares authorized;
issued and outstanding: 11,877,315 shares at March 31,
1999 and 10,698,010 shares at December 31, 1998 119 107
Additional paid-in capital 104,290 91,810
Retained earnings 3,583 1,630
-------------- --------------
Total stockholders' equity 108,012 93,567
-------------- --------------
$ 291,693 $ 308,902
============== ==============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
-4-
<PAGE>
<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<CAPTION>
For the Three Months
Ended March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,411 $ 1,093
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 2,021 1,201
Accretion on long-term debt obligations -- 526
Provision for doubtful accounts receivable 175 130
Gain on sale of fixed assets (4) --
Deferred taxes (147) --
Changes in assets and liabilities:
Accounts receivable 37,630 12,609
Inventories (1,550) (23)
Other current assets (2,843) (5,904)
Accounts payable (39,438) (18,123)
Accrued expenses and other current liabilities (7,573) (1,181)
------------ ------------
Net cash used in operating activities (9,318) (9,672)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of fixed assets 10 --
Acquisition of businesses, net of cash acquired (2,750) --
Acquisition of other assets (199) (45)
Acquisition of property and equipment (952) (248)
------------ ------------
Net cash used in investing activities (3,891) (293)
------------ ------------
Cash flows from financing activities:
Proceeds from short-term borrowings 140,160 69,351
Payments on short-term borrowings (124,769) (55,862)
Payments on debt obligations (34) (2,958)
Payment of cash dividend on preferred stock (40) --
Proceeds from exercise of stock options and warrants 25 247
Proceeds from employee stock purchase plan 299 125
------------ ------------
Net cash provided by financing activities 15,641 10,903
------------ ------------
Net increase in cash 2,432 938
Cash--beginning of period 5,820 2,919
------------ ------------
Cash--end of period $ 8,252 $ 3,857
============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
-5-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 three months ended
March 31, 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"). SFAS
131 supersedes Statement of Financial Accounting Standards No. 14,
"FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE" ("SFAS
14"). SFAS 131 changes current practice under SFAS 14 by establishing
a new framework on which to base segment reporting and also requires
interim reporting of segment information.
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 three months ended March 31, 1999 and 1998 were
approximately $1,384,000 and $1,414,000, respectively.
During the three months ended March 31, 1999 and 1998, approximately
80% and 75%, respectively, of our net sales were generated from the
sale of IBM products.
One customer accounted for approximately 15% and 20% of the Company's
net sales in the three months ended March 31, 1999 and 1998,
respectively, 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.
-6-
<PAGE>
The IBMCC Credit Facility is renewable in September 2000 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 not in
compliance with the current ratio covenant at March 31, 1999. IBMCC
granted a waiver as of March 31, 1999 for this specific violation.
Cash advances under the IBMCC Credit Facility were $21,619,000 at
March 31, 1999. Cash advances bear interest at prime (7.75% at March
31, 1999) plus 1.875%. Based on eligible assets, as of March 31,
1999, the Company had borrowings available of approximately
$13,553,000.
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
three-month periods ended March 31, 1999 and 1998 was $867,000 and
$1,186,000, respectively. Cash paid for income taxes during the
three-month periods ended March 31, 1999 and 1998 was $1,673,000 and
$305,000, 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
Ended March 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Numerator--basic and diluted EPS
Income $ 2,411 $ 1,093
Less: Preferred Stock dividends (380) (437)
------------- -------------
Net income--basic 2,031 656
Plus: impact of assumed preferred conversion 380 --
Net income--diluted $ 2,411 $ 656
============= =============
Denominator--basic EPS
Weighted average shares outstanding 11,344 5,448
============= =============
Basic earnings per share $ 0.18 $ 0.12
============= =============
Denominator--diluted EPS
Denominator--basic EPS 11,344 5,448
Effect of dilutive securities:
Common Stock options and warrants 759 719
Preferred Stock 2,038 --
------------- -------------
14,141 6,167
============= =============
Diluted earnings per share $ 0.17 $ 0.11
============= =============
</TABLE>
-7-
<PAGE>
Options to purchase 646,429 and 240,000 shares of Common Stock were
outstanding at March 31, 1999 and 1998, 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 Stock.
At March 31, 1998, 2,242,500 shares of convertible Preferred Stock
were outstanding, but not included in the calculation of diluted net
income per share as their effect was anti-dilutive.
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 purchase of Enlaces, an
IBM distributor company 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 agreement between the
Company and Enlaces contains an earnout provision which allows
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 midrange 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.
-8-
<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 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 our Common Stock falling below a pre-
determined 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 purchase 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 agreement
between Enlaces and us contains an earnout provision which allows 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 midrange 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.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
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 March 31, 1999
of $168,569,000 were 68% higher than the net sales of $100,504,000 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") and UniDirect Corporation ("UDC") in the second
quarter of 1998, the distribution segment of REAL Applications, Ltd. ("REAL") in
the third quarter of 1998 and Infinite in the first quarter of 1999. MCBA, UDC,
REAL and Infinite accounted for approximately $32,800,000 of net sales
in the quarter ended March 31, 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 as well as general market demand for
computer systems.
During the quarter ended March 31, 1999, sales to Sirius Computer
Solutions, Ltd. ("Sirius") accounted for approximately 15% of our net sales. Our
sales to Sirius are made under the Industry Remarketer Affiliate Agreement
between us and our Sirius dated September 30, 1997 (the "Sirius Agreement"),
pursuant to which we 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 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 first 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
-9-
<PAGE>
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 46% to $19,093,000 in the quarter
ended March 31, 1999 from $13,061,000 in the quarter ended March 31, 1998. As a
percentage of net sales, gross profit decreased to 11.3% for the three months
ended March 31, 1999 from 13.0% 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 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
increased 48% to $13,627,000 in the three months ended March 31, 1999 from
$9,226,000 in the same period a year ago due to the acquisitions of MCBA, UDC,
REAL and Infinite, 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 three months
ended March 31, 1999, compared to 9.2% 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 57% in the three months ended March 31, 1999
versus the same period in 1998 due to the payment of debt associated with the
purchase of Star Management Services, Inc. ("SMS") in the second quarter in
1998. In addition, interest expense was higher in the three months ended March
31, 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 warrants were revalued at $2,721,000. We recorded
approximately $232,000 in interest expense for the discount on the warrants
during the three months ended March 31, 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 49% versus the statutory rate of 34% due
primarily to non-deductible goodwill, other intangibles and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities during the three months ended March
31, 1999 totaled $9,318,000 compared to $9,672,000 for the three months ended
March 31, 1998. Net cash from operating activities was reduced by the decrease
in accounts payable of $39,438,000, which was due to a decrease in sequential
quarter inventory purchases, as well as a decrease in accrued expenses and other
current liabilities of $7,573,000. This was partially offset by a decrease in
accounts receivable of $37,630,000, which was the result of lower sequential
quarter sales and a significant amount of sales occurring in the last three
weeks of the previous quarter.
Net cash used in investing activities during the three months ended March
31, 1999 was $3,891,000 compared to net cash used in investing activities of
$293,000 during the three months ended March 31, 1998. Investing activities in
the three months ended March 31, 1999 consisted of the acquisition of Infinite
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 three months ended
March 31, 1999 was $15,641,000 compared to $10,903,000 provided during the three
months ended March 31, 1998. Financing activities in the three
-10-
<PAGE>
months ended March 31, 1999 consisted of net borrowings under the IBMCC Credit
Facility, which were used for general working capital purposes.
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 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 is renewable in September 2000 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 our assets.
We were not in compliance with the current ratio covenant at March 31, 1999.
IBMCC granted a waiver as of March 31, 1999 for this specific violation. Cash
advances under the IBMCC Credit Facility were $21,619,000 at March 31, 1999.
Cash advances bear interest at prime (7.75% at March 31, 1999) plus 1.875%.
Based on eligible assets, as of March 31, 1999, we had borrowings available of
approximately $13,553,000.
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 are in the process of conducting a Year 2000 compliance audit. As part
of the audit process, we are developing and implementing company-wide Year
2000 repairs and upgrades to computer systems and hardware. The audit addresses
a broad range of issues affecting us as a result of the programming code in
existing computer, and computer related, systems as the year 2000 approaches.
The Year 2000 problem is complex, as many computer systems will be affected in
some way by the rollover of the two-digit year value to 00. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 issue creates risks for us from problems in our
own computer and embedded systems and from third parties with whom we deal on
financial and other transactions. Failure of our and/or third parties' computer
systems could have a material adverse impact on our ability to conduct our
business. Our Year 2000 project is being headed up by our Vice President of
Information Technology, who reports directly to the Chief Financial Officer.
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. Certain of our offices are not yet fully
integrated into our enterprise-wide business software system. It is expected
that our newly acquired offices in Atlanta, Georgia, Huntsville, Alabama and
Canada will be integrated over the next three months. 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 are inventorying and analyzing 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 will take appropriate corrective action based
on the
-11-
<PAGE>
results of such analysis. We currently expect to substantially complete
remediation and validation of our internal systems, as well as to develop
contingency plans, by the third quarter of 1999.
THIRD PARTY SUPPLIERS AND VENDORS
We are currently in the process of contacting 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 80% of our revenue
derived from sales of IBM products. As a result, we will devote substantial
effort in working with IBM to address any potential Year 2000 problems supplied
by IBM. 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. We will deal 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 is not expected to be material to
our financial position based on preliminary assessments resulting from the early
phases of the Project. The estimated total cost of the Project is approximately
$1,500,000, $600,000 of which has already been spent to upgrade some non-Year
2000 compliant software and systems. 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 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
-12-
<PAGE>
December 31, 1998 and the quarter ended March 31, 1999, approximately 80%, of
our net sales were generated from the sale of IBM products, and we expect the
percentage to be consistent in 1999. 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 recently 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 from IBM. These market development
funds directly affect our gross profit as we typically use them to offset a
portion of our sales and marketing expenses. Any change in the availability of
these market development 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;
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;
-13-
<PAGE>
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
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.
-14-
<PAGE>
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 15% OF OUR NET SALES
During the year ended December 31, 1998 and the quarter ended March 31,
1999, sales to Sirius Computer Solutions, Ltd. accounted for approximately 18%
and 15%, 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 in 1999 as it represented in
1998. 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 twelve 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 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
-15-
<PAGE>
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 and technical, sales and marketing personnel and our ability to
identify and hire additional personnel. Competition for qualified management and
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, President, Chief
Executive Officer and Secretary, and Carlton Joseph Mertens, II, Chief Executive
Officer and President of our subsidiary, Business Partner Solutions, Inc., 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.
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
-16-
<PAGE>
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 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
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% (9.625%
at March 31, 1999) and is renewable in September 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.
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 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.
-17-
<PAGE>
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.
IBM and some of the other major systems vendors have developed programs
that allow us to assemble systems from components provided by the vendors. While
we have developed the ability to integrate and configure computer products, the
process of assembling large volumes of systems from components will require us
to implement new business practices. It is uncertain how the vendors will apply
policies related to price protection, stock rotation and other protections
against the decline in inventory value of system components acquired for a
system assembly program. We cannot assure you that we will be successful in the
integration and configuration of computer products or that our vendors will
apply price protection and stock rotation policies to our component inventories
devoted to these programs.
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.
-18-
<PAGE>
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 20% of our outstanding accounts receivable at March 31, 1999. No
other single customer accounted for more than 10% of our outstanding accounts
receivable at March 31, 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 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, sells 35-40% 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 sometimes 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 have recently begun to distribute IBM's AS/400 products in Canada. 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;
-19-
<PAGE>
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;
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 conducting a Year 2000
compliance audit. 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 are presently also
inventorying and analyzing 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. We currently expect to complete substantially the
remediation and validation of our internal systems, as well as to develop
contingency plans, by the third quarter of 1999.
As part of our Year 2000 audit, we are contacting 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 estimated total cash expenditures required for the Year 2000
project are approximately $1,500,000 million, although it is possible that as we
continue our audit and detect problems that are not currently known to us,
additional expenditures may be incurred, which could be substantial. The total
expense associated with our Year 2000 audit and required modifications to become
Year 2000 compliant is not presently expected to be material to our business,
financial condition and results of operations.
-20-
<PAGE>
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;
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 and the terms of the
agreement by which we acquired Business Partner Solutions. 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 340,000 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.
-21-
<PAGE>
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
have issued 2,242,500 shares of Series A Preferred Stock, of which 1,986,500 are
outstanding, and 10 shares of Series B Preferred Stock, all of which are
outstanding, and, without any further vote or action by the stockholders, have
the authority to issue up to an additional 8,013,490 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.
-22-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
None.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
On January 4, 1999, the Company acquired certain assets of Infinite
Solutions, Inc. for $2,750,000 in cash and 88,560 shares of the Company's Common
Stock valued at $8.47 per share. The transaction was made in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act of
1933, as amended, as a transaction not involving a public offering.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
Advance Notice Provision
------------------------
A stockholder proposal not included in the Company's proxy statement for
the 1999 Annual Meeting will be ineligible for presentation at the meeting
unless the stockholder gives timely notice of the proposal in writing to the
Secretary of the Company at the principal executive offices of the Company and
otherwise complies with the provisions of the Company's Bylaws. To be timely,
the Company's Bylaws provide that the Company must have received the
stockholder's notice not less than 35 days nor more than 60 days prior to the
scheduled date of such meeting. However, if notice or prior public disclosure of
the date of the annual meeting is given or made to stockholders less than 50
days prior to the meeting date, the Company must receive the stockholder's
notice by the earlier of (i) the close of business on the 15th day after the
earlier of the day on which the Company mailed notice of the annual meeting date
or provided such public disclosure of the meeting date and (ii) two days prior
to the scheduled date of the annual meeting.
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 March 31, 1999.
-23-
<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: May 14, 1999 By /s/ P. Scott Munro
-------------------------------------
P. Scott Munro
Chief Executive Officer
Dated: May 14, 1999 By /s/ James W. Dorst
-------------------------------------
James W. Dorst
Chief Financial Officer
Dated: May 14, 1999 By /s/ Dennis J. Polk
-------------------------------------
Dennis J. Polk
Chief Accounting Officer
-24-
<PAGE>
INDEX TO EXHIBITS
Exhibit
-------
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, 1998,
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.
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.
<PAGE>
Exhibit
-------
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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,252
<SECURITIES> 0
<RECEIVABLES> 120,053
<ALLOWANCES> 905
<INVENTORY> 40,463
<CURRENT-ASSETS> 186,870
<PP&E> 12,514
<DEPRECIATION> 6,504
<TOTAL-ASSETS> 291,693
<CURRENT-LIABILITIES> 182,698
<BONDS> 0
0
20
<COMMON> 119
<OTHER-SE> 104,290
<TOTAL-LIABILITY-AND-EQUITY> 291,693
<SALES> 168,569
<TOTAL-REVENUES> 168,569
<CGS> 149,476
<TOTAL-COSTS> 149,476
<OTHER-EXPENSES> 13,627
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 738
<INCOME-PRETAX> 4,728
<INCOME-TAX> 2,317
<INCOME-CONTINUING> 2,411
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,411
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17
</TABLE>
