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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission File Number 000-11560
SAVOIR TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2414428
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
254 E. HACIENDA AVENUE, CAMPBELL, CA 95008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 379-0177
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $0.01 per share Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates on March 9, 1999, based on the last reported sales price for the
registrant's Common Stock on the Nasdaq National Market on such date was
approximately $34,058,252. For purposes of the foregoing calculation only, the
registrant has included in the shares owned by affiliates the beneficial
ownership of Common Stock of officers and directors of the registrant and
members of their families, and such inclusion shall not be construed as an
admission that any such person is an affiliate for any other purpose.
As of March 9, 1999, there were 11,874,815 outstanding shares of Common
Stock, $0.01 par value.
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SAVOIR TECHNOLOGY GROUP, INC.
TABLE OF CONTENTS
1998 FORM 10-K
Item No. Page
- -------- PART I ----
1. Business.............................................................. 1
2. Properties............................................................ 15
3. Legal Proceedings..................................................... 15
4. Submission of Matters to a Vote of Security
Holders........................................................... 15
PART II
5. Market for the Registrant's Common Stock
and Related Stockholder Matters................................... 16
6. Selected Consolidated Financial Data.................................. 17
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 18
7A. Quantitative and Qualitative Disclosures About Market Risk............ 25
8. Financial Statements and Supplementary Data........................... 26
9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure............................ 45
PART III
10. Directors and Executive Officers of the
Registrant........................................................ 46
11. Executive Compensation................................................ 48
12. Security Ownership of Certain Beneficial
Owners and Management............................................. 52
13. Certain Relationships and Related
Transactions...................................................... 54
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................................... 55
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This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), regarding future events and the Company's plans and
expectations that involve risks and uncertainties. When used in this Report, the
words "estimate," "project," "intend," "expect" and "anticipate" and similar
expressions are intended to identify such forward-looking statements. Such
statements are subject to certain risks and uncertainties, including those
discussed below, that could cause actual results to differ materially from those
projected. Factors that may cause or contribute to such differences include, but
are not limited to, those discussed below under "Risk Factors," as well as those
discussed elsewhere in this Report and in the documents incorporated herein by
reference. In light of the important factors that can materially affect results,
including those set forth in this paragraph and below, the inclusion of
forward-looking information herein should not be regarded as a representation by
the Company or any other person that the objectives or plans for the Company
will be achieved. The reader is therefore cautioned not to place undue reliance
on the forward-looking statements contained herein, which speak only as of the
date hereof. Savoir Technology Group, Inc. (the "Company") undertakes no
obligation to publicly release updates or revisions to these statements.
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PART I
ITEM 1. BUSINESS
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EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO,
STATEMENTS REGARDING FUTURE EVENTS AND OUR PLANS AND EXPECTATIONS. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW IN "RISK FACTORS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
REPORT.
COMPANY OVERVIEW
We were incorporated in California in 1975 as Silicon Valley Services,
Inc. and were renamed Western Micro Technology, Inc. in April 1977. In August
1997, we reincorporated in Delaware. We changed our name to Savoir Technology
Group, Inc. in November 1997.
We are a value-added wholesale distributor of commercial mid-range
servers, peripheral equipment (including wireless networking equipment, storage
products, printers and terminals) and software. We believe that we are one of
the leading distributors of IBM's commercial mid-range servers product lines
(AS/400 and RS/6000). We also distribute commercial mid-range servers,
peripheral equipment and software manufactured by Unisys, NCR and Telxon. We
primarily distribute commercial mid-range servers and related products to
value-added resellers ("VARs") who generally combine our products with
commercial applications software and sell integrated computer systems to end
user customers. We also integrate and configure personal computers, workstations
and departmental servers for original equipment manufacturers ("OEMs") and VARs,
and provide and remarket installation and technical support services. Through
ten acquisitions since December, 1994 and internal growth, we have expanded our
products and services, increased our geographic market coverage, strengthened
our management and technical personnel and increased our operating leverage. As
a result, our net sales increased from $131.7 million in 1996 to $593.3 million
in 1998, representing compound annual growth of 112.2%, while our operating
income improved from $3.6 million in 1996 to $21.2 million in 1998.
PRODUCTS AND VENDORS
Two of our business divisions, the Mid-Range Systems Division and the
Computer and Peripherals Group, generate most of our net sales.
MID-RANGE SYSTEMS DIVISION. The distribution of commercial mid-range
servers in 1998 accounted for approximately 89% of our total net sales. The
principal goal of our commercial mid-range systems distribution business is to
provide customers with both rapid, accurate delivery of products and quality
configuration and technical support. Products distributed by this Division
include mid-range servers which run on Unix, OS/400 and NT operating systems,
peripheral equipment (including wireless networking equipment, storage products,
printers and terminals) and software. In addition to selling new equipment, we
also distribute refurbished IBM AS/400 equipment. Our Mid-Range Systems
Division represents four major manufacturers: IBM, NCR, Unisys and Telxon.
During the years ended December 31, 1996, 1997 and 1998, approximately 50%, 65%
and 80%, respectively, of our net sales was generated from the sale of IBM
products (including mid-range and peripheral equipment). Our mid-range IBM
product line includes the AS/400 and RS/6000 families of mid-range servers. We
have received the IBM business partner leadership award for the past three
six-month periods. This award is given by IBM to its top distributor in North
America once every six months. We are also one of several distributors to
qualify for IBM's Authorized Assembly Program ("AAP"). The AAP certification
allows us to utilize our integration facilities to assemble custom RS/6000
configurations, allowing for shorter delivery times to customers and a reduction
in required inventory levels of pre-configured systems.
COMPUTER AND PERIPHERALS GROUP. We offer OEMs and departmental server
customers a single source for their hardware, software and service needs through
our Computer and Peripherals Group ("CPG"), CPG accounted for approximately 11%
of our total net sales in 1998. Through CPG, we offer our customers a wide
variety of value-added systems integration services up to, and including, the
actual installation at the end user site (e.g., "turnkey" systems assembly of
departmental servers, workstations, hardware and software "bundling" and light
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manufacturing). CPG's more advanced products include fault tolerant software,
serial port expansion devices and disk striping and mirroring solutions for the
SCO/UNIX operating environments. Products assembled and manufactured by CPG
include special purpose PC-based subcomponents of larger systems, private-label
departmental and small enterprise servers and related peripherals. CPG purchases
components manufactured by Intel Corporation, IBM System Storage Division, Sony
Electronics, Inc., The Santa Cruz Operation, Inc. ("SCO"), Hitachi America, Ltd.
and Microsoft Corporation, among others. Through CPG, we also specialize in
building systems under long-term contracts for customers seeking fully
compatible configurations that remain consistent over time.
VALUE-ADDED SERVICES
In addition to the products we offer, we also provide a variety of
value-added services, including the following:
INTEGRATION SERVICES. We perform light manufacturing or
technical integration services, ranging from simple hardware and
software integration, burn-in and testing to building customized
systems to our customer's specifications.
TECHNICAL SUPPORT SERVICES. We currently offer our customers
pre-sale technical assistance, configuration review and verification,
consulting services, network design, implementation and installation
services and site planning, telephone support and help desk, patch/bug
isolation and identification, certification requirements and
preparation and system administration assistance. We also remarket
certain vendor maintenance and consulting services and reseller
training programs.
LOGISTICAL AND INVENTORY MANAGEMENT SERVICES. We offer
ordering and purchasing services, including order acknowledgment, order
management, contract purchasing and end-of-life buy programs. We also
offer inventory services such as expedited delivery, kitting and
bill-of-material services, warehousing and storage services, bonded
inventory programs, consignment programs and customer on-site
operations. In addition, we offer various delivery options and
services, including drop shipments, blind shipments, custom packaging,
consolidated shipping services, special handling services, personnel
services and exporting assistance.
MARKETING SERVICES. We make current and updated information on
our products and services available to our customers through fax
broadcast services and our web site. We also customize and provide
Internet web sites for certain of our customers. In addition, we offer
ready to execute demand generation campaigns, assistance with such
campaigns, assistance with organizing advertising campaigns and joint
marketing funds.
FINANCING, CREDIT AND LEASING SERVICES. We offer our customers
various financing and credit options, including open account terms,
electronic funds transfer, standby letters of credit, security
interest/UCC filings, personal guarantees, end user lock box services
and bid bonds. We also offer end user financing programs through third
parties, including leasing programs, joint purchase orders, payment
agreements and inventory financing programs.
CUSTOMERS
We currently have approximately 2,100 active customer accounts. One of
our customers, Sirius Computer Solutions, Ltd. ("Sirius"), accounted for
approximately 11% and 18% of our net sales in 1997 and 1998, respectively. No
other single customer accounted for more than 10% of our net sales. Our sales to
Sirius are made under Industry Remarketer Affiliate Agreement between the
Company and Sirius dated as of 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 in 1999 as it represented in
1998. The Sirius Agreement expires on December 31, 2000, but may be terminated
earlier under certain conditions, not including termination at will.
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We divide our significant customers into the following three broad
categories:
VALUE-ADDED RESELLERS. VARs typically install their own or other
vendors' software, configure completed systems and integrate their service
offerings with hardware. For example, Sirius purchases IBM mid-range servers
from us and typically bundles these servers with software provided by J.D.
Edwards. As a result, Sirius is usually able to provide its end user customers
with a complete turnkey computer systems package. Similarly, NxTrend, Inc.
purchases IBM and Unisys mid-range servers from us and sells the servers to its
end users combined with its own proprietary distribution applications software.
OEMS. These manufacturers similarly integrate or have us integrate our
products with their own products prior to distribution to their end user
customer. One example of our OEM customers is Melita International, Inc.
("Melita"), a provider of customer contact and telephone call management
systems. Melita uses our capabilities to configure its proprietary software on a
preconfigured system which can be shipped directly to Melita's customer. In
addition, customers such as Splash Technology, Inc. and Wang Laboratories, Inc.
have found it more efficient to outsource certain specialized product to us as
opposed to creating their own internal infrastructure.
SYSTEMS INTEGRATORS. Systems integrators focus on delivering
non-industry specific solutions to the end user customer. The solutions may
include electronic commerce, networking, Intranet/Internet configurations and
application-specific solutions. For example, Q.I.V. Systems, Inc. designs and
installs network systems solutions in a variety of application environments that
incorporate commercial mid-range servers purchased from the Company.
SALES AND MARKETING
We focus on selling and marketing high-quality commercial mid-range
servers and integrated computer system products from a relatively small number
of vendors. In general, sales, sales support and product management
organizations are organized by vendor into business units that sell and support
only products offered by that particular vendor. We believe that our customers
require ongoing support from technically trained sales professionals who (1) are
dedicated to certain vendors, and, in certain instances, to a particular product
line, and (2) can provide technical support on the increasingly complex
mid-range servers and systems we offer our customers.
We sell and support IBM mid-range products through our Business Partner
Solutions, Inc. subsidiary and NCR and Unisys mid-range products through our
Savoir Technology division (formerly Western Micro Technology). Our sales
professionals require the technical expertise to work with customers and our
mid-range product purchasing specialists to provide the computer system
solutions required by our customers and, ultimately the end user. Our sales
professionals regularly participate in vendor-sponsored training and
certification programs. Within the mid-range distribution business units, we
maintain a salesperson to technical support person ratio of approximately 4 to
1. We utilize directed telemarketing programs, maintain a database of current
and potential customers, participate in cooperative advertising with vendors,
participate in trade shows and advisory councils and utilize print media as part
of our sales and marketing efforts.
Our CPG sells primarily to OEMs. Technical expertise within CPG's sales
force is critical during the relatively long sales cycles required to develop
new commercial products. Once the products are developed, the sales force and
technical support personnel must carefully manage and review the ongoing
forecasting, manufacture, delivery and installation of these systems. Within
CPG, we maintain a salesperson to technical support person ratio of
approximately 2 to 1. Due to the complex nature of the products offered by CPG,
new customers are primarily solicited using targeted print advertising and
customer referrals.
As of December 31, 1998, we had approximately 134 direct sales
personnel. We have a North American presence served by sales offices in Campbell
and Irvine, California, Colorado Springs, Colorado, Chicago, Illinois, Boston,
Massachusetts, Huntsville, Alabama, San Antonio, Texas and Ontario, Canada.
Centralized marketing departments located in Campbell and San Antonio support
our sales offices. We generally compensate our sales and marketing personnel
based on attainment of specified gross profit margins and return on assets.
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OPERATIONS AND INFRASTRUCTURE
INFORMATION SYSTEMS
Our corporate information system is a scalable, centralized processing
system capable of supporting numerous operational functions, including
purchasing, receiving, order processing, shipping, inventory management, sales
analysis and accounting. Our customers and sales representatives rely on the
information system for on-line, real-time information on product pricing,
inventory availability and order status. The fully integrated modular system
provides customers and sales representatives on-line access to the status of the
backlog of shipments we expect to receive, thereby significantly reducing back
office telephone investigation time. After product pricing and availability have
been determined, the integrated order entry system automatically places an order
for shipment or, if necessary, allocates the inventory to the assembly
operations. The system then instructs warehouse personnel to pull products for
shipment and directs them to the location of the inventory. In order to optimize
the use of warehouse space, we use a random access system whereby inventory is
stored in the first available location within the warehouse. We believe that our
business systems, including our computer systems, are not subject to the Year
2000 problem.
INVENTORY CONTROL
For both the Mid-Range Systems Division and CPG, the Company's computer
system automatically determines price and availability of inventory and can
allocate inventory to bills of material. This computer system manages all of our
inventories at all of our locations throughout the United States. Inventories
are overseen by a dedicated group of product specialists, assigned by product
line, whose responsibility it is to appropriately manage inventory levels and
turnover. A significant portion of these specialists' compensation is paid based
upon the attainment of certain prescribed inventory management benchmarks.
WAREHOUSE AND INTEGRATION FACILITIES; SHIPPING
We maintain inventory stocking locations in Irvine and Fremont,
California, Chicago, Illinois and San Antonio, Texas. In addition, we have a
major integration facility in Fremont, California, adjacent to our warehouse,
with other integration facilities in Irvine, Chicago and San Antonio. Our
Fremont integration facility is ISO 9002 certified. We currently ship products
from our warehouses via FedEx, UPS and other common carriers. In addition, we
distribute some products by having our vendors drop-ship the products to our
customers.
FINANCIAL SERVICES
We offer a number of flexible leasing and financing alternatives to our
customers, including a variety of leasing options, inventory flooring options
and end user lock-box arrangements. We also maintain credit insurance in order
to more effectively manage the risk of extending credit to our customers.
COMPETITION
The markets in which we operate are highly competitive. Competition is
based primarily on product availability, price, credit availability, speed of
delivery, ability to tailor specific solutions to customer needs, breadth and
depth of product lines and services, technical expertise and pre- and post-sale
service and support. Increased competition may result in further price
reductions, reduced gross profit margins and loss of market share, any of which
could materially and adversely affect our business, financial condition and
results of operations.
Through the Mid-Range Systems Division, we compete with national,
regional and local distributors, including, but not limited to, Gates/Arrow
Commercial Systems, a division of Arrow Electronics, Inc., Hamilton Hall-Mark
Computer Products, a subsidiary of Avnet, Inc., and Pioneer Standard
Electronics, Inc. In some limited circumstances, we compete with our own
vendors. In the distribution of storage products, we compete with national,
regional and local distributors. Through CPG, we compete with contract
manufacturers, systems integrators and certain 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, such
competitors or future competitors may be able to respond more quickly to new or
emerging
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technologies and changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products than we can.
Competitors which are larger than us 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.
EMPLOYEES
As of March 9, 1999, we had approximately 550 full-time employees. We
are not a party to any collective bargaining agreement and consider our employee
relations to be good.
RISK FACTORS
WE ARE DEPENDENT UPON IBM AND A FEW OTHER VENDORS
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 years ended
December 31, 1996, 1997 and 1998, approximately 50%, 65% and 80%, respectively,
of our net sales were generated from the sale of IBM products, and we expect the
percentage to increase 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 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 sustain sufficient sales volumes of certain IBM
products or to maintain required technical infrastructure in
order to maintain most favorable volume discount status; and
o the addition of other wholesale distributors by IBM.
The balance of our net sales is derived from the sale of products that
we purchase from a limited number of other vendors. To become an authorized
distributor for these vendors, we typically enter into a non-exclusive agreement
that is cancelable by either party upon 30 to 120 days' prior written notice.
The occurrence of any of the following vendor-related events would have a
material adverse effect upon our business, financial condition and results of
operations:
o any disruption, change or termination in our relationship with
any such vendor or in the manner in which any such vendor
distributes its products;
o the failure of any such vendor to develop new products which are
accepted by our customers;
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o our failure to maintain sufficient sales volumes of certain
vendors' products to maintain most favorable volume discount
status; and
o the addition of other wholesale distributors by any such vendor.
As is typical in our industry, we receive volume discounts and market
development funds from most of our vendors. These volume discounts directly
affect our gross profit. In addition, we typically use market development funds
to offset a portion of our sales and marketing expenses. Any change in the
availability of these discounts or market development funds or our failure to
obtain vendor financing on satisfactory terms and conditions 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;
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
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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, 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 18% OF OUR NET SALES
During the years ended December 31, 1997 and 1998, sales to Sirius
Computer Solutions, Ltd. accounted for approximately 11% and 18%, 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.
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INTEGRATION OF ACQUIRED COMPANIES AND OUR BUSINESS MAY NOT BE
SUCCESSFUL
Since December 1994, we have completed ten 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 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
-8-
<PAGE>
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
technical personnel, key management and sales and marketing personnel and our
ability to identify and hire additional personnel. Competition for qualified
management, 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, President 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 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
-9-
<PAGE>
plus 1.875% (9.625% at December 31, 1998) 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.
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 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.
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
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<PAGE>
offset the effects of our low gross profit margins by increasing net sales,
availing ourselves 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 22% of our outstanding accounts receivable at December 31, 1998. No other
single customer accounted for more than 10% of our outstanding accounts
receivable at December 31, 1998. 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
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<PAGE>
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 successfully our
international business. 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;
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 and developing and implementing a company-wide Year 2000
compliance project. 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. We are aware of a need to
upgrade the associated database and hardware systems on which the software
system runs. 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 substantially complete remediation and validation of our
internal systems, as well as to develop contingency plans, by mid-1999.
As part of our Year 2000 project, we are developing a plan for
contacting our critical suppliers, manufacturers, distributors and other vendors
to determine if their operations and the products and services that they
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<PAGE>
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 of the Year 2000 project are
approximately $1.5 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.
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. 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.
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<PAGE>
OUR STOCK PRICE HAS HISTORICALLY BEEN VOLATILE
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 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.
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<PAGE>
ITEM 2. PROPERTIES
----------
We lease all facilities used in our business. The following table
summarizes the principal properties occupied by us.
<TABLE>
<CAPTION>
Approximate Lease
Location Principal Use Square Footage Expiration Date
-------- ------------- -------------- ---------------
<S> <C> <C> <C>
Campbell, California........................... Corporate Headquarters
and Sales Office 24,000 2000
San Antonio, Texas............................. Business Partner
Solutions, Inc.
Corporate Headquarters
and Sales, Marketing and
Technical Support Office 87,000 2003
Fremont, California............................ Warehouse, Distribution
and Integration Center 66,500 2003
Irvine, California............................. Warehouse, Distribution,
Integration Center,
Sales Office and
Technical Support Office 41,000 2004
Burr Ridge, Illinois (a suburb of Chicago)..... Warehouse, Distribution,
Integration Center and
Technical Support and
Sales Office 16,900 2003
Framingham, Massachusetts (a suburb of Boston). Sales Office 11,200 2000
Colorado Springs, Colorado..................... Sales Office 2,500 1999
Huntsville, Alabama............................ Sales Office 6,000 1999
Mississauga, Ontario, Canada................... Sales Office 3,300 1999
</TABLE>
We believe our facilities are suitable for our uses and are generally
adequate to support our current level of operations. We believe that lease
extensions or replacement space may be obtained for all of our leased facilities
upon the expiration of the current lease terms, in most cases at rates not
materially higher than those currently in effect.
ITEM 3. LEGAL PROCEEDINGS
-----------------
We are not presently a party to any litigation. We are involved in
various investigations and claims arising in the normal conduct of our business,
none of which, in our opinion, will have a material adverse effect on our
business, financial condition and results of operations or our ability to
conduct business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------
(a) Common Stock Price Range
------------------------
Our Common Stock is quoted on The Nasdaq National Market under the
symbol "SVTG." Prior to November 24, 1997, our Common Stock was quoted on The
Nasdaq National Market under the symbol "WSTM." The following table sets forth,
for the periods indicated, high and low sales prices for our Common Stock as
reported by The Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
First Quarter........................ $ 14.50 $ 9.50
Second Quarter....................... 13.50 8.63
Third Quarter........................ 12.75 8.00
Fourth Quarter....................... 11.63 9.00
YEAR ENDED DECEMBER 31, 1998
First Quarter........................ $ 12.75 $ 9.63
Second Quarter....................... 13.44 9.13
Third Quarter........................ 12.75 4.31
Fourth Quarter....................... 9.50 3.13
</TABLE>
(b) Holders
-------
As of March 9, 1999, there were approximately 250 stockholders of
record and approximately 1,800 beneficial stockholders of our Common Stock.
(c) Dividends
---------
We have never declared or paid any cash dividends 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 do not intend to
pay any cash dividends in the foreseeable future.
(d) Recent Sales of Unregistered Securities, Use of Proceeds from
-------------------------------------------------------------
Registered Securities
---------------------
Not applicable.
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994(1) 1995 1996 1997 1998
------- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales................................. $ 119,285 $ 106,462 $131,697 $237,884 $ 593,341
Cost of goods sold........................ 102,662 93,416 114,389 205,089 526,113
--------- --------- -------- -------- ---------
Gross profit.............................. 16,623 13,046 17,308 32,795 67,228
Selling, general and administrative
expenses............................... 16,958 13,694 13,716 25,969 46,002
Restructuring costs....................... - 3,600 - - -
--------- --------- -------- -------- ---------
Operating income (loss) - continuing
operations............................. (335) (4,248) 3,592 6,826 21,226
Interest expense.......................... 884 850 978 3,181 4,318
--------- --------- -------- -------- ---------
Income (loss) before income taxes-continuing
operation............................... (1,219) (5,098) 2,614 3,645 16,908
Income tax expense (benefit).............. (217) - 276 335 8,268
---------- --------- -------- -------- ---------
Income (loss) before extraordinary
item-continuing operations.............. (1,002) (5,098) 2,338 3,310 8,640
Extraordinary item, net of tax............ - - - - (2,338)
Discontinued operations, net of tax....... 387 - - - -
--------- --------- -------- -------- ---------
Net income (loss)......................... $ (615) $ (5,098) $ 2,338 $ 3,310 $ 6,302
========== ========== ======== ======== =========
Net income (loss) per share: (2)
-Basic................................. $ (0.17) $ (1.36) $ 0.55 $ 0.57 $ 0.10
-Diluted............................... $ (0.17) $ (1.36) $ 0.52 $ 0.55 $ 0.09
Number of shares used in per share
calculations:(2)
-Basic................................. 3,669 3,756 4,255 4,902 8,714
-Diluted............................... 3,669 3,756 4,513 5,976 9,343
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------
1994(1) 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $ 12,334 $ 7,312 $ 7,448 $ 6,454 $ 3,455
Total assets.............................. 37,898 35,899 63,276 186,888 308,902
Short-term debt........................... 9,261 7,126 11,335 15,579 22,260
Long-term debt, less current portion...... 65 117 53 22,330 1,087
Stockholders' equity...................... 14,424 11,004 15,714 47,080 93,567
- ----------
(1) Amounts have been restated to reflect the 1994 discontinuation of the
testing division and the 1994 acquisition of First Computer Corporation
accounted for as a pooling of interests.
(2) See Note 7 of Notes to Consolidated Financial Statements for
information concerning the computation of net income (loss) per share.
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion and analysis should be read in conjunction
with "Selected Consolidated Financial Data" and the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Report.
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. SUCH FORWARD- LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO,
STATEMENTS REGARDING FUTURE EVENTS AND OUR PLANS AND EXPECTATIONS. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED PREVIOUSLY IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS REPORT OR INCORPORATED HEREIN BY REFERENCE.
OVERVIEW
Recognizing the consolidation trend in the commercial mid-range systems
distribution industry, we commenced our acquisition strategy in December 1994
with the acquisition of First Computer Corporation. Since then, we have focused
upon expanding our commercial mid-range server distribution business through
internal growth and strategic acquisitions. Since December 1994, we have
completed ten acquisitions, which have expanded our products and services,
increased our geographic market coverage, strengthened our management and
technical personnel and increased our operating leverage. The following table
summarizes our acquisition history:
<TABLE>
<CAPTION>
Estimated Earnout Potential
Initial Consideration Actual Earnout Paid(1) Consideration(1)
------------------------ ---------------------- ---------------------------
Shares of Shares of Shares of
Transaction Common Common Common
Acquisition Target Date Cash Stock Cash Stock Cash Stock
------------------ ----------- ----------- ---------- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REAL Applications, Ltd.
("REAL")(2).................... 9/8/98 $12,875,000 - - - - -
MCBA Systems, Inc. ("MCBA")(3). 6/5/98 852,854 - 1,303,322 - 196,678
UniDirect Corporation
("UDC")(4)..................... 5/15/98 2,900,000 - - - - -
Star Management Services, Inc.
("SMS")(5)................ 9/30/97 42,150,000 460,000 2,500,000 - $2,500,000 -
Target Solutions, Inc.("TSI")(6) 3/17/97 - 220,273 - - - -
International Data Products,
LLC ("IDP")(7)................. 11/29/96 265,000 - - - - 140,000
Star Technologies, Inc.
("STI")(8).................. 11/7/96 - 113,263 - 166,800 - -
R&D Hardware Systems Company
of Colorado ("R&D")(9).... 1/2/96 1,000,000 125,000 - 78,587 - -
International Parts, Inc.
("IPI")(10)................. 11/18/95 - 300,000 - 42,516 - -
First Computer Corporation
("FCC")(11)................. 12/1/94 - 328,943 - - - -
- ----------
(1) As of March 9, 1999.
(2) For the year ended April 30, 1998, REAL had audited revenue of approximately
$80 million.
(3) We also canceled indebtedness of $487,000 owed to the Company by MCBA at the
time of acquisition. For the year ended December 31, 1997, MCBA had audited
revenue of approximately $27 million.
(4) For the year ended December 31, 1997, UDC had unaudited revenue of
approximately $18 million. We also owe a $1.7 million under a promissory
note to the former parent company of UDC.
(5) For the eleven months ended September 30, 1997, SMS had audited revenue of
approximately $87 million.
(6) For the year ended December 31, 1996, TSI had unaudited revenue of
approximately $15 million. The TSI agreement provides for a total earnout
potential consideration of $10,000,000 in cash and stock.
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<PAGE>
(7) Excludes assumed liabilities of $424,000. For the year ended December 31,
1995, IDP had unaudited revenue of $5 million.
(8) For the year ended June 30, 1996, STI had unaudited revenue of approximately
$8 million.
(9) For the year ended December 31, 1995, R&D had unaudited revenue of
approximately $10 million.
(10) For the year ended December 31, 1994, IPI had unaudited revenue of
approximately $15 million.
(11) For the year ended December 31, 1993, FCC had unaudited revenue of
approximately $6 million.
</TABLE>
INCOME TAXES
Due to the use of net operating loss carryforwards generated in 1995
and years prior, our effective tax rate was 10.6% and 9.2% in 1996 and 1997,
respectively, as compared to a normal combined effective tax rate of
approximately 40% for federal and state income taxes. As of December 31, 1997,
we had used substantially all of our available federal net operating loss
carryforward amounts. Due to the use of these carryforwards and the significant
amount of non-tax deductible amortization expense related to goodwill incurred
in certain acquisitions, our effective tax rate was 48.9% in 1998. We expect our
effective tax rate to be approximately the same percentage in 1999.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain income
and expense items as a percentage of net sales:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0%
Cost of goods sold.................................... 86.9 86.2 88.7
--------- -------- --------
Gross profit..................................... 13.1 13.8 11.3
Selling, general and administrative expenses.......... 9.7 9.8 6.7
Depreciation and amortization expense................. 0.7 1.1 1.1
--------- -------- --------
Total operating expenses......................... 10.4 10.9 7.8
--------- -------- --------
Operating income................................. 2.7 2.9 3.5
Interest expense...................................... 0.7 1.4 0.6
--------- -------- --------
Income before income taxes and extraordinary item..... 2.0 1.5 2.9
Income tax expense.................................... 0.2 0.1 1.4
--------- -------- --------
Income before extraordinary item...................... 1.8 1.4 1.5
Extraordinary item, net of tax effect................. 0.0 0.0 (0.4)
--------- -------- --------
Net income............................................ 1.8% 1.4% 1.1%
========= ======== ========
</TABLE>
COMPARISONS OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NET SALES. Net sales consists of sales of commercial mid-range servers,
integrated personal computers, workstations, peripheral equipment, storage
products, software and remarketed installation and technical support services,
net of sales discounts and returns. Net sales increased by 149.4% to $593.3
million in 1998 from $237.9 million in 1997, and 80.6% in 1997 from $131.7
million in 1996. Sales increased due to the continued expansion of our computer
systems distribution business, particularly through the acquisition of SMS in
the third quarter of 1997. The acquisitions of MCBA and REAL, the opening of a
sales office in Canada and increased software sales, primarily as a result of
the acquisition of UDC, also contributed to the rise in revenue. MCBA, REAL and
UDC accounted for approximately $64.2 million of net sales in 1998. Sales also
increased due to 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.
For the years ended December 31, 1997 and 1998, sales to Sirius
accounted for approximately 11% and 18%, respectively, of our net sales. Our
sales to Sirius are made under the Sirius Agreement, pursuant to which we
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<PAGE>
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 in 1999 as it represented in 1998. The Sirius Agreement expires on
September 30, 2000, but may be terminated earlier under certain conditions, not
including termination at will.
GROSS PROFIT. Cost of sales is comprised of purchase costs, net of
early payment and volume discounts and product freight and does not include any
depreciation or amortization expense. Gross profit as a percentage of net sales
is affected by several factors including the mix of high margin and low margin
products and services and the proportion of large orders on which we extend
volume discounts to our customers. Gross profit increased by 105.0% to $67.2
million in 1998 from $32.8 million in 1997, and by 89.5% in 1996 from $17.3
million. Gross profit as a percentage of net sales was 11.3% in 1998, 13.8% in
1997 and 13.1% in 1996. The decrease from 1997 to 1998 is a result of a higher
proportion of large orders on which we extended volume discounts to our
customers and the historically lower gross profit percentages of SMS, MCBA and
REAL. The increase from 1996 to 1997 was due to a greater mix of higher margin
products and services, including integration and technical support services, as
well as increased volume discounts provided by certain vendors.
OPERATING EXPENSES. Operating expenses include: salaries and
commissions paid to sales representatives; compensation paid to marketing,
product management, technical and administrative personnel; depreciation of
infrastructure costs, including 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. Fluctuations in operating expenses as a
percentage of net sales can result from planned expenditures by us for
additional sales, marketing, technical support and administrative personnel,
efficiencies gained through higher sales volumes and resulting economies of
scale and the timing of acquisitions.
Selling, general and administrative expenses (excluding depreciation
and amortization expense) increased by 70.3% to $39.7 million in 1998 from $23.3
million in 1997, and by 83.5% in 1997 from $12.7 million in 1996. Selling,
general and administrative expenses as a percentage of net sales were 6.7% in
1998, 9.8% in 1997 and 9.7% in 1996. In 1998, selling, general and
administrative expenses increased due to the acquisitions of SMS, MCBA, REAL and
UDC, necessary personnel increases as a result of higher systems sales and
start-up costs associated with opening an office in Canada. As a percentage of
net sales, selling, general and administrative expenses decreased in 1998 due to
the economies of scale generated from acquisitions and rapid net sales growth.
In 1997, selling, general and administrative expenses as a percentage of net
sales were essentially the same as in 1996, despite net sales growth. As a
percentage of net sales, these costs increased as a result of investments made
in infrastructure and personnel additions.
Depreciation and amortization expense increased by 137.1% to $6.3
million in 1998 from $2.7 million in 1997, and by 171.6% from $1.0 million in
1996. Depreciation and amortization expense as a percentage of net sales was
1.1% in 1998, 1.1% in 1997 and 0.7% in 1996. In 1998, depreciation and
amortization expense as a percentage of net sales was similar to the 1997
percentage due to the additional amortization expense from the acquisitions of
SMS, MCBA, UDC and REAL. In 1997, this percentage increased from 1996 due to
higher amortization expense as a result of increased goodwill related to larger
acquisitions and higher depreciation costs incurred due to leasehold
improvements and computer equipment additions.
OPERATING INCOME. Operating income increased by 211.0% to $21.2 million
in 1998 from $6.8 million in 1997, and by 90.0% from $3.6 million in 1996.
Operating income as a percentage of net sales was 3.5% in 1998, 2.9% in 1997 and
2.7% in 1996. The increases in operating income resulted from higher net sales,
operating expense control and economies of scale.
INTEREST EXPENSE. Interest expense increased by 35.7% to $4.3 million
in 1998 from $3.2 million in 1997, and by 225.3% from $1.0 million in 1996.
Interest expense as a percentage of net sales was 0.6% in 1998, 1.4% in 1997 and
0.7% in 1996. The increases in interest expense in 1998 and 1997 were due to
additional borrowings necessary to fund acquisitions, infrastructure additions,
expanded operations and overall growth. In addition, interest expense in 1998
also increased due to the amortization of a discount on warrants issued in
September 1997. The warrants were originally determined to have a fair market
value of $1,330,000, which was recorded as discount on notes payable. During the
first quarter of 1998, the warrants were revalued at $2,721,000. We recorded
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<PAGE>
approximately $330,000 in interest expense for the discount on the warrants in
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.
INCOME TAXES. Income tax expense was $8.3 million, $335,000 and
$276,000 in 1998, 1997 and 1996, respectively, reflecting effective tax rates
48.9%, 9.2% and 10.6%, respectively. In 1998, our effective tax rate was higher
than the federal statutory rate in 1998 (35.0%) due to non-deductible goodwill,
state income taxes and other intangibles. The effective tax rates were lower
than the statutory rates in 1997 and 1996 due to the utilization of net
operating loss carryforwards from losses generated in 1995 and prior and the
release of the valuation allowance against the deferred tax assets. These net
operating loss carryforwards were fully applied in 1997.
In connection with the repayment of our outstanding debt obligations,
we recorded an extraordinary charge of $2,338,000, net of tax, resulting from a
prepayment penalty, the write-off of unamortized discounts relating to certain
warrants issued to debt holders and other related expenses.
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<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial
data and such data expressed as a percentage of net sales for the quarters of
1997 and 1998. In our opinion, this information has been presented on the same
basis as the audited consolidated financial statements appearing elsewhere in
this Report, and all necessary adjustments (consisting only of normal recurring
adjustments) have been included in the amounts stated below to present fairly
the unaudited quarterly results when read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Report. The
operating results for any quarter are not necessarily indicative of the results
to be expected for any future period.
<TABLE>
<CAPTION>
1997 1998
----------------------------------------------- ----------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $ 35,950 $ 39,886 $ 46,139 $ 115,909 $ 100,504 $ 122,920 $ 149,809 $ 220,108
Cost of goods sold.......... 29,981 33,293 39,297 102,518 87,443 108,031 132,561 198,078
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit........... 5,969 6,593 6,842 13,391 13,061 14,889 17,248 22,030
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Selling, general and
administrative expenses..... 4,410 5,213 4,967 8,709 8,025 9,067 10,551 12,028
Depreciation and amortization 393 356 504 1,417 1,201 1,560 1,626 1,944
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses. 4,803 5,569 5,471 10,126 9,226 10,627 12,177 13,972
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating Income....... 1,166 1,024 1,371 3,265 3,835 4,262 5,071 8,058
Interest expense............ 432 496 604 1,649 1,709 963 605 1,041
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
extraordinary item..... 734 528 767 1,616 2,126 3,299 4,466 7,017
Income tax expense.......... 191 121 - 23 1,033 1,618 2,179 3,438
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary
item 543 407 767 1,593 1,093 1,681 2,287 3,579
Extraordinary item, net of
tax effect.................. - - - - - (2,338) - -
---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Net income (loss)...... $ 543 $ 407 $ 767 $ 1,593 $ 1,093 $ (657) $ 2,287 $ 3,579
========== ========== ========== ========== ========== =========== ========== ==========
Diluted net income (loss)
per share........... $ 0.11 $ 0.08 $ 0.15 $ 0.19 $ 0.11 $ (0.06) $ (0.20) $ 0.27
========== =========== ========== =========== ========== =========== =========== ==========
Number of shares (diluted)
used in per share
calculation.......... 4,977 5,196 5,144 8,194 6,167 10,747 9,599 13,253
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As a Percentage of Net Sales
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......... 83.4 83.5 85.2 88.5 87.0 87.9 88.5 90.0
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........... 16.6 16.5 14.8 11.5 13.0 12.1 11.5 10.0
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Selling, general and
administrative
expenses............... 12.3 13.1 10.8 7.5 8.0 7.4 7.0 5.5
Depreciation and amortization. 1.1 0.9 1.0 1.2 1.2 1.2 1.1 0.8
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses. 13.4 14.0 11.8 8.7 9.2 8.6 8.1 6.3
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income....... 3.2 2.5 3.0 2.8 3.8 3.5 3.4 3.7
Interest expense............ 1.2 1.2 1.3 1.4 1.7 0.8 0.5 0.5
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes and extraordinary
item................... 2.0 1.3 1.7 1.4 2.1 2.7 2.9 3.2
Income tax expense.......... 0.5 0.3 - - 1.0 1.3 1.4 1.6
----------- ----------- ---------- ---------- ----------- ----------- ----------- -----------
Income before extraordinary
item 1.5 1.0 1.7 1.4 1.1 1.4 1.5 1.6
Extraordinary item, net of
tax effect............. - - - - - (1.9) - -
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)...... 1.5% 1.0% 1.7% 1.4% 1.1% (0.5)% 1.5% 1.6%
=========== =========== =========== =========== =========== =========== ========== ===========
</TABLE>
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<PAGE>
Our quarterly net sales and operating results may vary significantly as
a result of a variety of factors, including, but not limited to, changes in the
supply and demand for commercial mid-range servers, peripheral equipment,
software and related services, the cost, timing and integration of acquisitions,
the addition or loss of a key vendor or customer, the introduction of new
technologies, changes in manufacturers' prices, price protection policies or
stock rotation privileges, changes in market development funds, changes in the
level of operating expenses, product supply shortages, disruption of warehousing
or shipping channels, inventory adjustments, increases in the amount of accounts
receivable written off, price competition, changes in the mix of products sold
through distribution channels and in the mix of products purchased by OEMs.
Operating results could also be adversely affected by general economic and other
conditions affecting the timing of customer orders and capital spending, a
downturn in the market for commercial mid-range servers, and order cancellations
or rescheduling. In addition, the computer distribution industry experiences
both seasonal trends and, within each quarter, tends to sell a substantial
amount of its products at the end of the quarter. For example, our largest
vendor, IBM, sells approximately 35-40% of its products in the last calendar
quarter. Historically, a substantial portion of our net sales has been made in
the last few days of a quarter. Accordingly, our quarterly results of operations
are difficult to predict and delays in the completion 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.
Because of the many factors that can affect our operating results, 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 future performance.
Our future operating results are expected to continue to fluctuate as a result
of these and other factors, which could have a material adverse effect on our
business, financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
We have required substantial capital to finance accounts receivable,
inventories, capital expenditures and acquisitions. In the past, we have
financed these requirements primarily through borrowings under credit
facilities, cash generated from operations, the issuance and sale of Common and
Series A Preferred Stock and Subordinated Notes.
In September 1998, we agreed with IBMCC to increase the IBMCC Credit
Facility line from $75.0 million to $125.0 million. Product purchases from IBM
and cash advances from IBMCC are directly charged to the credit line and are
paid by us based on payment terms outlined in the IBMCC Credit Facility.
Borrowings under the IBMCC Credit Facility are based on eligible accounts
receivable and inventory, as defined. The IBMCC Credit Facility expires on
August 31, 2000 and contains restrictive covenants which include the maintenance
of minimum current, tangible net worth and times interest earned ratios, as
defined. As of December 31, 1997 and 1998, we had outstanding obligations under
the IBMCC Credit Facility of $71.7 million and $113.7 million, respectively. Of
the total outstanding borrowings, $6.6 million and $6.2 million represented cash
advances at December 31, 1997 and 1998, respectively. Cash advances bear
interest at the prime rate plus 1.875% (9.625% at December 31, 1998). Based on
eligible assets, as of December 31, 1998, we had additional borrowings available
under the IBMCC Credit Facility of approximately $11.3 million.
On September 8, 1998, we executed an amendment to the IBMCC Credit
Facility, under which we obtained an additional loan of $15,000,000 to
consummate the REAL transaction. The loan bears interest at prime plus 2.0%
(9.75% at December 31, 1998) and is due in September, 1999.
Operating activities for 1998 provided cash in the amount of $15.6
million. For this period, cash was provided primarily as a result of increases
in accounts payable of $71.1 million and other current liabilities of $15.3
million, partially offset by an increase in accounts receivable of $77.2
million. Favorable accounts payable terms with IBMCC and increased leasing of
product purchases by customers through IBMCC and third party leasing vendors
resulted in the generation of cash in 1998. For 1997, net cash of $5.9 million
was provided. This was primarily attributable to growth in sales and the
resulting increases in accounts receivable and accounts payable.
Investing activities for 1998 used cash in the amount of $23.7 million.
For this period, cash was used for the purchase of REAL and UDC and continuing
leasehold and computer hardware and software investments made at the
headquarters, sales office and warehouse and integration center sites. For 1997,
$37.7 million was used in investing activities, principally for the acquisitions
of SMS and TSI as well as infrastructure additions.
-23-
<PAGE>
Cash provided by financing activities for 1998 was $11.0 million,
consisting of a $15.0 million loan from IBMCC and proceeds from a secondary
offering of our common stock of $28.6 million offset by payments on the
Subordinated Notes, SMS Seller Notes and the IBMCC Credit Advance totaling $32.6
million. In 1997, cash provided by financing activities was $34.4 million, which
resulted primarily from borrowings under the Subordinated Notes and the IBMCC
Credit Advance totaling $23.1 million and the issuance of Series A Preferred
Stock totaling $19.1 million, partially offset by our reduction in short-term
borrowings by $8.4 million.
We believe we have sufficient funds, or alternate sources of funds, to
carry on our business as presently conducted through 1999.
YEAR 2000 COMPLIANCE ISSUES
GENERAL
We are in the process of conducting a Year 2000 compliance audit and
developing and implementing a company-wide Year 2000 Compliance Project (the
"Project"). The Project 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. The 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. This system handles our
most critical functions, including, finance, inventory control, warehousing,
shipping and receiving, logistics, purchasing, sales and order taking. Over the
last three months, our business software system was upgraded to a more current
version, which we believe to be Year 2000 compliant. 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 Huntsville, Alabama and Canada
will be integrated over the next three months.
Once all of our offices are integrated into our business software
system, we will still need to upgrade the associated database and hardware
systems on which the software system runs. The hardware upgrade is expected to
be completed by April 1999 and to cost approximately $350,000. We completed the
upgrade of our database by migrating to the next version of the software in
March 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 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 mid-1999.
THIRD PARTY SUPPLIERS AND VENDORS
We are currently in the process of developing a plan for contacting our
critical suppliers, manufacturers, 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 dealing with IBM in addressing 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.
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<PAGE>
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, $300,000 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.
BACKLOG
Although we receive purchase orders for products to be delivered to
customers over a specified time period, there can be no assurance that such
orders will result in sales, as most orders are subject to revision or
cancellation without penalty. Consequently, we do not believe that backlog is a
meaningful indicator of sales for future periods.
RECENT PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee, or AcSEC,
released Statement of Position 98-1, or SOP 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 requires
companies to capitalize certain costs of computer software developed or obtained
for internal use, provided that those costs are not research and development.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. We are
evaluating the requirements of SOP 98-1 and the effects, if any, on our current
policies on accounting for software costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not Applicable.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Savoir Technology Group, Inc.
Campbell, California
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 55 present fairly, in all material
respects, the consolidated financial position of Savoir Technology Group, Inc.
and its subsidiaries at December 31, 1998 and 1997, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Item 14(a)(2) on page 55 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 27, 1999
-26-
<PAGE>
<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1998
----------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash........................................................ $ 2,919 $ 5,820
Trade accounts receivable, net of allowance for doubtful
accounts of $1,100 in 1998 and $319 in 1997............... 76,664 156,953
Inventories................................................. 36,841 38,913
Other current assets........................................ 7,388 16,017
----------------- -----------------
Total current assets.................................... 123,812 217,703
Property and equipment, net...................................... 4,920 5,526
Excess of cost over acquired net assets and other intangibles, net 57,537 83,810
Other assets..................................................... 619 1,863
----------------- -----------------
Total assets........................................ $ 186,888 $ 308,902
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................... $ 7,063 $ 21,240
Current portion of long-term debt........................... 8,516 1,020
Accounts payable............................................ 96,143 171,021
Accrued expenses and other current liabilities.............. 5,636 20,967
----------------- -----------------
Total current liabilities............................... 117,358 214,248
Long-term debt, less current portion............................. 22,330 1,087
Other............................................................ 120 -
Commitments and contingencies (Notes 4, 9 and 11)................ - -
Stockholders' equity
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; issued and outstanding: Series A: 1,986,500
shares in 1998 and 2,242,500 shares in 1997; Series B: 10
shares in 1998 and 1997; liquidation preference: $18,996
in 1998 and $21,444 in 1997............................. 22 20
Common stock, $0.01 par value; 25,000,000 shares authorized;
issued and outstanding: 10,698,010 shares in 1998 and
5,357,678 shares in 1997................................ 54 107
Additional paid-in capital.................................. 46,039 91,810
Retained earnings........................................... 965 1,630
----------------- -----------------
Total stockholders' equity.............................. 47,080 93,567
----------------- -----------------
Total liabilities and stockholders' equity..... $ 186,888 $ 308,902
================= =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
-27-
<PAGE>
<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1996 1997 1998
--------------- -------------- --------------
<S> <C> <C> <C>
Net sales....................................... $ 131,697 $ 237,884 $ 593,341
Cost of goods sold.............................. 114,389 205,089 526,113
--------------- -------------- --------------
Gross profit............................... 17,308 32,795 67,228
Selling, general and administrative expenses.... 13,716 25,969 46,002
--------------- -------------- --------------
Operating income........................... 3,592 6,826 21,226
Interest expense................................ 978 3,181 4,318
--------------- -------------- --------------
Income before income taxes and
extraordinary item...................... 2,614 3,645 16,908
Income tax expense.............................. 276 335 8,268
--------------- -------------- --------------
Income before extraordinary item................ 2,338 3,310 8,640
Extraordinary item, net of tax effect of
$2,246.................................. - - (2,338)
--------------- -------------- --------------
Net income.............................. $ 2,338 $ 3,310 $ 6,302
=============== ============== ==============
Net income per share:
Income before extraordinary item-basic..... $ 0.55 $ 0.57 $ 0.37
============== ============== ==============
Extraordinary item, net of tax effect...... - - (0.27)
--------------- -------------- ---------------
Net income per share-basic................. $ 0.55 $ 0.57 $ 0.10
============== ============== ==============
Income before extraordinary item-diluted... $ 0.52 $ 0.55 $ 0.34
Extraordinary item, net of tax effect...... - - (0.25)
--------------- -------------- ---------------
Net income per share-diluted............... $ 0.52 $ 0.55 $ 0.09
============== ============== ==============
Number of shares used in per share calculations:
Basic...................................... 4,255 4,902 8,714
=============== ============== ==============
Diluted.................................... 4,513 5,976 9,343
=============== ============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
-28-
<PAGE>
<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
Preferred Stock Common Stock Additional Retained
------------------- --------------------- Paid-In Earnings
Shares Amount Shares Amount Capital (Deficit) Total
-------- --------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996............. -- $ -- 4,009,988 $ 40 $ 15,547 $ (4,583) $11,004
Exercise of stock options.......... -- -- 92,157 1 330 -- 331
Issuance of common stock in
business combinations............ -- -- 366,789 4 1,945 -- 1,949
Issuance of common stock under
employee stock purchase plan..... -- -- 19,197 -- 92 -- 92
Net income............................ -- -- -- -- -- 2,338 2,338
-------- --------- --------- ---------- ---------- ---------- ----------
Balances, December 31, 1996........... -- -- 4,488,131 45 17,914 (2,245) 15,714
Exercise of stock options.......... -- -- 24,375 -- 74 -- 74
Issuance of common stock in
business combinations............ -- -- 809,898 8 6,817 -- 6,825
Issuance of common stock under
employee stock purchase plan..... -- -- 31,044 1 255 -- 256
Issuance of preferred stock and
common
stock warrants, net of offering
costs............................ 2,242,500 22 -- -- 19,110 -- 19,132
Dividend on preferred stock ....... -- -- 4,230 -- 50 (100) (50)
Common stock warrants issued in
connection with debt offerings... -- -- -- -- 1,330 -- 1,330
Tax benefit from exercise of stock
options.......................... -- -- -- -- 489 -- 489
Net income......................... -- -- -- -- -- 3,310 3,310
-------- --------- --------- ---------- ---------- ---------- ----------
Balances, December 31, 1997........... 22 5,357,678 54 46,039 965 47,080
Exercise of stock options.......... -- -- 54,611 1 308 -- 309
Issuance of common stock in
business combinations............ -- -- 1,193,510 12 9,727 -- 9,739
Issuance of common stock under
employee stock purchase plan..... -- -- 33,773 -- 297 -- 297
Issuance of common stock under
secondary offering............... -- -- 3,000,000 30 28,559 -- 28,589
Dividend on preferred stock........ -- -- 171,252 2 1,801 (1,803) --
Additional costs related to
issuance of preferred stock...... -- -- -- -- (219) -- (219)
Conversion of preferred stock to
common stock..................... (256,000) (2) 262,853 2 -- -- --
Dividend on preferred stock........ -- -- 612,533 6 3,793 (3,799) --
Cash dividend on preferred stock .. -- -- -- -- -- (35) (35)
Exercise of warrants............... -- -- 11,800 -- 114 -- 114
Revalue of warrants in connection
with
debt offering.................... -- -- -- -- 1,391 -- 1,391
Net income......................... -- -- -- -- -- 6,302 6,302
-------- --------- --------- ---------- ---------- ---------- ----------
Balances, December 31, 1998........... $ 20 10,698,010 $ 107 $ 91,810 $ 1,630 $ 93,567
======== ========= ========== ========== ========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
-29-
<PAGE>
<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1997 1998
--------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 2,338 $ 3,310 $ 6,302
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 983 2,670 6,331
Extraordinary loss on retirement debt........... -- -- 2,773
(Gain) loss on sale of equipment................ (11) -- 117
Provision for doubtful accounts receivable...... 120 472 842
Deferred taxes.................................. -- (1,551) (59)
Accretion on long-term debt obligations......... -- 344 732
Change in assets and liabilities:
Accounts receivable........................... (9,648) (23,282) (77,229)
Inventories................................... (9,831) (7,505) (2,089)
Other current assets.......................... (478) (1,564) (8,570)
Other assets.................................. (484) -- --
Accounts payable.............................. 15,591 32,312 71,080
Accrued expenses and other liabilities........ 403 655 15,331
--------------- --------------- --------------
Net cash provided by (used in) operating
activities................................ (1,017) 5,861 15,561
---------------- --------------- --------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired..... (640) (35,166) (18,573)
Proceeds from sale of fixed assets.................. 22 -- 6
Acquisition of other assets......................... -- (988) (2,665)
Acquisition of property and equipment............... (2,200) (1,592) (2,423)
---------------- ---------------- ---------------
Net cash used in investing activities..... (2,818) (37,746) (23,655)
---------------- ---------------- ---------------
Cash flows from financing activities:
Proceeds from short-term borrowings................. 119,915 72,761 301,023
Payments on short-term borrowings................... (116,481) (81,175) (301,440)
Payments on long-term debt obligations.............. (184) (236) (32,643)
Proceeds from issuance of common stock ............. -- -- 28,589
Proceeds from exercise of stock options and warrants 331 74 423
Proceeds from short term loan....................... -- -- 15,000
Proceeds from employee stock purchase plan.......... 92 256 297
Proceeds from issuance of long-term debt net of
issuance costs................................ -- 23,099 --
Proceeds from issuance of preferred stock and warrants,
net........................................... -- 19,082 (219)
Proceeds from equipment loans....................... -- 559 --
Payment of cash dividend on preferred stock ........ -- -- (35)
--------------- --------------- ---------------
Net cash provided by financing activities. 3,673 34,420 10,995
--------------- --------------- --------------
Net increase (decrease) in cash........................ (162) 2,535 2,901
Cash--beginning of period.............................. 546 384 2,919
--------------- --------------- --------------
Cash--end of period.................................... $ 384 $ 2,919 $ 5,820
=============== =============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
-30-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS:
Savoir Technology Group, Inc. (the Company), formerly Western Micro
Technology, Inc., is a value-added distributor of commercial mid-range servers,
peripheral equipment (including wireless networking equipment, storage products,
printers and terminals) and software. The Company believes that it is one of the
leading distributors of IBM's AS/400 and RS/6000 commercial mid-range servers.
The Company also distributes commercial mid- range servers, peripheral equipment
and software manufactured by Unisys, NCR and Telxon. The Company primarily
distributes commercial mid range servers and related products to VARs who
generally incorporate commercial applications software and sell integrated
computer systems to end user customers. The Company also integrates and
configures personal computers, workstations and departmental servers for OEMs
and VARs, and provides and remarkets installation and technical support
services. The Company's primary sales offices and distribution centers, from
which it ships products to customers throughout the United States, are located
in Northern California and San Antonio, Texas. In addition to these locations,
the Company has distribution centers in Massachusetts, Southern California and
Illinois, sales offices throughout the United States and one sales office in
Ontario, Canada.
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, including Business Partner Solutions,
Inc. ("BPS"). All significant intercompany accounts and transactions have been
eliminated.
ESTIMATES:
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CERTAIN RISKS AND CONCENTRATIONS:
The Company maintains cash balances with four major financial
institutions. The Company sells its products to a broad geographic and
demographic base of customers, extends trade credit, and generally does not
require supporting collateral. To reduce credit risk, the Company performs
ongoing credit evaluations of its customers, maintains an allowance for doubtful
accounts and has credit insurance. One customer accounted for 22% and 23% of the
outstanding accounts receivable balance at December 31, 1998 and 1997,
respectively. No other customer accounted for more than 10% of the outstanding
accounts receivable balance at December 31, 1997 and 1998.
Revenues are concentrated with a relatively limited number of customers
and the providers of certain systems are concentrated among a few manufacturers.
The loss of a major customer or the interruption of certain supplier
relationships could adversely affect operating results. During the years ended
December 31, 1996, 1997 and 1998, approximately 50%, 65% and 80%, respectively,
of the Company's revenue was generated from the sale of products purchased from
one of the Company's vendors, International Business Machines Corporation
("IBM").
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of the Company's financial instruments including
cash, accounts receivable, notes payable and accounts payable approximate fair
value due to their short maturity.
-31-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
REVENUE RECOGNITION:
The Company records revenue, net of allowance for estimated returns, at
the time of product shipment.
INVENTORIES:
Inventories, consisting primarily of purchased product held for resale,
are stated at the lower of cost or net realizable value. Cost is determined
using average and specific cost methods. The Company's inventories include high
technology computer systems that may be specialized in nature and subject to
rapid technological obsolescence. The Company does, however, have certain return
privileges with many of its vendors. While the Company attempts to minimize the
required inventories on hand and considers technological obsolescence when
estimating required reserves to reduce recorded amounts to market values, it is
reasonably possible that such estimates could change in the near term.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation is recorded
on a straight-line basis over the estimated useful lives, typically two to ten
years. Leasehold improvements are amortized over the useful lives of the
improvements or lease term, whichever is shorter.
When assets are sold or retired, the cost and related accumulated
depreciation are removed from the accounts and the resulting gains or losses are
included in income.
EXCESS OF COST OVER ACQUIRED NET ASSETS AND OTHER INTANGIBLES:
The excess of cost over acquired net assets is being amortized on a
straight- line basis over 15 and 20 year periods. Other intangibles are being
amortized on a straight-line basis over their estimated useful lives which is
typically 3 to 5 years. Amortization expense was $292,000, $1,400,000 and
$4,636,000 in 1996, 1997 and 1998, respectively. The Company reviews the
carrying value of excess costs over acquired net assets and other intangibles
for impairment whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. At December 31, 1998, the net unamortized balance
of goodwill is not considered to be impaired.
INCOME TAXES:
The Company accounts for its income taxes using the liability method
under which deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts expected to
be realized.
MARKET DEVELOPMENT FUNDS:
Primary vendors provide the Company with market development funds in an
amount that is generally based on purchases of the vendors' products and
services. These funds typically range from 1% to 3% of such purchases and are
required to be used to market and promote the vendors' products and services.
The Company records these funds when earned as a reduction to offset direct
costs of marketing, selling, general, and administrative expenses.
STOCK-BASED COMPENSATION:
The Company accounts for stock-based compensation using the intrinsic
value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the
-32-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
amount an employee must pay to acquire the stock. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation."
NET INCOME (LOSS) PER SHARE:
Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive potential common shares
consist of incremental shares issuable upon exercise of stock options and
warrants and conversion of preferred stock outstanding.
RECENT PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee, or AcSEC,
released Statement of Position 98-1, or SOP 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 requires
companies to capitalize certain costs of computer software developed or obtained
for internal use, provided that those costs are not research and development.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The
Company is evaluating the requirements of SOP 98-1 and the effects, if any, on
the Company's current policies on accounting for software costs.
RECLASSIFICATIONS:
Certain amounts in the financial statements have been reclassified to
conform with the current year's presentation. These classifications did not
change previously reported total assets, liabilities, stockholders' equity or
net income.
2. LONG LIVED ASSETS:
<TABLE>
Property and equipment consist of the following (IN THOUSANDS):
<CAPTION>
December 31,
--------------------------
1997 1998
---------- -----------
<S> <C> <C>
Computer and office equipment............................... $ 8,286 $ 10,119
Leasehold improvements...................................... 1,190 1,482
---------- ----------
9,476 11,601
Accumulated depreciation and amortization................... (4,556) (6,075)
---------- ----------
$ 4,920 $ 5,526
========== ==========
</TABLE>
<TABLE>
Excess of cost over acquired net assets and other intangibles (IN
THOUSANDS):
<CAPTION>
December 31,
--------------------------
1997 1998
---------- -----------
<S> <C> <C>
Excess of cost over net assets acquired..................... $ 55,528 $ 85,544
Other intangibles........................................... 3,740 4,633
---------- -----------
59,268 90,177
Accumulated amortization.................................... (1,731) (6,367)
---------- -----------
$ 57,537 $ 83,810
========== ===========
</TABLE>
-33-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. BORROWING ARRANGEMENTS:
<TABLE>
Notes Payable (IN THOUSANDS):
<CAPTION>
December 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Working capital line........................................ $6,645 $6,228
Other....................................................... 418 15,012
----------- -----------
$7,063 $21,240
</TABLE>
The Company has an inventory and working capital financing agreement
(the "IBMCC Credit Facility") with IBM Credit Corporation ("IBMCC"), an
affiliate of IBM, whereby purchases from IBM and cash advances from IBMCC are
directly charged to the IBMCC Credit Facility and are paid by the Company based
on payment terms outlined in the agreement. Total borrowings under the IBMCC
Credit Facility are based on eligible accounts receivable and inventory, as
defined, and are limited to $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 and times interest earned ratios,
as defined and is collateralized by substantially all assets of the Company. As
of December 31, 1997 and 1998, the Company had outstanding borrowings under this
agreement of $71,661,000 and $113,697,000, respectively. Of the total
outstanding borrowings, $6,645,000 and $6,228,000 represented cash advances at
December 31, 1997 and 1998, respectively, with the remainder included in
accounts payable which amounted to $65,016,000 and $107,469,000, respectively.
Cash advances bear interest at prime (7.75% as of December 31, 1998) plus
1.875%. Based on eligible assets, as of December 31, 1998, the Company had
borrowings available of approximately $11,303,000. The weighted average interest
rates for the Company's cash advances during 1997 and 1998 were 10.2% and 10.3%,
respectively.
On September 8, 1998, the Company executed an amendment to its credit
facility with IBMCC, pursuant to which the Company obtained an additional loan
of $15,000,000 to consummate the REAL transaction. The loan, included in notes
payable, bears interest at prime (7.75% at December 31, 1998) plus 2.0% and is
due in September, 1999.
<TABLE>
Long-Term Debt (IN THOUSANDS):
<CAPTION>
December 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Subordinated notes payable.................................. $15,700 $ --
IBMCC loan.................................................. 10,000 --
SMS seller notes............................................ 7,350 --
Other....................................................... 528 2,107
----------- -----------
33,578 2,107
Less discount............................................... (2,732) --
----------- -----------
30,846 2,107
Less amounts due within one year............................ (8,516) (1,020)
----------- -----------
Long-term debt due after one year........................... $22,330 $1,087
=========== ===========
</TABLE>
Principal payments for long-term debt at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $1,020
2000.................................................................... 933
2001.................................................................... 131
2002.................................................................... 23
-----------
$2,107
===========
</TABLE>
-34-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On May 15, 1998, in connection with the acquisition of assets from
UniDirect Corporation (see Note 11) the Company issued a $1,700,000 promissory
note to UniDirect. The promissory note bears interest at 8.25% and is payable
over a two-year period.
In connection with the acquisition of SMS (see Note 11), the Company
was obligated to pay the two selling stockholders of SMS cash payments totaling
$3,675,000 on the first and second anniversary of the acquisition, September 30,
1998 and 1999. The non-interest-bearing notes were discounted using the
Company's effective borrowing rate of 10.375%. The total discount on the face
value of the notes was $1,047,000 and was being charged to interest expense over
the life of the notes. The notes were paid in May of 1999.
On September 30, 1997, the Company entered into a note purchase
agreement (the "Note Purchase Agreement") with Robert Fleming, Inc. and
Canpartners Investments IV, LLC, as purchasers (together, the "Purchasers") and
Canpartners Investments IV, LLC as agent for the Purchasers. Pursuant to the
Note Purchase Agreement, the Company sold $15,700,000 of secured notes to the
Purchasers and granted to the Purchasers 10 shares of newly issued Series B
Preferred Stock of the Company and warrants to purchase 400,000 shares of the
Company's common stock. Each warrant issued in connection with this transaction
entitles the holder to purchase one share of common stock of the Company at an
exercise price of $7.50 per share and expires on September 30, 2004. On each
anniversary, the exercise price may be reset to 87.5% of the price of the
Company's common stock if the market price of the Company's common stock is less
than $7.50. This condition was met, and, in September 1998, the exercise price
was reset to $4.77. The warrants issued in connection with this transaction were
initially determined to have a fair market value of $1,064,000. During the first
quarter of 1998, the warrants were revalued at $2,177,000. This note was paid in
May of 1998 (see Note 13).
On September 30, 1997, the Company executed an amendment to its credit
facility with IBM Credit Corporation ("IBMCC"), pursuant to which the Company
obtained an additional loan of $10,000,000. In consideration therefor, the
Company granted IBMCC a warrant to purchase 100,000 shares of the Company's
common stock at an exercise price of $7.50 per share. The warrant expires on
September 30, 2004. On each anniversary, the exercise price may be reset to
87.5% of the price of the Company's common stock if the market price of the
Company's common stock is less than $7.50. This condition was met, and, in
September 1998, the exercise price was reset to $4.77. The warrant was initially
determined to have a fair market value of $266,000. During the first quarter of
1998, the warrant was revalued at $544,000. This loan was paid in May of 1998
(see Note 13).
4. OPERATING LEASE COMMITMENTS:
The Company leases its warehouse and office space under operating
leases. These leases expire through 2004 and provide for payment of insurance,
maintenance and property taxes. In addition, the Company leases certain
equipment under operating leases and rental arrangements extending for periods
of up to seven years.
The total rent expense, net of sublease income, was $722,000,
$1,600,000 and $2,169,000 for 1996, 1997 and 1998, respectively.
<TABLE>
Future minimum rental commitments for all noncancelable operating
leases are as follows (In thousands):
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1999 $ 2,459
2000 2,172
2001.................................................................... 1,992
2002.................................................................... 1,964
2003.................................................................... 1,410
Thereafter.............................................................. 677
--------
$ 10,674
========
</TABLE>
-35-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. INCOME TAXES:
<TABLE>
The provision for (benefit from) income taxes consist of the following
(In thousands):
<CAPTION>
Federal State Foreign Total
------- ----- ------- -----
<S> <C> <C> <C> <C>
1998:
Current........................ $ 6,055 $ 1,585 $ 687 $ 8,327
Deferred....................... (44) (15) -- (59)
---------- ---------- --------- ----------
$ 6,011 $ 1,570 $ 687 $ 8,268
========= ========= ========= =========
1997:
Current........................ $ 1,578 $ 308 $ - $ 1,886
Deferred....................... (1,301) (250) - (1,551)
---------- ---------- --------- ----------
$ 277 $ 58 $ - $ 335
========= ========= ========= =========
1996:
Current........................ $ 223 $ 53 $ - $ 276
Deferred....................... -- -- - --
--------- --------- --------- ---------
$ 223 $ 53 $ - $ 276
========= ========= ========= =========
</TABLE>
<TABLE>
The Company's effective tax rate differs from the U.S. federal
statutory tax rate as follows:
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory tax (benefit) rate...................... 34% 34% 35%
Goodwill and other nondeductible expenses......... 4 15 10
Benefit resulting from utilization of federal NOL. (33) (17) --
State taxes, net of federal benefit............... 6 8 6
Change in valuation reserve....................... -- (35) --
Other............................................. -- 4 (2)
-------- -------- ---------
11% 9% 49%
======== ======== =========
</TABLE>
<TABLE>
The components of the net deferred tax asset (included in other current
assets) are as follows (IN THOUSANDS):
December 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserve................................. $ 518 $ 443
Accumulated depreciation and amortization................... 85 (13)
Uniform inventory capitalization............................ 221 216
Inventory reserve........................................... 285 399
Other nondeductible reserves................................ 289 319
Other....................................................... 73 246
Net operating losses........................................ 80 -
----------- -----------
$1,551 $1,610
=========== ===========
</TABLE>
6. STOCKHOLDERS' EQUITY:
On April 29, 1998, the Company completed the public offering of
3,000,000 shares of its Common Stock at a price of $10.50 per share. After
deducting the underwriting discount and offering expenses, the net proceeds to
the Company were $28,589,000. The Company used the proceeds of the offering to
reduce its outstanding debt obligations, exclusive of the outstanding cash
advances on the IBMCC Credit Facility.
-36-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In August of 1997, the stockholders of the Company approved an
amendment of the Company's Articles of Incorporation to increase the number of
authorized shares of Common Stock from 10,000,000 to 25,000,000. The
stockholders also approved the change of the Company's state of incorporation
from California to Delaware.
PREFERRED STOCK PRIVATE PLACEMENT:
On September 19, 1997, the Company completed the private placement of
1,121,250 units (the "Units"). Each Unit consists of two shares of the Company's
Series A Preferred Stock, par value $0.01 per share, for an aggregate of
2,242,500 shares, at a purchase price of $9.5625 per share, and one Common Stock
purchase warrant (which expires in five years), par value $0.01 per share, for
an aggregate of 1,121,250 shares, at a purchase price of $.125 per warrant and
exercisable at a price of $9.6875 per share for a total purchase price of $19.25
per Unit. The Series A Preferred Stock has an eight percent (8%) cumulative
dividend, payable in cash or Company Common Stock at the election of the Company
and a potential special dividend should the price of the Company's Common Stock
fall below $9.5625 on each anniversary of the private placement. The special
dividend may not exceed $1.9125 per share each year. The Series A Preferred
Stock is convertible at the option of the Holders, at any time, into Common
Stock of the Company. The conversion price is $9.3125 and is subject to
adjustment if the Company issues any stock or securities at less than the
conversion price (see Note 14). During the year ended December 31, 1998, 256,000
of these shares were converted into 262,853 shares of the Company's Common
Stock. Subsequent to September 19, 1998, the Company may redeem the Preferred
Stock provided that the Company's Common Stock is trading at one hundred fifty
percent (150%) of the conversion price (as adjusted) and the daily trading
volume of the Company's stock is in excess of 125,000 shares, as defined.
Subsequent to September 19, 2001, the Company may redeem the Preferred Stock at
the conversion price (as adjusted). In connection with the transaction, the
Company issued warrants for the purchase of 112,125 shares of Common Stock to
placement agents. The warrants are exercisable at $9.6875 per share and expire
in five years. Net proceeds totaled approximately $18,900,000. The Company used
the proceeds to pay down its line of credit and for general working capital
purposes.
On September 19, 1998, the Company declared a special dividend, payable
in common stock, due to the holders of the Company's Series A Preferred Stock.
The Company issued 612,533 shares of its common stock with a fair market value
of approximately $3,800,000. The dividend was paid as a result of the average
common stock price falling below $9.5625 in the five trading days prior to
September 19, 1998, as stipulated in the Series A Preferred Stock Agreement.
WARRANTS:
At December 31, 1998, warrants were outstanding to purchase a total of
1,721,575 shares of Common Stock at exercise prices ranging from $4.77 to
$9.6875 per share. The warrants, which were issued in connection with various
debt and equity financings, expire between 2002 to 2004. At December 31, 1998,
the Company had reserved 1,721,575 shares of Common Stock for issuance upon
exercise of these warrants. During the year ended December 31, 1998, 11,800
warrants were exercised.
STOCK OPTION PLAN:
Under the terms of the 1987 and 1994 Stock Option Plans, the Company
may grant nonqualified or incentive stock options at prices not less than 85%
and 100% of the market value at the grant date, respectively. To date, most
options have been granted at 100% of the market value as of the date of grant.
Generally, options vest and become exercisable in equal annual increments over
four years beginning one year after the date of grant and expire five years
after they become exercisable.
-37-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
Shares Number Price Total
Available Of per (in
for Grant Shares Share thousands)
---------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Balances, January 1, 1996........................... 17,314 604,488 $2.00-$8.75 $ 2,502
Additional shares reserved..................... 400,000
Options granted................................ (441,000) 441,000 $5.00-$10.34 3,367
Options exercised.............................. - (92,157) $2.00-$6.13 (331)
Options terminated............................. 23,750 (23,750) $3.38-$8.25 (108)
---------- ---------- ------------ --------
Balances, December 31, 1996......................... 64 929,581 $2.00-$10.34 5,430
Additional shares reserved..................... 700,000
Options granted................................ (610,679) 610,679 $8.00-$12.75 6,506
Options exercised.............................. - (24,375) $2.25-$7.00 (74)
Options terminated............................. 79,875 (79,875) $2.13-$12.25 (629)
---------- ---------- ------------ --------
Balances, December 31, 1997......................... 169,260 1,436,010 $2.00-$12.75 11,233
Additional shares reserved..................... 925,000
Options granted................................ (1,178,500) 1,178,500 $5.63-$13.00 9,846
Options exercised.............................. - (54,611) $2.00-$9.00 (309)
Options terminated............................. 123,500 (123,500) $2.25-$13.00 (1,047)
---------- ---------- ------------ --------
Balances, December 31, 1998......................... 39,260 2,436,399 $2.00-$13.00 $19,723
========== ========== ============ ========
</TABLE>
At December 31, 1998, there were 2,475,659 shares of Common Stock
reserved for issuance under the Company's stock option plans. Outstanding
options for 598,330, 360,581 and 187,956 shares of Common Stock were exercisable
at December 31, 1998, 1997 and 1996, respectively, at weighted average exercise
prices per share of $6.43, $5.44 and $4.64.
EMPLOYEE STOCK PURCHASE PLAN:
The Company implemented an Employee Stock Purchase Plan (the "Plan") in
November 1995, under which 175,000 shares of common stock have been reserved for
issuance. The Plan is qualified under Section 423 of the Internal Revenue Code.
The Plan allows for the purchase of stock at 85% of the lower of the closing
stock price at the beginning or the end of each six-month purchase period. As of
December 31, 1998, 106,652 shares have been issued under this Plan.
The following information concerning the Company's stock option and
employee stock purchase plans is provided in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company accounts for such plans
in accordance with APB No. 25 and related Interpretations.
The following table summarizes information with respect to stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Outstanding Life Exercise Exercisable Exercise
Exercise Prices At 12/31/98 (Years) Price At 12/31/98 Price
- ----------------------------- --------------- ------------ ------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
$2.00-$3.63................. 201,595 5.77 $ 2.69 157,845 $ 2.69
$5.00-$6.88................. 940,750 8.80 $ 5.80 210,750 $ 5.68
$7.00-$8.88................. 87,375 7.20 $ 8.09 33,000 $ 8.10
$9.00-$10.75................ 621,750 8.60 $ 9.81 127,625 $ 9.25
$11.00-$13.00............... 584,929 8.74 $ 11.84 69,110 $ 11.23
------------ ------------
$2.00-$13.00................ 2,436,399 8.43 $ 8.10 598,330 $ 6.43
============ ============
</TABLE>
-38-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The fair value of each option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Group A Group B
------------------------ ----------------------
1996 1997 1998 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Risk-free interest rates............ 5.17 6.30 4.96 5.25 6.39 5.14
Expected life...................... 5 years 5 years 5 years 4 years 4 years 4 years
Volatility.......................... 87.42% 75.00% 56.00% 87.42% 75.00% 56.00%
</TABLE>
The weighted average expected life was calculated based on the exercise
behavior of each group. Group A represents officers and directors who are a
smaller group holding a greater average number of options than other option
holders and who tend to exercise later in the vesting period. Group B are all
other option holders, virtually all of whom are employees. This group tends to
exercise earlier in the vesting period.
The weighted average fair value of those options granted in 1996, 1997
and 1998 was $7.64, $6.90 and $4.27, respectively.
The Company has also estimated the fair value for the purchase rights
issued under the Company's Employee Stock Purchase Plan under the Black-Scholes
valuation model using the following assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ --------
<S> <C> <C> <C>
Risk-free interest rate.............................. 5.25 5.46 5.41
Expected life........................................ 2 years 0.5 years 0.5 years
Volatility........................................... 87.42% 75.00% 56.00%
</TABLE>
The weighted average fair value of those purchase rights granted in
1996, 1997 and 1998 was $4.80, $5.10 and $3.56, respectively.
The following pro forma income information has been prepared following
the provisions of SFAS No. 123 (amounts in thousands except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss)--pro forma....................... $ 1,750 $ 1,624 $ (252)
=========== =========== ==========
Basic net income (loss) per share--pro forma....... $ 0.41 $ 0.23 $ (0.03)
=========== =========== ==========
Diluted net income (loss) per share--pro forma..... $ 0.39 $ 0.21 $ (0.03)
=========== =========== ==========
</TABLE>
The above pro forma effects on income may not be representative of the
effects on net income for future years as option grants typically vest over
several years and additional options are generally granted each year.
-39-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. EARNINGS PER SHARE:
<TABLE>
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):
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Numerator-basic and diluted EPS
Income before extraordinary item....................... $ 2,338 $ 3,310 $ 8,640
Less: preferred stock dividends....................... -- (484) (5,439)
------------ ------------ ------------
Income available to common stockholders, before
extraordinary item.................................. 2,338 2,826 3,201
Extraordinary item, net of tax effect.................. -- -- (2,338)
------------ ------------ ------------
Net income-basic....................................... 2,338 2,826 863
Plus: impact of assumed preferred conversion........... -- 484 --
------------ ------------ ------------
Net income-diluted..................................... $ 2,338 $ 3,310 $ 863
============ ============ ============
Denominator-basic EPS
Weighted average shares outstanding.................... 4,255 4,902 8,714
============ ============ ============
Basic EPS
Income before extraordinary item....................... $ 0.55 $ 0.57 $ 0.37
Extraordinary item, net of tax effect.................. -- -- (0.27)
------------ ------------ ------------
Basic earnings per share............................... $ 0.55 $ 0.57 $ 0.10
============ ============ ============
Denominator-diluted EPS
Denominator-basic EPS.................................. 4,255 4,902 8,714
Effect of dilutive securities:
Common stock options and warrants...................... 258 453 629
Preferred Stock........................................ -- 621 --
------------ ------------ ------------
4,513 5,976 9,343
============ ============ ============
Diluted EPS
Income before extraordinary item....................... $ 0.52 $ 0.55 $ 0.34
Extraordinary item, net of tax effect.................. -- -- (0.25)
------------ ------------ -------------
Diluted earnings per share............................. $ 0.52 $ 0.55 $ 0.09
============ ============ ============
</TABLE>
Options to purchase 906,582, 211,720 and 96,085 share of Common Stock were
outstanding at December 31, 1998, 1997 and 1996, 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.
-40-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. SUPPLEMENTAL CASH FLOW INFORMATION:
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (IN THOUSANDS):
Cash paid for interest and income taxes was:
<TABLE>
Year Ended December 31,
-----------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Interest.................... $ 1,021 $ 2,700 $ 3,495
Income taxes................ $ 66 $ 706 $ 4,495
</TABLE>
Supplemental Disclosures of Noncash Investing and Financing Activities
(In thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Tax benefit from exercise of stock options.................. $ - $ 489 $ -
Common stock issued in connection with business combinations 1,949 6,825 9,739
Dividend on preferred stock................................. - 50 1,803
Special dividend on preferred stock......................... - - 3,799
Common stock warrants issued in connection with
notes payable issuance................................. - 1,330 -
Common stock warrants issued in connection with
preferred stock........................................ - 1,000 -
Common stock warrants revaluation........................... - - 1,391
</TABLE>
9. CONTINGENCIES:
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's financial position or results of operations.
10. SAVINGS AND RETIREMENT PLAN:
The Company maintains the "Western Micro Technology Savings and
Retirement Plan," qualified under section 401(a) of the Internal Revenue Code.
The Plan provides for tax deferred automatic salary deductions and alternative
investment options. Employees are eligible to participate after completion of
six months of employment. Participants may apply for loans from their accounts.
The Plan permits Company contributions determined quarterly by the
Board of Directors. No contributions were made in the years ended December 31,
1996, 1997 or 1998.
11. ACQUISITIONS AND INVESTMENTS:
On September 8, 1998, the Company acquired the distribution segment of
REAL Applications, Ltd. ("REAL") from its parent company, El Camino Resources,
Ltd. ("El Camino") for $12,875,000. In connection with the acquisition, the
Company recorded approximately $13,141,000 of goodwill and other intangible
assets. The
-41-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
acquisition has been accounted for as a purchase with the result
that REAL operations are included in the Company's financial statements from the
date of purchase.
REAL is a reseller of IBM commercial mid-range servers, including the
AS/400 and RS/6000, as well as high end data storage and IBM Netfinity servers.
REAL is also one of four authorized distributors of IBM's S/390 mainframe
systems. REAL had audited revenues of approximately $80,000,000 for the year
ended April 30, 1998.
The following presents unaudited pro forma combined net sales, net
income and earnings per share of the Company and REAL as if the combination had
occurred at the beginning of the earliest period presented. The pro forma
information is presented for informational purposes only, and is not necessarily
indicative of the operating results that would have occurred if the REAL
acquisition had been consummated at the earliest period presented, nor is it
indicative of future operating results.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1998
---------------------- ----------------------
<S> <C> <C>
Net Sales....................... $ 299,927,000 $ 646,575,000
Net Income...................... $ 3,360,000 $ 8,300,000
Net Income per share - basic.... $ 0.58 $ 0.33
Net Income per share - diluted.. $ 0.56 $ 0.31
</TABLE>
On June 5, 1998, the Company acquired all of the outstanding shares of
MCBA Systems, Inc.'s ("MCBA") common stock for $487,000 of canceled indebtedness
and 852,854 shares of the Company's common stock. In addition, the selling
stockholders of MCBA can earn an additional 1,500,000 shares of the Company's
common stock based upon attainment of certain performance goals in calendar 1998
and 1999. As of December 31, 1998, MCBA had earned approximately 1,300,000
shares of the Company's common stock. Additional amounts payable under
contingent earn-out provisions have been and will be accounted for as an
increase in the purchase price when such amounts become determinable. The
acquisition has been accounted for as a purchase with the result that MCBA
operations are included in the Company's financial statements from the date of
purchase. In connection with the acquisition, the Company recorded approximately
$9,800,000 of goodwill and other intangible assets. The fair values of assets
acquired from MCBA were approximately $4,045,000 and liabilities assumed were
approximately $3,945,000.
MCBA is a value-added wholesale distributor and reseller of IBM
commercial mid-range servers, including the AS/400 and RS/6000, and software.
MCBA is also one of four authorized distributors of IBM's S/390 mainframe
systems. In addition to the products it offers, MCBA provides network
configuration and technical support services to its customers. MCBA's audited
revenues for the year ended December 31, 1997 were approximately $26,900,000
with net income of approximately $26,000.
On May 15, 1998, the Company purchased substantially all of the
UniDirect catalog and VarCity distribution business and related electronic
software distribution organization of UniDirect Corporation ("UDC") for
$4,600,000, comprised of $2,900,000 in cash and a $1,700,000 promissory note.
The promissory note bears interest at 8.25% and is payable over a two-year
period. This transaction has been accounted for as a purchase with the result
that UDC operations are included in the Company's financial statements from the
date of purchase. In connection with the acquisition, the Company recorded
approximately $4,900,000 of goodwill and other intangible assets. During the
year ended December 31, 1997, the acquired businesses had unaudited revenues of
approximately $18,000,000.
UniDirect specializes in the sales and support of technically advanced
software products. VarCity is a nationwide distributor of client/server and
Internet software products to resellers. Software solutions sold by both
companies include products for areas such as web and intranet development and
related management tools, UNIX and Windows NT applications and utilities,
client/server applications, advanced operating systems and databases, and PC
connectivity applications.
-42-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On September 30, 1997, the Company acquired all of the capital stock of
SMS for an aggregate of $42,150,000 in cash at closing, 460,000 shares of the
Company's Common Stock, valued at $3,887,000, and additional cash payments of
approximately $6,870,000 were made in May of 1998. In addition, the selling
stockholders have earned $2,500,000 in cash payments based upon attainment of
certain performance goals and can earn an additional $2,500,000 in 1999. The
acquisition has been accounted for as a purchase with the result that SMS
operations are included in the Company's financial statements from the date of
purchase. In connection with the acquisition, the Company recorded approximately
$47,600,000 of goodwill and other intangible assets. Additional amounts payable
under contingent earn-out provisions have been and will be accounted for as an
increase in the purchase price when such amounts become determinable. The fair
value of assets acquired from SMS was approximately $41,400,000 and liabilities
assumed were approximately $36,100,000. SMS was a holding company for a family
of companies including Star Data Systems, Inc., dba Sirius Computer Solutions
("Sirius"), a value-added distributor for high technology mid-range solutions in
the IBM AS/400 and RS/6000 systems market. Sirius also sells systems directly to
end-user customers as an industry remarketer. Prior to the closing of the SMS
acquisition, SMS completed a spin-off of the Sirius end-user business as a
separate unaffiliated company. Upon acquiring SMS, the distribution arm was
renamed Business Partner Solutions, Inc. ("BPS"). Upon completion of the SMS
acquisition, BPS became a wholly owned subsidiary of the Company. For the eleven
months ended September 30, 1997, the distribution business of Sirius had
revenues of approximately $86,500,000 and income from operations of
approximately $1,100,000. The following presents unaudited pro forma combined
net sales, net income and earnings per share of the Company and SMS (excluding
the Sirius end-user business) for the fiscal years ended December 31, 1996 and
1997. The pro forma information is presented for informational purposes only,
and is not necessarily indicative of the operating results that would have
occurred if the SMS acquisition had been consummated at the beginning of the
earliest period presented, nor is it indicative of future operating results.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net sales............................ $ 208,000,000 $ 306,000,000
Net income........................... $ 631,000 $ 899,000
Net income per share-basic........... $ 0.13 $ 0.17
Net income per share-diluted......... $ 0.13 $ 0.14
</TABLE>
For purposes of the pro forma combined data, SMS's financial data for
its fiscal year ended October 31, 1996 have been combined with the Company's
financial data for the fiscal year ended December 31, 1996. The above amounts do
not include pro forma adjustments for sales that would have occurred between the
distribution business of SMS and the end-user business if the spinoff of the
end-user business had occurred at the beginning of such period presented.
Including these sales amounts, pro forma combined net sales would have been
approximately $247,000,000 and $336,000,000 for the year ended December 31, 1996
and 1997, respectively.
On March 17, 1997, the Company acquired all of the common stock of
Target Solutions, Inc. ("TSI"), a privately held company, for approximately
$2,200,000, paid in common stock (220,273 shares) of the Company. Additional
consideration, up to $10,000,000 in cash and stock, can be earned by TSI by
meeting certain defined gross profit targets through fiscal year 1998. An
additional 62,578 shares were issued by the Company on March 17, 1997, and
placed in escrow for the earn-out provision. No shares were earned in 1997 or
1998. The unearned shares will be returned to the Company. The acquisition has
been accounted for as a purchase with the result that TSI operations are
included in the Company's financial statements from the date of purchase.
Additional amounts payable under contingent earn-out provisions will be
accounted for as an increase in the purchase price when such amounts become
determinable. In connection with the acquisition, the Company recorded
approximately $2,600,000 of goodwill and other intangible assets. The fair value
of assets acquired from TSI was approximately $1,141,000 and liabilities assumed
were approximately $1,484,000. For the year ended December 31, 1996, TSI had
unaudited revenues of approximately $15,000,000 with net income of approximately
$200,000.
-43-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On November 29, 1996, the Company acquired the net assets of
International Data Products, LLC ("IDP"), a privately held company, for $265,000
in cash and assumed net liabilities of $424,000. The agreement between the
Company and IDP (the "Agreement") contains an earn out provision which allows
IDP to earn up to 140,000 shares of the Company's common stock based on the
attainment of gross profit targets for certain fiscal year 1997 and 1998 sales
(as defined in the Agreement). No shares were earned in 1997. As of December 31,
1998, IDP had earned the 140,000 shares of the Company's common stock. The
shares will be distributed according to the terms of the Agreement. Additional
amounts payable under contingent earn-out provisions have been and will be
accounted for as an increase in the purchase price when such amounts become
determinable. In connection with the acquisition, the Company recorded
approximately $780,000 of goodwill and other intangible assets. For the year
ended December 31, 1995, IDP had unaudited revenues of approximately $4,611,000
with net income of approximately $2,000.
On November 7, 1996, the Company acquired the net assets of Star
Technologies, Inc. ("Star"), a privately held company, for $950,000 paid in
common stock (113,263 shares) of the Company. The agreement between the Company
and Star (the "Agreement") contains an earnout provision which allows Star to
earn up to an additional $1,500,000 of the Company's common stock based on the
attainment of gross profit targets for certain fiscal year 1997 and 1998 sales
(as defined in the Agreement). An additional 89,418 shares were issued by the
Company on November 7, 1996 and placed in escrow for the earnout provision.
Additional amounts payable under contingent earn-out provisions have been and
will be accounted for as an increase in the purchase price when such amounts
become determinable. For the years ended December 31, 1997 and 1998, Star earned
48,721 shares and 118,079 shares, respectively, at an average price of $10.26
and $8.47, respectively. In connection with the acquisition, the Company
recorded approximately $400,000 of goodwill and other intangible assets. For the
year ended June 30, 1996, Star had revenues of approximately $7,500,000 with net
income of approximately $40,000.
On January 2, 1996, the Company acquired the assets of R&D Hardware
Systems Company of Colorado ("R&D"), a privately held company, for $1,000,000
and 125,000 shares of the Company's common stock. The agreement between the
Company and R&D (the "Agreement") contains an earnout provision which allows R&D
to earn up to an additional 125,000 shares of the Company's common stock based
on attainment of gross profit targets for certain fiscal year 1996 and 1997
sales (as defined in the Agreement) up to a cumulative value not to exceed
$855,000. Additional amounts payable under contingent earn-out provisions will
be accounted for as an increase in the purchase price when such amounts become
determinable. As of December 31, 1997, the end of the earnout period, 78,587
shares, at an average price of $10.33, have been earned under this provision. In
connection with the acquisition, the Company recorded approximately $1,400,000
of goodwill and other intangible assets. For the year ended December 31, 1995,
R&D had revenues of approximately $9,557,000 with net income of approximately
$446,000.
12. SEGMENT REPORTING:
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 include 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 as those described in the
summary of significant accounting policies. 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.
-44-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Foreign sales for the years ended December 31, 1997 and 1998 were
approximately $6,700,000 and $31,000,000, respectively.
During the years ended December 31, 1996, 1997 and 1998, approximately
50%, 65% and 80%, respectively, of our net sales were generated from the sale of
IBM products.
One customer accounted for approximately 11% and 18% of the Company's
net sales in 1997 and 1998, respectively, no other single customer accounted for
more than 10% of the Company's net sales.
13. EXTRAORDINARY CHARGE:
In connection with the repayment of its outstanding debt obligations,
the Company recorded an extraordinary charge of $2,338,000, net of tax,
resulting from a prepayment penalty, the write-off of unamortized discounts
relating to certain warrants issued to debt holders and other related expenses.
14. SUBSEQUENT EVENTS:
On January 4, 1999, the Company purchased Infinite Solutions, Inc.
("Infinite"), for $3,500,000 ($2,750,000 in cash and $750,000 in Common Stock).
For the year ended December 31, 1998, Infinite had unaudited revenues of
approximately $19,000,000.
The Company has entered into an agreement in principle with its Series
A Preferred Stock shareholders to eliminate the potential annual special
dividend as part of the provisions of the Series A Preferred Stock. In exchange
for the elimination of the special dividend, the Company has agreed to lower the
conversion price of the Preferred Stock from $9.3125 to $8.00 per share. The
stockholders of the Company will vote on this agreement in principle at a
special meeting to be held on April 6, 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
-45-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the
executive officers and directors of the Company as of March 11, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
P. Scott Munro(2).............. 42 Chairman of the Board, Chief Executive Officer, President,
Secretary
James W. Dorst................. 44 Chief Financial Officer
Robert O'Reilly................ 46 Senior Vice President
Chief Executive Officer and President of the Company's
Carlton Joseph Mertens II...... 33 subsidiary, Business Partner Solutions, Inc., and Director
Angelo Guadagno(1)............. 56 Director
James J. Heffernan(3).......... 56 Director
Guy M. Lammle(2)............... 46 Director
K. William Sickler(3).......... 49 Director
J. Larry Smart(1)(2)........... 50 Director
- ----------
(1) Member of the Compensation Committee.
(2) Member of the Nominating Committee.
(3) Member of the Audit Committee.
</TABLE>
P. SCOTT MUNRO has served as Chief Executive Officer, President and
Secretary of the Company since July 1995. Mr. Munro has also served as Chairman
of the Board since January 1998 and served as a Director of the Company from
July 1995. From January 1993 to July 1995, Mr. Munro was President, Computer
Systems Division of the Company, and from July 1990 to January 1993, he served
as Senior Vice President, Computer Systems Division of the Company. Prior to
1990, Mr. Munro served as a General Manager for both Future Electronics, Inc., a
distributor of electronic components, and Arrow Electronics, Inc., a distributor
of computer products.
JAMES W. DORST has served as Chief Financial Officer of the Company
since May 1995. From May 1994 to February 1995, Mr. Dorst was Chief Financial
Officer of Accolade, Inc., an entertainment software developer. From March 1986
to April 1993, he was Chief Financial Officer of Drypers Corporation, a
manufacturer of consumer disposable products. Prior to 1986, he was employed by
the public accounting firm of Coopers & Lybrand L.L.P.
ROBERT O'REILLY has served as Senior Vice President of the Company
since September 1997 and prior to that time served as Vice President of Human
Resources from February 1996 and Director of Human Resources from September
1995. Prior to joining the Company, Mr. O'Reilly was a Director of Human
Resources, with special emphasis on recruitment, training and development,
during his 10-year career with Future Electronics, Inc., a distributor of
electronic components.
CARLTON JOSEPH MERTENS II has served as a Director of the Company and
as Chief Executive Officer and President of the Company's subsidiary, Business
Partners Solutions, Inc., since September 1997. From 1984 to September 1997, Mr.
Mertens was an active member of SMS' management team, and served as Executive
Vice President of SMS from 1991 to September 1997 prior to its acquisition by
the Company.
ANGELO GUADAGNO has served as a Director of the Company since August
1997. From 1989 to 1997, he was the Vice President of Worldwide Channel Sales of
Data General, a manufacturer of servers, storage systems and related software.
During his tenure at Data General he also served as: Vice President of U.S.
Sales from 1994 to
-46-
<PAGE>
1996; Vice President, American Sales and Services from 1990 to 1994; and Vice
President of North American Sales Division from 1989 to 1990.
JAMES J. HEFFERNAN has served as a Director of the Company since
October 1995. Since January 1996, he has been a director of USWeb Corporation,
an Internet consulting firm and was Chief Financial Officer from January 1996 to
May 1998. From March 1995 to January 1996, he was Chief Financial Officer of
Interlink Computer Sciences, a software company. Prior to such time, Mr.
Heffernan was Chairman of the Board and Chief Financial Officer of Panoramic,
Inc., a software company. From June 1994 to June 1995, Mr. Heffernan was a
director of International Microcomputer Software, Inc., a software company.
GUY M. LAMMLE has served as a Director of the Company since August
1998. He has served as Chairman of the Board, Chief Executive Officer and
Director of NxTrend Technology, Inc. since February 1980 and assumed the
additional title of President in October 1996. From 1974 to 1980, Mr. Lammle was
employed with the Burroughs Corporation, a computer hardware company,
progressing from Sales Representative to Zone Manager and finally District
Product Manager.
K. WILLIAM SICKLER has served as a Director of the Company since July
1993. Mr. Sickler has served as Chief Executive Officer and President of Gadzoox
Networks, Inc., a provider of gigabit fibre channel networking products since
April 1996. From July 1995 to April 1996, he was Executive Director of Software
Business Development for Seagate Technology, a software developer and
manufacturer of disk drives, with responsibility for analysis of potential
software company acquisitions. From December 1992 to July 1995, Mr. Sickler was
President and Chief Executive Officer of Network Computing, Inc., a provider of
network management software for local area networks.
J. LARRY SMART has served as a Director of the Company since October
1995. From October 1995 to January 1998, he also served as Chairman of the Board
of the Company. Since March 1999, Mr. Smart has served as Presient and CEO of
Visioneer, Inc. (formerly, Primax V Acquisition Corp.), a developer of personal
desktop management products. Mr. Smart has served as a Director of ScanSoft,
Inc. (formerly, Visioneer, Inc.) since February 1997. From March 1997 to March
1999, Mr. Smart served as President and Chief Executive Officer of Visioneer,
Inc. (prior to Visineer, Inc. merging with ScanSoft, Inc.) and served as
Chairman of the Board of Directors of that company from February 1997 until
assuming the position of President and Chief Executive Officer. From July 1995
until March 1997, he was Chairman of the Board, President and Chief Executive
Officer of StreamLogic Corporation, a data storage company. From March 1994 to
February 1995, Mr. Smart was President and Chief Executive Officer of Maxtor
Corporation, a data storage company. From July 1991 to February 1995, Mr. Smart
was President and Chief Executive Officer of Southwall Technologies, Inc., a
materials sciences company.
The Company currently has authorized seven (7) members of the Board of
Directors. All directors are elected to hold office until the next annual
meeting of stockholders of the Company and until their successors have been duly
elected and qualified. Officers are elected at the first meeting of the Board of
Directors following the stockholders' meeting at which the directors are elected
and serve at the discretion of the Board of Directors. There are no family
relationships among any of the directors or executive officers of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules of the Securities and Exchange Commission (the "Commission") thereunder
require the Company's directors, executive officers and the beneficial owners of
more than ten percent of the Company's common stock to file reports of their
ownership and change in ownership of the Company's common stock with the
Commission. Based solely upon a review of such reports filed electronically with
the Commission, the Company believes that all reports required by Section 16(a)
of the Exchange Act to be filed by its directors, executive officers and ten
percent beneficial stockholders during the last fiscal year were filed on time,
except that (1) Angelo Guadagno, James L. Heffernan, Guy M. Lammle, J. Larry
Smart and K. William Sickler each filed a Form 5 approximately one month late
and (2) Astoria Capital Partners, L.P., Astoria Capital Management, Inc. and
Richard Koe have filed Forms 3 and Forms 4 from one to five months late.
-47-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The following table provides certain summary information for the years
ended December 31, 1996, 1997 and 1998 concerning compensation paid to the
Company's Chief Executive Officer and to the Company's three other named
executive officers whose compensation exceeded $100,000 in 1998 (the "Named
Executive Officers").
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-term
Compensation
Annual Compensation Awards
----------------------------------------- ----------
Securities
Fiscal Other Annual Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation($)
- --------------------------- ---- --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
P. Scott Munro.............. 1998 400,406 261,049 - 450,000 -
Chairman of the Board, Chief 1997 302,485 119,398 - 150,000 -
Executive Officer, 1996 221,286 122,564 - 125,000 -
President and
Secretary
James W. Dorst............. 1998 227,750 74,610 - 50,000 -
Chief Financial Officer 1997 192,333 51,872 - 30,000 -
1996 150,000 47,867 - 20,000 -
Robert O'Reilly(1)......... 1998 176,000 62,175 - 50,000 -
Senior Vice President 1997 142,517 36,578 - 30,000 -
Carlton J. Mertens(2)...... 1998 270,000 148,717 - - -
Chief Executive 1997 67,579 32,500 - 45,716 -
Officer and President
of the Company's
subsidiary Business
Partner Solutions,
Inc., and Director
- ----------
(1) Mr. O'Reilly became an executive officer of the Company during 1997.
(2) Mr. Mertens became an executive officer of the Company during 1997.
</TABLE>
-48-
<PAGE>
RECENT OPTION GRANTS
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1998 to the Named Executive
Officers.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
Percent of Potential Realizable
Total Value at Assumed Annual
Number of Options Rates of Stock Price
Securities Granted to Appreciation for option
Underlying Employees Exercise or Term($)(2)
Options in FISCAL Base price Expiration ---------------------------
Name Granted(#) Year(1) ($/Share) Date 5% 10%
---- ---------- -------- --------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
P. Scott Munro........ 150,000(3) 13.37% 10.25 1/16/08 966,925 2,450,379
300,000(3) 26.75% 6.00 9/8/08 1,132,010 2,868,736
James W. Dorst........ 25,000(3) 2.23% 10.25 1/16/08 161,154 408,397
25,000(3) 2.23% 6.00 9/8/08 94,334 239,016
Robert O'Reilly....... 15,000(3) 1.34% 10.25 1/16/08 96,693 245,038
35,000(3) 3.12% 6.00 9/8/08 132,068 334,686
Carlton J. Mertens.... -- -- -- -- -- --
- ----------
(1) Based on options to purchase an aggregate of 1,121,500 shares of Common
Stock granted during fiscal 1998.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of five percent (5%) and
ten percent (10%) compounded annually from the date the respective options
were granted to their expiration date and are not presented to forecast
possible future appreciation, if any, in the price of the Common Stock. The
gains shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise of the
options or the sale of the underlying shares of Common Stock. The actual
gains, if any, on the stock option exercises will depend on the future
performance of the Common Stock, the optionee's continued employment
through applicable vesting periods and the date on which the options are
exercised.
(3) These options have a 10-year term and vest at the rate of twenty-five (25%)
per year over a four-year period. These options have accelerated vesting
upon a change of control of the Company.
</TABLE>
The following table shows the number of shares of Common Stock
represented by outstanding stock options held by each of the Named Executive
Officers as of December 31, 1998.
<TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES(1)
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at Fiscal
Options at Fiscal Year-End Year-end ($)
Exercisable/unexercisable Exercisable/unexercisable
------------------------- -------------------------
<S> <C> <C>
P. Scott Munro......................... 217,968 / 668,750 682,524/ 1,013,438
James W. Dorst......................... 51,250 / 98,750 241,406/ 147,656
Robert O'Reilly........................ 26,250 / 98,750 30,625/ 124,688
Carlton J. Mertens..................... 11,429 / 34,287 --/ --
- ----------
(1) Based on a per share price of $8.6875, the closing price of the Common
Stock as reported by The Nasdaq National Market on December 31, 1998, the
last trading day of the fiscal year.
</TABLE>
-49-
<PAGE>
COMPENSATION OF DIRECTORS
The Company's outside directors (i.e., those who are not employees of
the Company) receive an annual retainer of $20,000, plus $750 for each board
meeting attended. The Company pays for directors' liability insurance and has
entered into indemnification agreements with each of its directors. At the 1994
Annual Meeting of Stockholders, the stockholders approved the adoption of the
1994 Stock Option Plan, which has been amended several times since its adoption.
The 1994 Stock Option Plan, as amended, provides for the grant of an option of
15,000 shares of the Common Stock to certain directors who are not employees
following their initial election or appointment and an option for 4,000 shares
of Common Stock at every regular annual meeting at which they are re-elected.
The exercise price of the options is the fair market value of the Common Stock
on the date of each respective grant and the options vest over a four-year
period. In April 1997 and September 1998, the Board of Directors made
discretionary grants of nonstatutory stock options to each of the outside
directors to purchase 6,250 and 10,000 shares, respectively, of Common Stock at
an exercise price of $11.00 and $6.00 per share, respectively.
CHANGE IN CONTROL
Stock options held by the Company's directors and Named Executive
Officers under the Company's Stock Option Plans will become fully vested and
exercisable following a change in control of the Company. A "change in control"
means the occurrence of any of the following events: (i) stockholder approval of
a merger or consolidation of the Company with any other corporation resulting in
a change in fifty percent (50%) or more of the total voting power of the
Company; (ii) stockholder approval of a plan of complete liquidation of the
Company of an agreement for the sale or disposition of all or substantially all
of the Company's assets; or (iii) any person becomes the beneficial owner of
more than fifty percent (50%) of the Company's total outstanding securities.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with P. Scott
Munro dated January 22,1998. Pursuant to the terms of the agreement, as amended,
Mr. Munro receives a base salary of $450,000 per year and is eligible to receive
a bonus of up to $170,000 per year, subject to achievement of certain
performance goals. If Mr. Munro is terminated without cause, he will be entitled
to receive his base salary for twelve (12) months following his termination. If
Mr. Munro's responsibilities are reduced within twelve (12) months following a
change in control and such reduction in responsibilities is not for cause, any
resignation of employment by Mr. Munro as a consequence of such reduction in
responsibilities will be treated as a termination of employment without cause.
The Company has also entered into employment agreements with other
management personnel as follows: (i) an employment agreement with James W. Dorst
dated January 22,1998, pursuant to which Mr. Dorst receives a base salary of
$250,000 per year and is eligible to receive a bonus of up to $60,000 per year,
subject to achievement of certain performance goals; and (ii) an employment
agreement with Robert O'Reilly dated January 22, 1998, pursuant to which Mr.
O'Reilly receives a base salary of $200,000 per year and is eligible to receive
a bonus of up to $50,000 per year. In addition to the foregoing, pursuant to
each of their agreements with the Company, if Mr. Dorst or Mr. O'Reilly is
terminated for cause, such person will be entitled to receive his base salary
and bonus through the date of his termination. If Mr. Dorst or Mr. O'Reilly is
terminated without cause, such person will be entitled to receive his base
salary for a period following his termination, twelve (12) months for Mr. Dorst
and six (6) months for Mr. O'Reilly. If Mr. Dorst's or Mr. O'Reilly's
responsibilities are reduced twelve (12) months following a change in control
and such reduction in responsibilities is not for cause, any resignation of
employment as a consequence of such reduction in responsibilities will be
treated as a termination of employment without cause.
The Company has entered into an employment agreement with Carlton
Joseph Mertens II dated September 30, 1997, pursuant to which Mr. Mertens
receives a base salary of $270,000 per year and is eligible to receive a bonus
of up to $130,000 per year, subject to achievement of certain performance goals.
If Mr. Mertens is terminated for cause, he will be entitled to receive his base
salary and bonus due through the date of his termination. If Mr. Mertens is
terminated without cause or if Mr. Mertens terminates his employment with the
Company for certain specified reasons, he will be entitled to receive his base
salary for nine (9) months following his termination; such reasons include
assignment or alteration by the Company of Mr. Mertens' duties, responsibilities
or obligations materially inconsistent with his position with the Company after
notice of Mr. Mertens' objections thereto, failure of
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<PAGE>
the Company to provide to Mr. Mertens the salary or bonuses described above,
relocation of the Company's Business Partner Solutions, Inc.'s principal offices
outside of San Antonio, Texas, any requirement by the Company for Mr. Mertens to
relocate anywhere other than San Antonio, Texas and instructions by the Company
given to Mr. Mertens to violate any applicable law after notice of Mr. Mertens'
objections. In addition, the Company has entered into a noncompetition agreement
with Mr. Mertens dated September 30, 1997 (the "Mertens Non-Compete"). The
Mertens Non-Compete was made in connection with the sale by Mr. Mertens of all
of his shares of SMS to the Company. Under the Mertens Non-Compete, Mr. Mertens
agreed that, with respect to certain geographic areas, including all of the
states of the United States of America (but excluding certain California
counties), Canada, Mexico and Puerto Rico, he would not sell computer hardware,
software or services to value-added resellers, resellers or systems integrators
or approach, contact or solicit any employee of the Company (or any affiliate of
the Company) to leave the employ of the Company (or any of its affiliates)
except through general employment advertising. The Mertens Non-Compete expires
on the earlier of September 30, 1999 or the date on which final payment of any
salary due to Mr. Mertens is made.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Angelo Guadagno and J. Larry Smart are the members of the Compensation
Committee.
-51-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth information as to the beneficial
ownership of the Capital Stock of the Company as of February 11, 1999, by: (i)
each person known to the Company to beneficially own more than five percent (5%)
of the Capital Stock of the Company; (ii) each of the Company's directors; (iii)
certain of the Company's executive officers; and (iv) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Shares
Beneficially
Name of Beneficial Owner (1) Owned (1) Percent (2)
------------------------------------------------------------------ -------------- -----------
<S> <C> <C>
Astoria Capital Partners, L.P. (3)
6600 SW 92nd Avenue, Suite 370
Portland, OR 97223...................................... 1,789,747 14.7%
Robert Fleming, Inc. (4)
320 Park Avenue, 11th Floor
New York, NY 10022...................................... 1,773,808 13.9%
Strome Susskind Investment Management, L.P. (5)
100 Wilshire Blvd., 15th Floor
Santa Monica, CA 90401.................................. 1,194,498 9.6%
John M. Harkins (6)
4955 Corporate Drive
Huntsville, AL 35806.................................... 1,101,661 9.3%
Michael N. Gunnells (7)
4955 Corporate Drive
Huntsville, AL 35806.................................... 1,086,661 9.2%
ROI Capital Management, Inc. (8)
17 E. Sir Francis Drake Blvd., Suite 225
Larkspur, CA 94939...................................... 894,946 7.4%
Carlton Joseph Mertens II (9) ................................. 471,429 4.0%
P. Scott Munro (10) ........................................... 277,330 2.3%
James W. Dorst (11) ........................................... 76,336 *
Robert O'Reilly (12) .......................................... 37,105 *
Guy M. Lammle.................................................. 33,537 *
J. Larry Smart (13) ........................................... 25,313 *
K. William Sickler (14) ....................................... 23,813 *
James J. Heffernan (15) ....................................... 11,313 *
Angelo Guadagno (16) .......................................... 3,750 *
All executive officers and directors as a group
(10 persons) (17) ...................................... 980,738 8.0%
- ----------
* Less than one percent (1%).
(1) Unless otherwise indicated, the beneficial owner has sole voting and
dispositive power over the shares reported in the table. Includes
shares of Common Stock and shares of Series A Preferred Stock on an
as-converted basis. Information with respect to beneficial ownership is
based upon information obtained from the stockholders and from the
Company's transfer agent. To the Company's knowledge, unless otherwise
indicated, the persons and entities named in the table have sole voting
and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission and includes voting and investment power with
respect to securities. Shares of Common Stock issuable upon conversion
of shares of Series A Preferred Stock, upon exercise of stock options
exercisable within 60 days of February 11, 1999 or upon exercise of
warrants that are currently exercisable or exercisable within 60 days
of February 11, 1999 are deemed to be outstanding and to be
beneficially owned by the person
-52-
<PAGE>
presently entitled to exercise for the purpose of computing the
percentage ownership of such person but are not treated as outstanding
for the purpose of computing the percentage ownership of any other
person. Each share of Series A Preferred Stock is currently convertible
at any time into shares of the Common Stock at a conversion ratio of
1.02684563758 shares of Common Stock for each share of Series A
Preferred Stock and is entitled to vote, without conversion, together
with the Common Stock as a single class on an as-converted basis.
(2) Based on 11,874,200 shares of Common Stock and 1,986,500 shares of
Series A Preferred Stock (equivalent to 2,039,828 shares of Common
Stock on an as-converted basis) outstanding as of February 11, 1999.
(3) Includes 1,473,690 shares of Common Stock, 207,000 shares of Series A
Preferred Stock and warrants to purchase 103,500 shares of Common
Stock. Common Stock ownership information is based on a Schedule 13G/A
dated February 11, 1999, filed jointly by Richard W. Koe, Astoria
Capital Management, Inc. ("Astoria Management") and Astoria Capital
Partners L.P. ("Astoria Partners") reporting ownership as follows:
Shares of Common Stock Shared Voting and
Beneficially Owned Dispositive Power
------------------ -----------------
Astoria Partners 1,162,434 0
Astoria Management 1,473,690 0
Richard W. Koe 1,473,690 0
Astoria Partners is an investment limited partnership, whose general
partners are Richard W. Koe and Astoria Management. Astoria Management
is an investment adviser registered under Section 203 of the Investment
Advisers Act of 1940. Richard W. Koe is Astoria Management's president
and sole shareholder. The shares of Series A Preferred Stock and
warrants to purchase shares of Common Stock are owned by Astoria
Partners.
(4) Includes 864,000 shares of Common Stock, 533,000 shares of Series A
Preferred Stock and warrants to purchase 362,500 shares of Common
Stock. Based on a Schedule 13G dated February 10, 1999 filed by Robert
Fleming, Inc.
(5) Based on a Schedule 13G filed February 16, 1999 by Strome Susskind
Investment Management, L.P. ("SSIM"), includes 603,591 shares of Common
Stock, 387,012 shares of Series A Preferred Stock and warrants to
purchase 193,506 shares of Common Stock held by SSIM and its
affiliates, which includes SSCO, Inc. and Mark E. Strome.
(6) Ownership totals are based on a Schedule 13D dated June 5, 1998 filed
by Mr. Harkins, as well as shares issued to Mr. Harkins thereafter.
(7) Ownership totals are based on a Schedule 13D dated June 5, 1998 filed
by Mr. Gunnells, as well as shares issued to Mr. Gunnells thereafter.
(8) Based on a Schedule 13G/A dated February 22, 1999 filed by ROI Capital
Management, Inc. ("ROI"), on behalf of ROI, Mark T. Boyer and Mitchell
J. Soboleski, includes 650,651 shares of Common Stock, 160,000 shares
of Series A Preferred Stock and warrants to purchase 80,000 shares of
Common Stock.
(9) Includes 460,000 shares of Common Stock, as reflected on a Schedule 13D
dated September 30, 1997 filed by Mr. Mertens. Also includes 11,429
shares subject to stock options that are presently exercisable or will
become exercisable within 60 days of February 11, 1999.
(10) Includes 265,468 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of February 11,
1999.
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<PAGE>
(11) Includes 57,500 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of February 11,
1999.
(12) Includes 35,000 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of February 11,
1999.
(13) Includes 11,313 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of February 11,
1999.
(14) Includes 23,813 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of February 11,
1999.
(15) Includes 11,313 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of February 11,
1999.
(16) Includes 3,750 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of February 11,
1999.
(17) Includes 439,586 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of February 11,
1999.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with Management and Others
Not applicable.
(b) Certain Business Relationships
Not applicable.
(c) Indebtedness of Management
Not applicable.
-54-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) 1. Financial Statements
The financial statements listed below appear on the pages
indicated:
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Consolidated Balance Sheets, December 31, 1997 and 1998...................................... 27
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998... 28
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997
and 1998.................................................................................. 29
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998... 30
Notes to Consolidated Financial Statements................................................... 31
</TABLE>
2. Financial Statement Schedules
The financial statement schedules listed below appear on the pages
indicated:
Page Number
-----------
Schedule II--Valuation and Qualifying Accounts and Reserves.......... 60
3. Exhibits
See the exhibits listed under Item 14(c) or filed or incorporated by
reference herein. Each management contract or compensation plan or arrangement
required to be filed has been identified.
(b) Reports on Forms 8-K
During the fourth quarter of 1998, the Registrant filed the following
Current Report on Form 8-K:
<TABLE>
<CAPTION>
DATE ITEM NO. EVENT REPORTED
---- -------- --------------
<S> <C> <C>
November 20, 1998 7. Submission of Financial Statements of REAL Distributor, a
Division of REAL Applications, Ltd., a wholly-owned
subsidiary of El Camino Resources, Ltd. and Pro Forma
Financial Statements of Savoir Technology Group, Inc.
</TABLE>
(c) Exhibits
The exhibits listed below are filed or incorporated by reference
herein.
Exhibit
-------
2.1 Asset Purchase Agreement dated January 2, 1996 between the
Company and R&D Hardware Systems Company of Colorado, filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K filed
with the Commission on January 17, 1996, and incorporated
herein by this reference.
-55-
<PAGE>
Exhibit
-------
2.2 Agreement and Plan of Reorganization dated March 17, 1997 by
and among the Company, WMT Acquisition Corp., Target Solutions,
Inc. and Lee Adams, filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the Commission on March
28, 1997, and incorporated herein by this reference.
2.3 Asset Purchase Agreement dated May 5, 1995 between the Company
and Reptron Electronics, Inc., filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Commission
on August 9, 1995, and incorporated herein by this reference.
2.4 Agreement and Plan of Reorganization dated November 18, 1995
between the Company and International Parts, Inc., filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K filed
with the Commission on December 4, 1995, and incorporated
herein by this reference.
2.5+# Stock Purchase Agreement dated June 4, 1997 by and among the
Company, Star Management Services, Inc., Harvey E. Najim and
Carlton Joseph Mertens II, filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Commission
on July 16, 1997, and incorporated herein by this reference.
2.6+# Third Amendment to Stock Purchase Agreement dated September 30,
1997 by and among the Company, Star Management Services, Inc.,
Harvey E. Najim and Carlton Joseph Mertens II, filed as Exhibit
2.1 to the Company's Current Report on Form 8-K filed with the
Commission on October 10, 1997, and incorporated herein by this
reference.
2.7 Purchase Agreement Assignment between the Company and the Agent
dated September 30, 1997, filed as Exhibit 10.5 to the
Company's Current Report on Form 8-K filed with the Commission
on October 10, 1997, and incorporated herein by this reference.
2.8# Asset Purchase Agreement dated November 7, 1996 by and among
the Company, Star Technologies, Inc. and the Stockholders of
Star Technologies, Inc., filed as Exhibit 10.24 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by this reference.
2.9 Asset Purchase Agreement dated November 29, 1996 by and among
the Company, International Data Products, LLC, Oliver-Allen
Corporation, Inc., International Data Products and Financial,
Ltd., Alan M. Bynder and Michael R. Duhaime, filed as Exhibit
10.25 to the Company's Amendment on Form 10-K/A to its Annual
Report on Form 10-K for the year ended December 31, 1996 filed
with the Commission on November 19, 1997 and incorporated
herein by this reference.
2.10 Certificate of Ownership and Merger dated as of November 21,
1997, filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K dated November 21, 1997, and incorporated herein by
this reference.
2.11 Agreement and Plan of Reorganization dated November 22, 1997,
by and among Savoir Technology Group, Inc., MCBA Systems, Inc.,
Michael N. Gunnells and John Harkins, filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K filed with the
Commission on December 22, 1997, and incorporated herein by
this reference.
- --------------
+ Confidential Treatment was granted by the Commission with respect to certain
portions of this exhibit.
# Schedules omitted from this exhibit will be furnished to the Commission upon
request.
-56-
<PAGE>
Exhibit
-------
2.12 Second Amendment to Agreement and Plan of Reorganization dated
April 23, 1998, by and among Savoir Technology Group, Inc., STG
Acquisition Corp., MCBA Systems, Inc., Michael N. Gunnells and
John Harkins, filed as Exhibit 2.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1998, and incorporated herein by this reference.
2.13 First Amendment to Agreement and Plan of Reorganization dated
March 27, 1998, by and among Savoir Technology Group, Inc., STG
Acquisition Corp., MCBA Systems, Inc., Michael N. Gunnells and
John Harkins, filed as Exhibit 2.12 to the Company's
Registration Statement on Form S-2 filed with the Commission on
April 29, 1998 and incorporated herein by this reference.
2.14* Asset Purchase Agreement by and between Business Partner
Solutions, Inc., a subsidiary of Savoir Technology Group, Inc.
and REAL Applications Ltd. dated as of September 8, 1998, filed
as Exhibit 2.1 to the Company's Current Report on Form 8-K
dated September 8, 1998 and incorporated herein by this
reference.
3(i) Restated Certificate of Incorporation of Savoir Technology
Group, Inc., a Delaware corporation, filed as Exhibit 3(ii) to
the Company's Current Report on Form 8-K dated July 23, 1997,
filed on August 14, 1997 and incorporated herein by this
reference.
3(ii) Amended and Restated Bylaws of Savoir Technology Group, Inc., a
Delaware corporation, filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by this reference.
4.1 Certificate of Designation, Preferences and Rights of the
Company's Series A Preferred Stock, filed as Exhibit 3.2 to the
Company's Current Report on Form 8-K dated October 10, 1997,
and incorporated herein by this reference.
4.2 Certification of Designation, Preferences and Rights of the
Company's Series B Preferred Stock, filed as Exhibit 3.1 to the
Company's Current Report on Form 8-K dated October 10, 1997,
and incorporated herein by this reference.
4.3 Registration and Put Rights Agreement among the Company and the
Purchasers dated September 30, 1997, filed as Exhibit 4.2 to
the Company's Current Report on Form 8-K dated October 10,
1997, and incorporated herein by this reference.
4.4 Warrant Agreement of Western Micro Technology, Inc. between the
Company and the Purchasers dated September 30, 1997 filed as
Exhibit 4.3 to the Company's Current Report on Form 8-K dated
October 10, 1997, and incorporated herein by this reference.
4.5 Common Stock Purchase Warrant in favor of Robert Fleming Inc.,
filed as Exhibit 4.4 to the Company's Current Report on Form
8-K dated October 10, 1997, and incorporated herein by this
reference.
- --------------
* Confidential Treatment requested pursuant to a request for confidential
treatment filed with the Commission on September 23, 1998. The portions of
the exhibit for which confidential treatment has been requested have been
omitted from the exhibit. The omitted information has been filed separately
with the Commission as part of the confidential treatment request.
-57-
<PAGE>
Exhibit
-------
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.
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.
9.1 Voting Agreement among the Company and certain holders of the
Series A Preferred Stock of the Company dated as of December
31, 1998, filed as Annex B to the Company's Definitive Proxy
Statement on Schedule 14A dated April 6, 1999, and incorporated
herein by this reference.
10.1 Lease Agreement dated February 2, 1998, by and between Green
Mountain Ventures I, Ltd., a Texas limited partnership and the
Company's subsidiary Business Partner Solutions, Inc., a Texas
corporation, filed as Exhibit 10.1 to the Company's Current
Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by this reference.
10.2 Employment Letter between the Company and P. Scott Munro dated
January 22, 1998, filed as Exhibit 10.17 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by this reference.
10.3 Employment Letter between the Company and James W. Dorst dated
January 22, 1998, filed as Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by this reference.
10.4 Employment Letter between the Company and Robert O'Reilly dated
January 22, 1998, filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by this reference.
-58-
<PAGE>
Exhibit
-------
10.5* Solution Provider Agreement by and between Business Partner
Solutions, Inc., a subsidiary of Savoir Technology Group, Inc.
and REAL Applications Ltd. dated as of September 8, 1998, filed
as Exhibit 10.1 to the Company's Current Report on Form 8-K
dated September 8, 1998 and incorporated herein by this
reference.
10.6 Inventory and Working Capital Financing Agreement dated
September 4, 1998 by and among the Company, Business Partners
Solutions, Inc. and MCBA Systems, Inc., filed as Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998, and incorporated
herein by this reference.
10.7 Amendment Number One to Industry Remarketer Affiliate Agreement
between the Company and Sirius Company Solutions, Ltd., dated
as of December 31, 1998 and filed herewith.
21.1 List of Subsidiaries.
23.1 Consent of Independent Accountants
24.1 Power of Attorney (see page 61).
27.1 Financial Data Schedule.
(d) Financial Statement Schedules
The financial statement schedules listed below appear on the pages
indicated:
Page Number
-----------
Schedule II--Valuation and Qualifying Accounts and Reserves......... 60
All other schedules have been omitted since the required information is
not present or not present in amounts sufficient to require submission of the
schedule or because the information required is included in the Consolidated
Financial Statements or Notes thereto.
- --------------
* Confidential Treatment requested pursuant to a request for confidential
treatment filed with the Commission on September 23, 1998. The portions of
the exhibit for which confidential treatment has been requested have been
omitted from the exhibit. The omitted information has been filed separately
with the Commission as part of the confidential treatment request.
-59-
<PAGE>
<TABLE>
SCHEDULE II
SAVOIR TECHNOLOGY GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<CAPTION>
Balance At Balance At
Beginning End of
of Period Additions(1) Other(2) Deductions(3) Period
--------- ------------ -------- ------------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts... $380 $120 $250 $339 $411
Year ended December 31, 1997:
Allowance for doubtful accounts... $411 $472 $80 $644 $319
Year ended December 31, 1998:
Allowance for doubtful accounts... $319 $842 $60 $121 $1,100
- ----------
(1) Charged to costs and expenses.
(2) Reserves related to acquisitions.
(3) Accounts written off against the reserve.
</TABLE>
-60-
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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 ON MARCH 31, 1999.
SAVOIR TECHNOLOGY GROUP, INC.
By /S/ P. SCOTT MUNRO
-------------------------------------------
P. Scott Munro
President and Chief Executive Officer
By /S/ JAMES W. DORST
-------------------------------------------
James W. Dorst
Chief Financial Officer
(Principal Financial Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints P. Scott Munro and James W. Dorst and
each of them, as his attorney-in-fact, with full power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute or substitutes, may
do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ P. SCOTT MUNRO Chairman of the Board, President, March 31, 1999
- ----------------------------- Chief Executive Officer and Secretary
P. Scott Munro (Principal Executive Officer)
/S/ JAMES W. DORST Chief Financial Officer March 31, 1999
- ----------------------------- (Principal Financial Officer)
James W. Dorst
/S/ DENNIS J. POLK Chief Accounting Officer March 31, 1999
- ----------------------------- (Principal Accounting Officer)
Dennis J. Polk
/S/ CARLTON JOSEPH MERTENS II Chief Executive Officer and March 31, 1999
- ----------------------------- President of the Company's
Carlton Joseph Mertens II Subsidiary, Business Partner
Solutions, Inc., and Director
-61-
<PAGE>
Signature Title Date
--------- ----- ----
/S/ ANGELO GUADAGNO Director
- -----------------------------
Angelo Guadagno March 31, 1999
/S/ JAMES J. HEFFERNAN Director
- -----------------------------
James J. Heffernan March 31, 1999
Director
- -----------------------------
Guy M. Lammle March , 1999
/S/ K. WILLIAM SICKLER Director
- -----------------------------
K. William Sickler March 31, 1999
Director
- -----------------------------
J. Larry Smart March , 1999
</TABLE>
-62-
AMENDMENT NUMBER ONE TO
INDUSTRY REMARKETER AFFILIATE AGREEMENT
THIS AMENDMENT NUMBER ONE TO INDUSTRY REMARKETER AFFILIATE AGREEMENT
(this "Amendment") entered into and effective as of December 31, 1998 by and
among SAVOIR TECHNOLOGY GROUP, INC., a Delaware corporation ("SVTG") (formerly
known as Western Micro Technology, Inc.), BUSINESS PARTNER SOLUTIONS, INC., a
Texas corporation ("BPS") (formerly known as Star Data Systems, Inc.) and SIRIUS
COMPUTER SOLUTIONS, LTD., a Texas limited partnership ("Sirius"),
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to that certain Industry
Remarketer Affiliate Agreement, dated as of September 30, 1997 (the
"Agreement"); and
WHEREAS, pursuant to Section 11.4 of the Agreement, the parties hereto
wish to amend the Agreement as provided herein;
NOW, THEREFORE, in consideration of the foregoing and the respective
promises, covenants and agreements set forth herein and in the Agreement, the
parties hereby agree as follows:
1. Section 8 of the Agreement is amended and restated to read in its
entirety as follows:
"Term. Subject to earlier termination in accordance
with Section 9 of this Agreement, the term of this
Agreement shall commence on September 30, 1997 and
continue (i) with respect to IBM AS/400 products,
until December 31, 2000, and (ii) with respect to all
other Products, until September 30, 2001, at which
time this Agreement will terminate unless otherwise
mutually agreed to by the Parties hereto."
2. Capitalized terms used herein but not otherwise defined herein
shall have the meanings as set forth in the Agreement.
3. Other than with respect to Section 8, this Amendment does not
modify, change or delete any other addendum, term, provision,
representation, warranty or covenant (the "Provisions") relating to
or contained in the Agreement, and all such Provisions shall remain
in full force and effect.
4. This Amendment shall be construed in accordance with and shall be
governed by the laws of the State of Delaware, without regard to
its laws as to conflict of laws.
-1-
<PAGE>
5. This Amendment may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together
shall constitute one and the same instrument.
6. This Amendment and any of the provisions hereof may not be amended,
altered or added to in any manner except by a document in writing
and signed by each party.
IN WITNESS WHEREOF, this Amendment has been executed as of the date and
year first above written.
SAVOIR TECHNOLOGY GROUP, INC., a
Delaware corporation
By /S/ P. SCOTT MUNRO
-------------------------------------
Its CEO
-------------------------------------
BUSINESS PARTNER SOLUTIONS, INC., a
Texas corporation
By /S/ CARLTON JOSEPH MERTENS II
--------------------------------------
Its PRESIDENT
-------------------------------------
SIRIUS COMPUTER SOLUTIONS, LTD., a
Texas limited partnership
By: Sirius Management, LLC
By /S/ HARVEY NAJIM
--------------------------------------
Its PRESIDENT
-------------------------------------
-2-
LIST OF SUBSIDIARIES
Savoir Technology Group, Inc., a Delaware corporation.
Star Management Services, Inc., a Delaware corporation.
Sirius Investments, Inc., a Nevada corporation.
Business Partner Solutions, Inc., a Texas corporation.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of Savoir Technology Group, Inc. on Forms S-8 (File Nos. 033-64279,
333-30825 and 333-08989) and Forms S-3 (File Nos. 333-53225 and 333-61865) of
our reports dated January 27, 1999 on our audits of the consolidated financial
statements and financial statement schedule of Savoir Technology Group, Inc. and
subsidiaries as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998 which reports are included in this Annual
Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 31, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<RECEIVABLES> 158,053
<ALLOWANCES> 1,100
<INVENTORY> 38,913
<CURRENT-ASSETS> 217,703
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